Hudson Pacific Properties Inc (HPP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hudson Pacific Properties Second Quarter 2010 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions.

(Operator Instructions)

As a reminder, today's conference is being recorded today, Tuesday the 10th of August, 2010. And now I'd like to hand the conference over to Mr. Andrew Blazier. Please, go ahead.

Good morning, everyone, and welcome to Hudson Pacific Properties second quarter 2010 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 and Chief Operating Officer, is also on hand 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 risk, 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 10, 2010, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.

Now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Thank you, Andrew, and welcome, everyone, to our first conference call as a public company since our IPO on June 23rd. It's symbolic of the strength of this Company and the management team that we were able to Hudson Pacific public at a price within our target range, and a time when several REITs that would have gone public withdrew their offerings. We appreciate your interest in Hudson Pacific Properties, and we're excited to begin this journey together.

As Mark is going to discuss during the financial summary, the second quarter was not typical of our quarterly financial results going forward. As a result of our June 29th IPO closing, our second quarter results include only two days of operations for the combined portfolio. As such, our comments on this call will focus more on what we've been seeing in the acquisition operating environment since our IPO.

For those of you just getting to know Hudson Pacific, we're a commercial office REIT based in California. We believe in the California story and the long-term fundamentals, which support our business plan of acquiring and owning real estate in these markets.

California's economy benefits from a number of favorable long-term growth drivers. Additionally, the economy is well diversified, with sectors as varied as education and health services, government, leisure and hospitality, media entertainment, professional and business services, and retail trade all making significant contributions.

On a standalone basis, California is already the eighth largest economy in the world and between 2005 and 2020, the state's population is expected to increase by 20%, a significantly higher growth rate than what was projected for the country as a whole.

Private sector employment growth is also expected to increase substantially. In terms of the opportunities in the California investment thesis, going forward the lack of new development and no future increase in supply are key components of positive outlook.

We are focused on infill suburban markets and central business districts where there are high barriers to entry, and we play to reposition both acquired and existing properties in markets, redeveloping them when it becomes economically feasible to do so.

This economic backdrop translates into a very favorable landscape for property acquisitions in California. From 2000 to 2007, office transactions in California totaled more than $75 billion, with more than 111 million square feet changing hands. Many of the portfolio buyers who bought those assets are not long-term holders; they are finite funds and people who we have direct relationships with for more than two decades.

We're already in discussions with many of the funds that own these assets, and we feel they're likely going to come back to the market, either on off-market deals or marketed deals to sell these assets in the near future.

Also, California has the highest number of distressed assets of any state in the country. Our strong balance sheet, low leverage, and uncapped credit facility give us the capacity to fund growth, take advantage of these opportunities, and successfully execute our business plan.

As many of you know, this is our second experience taking a company from private to public. I co-founded Arden Realty in 1990 with many member of this -- management team. They're a great group; they're experienced, they're disciplined and they have a proven track record.

Because of that experience, we have exceptional institutional partners who have helped us assemble a quality portfolio in key marketplaces from San Francisco down to San Diego. These institutional partners believe in our strategy and they have remained with us as Hudson Pacific shareholders following the IPO.

We have a solid based portfolio of eight properties in Los Angeles, Orange County, San Diego and San Francisco. On the office side, our portfolio consists of six high quality properties in Hollywood, Orange County, San Diego, and San Fernando Valley, and San Francisco.

The stabilized Office portfolio consists of five properties in 900,000 square feet, with a weighted average occupancy rate of 94%. The sixth building is an attractive redevelopment property at 875 Howard Street in San Francisco's (inaudible) district, which was completed in April of this year.

It consists of more than 286,000 feet, including 90,000 square feet of retail that is 100% leased. The entire project is currently 60% leased and offers significant upside from the office lease-up and below market rental rate leases.

Unlike most of our competition, about half of the current square footage is in the media and entertainment properties. We're the only professional owners of studios in the market, which gives us a leg up as we look to acquire additional media and entertainment assets.

The Sunset Gower and Sunset Bronson campuses combined about 900,000 square feet ore more than 26 acres of land in Hollywood, California. These properties are very attractive because of the location and the lack of competitive properties.

The barriers to entry are high, as it would be extremely difficult to assemble that amount of land or square footage in this location today and replicate these campus environments. That gives us pricing power for our media and entertainment tenants, but it also gives access to extremely desirable developable land.

