Hudson Pacific Properties Inc (HPP) 2014 Q3 法說會逐字稿

Greetings, and welcome to the Hudson Pacific Properties third-quarter 2014 earnings conference call.

(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. You may begin.

Good afternoon, everyone, and welcome to Hudson Pacific Properties third-quarter 2014 earnings conference call. With us today are the Company's Chairman and Chief Executive Officer, Victor Coleman, and Chief Financial Officer, Mark Lammas.

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 3, 2014, 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 reconciliation to the appropriate GAAP measure and an explanation of how the Company believes such non-GAAP financial measures are useful to investors.

And now like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Thank you, Kate, and welcome everyone to our third-quarter 2014 conference call. I am pleased to report we have another highly productive quarter as fundamentals in each of our key markets continue to improve.

Since our last call, we have seen continued leasing momentum with our office portfolio, made two additional investments in accordance with our core strategy, streamlined our portfolio by selling non-strategic assets, and completed financing transactions in increase liquidity and reduce related costs.

Our stabilized office portfolio is 94.1% leased and we're seeing a solid your-over-year net operating growth on both a cash and GAAP basis at our same-store properties largely due to signing new and renewal leases at higher rates. We completed new and renewal leases totaling 125,000 feet during the quarter with an average lease rate higher than expiring rates by 13% on a cash basis and 27.5% on a GAAP basis. Year-to-date, we have signed new and renewal leases totaling 421,000 square feet with average lease rates higher than expiring ones by 91.3% on a cash basis and 107.4% on a GAAP basis.

New leasing activity remains heightened within our San Francisco portfolio, and includes a 15-year lease with renowned retailer Saks & Company for 41,000 square feet at our 901 Market Street property. Saks Fifth Avenue OFF 5TH will occupy a portion of the ground floor and the entire lower level, much of which was substantially renovated as part of our successful reposition of this asset. 901 Market Street is now fully leased and Saks Fifth Avenue OFF 5TH is expected to take occupancy in the third quarter of 2015.

Regarding acquisitions, we continue to search off-market opportunities in our target markets. In late August, we purchased a $28.5 million participation in a $120 million bridge loan originated by Canyon Capital Realty Advisors for the acquisition and redevelopment of the historic Broadway Trade Center. Built in 1908, the Broadway Trade Center, located at 801 South Broadway in Los Angeles, is a 1.1 million square-foot mixed-use office and retail building that the borrower intends to convert into creative office space with ground floor retail space. We are excited to have made an investment in downtown's historic corridor, a sought after location for creative office tenants that continues to outperform the rest of the submarket.

Subsequent to the quarter, we acquired 12655 Jefferson Boulevard, a 94,000 square-foot office property in the Playa Vista submarket of Los Angeles for $38 million or $404 a foot. Built in 1985, the building is currently vacant but we intend to reposition the asset as creative office and already have interest from potential tenants to lease a significant portion of the space.

The Playa Vista submarket is experiencing a dramatic transformation as a result of growing demand from technology and entertainment companies for creative office space. Comparable renovated and new construction properties have recently sold in the range of $575 to$ 675 per square foot. Microsoft, Sony PlayStation, Facebook, YouTube, and TMZ have already moved in the area followed by a wave of public and private investment to build residential units, retail, and amenities to serve their employees.

In terms of dispositions, we continue to look to sell non-strategic assets in order that we cycle capital into value -- high-value acquisition and development opportunities. To that end, last quarter we sold our Tierrasanta property which has [erased] 112,000 square-foot office building in San Diego for $19.5 million. The property was originally acquired in connection with our initial public offering, but is primarily flex office space. It no longer aligned with our core investment strategy.

Proceeds from the disposition were used to acquire our Merrill Place property in Seattle pursuant to a like-kind reverse exchange under the Internal Revenue Code 1031. We also continue to pursue potential joint ventures with one or more assets in our portfolio such as our 1455 Market Street property in San Francisco.

On the financing front, we enhanced our liquidity position and reduced our financing costs with a closing of an amended and restated $300 million credit facility and a new $150 million unsecured term loan. The terms of the amended and restated credit facility and the new term loan reflect improved credit market conditions and provide us with increased financial and operating flexibility to continue to grow our business.

Now let me take a little closer look at our core markets. San Francisco remains one of the nation's best performing office markets. Recent data indicate that San Francisco metro has reached full employment with the unemployment rate at 4.5%. The region's economic recovery continues to outpace both California and the United States with expansion of high technology and professional service firms we target as tenants driving the year-over-year 36,000 net gain in jobs equivalent to a 3.3% increase.

