Hudson Pacific Properties Inc (HPP) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Hudson Pacific Properties third-quarter 2013 earnings conference call.

(Operator Instructions)

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

Good afternoon, everyone, and welcome to Hudson Pacific Properties' third-quarter 2013 earnings conference call. With us today are the Company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas. Howard Stern, the Company's President, is also available to answer questions.

Before I hand the call over to them, please note that on this call certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, November 4, 2013, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.

In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company's earnings release, which was released this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

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

Thank you, Kay; and welcome, everyone, to our third-quarter 2013 conference call. This past quarter was another important chapter in the growth of our Company. I am very pleased that during the third quarter we successfully closed our previously announced acquisition of the approximate [836,000] square-foot office portfolio in Seattle. As I mentioned in our last call, this high-quality portfolio gives us meaningful presence in the region with a significant foothold in the top submarkets in downtown Seattle. Also during the quarter, we completed the previously announced disposition of our City Plaza property, and used the proceeds from the disposition towards the acquisition of the Seattle portfolio, pursuant to a like-kind exchange under the Internal Revenue Code Section 1031.

Third-quarter leasing activity remained active. In addition to the 43,122 square feet of new and renewal leases that we executed at our office properties during the quarter, we also successfully negotiated a 12-year lease with Deluxe Entertainment Services, Inc., a leading provider of services in technology for the global digital media and entertainment industry, for our entire 63,400 square foot 3401 Exposition Boulevard property in Santa Monica, California. This lease was executed on October 22, 2013, a near five months following our acquisition of the exceptional renovation property.

As you may recall, we completed the acquisition of 3401 Exposition Boulevard during the second quarter for $24.7 million. Situated at the corner of Exposition Boulevard and Centinela Avenue, in the heart of the Olympic Media Corridor, 3401 Exposition is currently undergoing a full base-building redevelopment. The structure has been stripped to its core framing and has been structurally reinforced. Significant upgrades include new exterior facades, a new roof, and new mechanical and electrical systems.

The renovation process is on schedule and on budget and is expected to be complete by the first quarter of 2014. Deluxe is expected to commence their tenant improvements within the next 60 to 90 days, in time for an early third-quarter 2014 lease commencement.

In addition to our efforts at 3401 Exposition, the redevelopment of our Element LA project in West Los Angeles is on track to deliver one of Southern California's premiere creative office campuses. Toward the end of the quarter, we successfully purchased a building immediately adjacent to our Element LA project. With the addition of this fifth building, the 12-acre campus will now include approximately 285,000 square feet of creative office space, along with a five-story, 830-stall parking garage. The building, located on Bundy Avenue, along the parking structure, remain on schedule to be completed during the second quarter of 2014, with the Olympic building scheduled to be completed during the third quarter of 2014.

To date, we have had over 1 million square feet of tours from prospective tenants, which primarily consist of entertainment, media, technology, and social media companies, the same industries that have been driving growth in the Los Angeles office markets.

Turning to our Sunset Bronson studio development project, I am pleased to report that we have achieved an important milestone during the quarter with the receipt of planning commission approval, without appeal, for a 14-story, 315,000 square-foot office tower; a 5-story, 9,000 square-foot production facility; and a 9-level, 1,635-stall parking structure. We have commenced design drawings and other pre-construction efforts, and subject to preleasing, expect it to be in a position to commence construction as early as the fourth quarter of 2014.

In terms of leasing trends in Los Angeles, we remain encouraged by improving conditions, particularly in West Los Angeles. Overall, the West LA office market saw stronger levels of activity compared to the rest of the market. In fact, the two largest leasing transactions were recorded in West Los Angeles and Santa Monica, with the third largest transaction in Burbank, all submarkets where Hudson has focused its energy and investment strategies.

Third-quarter net absorption levels in greater Los Angeles were strong, with 570,000 square feet of positive net absorption during the quarter, more than 75% of which was recorded in West Los Angeles. Overall asking rates in greater LA also showed growth, improving 2.4% over the last 12 months, led by West Los Angeles, which improved by 4.8% over the same period.

