Hudson Pacific Properties Inc (HPP) 2012 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to the Hudson Pacific Properties first quarter 2012 conference call. (Operator Instructions). I would now like to turn the conference over to Kay Tidwell, Executive Vice President and General Counsel of Hudson Pacific Properties . Please go ahead.

Good afternoon everyone, and welcome Hudson Pacific Properties first quarter 2012 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 Victor and Mark, 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 Security and Exchange Commission from time to time.

All information discussed on this call is as of today, 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 the on Company's website, presents reconciliations to the appropriate GAAP measure and an explanation why the Company believes that strong GAAP financial measures are useful to investors.

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

Thank you, Kay, and welcome everyone to our first quarter 2012 conference call. We are off to a solid start in 2012. I am pleased with our overall performance during the first quarter as we made excellent progress in key aspects of our business. Specifically we completed a couple of attractive financings and had another successful quarter of leasing activities especially throughout our Southern California portfolio. Where we continue to see and take advantage of the improving market conditions.

On the financing front we are very active during our first quarter. We completed two 10 year term loans. One secured by our First Financial property and the other by our 10950 Washington property for a combined $73 million of proceeds at an average interest rates of less than 4.9%. These loans compliment our broader financial objectives including the management of the our debt maturities.

Turning to our operations. We continue to see strong leasing activity and improving fundamentals in our key submarkets. In the first quarter we executed 14 new and renewal leases at our office property totaling 88,332 square feet as result our office portfolio excluding our 275 Brannan property had a weighted average lease rate of 92.5% as of the end of the first quarter up from 91% at the end of the previous quarter. I am particularly pleased with the signing of a new 44,260 square feet lease for our entire 604 Arizona project in Santa Monica. This property generated significant tenant interest due to the limited space of creative office throughout West Los Angeles resulting in the execution of a 10 year lease of $3.35 triple net per month with a $15 per-square-foot tenant improvement allowance. All terms have exceeded our original underwriting expectations.

In Orange County at our City Plaza property we completed 3 new and renewal leases totaling 16,180 square feet in the first quarter. Pushing occupancy at this property to 82% up from 77.9% at the end of prior quarter. Our weighted average rent under leasing executed through the Plaza in the quarter were $1.80 full service growth per month with tenant improvements of $15 per foot.

Moving to an overview of our Northern California portfolio we continue to see strong tenant demand throughout our San Francisco portfolio. At current we are in negotiations for 50,000 square feet of leases and have another 350,000 square feet of (Inaudible) outstanding. Starting rents and terms for this activity reflect the exceptional market trends witnesses across San Francisco. The first quarter of 2012 marked the 7th consecutive quarter of positive net absorption in San Francisco. With net absorption for the first quarter of 2012 reaching 860,000 square feet and vacancy dropping 120 basis points to reach 10% market wide. Historically when San Francisco vacancy rate dropped below 10% (Inaudible) change the average asking rate accelerates and the first quarter may be an indication of this acceleration. As the tightening market conditions pushed average rental rates up (Inaudible) with average market wide asking rates reaching $43.04 per foot a 12% increase over the previous quarter.

Turning to our specific submarket. The (Inaudible) where our 875 Howard, 625 Second , 275 Brannan properties are located continues to fuel net absorption throughout the City. Direct latency and accelerating submarket to6 .1% at the end of the first quarterwith the average asking rents now of $48.81 per foot 4.4% increase over the prior quarter and more than 40% increase compared to a year ago. In fact, several deals completed towards the end of 2011 saw first year rents at $50 a foot or higher.

