Hudson Pacific Properties Inc (HPP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hudson Pacific Properties first quarter 2011 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Mr. Andrew Blazier. Please go ahead, sir.

Good afternoon, everyone, and welcome to Hudson Pacific Properties first quarter 2011 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 it them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time.

All information discussed on this call is as of today, May 10, 2011, 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.

Thank you, Andrew, and welcome, everyone, to our first quarter conference call. We've been very active thus far in 2011, and I'm pleased to say we've made tremendous progress on our strategic and operational initiatives. Our follow-on equity offering and concurrent private placement on April 28th, generated net proceeds before transaction costs of $156.7 million, providing us with equity capital to grow the company during the next several months.

To put this in perspective, this offering was highly successful compared to other REIT offerings during the last few years, as the stock traded up in the daily price offerings and has continued to appreciate in the days since.

We also completed several important financing transactions, including a $92 million loan on our media and entertainment properties, and an amendment to our $200 million secured credit facility, both of which significantly enhance the availability and cost capital for us to [to be pooled].

Operationally, we continue to see strong leasing activity, improving fundamentals in most of our markets, especially in San Francisco where we completed more than 100,000 square feet of new and renewal leases in the first quarter, often at starting rents and with concessions that were better than we initially projected when we acquired these assets.

In general, our property occupancy rates are better than the rates in their respective submarkets and the office property occupancy rates overall have improved in the majority of our markets. In the first quarter, we executed 20 new and renewal leases at our office property, filling 130,855 square feet. The office portfolio had a weighted average lease rate of 89.5% at the end of the first quarter, up from 88% in the fourth quarter. Early indications suggest that this healthy leasing activity could continue into the current quarter.

I'd just like to take a moment to underscore the progress we made in leasing since the IPO. At our IPO in June of last year, occupancy at certain of our assets was not yet stabilized. As an example, at our 875 Howard asset, we increased occupancy from 33% at IPO to 78% at March 31, and we've increased the total occupancy at our studio asset, Sunset Bronson and Sunset Gower, from 67% for the 12 months ended March 31 of last year, to 74% for the trailing 12 months ended March 31 of 2011.

As for assets we acquired since IPO, occupancy has improved at our 222 Kearny from 79% at acquisition to 94% at March 31, and at Rincon Center from 80% at acquisition to 85% at quarter end. This improvement is a great testament to the work of our leasing team and our focus on leasing since the company's inception.

During the first quarter, we exercised our option to acquire the remainder of Rincon Center in San Francisco's South Financial District, for a combined total gross purchase price of approximately $185 million. This includes the $40.3 million joint venture investment we made in December. On April 29th, we completed the acquisition of the remaining 49% joint venture interest in Rincon, for approximately $38.7 million.

In connection with that acquisition, we successfully refinanced the prior $160 million project loan with a seven-year, $110 million non-recourse loan bearing an interest rate of 5.134%.

With the completion of the Rincon transaction, our portfolio now consists of more than four million square feet [in four] properties that support future commercial development of up to an additional 1.4 million square feet. All these properties are located in our target markets, San Francisco, Los Angeles, Orange County, and San Diego.

Turning to our media and entertainment properties, we continue to benefit from the improving conditions in the media and entertainment sector. As I mentioned earlier, as of the first quarter of 2011, the trailing 12 month occupancy for our media and entertainment property increased to 74% from 67% for the trailing 12-month period ended March 31, 2010. The first quarter results reflect improving trends in the media and entertainment, especially in the television segment which continues to display strong demands of content.

Since our June IPO, we've now completed transactions on assets with a combined gross purchase price of more than $400 million. All of these transactions have been off market, stemming from our experience and relationships in the marketplace and demonstrating our ability to execute our growth strategy by consistently [accessing] our pipeline opportunities.

That pipeline continues to remain strong, and we are promising -- we are in promising negotiations on several additional properties, both office and media and entertainment. Consistent with our prior experience, these are mostly off-market opportunities stemming from relationships we've built up to over the last two decades of involvement in our core market.

