Hudson Pacific Properties Inc (HPP) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Hudson Pacific Properties Inc. fourth-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kay Tidwell, Executive Vice President and General Counsel. Thank you, Ms. Tidwell, you may now begin.

Good afternoon, everyone, and welcome to Hudson Pacific Properties fourth-quarter 2012 earnings conference call. With us today are the Company's Chairman and CEO Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas. Howard Stern, the Company's President, is also available to answer questions.

Before I hand the call over to them, please note that on this call certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time.

All information discussed on this call is as of today, March 6, 2013, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures.

The Company's earnings release, which was released this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to the investors. And now, like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Thank you, Kay, and thank you, everyone, for joining us today. We concluded 2012 with a very strong fourth quarter that included the announcement of an important acquisition and substantial leasing activity, both of which I'm going to discuss in more detail in a moment. And following the end of the quarter, we also completed a very successful offering of our common stock that will support our growth objectives for 2013.

During the fourth quarter we completed the acquisition of an important addition to our portfolio of high-quality projects catering to entertainment and media tenants. As announced in November, we formed a joint venture to acquire The Pinnacle, a two-building 626,000 square foot class A property located in the heart of the Burbank Media District for a total purchase price of $342 million -- $342.5 million.

Situated on a 4.3-acre campus directly adjacent to Warner Bros. Studios and Burbank Studios and blocks away from the Walt Disney Studios, The Pinnacle's prime location has made it the premiere office building in this sub-market. The property is currently 95% leased to some of the highest-quality media and entertainment companies in Southern California, with tenants such as Warner Bros. Entertainment, NBC Universal, Sony, and Clear Channel Communications, just to name a few.

With only in handful of expiring leases over the next few years and limited non-recurring capital improvements to stabilize -- this stabilized high-quality asset is extremely complementary to our portfolio. The acquisition of the 394,000 square foot Pinnacle I building by the joint venture closed in early November of 2012.

The 232,000 square foot Pinnacle II building is expected to be contributed to the joint venture for an agreed-upon price of $130 million by the end of first quarter of '13, subject to certain closing conditions, including the lender approval of the assumption of an existing $89.2 million project loan. Upon completion of the transaction, we expect to own approximately 65% of this joint venture and will serve as its managing member.

We will also assume day-to-day property management responsibilities with Awards real estate group overseeing leasing of this property. Importantly, we expect that this joint venture can serve as a long-term platform for the acquisition of additional class A properties within the M. David Paul work portfolio, which currently consists of 21 properties totaling 5 million square feet and an additional 3 million square feet of development rights.

Year-end net absorption levels in greater Los Angeles were fairly solid compared to recent years with more than 646,000 square feet of net absorption for the year. Overall asking rates in the greater Los Angeles area have likewise been on the rise during the past few years, experiencing an increase in four the past six quarters. Absorption and rental rate increases have been driven largely by the sub-markets with higher concentration of the handful of industries that are leading the charge in terms of job creation, including high tech and entertainment.

These sectors have generated the bulk of the office demand to date and have allowed certain sub-markets to out perform the metro-wide trend, specifically tech, to spark growth in Santa Monica, Venice and the beach communities, while the entertainment industry has been responsible for the growth in Hollywood, West Los Angeles and Burbank. West Los Angeles, for example, accounted for more than 352,000 square feet of net absorption for the year, representing 40% of the greater Los Angeles total.

These trends continue to support our goals for our Element LA project, located near the corner of Olympic and Bundy in West Los Angeles, and underscore the strength of our growth and strategy of targeting assets from Santa Monica through West Los Angeles and into Hollywood and more recently now in the Burbank's Media District.

Turning to our Northern California portfolio, office fundamentals in San Francisco remain among the strongest in the country. San Francisco was the brightest spot in the US in 2012 with strong employment gains, particularly in the technologies industry. Employment expanded by 3.3%, which is more than twice the national rate over the past year.