Net absorption during the third quarter of 293,000 square feet pushed vacancy down to 6.7%, representing an improvement of 30 basis points for the quarter and 160 basis points year over year. Similarly, asking rents increased 4.1% for the quarter, 14.6% year over year, and 11.4% year-to-date. Throughout the region, rising prices for top-quality, low vacancy office buildings and continued demand for large tenants has increased new construction.

Four projects totaling 885,000 square feet are scheduled for completion during the fourth quarter of 2014, of which 70% is preleased. Another 2.1 million square feet will be delivered in 2015 but these properties are 93% preleased and will not add significantly to available supply. Given the city's annual cap on new office development as mandated by Prop M, we expect continued rent and occupancy gains and limited impact to the landlord favorable market conditions.

At the end of the third quarter, our San Francisco stabilized office portfolio is 94.1% leased and 93.9% occupied with annualized base rents at $32.28 per square foot. We expect to continue to create significant value as below leases roll and are replaced with new and renewal leases at higher rents.

In Los Angeles, we're experiencing a more measured but steady growth fueled by expanding technology in our entertainment companies such as our Riot Games tenant. Over the past 12 months, the region added 69,000 jobs, equivalent to the annual growth rate of 1.7%. And recent data shows the unemployment rate at 8.5%, down from 10.2% a year ago.

Net absorption in the third quarter reached its highest level since the third quarter of 2012 at 705,000 square feet, and reflects an amount of leasing activity not seen since 2007. Asking rents increased 0.8% for the quarter and 6.4% year-over-year and 5.1% year-to-date.

Class A assets performed slightly better, up 1% for the quarter, 8% year-over-year, and 5.4% year-to-date. In the Hollywood submarket, vacancy fell 70 basis points in the third quarter to 7.2% or 480 basis points year-over-year decline, with Class A rents increasing 1.1% for the quarter and 8.9 % year-over-year. Net absorption for the quarter was 23,000 square feet bringing the year-to-date net absorption to 153,000 square feet. Office development remained steady with approximately 660,000 square feet under construction and approximately 1 million square feet in the planning stages.

In September, we broke ground on the parking structure of a 413,000 square-foot Hollywood office development, Icon at Sunset Bronson Studios. We remain confident that there is pent-up demand sufficient to absorb new supply as projects come online in the submarket. To-date, we have toured over 30 perspective media entertainment tenants, looking for a total of 3.2 million square feet of creative office space. Nearly half of these tenants require properties that can accommodate leases of 100,000 square feet or more and approximately 20% are focused exclusively on Hollywood.

In Seattle, continued growth is driven by the technology industry. In the first three quarters 2014, technology-related firms significantly -- firms signed approximately 36% of new leases for 2 million square feet, while other tenants in the market continue to grow 29% from 5 million to 7 million square feet.

All but one of our Seattle office properties are located in the downtown Seattle submarket where fundamentals continued good growth. While vacancy increased 30 basis points for the quarter to 13%, year-over-year vacancy decreased 160 basis points and Class A assets is even lower to 11.2%. Downtown Seattle has year-to-date positive net absorption of 534,000 square feet, equal to 128% increase relative to the same period last year and remains the region's leader in terms of Class A asking rents, which were up to report 1% in the quarter and 6% for the year.

Three of our Seattle office properties, including the development site, we're entitling for approximately 130,000 square feet are located in the Pioneer Square submarket. Pioneer Square has become the hub for creative and technology companies seeking alternatives to the pricier South Lake Union submarket. In the third quarter, Class A office vacancy dropped 55 basis points to 8.6%. In terms of supply, Pioneer Square has only one new office development under construction, which totals approximately 200,000 square feet and is already 100% preleased to Weyerhaeuser, an iconic Seattle-based company.

Tenants like EMC Corporation, Blue Nile, and McGraw-Hill, are drawn to this neighborhood's historic buildings, restaurants, and convenient public transportation access. Our properties feature a large floor plates, atypical for the neighborhood and are adjacent to the Seattle Ferry Terminal to link light rail in Seattle Streetcar stations, Highway 5, and Interstate 90. Private investment has accelerated in this submarket to build residential units and amenities while public agencies are spending billions to take the Alaskan Way Viaduct underground to create a series of waterfront parks directly across from our assets.

