Hudson Pacific Properties Inc (HPP) 2015 Q4 法說會逐字稿

Greetings and welcome to the Hudson Pacific Properties, Inc. Fourth 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. Thank you, you may begin.

Good afternoon, everyone and welcome to Hudson Pacific Properties' fourth quarter 2015 earnings conference call.

With us today are the Company's Chairman and Chief Executive Officer, Victor Coleman, and Chief Operating Officer and Chief Financial Officer, Mark Lammas. Other members of the Company's senior management team are also here to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, February 25, 2016 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. Good afternoon and welcome to our fourth quarter call.

It won't surprise anyone listening today that our conversations with investors over the last several months and really since NAREIT in June have focused on the state of tech and venture capital and in turn what 2016 will hold for our tenants and markets. This is an important dialog and rest assured that we're monitoring the larger macro environment as well as the situation on the ground with great intensity.

In the face of these potential headwinds, 2015 was a banner year for Hudson Pacific. We doubled the size of our Company and portfolio to over 17 million square feet by purchasing 26 exceptional Northern California assets, gaining a once in a lifetime foothold with significant value-added opportunities in the nation's top-performing high barrier office markets. We executed 1.6 million square feet of leases at cash rent spreads north of 30% and added exceptional tenants like Netflix, Wal-Mart, Stanford and Google to our portfolio. We purchased two of the best assets in what is now fast becoming Los Angeles' cultural epicenter, the LA Arts District, completed over $613 million in joint ventures and sales of non-strategic assets, we raised over $3 billion of new debt and public equity and earned investment grade credit ratings for all three major rate agencies.

We posted strong fourth quarter earnings in 2015. During that quarter, we executed over 400,000 square feet of new and renewal leases at rents 23% higher on a cash basis and 42% on a GAAP basis. As a result, our in-service office portfolio, which we'll remind you, includes both stabilized and leased-up assets reached 90.1%, up 60 basis points from the prior quarter. And during the quarter, we leased over 100,000 square feet at Pinnacle I in Burbank stabilizing that asset at 92.9% leased, which address our largest 2016 expiration. We backfilled Clear Channel's 109,000 square foot lease with renewal lease from iHeart Radio for 75,000 square feet, and a new lease from Fox Twentieth Television for 32,000 square feet.

At 1455 Market Street in San Francisco, we executed a 24,000 square foot lease with Vevo, a leading music and video entertainment platform backfilling 50% of Rocketfuel's recently vacated space at rents roughly 48% higher. We actually leased up the balance of that space in the first quarter of this year, which I'm going to talk about in a minute. We also pre-leased 18,000 square feet at our 12655 Jefferson redevelopment in Playa Vista to Dentsu Aegis Network, a multinational media and digital marketing firm. And we're in leases for the balance of that space and expect that project to be 100% pre-leased shortly with delivery anticipated this summer.

Demand for office and studio space at Sunset Gower and Sunset Bronson reached an all-time high in the fourth quarter. The level of activity is continuing into 2016. This uptick in studio demand is indicative of larger industry trends, traditional and cable networks now compete with streaming video networks for a finite number of stages and production offices. And the case in point, our team recently signed deals with Fox, HBO and Amazon. The California tax incentive, the continuation of demand for high-quality production at Hollywood's resurgence are also adding to this draw.

Now, I'd like to talk about what we're seeing in our markets accomplishing our first few months of 2016 and after all, there is no better counterpoint of negative sentiment than tangible positive results. And while Mark is going to provide an update as to where we see and overall in our leasing and our Peninsula and Valley assets going forward, we're not going to comment on or forecast these metrics, which are becoming less -- significantly less meaningful due to the completed and anticipated dispositions.

That's it, as of this call leasing activity across our markets is on track to significantly outpace prior quarters and we're still not seeing any cracks in terms of fundamentals. We have over 860,000 square feet executed and in leases and another 745,000 square feet in LOIs, which includes 365,000 square feet relating to 2017 expirations. As you recall in August, we announced that Netflix had pre-leased 200,000 square feet or just 6%, a little over of our ICON office tower in Hollywood. Earlier this month, they executed a lease for the remaining five floors and another 123,000 square feet with the majority of that space at the same rental rate and a portion of that at a higher rental rate. ICON is now 100% pre-leased and anticipated delivery in the third quarter of 2016 and our Netflix deal remains the largest lease ever signed in Hollywood in terms of square feet.

It's import to remind everyone that this is a landmark deal for Hollywood, for our Company and for the project and Sunset Bronson Studios. This lease exemplifies the convergence of tech and media in Los Angeles and how the next-gen content providers are thinking about growth, business strategy and the use of office and studio space. In owning and operating Sunset Gower and Sunset Bronson, where we still have a significant additional FAR to build, we're uniquely positioned to accommodate these types of companies. They can rent first class studio production and office space all from one landlord in one location and receive the level of specialized services they need day in and day out to run their businesses. No other owner operator in the marketplace today offers that kind of value proposition. The number of companies looking to be in Hollywood has shown no signs of slowing. So there is still a lack of supply competitive to our product. Around 360,000 square feet of new supply delivered in the quarter, but with vacancy around 7.7% is done little to leave upward pressure on rents. Two recent office sales in the Hollywood Media Center located off of Sunset Boulevard for just under $600 a foot and the other, the CNN building last renovated in 2001 for $625 per foot are both testaments to the market's continued strength.

