Hudson Pacific Properties Inc (HPP) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Hudson Pacific Properties Inc. Third 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, Kay Tidwell, Executive Vice President and General Counsel for Hudson Pacific Properties. Thank you, Ms. Tidwell, you may begin.

Good afternoon, everyone, and welcome to Hudson Pacific Properties' third 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, November 5, 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. Welcome, everyone, to our third quarter 2015 conference call. We've had another solid quarter marked by significant leasing activity and a series of capital transactions which added to our pipeline of value creation projects and strengthened our balance sheet.

We completed nearly 680,000 square feet of new and renewal leases in the quarter, a testament to how quickly our team is moving, and strong activity across all of our markets.

And we closed on our second redevelopment asset in downtown Los Angeles's Art District, improved our office portfolio with the sale of a nonstrategic asset which, combined with refinancing of our [Elman] LA property, generated significant net proceeds to repay a portion of our floating rate debt.

Taking a closer look at our leasing activity at the end of the quarter, our in-service office portfolio, which includes leased stuff as well as stabilized properties, was 89.5% leased, representing a 70 basis point quarter-over-quarter increase.

We continue to achieve significant positive cash and GAAP rent spreads on new or renewal leases portfolio-wide in an impressive 43.5% and 62.8%, respectively, for the quarter.

Notably, in August we executed a 200,000 square foot lease with Netflix at our under-construction ICON office tower, resulting in the property being over 60% pre-leased nearly a year prior to delivery.

We're now trading paper with several tenants for the balance of that building as well as an adjacent 90,000 square foot creative office building currently in predevelopment and expected to be delivered in mid-2017.

As previously noted, the Netflix deal is the largest leased signed to date in Hollywood and proves out a key part of our investment thesis in that sub-market -- that top-tier next generation media and entertainment companies will see value in premiere creative office immediately adjacent to stage and production space.

Touching briefly on the leasing specific to our in-service Peninsula and Silicon Valley assets. As of this call, those properties were approximately 88% leased, including deals and leases.

A majority of our leasing activity for the fourth quarter, over 400,000 square feet, took place at these assets, including a new 40,000-plus square foot lease with Stanford University at Page Mill Center in Palo Alto and a 20,000-plus square foot lease with Uber Technologies at Skyway Landing at Redwood Shores adjacent to San Carlos.

We continue to outperform our [national] underwriting in terms of new and renewal tenants and leases and a deal pipeline representing over 1 million square feet of demand from tech and non-tech users. We remain on track to achieve a 90% leased sometime around the start of 2016.

Regarding acquisitions, in August we closed on our second redevelopment asset with three existing buildings totaling 83,000 square feet in downtown Los Angeles's Arts District for $40 million. Known as 405 Mateo, this property is currently vacant and we are in design review to determine the optimal program. Early concepts include a mix of creative, office, retail, and parking achieved by redeveloping the existing square footage as well as building new.

And to date, we have a pipeline representing over 1 million square feet of demand from quality fashion, tech, media and other creative office users for both 405 Mateo and our four contraction projects.

In terms of dispositions, in September we sold Bay Park Plaza, a two-building 260,000 square-foot property in Burlingame to an Asian private equity firm, H&Q Asia Pacific, for $90 million. The sale's benefits were twofold. First, we disposed of a noncore asset at a premium to our purchase price allocation just five months after acquiring it as part of the EOP Northern California portfolio. And second, we're using net proceeds to pay down a portion of our two-year floating rate term.

We constantly evaluate our portfolio for opportunities to recycle capital, be it through higher-value investments or repayment of debt or for corporate purposes, and expect to have additional updates on this front in the coming quarters.

Now, let's just discuss some conditions of our core market, starting with the Bay Area, which has been in the headlines recently. Market conditions in the CBD of San Francisco continue to tighten. Class A rents near $74 a foot, up 3% for the quarter and 12.7% year over year. And as a result, vacancies fell to 5.5%, down 20 basis points for the quarter and 120 basis points year over year. We've seen no significant fluctuation in sub-lease availability, which remain just over 1 million square feet, or roughly 1% of the overall market, and is primarily the result of non-tech tenants downsizing rather than a barometer for tech sector weaknesses.

Our 2.4 million square foot San Francisco CBD portfolio is stabilized at 92% leased, and we have just 87,000 square feet rolling for the remainder of 2015. We continue to work on backfilling BofA and Rocket Fuel at 1455 Market, and are in conversations with tech and non-tech tenants at leasing rates representing a mark-to-market of more than 40% of our in-place rents.