With that, I'm going to turn the call over to Mark Lammas, our CFO, for a discussion of our first quarter results. Mark.

Thank you, Victor. For the first quarter of 2011, funds from operations totaled $8.8 million or $0.34 per diluted share. As we mentioned on our March conference call, we received an early termination payment of $2.7 million or $0.11 per diluted share from a single floor tenant at our City Plaza project during the first quarter. That amount was partially offset by the write-off for the straight-line rent receivable and a lease buyout cost asset associated with that early termination of $716,000 or $0.03 per diluted share.

Excluding the early lease termination, FFO for the first quarter of 2011, totaled $6.8 million or $0.26 per diluted share.

Net loss attributable to common shareholders was $2.5 million or $0.11 per diluted share, compared to net income of $666,000 for the same period a year ago.

Turning to our combined operating results, as we've noted before, as a result of the property acquisitions at our IPO and during the third and fourth quarters of 2010, our operating results prior to June 2010, offer little comparison to the results for the current period with the exception of our reported media and entertainment segment.

For the first quarter of 2011, total revenue increased 244%, to $34.8 million from $11 million a year ago. The increase in total revenue was primarily attributed to a $14.7 million increase in rental revenue to $23 million, a $5.6 million increase in tenant recoveries to $6.4 million, a $1.4 million increase, and other property-related revenues of $2.3 million.

Total operating expenses increased 255% to $30 million from $8.4 million a year ago. The increase in total operating expense is -- expenses was primarily the result of a $9.1 million increase in office operating expenses to $10.3 million, a $600,000 increase in media and entertainment operating expenses, to $5.2 million, an $8.6 million increase in depreciation and amortization to $11.4 million, and a $3.1 million increase in general and administrative expenses with no comparable expense in the prior period.

Income from operations increased 91%, to $5 million, compared to income from operations of $2.5 million a year ago.

Interest expense during the [fourth] quarter increased [123%], to $4.6 million, compared to interest expense of $2.1 million a year ago. At March 31, 2011, we had $332.2 million in notes payable, compared to $342.1 million of notes payable at December 31, 2010.

Looking at our results by segment, total revenue in our office property segment increased 638%, to $25.6 million from [$3.5] million in the first quarter of 2010. The increase was primarily the result of a $14.5 million increase in rental revenue, a $5.6 million increase in tenant recoveries, and a $2 million increase in other revenue, which were largely attributable to contributions from office properties acquired in connection with our IPO and during the second half of 2010, along, to a lesser extent, with improved occupancy at our existing office property.

Property operating expenses in this segment increased 758%, to $10.3 million, from $1.2 million a year ago. At March 31, 2011, our office portfolio was 89.5% leased, up from 88% leased at December 31, 2010. During the quarter, as Victor mentioned, the company executed 20 new and renewal leases at our office properties, totaling 130,855 square feet.

Turning to our media campuses, total revenue at our media and entertainment properties increased 22%, to $9.2 million from $7.5 million for the first quarter of 2010. The increase is primarily the result of a $200,000 increase in rental revenue to $5.5 million, a $1.4 million increase in other property-related revenues to $3.3 million.

Total media and entertainment expenses increased 14%, to $5.2 million from $4.5 million in the same period a year ago. As March -- as of March 31, 2011, the trailing 12-month occupancy for our media and entertainment portfolio increased to 73.8%, from 66.9% for the trailing 12-month period ended March 31, 2010.

Turning to the balance sheet. At March 31, 2011, the company had total assets of $994.2 million (sic -- see press release), including cash and cash equivalents of $38.3 million. In addition, the company has total capacity of approximately $139.8 million on a $200 million credit facility, $46.5 million of which had been drawn out at the end of the first quarter.

