Hudson Pacific Properties Inc (HPP) 2015 Q1 法說會逐字稿

Operator: Greetings and welcome to Hudson Pacific Properties' First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kay Tidwell, Executive Vice President and General Counsel.

Good afternoon, everyone, and welcome to Hudson Pacific Properties' first quarter 2015 earnings conference call. With us today are the Company's Chairman and Chief Executive Office, 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, May 7th, 2015, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.

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

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

Thank you, Kay, and welcome to our first quarter 2015 conference call. Those who follow us closely know the last few months have been very eventful here at Hudson. We sold a non-strategic office asset, entered into a new joint venture on another office asset with Canadian Pension Plan Investment Board or CPPIB, and completed a successful equity offering with net proceeds from these transactions funding the Blackstone portfolio acquisition, which we closed on April 1st.

In terms of leasing activity, our stabilized office portfolio is now 93.7% leased. We executed new and renewal leases with our office portfolio with an average positive leasing spreads of 25.6% on a cash basis and 26% on a GAAP basis. In March, we announced the extension of KTLA's 94,000 square foot lease through 2030 at our Sunset Bronson Studios property in Hollywood. One of the Los Angeles' largest independent television stations, KTLA, has been headquartered at Sunset Bronson for close to 60 years. KTLA plans to renovate space, which coincides with the significant capital projects already underway at Sunset Bronson such as our 323,000 square foot Icon office tower, adjacent 90,000 square foot creative office building, and 1,600 space parking structure. KTLA's continued presence complements the many next-generation media and entertainment companies that leverage our studio's unique combination of stages, production facilities, and office space.

Taking a closer look at the capital transactions for the quarter, in January we formed a joint venture to which CPPIB purchased a 45% interest in our 1455 Market Street property for $219.2 million before closing adjustments, which was equivalent to an asset value of $487 million with net proceeds funding a portion of Blackstone portfolio acquisition via 1031 exchange. We acquired the property in December of 2010 for $93 million and retain the 55% ownership stake along with general partner status as well as management and leasing oversight. The joint venture and sale follows a major renovation and backfilling of over 584,000 square feet of space vacated by Bank of America with tenants including the San Francisco MTA as well as the high-growth companies such Uber and Square. We've unlocked a portion of value created for shareholders to date and will participate in additional upside from mark to market on rents and retail repositioning to be completed in the fourth quarter of 2015.

In March, we sold our 222,000 square foot First Financial office property in Encino, California, to Douglas Emmett for $89 million, which after the repayment of property level debt, generated approximately $46.7 million in net proceeds used towards the Blackstone portfolio acquisition via 1031 exchange. We purchased the property in connection with our 2010 IPO for approximately $65.8 million and created additional value prior to the sale through lease renewals and backfilling the space, including a 30,000 square foot lease with a luxury fitness company, Equinox. The investment yielded a 9.4% unlevered IRR and a 13.8% levered IRR.

In January, we completed a successful public offering of 12.65 million shares of common stock at a price of $31.75 per share, generating $385.2 million of net proceeds, which we contributed to the operating partnership to repay amounts outstanding under our secured credit facility with a balance applied towards the Blackstone portfolio acquisition.

In April, funds affiliated with Farallon Capital Management completed a public offering of six million shares of common stock from which we did not receive any proceeds. Subsequent to our April -- to April 1, quarter, we closed on the 8.2 million square foot 26 property San Francisco peninsula and Silicon Valley office portfolio from Blackstone Real Estate funds for approximately 63.5 million common shares and operating partnership units and $1.75 billion in cash before closing adjustments.

In addition to the net proceeds from our joint venture from CPPIB, First Financial sale, and the January equity offering, we funded the transactions cash component and closing costs with $1.3 billion of unsecured debt, details of which are outlined in our earnings release and our 8-K filed with the SEC in connection with this acquisition.

