Hudson Pacific Properties Inc (HPP) 2015 Q2 法說會逐字稿

Greetings and welcome to the Hudson Pacific Properties, Incorporated, second-quarter 2015 earnings conference call. (Operator Instructions.) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Kay Tidwell, Executive Vice President and General Counsel. Thank you. You may begin.

Good afternoon, everyone, and welcome to Hudson Pacific Properties' second-quarter 2015 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, August 6, 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?

Thanks, Kay, and welcome, everyone, to our second-quarter 2015 conference call. We had a strong second quarter, in part due to months of preparation to acquire the EOP Northern California Portfolio, which closed on April 1. During the quarter we completed over 470,000 square feet of new and renewal leases, with the majority of activity, roughly 365,000 square feet, at our newly acquired San Francisco Peninsula and Silicon Valley assets.

We added to our pipeline of value creation projects, purchasing a property and entry into contract to acquire another property, both for redevelopment in the same downtown Los Angeles Arts District, and we enhanced our access to capital, earning investment-grade credit ratings from all three major US rating agencies.

Taking a closer look at leasing at the end of the quarter, our stabilized office portfolio was 94.7% leased, which represents a 100-basis-point quarter-over-quarter increase. Our in-service portfolio, which includes leased-up properties, part of the EOP Northern California Portfolio, was 88.8% leased. Cash and GAAP rent spreads for new and renewal leases throughout the portfolio were 35.3% and 48.5%, respectively, a testament to the success of our leasing team, as well as our market's continued strength.

Same-store office NOI for the second quarter increased 18.1% on a cash basis, as free rent associate with nonrecurring upfront abatements on several leases expired. Specific to the EOP Northern California Portfolio, as of this call these assets were approximately 88% leased, including deals and leases. We continue to significantly outperform our initial underwriting in terms of new and renewal deal economics.

We've also made notable progress at properties with some of the largest vacancies in a near-term role, such as our Peninsula Office Park property in San Mateo, California. In May, we renewed and expanded our lease with business software services company NetSuite by approximately 49,000 square feet, bringing their total footprint at the property to over 166,000 square feet.

We have a robust deal pipeline, representing approximately 1.2 million square feet of demand across the EOP Northern California Portfolio assets, and are in active discussions on LOIs and leases with several blue-chip companies that are household names.

Turning to the acquisitions, in May, we purchased an approximately 120,000-square-foot former Coca-Cola bottling facility at the intersection of East 4th and Merrick Streets in downtown Los Angeles Arts District for approximately $49.3 million, or roughly $410 a foot. Built in 1915, the building is currently vacant and entitled for creative office conversion to include ground-floor retail, a roof deck, and a new 300-plus parking structure. We are preparing to break ground by year end, with delivery in 2017.

We're also under contract to acquire another building with three existing buildings, roughly 80,000 square feet for redevelopment as creative office, retail, and parking about one block away. Upon closing, we have assembled a significant foothold with two of the best properties at quote-unquote "Main and Main" in this demand-supply constrained micromarket, ideal for creative tenants.

We have not formerly marketed either project but already have a pipeline of potential tenants representing over a 1 million square feet. These are well-known fashion, media and technology companies that value the neighborhood's urban, amenity-rich environment as an alternative to Hollywood or West Los Angeles.

And finally, in May we earned investment-grade ratings from all three US credit rating agencies. We received a Baa3 rating from Moody's Investor Services and a BBB- rating from Standard and Poor's Ratings Services and Fitch Ratings. All three credit ratings have a stable outlook, which improves our access to capital markets and enhances our competitive position and financial flexibility as we continue to grow.

With that, I'm going to take a moment to discuss the conditions of our core markets. And first, in Los Angeles, the market fundamentals continue to improve, primarily driven by demand for creative space in submarkets like West Los Angeles and Hollywood. In West Los Angeles, vacancy rates fell by 40 basis points to 12.3% in the quarter, down 170 basis points year over year.

The commencement of our Riot Games 284,000-square-foot lease at our Element LA property in May contributed to nearly 600,000 square feet of positive absorption, and Class A rents are up 2.4%, to $52 a foot, a 10.5% year-over-year increase. In Hollywood, vacancy rates fell 40 basis points, to 8.7% in the quarter, down 80 basis points year over year, and Class A rents were almost up 2% for the quarter, to $45 per square foot, a 5.7% year-over-year increase.