We've got a pipeline of over 500,000 square feet of real requirements for CUE. Our 90,000 square foot Creative Office Building adjacent to ICON on the Sunset Bronson lot, which we started construction on earlier this month. We're also in entitlements for an additional 300,000 square feet at 5901 Sunset Boulevard across the street from ICON and CUE. And while we have interest from several large media companies for that space where we will unlikely break ground until this project is substantially pre-released.

Before we leave Los Angeles, I'd like to briefly touch on the status of our Arts District properties. We broke ground on the parking structure and started building renovations at Fourth & Traction with anticipated completion by the second quarter of 2017. At 405 Mateo, we're still evaluating our design options with plans to start renovating the existing structures in the next two months. We're in conversations with active pipeline of tenants representing 350,000 square feet of real demand including non-tech and full-back building users. Meanwhile, the Arts District is getting worldwide acclaim with recent articles in The Economist, The New York and LA Times, GQ and prominent publications in both London and France.

As I alluded to earlier in this call, in San Francisco CBD, we're now fully addressed our roughly 50,000 square feet of space that Rocketfuel has vacated. With 50% of that backfilled by Vevo and the balance by our existing tenant Uber. In fact, Uber's new lease is for a total of 49,000 square feet of the property, consisting of 24,000 square feet of the former Rocketfuel space, and additional 25,000 square feet occupied by Bank of America. At $73 full-service gross equivalent for Uber, that weighted average mark-to-market increase to the equivalent expiring rents at Rocketfuel and BofA was 87%.

Our San Francisco CBD assets, which comprise only of about 25% of our Bay Area exposure remains stabilized at 93.2% leased as of the end of the fourth quarter. We don't foresee any sublease space coming online within our portfolio. But we're in constant dialog with our tenants and noted this strong demand for Twitter and Dropbox spaces which will likely be 100% spoken for by some combination of PayPal, Lyft and [Stripe]. Overall, the fourth quarter numbers reflect what we're seeing in the CBD today, continued compression in rents and vacancy and demand far outpaces supply.

Turning to the Peninsula, in January, we sold our Bayhill Office Center, a 550,000 square foot campus in San Bruno to Google owned YouTube for $215 million. This is an all-cash off market transaction sold in a premium to our purchase price allocation as part of the Blackstone portfolio. We viewed the property as a non-core based on its location, and while we have no direct knowledge of YouTube's use plans, I'd like to make two observations. First of all, the multi-tenant property was 93% leased at the time. So it's logical to think YouTube is banking the asset to accommodate eventual growth representing significant future net absorption in that marketplace. Secondly, YouTube and Google are sophisticated companies with sophisticated teams for growth plans and real estate. They like Apple and Facebook are continuing to purchase assets in the Peninsula and Valley and not waiting for the market to soften. We have two other disposition opportunities in the horizon and we are negotiating an LOI for one deal, and we're in escrow on the other.

Activity across the Northern Peninsula remains strong. Tenants, particularly those of 10,000 square foot to 25,000 square foot requirements are still in the expansion mode. But being mindful not to over extend, bigger companies are looking to increase their presence as well. An example of this was in January Sony announced it was moving all of its PlayStation 4 operations to San Mateo, where Sony already occupies 450,000 square foot office complex. We've been very proactive about getting in front of these groups that have already outgrown or expect to outgrow their existing footprint, both on our properties as well as alternative locations.

In addition to the Peninsula, Valley are becoming ground zero for the development of the autonomous vehicles. We're seeing a number of 10,000 square foot to 20,000 square foot requirements for that type of use in those markets. The technology and capital behind the driver-less cars are real as evidenced by GM's investment in Lyft and Google's likely partnership with Ford. Directly across from our 2.6 million square foot portfolio in North San Jose, Apple just received the approval to build over 4 million square feet likely for office and R&D related to the iCar. This represents net absorption and is transformational for that sub market, which had a very strong fourth quarter; nearly 2% rent growth, 380 basis point drop in vacancy and 355,000 plus square feet of net absorption. We also like what we're seeing in terms of new investment activities from high quality end users like Broadcom.

We're about a year into our three-year capital improvement program for our Peninsula and Valley assets. These are property specific capital plans ranging from common area upgrades to full scale repositions, like the one underway at Gateway in North San Jose. The real construction work kicked off just after the [New Year]. So we expect to start seeing the impact of those improvements in the coming quarters. It's noteworthy however to know that all leasing progress to date has been accomplished without any significant CapEx or other TI allowances -- other than TI allowances of course.

Finally in Seattle, we're in leases with a well-regarded non-tech tenant for over half of our now fully entitled 450 Alaskan Way development project and in ongoing conversations with tenants for the balance of the building. We expect to kick up the demolition to clear the site this quarter. Overall, market conditions in broader Seattle continue to tighten. 2015 was a very good year for Pioneer Square and in particular, rents were up 11% to $35 a square foot and vacancy down 430 basis points to 6.5% and nearly 140,000 square feet of net positive absorption.