We are currently completing significant capital improvements programs at our 83 King and Merrill Place properties to update the common areas and increase the assets profiles among our large target tenants. In conclusion, we remain focused on building an exceptional portfolio of office and media properties that will attract high-quality tenants and create value for shareholders, both near and long term. We will continue to make strategic investments in our core markets and to leverage our team’s operational leasing and redevelopment expertise to minimize execution risk.

Now, I am going to turn the call over to Mark, our CFO, for details on our third-quarter financial performance. Mark?

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended September 30, 2014, total $20.8 million or $0.30 per diluted share compared to FFO excluding specified items of $14 million or $0.24 per share a year ago.

Specified items for the third quarter of 2014 consisted of acquisition related expenses of $200,000 or $0.00 per diluted share, costs associated with a one-year consulting arrangement with a former executive of $900,000 or $0.01 per diluted share. And a one-time supplemental net property tax expense for periods prior to the third quarter this year of $1.1 million or $0.02 per diluted share, described more fully below.

Specified items for the third quarter of 2013 consisted of expenses associated with the acquisition of our Seattle office portfolio of $500,000 or $0.01 per diluted share. FFO, including the specified items, totaled $18.6 million or $0.27 per diluted share for the three months ended September 30, 2014, compared to $13.5 million or $0.23 per share a year ago. Net income attributable to common shareholders was $7.6 million or $0.11 per diluted share for the three months ended September 30, 2014, compared to net loss of $5.7 million or $0.10 per diluted share for the same period a year ago.

Turning to our combined operating results for the third quarter of 2014, total revenue from continuing operations increased 27.8% to $68.2 million from $53.3 million a year ago. The increase was the result of a $6.2 million increase in rental revenue to $45.7 million, a $5.3 million increase in tenant recoveries to $12.4 million, a $1.9 million increase in parking and other revenue to $5.5 million, and a $1.4 million increase in other property related revenue to $4.6 million.

Several factors contributed to this increase, including acquisition of the Seattle portfolio on July 31, 2013, and the Merrill Place property on February 12, 2014. Interest income earned from the Broadway Trade Center note participation purchased on August 20, 2014, and higher same-store revenues from our office and media entertainment properties.

Tenant recoveries include $3.6 million of one-time property tax recoveries resulting from the reassessment of the 1455 Market Street and Rincon Center properties, and to a lesser extent, other assets within the San Francisco portfolio, for periods prior to the third quarter of this year.

Total operating expenses from continuing operations increased 15.3% to $55.5 million from $48.2 million for the same quarter a year ago. The increase was primarily the result of the Company's acquisitions of the office properties described above. But also reflects a one-time property tax expense of $4.7 million resulting from the reassessment of assets within the San Francisco portfolio for periods prior to the third quarter of this year.

Separate from our office properties, a $1.3 million increase in total media and entertainment operating expenses to $7.4 million reflects increased expenses associated with higher production activity compared to the same period a year -- from last year.

Finally, a $1.8 million increase in general and administrative expenses to $6.8 million includes $900,000 associated with a one-year consulting arrangement with a former executive and an increase in headcount and salaries attributable to our higher continued growth. As a result, income from operations increased 144.1% to $12.6 million for the third quarter of 2014, compared to income from operations of $5.2 million for the same quarter a year ago. Same-store total property net operating income in the third quarter, excluding specified items, increased by 7.7% on a GAAP basis and 11.6% on a cash basis.

Interest expense during the third quarter decreased 10.5% to $6.6 million from $7.3 million for the same quarter a year ago which reflects the Company's ability to obtain financing at more favorable interest rates as well as an increase in capitalized interest resulting from additional development and redevelopment activities. At September 30, 2040, the Company had $920.9 million of notes payable compared to $931.3 million as of December 31, 2013, and $891.2 million at September 30, 2013.

As of September 30, 2014, our stabilized office portfolio was 94.1% leased. During the quarter, the Company executed 13 new and renewal leases totaling 124,893 square feet. At September 30, 2014, the trailing 12-month occupancy of the Company's media and entertainment portfolio increased to 71.6% from 71.5% for the trailing 12-month period ended September 30, 2013.

Turning to the balance sheet. At September 30, 2014, the Company had total assets of $2.3 billion including unrestricted cash and cash equivalents of $69.4 million. At September 30, 2014, we had $300 million of total capacity under unresolved -- our unsecured revolving credit facility of which $95 million had been drawn. In addition, at September 30, 2014, the Company's $150 million unsecured term loan facility was fully 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. The Company is increasing its full-year 2014 FFO guidance from a range of $1.12 to $1.16 per diluted share, excluding specified items, to a revised range of $1.14 to $1.18 per diluted share, excluding specified items. The guidance reflects the Company's FFO for the third quarter ended September 30, 2014, of $0.30 per diluted share, excluding specified items.