Although many submarkets are fairly segmented in their recovery cycle, the areas with higher concentration of technology, entertainment, and media companies continue to fuel the submarkets that have led the recovery. These companies tend to prefer a more creative style of building. As West Los Angeles continues to see large demand from users requesting creative office environment, we expect the landlords, such as Hudson, will continue to have the ability to tighten concession packages and continue to increase asking rental rates.

Turning now to San Francisco, the office market fundamentals remain very healthy, largely fueled by strong high-tech demand. Occupancy gains in the third quarter outpaced the entire first half of the year, largely driven by preleasing on recently completed projects, which accounted for 420,000 of the 737,000 square feet of net absorption for the quarter. Year-to-date absorptions in the third quarter totaled one million square feet. While much of this growth has been organic, as tech companies, citywide, add jobs and expand their space requirements, there is also evidence that growth is increasingly being fueled by outside tenants moving into the marketplace.

In the third quarter, alone, over 400,000 square feet of space was leased by tenants from outside the market. As a result, even with 151,000 square feet of unleased vacant space added to the market by the recently completed projects, the vacancy rate declined 30 basis points to 8.2% from last quarter's 8.5% vacancy rate.

Rent growth over the third quarter also continued its upward march, growing a 3.5% rate over the last quarter. Year to date, rents have increased, market wide, by more than 10%, or $5.01 per square foot. With 500,000 square-foot-plus tenants expected to lease in the fourth quarter, net absorption for 2013 appears to be on pace for 1.3 million feet, comparable to that of last year.

Allow me to briefly update you on the new construction of San Francisco's [seven] projects, totaling 2.3 million square feet, that are currently under construction. Nearly 60% of the new construction has already been preleased. Approximately 1.5 million feet of this new construction is scheduled to be delivered in the first half of 2014, at which time, a significant slowdown in new deliveries is expected until at least the middle of 2015. Assuming demand remains healthy over this period, we expect that the level of new deliveries will continue to support market conditions, characterized by tightening availability and market-wide pressure on rents.

Turning now to Seattle, posting a 5.2% unemployment rate, 210 basis points below the national average, Seattle's diverse economy continues to outperform nearly every other major metropolitan marketplace. The most recent employment forecast from the Puget Sound Economic Forecaster calls for an employment growth of 2.8% in 2013, substantially outpacing the 1.6% national average. Employment growth is expected to continue at an impressive 2.3% in 2014.

In terms of trends in our submarkets, Class-A vacancy in the Pioneer Square/Waterfront submarket, where our First & King property is located, dropped by an astounding 45%, from 17.1% as of the end of the second quarter, to 9.6% at the end of last quarter. Rents, likewise, improved nearly 6%, from $30.22 to $32.01. Similarly, the already tight Class-A vacancy in the Lake Union market, where our Met Park North project is located, also witnessed an exceptional quarter, dropping 60% from 5% as of the end of the second quarter, to 1.9% as of the end of the last quarter. Rents, likewise, improved 1.2%.

Our supplemental report, filed this afternoon, includes a schedule of annual lease expirations as of the end of the quarter. As indicated in that schedule, 253,950 square feet, or approximately 4.8%, of our total office portfolio square footage is scheduled to expire by year end. Nearly 70% of that space has been backfilled or renewed, and another 10% is under letter of intent or in negotiation, leaving less than 60,000 square feet, or 1.1%, of our total office portfolio square footage left to backfill or renew.

If you recall, that heading into 2013, nearly 18% of our total office portfolio square footage was scheduled to expire this year. The vast majority of which we have now successfully backfilled or renewed. Looking ahead to 2014, you will note that only 131,374 square feet, or approximately 2.5%, of our total office portfolio square footage is scheduled to expire over the next calendar year, and of that, we have already backfilled or renewed 25%.

In short, our leasing efforts have either backfilled, renewed, or result in lease negotiations, with respect to nearly 80% of the remaining 2013 expirations, with [in-rolls] on 2014 expirations already underway. And in most instances, at considerably higher starting rates than corresponding expiring rents for the same space.

Now, let's turn to briefly update you on the status of our media and entertainment properties. Last quarter, we reported that our Sunset Gower property had four vacant stages, largely stemming from the conclusion of the Showtime series, Dexter, toward the end of the second quarter. We were cautiously optimistic at that time about quickly backfilling the available stages, but anticipated a temporary decrease in the net income from operations on account of that vacancy and related lull in the production activity. As expected, production activity over the third quarter slowed compared to the prior year. That said, we also successfully backfilled most of our stages available over the quarter; and at present, we have one vacant stage at our Sunset Gower property, with promising prospects for that stage currently.