We're excited about the existing portfolio, but the key to our future growth will be property acquisitions. Already we have an impressive acquisition pipeline of more than $1 billion of assets. We forge this pipeline by capitalizing on our experience and our relationships within the marketplace, including brokers and institutional owners.

Most of these properties would potentially be off-market transactions throughout our target markets, which will allow us to negotiate directly with the sellers and mitigate competition from other potential buyers.

We're currently in negotiations for purchase and sale agreements and letter of intent on a number of office and media and entertainment properties in our pipeline. The volume and metrics on these assets are consistent with what we discussed on the road show. There are just a few -- they are just the first transactions of what we are confident will be significant deal flow during the next several months as we work through our initial pipeline.

With that, I'm going to turn the call over to Mark Lammas, our CFO, for discussion on our second quarter results. Mark?

Thank you, Victor. As Victor said earlier, our second quarter results were unique. We acquired three of our assets on June 29th. As a result, our second quarter results are not representative of the current portfolio and not -- and will not be very useful to you for baseline comparisons going forward.

That said, for the second quarter of 2010, the Company reported a net loss of $2.8 million compared to a net loss of $100,000 a year ago. Net loss for the first six months of 2010 was $2.2 million, compared to net income of $100,000 in the first six months of the prior year.

Second quarter 2010 results include a one-time $2.4 million expense relating to our acquisition of properties in connection with our IPO related formation transaction. Turning to our combined operating results for the second quarter of 2010, total revenue increased 2.4% to $11.1 million, from $10.8 million a year ago. The increase in total revenue was attributable to a $600,000 increase in rental revenue to $8.2 million, which was partially offset by a $400,000 decrease in other property related revenue to $1.9 million.

Total operating expenses increased $500,000, or 6%, to $9.3 million from $8.8 million a year ago. The increase in total operating expenses was primarily the result of a $200,000 increase in office operating expenses and a $300,000 increase in depreciation and amortization expense.

Our income from operations was $1.8 million, compared to income from operations of $2 million a year ago. Interest expense during the second quarter remained relatively flat compared to the same period of 2009.

Acquisition related expense during the second quarter was $2.4 million, with no comparable expense in the same period last year. The increase was due to a one-time transaction cost relating to our acquisition of properties in connection with our IPO and related formation transactions.

Looking at our results by segment, total revenue on our office property segment increased 23% to $3.7 million from $3 million in the second quarter of 2009. This increase was primarily the result of a $700,000 increase in rental revenue to $3.3 million, which was largely attributed to improved occupancy.

Property operating expenses in this segment increased 10.4% to $1.6 million, from $1.5 million a year ago. At June 30, 2010, our office portfolio was 85.9% leased and 80.2% occupied. During the quarter, we signed five new and renewal leases totaling 11,086 square feet.

Total revenue at our media and entertainment properties decreased 5.7% to $7.3 million from $7.8 million in the second quarter of 2009. The decline was primarily the result of a $400,000 decrease in other property related revenue. Total media and entertainment expenses remain relatively flat compared to the same period a year ago. At June 30, 2010, our media and entertainment portfolio was 67.1% leased.

Turning to the balance sheet, at June 30, 2010, the Company had cash and cash equivalents of $84.5 million and total real estate assets of $487.9 million. Also, at June 30, we had availability of approximately $77 million on our undrawn $200 million secured credit facility.

Given the recent IPO, and the fact that this was both our first public quarter and an unusual one, we will not be providing guidance at this time. We plan to provide initial guidance for 2011 when we report our third quarter 2010 results.

And now, let's turn the call back over to Victor for some final thoughts.

Thank you, Mark. I'm excited about our company and of the team we put together here at Hudson Pacific. Our experienced and proven management team, our track record, and our significant public company experience speak for themselves.

We believe now is the right time to take advantage of the opportunities here in California. We already have a high quality office portfolio, which will serve as a solid foundation as we look to grow this Company for the long term. We have an established internal growth structure, but we also have a robust acquisition pipeline that we're very excited about.

Finally, our flexible capital structure and low leverage will help us navigate through any economic uncertainty. We're very excited to be back in the public markets again, and we look forward to delivering significant value to our shareholders in the years to come.

And now, operator, we welcome any questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions)

Our first question comes from the line of Chris Katen with Morgan Stanley. Please, go ahead.

Hi. Thank you. Victor, maybe could you talk for a moment about which of the California markets you're most bullish on in terms of taking a value added or lease-up risk in your acquisitions, and maybe which markets you're least bullish on?

Sure. Hey, Chris. How are you?

I'm good.