We have a solid pipeline of tenants for our ICON project, representing approximately 2 million square feet of demand at rates in excess of both Class A market average and our initial underwriting. We look forward to providing additional details as deals are finalized.

Turning to San Francisco, we continue to see robust demand, and Class A rents climbed 2.4% over the quarter to $72 per square foot, up 13.3% year over year. Despite positive net absorption for the quarter of around 144,000 square feet, vacancy increased just 20 basis points to 5.7% as a result of non-tech tenants both downsizing and leaving the market. We expect market conditions to be very favorable for the existing owners for the remainder of the year, as the 1.5 million square feet of new construction for delivery in 2015 is 93% pre-leased.

Our San Francisco CBD portfolio is currently 93.2% leased, approximately 55,000 square feet of our role in 2015, as well as the ongoing back-selling of BofA space at our 1455 Market Street property will allow us to continue to mark to market rents at significant positive trends. We have yet to see the data that indicates San Francisco sublease space is a sign of market or tech sector weaknesses. There's been no real fluctuation in sublease square footage on the market over the last 12 months, and the largest 20 tenants' sublease spaces currently on the market belong to non-tech tenants downsizing or leaving the market entirely.

Tech firms, on the other hand, are subleasing, primarily to feed continued growth, marking space too small or banking it for short-term or future use. Case in point, our tenant Square has roughly 50,000 square feet in the market for short-term sublease at our 1455 Market Street property has already secured a subtenant for more than half the space.

Along the Peninsula, the Central County including Foster City, San Mateo, and Redwood City contributed to over half the region's 400,000 square of positive net absorption. Class A rents increased 1.8% to $68 for the quarter, up 10.2% year over year. Vacancies fell 150 basis points during the quarter to 8%, down 200 basis points year over year. Very little vacant space is projected to come to the market as a result of a new product or large-scale move-outs for the remainder of 2015. Renewals and expansions resulting from the organic growth among large, local and midcap companies, such as our recent deal with NetSuite, and pricing acceleration to the south will continue to drive demand.

In Silicon Valley, we've seen activity surge to over 1 million square feet of positive absorption, making the region's ninth straight quarter of occupancy gains north of 500,000 square feet. Vacancies fell 100 basis points in the quarter to 7.2%, down 310 basis points year over year, while Class A rents were up 4.8% for the quarter to $58 per square foot, a 15.3% year-over-year increase. Overall, Silicon Valley's office market fundamentals remain strong in 2015, particularly since 9.6 million square feet under construction is more than 60% preleased or owner-user.

We're the largest landlord in North San Jose, with over 2.6 million square feet located just down the street from where Apple recently purchased a 43-acre site entitled for 2.8 million square feet, on the heels of leasing approximately 300,000 square feet at the existing building, which includes rights to build an additional 650,000 square feet.

Apple's arrival represents new absorption and marks a significant milestone for the submarket, which is already home to leading companies like eBay, Samsung and our tenant, Qualcomm. Apple's presence strengthens the demand for our assets in both near and longer term, as they're ideal for the mid-size and small companies looking to locate close to the tech giant.

Rising tech center employment continues to drive the Seattle marketplace, as the competition for talent remains central to workplace strategies. Blue-chip companies like Twitter, Oracle, Amazon, Alibaba and Dropbox are expanding their presence in that region. And even so, most of the quarter's significant leases actually involve non-tech firms in the travel, insurance, biotech and retail sectors, to name a few.

We're seeing similar trend with regards to the tenant interest in our planned approximately 165,000-square-foot office development in our Merrill Place property in Pioneer Square. We're on track to break ground in early 2016. While we've yet to kick off our marketing, we've been approached by two tenants to prelease a significant portion of the building.

Market conditions in Pioneer Square, particularly with regard to a limited supply of true Class A office space, continue to heighten, and vacancies fell 220 basis points to 7.5%, which is a 360-basis-point year-over-year decrease, while Class A rents increased 1.1% to $34 per square foot, up 9.4% year over year.