With that, I am going to turn the call over to Mark, our CFO.

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended September 30, 2013 totaled $14 million, or $0.24 per diluted share, compared to FFO, excluding specified items, of $10.5 million, or $0.21 per share, a year ago. The specified items for the third quarter of 2013 consisted of expenses associated with the acquisition of our office portfolio in Seattle, Washington, of $500,000, or $0.01 per diluted share. Specified items for the third quarter of 2012 consisted of expenses associated with the acquisition of the Element LA campus in West Los Angeles, of $500,000, or $0.01 per diluted share.

FFO, including the specified items, totaled $13.5 million, or $0.23 per diluted share, for the three months ended September 30, 2013, compared to $10.1 million, or $0.20 per share, a year ago. Net loss attributable to common shareholders was $5.7 million, or $0.10 per diluted share, for the three months ended September 30, 2013, compared to net loss of $3.4 million, or $0.07 per diluted share, for the same period a year ago.

Turning to our combined operating results. For the third quarter of 2013, total revenue from continuing operations increased 31.5% to $53.3 million, from $40.6 million a year ago. Total operating expenses from continuing operations increased 33.7% to $48.2 million, from $36 million for the same quarter a year ago.

As a result, income from operations increased 14.1% to $5.2 million for the third quarter of 2013, compared to income from operations of $4.5 million for the same quarter a year ago. I will discuss the primary reasons for the increases in total revenue and total operating expenses in connection with our segment operating results.

Interest expense during the third quarter increased 62.2% to $7.3 million, compared to interest expense of $4.5 million for the same quarter a year ago. At September 30, 2013, the Company had $891.2 million of notes payable, compared to $582.1 million as of December 31, 2012, and $359.5 million at September 30, 2012.

Turning to our results by segment. Total revenue from continuing operations in our office properties segment increased 47.2% to $43.5 million, from $29.6 million in the third quarter of 2012. The increase was primarily the result of an $11.5 million increase in rental revenue to $33.6 million; a $1.5 million increase in tenant recoveries to $6.5 million; and a $900,000 increase in parking and other revenue to $3.4 million, largely resulting from the acquisitions of the Pinnacle I and II buildings by our joint venture with MDP/Worthe on November 8, 2012 and June 14, 2013, respectively, and our acquisition of the Seattle portfolio on July 31, 2013.

Operating expenses from continuing operations in our office properties segment increased 37.3% to $16.8 million, from $12.2 million for the same quarter a year ago. The increase was primarily the result of the office property acquisitions I mentioned a moment ago. At September 30, 2013, our stabilized office portfolio was 95.5% leased. During the quarter, the Company executed eight new and renewal leases totaling 43,122 square feet.

Total revenue at our media and entertainment properties decreased 10.7% to $9.8 million, from $11 million for the same quarter a year ago. The decrease was primarily the result of a $1.3 million decrease in other property-related revenue to $3.2 million, largely resulting from the lower production activity compared to the same quarter a year ago. Total media and entertainment expenses decreased 11.5% to $6.1 million, from $6.9 million in the same quarter a year ago, primarily resulting from the lower production activity compared to the same quarter a year ago. At September 30, 2013, the trailing 12-month occupancy for the Company's media and entertainment portfolio increased to 71.5% from 71% for the trailing 12-month period ended September 30, 2012.

Turning to the balance sheet, at September 30, 2013, the Company had total assets of $2.1 billion, including cash and cash equivalents of $29.3 million. At September 30, 2013, we had approximately $237.3 million of total capacity under our unsecured revolving credit facility, of which $80 million had been drawn. During the quarter, we paid a quarterly dividend on our common stock of $0.125 per share, and we paid a quarterly dividend on our Series B Cumulative Preferred Stock equivalent to 8 3/8% per annum.