Fundamentals along the Peninsula remain strong as well. Market-wide rent rates for Class A space are up 2.9% for the quarter and 10.5% year over year to $63 a foot. Overall vacancy along the Peninsula ticked up 27 basis points in the quarter to 9% due to new construction deliveries but still is down 205 basis points for the year.

Demand for Silicon Valley continues to outpace supply, with a record 1.6 million square feet of positive net absorption in the quarter, making it the fourth time in the last four quarters absorption has exceeded over 1 million square feet. Likewise, vacancy fell 80 basis points in the quarter, down 260 basis points year over year to 6.4%.

Silicon Valley's Class A rents increased 3.9% for the quarter and 16.8% year over year to $60 a foot, with rates in Palo Alto, which comprises 1.3 million square feet of our portfolio, reaching an impressive $112 per square foot.

In north San Jose, Apple has begun titling 43 acres, where it could build up to 2.8 million square feet, just down the street from where we own 2.6 million square feet. Apple currently owns a total of 86 acres containing two office and R&D buildings, and leases roughly 365,000 square feet and most of the R&D and industrial space in that sub-market.

While the precise impact of Apple's entrance is difficult to quantify, given the new development's use remains unknown, there's no doubt that the company's growing presence has elevated the area's profile for top tier tech companies and will drive future demand.

North San Jose had another strong quarter, with the rents up 2.9% for the quarter and 17.7% year over year to $38%, and net absorption of 28,000 square feet contributed to a 60 basis point drop in vacancy for the quarter and 230 basis point drop year over year to 14.1%.

Now, touching briefly on Southern California, the greater Los Angeles market remains in an expansion mode with all year-to-date metrics moving in positive directions. We've had over 700,000 square feet of tours, an increase at our 6555 West Jefferson development project Playa Vista, and we're now in leases with two tenants to occupy the entire building. We expect to have more news on this front next quarter.

And finally, the greater Seattle office market had another strong quarter, with demand outpacing supply, particularly for large lots of contiguous space, a trend expected to continue well into 2016.

Market conditions in Pioneer Square are even tighter, with Class A rents holding at $35 per foot for the quarter, up 12.9% year over year, while vacancy just rose 70 basis points in the quarter to 8.2%.

It's still down 260 basis points year over year, and we're preparing to break ground on a 165,000 square-foot office tower early next year and are in negotiations with a well-regarded non-tech pre-tenant to prelease a significant portion of this building, further highlighting that Pioneer Square has become a location of choice for tenants across industries and sectors.

Now, before I turn the call over to Mark, I just want to take a minute to share our perspective on the overall health of the tech sector as well as how we think about it and are addressing the associated risks. First and foremost, the technology industry is fundamentally different today than it was in 2000. Technology use is ubiquitous as mass markets for relating goods and services are far more developed.

While cloud computing, ecommerce, Internet search, and digital media all exist -- they existed during the dotcom era -- consumers and businesses had not incorporated these technologies into everyday life. Today the prevalence of mobile hardware and the overall decline in cost to produce and consume digital products and services has allowed the tech industry to flourish. Tech is now fully integrated into all sectors of the economy and our lives, and this breadth of utility will sustain the sector over the long term.

There is little doubt that public companies are rationally valued and well capitalized. Earnings, not PE multiples, are growing and tech contributions to the S&P is flat. Large, well-funded companies, many of them public, represent more than half of our tech exposure and we continue to see strong interest from this group for immediate and near-term space requirements. And tech companies across the board, particularly those contributing significantly through office absorption, are very different today.

They're established firms with proven revenue streams and profitability and the lines between tech and non-tech are increasingly being blurred. In many instances, the services provided are completely tangible but powered by technology.

Global Reach Walmart expanded their Bay Area presence with us to grow its ecommerce platform. Our tenant Uber is hardly just an app; its massively disruptive transportation company as it exists today. There are endless examples such as Google's home automation system, Nest, which is also our tenant.

This diversification, the combination of tech and traditional elements of a business, should also strengthen the sector's resilience in future downturns.

With regard to venture capital funding, there's been no real surge as a percentage of GDP. It's a fraction of what it was in circa 2000. And while there's been an increase in seed funding for very young companies, absolute dollars remain small. Today, some 80% of the funding goes to three-plus-year-old companies versus more than half going to two-year-old companies in the last cycle.

And we don't anticipate any dramatic pull-back in this capital source. They understand the shifts of the tech better than anyone else and are likely to be more patient in terms of an exit.