The financial district and sub financial district saw a 222 Kearny and Rincon Center properties respectively are located are also benefiting from a very positive submarket trend with 710,000 square feet of net absorption in the first quarter 2012 . Bringing direct Class A vacancy to 7.2% down from 9.2% in the fourth quarter 2011 and 11.4% a year ago. Likewise rents continue to improve with average asking rates reaching $44.87 during the first quarter 2012 up 14.6% from the prior quarter and more than 34.3% over the prior year. Fueled by steady governmental demand and tightening conditions in (Inaudible) vacancy in the Civic Center/Mid market Submarket continues to improve. With current vacancy dropping to 22.5% compared to 26% last quarter and 25%a year ago. Rents are increasing with current asking rent at $31.07 compared to $30.96 last quarter and $28.24 a year ago.

Our 1455 Market property leads the market in terms of both occupancy and competitive rents. You will recall the third quarter of 2011 we completed 40,000 square feet at $30.50 modified growth followed by an additional 25,000 square foot lease at $28.50 full service growth last quarter. Currently we are in negotiations for leases totaling an additional 75,000 square feet of starting rents in the $28 to $30 per square foot full service growth range.

Before I turn the call over to Mark for a summary of our first quarter results, I want to provide some color on our latest results for our media and entertainment properties. You may recall that we encounter an unusual seasonal adjustment (Inaudible) for our Sunset Gower Studios property in the fourth quarter last year. I am pleased to report that occupancy at Sunset Gower recovered nearly 6% over the most recently completed quarter pushing our trailing 3 month occupancy for the combined media and entertainment properties at 70% for the quarter ending March 31, 2012, up 65% for the quarter ending December 31, 2011. This increase activity in the first quarter is due to approximately 88,000 square feet of new deals at Sunset Gower and approximately 50,000 square feet of new deals at Sunset Bronson. Additionally we successfully negotiated 2 year renewals for 2 long running CBS production shows at Sunset Bronson resulting in approximately 21,000 feet. The demand for production continues to be solid, and we look forward to the May 2012 broadcast network and cable television advertising up front when the new policy and schedule will be announce.

Now I will turn the call over to Mark our CFO.

Thank you, Victor. Funds from operations after specified items for the 3 months ended March 31, 2012 totaled $9.4 million or $0.26 per diluted share compared to FFO after specified items of $6.6 million or $0.26 per share , a year ago. The specified items for the first quarter of 2012 were comprised of expenses associated with the acquisition of operating properties of $100,000 or $0.00 per diluted share. The specified items for the first quarter of 2011 were comprised of a one-time early lease termination payment from a tenant at our City Plaza project of $2.0 million, or $0.08 per diluted share. FFO including the specified items totaled $9.4 million, or $0.26 per diluted share, for the three months ended March 31, 2012, compared to $8.6 million, or $0.34 per share, a year ago. Net loss attributable to common shareholders of $2.6 million, or $0.08 per diluted share compared to net loss of $2.5 million, or $0.11 per diluted share, for the same period a year ago.

Turning to our combined operating results . We want to remind you the operating results for the (Inaudible) first quarter of last year will not be comparable to the current period operating results due to the significant property acquisitions during the third and fourth quarter of 2011. First quarter 2012 total revenue increase 9.8% to $38.2 million from $34.8 million a year ago. The increase in total revenue was primarily attributable to a $4.8 million increase in rental revenue to $27.8 million and a $300,000increase in tenant recovery to $5.6 million, largely resulting from the acquisition of office properties in the second half of 2011.

The increase in rental revenue and tenant recoveries was partially offset by a $600,000 decrease in other property-related revenue to $2.6 million from slower production activity in the company media and entertainment properties compared to the same quarter a year ago, and a $1.1 million decrease in other revenueto $2.2 million reflecting the one-timeearly release payment at our City Plaza property of $2 million in the first quarter 2011, with no comparable activity in the current quarter. If the early lease termination payment is disregarded, other revenue would have increased by $1.4 million from thesame quarter a year ago as a result of the acquisition of office properties in the second half of 2011.