In February, we closed a five-year term loan totaling $92 million with Wells Fargo Bank, secured by the Sunset Gower and Sunset Bronson campuses. The loan bears interest at a rate equal to one month LIBOR plus 350 basis points. On March 16, 2011, we purchased an interest rate contract to cap one-month LIBOR at 3.715%, with respect to $50 million of the loan through its maturity on February 11, 2016. Proceeds from this loan were used to fully refinance a $37 million mortgage loan secured by our Sunset Bronson campus that was scheduled to mature on April 30, 2011. The remaining proceeds were used to partially pay down our $200 million secured credit facility.

Shortly following the end of the quarter, we announced we had completed an amendment to our $200 million secured credit facility. As a result of the amendment, the facility now bears interest at a rate per annum equal to LIBOR plus 250 to 325 basis points, down from 325 to 400 basis points, depending on the company's leverage ratio and is no longer subject to the LIBOR floor of 1.5%.

The facility continues to include an accordion feature that allows the company to increase availability by $50 million to $250 million. The amount available for the company to borrow under this facility remains subject to loan-to-value and (inaudible) services coverage threshold, both of which were increased under the amendment to improve capacity.

Finally, the annual fee charged against the unused portion of the facility has been reduced to 40 basis points, down from 50 basis points.

One final update regarding our credit facility. A portion of the proceeds from our recently announced secondary offering were used to fully repay the outstanding balance on our facility, leaving the current $139.8 million capacity entirely available.

During the quarter, we paid a quarterly dividend on our common stock of $0.125 per share for the first quarter of 2011, which references a 31.6% increase from the fourth quarter.

And now I'll turn the call back to Victor for some final thoughts.

Thanks, Mark. We've made significant achievements during the first quarter, including significant leasing in our northern California portfolio, securing a five-year project financing for our media and entertainment properties, securing an important cost-savings amendment to our secured credit facility.

We're pleased with these first quarter accomplishments and we seek to enhance performance of our existing portfolio and look ahead to further opportunities to build a portfolio positioned for long-term growth. We appreciate everyone's continued support of Hudson Pacific Properties. And now we're going to look forward to updating you on our progress again next quarter.

Now, Operator, I'll open the call up for questions, please.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Jamie Feldman with Bank of America/Merrill Lynch. Please go ahead.

Hi. This is Michelle Ko for Jamie Feldman. I was just wondering if you could give us an update on the acquisition pipeline in terms of size, pricing, and timing, and how much of it is media versus traditional office.

Sure. Well, the majority of the assets we're looking at, about I would say 75% of them are office assets in our core market. There are a few media and entertainment assets that we are looking at now. Currently we don't have any deals under contract or in any forms or functions. And so we are actively pursuing the existing pipeline that we've shared with the Street in the past 30 to 45 days. That pipeline's gotten a little bit bigger, but materially hasn't change from what we looked at in the past. As I said, the majority of the assets are office assets with a couple of specific media and entertainment properties involved.

Could you give us an idea of the size of the pipeline that you're looking at now?

Well, our pipeline hasn't changed, as I said, from the last 45 days, which is slightly over $900 million in assets that we are covering on various different levels of conversations and evaluating the assets.

Okay. And could you also talk about what kinds of cap rates you're seeing in some of your core markets?

Yes, sure. From a stabilized standpoint, we've seen cap rates drop somewhere between 50 and 75 basis points from, let's say the end of the third quarter last year to currently where we are right now. On a stabilized basis, we're looking at going end cap rates in the mid- to low sixes for the high quality assets that we are pursuing on the office side. On the media and entertainment assets, they're slightly higher than that. They're more like 100-wide from that, so they're in the mid-sevens. And what we're seeing is an increase in price-per-foot on some of these assets as well, but still well below replacement cost.

Okay. Great. And can you talk a little bit about guidance?

Sure. Hi, Michelle. The -- so we've completed some fairly material transactions both on the financing side and leasing, and then most recently on the secondary offering, shortly before this call and posting our first quarter results.