As far as integration, it's gone smoothly on all fronts, including accounting, leasing, property management, operations and IT and we've already executed on asset-specific business plans. Our leasing team took over immediately following the December announcement and since January 1, we've completed approximately 700,000 square foot of new and renewal leases, resulting in a Blackstone portfolio being approximately 87.5% leased as of this call. Recent velocity in rents are ahead of our initial underwriting and we remain extremely optimistic about achieving a leasing percentage of approximately 90% by year end.

Now just let me run through a few conditions of our core markets briefly. The San Francisco market strength continues to afford us opportunities to create significant value through renewals and backfilling of office space. Average asking rents rose to $66 per square foot during the quarter, a 4.2% quarter-over-quarter increase and a 16.3% year-over-year increase. Positive net absorption north of 600,000 square foot and vacancy dropping to 5.5% has put upward pressure on rents, a trend we expect to continue through all of 2015, giving new deliveries totaling 2.2 million square feet that are currently 90% pre-leased. South of market and one of the most significant gains in absorption and the largest drop in vacancy from 6.8% to 4.2%. At our 1455 Market Street property, we're seeing demand for high profile new tenants as well as those looking to expand and notably higher rents than our most recent transactions and expect to have more on this in the near future with prospect tenants.

The San Francisco peninsula in Central County, which includes Redwood City, San Mateo, and Foster City, were approximately 2.2 million square feet of the Blackstone portfolio assets are located, continues to drive growth. As demonstrated by a biopharmaceutical company, [Illuminous], pre-lease of entire 360,000 square foot campus in Foster City during the quarter. In Foster City, rents are up 4.2% for the quarter and 9.5% year over year to $59 per square foot and vacancy remained relatively flat at 12.7% quarter over quarter, down 240 basis points year over year.

Rents in San Mateo increased by 6.3% quarter over quarter and 14.2% year over year to $48 a square foot and vacancy to 9.5% is down 110 basis points year over year, despite a 80 basis point increase for the quarter that coincided with 90,000 square foot of negative net absorption.

Silicon Valley, which contains approximately 4.7 million square feet of a Blackstone portfolio, mostly in Palo Alto and North San Jose, started the year strong with over 500,000 square feet of net absorption while total leasing activity topped 2 million square feet and nearly 40% year-over-year increase. Due to several large vacancies coming on line in Santa Clara, vacancy rose 20 basis points in the quarter to 8.2%, still down 240 basis points year over year. Rents increased for the 18th straight quarter to $47 per square foot, which is a 4% quarter over quarter and 12.9% year over year, which is the largest increases in Palo Alto, which is 6.7% quarter over quarter and 9.8 % year over year to $90 per square foot. In North San Jose, rents were up 3% quarter over quarter and 15.5% year over year to $33 a foot and vacancy remained flat year over year but increased 40 basis points for the quarter to 14.2% due to the expiration of a few smaller leases.

A majority of our Los Angeles office assets are located in West Los Angeles, where fundamental market conditions continue to improve with rents increasing 2.2% quarter over quarter and 9.8% year over year to $50 a square foot. Vacancy held steady at 12.7% over the quarter, down 150 basis points year over year. Los Angeles' unemployment rate fell to 7.7% in the quarter and an unemployment level surpassed pre-recession peaks, led by growth in a handful of industries including technology and entertainment.

We're seeing strong interest from top tier tenants looking to lease a significant portion of our Hollywood Icon project with total demand to date in excess of two million square foot. Vacancy in the submarket increased 120 basis points quarter over quarter to 8% but decreased 90 basis points year over year. With the near-term vacancy increase partly resulting from the media's college SAE vacating space in order to relocate and consolidate operations in another Hollywood location. Rents stayed relatively flat at $44 per square foot with a minimal absorption, but are still up 5.5% year over year.