In summary, we continue to assemble and execute on an exceptional pipeline of lease-up repositioning and development opportunities in some of the country's best-performing markets. Our shareholders stand to benefit from significant rent growth and occupancy gains as the EOP Northern California Portfolio assets stabilize and as projects are delivered and new leases are signed.

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

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended June 30, 2015, totaled $68.4 million, or $0.47 per diluted share, compared to FFO, excluding specified items of $19.8 million, or $0.28 per share a year ago. The specified items for the second quarter of 2015 consisted of acquisition-related expenses of $37.5 million, or $0.26 per diluted share. Specified items for the second quarter of 2014 consisted of costs associated with a one-year consulting arrangement with a former executive of $1.1 million, or $0.02 per diluted share, and an early lease termination payment from Fox Interactive Media, Inc., relating to our 625 Second Street property of $1.6 million, or $0.02 per diluted share.

FFO, including the specified items, totaled $30.9 million, or $0.21 per diluted share, for the three months ended June 30, 2015, compared to $20.2 million, or $0.29 per share a year ago.

Net loss attributable to common shareholders was $25.2 million, or $0.28 per diluted share, for the three months ended June 30, 2015, compared to net income attributable to common stockholders of $3.4 million, or $0.05 per diluted share, for the three months ended June 30, 2014.

Turning to our combined operating results for the second quarter of 2015, total revenue from continuing operations increased 144.4% to $151.8 million from $62.1 million a year ago. The increase was primarily the result of increases in our office property segment of $80.1 million in rental revenue to $120.1 million and an $11.8 million increase in tenant recoveries to $17.8 million, offset by a $1.3 million decrease in parking and other revenue to $5.7 million and a $1 million decrease in total revenue at our media and entertainment properties to $8.3 million.

Additional rental revenue and tenant recoveries resulting from the EOP Northern California Portfolio acquisition largely account for the increases in office rental revenue and tenant recoveries, though higher occupancy and rents at our same-store office properties and lease commencements at our Element LA and 3401 Exposition Boulevard properties also contributed to these increases.

Decreases in parking and other revenue are attributable to an early lease termination payment from Fox Interactive Media at our 625 Second Street property in the second quarter of last year, with no comparable activity in the second quarter of 2015. Decreases in media and entertainment property revenue are the result of taking certain buildings and stages offline to facilitate our ICON development and extension of our lease with KTLA at our Sunset Bronson property.

Total operating expenses from continuing operations increased 177.4% to $135.7 million from $48.9 million for the same quarter a year ago. The increase was primarily the result of operating expenses associated with the EOP Northern California Portfolio acquisition. As a result, income from operations increased 22% to $16.1 million for the second quarter of 2015 compared to income from operations of $13.2 million for the same quarter a year ago.

Same-store office net operating income in the second quarter, excluding specified items, increased by 0.1% on a GAAP basis and 18.1% on a cash basis, as free rent associated with nonrecurring upfront abatements on several leases expired.

Interest expense to the second quarter increased 119% to $14.1 million from $6.4 million for the same quarter a year ago. At June 30, 2015, the Company had $2.1 billion of notes payable compared to $852.5 million at June 30, 2014. As of June 30, 2015, our stabilized and in-service office portfolio was 94.7% and 88.8% leased, respectively.

During the quarter, we executed 52 new and renewal leases totaling 473,449 square feet, with 41 of these leases totaling 364,946 square feet executed at properties within the newly acquired EOP Northern California Portfolio. As of June 30, 2015, the trailing 12-month occupancy for our media and entertainment portfolio increased to 71.6% from 69.9% for the trailing 12-month period ended June 30, 2014.

Turning to the balance sheet, at June 30, 2015, the Company had total assets of $6.3 billion, including unrestricted cash and cash equivalents of $40.3 million. At June 30, 2015, we had $400 million of total capacity under our unsecured revolving credit facility, of which $45 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.

The Company is increasing its full-year 2015 FFO guidance from its previously announced range of $1.50 to $1.56 per diluted share, excluding specified items, to a revised range of $1.56 to $1.62 per diluted share, excluding specified items. The guidance reflects the Company's FFO for the second quarter ended June 30, 2015, of $0.47 per diluted share, excluding specified items.