Total operating expenses increased 9.4% to $32.8 million from $30.0 million for the same quarter a year ago. The increase in total operating expenses was primarily the result of a $1.1 million increase in office operating expenses to $11.4 million and a $800,000 increase in depreciation and amortization to $12.1 million, in both cases primarily attributable to the acquisition of office property in the second half of 2011, and a $1.4 million increase in general and administrative expenses to $4.5 million. These increases were partially offset by a $400,000 decrease in media and entertainment operating expenses to $4.8 million resulting from savings associated with slower production activity at the Company's media and entertainment properties compared to the same period a year ago.

Interest expense during the first quarter increased 5.4% to $4.9 million, compared to interest expense of $4.6 million for the same quarter a year ago. At March 31, 2012, the Company had $361.1 million of notes payable compared to $332.2 million of notes payable a year ago and $399.9 million of notes payable at December 31, 2011. Looking at our results by segment. Total revenue in our office property segment increased 15.5% to $29.9 million and $25.6 million from the first quarter 2011. The increase was partially a result of the $4.9 million increase in rental revenue to $22.4 million and a $400,000 increase in tenant recoveries to $5.4 million which were largely attributable to the acquisition of office properties in the second half of 2011. These increases were partially offset by $1.1 million decrease in other revenue to $2.1 million reflecting a one-time early lease termination in the first quarter of 2011, with no comparable activity in the current quarter , all as described earlier.

Office property operating expenses in this segment increased 10.5% to $11.4 million from $10.3 milliona year ago. At March 31, 2012, our office portfolio was 91.3% compared to 91% leased last quarter. During the quarter, the Company executed 14 new and renewal leases at our office properties totaling 88,332 square feet.

Total revenue at our media and entertainment properties decreased 8.8% to $8.4 million in the first quarter 2012 to $9.2 from the first quarter of 2011. The decrease was primarily the result of $600,000 decrease in other property-related revenue to $2.6 million. Total media and entertainment expenses decreased 7.9% to $4.8 million in the first quarter 2012 compared to $5.2 million in the same period a year ago, primarily as a result of lower operating expenses stemming from slower production activity.

As of March 31, 2012, the trailing 12 month occupancy for the Company's media and entertainment portfolio increased to 69.2% from 73.8% for the trailing 12-month period ending March 31, 2011, but trailing 3-month occupancy significantly improved over the fourth quarter of 2011, with occupancy reaching 69.7% for quarter ended March 31, 2012, up from 65.8% for the quarter ended December 31, 2011.

Turning to the balance sheet. At March 31, 2012, the Company had total assets of $1.2 billion including cash and cash equivalent of $21.9 million. At March 31, 2012 the Company hadtotal capacity of approximately $161.8 million on a $200 million secured credit facility of which $10 million had been drawn.

During the first quarter we completed 3 significant capital transactions. In January we closed a 10 year term loan totaling $43 million with PNC bank secured by the our First Financial Plaza property in Encino with interest of a fixed annual rate of 4.8%, and will mature in February 2022. In January we completed the public offering of 2.3 million shares of our 8.375% Series B Cumulative Preferred Stock total proceeds from the operating , after underwriting discounts plus 4 other transaction costs were approximately $56.1 million. In February we closed a 10 year loan totaling $30 million with Cantor Commercial Real Estate Lending, secured by our10950 Washington property in West Los Angeles. The loan bears interest at a fixed annual rate of 5.316% and will mature on March 2022. During the quarter we paid a quarterly dividend on our common stock of $0.125, and we paid a quarterly dividend on Series B Cumulative Preferred Stock of $8.375.

Before moving to our outlook I have quick housekeeping item. On January 1, 2012, the Compensation Committee of the Company's Board of Directors adopted the Hudson Pacific Properties, Inc. 2012 Outperformance Program, as a result our general and administrative expenses commencing with the most recently completed quarter will include the amortization cost associated with this program. For further details regarding this program you will find a summary included in our form 10-Q for the quarter ending March 31, 2012, expect to be filed with the SEC on or before May 10, 2012.