Gains in the metro technology sector have driven its labor market, leading to outsized growth in the professional and business services and information sectors. That trend is expected to continue with the likes of salesforce.com, Facebook, Riverbed Technologies and Twitter set to aggressively hire this cycle. In short, with employment gains expected to outpace the national average through 2017 and stiff supply constraints moderating new supply, occupancy and rental rate gains should continue to exceed other major metropolitan markets for the foreseeable future.

Strong demand in the fourth quarter pushed the market-wide vacancy rate down 20 basis point from the prior quarter to 9.5%. Market-wide lease rates increased by 5.9% to $48.82 over the prior quarter and a whopping 27.2% over the prior year. Six large lease transactions exceeding 100,000 square feet completed in the fourth quarter ultimately helped propel the net absorption for 2012 to a healthy 1.3 million square feet.

As a Company, we enjoyed what can only be described as an unprecedented level of leasing activity during the fourth quarter, particularly in our San Francisco properties. In the fourth quarter, we executed a total of 17 new and renewal leases at our office properties totaling 705,905 square feet. As a result, our stabilized office portfolio, excluding our 275 Brannan, 901 Market Street and Element LA properties, reach 93.5% leased at the end of the fourth quarter, compared to 92.3%, excluding 275 Brannan, as of year ago.

Highlights of our fourth-quarter leasing activity included a lease completed in October with Square Inc. for its new corporate headquarters in our 1455 Market Street property in San Francisco. The lease, which was the second-largest lease executed in San Francisco in the fourth quarter, encompasses approximately 327,400 feet, including 246,000 square feet of initially committed occupancy and an 81,400 square-foot expansion option, which the tenant has now exercised.

181,800 square feet is scheduled for commencement later this month; 16,000 square feet is scheduled for commencement in July of '13, and the remaining 130,000 square feet is scheduled for commencement in early '14. The lease backfills 238,000 square feet of space currently occupied by the project's largest tenant, at starting rents above our underwritten and expiring rents for the same space. This lease represents a long-term commitment with one of San Francisco Bay Area's most innovative and dynamic companies and is an excellent addition to our roster of strong tenants of 1455 Market.

Other fourth-quarter leasing activities include substantial leases from thriving San Francisco-based technology companies salesforce.com and GitHub. Salesforce.com signed a new long-term lease at our Rincon property totaling 236,000 square feet. The lease backfills nearly 188,000 square feet of currently occupied space, including 148,000 square feet occupied by the project's largest tenant scheduled to expire in August 31 of this year and takes an additional 40,000 square feet of currently vacant space.

Occupancy under this lease is phased; 93,000 feet scheduled for commencement in November of '13, 60,000 square feet scheduled for commencement in May of '14 and the remaining 83,000 square feet scheduled for commencement in August of '14. Starting rents exceed our underwritten and expiring rents for the same space. And finally, we completed a long-term lease with GitHub, a leading provider of web-based hosting services for our entire 55,000 square-foot 275 Brannan property.

275 Brannan Street is currently vacant and has been under renovation since we acquired it in September of 2011. This brick-and-timber office properties generates significant interest from prospective tenants, underscoring its appeal to creative technology companies like GitHub. Importantly, starting rents in the early April of '13 lease commencement are ahead of our original underwriting expectations. Our leasing efforts to date have resulted in new and renewal leases that backfill 64% of the scheduled 2013 expirations.

In our most recent supplemental report, in nearly every instance, these rental rates are well above the expiring and underwritten rents. Those same efforts have also generated lease negotiations or active discussions with respect to an additional 20% of the scheduled 2013 expirations. So, in short, we've committed or are actively working with tenant prospects that combine 84% of our scheduled '13 expirations.

Turning to fourth-quarter results for our media and entertainment properties, as of the conclusion of the fourth quarter, the trailing 12-month occupancy for our media and entertainment properties increased to 73.7%, up from 71% for the trailing 12-month period ending September 30, 2012 and 70.1% for the trailing 12-month period ending December 31 of '11.