In addition, we completed several important financing transactions during the quarter. In connection with the acquisition of the Seattle portfolio, on July 31, 2013, we closed a seven-year loan totaling $64.5 million, secured by our Met Park North property. The loan bears interest at a rate equal to one-month LIBOR plus 155 basis points. The full loan is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of 2.1644% through the loan's maturity on August 1, 2020. Proceeds from the loan were used towards the purchase of the Seattle portfolio.

On August 14, 2013, we closed a five-year loan totaling $95 million, secured by our First & King property. The loan bears interest at a rate equal to one-month LIBOR plus 160 basis points. Proceeds from the loan were used towards the repayment of amounts drawn on our unsecured credit facility in connection with the Seattle portfolio acquisition.

Finally, effective August 22, 2013, the terms of our loan secured by our Sunset Gower and Sunset Bronson media and entertainment properties were amended to increase the outstanding balance from $92 million to $97 million, reduce the interest rate from LIBOR plus 350 basis points to LIBOR plus 225 basis points, and extend the maturity date from February 11, 2016 to February 11, 2018.

The Company is revising its full-year 2013 FFO guidance from its previously announced range of $0.91 to $0.95 per diluted share, excluding specified items, to a revised range of $0.93 to $0.97 per diluted share, excluding specified items. The revised guidance reflects the Company's FFO for the third quarter ended September 30, 2013 of $0.24 per diluted share, excluding specified items. Stronger than expected operating results on our media and entertainment properties and interest savings from the recent amendment to the loan secured by the media and entertainment properties largely account for this upward revision.

In addition, this guidance reflects the acquisitions, financings and leasing activity referenced herein and all previously announced acquisitions, dispositions, financings and leasing activity. As is always the case, the Company's guidance does not reflect or attempt to anticipate any impact to FFO from speculative acquisitions. The full-year 2013 FFO estimates reflect management's view of current and future market conditions, including assumption with respect to rental rates, occupancy levels and the earnings impact of events referenced herein, but otherwise exclude any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity, or similar matters.

Now, I will turn the call back over to Victor.

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

Now, Operator, we will open the call for any questions.

(Operator Instructions)

Our first question is from Craig Mailman of KeyBanc Capital Markets.

Victor, on getting all the permits you guys need on the potential studio development -- to get started in 4Q of 2014, how much pre-leasing would you need? Are you talking to tenants? What do you guys envision there on potential spend?

Craig, thanks for calling in. We are fully entitled, and we have permits right now. We are going through working drawings.

After we announced that we were fully entitled, we've received a lot of activity from tenants that are looking at the same sort of calendar time frame where occupancy can come into play. We have got two unsolicited tenants at 50,000 feet and greater that are looking right now.

I don't know if I have a specific number that says we need to be pre-leased at X. But it's 25% to 40% range for us to be pre-leased, I think, is what Mark and I have talked about that's the comfort level right now.

Okay.

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

Okay. What type of yield would you guys be looking at for this type of development?

Stabilized yield is like an 8.5%.

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

We achieved -- I think it's about $0.10 or $0.15 a foot per month. I think we underwrote it at $3.15, and I think we did the deal at $3.35.

Net.

That's net.

Okay. Then, just lastly, you guys touched on -- you guys are 95% leased, or over that. You really don't have many expirations through 2014 -- even a little bit beyond that. Your biggest year is going to be in 2017. What's the catalyst from here? What are you guys seeing in terms of value-add acquisitions that will give you more product to lease?

We currently -- I mean, listen, as you well know, you have followed us since the beginning. We sort of went like 60/40 stabilized to value add, and then we sort of shifted to a 50/50 model on the acquisitions and new assets.

Now with, I think, our future development opportunities coming in late 2014 development, and then we have another project that we're on the books for, for late 2015, probably 12 months thereafter -- the stuff that we are looking at now and that we're seeing in the market is much more value add since the portfolio is relatively stable. But we haven't brought it online yet -- the development projects that we are currently working on or the value-add projects that we have in our ownership.

Great. Thank you, guys.

The next question is from Brendan Maiorana of Wells Fargo.

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

We've got pretty stable activity right now in the portfolio in all our markets, in general. Specifically to Element, we've got three tenants that are looking at substantially a fair amount of the space. We are pretty confident that our team is in conversations with a multiple of tenants, right now, where we can lease up that asset.