In Seattle, we're seeing an influx of national technology companies, resulting in a positive start to 2015. Three of our assets are located in downtown Seattle's transforming Pioneer Square, which had its 15th consecutive quarter with positive net absorption. Lowering vacancy 240 basis points to 8.4% for the quarter or 390 basis points year over year, rents stayed flat for the quarter and up 8.4% year over year to $32 per square foot. Significant deals included TV stations King 5, 58,000 square foot lease at Home Plate Center North and Home Improvement Network, Porch.com, 75,000 square foot lease at 2200 First Avenue South. In addition, construction commenced on 150,000 square foot built to suit for Weyerhaeuser, a private owner of Timberland at 200 Occidental Avenue South. We foresee growing demand for high-quality office product in Pioneer Square and have begun entitling our Merrill Place development site for approximately 140,000 square foot mixed use project with office, ground floor retail, and structured parking. We expect to start construction on this project in the first quarter of 2016.

All in all, we had an extremely productive first quarter, which laid the groundwork for a successful closing of the Blackstone portfolio acquisition. This transaction has been transformative for our company but we remain focused on the tasks at hand, realizing value for our stockholders with the expanded portfolio and by an active pipeline of opportunities across all markets.

Now, I'm going to turn the call over to Mark Lammas, our CFO, for details on our first quarter financial performance.

Thank you, Victor.

Funds from operations, excluding specified items for the three months ended March 31, 2015, totaled $18.5 million or $0.23 per diluted share compared to FFO excluding specified items of $17.9 million dollars or $0.27 per share a year ago.

The specified items for the first quarter of 2015 consisted of acquisition-related expenses of $6 million or $0.08 per diluted share. Specified items for the first quarter of 2014 consisted of costs associated with the one-year consulting arrangement with a former executive of $800,000 or $0.01 per diluted share and expenses associated with the acquisition of the Merrill Place property of $100,000 or zero cents per diluted share.

Net income attributable to common shareholders was $19.2 million or $0.25 per diluted share for the three months ended March 31, 2015, compared to net income attributable to common shareholders of $1.3 million or $0.02 per diluted share for the three months ended March 31, 2014.

Turning to our combined operating results for the fourth quarter of 2015, total revenue from continuing operations increased 13% to $62.8 million from $55.6 million a year ago. The increase was primarily the result of increases in our office property segment of $5.6 million in rental revenue to $47 million, $800,000 in parking and other revenue to $5.3 million, and $500,000 in tenant recoveries to $6.1 million, nearly $500,000 increase in other property-related revenue to $4 million at our media and entertainment properties also contributed to higher total revenue.

Several factors contributed to these increases including additional revenues stemming from higher occupancy and rents at our same-store office properties. The impact of interest, income earned from the Broadway Trade Center note participation purchased on August 20, 2014, commencement of the lease with Deluxe Entertainment Services at our 3401 Expedition Boulevard property, and improved occupancy at our 901 Market Street property, all partially offset by the sale of our First Financial property. We also enjoyed higher production activity at our Sunset Gallery media property compared to last year.

Total operating expenses from continuing operations increased 11.5% to $49.5 million from $44.4 million for the same quarter a year ago. The increase was primarily the result of higher expenses associated with improved occupancy at our same-store office properties and to a lesser extent, the commencement of the lease with Deluxe Entertainment Services at our 3401 Expedition Boulevard property and improved occupancy at our 901 Market Street property, all partially offset by the sale of our First Financial property. As a result, income from operations increased 18.8% to $13.3 million for the first quarter of 2015 compared to income from operations of $11.2 million for the same quarter a year ago. Same-store office net operating income in the first quarter, excluding specified items, increased by 10.8% on a GAAP basis and 9.9% on a cash basis.

Interest expense during the first quarter decreased 15.8% to $5.5 million and $6.5 million for the same quarter a year ago.

At March 31, 2015, the Company had $787.2 million of notes payable compared to $827.4 million at March 31, 2014. As of March 31, 2015, our stabilized office portfolio was 93.7% leased. During the quarter, the Company executed 9 new and renewal leases totaling 32,223 square feet.

As of March 31, 2015, the trailing 12-month occupancy for the Company's media and entertainment portfolio increased to 71.6% from 69.1% in the trailing 12-month period ended March 31, 2014. Since the Blackstone portfolio transaction closed on April 1st, our public filings will not include those assets until second quarter 2015.