Greater uncertainty exists around future capital outlays with nontraditional tech investors -- the mutual funds, the insurance companies, sovereign wealth funds that have stepped up and fund larger later-stage rounds. There's an argument that this group has overvalued the hundred and so private tech companies referred to as unicorns and are contributing to a so-called bubble. But renowned venture capitalist Marc Andreessen and industry experts like him see things differently -- that the combined valuation for these companies are about half of Microsoft's market cap.

In terms of exits, the jury's still out as to how it will impact funding from this newer category of tech investor in particular. But in light of the IPO pullback in 2015, not just in the tech sector, we'll be keeping a close eye in 2016.

And it's important to remember, though, that an IPO is not the only path of exit. There's also liquidity in secondary markets and as well, many companies will ultimately get bought. We'll be watching the bottom markets which, if they remain healthy, should motivate nontraditional investors to continue to look for higher risk-adjusted returns in tech.

While we're very mindful of all this, it's also important to note that the way we run our business day to day has not changed at all. We're thrilled to lease to hugely successful high-growth companies and own properties in the best-performing markets in the country, if not the world. We remain committed to growing a diverse tenant base and rigorously evaluate tenant credit and space needs before executing any leases.

And, as I think you'll see by Mark's comments, to follow, our underwriting mark-to-market on rents is extremely conservative, providing an additional cushion in terms of our performance should market conditions shift.

To summarize, for the quarter our markets are performing exceptionally well and the outlook for the remainder of 2015 and 2016 is very positive. We're on track with regard to lease-up in our Peninsula and Silicon Valley assets as well as our pipeline of value-creation projects and are outperforming our underwriting in terms of lease deal economics.

In the coming quarters, we'll continue to look for opportunities to dispose of non-core assets like our Bay Park Plaza at favorable pricings, using proceeds to fund strategic growth and strengthen our balance sheet.

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

Thanks, Victor. Funds from operations, excluding specified items, for the three months ended September 30, 2015, totaled $63 million, or $0.43 per diluted share, compared to FFO, excluding specified items, of $20.8 million, or $0.30 per share, a year ago.

The specified items for the third quarter of 2015 consisted of acquisition-related expense reimbursement of $100,000, or $0.00 per diluted share. Specified items for the third quarter of 2014 consisted of acquisition-related expenses of $200,000, or $0.0 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 of 2014 of $1.1 million, or $0.02 per diluted share.

FFO, including the specified items, totaled $63.1 million, or $0.43 per diluted share, for the three months ended September 30, 2015, compared to $18.6 million, or $0.27 per share, a year ago.

Net loss attributable to common shareholders was $3.9 million, or $0.04 per diluted share, for the three months ended September 30, 2015, compared to net income attributable to common stockholders of $7.6 million, or $0.11 per diluted share, for the three months ended September 30, 2014.

Turning to our combined operating results for the third quarter of 2015, total revenue from continuing operations increased 122.4% to $151.6 million from $68.2 million a year ago. The increase was primarily the result of the increases in our office property segment of $75.2 million in rental revenue to $114.7 million, $8 million in tenant recoveries to $20 million, and $1.5 million in parking and other revenue to $6.6 million, offset by a $1.2 million decrease in total revenue at our media and entertainment properties to $10.2 million.

The increase in rental revenue and tenant recoveries was largely the result of the EOP Northern California portfolio acquisition on April 1, 2015, though revenue associated with leases at Element LA and 3401 Exposition Boulevard also contributed.

The increases in parking and other revenue was largely the result of higher parking revenues at several of our same-store office properties.

Decreases in media and entertainment property revenue stem from our decision to take a stage off line to facilitate the extension of our lease with KTLA at our Sunset Bronson property along with a production hiatus of two television shows, one at Sunset Bronson Studios and the other at Sunset Gower Studios.

Total operating expenses from continuing operations increased 165.4% to $147.4 million from $55.5 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 decreased 67% to $4.2 million for the third quarter of 2015 compared to income from operations of $12.6 million for the same quarter a year ago.

Net operating income with respect to our 19 same-store office properties for the third quarter increased 9.8% on a cash basis and decreased 0.3% on a GAAP basis, as free rent associated with nonrecurring upfront abatements on several leases expired.

Interest expense during the third quarter increased 120.8% to $14.5 million from $6.6 million for the same quarter a year ago. At September 30, 2015, we had $2.1 billion of notes payable compared to $920.9 million at September 30, 2014.

As of September 30, 2015, our stabilized and in-service office portfolio was 94.5% and 89.5% leased, respectively.

During the quarter, we executed 83 new and renewal leases totaling 679,443 square feet, with 65 of these leases totaling 411,563 square feet executed at our recently acquired EOP Northern California portfolio asset.