In terms of stabilization, this is a huge project. We'll be done with the parking structure first quarter -- maybe late first quarter, early second quarter of 2014. We will be done with the majority of the capital improvement work on the Bundy stuff late second quarter of 2014. And then, the second building, probably sometime around Summer of 2014.

So, we can stabilize -- my guess is, if the activity continues at the feverish rate that it currently is right now -- early 2015 fully stabilized. I am hopeful that we'll have a lot of lease negotiations sometime in the next several months.

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

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

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

Yes, it's timing, right? It tends to come in a bit lumpy.

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

Okay. Thank you.

(Operator Instructions)

Our next question is from Vance Edelson of Morgan Stanley.

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

This is Victor. On that deal, we had multiple tenants looking at it. It's a very unique asset because it was -- we always marketed that asset as 100% occupied, single-tenant asset. It's creative office to its fullest extent. As I mentioned in my prepared remarks, this is with completely gutting the space, and having an open indoor-outdoor space and full utilization.

We did not have to give up, as I mentioned earlier, rate. We pushed rate from our initial underwriting up to $0.20 off of what we started with. We got annual increases.

We pushed term on this as well. This is a 12-year term. It was initially a 7-year term, and we pushed it to 12. We got increases across the way.

The only thing that is still required for something like this is free rent. We did have to give up free rent. But the overall yield is substantially higher than we initially underwrote it as. I think the TIs are lower than what we initially looked at.

I think our going-in yield is still much higher than we originally anticipated here. So, I'm going off of memory, but you can -- Mark can verify this. I think it was like underwriting somewhere a stabilized 7.25%, and I think we ended up getting an 8%-plus on this thing.

That's right.

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

Okay, that's very helpful color. Thanks for that.

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

On a stable -- we saw the floating-rate market really pick up on the heels of rate volatility, following May 21. We're not actively pricing the loan right now, but I think on stabilized product, you could expect to see pricing right around that -- for floating rate debt, right around that LIBOR 155 to 160. Obviously, assets set up differently, but that pricing probably still holds.

I don't think that -- and if anything, rates have come in a bit since we were last in the market looking at fixed-rate financing. So, hard to say for sure, but the last fixed-rate financing we did came in just shy of 4%, I think. If you were going to price a stabilized asset in a fixed-rated market, my guess is you would be somewhere in the low-4%s.

Okay. Great. I'll leave it there. Thanks, guys.

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

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

Let's take it -- it is sort of the haves and the have nots. The marketplaces that my prepared remarks were referring to are the stuff that we're in. And so, we have seen overall rent growth, and you can take the corridor, right? Santa Monica, West LA, Brentwood, Westwood-Century City, Beverly Hills, West Hollywood, Hollywood -- in that corridor, you have seen rent growth consistently quarter over quarter.

Most recently, those markets have really supported and fueled the overall rent growth, which I think I referred to as like 2.4% over the last 12 months, but that's a great area. Those markets -- you are seeing a much higher rent growth.

It is just indicative of the leases that we are doing and the activity we are seeing on our space that -- the lack of space that we currently have, but the space that we have that's vacant. It's 2.5% to 3% a quarter growth for at least the last three to four quarters, and maybe even more so.

It's specific to those markets. If you go outside those marketplaces and you go to the west San Fernando Valley or you go south, even past Playa Vista, Culver City, all the way down to Orange County, you don't have that kind of rent growth, and you don't have that kind of activity. And the vacancy factors are obviously being altered. So, there is really the haves and the have nots.

I am optimistic of the tenant mix and the activity and where we're seeing growth, that we are going to continue to see that in these markets. And people who are looking to move realize that there is a lack of product. As you well know, the number of new start-up commercial office sites for new sites, even on the west side all the way through Hollywood, is at all-time low. When you typically have a 2% to 4% of the product coming online, you have got sub-1%, and we've had that -- less than 0.5% for several years now. So, I am still pretty optimistic on the rent growth.

Okay. Sticking with the supply story, how are you thinking about competitive supply in Hollywood? It seems like there is a lot going up. Where does your product fit in, both with leased and what you are thinking about building?

I think our product is the best. I have to say that, right? I think our product, relative to the marketplace -- there are some pretty good projects out there. We are very optimistic on what we are seeing. We are very optimistic of what the market is out there, in terms of the demand. The demands are very, very high.