Demand for television production in Los Angeles remains very strong. In the quarter, higher production office occupancy, as well as heavy production activity, resulted in higher rental revenues and other property-related revenues. While both occupancy and rent increased under Sunset Bronson property, the year-over-year improvement in our media and entertainment segment occurred largely in our Sunset and Gower property, which enjoyed a trailing three-month 25% increase in occupancy and 39% increase in stage space rent.

The fourth-quarter other property-related revenue was even better with Sunset/Gower generating a 73% increase compared to last year on the strength of high production activity by shows such as Scandal.

And before I turn the call over to Mark, just allow me to briefly update you on the status of our acquisition pipeline. We are currently looking at more than 4 million square feet of properties in both Northern and Southern California with gross value in excess of $1 billion. The pipeline consists of a combination of stabilized in value-add properties in target markets which would be very complimentary to our existing portfolio. We are encouraged by the transactional activity and potential acquisitions we are seeing and hope to be in a position to announce our next acquisition in the near future. Now I'm going to turn the call over to Mark, our CFO.

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended December 31, 2012 totaled $11.6 million, or $0.23 per diluted share compared to FFO, excluding specified items, of $9.2 million, or $0.25 per share a year ago. The specified items for the fourth quarter of 2012 consisted of expenses associated with the acquisition of our Element LA property at Olympic and Bundy in West Los Angeles of $200,000, or $0.00 per diluted share.

Specified items for the fourth quarter of 2011 consisted of expenses associated with the acquisition of 6922 Hollywood Boulevard in Los Angeles of $900,000, or $0.03 per diluted share. FFO, including the specified items totaled $11.4 million or $0.23 per diluted share for the three months ended December 31, 2012 compared to $8.3 million, or $0.23 per share a year ago. Net loss attributable to common shareholders was $5.9 million, or $0.13 per diluted share, compared to net loss of $3.2 million, or $0.10 per diluted share for the same period a year ago.

Turning to our combined operating results for the fourth quarter 2012, total revenue increased 22.1% to $45.2 million from $37.1 million a year ago. The increase in total revenue was primarily attributable to a $5.3 million increase in rental revenue to $31.7 million, a $1.4 million increase in other property-related revenue to $14.7 million, a $1 million increase in parking and other revenue to $2.9 million, and a $500,000 increase in tenant recoveries to $6.7 million.

The increase in rental revenue, parking and other revenue and tenant recoveries largely reflect the acquisitions of office properties during the second and third quarters of 2012, a full quarter of operating results from the 6922 Hollywood Boulevard office property acquired on November 22, 2011 and parts of quarter impact of The Pinnacle I acquisition on November 8, 2012.

Though higher rents and occupancy at the media and entertainment properties also contributed to the higher rental revenue. The increase in other property-related revenue reflects stronger production activity associated with higher occupancy of the Company's media and entertainment properties.

Total operating expenses increased 29.8% to $43 million from $33.1 million for the same quarter a year ago. The increase in total operating expenses was primarily the result of a $6 million increase in depreciation and amortization to $17.6 million and a $3.3 million increase in office operating expenses to $15.4 million, in both cases primarily attributable to the acquisition of office properties during the second and third quarters of 2012.

The full-quarter impact of the 6922 Hollywood Boulevard office property acquired on November 22, 2011 and the partial quarter impact of the Pinnacle I acquisition on November 8, 2012, and a $1 million increase in media and entertainment operating expenses to $6.3 million, resulting from higher production activity and occupancy at the media and entertainment properties compared to the same quarter a year ago, all of which was partially offset by a $300,000 decrease in general and administrative expenses to $3.7 million.