This guidance also reflects all acquisitions, dispositions, offerings, financing, and leasing activity referenced in the press release. 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 events referenced in the release, but otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity, or similar matters.

This guidance also assumes full-year 2015 weighted average fully diluted common stock in units of 129,575,000. For purposes of this estimate, the Company has updated its assumption with respect to the $250 million of its five-year term facility and its $550 million two-year term facility, the interest rates under which were floating as of its last guidance estimate and currently remain floating.

Over the course of evaluating its near-term financing strategy, the Company has identified the opportunity to sell an asset expected to generate approximately $90 million in proceeds, to be applied toward a partial repayment of its $550 million two-year term facility. The Company's updated guidance assumes this will occur prior to the end of the third quarter.

The Company is also pursuing the refinancing of the construction loan secured by its Element LA project with long-term financing. The Company's updated guidance assumes that prior to the end of the third quarter, the existing approximately $83 million Element LA loan balance will be repaid with a $168 million, 10-year fixed-rate loan bearing 4.5% per annum. The remaining approximately $85 million in net proceeds from this refinancing are assumed to be applied towards a partial repayment of its $550 million two-year term facility.

With respect to the remaining approximately $375 million of its two-year term facility and the $250 million of five-year term facility which remains floating, the Company continues to explore various alternatives to refinance some or all of these facilities, but this guidance assumes that those amounts remain outstanding at their current floating rates of interest through the remainder of this calendar year.

And now I'll turn the call back to Victor.

Thanks, Mark. Before we wrap up, I'd really like to acknowledge the entire Hudson team, especially our terrific senior management, for their exceptional hard work this past quarter. Congratulations. And to everyone on this call, we appreciate your continued support of Hudson Pacific Properties, and I look forward to updating you on our next quarterly call.

Operator, with that, I'm going to turn it over for questions.

Thank you. (Operator Instructions.) Vance Edelson, Morgan Stanley.

Could you discuss the extent of the work required at 4th & Traction? How much of the original structure will remain, if you could just walk us through the conversion process? And as long as you're starting the work now, what are your thoughts on demolition and construction costs, how they've trended recently and whether you plan to lock anything in to avoid surprises over the next year and a half?

Hey, Vance, it's Alex. So with 4th & Traction, we are finalizing our entitlements. We anticipate breaking ground on a structured parking deck some time in the coming months and delivery of the overall project end of 2016. The existing building is fully vacant, but we're doing a complete gut renovation, building out the infrastructure, repositioning it for retail and office. And then we're building a structured parking deck on what now is just surface parking. So it's a fairly large-scale project.

Okay. And on the costs and how they're trending -- anything there?

Chris Barton, our Head of Development, is right here.

Yes, I would say construction costs are still relatively stable for commercials. I would say we're looking at escalation, probably this year, 3% to 4%. Southern California is still pretty reasonable.

Okay. And then up at Merrill Place, Victor, I think you mentioned you've been approached by a couple potential tenants. Is that a significant portion of the building they're looking at? And are you likely to go ahead and pre-lease to them, or do you feel that if you wait longer you might get even better pricing? How are you handling that situation?

Yes, Vance, thanks. Over there right now, I think Art and his team are looking at just guys with preliminary interest between a half and three quarters of the building. And the tenants they're looking at right now are just in early conversations. So I think when our plan really comes out and our marketing is completed early this fall, we are even to get more attraction to it. The quality of the tenant mix, though, right now and the market banter is exceptional. So we're pretty happy with the status of where we are right now.

Okay, great. That's helpful. And then just maybe a quick question for Mark. Could you update us on the dividend policy? As the EOP cash flow kicks in, could we see a decent-sized increase at some point over the next year?

Yes, maybe not quite this year. It's going to partly depend on just timing of the CapEx largely associated with the EOP portfolio. That will depend on just timing of TIs, really, and commissions. But I do think it's fair to expect that towards the end of this year we'll have greater clarity of our coverage. And as we start to see our coverage, our AFFOs start to exceed the existing dividend on a projected basis, we'll begin to move towards what our base target distribution policy, which is to ultimately get to towards 90% of our stabilized AFFO. So I would think we'll be in a positive to give some clarity around that either towards the end of the year or first of next year.