I do think that -- you have got two other projects that are commercial. But most of the fact out there is residential that you're seeing. That's where -- you drive out there, the number of cranes is almost exploding for residential development. It's got to be, per capita, the most cranes of anywhere else in the country, where you are seeing that development. And virtually all of it is residential, with the expectation of two other projects -- ours and two others.

So, there is a lot of room in that marketplace, and there is a lot of tenant demand and expansion. And it's primarily revolving around media, social media, and entertainment.

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

Listen, the Seattle marketplace, as I mentioned, is extremely strong right now. The activity and growth of some of the core companies, in terms of job growth there, is at an all-time high, and the demand for the high-quality labor force is at an all-time high. I think we see some pretty interesting value-add market deals that are going to help mix in the portfolio in the specific areas we are looking at, and help us look at those deals accretively throughout the portfolio.

In terms of our powder and ability to acquire those kind of deals, those are average-size deals, and I am comfortable at the ability of our balance sheet and our credit facility that we can get a couple of these things done on a very comforting level. I think we're seeing some pretty interesting opportunities, and the business plan that we set out at the beginning of this year is really coming to fruition.

Great. Thank you very much.

Thank you. Have a good day.

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

On Seattle -- just to follow up on that -- what was the impact on guidance from the deal, being that you bought it at a sub-5%, at least initially realizing there is upside? But what was the weight relative to the increase in guidance that you reported today?

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

$0.01 positive?

Positive, yes.

Positive?

Positive, yes. Right, because it was $0.03 (multiple speakers). Yes, because of financing, right.

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

Right now we're focused -- our attention is primarily focused on your pecking order, one and two.

Okay. Is this -- well, it's not something that you can turn around and sell, I guess, right?

You mean the third asset? I mean, we --

Northview Center --

Yes, we would -- Northview -- we would entertain selling that, probably -- I think after a stabilized hold of 24 months.

Right. There's three guidelines, I guess, right?

Correct. Yes.

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

No, I don't think so. Listen: I think with the -- the office market fundamentals are still relatively very healthy and there's strong tenant demand. As I mentioned, there is a series of large tenants out there looking to find a home.

I do think that the number of deals we've seen has gone down. But a lot of that marketplace has traded hands in the last two to four years, so to speak. So, those guys aren't going to necessarily sell those assets.

We're still seeing, though, Rich, at the end of the day, some pretty interesting assets. And I think you have to be very disciplined in your ability to buy those assets. The opportunities are nowhere near what they were, but I still think we are going to be active there.

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

I don't think that's an unfair way of looking at it. We did reset guidance after the Seattle deal, and looked at where we thought media was going to perform for the balance of the year. Our revised guidance reflects what is basically a $0.01 better performance for Q3 than we had forecasted for that quarter.

I don't know that you would say it's conservative. It's rather that we do the best we can to forecast absorption of the stages, and we did really well on those stage absorptions.

And just one more note, because I concur with Mark, except for you have to remember: it was non-seasonal when they left. They extended beyond the season time frame. Therefore, the gap was a non-nominal season where we didn't have access to the shows and the float of shows that typically come in Spring, which is normal. They left later. So, as a result of that, we didn't know we could have that kind of activity, and we just were pleasantly surprised.

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

So, you know what? Listen, I think, as you know our portfolio relatively well. The fortunate thing about our current portfolio is that we have our roll-up is substantially in almost every single asset in the portfolio. At least it's roll -- even though we have a little amount of leasing to do, they are all rolling up.

And so, I don't think there is anything glaring in the portfolio that we are going to sort of trim at the end of the day. Maybe if we were to look at an asset that you were to hold my feet to the fire a little bit, I would say San Diego because that asset is stabilized. I am not so sure we can get a lot more juice out of that at the end of the day.

I don't think there is anything really standing in the portfolio that says -- we have to trim it for us to take advantage of where the market is. There is still a lot more juice in the existing portfolio on a roll-up basis. So, we're pretty comfortable with the way we have outlined the portfolio as it sits.

Okay. Great. Thanks very much.

Thank you.

Thank you. We have no further questions in the queue at this time. I would like to turn the call back over to Mr. Coleman for closing remarks.

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

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