As a result, income from operations decreased 43.3% to $2.2 million for the fourth quarter of 2012, compared to income from operations of $3.9 million for the same quarter a year ago. Interest expense during the fourth quarter increased 20.3% to $5.4 million, compared to interest expense of $4.2 million for the same quarter a year ago. At December 31, 2012, we had $582.1 million of notes payable compared to $359.5 million as of September 30, 2012 and $399.9 million as of December 31, 2011.

Looking at our results by segment, total revenue in the office property segment increased 19.6% to $34.5 million from $28.8 million for the same quarter a year ago. The increase was primarily the result of a $4.4 million increase in rental revenue to $25.4 million, a $1.1 million increase in parking and other revenue to $2.9 million and a $200,000 increase in tenant recoveries, largely resulting from the acquisition of office properties during the second and third quarters of 2012, a full quarter of operating results from the 6922 Hollywood Boulevard office property acquired on November 22, 2011 and partial-quarter impact of the Pinnacle I acquisition on November 8, 2012.

Property operating result results in the segment increased 26.8% to $15.4 million from $12.1 million for the same quarter a year ago. The increase largely reflects the acquisition of office properties during the second and third quarters of 2012, the full quarter of operating results from 6922 Hollywood Boulevard office property acquired on November 22, 2011 and partial-quarter impact of Pinnacle I acquisition on November 8, 2012.

At December 31, 2012, the Company stabilized office portfolio was 93.5% leased. During the quarter, the Company executed 17 new and renewal leases totaling 705,905 square feet. Based in our new and renewal leasing activity, throughout 2012, as adjusted for market rent changes over that same period, we estimate that rent levels in our office portfolio are approximately 15% below market as of December 31, 2012.

Total revenue in our media and entertainment properties increased 30.7% to $10.8 million from $8.3 million for the same quarter a year ago. The increase was primarily the result of a $1.4 million increase in other property- related revenue to $3.9 million and a $900,000 increase in rental revenue to $6.3 million resulting from higher production activity and higher rents and occupancy at our media and entertainment properties compared to the same quarter a year ago.

Total media and entertainment expenses increased 18.1% to $6.3 million from $5.4 million for the same quarter a year ago, primarily resulting from higher production activity and occupancy at the media and entertainment properties compared to the same quarter a year ago. As of December 31, 2012, the trailing 12-month occupancy for the Company's media and entertainment portfolio increased to 73.7% from 70.1% for the trailing 12-month period ended December 31, 2011.

Turning to the balance sheet, as of December 31, 2012, the Company had total assets of $1.6 billion, including unrestricted cash and cash closings of $18.9 million, and total capacity of approximately $204.1 million on our $250 million unsecured credit facility, of which $55 million had been drawn. Following the end of the fourth quarter, we used proceeds from our February common stock offering to fully repay the outstanding balance under unsecured revolving credit facility, as a result of which, nothing is currently drawn under that facility.

During the quarter we paid a quarterly dividend on our common stock of $0.125 per share, and we paid a quarterly dividend on our series B cumulative preferred stock equivalent to 8.375% per annum.

During the fourth quarter, we closed financings on two of our San Francisco office properties, a $15 million construction loan for our 275 Brannan property to fund base building and lease-up costs associated with the renovation and lease-up of this property and a $61.5 million loan on our 901 Market Street property, $49.6 million of which was funded at closing with an additional $11.9 million remaining available to fund base building and leasing costs associated with the renovation and lease-up of that property.

We also closed a $129 million loan in connection with the acquisition of our Pinnacle I project. More detailed descriptions of those loans can be found in our earnings release filed this afternoon.

Subsequent to year-end, we completed the public offering of 8 million shares of common stock and the exercise of the underwriters' over-allotment option to purchase an additional 1.2 million shares of our common stock at the public offering price of $21.50 per share. Total proceeds from the public offering after underwriters' discount were proximally $189.9 million. $60 million of the net proceeds from the offering were used to fully repay the outstanding balance under our unsecured revolving credit facility.