Seattle's redeveloping waterfront is attracting world-class companies like Expedia, which tends to expand a recently acquired office campus to around 1.2 million square feet and move its operations from Bellevue in 2019. Suffice to say we remain very bullish on our core markets in Seattle, which JLL recently ranked as one of the top 15 global cities for innovation and livability.

Lastly, we've got a lot of questions about the possibility of us buying back stock and given the significant disconnects between our stock price and the Company's NAV, in January, our Board approved an initial $100 million share repurchase program, which we will -- which we can implement at any time for up to one year subject to 10b-18 and other standard legal requirements. We view this authorization to repurchase as another tool to allocate our capital or return capital to shareholders from asset dispositions, which we'll carefully weigh against investment opportunities in the future.

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

Thank you, Victor.

Funds from operations excluding specified items for the three months ended December 31, 2015 totaled $64.8 million or $0.44 per diluted share compared to $22.2 million or $0.32 per share a year ago. The specified items for the fourth quarter 2015 consisted of acquisition-related expense savings of $100,000 or $0.00 per diluted share. Specified items for the fourth quarter 2014 consisted of expenses associated with the acquisition of the EOP Northern California portfolio of $4.3 million or $0.06 per diluted share and costs associated with a one-year consulting arrangement with a former executive of $1.3 million or $0.02 per diluted share.

FFO including specified items totaled $64.9 million or $0.44 per diluted share for the three months ended December 31, 2015 compared to $16.6 million or $0.24 per share a year ago. Net loss attributable to common shareholders was $6.5 million or $0.07 per diluted share for the three months ended December 31, 2015 compared to net loss of $2.3 million or $0.03 per diluted share for the same period a year ago.

Turning to our combined operating results for the fourth quarter, total revenue from continuing operations increased 124.8% to $154.7 million from $68.8 million a year ago. Total operating expenses from continuing operations increased to 146.5%, $140.8 million from $57.1 million for the same quarter a year ago. As a result, income from operations increased 18.6% to $13.8 million for the fourth quarter compared to income from operations of $11.6 million for the same quarter a year ago. I will discuss the primary reasons for the increase in total revenue and total operating expenses in connection with our segment operating results. Interest expense during the fourth quarter increased 158.8% to $16.6 million compared to interest expense of $6.4 million for the same quarter a year ago. At December 31, 2015, we had $2.3 billion in notes payable compared to $957.5 million at December 31, 2014.

Turning to our results by segment. Total revenue from continuing operations at our Office Properties increased 145.5% to $143.9 million from $58.6 million in the fourth quarter of 2014. The increase was primarily the result of a $76.3 million increase in rental revenue to $118.2 million, and a $11.5 million increase in tenant recoveries to $22.3 million largely due to the EOP Northern California portfolio acquisition, though revenue associated with leases at Element LA and 3401 Exposition also contributed. Operating expenses from continuing operations at our Office Properties increased 148.5% to $50.8 million from $20.4 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, Office Property net operating income in the fourth quarter increased by 143.9% on a GAAP basis and 146.2% on a cash basis.

At December 31, 2015 our stabilized office and in-service office portfolio was 95.3% and 90.1% leased respectively. We executed [16] new and renewal leases during the quarter totaling 400,441 square feet.

Total revenue at our Media and Entertainment Properties increased 5.8% to $10.8 million from $10.2 million for the same quarter a year ago primarily due to a $900,000 increase in rental revenue to $6.1 million, partially offset by a decrease in other property-related revenue by $400,000 to $4.3 million. The increase in rental revenues stem from improved stage and production office occupancy at both properties, while the decrease in other property-related revenue primarily resulted from lower [lighting and grip] revenue at Sunset Bronson due to the production hiatus at certain stage users.

Total Media and Entertainment expenses decreased 13.6% to $6.4 million from $7.4 million for the same quarter a year ago, largely due to administrative expense savings associated with development overhead allocations as well as lower equipment rental costs at Sunset Bronson due to the aforementioned production hiatus. As a result, Media and Entertainment net operating income in the fourth quarter increased by 57.2% on a GAAP basis and by 42% on a cash basis. In the fourth quarter, we completed a full examination of space utilization at Sunset Gower and Sunset Bronson.

We historically based occupancy trends for these properties on estimated gross square footage as determined at the time of their respective acquisitions in 2007 and 2008. Commencing this quarter, we are implementing a revised methodology whereby the rentable square footage will include spaces reconfigured or adopted through improved utilization or use for certain production support and building management but exclude structural vacancy not available for tenancy.

We believe this approach is more consistent with customary methodologies used for measuring office occupancy and for this quarter and going forward we will report occupancy trends for Sunset Gower and Sunset Bronson accordingly. Likewise we have recalculated and we'll report historic occupancies in line with this revised methodology for comparison purposes. Management expects these enhancements to more accurately reflect higher lease percentages than under the prior methodology. As of December 31, 2015, the trailing 12-month occupancy for the Company's Media and Entertainment Properties increased to 78.5% from 76.4% for the trailing 12-month period ending December 31, 2014. By way of comparison, under the prior methodology reported trailing 12-month occupancy as of the fourth quarter ending December 31, 2014 was 71.6%.