Okay, that's great. Thanks, guys.

Brendan Maiorana, Wells Fargo.

Mark, so the change in guidance -- is that driven by just the changes on the financing side of things, or is there better NOI that you guys are getting, or is it a combination of the two?

Yes, no, you're on it. It's a combination of the two. There is interest savings associated with the financing alternatives that we're looking at as opposed to the prior guidance, where you thought we were heading right towards doing a sizable public offering. That's contributing, but the bigger contributor this quarter, and certainly a sizable contributor in Q3 and Q4, is associated with better office fundamentals. And in that regard, it breaks out in two ways. In the current quarter, about $0.015 relative to our expectations came through in just better leasing activity on the Redwood portfolio in terms of cash contribution.

The other contributor for about, call it a little less than $0.03, was better office fundamentals in a GAAP sense in terms of higher below-market rents and mostly associated with leases that have near-term expiration. And the purchase price accounting got done after the acquisition, and obviously before this call, and we had our own estimates running through our number. But once the final mark-to-market got done, it actually showed that we were conservative on our below-market expectations on the in-place rents. And so that, plus about a little bit more than $0.01 in the second quarter of interest savings basically made up the second-quarter improvement, and then that translated into the full-year number makes up the $0.06 adjustment.

Okay, so that actually leads me into my next question, which -- so page 22 of your supplemental, you guys have $20 million of non-cash rent between the non-same-store office portfolio and the lease-up properties. The vast majority of that relates to the Redwood portfolio, right? And then you got, I think, Element and 3402 Pico and maybe one other in there. So is most of that driven by FAS 141, because it's $20 million in the quarter versus $85 million of GAAP rents? Or is that free rent, or how should we think about that big delta between cash and GAAP rents?

There's not a lot of free rent in there. It's largely FASB 141 below-market rents.

Okay. But you think that burns off?

Yes. That will burn off over the life of the underlying tenancy on a per-lease basis.

But I think you mentioned, Mark, you have a couple of big guys that have more near-term expirations where you realized a mark-to-market on a cash basis?

Yes. So all I wanted to do, Brendan, was draw a comparison between the aggregate mark-to-market of the Redwood or the EOP portfolio in terms of what we've always been -- we've been saying now for quite a while in terms of being about 15% below market. Against our current underwriting, it still is about that amount; maybe it's a tick above that now.

But we've also indicated in earlier calls that year 2015 expirations and 2016 expiration mark-to-market are 20-plus percent below market. What we learned when we ran our purchase price accounting is that 20% or 21% estimate as it related to 2015 expirations was probably conservative. It's probably more like in the mid-20s. And so we're seeing a greater impact of the below-market rents in the -- as it relates to, but it's more attributable to leases that have a shorter remaining term on it. That's all I was trying to -- .

Got you. No, that's helpful. Okay. So then just last one, it looks like so your net absorption in the quarter was about negative 40,000 square feet. It seems like you have very good traction on the Redwood portfolio. So does Redwood, was that in the net absorption stats for Q2, or does that not go in because technically it wasn't closed as of 3/31?

That's why. So Redwood, this is the first quarter that the Redwood portfolio factors into our leased-and-occupied percentage. I would say, Brendan, and maybe for the benefit of the listeners, we introduced a new category because we have a more expanded portfolio. And historically, if we had a property that fit into our lease-up category, we carried that categorically on its own and reported a stabilized same-store, non-same-store number. You can still find our stabilized same-store, non-same-store number, but we've included now our lease-up properties because it's quite a bit larger; it's a big portion of the Redwood portfolio. And we categorize those collectively as in-service. So that's a new statistic that we're now providing.

Okay. So the net absorption that was in the quarter -- that included Redwood?

No.

Oh, that did not include Redwood, okay, sorry. Got it. Okay, all right. Thanks, guys.

James Feldman, Bank of America.

Thank you. I guess just starting out, you talked about 1.2 million square feet of demand for the EOP asset. Can you talk more about whether those are new to the portfolio or renewal and where would they be coming from?