The remaining proceeds are available to be used to fund development or redevelopment activities, potential acquisition opportunities and for general corporate purposes. We were extremely pleased with the level of investor interest in this offering and appreciate the continued support for our operating platform and vote of confidence in our investment decisions.

Turning to our outlook, as highlighted in our earnings release this afternoon, the Company is providing full-year 2013 FFO guidance in the range of $0.90 to $0.94 per diluted share, excluding specified items. This guidance reflects the financing of leasing activity discussed on this call and referenced in the earnings release filed this afternoon and all previously announced acquisitions, including the anticipated contribution of The Pinnacle II building but excludes acquisition related expenses associated with acquisitions.

This guidance also reflects the February 2013 common stock offering described earlier. As is always the case, this guidance does not reflect or attempt to anticipate for any impact to FFO from speculative acquisitions.

The full-year 2013 FFO estimates reflect management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels in the earnings impact of advanced reference in this release, but otherwise exclude any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters.

One final word about our full-year guidance. 2013 is expected to be an important transition year for the Company as the significant leasing activity completed throughout 2012 phases in and begins to replace existing tenancy. You can find further details regarding the phasing of the larger leases executed in 2012 in the footnotes to our supplemental report filed this afternoon. And now, I'll turn the call back to Victor for some final thoughts.

Thank you, Mark. To summarize, our fourth quarter was highly productive and very rewarding. We are executing on our asset growth strategy, leasing activity continues to demonstrate strength in our sub-markets, especially the most recent activity in our San Francisco portfolio. We obviously appreciate your continued support of Hudson Pacific Properties and we look forward to updating you on our progress again next quarter. And now, operator, we will turn the call over for any questions.

(Operator Instructions)

Craig Mailman, KeyBanc Capital Markets.

Victor, could you give us a sense of where you are seeing pricing on the $1 billion pipeline, maybe for value-add versus stabilized in Northern versus Southern California?

Sure, Craig, it's good to hear from you. Right now what we're finding is the arbitrage between stabilized and value-add is shrinking as we thought. What was more like 75 BPS to 100 BPS is more like 25 BPS to 50 BPS. And in Northern California, we are seeing stabilized cap rates in the low 5s to mid 5s and in Southern California, we are about another 75% up, just over 6 on a stabilized basis.

Okay, and in that 4 million square foot, that does not that include any of the other potential joint venture properties with your partner, does it?

No. What we are looking at right now is one specific joint venture deal that is significant; we're talking with them right now on.

Okay, and you obviously have a better sense of timing on the pipeline. How quickly do you think you can get the proceeds out from the recent equity offering?

We are confident we are going to get it out imminently, and imminently could be anywhere from three to six months, is our opinion.

Okay. Then for Mark or Victor, whoever, just curious on the deals you guys have signed, how much incremental NOI is there that could come in from Square and some of the other leases relative to what was in place?

Craig, I think that is going to be too -- that is going to be tough to answer in a sound bite, because it's going to depend on what NOI we use as a starting point and what NOI you are going to pick as the ending point, because the NOI is going to phase in, in a pretty -- over a fairly involved -- fairly long stretch of time. But what I can point out to you, Craig, is if you look at the footnotes in our supplemental, you will see a detail of the square footage that is going to phase in by what date it phases in by and the square footage that is being backfilled by the significant tenants that are being replaced.

I can also tell you that -- and since both of those deals, which are the more impactful deals as it relates to NOI. Both of those deals are in Northern California. I can tell you right now, our mark-to-market, and we referenced the 15% portfolio-wide, but the Northern California component of that is 20%, 25%. That is to say the current mark-to-market on rents is not 25%. If what you can spend at some time doing is go through the notes that we've given you and the square footages and the commencements and then the square footages that are rolling out, you can see how the NOI increases and at what point in time.

Okay, that is helpful. Thanks, guys.

Brian Hicks, Wells Fargo.