Now turning to our outlook. As highlighting in our earnings release this afternoon we are reaffirming full year FFO guidance in the range of $1.00 to $1.04 per diluted share. The full year 2012 FFO estimate reflects management's view of current and future market conditions, including assumptions with respects to rental rates, occupancy levels, and the earnings impact of events referenced in our release, but otherwise exclude any impact from future acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity, or similar matters.

Now I will turn the call back to Victor for final remarks.

Thanks, Mark. To summarize, as I said I am pleased with the start of this year and the great progress in all aspects of our business. Looking ahead we continue to see significant level of very attractive acquisition opportunity in both Northern and Southern California and remain (Inaudible) on the improving fundamentals to our key real estate markets.

As always we appreciate your continuing support of Hudson Pacific Properties, and we look forward to updating you on our progress next again next quarter. Now, operator, I am going to turn the call over to you for questions.

Thank you. (Operator Instructions). And our first question comes from the line of Brendan Maiorana with Wells Fargo . Please go ahead.

Thanks. Good afternoon guys.

Hi.

Just to start on the acquisition outlook . Victor, you mentioned that it is still attractive out there in your core markets in L.A. and San Francisco and given the improvement that has happened in the office market conditions in San Francisco, can you give us a sense of what returns look like? How much you guys are pushing your underwriting assumption, and how big is the pipeline of opportunities that you are looking at?

Let me start with the latter. We still have a consistent fairly aggressive pipeline of a $1 billion through northern and southern California combined. It is probably somewhat skewed to 60% northern 40% southern California. Overall up in northern California specifically we are seeing , as I mentioned in my prepared remarks, growth in the rental rate throughout all the San Francisco and extending down through the peninsula in a fairly aggressive mode. That being said , we don't underwrite that kind of growth even remotely. As a matter fact I think overallour underwriting has been on average 3% to 5% growth a year for the first few years, maybe maxing out at 5% and then some sort of stable back to 3% for years 4 and 5. So even though we have seen that growth, we don't underwrite it that way. In terms of yields that we are looking at on an unlevered basis on a IRR we run it at a 8.5% to 9% and levered basis it is somewhere in the low teens.

Okay. That is helpful. Are we to presume given the interest that is in the northern California markets and with 60% of your pipeline there, is it safe to assume that most of opportunities you are looking at are either lease up assets or assets that have some sizable role where maybe the renewal prospects are unlikely?

Yes. Listen there is a lot of stabilized assets in the market place , but that doesn't fit in our sort of acquisition criteria right now. We are looking for value at (Inaudible) exactly that. There is some lease up play or some role mark-to-market that is going to be increased or repositioning of some sort from a capitalized repositioning to improve the asset in the market place. That is exactly it.

How do you guys think about what your capacity is like on the balance sheet. Would you think of funding the opportunities with assets sells, or do you feel like you have enough capacity as the balance sheet stands today?

It depends on what we get versus what we are bidding on. Our leverage levels today are fairly low, so we have some capacity there on our credit facility and increasing our leverage levels. We consistently have been approach on certain JV structures, and we are going to look at whatever the best sources of capital and alternatives are at the time for us to make the right decision as to which acquisition will match our capital structure.

Okay. Last one for me then I will jump off. Mark, G&A for the quarter jumped up sequentially from the fourth quarter. I gather most of that is the OPP plan. Can you give us a sense of what the full year number is likely to be on the G&A line?

That number you are looking at comes in probably a bit on the high side not because of the OPP which you are right about in comparison to the fourth quarter. First quarter tends to be a bit lumpier because of professional fees. The end of last year marked our first year compliance under 404 , so we had to do all of our stock compliance and you are seeing the professional fees and the combined amount of professional fees from that plus the audit work, just normal audit, year end audit work, coming through in that quarter. So it just comes in a bit lumpier on account of that.

Are you still expecting the $15 million to $16 million or so of G&A annually for the year?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets . Please go ahead.