In terms of the core results, disregarding for a moment the per share results, we're not -- we don't -- we certainly don't have reason to think that we're not on track with respect to our underlying assumption. Naturally, the per share guidance amount is going to be considerably different than what we discussed in our first -- on our fourth quarter conference call if only because we just issued more than 11 million shares.

But in terms of that underlying number, I would think our assumptions are intact, sort of as we look and compare our first quarter results against our full-year assumption.

Okay. I guess will you be reissuing a new number --

Yes.

-- including the --

We're going to be -- yes, we're going to go back. We haven't discussed yet on whether or not we'll do it before we announce our next set of earnings or if we'll do it sooner. But we are going back and re-looking at our Q1 performance actuals against our original assumptions. And we do expect to reissue guidance, we just don't know exactly when between now and the next set of earnings.

Okay. Thank you.

Thank you.

Our next question is from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Hi. It's Craig Mailman here with Jordan. Mark, could you maybe give us an update of dry powder pro forma, the Rincon, the remaining acquisition there, and the offering?

Sure. We completed the Rincon acquisition on the 29th. And so the number I'm going to give you in terms of dry powder factors that in. With the net proceeds raised from the follow-on offering and our utilization of about $81 million of those proceeds and repayment of what was then the outstanding credit facility balance, our total available liquidity is approximately $210 million on assuming the current borrowing base availability of approximately $140 million under the credit facility, plus additional cash on hand from the offering. Just to make sure we're not talking (inaudible), that $140 million of current borrowing base capacity can increase it to the extent that we acquire more assets that become available for the lines.

And so there's further potential liquidity embedded in the facility itself. And then in terms of buy -- so that gives you an idea of capacity. In terms of potential target growth acquisitions, I think we look at the recent raise, which was net about 100 -- between 150, 160 -- [156], call it. We look at it at about $300 million of gross acquisition availability levered.

Okay. And then how much bigger does the borrowing base have to get to get the additional [$50] million on the line?

Well, you -- it depends on if [it tests based] on the lower of loan-to-value and DSCR, both of which are better than the original facility, we've laid it out. But you're basically capped at, call it 60% of whatever the appraised value of the property coming in, assuming that the DSCR, which is at a one five DSCR on a trailing 12, assuming it too supports a loan-to-value of that amount.

Yes. So like $100 million of additional unencumbered acquisitions will get you there, roughly?

That's a -- it's a little bit more, but, yes, that's a good estimate.

Okay. And then just, Victor, maybe you can go through where stabilized yields are coming in in some of the recent acquisitions upon leasing, like 222 Kearny and Rincon, relative to expectations? And then just maybe the -- an overall level.

Yes. I mean, overall, the yields are higher than what we underwrote them at, given where the stabilization is and the timing by which we signed the leases in the last couple of quarters. On 222, we're probably ahead by about 100 basis points, I think, than what we underwrote it at. In terms of -- in terms of 1455, we are -- we're just -- we've done a little bit better leasing. And so, but we had underwritten that at just above a 10, and we're over an 11 on that right now.

Rincon, it's too early to tell on that. We've got leasing, as I mentioned, increased 5%. On Rincon, we underwrote it at about a six eight, and we're better than that as we sit today. Our [two facilities in] southern California, our 9300 asset, we underwrote that as a -- at a low eight basis, and we're about 8.75 right now on that asset. And then on 10 -- on 10950, which is our NFL building, we underwrote that at a seven two initially, and we're just slightly better than that now because it was virtually 90-plus percent occupied when we bought it.

So on every asset that we bought so far to date, our initial cap rates and stabilized yields going in are much higher than they were in some instances and slightly higher in others.

All right. Great. Then just lastly, on overall leasing, maybe give a little bit more color on San Francisco and some of the remaining vacancy you have there and kind of the prospects. And also, maybe an update on the -- I know you had talked about a potential abatement near 1455, and just where that stands.