Turning to the balance sheet, as of March 31, 2015, the Company had total assets of $2.8 billion including unrestricted cash and cash equivalents of $247.9 million. At March 31, 2015, we had $300 million of total capacity under our unsecured revolving credit facility of which nothing 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 accumulated preferred stock equivalent to 8.375 per annum.

The Company is reaffirming its full-year 2015 FFO guidance last provided on April 2nd, 2015, in the range of $1.50 to $1.56 per diluted share excluding specified items. The guidance reflects the Company's FFO for the first quarter ended March 31, 2015, of $0.23 per diluted share excluding specified items. This guidance also reflects all acquisitions, dispositions, offerings, financings, and leasing activity referenced on this call and in our press release. It includes approximately $46.6 million of total GAAP adjustments for our combined portfolio, including approximately $24.2 million in GAAP adjustments with respect to the Blackstone portfolio acquired on April 1st, largely stemming from in-place rents which are significantly below corresponding market rents.

As Victor noted, with respect to the financing obtained in connection with the Blackstone portfolio acquisition, further details are outlined in our earnings release and in our 8-K filed with the SEC in connection with the acquisition. For purposes of this estimate, we have assumed that the interest rate, with respect to $250 million of the 5-year term facility and the entire $550 million, 2-year term facility, both of which remain floating, will be fixed effective as of May 15th, 2015, to a combined rate of 4.25% per annum, including estimated amortization and deferred financing costs. As is always the case, the full year 2015 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and earnings from advanced referenced on this call and in our earnings release, that otherwise excludes any impact of future unannounced or speculative acquisitions, dispositions, debt financing to repayments, recapitalizations, capital market activity, or similar matters.

Now, I'll turn the call back to Victor.

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

Now, operator, with that, I'm going to turn it over to you for any questions.

(Operator Instructions) Brendan Maiorana, Wells Fargo

Thanks, good afternoon. So Victor, it sounds like making nice progress leasing up the EOP portfolio. I think you mentioned 87.5% leased as of now. To get to around 90% by year end, is that really just taking down kind of the current vacancy from a leased rate perspective or is there much roll and roll that you'd be concerned is at risk for moving out for the remainder of the year as well?

Hey, Brendan, well no. It's a combination of both. So, sort of to delve numbers, you can obviously spend time with Mark and the team. You know we've leased about 700,000 feet and the combination of leasing 700,000 feet comes to a lease of almost 200,000 feet in new deals and then renewals and backfills are the difference of about 500,000 feet on average.

On the renewal basis for 2015, I think we've got about 600,000 feet of remaining expirations. So the combinations of rolling those, where we're in a position that we look pretty good on right now and the additional square footage of vacancy that we're in. We categorize them in two, three's and four's as to toward LOIs and then serious negotiations with leases. There's an additional 400 plus thousand feet that we're in various forms and functions.

So to get to the 90%, it's a combination of both. I think we feel very comfortable that given the current activity of over a million square feet of transactions that we're working on, things look pretty good.

Okay, great. Then refresh my memory, were you thinking that your mark to market on sort of the near term roll was around 20% higher. Is that still a pretty good target?

Yes, it's actually, it's about 22% as a mark to market. Right now, I think on average on the rents we're above market of 8% of where underwriting is right now on just rental rates alone. Then TIs and for new or renewal are way above where we underwrote them as well. So, overall, it's a good deal.

Okay, great. Then there's a couple building-specific questions. So I think Rocket Fuel has put some sublet space back on the market at 1455 Market, is that an opportunity for you guys? Are they below market and might you be able to capture some outside there or is that not something that is an opportunity for you guys to move rents higher?

Yes, listen I think it's -- suffice to say that their rent right now is 46 and we are in conversations with that space for somewhere with a 6 in front of it. So there is great upside for us.

Okay and then, Heald College at 875 Howard, I think their stock is down to like a penny or something like that. Are they paying you guys rent? If they aren't, is that an opportunity to take back the space that they have there?