Hi guys. Just two quick follow-ups from the investment side. Victor, of the 60% northern California is any of the down the Peninsula or is that all CBD?

No, we are looking some of it down in the Peninsula, and probably of that I am going to say about one-third of it is down in the Peninsula and the remainder is in the City or in other surrounding areas.

Okay. You mentioned you guys are still getting approach from the joint venture side. Should we assume that the potential studio JV is still in the works or are you guys moving on to office assets?

We are looking at both. both JV sides on the office side and on the media studios facility are both in play and in discussion. The deal we are working with on the studio stuff is still activity. The ones in the office have been sort of ongoing relating to specific assets that either ownership is held by the current JV partner and looking for us to come in and be a partner or new assets combined with new capital.

Okay. And then on the leasing side it seems like you have a pretty good backlog the 350 and the 15 negotiations , and then you guys are talking about the 75,000 at 1455. Is that 75,000 related to any of the BofA role, or is that other space you guys have available there?

No, the 75,000 we have are all new tenants and the current spaces in place today.

We do have activity or looks at that 50,000 feet that is rolling at the very end of this year , but we did not include it in that 75,000.

Okay. Could you guys just touch on any conversations you are having with AT&T and BofA and give us an update on Gower? The big 2013 expirations and where you stand on those?

So the Market address , BofA we are getting the space back , the 50,000 feet at the end of the year. In terms of the remainder space with BofA we are currently approaching them as deals come to us and their response time has been fairly slow. It looks as if they are going to want to continue to roll some space. Our objective is to roll them out because the activity is pretty fierce. In terms of AT&T over at Rincon they currently have an option to let us know if they want to continue on or not at the end of this month . Our anticipation is that we are hopeful that they are going to give us the space back . We have a couple of deals right now that are large deals that have toured the state. And we are on a short list on one very prominent large deal that we are looking to hopefully put in that space if AT&T gives us the indication they are not going to need to the space at the end of this month which really comes down to (Inaudible). In terms of (Inaudible), we have the rolling space in 2013 which is about a 125,000 feet. We have two tenants looking at that space. One needed a higher increase in capacity for parking spaces which I don't think we are prepared to accommodate given that we don't have access to them. The other we are one of 4, and both are for the entire space. The third option there would be (Inaudible) had indicated they would like potentially stay and down size, but yet we are not determined how much they want to down size for.

Okay. One quick one on the studios. Do you guys have enough activity on there where you think you can get back in the mid 70s by mid year, and are there any shows that you have in there that you are concerned about? I know we don't find out for a little bit. But any shows you are concerned could not renew?

Sure. Over at Bronson we feel pretty good we just did some 2 year renewals with regards to CBS on 2 productions there I think we noted. With regard to the fall season and the chances of something not being renewed. We do have Private Practice on 1 stage right now. It is an additional stage. They also were in another facility. We think that they will be picked up, and they will most likely renew when they do that at an increase for a year for annual bonds.

We also have Castle which is also an ABC show. We are expecting that to be renewed. Other than that, we also have some cable shows that have yet to air, and one of them is an Erin (Inaudible) and we also have Dexter of course is going through another season. We definitely have a lot of activity . The demand is strong, and, again , we anticipate good activity as result of the upfront.

Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Chris Caton with Morgan Stanley. Please go ahead.

Hi , Howard or Victor. I just wanted to follow-up on the studios. You mentioned some of the quarterly stats, first quarter versus fourth quarter. Wonder if you can just talk year on year given the trailing data still declined, and that may be attributable to weakness you saw in the fourth quarter, but I wonder as we think about NOI from the studios we can look on your comps pretty easily for that, how you expect it to play out. Do you think you are right back on track or is there another quarter or two to push occupancies farther?