So -- good. So sort of in no particular order, I think we're very bullish in the northern California, specifically in the city -- San Francisco area. We are less, in the northern California marketplace in terms of lease-up and absorption aspects, we're less intrigued on the East Bay and the surrounding areas, obviously, down the East Bay.

In terms of the peninsula, there are certain pockets in the marketplace there that we're very excited about, but given the fact that there's a (inaudible) fairly large tenant marketplace, the quality is obviously going to be key.

In terms of Southern California, very bullish on Los Angeles given the lack of development and the deals that we're seeing right now, we're working on, the opportunities are pretty exciting. Clearly, we're not downtown players. The tri-city marketplace and the Inland Empire are areas that we're not exactly all that excited about in this phase, given where absorption has been and the future absorption is.

I'm not discounting Orange County. We know that the vacancy in Orange County has been very high, but our performance in those markets is consistently and most recently been very good. We're very excited about the Orange County marketplace, specifically north Orange County versus the Irvine or central Orange County airport area.

And then in San Diego, I think pockets of San Diego we really like and we'd like to stay very focused in the [Sarento Kearny] area and maybe stay a little bit further away, the downtown and the north San Diego County area right now.

That's helpful. One follow-up on kind of the bullishness on Northern California, are you seeing good tenant traffic through 875 Howard? I think you said you were 60% leased. What do you think would be a good goal in terms of leasing that up?

So we projected in our numbers to be by end of second quarter of '11, fully stabilized there. We've got, right now, very good traction at 875. Three large tenants for the vacancies that are in place today, totaling about 55,000 feet, we're in discussions on. So, we're well ahead of schedule as to where we thought.

There are media and technology companies specifically, like we talked about, that attract that area and that specific building, so it's exactly in line with what we thought. I think we're ahead of schedule, but I don't want to -- I don't want to speak before something sort of triggers, but we are in negotiations on some interesting LOIs on three specific tenants for some pretty good space.

Sure, and as you -- last question, I guess -- as you talk to those tenants about rents, is that coming in kind of where you thought -- you might have thought three months ago? Is there a bottoming? Is there any increase? What do you -- what do you think on the rent side?

It's definitely in line. We're just right now somewhere in the 30 -- $30 a foot, which is net of janitorial and the likes of that. So it's in line with what we think. I think the rent is not going to surprise us, nor is the concessions to where we underwrote it at. Not sure yet with tenant improvements, but we should still feel pretty comfortable that we're right there.

Thank you.

Thank you. And our next question comes from the line of Michael Knott with Green Street Advisors. Please, go ahead.

Good morning, guys. This is Enrique Torres on behalf of Michael Knott. Can you just comment, give a little color on traction in the media portfolio this past quarter, in terms of you seeing if you have potential leases in the works for increasing the occupancy over the rest of this year, and also commenting on the other property revenues?

Yes, sure. Hey, Enrique. How are you doing?

Good.

Well, we backfilled our (inaudible) space 100%, which was a total of 152,000 feet. We have -- we backfilled that in a 15 day period with three separate tenants and we had positive absorption in terms of capital dollars there. But we're very happy about that.

I think we're seeing a tremendous television -- increased television. There's the midseason pickup show is still very strong, as well as the year-end shows, was really -- increased the number of shows that we thought were transferred out. So, we're happy with that.

In terms of the office, we are consistently seeing an increase in there. Over on Sunset-Gower, we're almost 100% leased, with the exception of our 6060 -- and our 6060 Building which is the new building that we just rebuilt. That building currently today is showing two specific tenants to take the entire space.

So, we're seeing activity there as well. So in terms of Bronson and Gower, we are very happy with the performance in terms of the second quarter and the third quarter looks very good as well.

So would you say that occupancy is going to remain stable there, or is there a chance that it goes up by the end of the year?

No, I think we're pretty confident that it will go up by the end of the year, specifically on the office side. In terms of the soundstage space and the ancillary revenues, I think we're going to be consistent with where we were last year. Ancillary revenues has been flat over year-over-year.

We do have -- I think we had mentioned this when you were with us, actually, and we'd also mentioned this from the road, we do have an interesting HD upgrade package that would attract additional ancillary revenue that we are in process of installing and owning the equipment. So that HD upgrade will, I think, enhance the ancillary revenue stream.

And then as a follow-up to your comment on the LOIs on several deals. Do you expect any of those to close before year end, or how is timing looking no those?

In terms of acquisitions, Enrique?

Yes.

Yes, we expect to have a number of deals closed before year-end.