This guidance reflects all acquisitions, dispositions, financings, and leasing activity referenced on this call and in today's press release, including the Saks & Company lease at 901 Market Street, Tierrasanta property disposition, the Broadway Trade Center bridge loan participation, as well as the new unsecured revolving credit facility and term loan facility. The costs associated with the one-year consulting arrangement with a former executive had been excluded from the guidance estimate as non-recurring costs.

As is always the case, the Company's guidance does not reflect or attempt to anticipate any impact to FFO from unidentified acquisitions. The full year 2014 FFO estimate reflects Management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of events referenced in this release. But otherwise exclude any impact from future unannounced or unidentified acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity, or similar matters.

And now, I’ll turn the call back to Victor.

Thanks, Mark. As always, we appreciate your continued support for Hudson Pacific Properties and we look forward to updating you on the progress again next quarter.

Now, operator, with that, I am going to ask you to open the call for questions. Thank you.

(Operator Instructions)

Our first question comes from Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. Good afternoon. Hey, Victor, on the deal in Playa, so I think you mentioned it was low $400s a square foot in terms of where your basis is today. It’s vacant.

What sort of the capital cost do you think are likely to go in there? And where are rent levels for a property like that? I gather you'd probably look to improve the quality of the asset which would suggest that maybe there is some reasonable levels of capital that need to go into it.

Yes, thanks, Brendan. How are you doing? So the asset itself will probably be into somewhere in the mid-$500s, and my guess is, you know, maximum $100 to $150 a foot will stabilize it. I think we believe that we have occupancy in that asset sometime in late summer, early fall of next year. Rental rates on a per foot basis around $450 a foot full service, is what, sort of what we're looking at on that basis, per month.

Yes, and what are operating expenses like, so what, sort of a triple net equivalent?

You know what, I think we are probably talking 11, 12 through that, maybe 13. I am not sure what the taxes are on that. I am looking at Chris. He is probably referring to somewhere around net rents in the $3.10, $3.20 range, so somewhere like that.

Okay. That's helpful. And how do you feel about Playa? I think in LA, there are several submarkets that are catering to creative office users. Obviously, you guys have a presence in Hollywood and your -- you've got Icon, so you're a believer in that market.

There is Santa Monica, and then as you move further south down the coast, down to Playa and then some of the submarkets in between. And then I think you had also spoken about downtown LA is an area that may be of interest. How do you sort of compare and contrast the various creative office submarkets that exist in LA?

That's a tough question. I think you are going to compare and contrast the markets in LA on the creative office side from where rents are going to be from a high to a low. So your premium rents are going to be Santa Monica and surrounding West LA area. As you’re going to jump over, I think you are going to see higher rents in the Hollywood area, and it’s from a pure point creative office standpoint.

I think the next phase of that really is the -- I consider Culver City, even though it’s a limited market space. Culver City and Playa is the next areas where you are seeing some pretty progressive rents. It’s a tier down or a tier-and-a-half down relative to the West LA stuff. But the demand has been very strong there and you know the absorption in those markets has been at an all-time high. So -- and the reason is, is they have had access to space.

That market is almost completely sold out right now from a vacancy standpoint, and the good news about that marketplace is, there's very little lull because most of these deals have been done in the last 24 months or 36 months or sooner. And so you’re going to find that will be sort of a close-net race to, as I said, to the West LA.

It does not compare to Downtown LA. I think Downtown LA rents are going to be probably $0.75 to maybe even $1 lower on a rent basis, on a net-net basis.

Okay. And in San Francisco, do you feel like just where prices are, and where rents are, that you know buying into these type of deals in San Francisco, it's just much more challenging to do that up north as it is to find deals that pencil in LA now?

Well you know, listen. We've got some pretty interesting deals we’re looking at in San Francisco. I think they pencil out great. The rent supports the price. I do think they are very similar in that we’ve got some value-add transactions we’re working on right now, which are a complete repositioning, and then we’ve got lease-up plays.

And both those have their place in our portfolio. And I think yes, you’ve seen a tremendous appreciation and valuation in the Bay Area, but you’re also seeing disappointed rental rates that is unprecedented in our market. So we continue to look and I think we’re going to continue to buy in those markets for the right assets and fit within our existing portfolio.