Turning to the balance sheet. At December 31, 2015, we had total assets of $6.3 billion, including unrestricted cash and cash equivalents of $53.6 million. At December 31, 2015, we had $400 million of total capacity under our unsecured revolving credit facility, of which $230 million had been drawn. Subsequent to the end of the quarter, we repaid $210 million of the unsecured revolving credit facility from proceeds generated by the sale of Bayhill Office Center.

On November 17, 2015, our operating partnership entered into a new term loan agreement which provides for a $175 million of unsecured five-year and a $125 million of unsecured seven-year term loan facilities. As of this call, those facilities remain fully undrawn and proceeds are available to fund investment activities repaying indebtedness or for general corporate purposes. We have not determined the ultimate use of these funds, but we'll give guidance regarding potential use as part of our full year 2016 FFO estimate.

On December 16, 2015, our operating partnership completed a private placement for $425 million of guaranteed senior notes consisting of $110 million of 4.34% Series A Guaranteed Senior Notes due January 2, 2023; $259 million of 4.69% Series B Guaranteed Senior Notes due December 16, 2025 and $56 million of 4.9% Series C Guaranteed Senior Notes due December 16, 2027. These notes pay interest semi-annually until maturity and are fully and unconditionally guaranteed by us and in certain limited circumstances our subsidiaries.

The operating partnership use proceeds to repay the remaining $375 million balance due under our two-year term facility with the balance going to repay indebtedness under our unsecured revolving credit facility and to fund general corporate purposes.

During the quarter, we paid a quarterly dividend on our common stock of $0.20 per share or the equivalent of an annual rate of $0.80 per share, representing a 60% increase from the previous annualized dividend level of $0.50 per share. On December 10, 2015, we redeemed all [5.8 million] issued and outstanding shares of our [8.375%] series B cumulative redeemable preferred stock. The redemption price is $25 per share, plus all accrued and unpaid dividends for a total payment of $25.40712 per share.

Turning to guidance. We are providing full year 2016 FFO guidance in the range of $1.65 to $1.75 per diluted share excluding specified items. This guidance reflects the acquisitions, dispositions, financings and leasing activity referenced on this call. As is always the case, our guidance does not reflect or attempt to anticipate any impact to FFO from speculative acquisitions or dispositions. This guidance assumes full year 2016 weighted average fully diluted common stock and units of 146,296,300. This guidance also assumes that the $175 million five-year and $125 million seven-year unsecured term loans described in this call are fully drawn as of April, with the proceeds used towards the repayment of floating rate indebtedness, including the [$30 million] loan secured by 901 Market Street, the $21 million outstanding balance under our revolving credit facility, and the remaining $250 million applied to repay a corresponding amount of the unhedged portion of our existing five-year term loan. This guidance further assumes that the interest rate for the undrawn $125 million seven-year unsecured term loan is fixed through an interest rate swap upon funding at a rate consistent with our existing seven-year term financing namely 2.66% to 3.56% per annum, before amortization of deferred financing costs.

The full-year 2016 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced 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.

As Victor touched on earlier, in light of the changing composition of the Northern California portfolio purchased last year from Blackstone, both as a result of [Mateo] asset sales and potential future dispositions or investment activity, looking ahead, we do not expect to continue with forward-looking leasing targets isolated to these assets. That said, we recognize that estimates of the 2015 leasing of that portfolio have been a topic of discussion since we announced the acquisition back in December 2014. So we are taking this opportunity to provide a final account of the original portfolio's leasing status.

Since the December announcement, we completed approximately 1.6 million square feet of leases at those assets including renewal or backfill of nearly 81% of 2015 lease expirations. As a result, the original Blackstone portfolio including for comparison purposes, the two sold assets Bay Park and Bay Hill as leased after date of their dispositions was nearly 88% leased by year-end. Since then, strong leasing activity has continued to drive the leasing percentage to nearly 89%. Perhaps more importantly, of the 860,000 square feet of executed and in leases -- of deals executed and in leases since the beginning of this year, half of that activity is attributable to the Blackstone portfolio, while three quarters of the 745,000 square feet currently in LOI including more than 365,000 square feet relating to 2017 expirations is attributable to those assets. In short, while leased percentages at this specific moments continue to reflect the natural ebb and flow of expirations and new leases, overall activity remains healthy supporting near-term stabilization goals.

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

Thanks, Mark.

Our fourth quarter results rounded out an impressive and really a landmark year for our Company. And as you can tell, particularly from the glimpse of our first quarter activity, despite pervasive negative sentiment, we're focused on the execution at the highest levels and creating value for our shareholders in both near and long term. Thanks to the entire Hudson Pacific team and our terrific senior management for their excellent work and everybody in this call we appreciate your continued support for HPP and we look forward to updating you next quarter.

Now, operator, let's open the call for any questions.

At this time, we will be conducting a question-and-answer session. (Operator Instructions)

Craig Mailman, KeyBanc Capital Markets.

So a few questions on the year-to-date leasing activity. On the 860, how much of that is, or I guess 860 and the 745, how much of that is new versus renewal?

So, okay, so of the 860, I'm looking -- I'm going off of -- those are leases that are either completed or signed and it includes Netflix, which is new. It includes a lease out for [a signature name]. I'm going to say, it's probably more like 60%, 70% new and the rest are new, I'd say, it's probably the number. In terms of the 745, a large piece of that is renewals, so it's probably a 50-50 new and renew.