Okay. Great. Thanks for the color, guys.

Thank you. And our next question comes from the line of Brendan Maiorana from Wells Fargo. Please, go ahead.

Yes, it's actually Young Ku here for Brendan. Good afternoon, guys. Just had a quick question on the financial side. Mark, you said that this wasn't a clean quarter because, obviously due to the IPO, but if we were to look at it going forward, what kind of clean FFO run-rate could be expect in Q2 or maybe if it happened in Q1?

So, I'm thinking we're going to have our supplemental and Q out in 24 hours. I could back you into an FFO off of the reported numbers now, but they would be -- it would be indicative of only a subset of the assets.

And so, I think what would be better is after we get the numbers out, to look at -- for you to look at the FFO that those numbers show and for us to then -- if there's a lot of questions -- follow-up questions about what our run-rate looks like in terms of FFO from there, for us to discuss that further.

And rather than us to try to, I don't know, extrapolate from the numbers that are running through now and add unreported numbers on the assets that we only owned for the two days, to sort of -- and then sort of strain that guidance, which we weren't -- we're not prepared to provide just yet.

But I want to make sure that we're making ourselves available to give you a sense for where FFO would be heading. I just don't think the numbers that are available right now are kicking kind of a right springboard, if you will, to start that discussion yet.

Okay. That's fair enough. Just wanted to go back to the studio assets a little bit. Victor, I think you talked about that you guys would be interested in acquiring additional media and entertainment assets. It's a relatively thin market, so just wondering what kind of opportunities might be available out there and what kind of cap rates are you guys looking at?

The opportunities in the media and entertainment assets here are about four or five specific ones that we are in various different conversation with. Cap rates are in line with what we sort of underwrote our existing portfolio, which is sub-nines. So somewhere in the mid-eight range to nine cap range on current, in-place income, which I caution, when you look at valuing these things, the ancillary revenue is in place today versus a run-rate for an annualized amount.

So, that's why we can [entice] a higher cap rate basis. I think there is additional cost savings and synergistic value add when we're going to look at these assets that we've not taken in consideration once we acquire these going forward.

Now those four or five that you just talked about, what kind of occupancy are those guys -- are those assets supporting right now?

Market occupancy levels are anywhere from the 70% to 85% range, depending on the asset they're at, so I think they're very consistent with what we have. Some of them do not have the amount of office space occupancy -- high level office space that ours currently have, so the upside will be more in the office than in the media and entertainment.

So, could we extrapolate that, that Gower and Bronson you could probably get the stabilized occupancy to maybe low 80s?

I think our functional occupancy levels for Gower and Bronson in peak times is going to be the mid to low-80s.

Okay. And, when do you think that can materialize over time?

I think we're hopefully looking at first quarter of 2011.

Sounds good. Thank you, guys.

Thanks.

Thank you. And our next question comes from the line of Rich Anderson with BMO Capital Markets. Please, go ahead.

Thanks. Good morning, out there. I guess, Victor, what would you say in your mind would be too long before you actually started to close things following your IPO? I mean, do you have a timeline in mind that you think is important for you to meet in terms of getting people behind the story from an acquisition standpoint.

I don't think it's too long. I think it's going to be the quality of the deals we're going to do out of the chute. And we -- I'm very comfortable that the team here is going to be able to announce certain deals in the near future that are going to be completely in line with what our road show and IPO story was, which is a combination of three things.

It's going to be some value-add stuff which is going to be a lease-up play and price per pound in well located assets. It's going to be higher cap rates, which are going to be media and entertainment assets and/or some existing off-market deal. Both of those -- that we are in discussions with that are a higher cap rate, and then low cap rate class A stuff to round out the portfolio and increase the overall value of the portfolio in specific locations.

We are also in conversations, as I had indicated when we were on the road, with transactions and certain specific sellers where we're going to be using our currency for specific deals and part of our equity, our basis going in.

I think the last thing you need is -- we're very comfortable with the value-add assets that we're looking and the amount of leverage that we're going to put on the Company overall to keep it in that range of sub-50% and closer to 40% level once we're fully stabilized. I don't think timing is the issue. I do think that in the near future, the rally behind the so-called value added and our acquisition pipeline is going to be pretty well received in the next few months.

Okay. Would you say that kind of the redevelopment bucket would be a third of the overall pipeline or is it more than that?

From a dollar standpoint --

Yes.