Yes. So let's just start in general, I mean, leasing is up from a velocity standpoint in all the markets we're in right now. We're seeing it in all our assets a much greater tour rate, a lot more proposals, less concessions, and asking rates are starting to move in virtually all the marketplaces with the exception of Orange County right now, where they're probably flat and the concessions are equally to what we underwrote them at in the last 12 months.

In San Francisco particularly, obviously the velocity is much higher and the leasing there, we're pushing rates quite substantially to where we initially underwrote it between six and 12 months ago. We are -- every space that we currently have in the marketplace is at a higher rental rate than we thought it was going to be when we initially underwrote it.

We're seeing obviously the drive by the social media and the tech in the city, being the most populous groups to come to the marketplace.

In terms of, the bigger asset with vacancy for us, 875 Howard, we had always said that by sometime end of third quarter, beginning of fourth quarter, we'd be stabilized. Currently today, we went from just under 40% occupancy less than a year ago, 10 months ago, to about 80% currently today. We've got proposals outstanding to take us to roughly about 94%, 93% stabilized. Right now we only have about 6,000 square feet available in that asset that's not -- that nobody's looking at. Everything else we have multiple proposals on.

And so we're -- and where our rental rate's much higher than our forecasted rental rates were by somewhere between $2 and $3 a foot. So we're real happy about that asset and seeing where the stable [aspects] are.

On 1455, as I mentioned, we -- with BofA starting to roll, BofA's come back to us in that marketplace, given the fact that they have nowhere else to go, and asked to extend some of their shorter term leases, which we're in conversations on, and we've got new tenants looking at the remaining vacant space to the tune of about 50,000 feet in proposals outstanding right now on two main tenants that we're in negotiations on for 10-plus-year deals on both.

So we're seeing that. And then lastly, over on Rincon, one of the larger spaces available, we have activity there as well, which is about 35,000 feet in negotiations on that asset, at rental rates that are also higher than what we had anticipated there. So the activity has clearly picked up in the bay area and the capacity for us to lease much more of that space is pretty limited, given the fact that we're going to be ahead of schedule across the board.

In terms of --

Go ahead.

I was just going to -- this is Jordan. I was just following up on the commentary on San Francisco there. Are you seeing a difference between the demand for sort of the Rincon and its submarket versus Howard Street and 1455?

No. I mean, quite frankly, I mean, Rincon is still in that same tougher market area anyways, and --

Yes.

-- just more in the flow of it. But we're seeing activity across the board. I mean, our 222 Kearny deal, we've taken it from 74% to 93%, in a very short period of time. We're seeing anywhere from the -- obviously, the, as I said, the tech and social media drive, but we're seeing a lot of government and financial businesses as well, picking up space. We've got a large hospitality transaction that we just signed with a tenant there. So I think in all facets we're seeing a growth in those marketplaces pretty good.

I just want to talk -- just touch on the last part of the question that was asked, which is on our 1455 tax abatement aspect there.

Right. Right.

So the neighboring tenant with the building, which was Twitter, signed a 300,000 square foot lease in that zone. We were initially in that zone. It's being revisited on the payroll tax aspect, and as it currently stands today, we may not be in that zone going forward. The main aspect on that, though, is it has to be new tenancy and not government-related tenancy. And then there's an underlying bill that's being bantered around in San Francisco to abolish all payroll tax anyway. So it may be a moot issue at the end of the day.

But it currently doesn't affect us, but it sure does affect the surrounding area, which indirectly affects us because the growth in the -- of the existing media tenants that are there, specifically with Twitter and what's going to happen with that is really a positive effect to our property.

Great. Thanks.

Our next question is from the line of Chris Caton with Morgan Stanley. Please go ahead.

Hi. For either Victor or Howard, can you talk a little bit about the results of the studios? Certainly up by about a third year-on-year. Could you talk about -- could you talk about that? And then the occupancies seem to be up kind of like 600, 700 basis points. Can you talk about how this -- these assets will scale going forward? Because it looks like rental revenues are up maybe a little bit, certainly less than that, but expenses have grown more than that. Can you give us a little color on all the drivers there as the studios recover?