Okay and is that -- the renewal there, is that Qualcomm or is that kind of a bunch of small renewals?

I can't get into the details of it until we're done.

But, it's suffice to say it's probably one renewal, not several.

No, there's lots of renewals in there.

Okay, all right. And kind of the makeup of the tenants that you guys are leasing to, is it predominantly tech, non-tech and just kind of the sentiment maybe update in San Francisco on the ground from a tenant perspective, are you getting any pushback on rents are you guys still comfortable with that kind of 20%, 25% mark-to-market for 2016 and 2017?

The answer to that -- Craig, I'm going to answer the second part of your question. Absolutely, I mean, look we just gave you a comp on 1455 and we've rolled out at 80%-plus mark-to-market from a tenant that was Rocketfuel that we leased from them 2.5 years ago. So we back-filled that with two different types of tenants, one was tech and one was media. I don't know how else we can continually explain where we think the sentiment is in the marketplace other than the facts that we're throwing out there on consistently looking at both GAAP and cash mark to markets in the 30% plus on the cash side and another 40% plus on the GAAP side.

The mix of tenants is just that, it's not all tech, it's not all non-tech. I think when we define the larger deals we've been doing recently with the exception of Uber, the preponderance of those tenants have been credit non-tech related tenants. And the ones that we signed that we've told you about have expect for Uber have all been non-tech related tenants and the ones that we're signing as we speak or about to sign are going to be mostly a combination of both in the Bay Area.

Okay, now that's fair. And then just one last one on the leasing, you had mentioned I guess that you're doing deals with less CapEx, are those deals that you guys had penciled in EOP that are just, you guys are spending less and maybe give us an update on the CapEx spend remaining in 2016, 2017 for EOP?

Yes, I'll take the first part, Mark will take the second.

I think what's happened is that the demand for some of the space that is available, both in the Peninsula from the new portfolio and the existing stuff in the Bay Area has just needed less TIs. There's been no trend for us to say we're not using less or the capital deployed is less. I think the rents are supporting well beyond our underwriting in terms of we're beating all metrics on that basis. That's not to say that going forward, we're not anticipating spending our full allocated amount and the leasing team is spearheaded by Art's crew who know that they will spend whatever is necessary on the budgeted basis on a TI and capital improvement base, which is I think we've just spent a little less this first eight to ten months into this than we anticipated.

On the spend update, Craig, a couple of those asset sales actually reduced the original projection of that $250 million to $255 million or amount that we've been talking about. So the current three-year total spend amount on the Northern California portfolio is now a little bit less than $240 million. In 2015, we spent about $26 million of that, so you can do the math, but the rest is expected to be incurred in 2016 and 2017, as you've heard me say it a million times CapEx can be lumpy, but the current layering in 2016 and 2017 of the remaining spend is about $135 million in 2016 and another $75 million-ish in 2017.

Okay, then just one last one on the sales, assuming those are smaller buildings given kind of where you guys said, you had potential sales activity last quarter and where San Bruno came in?

I mean, listen, we have one in escrow, we have one that we're hopefully going to put in escrow. We're not going to talk about it until they're done, but suffice to say they are sort of a combination of both.

Nick Yulico, UBS.

On the guidance, a couple of questions, I mean it sounds like you're getting a lot of leasing done, but it'd be pretty helpful to know what your guidance assumes for ending office occupancy for the total in-service portfolio at the end of 2016 and then also like a full year annual NOI number, sorry GAAP and cash possible?

We didn't -- okay, I guess we could consider that adding that to the guidance update next quarter, Nick. It's something that we've typically provided, but you're comments, we'll take and so we'll consider that for next quarter.

Okay. Yes, maybe pretty helpful since part of the story here is that your NOI, you have a lot of leasing, you have a lot of NOI coming into the portfolio this year and so by the end of the year you've got a lot more NOI than you had in 2015. So it is pretty and it's not sort of obvious what those numbers are from -- I mean, are there any other numbers you can sort of put around that for -- based on your guidance?

I'd want to [can we make-up], we obviously -- we have a model that clearly shows what the NOI expectations and the ending lease percentages, but rather than try to communicate that here on this call, I prefer to think about it, so that I know that it fits squarely within the guidance that we're providing. So maybe for next quarter, Nick, we'll think about adding that.

Okay, thanks. And then just on the buyback, I guess how should we think about your -- how are you thinking about your leverage in relation to a buyback? And then as well, how much -- whether you would do -- whether you have to complete asset sales to do a buyback or whether you're comfortable doing -- being able to do a buyback right away without having those asset sales in place?

Yes, I mean our preference would be -- I mean, we're not -- our authorization is we are free to use whatever form of capital management chooses, but that wouldn't -- we're not looking to use leverage per se. We've been completing asset dispositions, those have been generating considerable capital, we've been actually buying our leverage down steadily with that and we have some asset potential dispositions on the horizon. Overall, our general view is those dispositions are really the underlying source of potential share repurchases. So we don't expect there to be really any impact in terms of leverage ratios.