I think it's probably a third. I think from the sort of a redevelopment -- we sort of throw that bucket of redevelopment price per pound. Yes, I'd say that's about a third from a dollar standpoint, maybe a little less than that. Obviously, when we're talking about lower cap rate, class A stabilized assets, the value of those are much higher from a price -- dollar standpoint, which is going to jade the overall amount of the acquisitions --

(inaudible)

(inaudible) unique, too.

Okay, got you. On the Studio business, can you talk about lease terms and my understanding after doing the tour with Howard, the different strokes were all together that coincide with the shows and they tend to be the shorter term leases. Can you talk about why that doesn't feel like a risk to you, and some of the history that you have with that business and how short-term leases have actually turned into long-term leases because of renewals and whatnot?

Absolutely. So if you look at the pie charts that are this way, it's sort of -- sort of three different classification. You've got your ancillary revenue, which is about 25% of the revenue stream, which is correlated to the studio space. So if the studio space is occupied and being produced, you're going to see ancillary revenues being correlated to that.

The other, maybe somewhere in the 35% to -- sorry, 35% to 40% of the bucket is the studio space, the actual facilities themselves. Those are seasonal. Now, those shows are year to year. The leases are signed year to year, but in any instance, if those shows are consistently improved and picked up, like our shows we have at one of our facilities, which is a show called Dexter, they're going on their fifth season there -- it's a five year lease, but it's five one-year renewals.

So the consistency of that tenant is great. And the backside of that is that if that show is not picked up, the production company and/or the studio who backs it, which in this case is CBS/Showtime, they would bring another show because of their experience at our facilities. And we've seen that time and time again.

Disney has consistently come to the same facilities with us on show after show after show, and prior to our Hannah Montana success story, we had since day one. Prior to that studio was here in the same location, and then they'd turn around and been their consistent link all the way through. And now, they've picked up the space with another Disney show.

The last attribute of the show -- the shows aspect, is we've got certain tenants, like KTLA, like -- two reality TV shows that have been there 15 plus years. One show on KTLA had been there over 15 years and one show's been there 12. So, that's what I would consider a long-term tenant. And every year those leases are renewed and they have automatic increases and it's a pretty stable income stream.

The caveat for -- let me just give you the last piece of the puzzle. Last piece, that 35% are long-term tenants. You're stabilized long-term tenants are just normal office tenants that have normal occupancy levels and renewals every five yours or whatever the case may be, or three to five year leases and the likes of that.

The only attribute that I think is worth noting is on the media side, these shows -- there's a voracious appetite for content in the marketplace today, and so these shows need a place to go. There's no new construction in the media world today in terms of new facilities and there's a higher demand for television than it's ever been before.

So, we're seeing a tremendous amount of feverish activity on these stages at certain times of year. Typically, that falls in the classification of May, and cyclically that falls into the classification again in the -- in sort of a -- in what we call a midseason pickup, which is September and October again when these shows get green lit to replace the existing shows.

So there are certain times of the year that it's much more feverish than others, but we look at these year-to-year leases and we've been pretty consistent in terms of rollover and the stickiness of these tenants renewing on a year-to-year basis.

So just to kind of tie it all up, so a show like The Event, if The Event becomes the non-event, it's less to do with the show, more to do with the relationship you have with the production company?

Well, it's a great example there, because Heroes was a show that was replaced -- The Event was one of the shows that replaced -- with Heroes, which are both NBC shows. And so, NBC replaced one with the other. And if The Event becomes a non-event, which we -- which we'll find out sometime in Fall, we'll know that the NBC guys will end up coming back and saying we've got a replacement show. This is what we want to do.

Don't forget, based on a year lease, so they need to back-deal their own space.

Right.

And -- they're (inaudible) to pay rent for the remaining seven months of the lease term or whatever the case may be. They'd rather bring a show in. So there's -- it's a consistent cycle of relationships going forward.

Okay. Is the ancillary revenue good income from REIT perspective?

What we've done is we've structured it in two different buckets; one is the taxable REIT subsidiary and then one is good income. And it's because of the classification of the ancillary income stream.

So some of it is good, and some of it's not good?

Yes, right. What's the leakage?

Yes, our run-rate leakage on it is about 250 per annum.

Okay. And just last question, for the existing office portfolio, it's my understanding, occupancy may have slipped a little while in that period while you were going through the IPO process. You had a -- I don't want to use the word, but -- an owner who knew that the clock was ticking.

How much do you feel like the existing portfolio has upside to it now that it's under your jurisdiction, both from an occupancy standpoint and a rent standpoint, if at all?