And just lastly, you mentioned 1455 Market. Is there any update that you can offer in terms of where you are in the process of maybe finding a JV partner for that asset?

A lot of activity, a lot of interest, and I think we're progressing at a good pace.

And is -- can you offer how much is Square occupying of the portion they have leased?

All of it. They are occupying all of it.

Oh, oh. They are occupying all of it. Okay. I thought there was some consideration that maybe they were -- that they weren't occupying all of it, but --

No, they're occupying all the space. They just haven't got all the bodies in it like Uber does right now. But no, the space that they've taken down, they're occupied.

Okay. And there's no discussion of some of the -- for the bodies that they have that their hiring plans are slowing and they could give a little feedback.

You know, our guys are -- between Drew and Josh and Art, they are on top of those guys on a regular basis. We’ve asked the question. We’ve offered them opportunity to come to us and have conversations, and their business plan as we sit today is pretty concrete and they’re very comfortable with the space and their commitment. If something changes, we’ll be on top of it.

It won’t come as a surprise to us, which is the good news and secondarily, we’re going to be in a position where based on our rental rates and what we’re getting in that space today and what we’re getting in the building going forward and the new stuff that we’re looking at, we’re very comfortable with our basis with those guys and the buildout.

Okay. Great. All right. Thanks for the time. Thank you.

Our next question comes from Craig Mailman with KeyBanc. Please proceed with your question.

Hello, guys. Just a follow-up on that Square question. Victor, how far below market do you think Square is?

I'm looking at Mark. I think they're $8, $9, maybe more.

There are, I mean they're at the low 30s modified, right? Market will probably be --

So we'll say $20. I was off by 50%.

Okay. And other tenants in the building have expressed expansion plans, right, if that space were to ever come back. Is that sort of a fair assessment?

Yes, I think it's fair to state that the building itself and the space as built out is a hot commodity for the City of San Francisco for existing tenants as well as other tenants in the marketplace that would be very desirous of that space.

Okay. That's helpful. And then Mark, on the balance sheet side, you guys expanded the line there but it looked like you paid off the 6922 loan. I'm assuming that’s on the line. I guess just at this point in the cycle, thoughts about refinancing plans. I know you guys are trying to go more -- stay unsecured, but just your thoughts on how long in the curve you want to go at this point?

Yes, just so you know, that -- we actually repaid that 6922 debt off that term line that we took out in the 150 as opposed to the revolvers a bit, a fungibility there, but we really sized the term loan to take care of the 6922 debt and floating rate debt that we had on First & King. In terms of going out on the curve, we don’t have a lot of opportunity to refinance debt in the near term.

I think if you look at our maturity table, the next decent sized loan isn’t until -- really until 2016. But we are looking at doing something on the $97 million studio loan in connection with obtaining construction financing there, and we'll look to first term there a bit longer and get a 4 plus 1.

And then to the extent that we do find opportunity to take down additional debt within the portfolio, which as you know, there’s not that many opportunities. We have been striving to push out towards the longer end of the curve.

In some cases, we have done 7-year money like in Met Park North where we found that we just got them down to where most competitive quotes were. In others cases, we've gone out to even longer to 10-year money and we will continue to pursue a longer end where the opportunities present themselves.

Okay. That's helpful. And then just lastly on Icon. Victor, that was helpful. The detail there and the 20% that are just focused exclusively on Hollywood, are those tenants that are currently in the market with expirations coming up? Or is that sort of organic demand given the fact that Kilroy's leased another big chunk of Columbia Square. At what point do you think we could see a prelease here on Icon?

Well, I don't want to prognosticate. There's a ton of activity. The answer is the majority of these guys are new to the market. They are new to the Hollywood market. They are coming from other places, expanding or consolidating from other spots in LA.

There's a couple of very large guys that are new to LA on the media side. I'm sure you can, given the activity in the world markets today you can probably figure out who some of those guys are and where they're looking and where the lack of space is.

In terms of what's happened with Kilroy, I mean they're doing a great job. We just want to see them continue to lease. It sounds like there's some pretty big activity coming our way and I think I'm anxious to see some pen to paper in the near future, but right now we're not going to project when that's coming.

Great. Thank you.

Thanks.

(Operator Instructions)

Our next question comes from Rich Anderson with Mizuho Securities. Please proceed with your question.

Thanks. Good afternoon. Did you guys give the rate on the bridge loan?

On the term loan?