Yes, but 0.5 million feet are new and about 700,000 -- almost 800,00, because it's a little over 1.2 million are renewals or backfills.

Okay. And that they don't fit with that 25% below market, the 700,000?

Well, yes, I mean, listen, right now we're probably a little in excess of that. I mean, we look back to the last series of deals that were done, the average was in the mid to low 30% mark-to-market. In some instances, they were high, as high as high 50s.

Okay. And then bigger picture on downtown LA, can you just talk about your thesis there? You guys did a great job in Hollywood. And just kind of what you're thinking there over the next couple years and why the investment now and what kind of demand you're seeing?

So listen, I think we've mentioned this in the past and how we believe in the market. Downtown LA is three markets. And we can get into more of an offline conversation and education on that process, but there's Bunker Hill, there's South Park, and then there's the Arts District. And the Bunker Hill is your mainline downtown Los Angeles corporate finance world where you see only move-around, and run rate movement has been de minimis.

Your South Park marketplace is really right around Staples, and that's where you have a tremendous amount of residential, multifamily growth, very little office, majority of that office is entertainment-related around ESPN, and what's taking place with AEG down there.

The Arts District is where our assets are, and it's a completely different marketplace. I mean, there's scarcity there of large, authentic, vintage-type gray space buildings. I think at the end of the day, you're looking at the demand we're having for that space right now, as was mentioned in our prepared remarks. We haven't started marketing either projects, and we've got over 1 million feet of interest for both retail and office in that area at rental rates that are -- I mean, looking at art, but basically approaching almost Beverly Hills-type rental rates.

And so the square footage demand and the returns are going to be completely different than what we would consider as a downtown Los Angeles marketplace. I mean, to give you an idea, rental rates on a retail basis are going to be somewhere in the $5 plus triple net range, and office rents are in the $3 to $4 triple net as well.

And the tenants that are interested -- are they going to be bringing people in from other places or is it more with a live-work-play at this point? What's the attraction from the tenant perspective?

The tenant demand there right now is media, entertainment-centric first, and the live-work is there as well. But the tenant mix is also coming from the users are having employees come from all over LA, so it's centrally located.

Okay. And then turning to the media asset, what should we assume is going to be the normalized run rate once you've taken everything out of service? Like I know that was the decline in same-store? Is that it or is there more to come?

No, we're back online for all intents and purposes on the three stages that we had to temporarily take out of service. In fact, the stages 1, 2, and 3 at Bronson are committed for the balance of the year. And Bill's team did a great job in committing a tenant to that front historic building, James, at the front of Bronson. So we're, for all intents and purposes, that those two quarters of temporary downtime are now behind us, and we expect for the third and fourth quarter things to normalize again. So, James, nothing's ever that normal on a quarter-by-quarter basis for the studios, but relative to historic performance, we've got that temporary downtime behind us.

Okay. And then finally, what's left to spend in CapEx? What are your latest estimates for CapEx for the EOP asset?

We're still tracking. I mean, it's only been a quarter or so, and a full in-depth analysis of the portfolio is now complete. Josh and the team and everyone bore down on that. It's still about $250 million over the three years starting as of April 1, which is the number we've been talking about since the outset. And yes, so Josh just gave me a note. Without -- this is an interesting way to look at it, James -- without tenant improvements and leasing commissions, the spend over the three years, the component at $250 million related to CapEx without TI and LC, is about $75 million.

So $75 million and the rest is leasing related?

Yes.

Okay. And then I assume that's still the number -- you didn't spend that much in the quarter?

Yes. We haven't spent that much, really, in the quarter. There was always some very near-term items that some back-of-the-house and other items that were flagged very early on that we've started to spend on, but it's not that much yet.

Okay, all right. Thanks, guys.

Craig Mailman, KeyBanc.

Just a follow-up on 4th & Traction and the other asset you have under contract. Targeted yield and total all-in spend there is what?

Okay, Craig, it's Alex. So we're going to be -- so both buildings are being acquired for roughly $400 a foot and stabilized. We're going to be into it for low to mid $600 a foot.

Okay. What would ground-up development in that part of downtown LA be? Are you guys all in at $600 below replacement costs on a brand-new building?

Well, with land costs and everything else, yes, right around there.