So they filed bankruptcy. We're in close contact. Our counsel and their people are in close contact. I think the optimistic aspect from our standpoint is, is their current rent is well below market and if in the next several weeks they make a determination as to what they're going to do with the existing space, we would have the ability to evaluate taking that space back and putting it back in the market.

Okay, great, and then just last one, Mark, G&A, it seemed like it was -- it seemed like it was a little bit higher than where we were going to -- then where we forecasted. It was in line with last year but I thought it was going to move down. Was there -- were there some one-timers in there? Should we -- where should we expect that to normalize ex sort of all the unusual costs that you're going to have this year?

Yes, well we started incurring some of the costs in anticipation of the expansion of the portfolio. So, it phased in a bit sooner in the quarter than we ultimately anticipated. We think ultimately G&A kind of levels out at the level that we kind of pointed to in the early announcement of the deal. So, on a full-year run rate basis, it's probably cash and noncash still trending towards right around just shy of $40 million, call it $39.6 million. Just some of it hit a bit sooner than we originally had forecasted.

Okay, got it. Thanks.

Craig Mailman, KeyBanc

Hey, guys. Mark, could you just run quickly through some of the kind of key assumptions in guidance. It sounds like G&A will be around $40 million, but maybe share count, interest expense and maybe what you guys are thinking for NOI on the studios full year?

Sure. You know the -- don't let me forget any of these, cause you kind of ran through a list. On share count, weighted average full year share count is -- I got Harout next to me, so he'll check me on it. But I think it's 132.4 for the full year. Now we -- you have to be careful with that, right, because that's a weighting over a full year's outstanding share amount. Any quarterly basis, that won't be your share count right. So, for the second quarter, for example, your weighted average share count will be like 146 call it, right. But when you take a much lower share count in the inception of the year and that 146 current share amount and you spread it out over the full year on a weighted basis, it comes out to about 132.4.

On interest expense, you know we've got some work to do around the debt, as mentioned in our guidance in terms of fixing some floating rate debt. We've tried to outline exactly what the underlying assumption is on that but on a full-year run rate basis, including deferred financing costs, we're looking at about $62.6 million.

What else did you ask me? G&A I gave you.

Do you have studio NOI, rough guess?

On the studio, sorry, Harout was whispering in my ear, on the studios on a GAAP basis, and there's not much GAAP adjustment, although we did sign that lease with KTLA and that includes, there's a GAAP adjustment on that. On a GAAP basis in studios is coming in right around 14, on a cash basis closer to 12. What was the other one?

No, that was the major ones. That's helpful. Then bigger picture, just curious with Salesforce in the news and them being one of your bigger tenants, just thoughts on of course San Francisco market in general, if there were M&A there or if M&A were to ramp kind of with some of the bigger takers of space over the last couple years, what you guys would foresee for demand, sublet space, etc. Then also just remind us, does Salesforce have any outs at all at Rincon?

So the answer is no, they don't have any outs. I think they've got 156 months remaining on their term. Craig, they're about 235,000 feet. Obviously, we've looked at that. They're effectively at a full service basis about $46 a foot. The deals what we're doing in the building now are in the -- sort of in the mid to high 60's. So there's very few large blocks of space. Good news from our standpoint is that their space is virtually all built out with the exception of one floor. So we like the space. We like the quality of the space and obviously it's way premature to see what happens here, given what effectively they occupy our space relative to the other space in the market.

Great. Then just lastly, I know Brendan was asking about Rocket Fuel, but Victor your comments specifically on 1455, you guys are seeing some good demand there. How much space could you get back at that building from BofA and you know is there other spaces that maybe you're pre-marketing in that building with anticipation of credit problems? Or is that just people wanting to get into that building just trying to get to the commentary around there?

So there's no credit issues there other that what we're looking at with the Rocket Fuel space, which is not credited. They're just giving it back. So there's no credit issues there. We have some space coming with BofA, coming due the end of this year and then in 2017. That's going to be a combination of space, which is the basement space as well as some of the upper floors. Suffice to say, everything that is potentially available or coming available through 2017 and existing space that we currently have right is under negotiations at those same numbers that I talked about.