Can you give a little bit more color on update on leasing for the retail portion remaining at 901 Market and interest at your Olympic/Bundy, or I guess Element LA property?

Sure, we will start with 901. In 901 Market, we are in lease negotiation right now with a brand name tenant for a little over 1.5 floors of what we have available. I think we should -- we are anticipating signing that lease in the next 30 to 60 days, and we are pretty confident on that. We've got activity for the remaining 40,000-some-odd feet on two different groups who are looking at it, and we are pleasantly surprised that we are ahead of our expectations on underwriting and terms and conditions.

On Element LA, right now we've got two large tenants, one looking at the entire project and one looking at about 100,000 square feet. We've got a couple of proposals outstanding for about 250,000 feet on various different sizes, and some are for the individual buildings on the east side of the project and some are for portions of the west side of the project.

We are about to break ground in the next 30 days on our parking structure there, and we are still heading for overall occupancy and stabilization sometime early '14. And potentially, we are going to have some tenants in the east side of the project earlier than '14, maybe fourth quarter of '13.

Okay, great. And I think the last time we talked you guys mentioned that you were expecting net rents in around the high 3s, is that still applicable?

The net rents, we are quoting in the marketplace right now 350 a foot, and we are seeing -- I think we are pleasantly seeing stuff that is plus or minus that number.

Great.

Triple net.

Right. And then lastly, are you guys still looking at a potential sale of City Plaza, and if so, have you seen a good interest in that?

We have seen some very good interest in that asset, and we are evaluating some reverse inquiries at this time.

Okay, great. Thank you.

Jamie Feldman, BofA Merrill Lynch.

I guess just thinking about the same-store in the quarter, on a cash basis you guys are up 17%, your media revenues are up 38%, office expenses were neg -- were down. Can you give us a sense of looking at 2013, what you guys think the same-store might be maybe office versus media? And then are some of these -- like media revenues were up 38%, as I said, is that sustainable, that kind of growth? How should we be thinking about next year of this year?

Yes, so Jamie, the same-store portfolio that is reflected in that -- the supplemental which, by the way, it's the first time we've introduced that disclosure. If you focus on that same set of 11 assets, I think it is important to realize that if those assets include 1455 and Rincon Center, which are two, and City Plaza, and all three of those assets are front and center in that key leasing activity that happened in 2012 and so on.

I think you should expect in 2013 that we are going to see a temporary erosion on a same-store basis from both GAAP and cash because we are going to have a phasing in; that is to say, we're going to have leases that terminate -- early termination of leases take, for example, on the Bank of America early termination, to make room for Square.

That is going to come out, and there's going to be a little bit of downtime and then a commencement by Square on some of that same square footage. And by the way, there is some upfront free rents who own Square, so that is going to also impact that cash number even more than the GAAP number gets impacted.

And there is a similar dynamic going on with the footage at -- that salesforce is taking at Rincon Center with the termination of AT&T and some downtime before the salesforce lease takes effect. And then we also have a phasing in of CashCall that is still underway this year. So, on a same-store basis, GAAP and cash we will temporarily dip, and then it will start to ascend again as we head towards the end of the year.

Then on media, our current guidance is not forecasting on a year-over-year basis the same type of final result we got in terms of NOI. I think our final media NOI number came in at -- in the upper 15s, like 15.8 thereabouts, and that is on the strength of a very, very -- that reflects a very strong media performance for the year. The prior year, I believe, was 14.5 of NOI, just to give an you an idea of that year-over-year increase.

A couple of things to be aware of, among other things, is Dexter occupies four stages. They may or may not get picked up, we do not know. And so we are being mindful of the fact that things could break one way or another for the studios. And so I think the bottom line is we are not necessarily forecasting the same type of year-over-year improvement in 2013 for the media assets that we saw from '12 to '11.

So, are you assuming flat or down?

Our current -- no, we're not. Our current forecast is actually below the 2012 actual, but it happens to be above our 2012 initial budget. So, that leaves you in no man's land. It is close -- suffice it to say it's closer to 15 of NOI than it is 15.8.