As of September 30, 2015, the trailing 12-month occupancy for our media and entertainment portfolio increased to 71.9% from 71.6% for the trailing 12-month period ended September 30, 2014.

Turning to the balance sheet, at September 30, 2015, we had total assets of $6.3 billion, including unrestricted cash and cash equivalents of $46.7 million. At September 30, 2015, we had $400 million of total capacity under our unsecured revolving credit facility, of which $105 million had been drawn. A $550 million five-year term loan, and $350 million seven-year term loan were each fully drawn.

During the quarter, we repaid $90 million of our two-year term loan, resulting in a $460 million balance under that facility as of September 30, 3015. Subsequent to the end of the quarter, we repaid an additional $85 million of our two-year term loan, resulting in a current $375 million balance under that facility.

During the quarter, we paid a quarterly dividend on our common stock equivalent to $0.125 per share, and a quarterly dividend on our series B cumulative preferred stock equivalent to 8 3/8% per annum.

In addition to Victor's comments about what we're seeing on the ground regarding tech sector health, we thought it might be worthwhile to more clearly quantify the tech exposure within our Peninsula and Silicon Valley office portfolio to help everyone better understand the risk/reward profile of these assets.

Tech sector tenants comprise roughly 40% of the square footage in these sub-markets while [fire] sector and other non-tech tenant occupy the balance of space. These properties are currently 88.2% leased, including deals and leases. Therefore, with respect to current vacancy, we'll need to execute roughly 300,000 square feet of new deals in order to reach a 92% stabilized lease rate.

As of today, our overall new deal pipeline, not including deals and leases, renewal, or backfill activity, totals nearly 155,000 square feet of demand which, if these deals close, puts this portfolio at 90.2% leased. From that level, in order to reach 92% stabilization, just 145,000 square feet of incremental new deals on existing vacancy would have to be executed. This represents approximately one-fourth of the new deal activity we're on track to successfully complete in the current calendar year.

Regarding 2016 and 2017 expirations, we're in early discussions with QUALCOMM to renew its lease, which is scheduled to expire in mid-2017 at our Sky Port Plaza project in San Jose. After relocating from Santa Clara in 2010, they appear committed to the sub-market in place for early renewal talks.

Excluding QUALCOMM, approximately 2.2 million square feet of tenancy is scheduled to expire over the next two-year period beginning in 2016. Assuming we achieve 70% renewal of these tenants, in line with our 2015 renewal rate of 73%, then we'll need to backfill approximately 325,000 square feet of space in each of 2016 and 2017 in order to maintain a 92% stabilized rate during that period.

To put that in perspective, we're on track to successfully complete about 420,000 square feet of backfill deals within the current calendar year, or roughly 30% more backfill activity than necessary over the next two years to achieve stabilization.

In other words, in order to achieve and maintain a 92% stabilized lease rate through 2017, even at a lease renewal rate 300 basis points below our current level, we'll need to execute an estimated 475,000 square feet of new and backfill leases per annum over the next two years, a level that is less than half the new and backfill activity we're on track to successfully complete in the current calendar year.

Finally, as Victor referenced, our underwritten mark-to-market for new and renewal leases is around 29% in 2016 and 24% in 2017, well below this quarter's cash and GAAP rent spreads for these assets at 48.9% and 70.8%, respectively.

In short, all indicators continue to support our stabilization and rent growth goals for our in-service Peninsula and Silicon Valley portfolio, with substantial margin to succeed even in the event of a tech sector slowdown.

Turning back to guidance, we're increasing our full-year 2015 FFO guidance from our previously announced range of $1.56 to $1.62 per diluted share, excluding specified items, to a revised range of $1.60 to $1.64 per diluted share, excluding specified items.

This guidance reflects our FFO for the third quarter ended September 30, 2015, of $0.43 per diluted share, excluding specified items, as well as all acquisitions, dispositions, offerings, financings, and leasing activity referenced on this call.

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 on this call, 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 assumes full-year 2015 weighted average fully diluted common stock from units of 129,575,000, and that the remaining $375 million balance due under our two-year term facility is fully repaid on or around December 15, 2015, with fixed rate financing bearing 4.613% per annum.

Our other unhedged floating rate indebtedness, including the $250 million five-year term financing, which remains unhedged, is assumed to remain at its current floating rate of interest through the balance of this calendar year.

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

Thank you, Mark. Once again, I want to thank the entire Hudson team, particularly our senior management team, for their excellent work this quarter. And to everyone on this call, we appreciate your continued support of Hudson Pacific Properties and look forward to updating you next quarter.