All right, great. Thanks, Victor.

Jamie Feldman, Bank of America/Merrill Lynch

Thank you. I guess just starting out with the peninsula portfolio and you think about the fact that you think you'll be at 90% by year end, the leasing pipeline behind that 90% or kind of once you get that 90%, does it -- is that when it starts to really get challenging? Not that it hasn't been hard to get to 90%, but just is this kind of the lowest hanging fruit that'll get you there and then you know how does your leasing pipeline look beyond that? Or just what's your sentiment on getting it beyond that 90%?

So, Jamie, you know we're not going to forecast beyond the initial 90% cause it's up 9% from when we took it over. We initially had talked about that 90% being the end of 2016. We've brought it back to the end of 2015, given the fact that the activity of what we've seen -- to say that it's the harder space, the last 3%, 4%, 5%, to get it to a stabilize is not the case. I just think that the activity we're seeing now is across the board. We could eclipse that but I'm not comfortable with making any statements around that currently today. I feel very comfortable that the 90% number. I mean we've got a number of spaces across the board are being in tours and in conversations. I think at the end of the day, we've got a number of assets, which we talked about, that we're going to reposition. So we're going to take a little longer in leasing up cause we're putting substantial capital in those assets.

Which submarkets would you say are the bulk of that -- those leases will get signed?

It's across the board. I mean I'm looking here, it's in Palo Alto, Redwood Shores, the peninsula and the airport and Silicon Valley equally have anywhere from on that square footage to get you to 90%, anywhere from 10% to 12% across the board. I think the biggest one is the peninsula has got the most square footage that we're seeing transactions on right now. But, you know they're all equally across the board, a lot of activity.

Okay and then what about leasing demand for Icon? How does that pipeline look? I know you had mentioned you have a lot of interest, but talk a little bit more about the types of tenants, when we might see something get signed there?

Well, we just finished pouring there. Now, they're starting to go up. We've had over two million feet of tours. I think all the tours are pretty much upwards of 75,000 feet or greater. We've got two tenants looking at over 200,000 square feet now. I think we've got several in the 100,000 to 125,000 square foot range. I'm optimistic that we're working on a couple of transactions that are looking fairly dynamic and something that we'll consider moving to the next level. Many of them are brand name guys, several global technology or media entertainment companies. They're either looking to locate as new or some are actually looking to expand or consolidate their operations in Hollywood.

Where would they be coming from if they're new to the submarket?

Some are coming from the west side. Some are new to LA. They're coming from northern California.

Okay. Then finally your credit watch list, I know you had mentioned before one tenant that went bankrupt. How would you say your credit watch list looks today versus last quarter?

I mean I think in a credit watch list basis, I can't think of anybody else of significance that we would even put into that category. We've been monitoring one tenant along the way for the last year or so. We've got some issues with them. Heald is the second tenant I think of that sort of significance amount. But as I mentioned earlier, I mean Heald's coming out of space that's looking at effectively sub-$30 a foot space going to high 40's on initial effective rents. So I think -- you know and that's been a building that we've got two large tenants with very low rent, them being one that we'd love to get out. I don't think the credit watch on that basis is unique to us or anybody else in the portfolio business, you know one tenant. I don't think there's anybody else that I could think of that is material in that fact.

Okay, all right. Thank you.

Alexander Goldfarb, Sandler O'Neill

Yes, good afternoon, out there. Just a few questions. Sort of big picture, Victor, when you put it all together, the fact that you guys are ahead of schedule on your occupancy, how should we think about the yield versus the initial yield that you guys bought EOP at and what you are targeting once you got sort of everything stabilized? How would that original pro forma yield compare to where you're trending now? So we put it all together.

So we -- as we look at it year one, we were at a 5.1. I think currently now we're probably closer to a 5.5, 5.6. I think our stabilized number was a 7. That would have brought us to a 90% -- I think it was sort of a 90%, 91% occupancy number, maybe push it to 92%. So that's sort of I think on line with that. I think it's just quicker. I think we looked at stabilization at year three and we're probably looking at stabilization closer to year two. So that's sort of how we're looking at it from the yield standpoint and the shift.