I would say there is a little bit of -- you have to be sort of willing to think about the passage of time and the generation of proceeds from asset sales, as it relates to how we in turn ultimately access capital to purchase shares. So for example, if we do a massive -- a large asset sale, we pay down our line, for example, because that's the least dilutive use of sales proceeds. And then we later access the line in connection with the share repurchase, that's a smarter less dilutive way of allocating capital. But from our point of view, we don't look at that as using leverage per se to by share repurchase because that access to the revolver was in effect generated through an earlier asset disposition.

(Operator Instructions)

Jamie Feldman, Bank of America.

Can you talk a little bit about the same-store comparison this quarter versus this time last year and just maybe what the key drivers are?

Jamie, by the way, thank you for that question. I feel like I spent a bunch of time preparing notes on it, (inaudible). A couple of things, it's only 19 assets, I think that's a key thing to -- unlike a lot of companies who don't have nearly the type of growth that we do. Our same-store tends to be a lot less representative to our growth and the potential growth on the horizon, but a couple of things.

So it's 4.3 million square feet which is roughly a third of our total office portfolio. You'll see our ending and our average percent occupancy went down slightly on a quarter-over-quarter basis 2014 to 2015, there were a few contributors to that. Heald College, about as you know for 55,000 feet; we lost a 23,000 footer in North Seattle and then another smaller tenant, 19,000 feet NBC at Pinnacle. So some smaller, relatively small expirations accounting for the roll down on occupancy. But given the size of that portfolio, it doesn't take that much to move the needle.

You'll see that the reported office NOI on a GAAP basis and on a cash basis roll down and there is one key, I think, sort of fact that's helpful but understand what's really going on here though. In the fourth quarter of 2014, we got a fairly largeable CAM recovery on 1455 from Bank of America that in that particular quarter drove office revenue. We were -- it's a utility recovery in non-recurring, but in any event it's sizeable enough given the -- again the size of that portfolio was $3.153 million. If you disregard that amount in the fourth quarter of 2014, you actually see, you get a better understanding that what happened on a same-store basis. And on a GAAP basis, for the office component, it ends up being flat; instead of down 9.8%, it's like almost identical quarter-over-quarter and on a cash basis, it actually goes up 7.3% for the office component.

So I think that's a better indicator. And then you could see on a full year basis, the upward trend both on a GAAP and cash basis and especially on a cash basis full year, if you exclude that one-time CAM recovery, it goes up in the office component by 11.6%. So, I don't know, hopefully that addresses your question, but that's what's going on.

Okay, that's helpful. And then thinking about this coming year, what do you think, I know you won't give occupancy guidance, but just kind of like internal growth. How do we think about the drivers of internal growth and on a percentage basis what it could look like?

Sorry, Victor, to keep going here, but I wasn't trying to, but I just would rather do it in a little bit more disciplined way than sort of pull a model and say this or whatever. But look, I think what Victor walked through in the script, should be an early indicator of what our general expectations are that is to say, we've got an extraordinarily high level of activity in the first two months of the year and it points to probably a much stronger level of overall leasing activity in 2016 than we saw in 2015. And if that trend continues, we expect both to stabilize and in-service portfolio occupancy and lease percentages to reflect that, hopefully by the end of the year and we're looking to avoid this, but at some point, maybe by next guidance, we'll give a more precise number. But I would think instead of a 90.1%, it's somewhere in the low 90%s, maybe its 91%, 92% or something like that.

Yes, and I think, Jamie, somebody who's covered us for all these years, looks like 2016 is very similar to 2013 for us where we had a lot of leasing and by the end of the year the cash flow will come into play and the numbers are pretty impressive as to where we see the growth for full year 2017 given all the leasing that we've done just in the first two months of this year and we anticipate closing in the next couple of months. That, all that will come through year by -- end of third quarter, fourth quarter this year and full year 2017. And so those numbers are what we've been reflecting in the past, telling you that we're anticipating those are not going to come to fruition and we're pretty confident that we're going to get there.

Okay, that's helpful. And then finally in terms of AFFO, how should we think about what your guidance means in terms of what you can put up there and maybe dividend coverage?

Yes, I -- look, we modeled on the dividend coverage that we're at the current quarterly run rate we're right around even covers I'd say, we've adjusted our coverage -- we just about covers, sorry. In terms of the AFFO and trying to give you a precise number I will tell you, Jamie, it's just so -- it's been so difficult to pin down with any level of real precision the recurring CapEx and TI and commission because it's like I said it's so driven off of not just timing of leasing, but the timing of the build-outs and then in turn the allowances and so forth. So, obviously, we have a model but I don't think it's productive to try to give you a sense for exactly where AFFO shakes out in the quarter, I mean in the coming year.

Do you guys think you might be efficient to raise the dividend again next year?

I don't -- I mean, the first criteria is tax and obviously we have to -- that's going to ultimately decide how much the dividend is and whether or not we raise, but under our projections, we don't anticipate a dividend increase this year.

Alexander Goldfarb, Sandler O'Neill.

Victor, maybe without sort of questioning what's going on, tenants are -- what's going on on the leasing front, maybe you could just provide a sort of tone difference across your three major markets. Over the past six months as far as -- have all the markets moved in step or maybe one market is sort of getting more optimistic with activity where maybe the other two markets are the same, now that they were a year ago?