And with that, Operator, I'm going to turn the call over to you for any questions.

(Operator Instructions) Craig Mailman, Keybanc Capital Markets.

Hey, guys. Mark, just on guidance, the $375 million being repaid, kind of what's the size of the financing that you're targeting at this 4.6%?

$425 million. So there'll be approximately $50 million of net proceeds after repayment of the two-year. And depending on where we are on deal activity, that may come into play. But assuming there's no other use of proceeds, we'll apply that against whatever revolving balance there is at that time.

Okay. Then, the comments were helpful on the leasing side. Maybe just an update -- of the 150,000 square feet of demand -- kind of the new deal pipeline. Any of that under contract or LOI?

I just want to clarify before Art jumps in because there's sort of a careful distinction I want to draw. We did not include what we call our fours, which are deals in leases in that number. So that includes deals which are -- and there are, in internal nomenclatures, twos and threes. So Art, I don't know if you want to expand on that.

Yes, they're all under LOI, yes.

So not under leases but under LOI, Craig.

Okay, the whole 155. Is there anything that you guys had done post quarter end on the new side that would kind of go towards the absorption goal, or the 90% lease goal?

We've picked up -- so nothing -- no monsters out there. But certainly there's probably another -- I'd call it 50,000 to 80,000 feet I think that we have in leases right now; I think they're certain to close.

Okay. When you ran through the numbers, it seems like that 92% goal is pretty easy at this point, assuming conditions stay where they are. Given what you guys kind of have in your pipeline and the visibility you have, is 90% sort of by year-end 2015, are we at 92% by second or third quarter of 2016?

Craig, let me just jump in. First of all, I'm having two guys pick Art off the floor when you said it was easy to get to 92%.

(Laughs) It seemed that way from the commentary.

Obviously, nothing's easy. What we're doing is -- you know we went from 85% to 90% for 2015, and we're comfortable with that number. And I think how Mark sort of outlined to get to the 92% is really sort of second quarter 2016 is sort of the objective there. And if it comes in sooner, we'll know by the end of the first quarter. But we're still holding firm at 90% and then moving to 92%.

Craig, one thing just to make sure not to lose track of that commentary is we have roll that continues through 2016 and 2017, and what we're trying to do -- And we've always said that our goal is to stabilize within this kind of -- get to, and hopefully hold onto, that stabilized level of 92% through 2017.

Well, there's a certain ebb and flow to that, and all we're trying to do is give some perspective around what level of activity we need to achieve as it relates to either renewal or backfill in order to get into that 92% range and maintain that. And I think you can see how -- that it compares very favorably to the amount of activity we've already seen in 2015.

So I think while Victor's comments, I think, hold, I just want to be careful to point out to you that it's something to gauge over, say, that two-year window because of the renewal and backfill activity.

All right, that's helpful. Thanks, guys.

Thanks, Craig.

Jamie Feldman, Bank of America.

Great; thanks. Can you talk a little bit more about the leasing pipeline? You said to backfill BofA and Rocket Fuel at 1455 Market.

Sure. Hey, Jamie, how are you?

Good.

So we've got right now two tenants to backfill 100% of that space, and I think the mark-to-market move on that is about 40% higher than the in-place rents today.

Yes, north of 40%. So it's really -- they're actually two non-tech tenants.

Yes, can I just clarify? Jamie, right now we've got 75,000 feet available because Rocket Fuel doesn't roll out on one of its floors until the end of the year. So Victor's 100% right about the 100% on the 75,000 feet. So we still -- I don't know that we have someone yet for that other 25,000.

That's the two tenants, right? One would be a two-floor deal, the other a single floor deal with rents.

Right.

One of them right about 40%, the other one well above 40% mark-to-market.

Okay. I'm sorry -- so you're saying -- 70,000's taken care of, but you still have the other space?

So Rocket Fuel had two floors and BofA had two floors. That equated to 100,00 feet. But Rocket Fuel doesn't give back one of their floors until the end of the year. Right now, we have two tenants for 75,000 feet of that total.

No, Rocket Fuel doesn't roll out to the end of the year on one of their floors.

So wait -- I'm sorry, Jamie -- do you have a tenant for that other 25,000 feet?

There were three floors in question. By the end of the year, we have them (inaudible) 100%.

Okay, sorry.

So I just got updated, Jamie. It looks like we have demand for all 100,000 feet.

Okay. Things are happening fast, I guess.

Yes. (Laughter)

All right. And then, same question for ICON. And I think you mentioned a second project -- a building that you might be working on? Can you give more color on that?