Yes. Well, let me have Mark first talk about the latter, and then Howard and I will touch upon the media stuff. Go ahead, Mark.

Great. So if you look at that year-over-year, Chris, the trailing 12 doesn't necessarily give you the best indication of how that quarter performed on a year-over-year basis insofar as the trailing 12 is dragging behind it the preceding period. And so you are seeing substantially higher trailing 12-month occupancy looking back at each of March 31, 2010, and March 31, 2011.

But if you just isolate the weighted average occupancy in each of those first quarters, what you find is there was about a little -- about a 4.5% improvement in weighted average occupancy in each of those two quarters year-over-year. And so I think you'll find, if you -- just focusing on the rental revenue, improvement again year-over-year, you have about that amount on the rental revenue side of improvement. That is to say it's roughly a 4% year-over-year improvement on rental revenue.

Where we see a substantially higher improvement is on the other property-related revenue. And under -- and I mean much higher than something corresponding to a 4% lift on occupancy. And the underlying driver of that is really the composition on the -- of the underlying tenancy in that quarter.

If you recall kind of going back to maybe IPO discussion days, in the first quarter of 2010, we had a very substantial tenant which didn't get picked up, called Heroes that was occupying five stages. And it not only didn't get picked up, but was in occupancy. But on account of it not being picked up, it never -- it never went into production, and so we weren't driving any ancillary revenue off of that, so-to-speak captive five stages. It was nice to have the base rental revenue, but we were sort of missing out on that property-related revenue.

By contrast, the makeup of the first quarter tenancy in this year is -- was made up of a lot of tenants that were more active in the first quarter. If you remember, we replaced Heroes with three new shows, the Cape, Outlaws, and the Event. Some of those are not in production, but other tenants came in on those stages and were in -- were far more active in the quarter.

And so if you just look at that year-over-year increase on other property-related revenue, about $1.4 million, about $900,000 of that is simply higher lighting and (inaudible) related to that higher production activity in that kind of comparable space. And then there's other ancillaries driving that.

And so hopefully that gives you kind of a way to reconcile that year-over-year improvement on revenue, compared to the pickup in the year-over-year as opposed to the trailing 12-month occupancy.

Yes. No, that's helpful. And would -- it sounds like you characterized last year's other property income as unusually low. Would you characterize this first quarter other income as unusually high or is it a more normalized level? How should we think about this going forward?

I think it was inline. The other property-related revenue, I think we were, to some extent, somewhat pleasantly surprised by. But I don't want to give you the sense that as we look at this better result against our own full-year expectations that it was that different from our full-year expectations. It was modestly better on the other property, but not a lot. And I think this is a useful time to remind you about seasonality, right? I mean --

Yes.

There's -- we said, there is some predictability in the patterning of seasonality, but it's not perfectly predictable. And so there may be occasions where in a quarter we have a pleasant performance in terms of that production revenue and other times when maybe it lags a little bit.

So, yes. So I think, Victor or Howard, I think you were going to comment -- looking at the first quarter results and looking at leasing velocity, how are things at the studios?

Yes, I think there's some -- and, Chris, it's Howard. I think there are some positive trends happening in the industry right now, especially on the television side, which, again, represents most of our income stream. And this is an important month for the television world because the next week to two weeks are the upfront, the advertising revenue upfronts where they obviously sell the majority of their time. And we're looking for some positive trends.

The forecast for this season on the network television side in terms of ad spending, they're looking at a projection of at least 3% increase versus last year and even double digit numbers on the cable side. So I think that bodes well for the industry. That's been driven by the increase in automotive and telecom, retail spending. It's alive and well, and obviously higher year-to-year. So I think that bodes well for the industry and, of course, the facilities.

Also, there's a trend for more scripted television. Even in the cable world where they typically do a lot of reality, they're finding that to get the prestige that they needed and the ad dollars, they're looking to do more scripted television. So that's a trend that's going to bode well for the studios, which, again, scripted tends to be more in the studios versus on location of reality.