Chris, this Mark. I know you directed Howard. I just want to comment on the trailing 12 just because I have the pleasure really looking at those trend reports pretty carefully. And you are right on the year on year. The dynamic there is even though we had a stronger first quarter than fourth quarter as we indicated in our prepared remarks, what we lost when we run that trailing 12 month number is we lost a very, very strong first quarter of last year. That was actually for that trailing 3 month period was well into the 70s it was in the 73.5 or so range , and that dropped out of the trailing 12 month number.

So even though we had a , again, somewhat stronger than expected first quarter this year we in effect switched that out for an even stronger first quarter of the last year, so you see that flow-through that trending 12-month number.

That is helpful. So I see you did about $4 million in GAAP NOI last year versus something like $3.6 million this year in thequarter. I just wonder as you look at the operations you talk about some of the shows that are coming in I think you did about $3.6 millionlast year I wonder how is the second quarter shaping out? Are you occupancy and rents where you want them to be?

Yes, basically in terms of our future right now we are higher than what those trailing 12 months figure show. As mentioned in the last quarter we did a substantial amount of the leasing roughly 138,000 square feet. And we continue to see good demand , so we are pretty optimistic that we can definitely be north of the figures we had in terms of the last trailing quarter.

Thanks Howard.

Chris, to give you a brief point of reference Gower really has come back nicely and it finished of the month of March back above 70%, it was actually 71.4%, so it gives you an idea that we are seeing a nice trend in the right direction.

Yes. And then I had some operational questions in San Francisco we have been talking about 1455 Market. I wonder -- I don't think you disclosed the occupancy in the supplemental, but maybe Victor can you talk about what the availability is at the asset, where it is in the building. And then you mentioned the prospects you eluded and there was a follow-up question. I wonder are those all kind of City and State leases , or are there other tenant in there.

And then last question on 1455. The role you have later this year you talked about some of it being BofA I wonder where that is, and then also I see there is 40,000 at (Inaudible) I presume that is floating and maybe no windows, can you talk about the releasing of that space?

Let me just get rid of the last one. There is 40,000 feet which is (Inaudible) is going to be taking us once we complete the decommission of the space. We are tearing the 40,000 feet pending the commensurate for BofA because it hasn't technically terminated yet, but it is fully abated during the period of the decommission so it is dollar cost averaging down that rent to a very small number.

Okay.

Also , Chris, want to note as we have in past calls that our demand right now we are seeing a lot of deals that are absolutely City deals in addition to that we cast that net wider to tech companies and some other media companies that are now looking at the Mid market as a viable option.

And the floors that are available right now are all prime floors 11, 12, and 18 are the ones being negotiate or are being toured on effective basis. Right now we are currently 92.5% leased.

Those are all available now?

Yes, those three floors.

And the deals are indicative of what you have done before in terms of longer term. I forget your capital cost, but typical consistent with the past it sounded like.

Absolutely. And we are quoting both modified gross and full service growth depending on the tenant use.

Last question for me. Can you update us on the retail at Rincon, and how that has trended over the last 3, 6 months?

We actually have some activity right now. We are working on some deals that represent possibly represent up to 12,000 square feet to 14,000 square feet of space for local retailers, and we are working on that. So we are optimistic that we will go forward with those.

How is traffic doing in that space . I know the availability there has been a challenge. Are you optimistic you are able to get to a more stabilized level?

On the retail side yes. The traffic quotes because of the inside retailer (Inaudible) really flows the traffic. The day-to-day traffic flow is great from a pedestrian standpoint. We also have a potential night time venue that we are looking at, which is a street level (Inaudible) which we have been seeing a lot of interest on. So that is going to hopefully make that part of the retail much more attractive in the market place. So we are repositioning for both inside and out.

Thank you.

You got it. Thank you.

Thank you. At this time I am showing no further questions in the queue. I would like to turn the conference back over to Mr. Coleman for closing comments.

Thank you so much. And I appreciate everybody's participates in our first quarter call. We look forward to catching up the topic floor in a few months from now. Thanks so much.

Ladies and gentlemen, this does conclude our conference for today . We thank you for your participation, and at this time you may now disconnect.