So part of ICON -- as you know, ICON's initially 300,000 feet and then Q, which is the production office building to it, which is all part of the master development, is about 90,000 feet. So the combined almost is 400,000. We've leased 200,000; we've got activity in the remainder of ICON and we are starting to tour and have a pretty good following and activity on the Q building, which we break ground first quarter of 2017.

Okay, and that may end up being a build to suit?

No, we've already designed the building and we're building the building. The question is, it may be a single user for the whole thing. That's what we've seen right now.

Okay, but there is activity for the whole -- there are users interested in the entire building.

Correct. And the remainder of ICON.

All right. And then, can you talk more about the downtown LA investment? I know you've got several projects there now. What does the leasing activity look like? I think the tenant that was supposed to move into the -- was it the Ford Factory -- decided not to go forward with that. Just what's an update on that sub-market?

From our standpoint, the sub-market is looking very good. As I said in my prepared remarks, I think we've got about a million square feet of inquiries. We've got a credit-quality tenant for one of the entire projects that Art and his team are talking to.

The reality is, on both of those projects we have a substantial amount of development and capital improvement work to get done. The occupancy levels on both of those buildings won't be until, at the earliest, end of 2016, early part of 2017. We're pretty confident that the activity that we have right now is going to correlate to us getting occupancy well -- sorry, leased -- well ahead of our scheduled time frames.

Okay. And then finally, can you just update us on your expected CapEx spend, I guess throughout -- for the whole portfolio, but I guess more specifically the EOP asset?

Well, yes, I can certainly give you an update on all the EOP assets. Maybe we can figure out a time to talk about spend as it relates to the rest of the portfolio, because I think that gets a little bit difficult to cover in a sound bite on this call.

But on the EOP assets, you'll recall that we had given a $250 million estimate for the first three years of ownership. And now that we've got a couple of quarters under our belt, we can give you an idea on kind of where we stand on that.

The current estimate is still right around the $250 million. It's ticked up a tiny bit; it's $255 million for the first three years. It reflects a little bit higher TI forecast, mostly, on what is proving to be longer-term deals than we had originally underwritten.

As to where we are in the spend, as of 9/30/2015, we had incurred $14.5 million actual out of pocket and we've committed another $18.3 million, which we expect to spend before the end of the year. And then we've got some LCs, some leasing commissions, projected through the balance of the year of $1.1 million.

So by the time the year is over, we think we'll be about $38 million into the $255 million of spend. The remainder of 2016 and 2017, that gets us to that $255 million. We're currently estimating at $133 million in 2016 and $84 million, call it $84.5 million, in 2017.

As you can imagine, the bulk of the spend in 2016 really captures most of the CapEx spend. You remember that original $75 million or so of CapEx that we --non-TI, non-LC spend that we had -- with much of that sort of behind us by the time we get to 2017. And then 2017 mostly reflects TIs and commissions.

Okay. And then along those lines, you guys have $0.31 of AFFO in the quarter? What's the run rate heading into the fourth quarter based on your guidance?

It looks like -- that's a little lower than we expected -- I mean, a little higher than we expected. We expected more of a $0.17 FFO. But run rate's different --

It's very lumpy, depending on timing of our lease signings and spending of our CapEx. But we're expecting $0.17 next quarter.

Okay, thank you.

Nick Yulico, UBS.

Thanks. Just looking at the ICON project and the Jefferson project, it looks like the costs went up for both but the projected yields also went up? Could you just talk about what's going on there?

Yes. Victor mentioned that 90,000-foot adjacent building that's next to the ICON tower. That recently went a redesign; we upgraded certain aspects of it, rooftop amenities, other exterior upgrades. And that accounts for the change from last quarter; it's roughly $0.5 million higher than last quarter.

But we also, on account of those upgrades and the activity we were seeing, we're expecting to see better rents on that 90,000 feet. And so the combined effect of the higher rents relative to the higher basis actually drove an improvement in yield of about 20 basis points. So that's what's driving that. We picked up a little parking revenue, too.

On Jefferson, I think we mentioned in the prepared remarks that we're talking -- we're actually in leases with tenants there. The increase, which is about $6.8 million from last quarter, represents largely higher TIs associated with that leasing activity.

But not surprisingly -- sorry, and Chris points out, too -- you'll also notice that the square footage went up by about 6,125 feet. And the combination of the incremental rentable square footage, which is going to be leased to these two tenants we're talking to, plus higher-than-originally-forecasted rents on these tenants actually drove the yield by 60 basis points, not withstanding the incremental higher costs.