Got it. And then in thinking about those assets. You brought them in, they were an opportunistic property type. Have a now stabilized? Is this what we should expect to see on a normal year? I know coming out of a tough time for the business, is this what the run rate should look like?

We are seeing as good of demand now on a stabilized basis I think as we seen in three years. So, I think this is a good benchmark for stabilization. There is still more room for growth and pushing rates, but I think this is a fair level of stabilization.

Okay, and then on the core portfolio, or the same-store, what is your assumption for -- what would your occupancy be at year-end? What you assuming in your guidance?

The year-end office portfolio, Jamie, on -- wasn't anticipating that. Offhand, I couldn't tell you. Our stabilized office is at 93.5%. On the as-leased percentage, I wouldn't expect there to be any erosion in that number. Because we've -- as our prepared remarks indicated, we either backfilled -- we backfilled 64% of the 2013 expiration and we are discussing on footage that deals with the next -- the amount that takes us to 86% of that expiration, which in turn means we are only foreseeing or anticipate somewhere in the neighborhood of 16% of the current expirations seem to be known to vacate.

I would expect occupancy on a stabilized portfolio probably stays around that 93.5%. It might even pick up -- it might pick up a small amount.

And that we are dropping in 901, 275, which will be effectively leased, and then at the end of the year, we will be Element LA.

Yes, and so to the extent that any one of those assets before year-end reaches our 92%, they will shift from the non-stabilized to stabilized portfolio, which will have the possibility of enhancing that stabilized percentage.

Okay, and then shifting to the investment portfolio or the investment opportunities, what do you consider your total firepower -- acquisition firepower with leverage?

Somewhere around $400 million.

Before you have to go back to the capital markets?

Before we have to recycle capital or go back to capital markets.

Okay, and then in terms of -- you said Northern California, Southern California, I think last time we spoke about it you were thinking more Silicon Valley. Any -- within those regions, what are the sub-markets that are most interesting or where you're finding the best opportunities?

We are seeing some stuff in the Valley, we are seeing several deals here in Burbank. Again, in Hollywood, we've got a couple of things we're looking at. I think the majority of the stuff that is coming our way, though, is West LA.

Okay, great. Thank you.

(Operator Instructions)

Rich Anderson, BMO Capital Markets.

Just want to get back to Jamie's line of questions, a little bit more down to the bottom line on the FFO results. So, in '11 you produced 108, in '12 you produced 92. In '13, when you talk to -- Mark, when you talked about -- you called it a transition year and some of the delayed impact that you will see from some of the leasing activity rolling over, but then you have equity potentially to raise in the interim. Is this another year where you are flattish, or do you think that it could start to turn positive, whereas lately it's been going down as you finance and absorb the financing of the acquisition activity?

Yes, our -- as you know, our 20 -- our guidance is always on a in-place, same-store number, if you will; that is to say, it only reflects the existing portfolio. And the $0.92 midpoint number reflects no redeployment of our existing capital that we -- we just raised $200 million, $190 million and brought the line to zero. So, we are sitting on about $150 million of cash, as Victor pointed out. There's quite a bit, on a levered basis, gross buying power.

And so one, I think key consideration as you think about where FFO goes from 2012 to 2013, while our guidance midpoint number is $0.92, which appears to be flat with 2012, it does not assume any acquisitions. So, to the extent that we can successfully redeploy capital, and depending on how quickly it goes out and how much of it goes out, our FFO should -- you can expect to see our FFO improve off of that baseline $0.92.

Okay. So, you started the year for 2012 at $1 to $1.04 and you ended at $0.92. That is what I'm talking about. Do you think that's the kind of trend you will see or do you think you're turning the corner a little bit?

If I am following your point, and I'm not sure I'm following your point. We issued 9.2 million shares of stock in February.