Yes, and Alex, on that note, we've -- when we talk about sort of our forecasted yield, we referenced back to the underlying valuation at the point of the announcement of the deal of approximately $3.5 billion.

Okay, okay. Then to that point, if you guys are on track to achieve stabilization sooner, does that mean that the original I think it was like $100 million or something like that of CapEx spend, does that mean that that, a portion of that no longer has to be spent?

So the CapEx is -- that's a great question. The CapEx was TI's CapEx leasing commissions and the like were $250 million allocated to the portfolio. We have some activity at space that we didn't think we would have activity for and we're redirecting those dollars. Right now, Alex, we're not looking at lowering those dollar amounts. We're repositioning them to other assets that may take longer and there are some assets that we actually think we could put money in sooner on the timeframe and get higher capitalization, deployed capital to those assets and lease them up faster. So, that's a moving target. We're not coming off of the $250 million at this time.

Okay and then just finally, Victor, when we all think bigger picture about the portfolio, obviously it's great things that are happening in San Francisco. We hear it from the apartment guys and obviously on the office side. But that said, there's certain submarkets that historically haven't been as strong. So, as you guys think about leasing up assets, stabilizing etc. is there thought to maybe starting to prune or sell some of the assets sooner than stabilization? Or your view is you want to get everything stabilized and then think about pruning?

So we're carefully underwriting the assets. We've had several reverse increase that we'll always take a look at to see if it makes sense on a present day pruning versus a stabilization. As I said, given the activity initially on leasing and what we're seeing, the intent is to try to get a higher revenue stream on the current assets and then maybe prune some assets. We'll always look to prune. There are -- I always said even from the beginning there was at least a couple of assets that we would like to probably sell off. I don't think that changed. Maybe that number's two or three initially and then over the next 6 to 12 months after ownership, we'll be looking at that a little bit more seriously.

Okay, thank you very much.

Vance Edelson, Morgan Stanley

So back on Icon, it sounds like the strong demand is coming from multiple potential tenants. Does it look like rents are likely to be better than what had been originally underwritten and do you think that free rent is still going to be involved there?

So the answer is yes and yes. I mean we've always underwritten to be -- to have free rent. We're looking at -- the initial larger tenants are 10 plus year deals, some are 12. Average free rents on those deals, I'm looking at [orders] like nine or ten months on free rent on those deals. But, the flipside is, is our rental rates are -- have increased beyond our initial underwriting on those assets, on those transactions.

Okay, that's helpful. Then also, Victor, I wanted to give you a chance to talk about the steps you've been taking to improve the performance of EOP. It sounds like you've probably found some quick fixes since things are going very well. Anything in particular that you think is driving the faster-than-expected progress?

So, I mean initially you know we've got a great team in place. It really revolves around the operations and leasing. So the management team on the ground, we've filled the buildings with personnel. We've got a great operational rhythm with the leasing team and our existing leasing head here, Art, and I think that's been the key to success. The other thing that we are seeing a tremendous response, which we didn't think would effectively come as soon as it did was we're taking some of this vacant space and we're prepping it now. We're building it out. That was part of the game plan we had looked at doing sometime in summer or fall. We've already started that and the response to the space being built out for the plug-and-play tenants in the marketplace has been much better for us. I'm pleasantly surprised at the response the number of tenants are looking at that. So we're expanding that program to other assets in the portfolio.

Okay, that's great. Lastly, could you just comment on how active the acquisition pipeline is and how would you rank your current markets in terms of being the most fertile ground for finding acquisitions? Would it be Seattle and then San Fran and then LA is sort of a distant third, if we were to exclude the potential EOP opportunity there? Is that the right way to think about it?

So we're looking at a consistent portfolio of transactions that we have a pipeline always in sort of conservatively around $750 million to $1 billion. I would classify it right now, we're seeing some pretty interesting transactions in Los Angeles probably as our first marketplace. Seattle second, we're doing our Merrill development play there. We're seeing a great activity on office and so I'd say Seattle's second. I would say the Bay area is third in sort of ranking from our standpoint.