Okay, that's helpful. And then, going back to -- you gave some good sort of info on how you get up to the 92% lease with EOP. But can you just remind us for that original 7% yield on that acquisition, what you guys underwrote for rent growth through 2015, 2016, 2017 -- in those markets? Because I'm assuming there was some level of rent growth you guys were assuming as well.

Yes, it's a handful of sub-markets. So the rent growth we applied to each sub-market varied, but it was no higher than 7% in some markets and as low as inflation in other markets. So somewhere between 3% and 7% over the first year or two. And then, pretty much inflation after that. So fairly de minimis rent growth in our assumptions.

Okay. And so I imagine year to date, the rent growth is tracking above your expectation?

Correct.

All right. Thanks, guys.

Brendan Maiorana, Wells Fargo.

Thanks, good afternoon. Mark, start with you. Guidance -- the increase, is that higher NOI? Is it lower interest expense? A combination of the two? What's driving the increase?

It's largely driven off of this quarter's -- third quarter results. Let me just give you kind of a quick rundown of the main contributors. It was about $1 million of G&A savings, which was -- that itself was made up of somewhat higher capitalized payroll associated with higher leasing activity, so we ended up capitalizing a bit more payroll.

Plus less travel -- so we had better-than-expected travel expenses. We had lower professional fees and we had a little lower cost associated with new hires. So that resulted in about $1 million of better G&A for the quarter.

We had interest savings, as you've already anticipated. About $0.5 million of interest savings that really stem from just timing on the closing of the Element loan compared to what we thought the timing might have ended up.

And then, about $350,000 of higher capitalized interest, which just relates to timing of the development spend.

And then the last two main contributors, where we did better on the studios by about $300,000 for the quarter. That was just good production activity, basically.

And then lastly, the Bay Park sale timing was a bit later than we had initially anticipated and that asset was accretive to earnings, so we picked up about $400,000, give or take.

So the combined amount of that basically drove more or less $0.02, if you will, of better-than-expected in the second quarter -- in the third quarter, sorry.

And then sort of to get from the old midpoint of $1.59, which was actually a pretty high $1.59, to the current $1.62, there's a little bit of other contributors over and above the third quarter results. But there's no one single main contributor that accounts for the difference.

Okay. Yes, that's helpful color. And then, just another one on kind of the numbers. It looked like the FAS 141, or amortization of the above-market leases, really dropped sequentially from June 30 to this quarter. I thought last quarter most of that was attributable to the FAS 141 on the EOP acquisition, but I wouldn't think it would drop off from $10.3 million to $3.7 million. So what drove that change?

Yes. So we had -- I think last quarter we tried to highlight for everyone that we expected to see a significant drop. I mean, as you know, that's dependent on the composition of the leases and the expiration of the leases, right? So we had anticipated a drop and it was a sizeable drop.

I would mention, though, Brendan, for you and for everyone else benefit on this call, if you look at -- just in terms of trying to get a handle on run rate on the non-cash component of office rents, the combined amount of straight line in FASB 141 for the third quarter was about $12.6 million. As we look to the non-cash office rent component for the fourth quarter, straight line and FASB combined, we are forecasting a number very close to that number -- that $12.6 million. (inaudible) run rate.

That's not -- because I would have thought it would have dropped a little more on the straight line because you guys have -- I think Element starts cash paying in, like October 1?

It will drop -- the straight line will drop -- then. But the FASB 141 number's actually higher than the third quarter; a bit higher.

Yes, just to add a little color to that. So FASB 141 is comprised of both above- and below-market leases. So as leases burn off, some which are above market leases, so therefore showing an increase in our below-market, right? So that's part of the equation there.

Okay, sure. Fair enough. And then, Victor, so you guys sold Bay Park, got nice execution on that. Anything else sort of planned in terms of dispositions that you guys might think about over the next couple of quarters?

So we've got a couple of reverse inquiries on a few non-core assets that we're looking at. Nothing is imminent, but I think if we were to execute something over the next couple of quarters, it could be upwards to almost $250 million to $300 million.

Okay, great. And then, you put this in the press release. I think you might have mentioned it in your prepared remarks, too. You were evaluating acquisitions, dispositions, refinancings, and then other opportunities to capture additional value. What -- is that something beyond development? Is there something else that we should be thinking about in terms of that commentary?

No, it's development and development-related aspects.

Got you. Okay; all right, thanks, guys.

Thanks, Brendan.

(Operator Instructions) Rich Anderson, Mizuho Securities.

Thanks, good afternoon. Victor, you said we're watching closely when you went through your discussion about technology, in particular the exits and the IPO market. Say you see a significant slowdown there -- what are your strategic options, and what might you do as a company?