And again, the underlying trend in the content demand that, again, the convergence of media and technology and the growth in the number of channels that there are, there is this continued insatiable appetite for content to be produced and it still needs to be done in these facilities.

Just two quick follow-ups, then I'll drop. And, Howard, how is the mix shift or has there been a mix shift? How's the mix of business for either television programs, as you say scripted programs, or commercials? How does that break out? And is that shifting at all in your business?

Well, at the studio we, again, the commercials are used solely when we have downtime in the stages to fill for some stages -- from some shows that might give back a stage during hiatus period for a couple months, we will backfill those with commercials. Those tend to be seasonal, those commercials. They usually start ramping up in October and go to the end of the year for the holiday shopping and for the Super Bowl. And then it goes down a little bit after January. So most of that, although it still continues throughout the year, most of those commercials are done towards the fourth quarter.

Thank you.

Our next question is from the line of Brendan Maiorana with Wells Fargo. Please go ahead.

Thanks. Good afternoon. Question for Mark. The leasing that you guys did in the quarter, it looks like if I take the net absorption of the 88,000 square feet, it probably adds around $2.5 million to your rent numbers. Is any of that in the Q1 NOI numbers or is all of the positive net absorption going to be additive in Q2 and beyond?

Yes. Some of it, it phases in into that first quarter to the extent that the 100 and -- we did about 140,000 feet of new and renewal if you included close to 10,000 feet we did at [1660], which we run through our media number. And as those came in, on a straight-line basis, the revenue began to phase in. So some of it's in there, but obviously not the full quarterly run rate on that square footage.

So is it most of it's not? Or, I mean, can you give us a sense of like in rough numbers of or percentages that's online versus not?

It's a little tricky, Brendan. I would guess probably it's probably phased in fairly evenly over the quarter because we didn't sign any huge one deal that accounts for that square footage. So I would say roughly half of it's factored into the quarter.

Okay. And then is there any update on the backfilling of Citi Plaza? I think you guys had mentioned on the last call that you had a potential prospect to take the place of the tenant that vacated there.

Yes. Hey, Brendan. It's Howard. We are still in negotiations with a perspective existing tenant in the building to do a renewal and expansion that would go into that space. So we are still in the discussion stages of that. So we hope in the next upcoming weeks that we make some progress and we'll know for sure.

Sure. And then, Victor, you mentioned I think stabilized cap rate for office assets are I think low sixes for high quality assets in your market. I think you mentioned media was maybe about 100 basis points or a little bit more than that higher.

What do you think is more attractive at this point? And where -- I guess are you more oriented towards office? It sounds like that's three-quarters of your pipeline. But do you think media appears a little bit more attractive, given where prices are for both now?

Well, listen, obviously from a pricing standpoint, the media and entertainment assets are going to be much more attractive. But the reality is there's a limited number of them. And since we are one of the most active players in that marketplace, obviously pricing's going to be a little bit more challenging because the competitors out there are limited so people are going to hold firm to numbers.

That can work as a double-edged sword for us, it's a positive and a negative. Clearly, if we found more opportunities with a higher and better value pricing in media and entertainment, we'd be focusing more on that. But just the limited numbers, obviously (inaudible) percentages in favor of office.

What's the kind of discount on cap rate that you think is appropriate if you look at media versus office?

About 100 basis points.

About 100, okay. And just -- it sounds like the pipeline's about the same as it has been, which has been fairly full. Can you just give us the outlook on the decision to raise common now given that the pipeline seems like it's about the same, you guys still had a little bit of capacity if you look at kind of where you were before the offering. Just why the decision to do it now versus maybe waiting or not doing it earlier?

Well, you know what? We took off a big bite at the end of last year with ending the year with about $400 million in acquisitions. We sort of saw the pipeline and it has shifted in terms of number of assets on it or the -- at least the assets specifically on it versus the ones that weren't. The reality was there are some assets on there that are pretty synergistic to our existing portfolio and assets that we think are accretive to what we want to build around our quality portfolio and [ante] going forward. That's why we chose the time frame and the size for the offering versus waiting later on in the cycle.