Well, I mean, the (inaudible) portfolio is 94% leased and I think the upside is going to be in rental rate movement, obviously not in occupancy levels. But 875 Howard got tremendous upside.

We've got 6% occupancy there with great activity, so I think First Financial, Tierrasanta, City Plaza and Technicolor are fairly well stabilized and we've got some (inaudible) assets to the likes of that, but in terms of 6060, which we've got 100% upside there. We've got, as I said, 40% upside in office over at 875. So, we're pretty excited about the upside and the lease-up in those assets.

Okay. Great.

We've taken those over at full charge the day after we went public, so even the predecessor assets now are combined with the newer assets.

Okay, great. Thank you very much.

You got it.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please, go ahead.

Good morning.

Morning, Jordan.

Wanted to touch base quickly on the pipeline. You said $1 billion in your prepared remarks and we're dancing around it a little bit, but you said you're in negotiation on several purchase sale agreements. Could you maybe bracket for us a little bit better the stuff that's a little bit more imminent or under negotiation, letter of intent, purchase of sale?

Listen, within reason these brackets are fairly large, okay, for obvious reasons.

That's fine.

We are negotiating the purchase of sale agreement currently today on a fairly large media and entertainment asset. We are negotiating -- in the early stages of negotiating that purchase of sale agreement for an office building right now in the Bay area.

We are also looking at another office building in the Bay area that's fairly large that we are negotiating a fairly sound LOI. We have a couple of -- we have our Del Amo deal, hopefully is going to be closing this week that is in escrow that we reported. We've done another office building, which is small, here in Los Angeles that we are -- we have negotiated a purchase of sale agreement and hope to close by the end of August.

So that sort of gives you a bracket of the deals that are -- hotly contested and stuff that we are very close to various different stages of acquiring. I think in terms of the next sort of phase, we've got four or five other transaction that we are in conversations with and the negotiations are back and forth (inaudible) and making offers on that are marketed and/or not marketed deals.

And it's the same combination with the ones we're talking about. Of the deals that I mentioned, one, two, three -- three are not marketed.

Okay. Order of magnitude, $100 million to $200 million, or --?

No. In terms of -- in aggregate of all the deals? It's over $300 million.

That's very helpful. And then --

Helpful for you, or helpful for us?

Hopefully, both.

Good.

The other question I had was surrounding sort of the leasing. 875 Howard, I think you said consistent with expectations, but what are asking rents, TIs, just basic leasing costs in that property right now?

I mean, the effective rent that we're talking about here are just on all -- on all three deals that we are looking at, which total, as I said, over 50,000 feet, are $29 to $31. So it's effective in terms of the TI packages, they're all very consistent. They're all 40 to 50 because it's raw space. And in terms of the abatement on these deals, you're probably talking three months across the board. And the average term is three to five.

And those are gross rents --?

No, no, no. Those are -- those are net of utilities and janitorial.

Very helpful. Thank you.

Got it.

Thank you.

(Operator Instructions)

And our next question comes from the line of Michael Knott with Green Street Advisors. Please, go ahead.

Hi, guys. It's one more follow-up on deals. McGuire announced this morning that they're shopping their good project, the recent development in Glendale that's mostly vacant. Is that something that would be on your radar in terms of that location, as well as taking on that kind of leasing risk for like a -- essentially a more empty building, even though it is a smaller asset?

Enrique, I think parameter-wise it's the kind of think we would look at. Right now, as I said and I think it was the very first question I was asked, it's not primary marketplace that we would look at in terms of the tri-cities area. It's not something that we won't look at. We'll look at everything.

Right.

And see what the value-add is or what makes sense. I think eventually the tri-cities, for us, we would sort of call it the bi-cities because I think we feel that Glendale and Burbank are better than Pasadena, so we would look at those markets, but that's not exactly first and foremost on our list of deals that we're looking at.

Okay. Thank you.

You got it, Enrique.

Thank you. And our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please, go ahead.

Sorry, just a follow-up on the Heroes backfill. Could you give us sense of rent roll -- up, down?

It's up and it's -- I think it's about 10% higher than it was before.

10%. Okay. Perfect. Thank you.

You got it.

Thank you. And I'm showing no further questions in the queue. I'll hand it back to Mr. Coleman for any further remarks.

Thank you very much for participating in our first call. We anticipate a lot of good news coming out of the Company going forward, and we appreciate your time. Have a good day.

And, ladies and gentlemen, that does conclude the Hudson Pacific Properties Second Quarter 2010 Earnings Conference Call. Thank you for your participation. You may now disconnect.