I was referring to the technology companies' exit, not our company's exit, Rich.

No (laughs), I know that. But I mean, let's say it gets worse and there's some sort of impact on the fundamentals of your business -- what are some of the reactions you might have as a company to address that?

Well I think, like anything else, on an ongoing basis we're underwriting each tenant, no matter what the classification of their businesses are, on the same terms and conditions, which is a complete over-evaluation of their balance sheet, their businesses, and the likes of that.

In terms of our positioning, we're hopeful that every time we build out space the space is not just definitive for a specific case but there has a substantial portion of reusability at that space.

On the exit strategy, we're hopeful that -- one of our large tenants is trying to go public right now; it would validate their balance sheet even greater than what we think their underwriting would be. And I think that's going to be indicative of several others of our tenants in that marketplace in the Peninsula.

Also, on the aspects of just normal course of business, we're going to monitor, on a regular basis, the M&A business because that's going to occur -- we've talked about that quarter over quarter. We believe that's going to be a fundamental aspect and consolidation's part of it, and as a result you'll have -- some space will come back in the market and some space will maintain with the new company at better credit.

Okay, fair enough. I don't think you have any exposure to WeWork. And first of all, if you can confirm that. And second of all, what your thoughts are about that business model, and if you'd be willing to do business with WeWork.

So the answer is no, we do not have any current exposure to WeWork. I think if the right opportunities -- the executive-type space is conducive for certain assets and certain properties. I don't think that it is for everybody and every type of asset, and I don't think it should be also obsolete. There are places in markets that it's conducive and they're going to do well; and I believe, from what I've seen and what I've read, they do have a business plan that is being copied and mirrored by various other people.

So there has to be at least something right with it; not necessarily the best business plan that I've ever seen, but quite frankly, it's just another form of [Regis] or [Figin] or whatever decade you want to go back to and date myself as to who's done this in the past.

Okay. And Mark, you went through good detail about how you maintain your 92% occupancy in 2016 and 2017. And you identified the 75% retention. But if there is a slowdown in tech, it's possible that that 70% retention would be something lower. Have you stress-tested your analysis and looked into what would happen if retention wasn't 70% but 40% or something like that?

Yes, we didn't drop it at 40%; I don't know that there would be -- (inaudible) a little bit extreme. We did stress to 60% and 65% but we resisted the urge to make the script longer to give even those [docs].

But let me point out that there's (inaudible) to the connection between the level of activity that we need at the 70% renewal probability and how that compares to the 2015 activity insofar as it's -- even at a stressed renewal probability of 60%, you still have a lot of headroom between the comparison of 2015 actual activity to what you would need on a backfill even at a 60% renewal probability.

Fair enough. And while I have you, do you have an idea -- with the deal expected midway, or three-quarters of the way, through the fourth quarter, what your interest expense number and G&A might look like for the fourth quarter in the guidance?

Yes. So first of all, why don't I just give you a bigger picture for the benefit of you and everyone else? We mentioned in our prepared remarks that that rate would be 4.613% per annum -- so that's the interest rate of that financing.

As it relates to interest in the quarter, our own expectations are that the combination of the new Element financing that closed basically at the beginning of the fourth quarter and this new financing will ultimately drive the quarterly interest expense to approximately $15.7 million for the quarter.

And to be clear about that, that does not include -- I just want to be clear -- it does not include early extinguishment of debt. So we may end up having early extinguishment of debt. That's just the interest expanse itself.

Okay. And just G&A?

G&A -- so we mentioned that this quarter we saw some savings from our own expectations. To give you a point of reference, though, in the second quarter you'll recall that we had about $10.4 million of cash and non-cash G&A. And as we look ahead to the fourth quarter, we actually see G&A ticking up relative to the second and third quarter. Right now, cash and non-cash, we think it'll approach somewhere in the neighborhood of $12 million.

Okay. And then, I'm sorry, my last question -- media similar kind of text from the second quarter about some of the shutdown for KTLA and all that. When do you expect that to kind of get back into better stead from a year-over-year growth perspective?

Right now, we have pretty much fully occupied both facilities and all stages. There'll be somewhat of a seasonality at the beginning of December, and it looks like we're going to be back up and running probably on the same full stabilized basis with one stage out.

So we're looking at February, basically everything will be up and running with the exceptional new KTLA stage.

Great. Thanks very much.

Thank you.

There are no other questions in queue. I'd like to hand the call back over to Victor for closing comments.

Thank you so much for participating and we look forward to chatting with you next quarter.

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