Okay. And so that's like a mid-6% return, given the rents that Victor put out there?

We're bogeying closer -- call it 7% return on cost.

Okay. Is there anything else down there that you guys are looking at in that neighborhood? Or I know you guys said this is the Main & Main two best assets, but is there anything else in your radar?

Right. I mean, there's -- we think there's more to come. Right now, we're obviously focused on executing our business plan on these two assets. We'll have about 200,000 square feet, which will give us critical mass because it really is a micromarket, and we'll be the dominant office landlord in that space. But there are other opportunities that we're evaluating, so you could easily see us doing more down there for the right opportunity.

What do you think that submarket cap would be in terms of investment, dollars investment?

I think it's too early to tell. Craig, I think right now, as Alex indicated, we'll be a little over 200,000 feet and maybe even growing that, maybe incrementally, and we'll have to see the opportunities that are there. I mean, there are some comps that are coming out on land comps that are pretty astronomical. So on the existing stuff is really where we're looking at, and I think we have the opportunity to pick up maybe a couple more.

Okay, that's helpful. And then, Mark, just on the decision to let the debt float a little bit longer here versus fix it in -- is that just your view on rates here over the next 12 months, or was something else going on there?

Yes. We really -- it's really not trying to outsmart interest rates at all. In May we had just finished the rating process and had a view around entering the public debt market. And in a very short order we got this opportunity I mentioned in the prepared remarks to sell an asset. We also identified the CMBS market is in a very healthy spot right now and it occurred to us that it's advantageous to put some longer-term debt on Element because it's got a 15-year lease and we think we can get really attractive financing there.

And that, coupled with what we're seeing is attractive opportunities in the private debt market, actually pricing a little bit more favorably right now than public debt. That informed our view that we ought to be looking at different alternatives towards the takeout of some of that floating REIT, and that's the essence of it.

Okay, that makes sense. And then the building you guys, someone came to you, is that San Francisco legacy or is that EOP?

Oh, the building that -- the disposition?

Yes. Is it 222 Kearny or is it a different asset in the EOP Portfolio?

We don't want to disclose the specific asset right now, but it's an asset that's part of the EOP Portfolio that we received an unsolicited offer on at a very favorable price.

Okay, and then just lastly on NetSuite, the mark-to-market on that -- was that consistent with the overall for the quarter, or was there a discrepancy there?

No, the NetSuite mark-to-market was almost 40%.

Okay, great. Thanks, guys.

(Operator Instructions.) Ryan Peterson, Sandler O'Neill.

Just couple of questions from me. So the two acquisitions that you talked about, prospective acquisitions, can you just discuss a little bit what your funding plans are for those?

I'm sorry. Could you repeat the question?

Yes. How do you guys plan to fund the two acquisitions that you discussed?

Oh, yes. So we've already funded one of them, right? And it came from a draw on the line. The second we've mentioned would likely come off the line. I mean, we have $30-plus million of cash on hand, but we tend to keep that on hand. But we have $400 million revolving facility, so we have tons of capacity left on that.

Okay, great. And then should we expect any further transaction costs related to EOP?

There might be a trickle but, really, no. I mean, as you see in our numbers, we had spent roughly $38 million, I think, in acquisition costs for the quarter. We had incurred, I don't know, $6 million between the fourth and first quarter. That's really all the cost. There might be a small amount that trickles in, but it would be very little.

Okay, great. And then, last question, just more broadly speaking, the potential of the new EOP assets coming to market. Do you guys expect that that will change the way assets are viewed in L.A.? Or do you think there are enough comps where the market has already been driven upward?

I think those assets are going to -- they'll move to where the marketplace is already shown on some pretty substantial comps. There was a comp just recently, a $900-a-foot in Beverly Hills. There's another comp in West L.A. at $875 a foot. I think there's a comp that's projected in Westwood right now that's close to $800 a foot. So I think it's going to be in line with what you're seeing. I don't think it's going to be any different than where the market is showing right now.

Okay, great. That's really helpful. Thanks, guys.

Thank you. At this time, I would like to turn the call back over to Mr. Victor Coleman for closing comments.

Thank you so much for the support and the vote of confidence, and we look forward to chatting with you all next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.