Yes, sure. So we'll -- let's just start to take it sequentially, we'll start at the Pacific Northwest. As my prepared remarks indicated, we are seeing increase in rents, we're seeing increase in occupancy and obviously the information I disclosed on our to-be built assets which we have even broken ground and the activity there is showing a strong indication of a current trend that's on the upward swing. We're going to see in those markets that we're in and primarily in Pioneer Square rental rates that are going to be really at all-time high. We have multiple proposals on the remainder of the space that we were hopeful to announce at least four, as I mentioned, half of the space almost imminently. And so that's obviously a clear indication and we've seen it sequentially move up over the last four or five quarters, but we really see that opportunity at least for our stuff to be pretty active.

Obviously you're seeing what's happening on the banter around the very minimal sublease space and how quickly it's been gobbled up, our peers are talking exactly the way we're talking. On the ground, we're seeing de minimis impacts in the Bay Area across the board. And as a result, we've got a tremendous amount of LOIs throughout the entire portfolio from San Francisco down to San Jose and it's obviously slightly less than we've seen in the past in terms of the activity, but from our standpoint, the stuff that we currently have available, which is very little in the city is all but spoken for or LOIs are on it.

And in the Peninsula, we've got the preponderance of some super strong markets where you're seeing rental rate growth continue and in other markets it's flat. And so it's a mix. And as I mentioned, the quality of tenants, they are not just tech-related tenants there, a lot of other related tenants and the San Jose marketplace has been very surprising to us.

I would say overall coming to Southern California and specifically the markets we're in which usually Santa Monica and the Hollywood, we've really never seen the kind of growth and rental rate movement that we're seeing right now. It's obviously a huge testament to our team to see what they did with Netflix at a building that's not even -- going to be completed. The demand for that space was completely off the charts, in terms of multiple tenants who wanted it, which is great for us because we were looking at, potentially launching other building and as I mentioned, we're not going to build that building unless we have a substantial pre-leased component, and I'm confident that that's going to happen. But we're not only seeing -- that we're seeing a lack of concessions, we're seeing rental rates at highs in Southern California, and I think overall the slowness here in Southern California in the past is now picking up, and it's probably the strongest of all three markets in terms of what we're seeing in percentage growth.

So, as I mentioned, I can't keep saying it without seeing same what the proof is and now we're proving at. So the combination is pretty healthy.

So you have -- so you've seen no discernible change in the demand from tenants over the past six months across the three markets, it's not like, they are more active, they are less active, they've been pretty constant over the past six months just reflecting the trends that you just described, is that correct?

Yes. I'd say very simply, the pipeline remains strong and active in those markets and perception maybe -- many people take a little longer to get deals done, but that's all normal part of the transactional timeframe. Sometimes deals get done quickly and sometimes they just take a little longer. Right now, we're very comfortable with the combination of those markets and the pace by which we're getting deals done.

On the guidance, the two dispositions that you discussed that one that's in escrow and the one that's potentially hope to soon be in escrow, are those in guidance or those are not in guidance?

The one that's in escrow is quite small. And without disclosing too much, it does not affect earnings. So it's in guidance. The one that's not in escrow is in guidance, that is to say we assume the ongoing ownership of it, because we haven't -- we are not under contract or anything.

Okay. And then just finally, it's small revenue because the studios are small relative to the overall portfolio, but accounting changes are always interesting. What prompted the change in the occupancy methodology and the [states] never used before why it's accounted, or why it was accounted in the occupancy methodology before?

I think you have the benefit of being a little newer to our name and but if you were to sort of think back or had been involved six years ago, I think you would have heard an explanation that these assets were acquired by our predecessor and at the time they undertook a measurement of this portfolio, and we had financials and occupancies that went -- and since they were contributed under accounting rules, we were required to the predecessor rules to live with those referred earlier measurements and so forth at the time of IPO.

And so, the Company has just continued to kind of utilize that, but we have been aware for a while, we just wanted to make sure we did a really thorough analysis, but we've been aware that certain footage carried in that historic measurement like covered pathways or transformer rooms and other things, which might have been maybe fine for other reasons including in a gross measurement, one of the things that you could ever get tenancy in and so we undertook that analysis.

The other thing too is we've been -- our management office there has been fairly migratory and we've changed that and we've got permanent space built out there and that has enabled us to actually reflect that utilization like you would in any other office occupancy analysis. So we wanted to do the analysis so we could conform more closely to the way you would reflect occupancy in office, we just needed to actually undertake that analysis. And you can imagine, it takes a little while not only to really do a thorough analysis of a million square feet of a unique type of product like that, but also we had to -- Dale Shimoda and a whole team had to spend inordinate amount of time doing all the historical occupancies to be consistent with that. So that's in a nutshell, we just wanted to get it right.

Ian Weissman, Credit Suisse.

I mean, you guys are clearly very optimistic about the business today and rightfully so, we've heard this time and time again from your peers this quarter. I mean, fundamentals in San Francisco are obviously very, very good. But you can't ignore some of the noise that we've heard in the global macro and US macro, in the credit markets and even maybe not all tech tenants, but certain tech tenants have certainly had some issues. So I guess my question is and I don't know when the end of the recovery is, but why not be more aggressive today at just selling non -- or selling assets whether non-core or core assets, reducing some of your exposure and whether be more aggressive in buying back stock or having the liquidity, I mean how do you think about the $100 million of asset sales and then maybe just upping that significantly taking advantage of what is still a pretty strong bid for your asset class into the market?