Okay, thanks very much.

(Operator Instructions) Rich Anderson, Mizuho Securities

Thanks, good afternoon. The 90% leased by year end, if you're saying your timeline now is a year shorter, would we say 90% occupied by year end 2016?

You know, Rich, it's a good question. I would say that the occupancy is clearly trailing but I don't think it's 12 months trailing. I think it's probably less than that. It's probably four to six months trailing. So, if you were talking leased up by year end, you're probably talking end of second quarter, which is year end 2016.

Okay and then -- but you said stabilized occupancy of 91%, 92%. I think you said that. So, it would just be another 100 and some odd basis points to get you to full stabilization by year end 2016, is that all it would take?

So we're looking at -- so when I refer to the stabilization, I was referring to based on the yield that we -- a stabilized yield is a seven and so that was sort of 92%, 93%. So it's not necessarily that's what we're going to say it's going to stabilize at. But that's how our underwriting looked at when we've underwritten the deal. So and as I said earlier, Rich, you know we're not projecting what year end 2016 is yet, we're still too far away to look at that.

Okay, regarding the activity that you were able to do from January 1 to today in terms of the leasing activity pre-closing of the deal, did that require some sort of special permission or how did that work? Did you get compensated for doing that work, you the firm?

So the answer is when we agreed on the transaction, we also agreed on basically overseeing all major decisions from that point going forward, which included leasing and operations and any capital deployment. So that was factored into the transaction on a pro-rated basis. So in terms of getting compensated for, the answer is no, but then you have to -- we have to approve the deals and they have to approve the deals. Obviously, if we hadn't closed the transaction, they would have had to incur the costs. But those costs then were incurred on us.

Got you. Okay. Then on the 33,000 that was signed during the quarter that wasn't EOP, Blackstone, was that in line with your expectations or do you think it's reasonable to think that you're -- you were distracted by this enormous activity and so maybe fell short of your expectations or you know just comment on that small level relative to what you've done in the past?

Well, you know Rich, we have next to no expirations in the calendar 2015 year. So we're not going to have a whole lot, like, well that's what this is. I got a whole lot of opportunity to do a lot of leasing activity on the existing legacy. So was it in line with our expectations? Perfectly in line with our expectations.

Okay, perfect. Then lastly, Victor, your legacy with Art and you know several years ago in timing the market well, you're turning this around faster than expected. What -- is there any voice in the back of your mind that another market timing scenario or is this all just stay on point and not think about that right now? I'm just curious where your mind is about that, given what you've done in the past?

My mind is laser focused on leasing and operating the current portfolio plus the new Blackstone portfolio. We've got a lot of opportunity there. We've got four or five projects in development or redevelopment stages. I think there's tremendous amount of value add going forward for growth in the existing portfolio.

Okay, fair enough. Thank you.

Brendan Maiorana, Wells Fargo

Hey, guys, just a quick follow-up. It looked like occupancy dropped at Pinnacle. I didn't think you had any expirations or any meaningful ones that were happening this quarter. So I was just wondering what the change was there?

We had a 40,000 foot roll, expected roll there, Brendan on NBC. We're already working on the backfill of it. I think we've got 7 (inaudible), 17 of it backfilled. Something like that. So, it was an expected expiration.

It was, okay. Then just Clear Channel, which is not until I think late next year, how do you guys feel about that one?

I think we're -- it's kind of wait and see on it. It's a little too early to know just yet (inaudible).

Okay, all right. Thanks.

There are no further questions. At this time, I'd like to turn the call back over to management for any closing remarks.

Well as always, I want to thank you for the support and actually make a little shout out to the management team at Hudson. In the last five months, the amount of effort and energy put into, not just the existing legacy portfolio, but into the Blackstone portfolio has paid off and I want to congratulate all of them and thank them for all their hard work. Thanks very much and we'll see you and speak to you all next quarter.

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