No, on the Broadway --

The Broadway. We did. It's in our supplemental. You'll see it. We've added it to our debt page as a note receivable, and you'll see there under interest rate it's at 11% per annum rate.

Okay. And what's the plan there? Are you happy collecting interest income or do you have a longer-term plan to ultimately own the asset?

No, you know what, we are a passive partner in that deal. We love the interest rate. If we get paid off, that's fantastic. If something else happens, it'll be down the road but that's not our game plan.

Okay. Victor, do you think Prop M is good?

Do I think prop M is good? That's a loaded question, Rich. Specifically, this is some more of election day, right. (laughter)

You know what, I think -- I'll say it this way, I think if you are a landlord and you own space in the City of San Francisco, and you like your portfolio, I don’t think it hurts you. I think if you're a speculative guy who wants to come into San Francisco, it’s going to cost you more than you think and you are going to have to position to deal with it going down the road. There are loop holes in Prop M and a lot of guys are playing that card, and I respect anybody who is trying to make that work.

From our standpoint, it’s a non-existent issue because we don't have development core, ground up development in the city as we sit today. Everything we have and everything we’re looking at is a renovated project basis. And so as a result, I think Prop M only helps us and will help evaluation of the city real estate and commercial side overall.

How big do you estimate the non-core portfolio is today?

You’re referring to assets that don’t fit within our portfolio?

Yes, so Tierrasanta happened, I mean what else is there?

You know what, I really think there's -- we've mentioned this before. On a potential dispo, we’ve got one to two assets in mind that fit, one clearly fits, another one probably fits, and then there is a third that we'd like to fit but we don’t put it in because it’s got some technical aspects around the salability of that asset until we can figure out, it's one of the ground lease issues until we figure that out. Otherwise, everything else is core to the portfolio.

Okay, and raising the FFO guidance, what would you say that pretends to be -- portends to be on an AFFO or CAD basis. Do you think that -- I guess the bigger question is what’s CapEx look like relatively speaking and do you think your AFFO number would go up by a little bit as well this quarter?

Well, I would think it -- I think the AFFO is going to continue to move in a very difficult to pin down way on a quarterly basis until we can get through the rest of this CapEx for just because of the lag often between drop on TI allowances and other amounts. But I think given the component parts of what's running through the bonbon guidance, you can expect it to be -- to translate directly into AFFO, that is to say, it’s largely comprised of the [broad we know] and the safety interest rate savings, and so that -- none of that is correlated to AFFO so it just drops the bottom line.

Got it.

But you can expect that.

Okay.

And then at some point, Rich, as we -- you and I had talked about (inaudible) the cap, we will get through all of the heightened CapEx associated leasing activity and AFFO will begin to normalize in a very much more predictable way. And then at that point, I think we can have a fruitful conversation about kind of what that normalized AFFO looks like.

Okay. Last question. What do you think the market is for your studio assets? Obviously, you're building around Bronson now, but do you think there is a reasonable market and would you ever consider them to be non-core to you?

You know what, the answer is no. They are core to them because of exactly that opportunity. We have got development and redevelopment opportunity in the marketplace that you're seeing more office and creative office demand than anywhere else in the city.

I think if you ask our team, the amount of development that's going on in Hollywood is probably the highest amount of also in California from a concentrated area and the preponderance of that development is retail and residential. And so it's amenity based. So the core to that portfolio is absolutely part and parcel of our core assets going forward.

In terms of a productivity standpoint, every quarter for the last five quarters we've seen this portfolio just get better and better. I mean, the gross income is increased again, and year over year we've seen highest revenue that we've ever seen in those assets. And so the combination of that with the land we have with the development that we’re gaining, it makes it pretty exciting to maintain those assets in the portfolio.

Okay, one more. San Diego, are you out for good now or what would you reconsider some opportunities in San Diego?

I never want to say we're out for good because that would not be fruitful of us to always consider opportunities. Right now, we have not seen anything in that marketplace that attracts us to the type of tenant base and the type of asset quality that we would want that would be sort of complimentary to our portfolio.

That being said, I’m sure there will be opportunities and we consistently revisit that marketplace and look at what’s in the marketplace from a multiple asset opportunity. From a single asset opportunity, I think it would be safe to say that we’re not going to buy one-off assets in San Diego at this time.

Got you. Thank you.

Thanks. Operator, is that it?

Yes, there are no further questions at this time. I would like to turn the floor back to Victor Coleman for closing comments.

Thanks very much for the support of Hudson Pacific and we look forward to speaking and hearing from you all next quarter. Thanks, operator.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.