So let me sort of address that. So, we sold $300 million, so you give or take a little bit more than that in a fairly quick time frame. We've got a couple of assets that we're looking to sell. We haven't told you what the amounts are and the assets and we've launched the buyback plan. So I think we are taking advantage of that given where we see the markets today and the disparity between the private and the public's valuations. That's also to say that we think that there may be other opportunities out there. The portfolio -- our core portfolio has been extremely synergistic to the growth of Hudson and we continually prove that based on the results that were measured off of on a quarter-by-quarter basis or an annual basis.

And so for us to take that same momentum swing and go back three years and say, the markets aren't cooperating at the same level, we should get out of the markets, we've taken NOI yields at levels that were currently in place and grown them considerably over those years and we anticipate the same thing. I think the value of the portfolio we have today and the lease-up that we're doing is going to make these assets on a stabilized basis worth a lot more than they currently are today. We've got several assets that are not in service and that will be coming online. And at the time, we'll evaluate those and I'd say [if core to] the portfolio or not.

Suffice to say that we have been extremely flexible in our approach, I'm going to continue to look at that going forward. And I'm not saying that it was limited to just two assets for sale, there are two assets right now we're looking at. And when we get through those, we'll look at others if possible and if it makes some sense, we'll end up evaluating at that time.

How does your approach change if the stock continues to trade as wide of a discount as it does today?

It's trading wide at a discount, because nobody is giving any benefit for good news, they're only giving benefit --the negative news is portrayed on a magnified basis and when people come out and decipher the sentiment is where the thing is going to -- this is where stocks should be trading at versus fact, then people are going to end up evaluating based on somebody's determination of what sentiment is. What our basis is to say, forget about sentiment, we're dealing only in facts. And facts today are performances, what will evaluate where the stock is and we can't look at it from a moment in time. That's what you do, you like to look at it from a -- in a place -- moment in time, which is not valid. We look at it as a totality of the portfolio and consistently right now we're seeing private valuations and public valuations are not matching and you can sit there and say, it's wider, it's wrong but until the markets globally shift on that basis, I think the only we can do is continuing to perform at the levels we are performing at.

Rich Anderson, Mizuho Securities.

First of all, on the decision to kind of not isolate the BX portfolio occupancy process any longer, I guess, I'm just curious what should we expect to hear from you on that. I mean, considering the majority of the CapEx is yet to be spent and you've done a fantastic job leasing up to this point seems like you're missing out on the opportunity to continue to tell that story. I'm just curious how -- what should we be expecting from you guys next quarter and beyond in terms of how you will kind of craft your comments on how you're doing there?

I think it's not the same portfolio when you've sold 10% of that portfolio office, an example. So the numbers were going to shift. I think secondarily, you'll be able to decipher based on the markets and the way we've presented our supplemental what assets are performing and what assets aren't performing and what regions are performing and what regions aren't and as time goes by, I think your familiarity will help you get there even further.

When we complete the series of leases and renewals that we're working on, I think, it's going to be a clearer picture. Overall though, we're going to roll into a same store at the end of this quarter for the totality of the Company and there won't be a differentiation between legacy and Blackstone. And I think you'll see how the flow of occupancy will increase based on the totality of the portfolio and as we add more assets that are in service to our redevelopment and development pipeline, which comes online, I think it's going to be a cleaner way of looking at it. I do understand and as I said, I appreciate the compliment of the work that our team has done to get the occupancy from the low 80%s to 90% plus on that portfolio, but overall the whole portfolio will sort of move in tandem. And I think it will make a lot more sense as time goes by.

Okay, fair enough. In terms of the buyback, speaking again to that portfolio, have you unearth any potential, additional sale candidates -- asset sale candidates that got you more and more comfortable to do a buyback or is this not really disposition driven, this is purely you are seeing where your stock is trading and you want to take advantage of some of that?

No, two absolutely separate and distinct issues. The potential dispositions are just that, they are potential dispositions, the ones we've done and the ones we're looking to do and we will consistently look at that at all times in the marketplace as I mentioned within, it's not going to be just depended upon because the market is good or bad. If the assets don't fit in the portfolio, they don't fit. The buyback is a first step in looking at what's in the best interest of shareholder value for us to take into account based on how we are trading versus our belief and what NAV should be. And the substantial discount will enable us to continue to do that and as Mark mentioned in his prepared remarks, I mean, you're looking at a combination of dispositions, a combination of potential buyback or accommodation of potential acquisitions, depending on what's the right play for the Company at the right time.

And then lastly on the dividend, how close are you still to having to raise the dividend again for requirement reasons or did the 60% increase really kind of put that type of pressure fully behind the Company for now?

Yes, under our two-year forecast, the dividend raise should cover us in terms of income.

At this time, I would like to turn the call back over to Mr. Coleman for closing remarks.

Thank you so much for participating and I appreciate the dedication and following Hudson. We'll see you next quarter.

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