Some of these assets are -- if we're not going to get them, they're going to trade to other people on an off-market basis as well. So we thought that the timing was probably pretty appropriate given where it was. And as we stated in our last call, we weren't going to go out and do a huge transaction without really allocating the proceeds to the kind of deals that we think are accretive to the portfolio, which we're pretty comfortable that we're working on now.

Okay. All right. Thank you.

Thanks.

(Operator Instructions) Our next question is from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Thanks. Good afternoon, everybody.

Hi, Rich.

Listen, I just want to speak for everyone on this call. I know we can all do our work, but I think you really have to provide guidance on a per share basis following the offering. I just don't think anything good can come from the lack of visibility as it relates to what your earnings power will be in a per share basis. I just want to say that. And hopefully you can get it out sooner rather than later.

And my questions, you talked about leasing and the success and certainly you've had that. But can you talk about what the cost to leasing has been in terms of like rent concessions or CapEx, elevated CapEx? Has there been any kind of giveback to get your occupancy up? Or have you been able to pretty much stay at market with that?

Well, as we mentioned, the concessions are less in certain markets than others. Clearly, in the northern California marketplace, the concessions are much less than they were six to 12 months ago. In terms of the tenant improvement numbers, they're stable because most of the space that we're building out, specifically our 875 or our 1455 asset are going to be second generation, and 1455 fully completed and new or, in the case of 875, first generation space because it's brand new space.

But for the most part, there are no concessions that indirectly that you're buying in deals - it's the exact opposite, we're actually seeing better economics on transactions from a rental rate basis.

If you shift down to southern California, with the exception as I mentioned earlier from Orange County --

Right.

-- you really aren't seeing -- you're seeing the same sort of trend. No increased concessions, [TI's] are on budget to what we underwrote them at, obviously with the exception of a [6050] asset, which is brand new space for second generation space.

And in Orange County, we are seeing deals being done at -- now at low rental rates or flat rental rates to that we underwrote it at on concessions that have not moved at all and we're not seeing them going higher, but they haven't moved at all in a negative direction.

Okay. And as it relates to Orange County and City Plaza, can you talk about the progress you're making in backfilling the termination?

We just covered that in the last question.

I'm sorry. I must have missed it. I'll just review the transcript.

Okay.

And then lastly, I guess the pipeline you said is mostly office. But am I detecting that you have a little bit more interest in studio assets than maybe you were thinking at the time of the IPO or is that the wrong assessment?

No, no, no. I don't think that's an accurate assessment. We -- I think we've held pretty much a straight [party] line, which is we started off at about a 60/40, 65/35 in favor of office. We've shifted down to a 75/25. We sort of said that there are several media and entertainment assets that are strategic buys for our portfolio and to enhance it. There are limited buys.

I think we're going to continue to do that. We're excited about those opportunities if we can get them at the right valuations, and we'll continue to pursue that. But the number of office space and assets [indicated] in our portfolio that are strategic going forward far outweigh the number of media and entertainment assets.

And so it's not to say that that number is going to stay constant at 75/25, just given our growth pattern and where we're looking at, I think it will be probably more like an 80/20 or an 85/15 at the end of the day on a stabilized base.

Okay. So the reverse of what my sense was in other words?

Yes.

Okay. Thank you very much.

You got it.

I show there are no further questions at this time. I would like to turn the conference back to Mr. Victor Coleman, Chairman and CEO, for closing remarks. Please go ahead.

Well, thank you very much for participating in this quarter's call. I appreciate the good questions and the follow-up questions on our presentation for the quarter's results. And we look forward to a successful quarter going forward.

Ladies and gentlemen, this concludes the Hudson Pacific Properties first quarter 2011 earnings conference call. Thank you for your participation. You may now disconnect.