Yes, I understand that. I am saying -- and there is no misunderstanding, you have to fund your activity, and I think everyone understands that, particularly at this relatively early stage of the Company as a public entity. But all I am saying is, having to finance future activity, you have $0.92, you're having to redeploy that capital, but when will that benefits of all this great leasing activity you've done overshadow the financing dilution that you've had to absorb? That is the point I'm trying to make.

Oh, I see. Well, in some regards, it is -- you are taking one contributor to your FFO and you're taking another item that is diluting that. Namely, we're seeing all of this leasing phasing in, and that is going to begin to improve FFO over time. And then there is this offsetting factor, namely that dilution associated with raising funds and you're -- and in some regards, you are asking, when does the leasing begin to overcome the dilution?

And in fact, they are really two different -- there's two different things occurring. One is the leasing is going to begin to improve FFO, but so is the redeployment of that financing. And one is not designed to offset the other. They are both -- they should both enhance FFO fundamentally.

If you had to guess, would your number for 2013 be bigger or smaller than $0.92?

It will be bigger, assuming the redeployment of capital.

Okay.

Right now, it is $0.92 without any acquisition.

Right, okay.

Right? Okay.

I got you. You said this, Victor, but I want to confirm, you mentioned the job growth is in San Francisco being very strong and having great for the value of your portfolio and leasing activity. You said also that you're seeing more activity in LA. I don't remember where in LA, but you said something along those lines. Do you think that the opportunity is not overheated in San Francisco, but you think that condition is going to move you south in the coming years, more so than it has been in the past?

I think the opportunities in San Francisco are harder because the economy is stronger. But that doesn't mean that we're not going to -- and the values are obviously increased. But that doesn't mean we are going to move out of that area. We are still going to concentrate our efforts equally in looking for the opportunities that enhance our portfolio and the assets that mirror that kind of assets that we currently own today.

In terms of -- a separate discussion is, we are -- we have been and we will continue to be buying in Southern California in anticipation of the increase in the media and technology and the entertainment growth that we are seeing in jobs.

Okay. And then on dispositions, the question was brought up about Orange County. But are you thinking about that strategy any place else where you have achieved the leasing you wanted to do in a given asset and now you're starting to think about it as a sale candidate, having created the value you wanted to create? Is that a growing strategy within the Company?

I think on a selective basis we will look to dispose of assets, but it is not a strategy that is inherent to our growth prospects. You have to remember, Rich, at the end of the day we bought some extremely well-valued-add assets that cash flow will be coming online, and our basis is well below replacement cost. And we are going to create that growth internally in the Company for years to come based on some of these great buys, so why deploy them -- those assets and then redeploy that capital for something that we're not going to get the same kind of returns?

Okay, and then my last question is on the Pinnacle JV, just look at it bigger picture. It is a large deal, which I suppose is behind the motivation for a joint venture. But it is also core fully occupied, little to no rent expirations in the near term, so pretty stable, safe two assets there. I am curious, what does that say about your general view of the world? Do you want to put core stuff on -- into joint ventures and still participate fully 100% on balance sheet for more the value-add stuff? Or is it just a case-by-case basis as --

I have always said, we have balanced the portfolio and will continue to do so on 60% value -- core and 40% value-add with Element LA and 901 and then Pinnacle as the last three deals that we have done. That's a pretty much of a perfect match on 60/40 for us to have match out to current cash flow. Core for us, just because it was a JV did not mean that's why we did it, because of the size. We did it because we had the opportunity to buy that asset, and the partner on that asset wouldn't sell unless they could stay in on some portion. It's a case-by-case basis, offering a consistent look at the match between core and value-add.

Okay, sounds good. Thanks very much.

Thank you. At this time, we have no further questions. I will turn the call back over to Mr. Coleman for any closing comments.

Thank you so much, and appreciate the support for Hudson Pacific, and we look forward to speaking again next quarter.

Thank you, this does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.