Hudson Pacific Properties Inc (HPP) 2016 Q2 法說會逐字稿

Greetings and welcome to the Hudson Pacific Properties second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Miss Kay Tidwell, Executive Vice President and General Counsel. Thank you. You may begin.

Good morning, everyone, and welcome to Hudson Pacific Properties second-quarter 2016 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.

Before I hand the call over to them, please note that on this call certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time.

All information discussed on this call is, as of today, August 4, 2016, and Hudson Pacific does not intend and undertakes no duty to update future events and circumstances. In addition, certain of the financial information present in this call represents non-GAAP financial measures. The Company's earnings release, which was released this morning and is available on the Company's website, presents reconciliation for the appropriate GAAP measure and an explanation to why the Company believes such non-GAAP financial measures are useful to investors.

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

Thanks, Kay. Good morning, everyone, and welcome to the second-quarter call. We had an excellent second quarter, so I'm going to dive right in. Once again, we outperformed on the leasing front, exceeding even our first-quarter results by executing 970,000 square feet of new and renewal deals, bringing our year-to-date total to an impressive 1.8 million square feet. GAAP and cash-rent spreads in the second-quarter deals -- on the second quarter deals, the majority of which were in the Bay Area, were 58% and 49% respectively.

And with respect to leasing, I'm going to touch on a couple of this quarter's highlights, all in the Bay Area, that represent nice wins for our portfolio. First, I will remind everyone that our Qualcommm renewed their lease for 365,000 square feet at our Skyport Plaza in North San Jose through 2022. Our team did what they do best on this renewal, which is address our largest 2017 expiration, 16 months ahead of schedule, at favorable terms; and we're delighted that Qualcommm, an industry leader, well-capitalized, public technology company, will remain one of our largest tenants.

We also signed a new lease, 37,000 square feet, with a company called Bright Edge Technologies, for the entire floor at 989 Hillsdale Avenue, part of our Metro Center Complex at Foster City. You may recall that Metro Center, currently 66% leased, is one of our high-priority, leased-up assets. Under the EOP Blackstone ownership, Sony vacated over 300,000 square feet of space in the two low-rise buildings flanking the well-known tower. An early success with activity, marketing and repositioning under way, which includes a major lobby upgrade, exterior re-landscaping and common-area improvements, has generated additional activity of just over 100,000 square feet of requirements. We expect to have additional good news on Metro Center in the coming months.

Our team continues to find creative ways to accelerate lease-up on our Peninsula and Silicon Valley assets. At our Investor Day in May, we highlighted our vacant space prep, or VSP program, which leverages four tenant improvements, spend to captured, demand for fast-moving tenants, in turn, reducing down time on smaller vacancies in those markets.

The first phase of the VSP spaces came to market in the third quarter of 2015. Since that, we can attribute roughly 76,000 square feet of deals, either leased or in leases to that program. In turn, we reduced down time on each of these spaces by five to six months. The program has been so successful, we recently approved a second phase, another 260,000 square feet, at our high-priority leased-up assets, which will be ready for occupancy in the third quarter of this year.

In the San Francisco CBD, one of our largest tenants, Salesforce, took down an additional 24,000 square feet at Rincon Center to backfill the entire space formally occupied by Intrax. We're delighted that Salesforce continues to grow within our portfolio and view this transaction as a reaffirmation of their continued need for space at Rincon.

Our CBD portfolio remains stabilized at 95.8% leased, up 120 basis points for the quarter. We have just 40,000 square feet expiring in the remainder of 2016, all of which is around 40% below market. And we expect to see continued strong demand from larger public and private tech companies for significant blocks of space in the CBD. Amazon's recently announced lease for 185,000 square feet in one of the city's under-construction development projects at $62 per square foot triple-net rents underscores this point.

Now, turning to LA, the city's economic expansion continues across all sectors, with unemployment reaching a new low at 4.3% in the quarter. Every Los Angeles County sub market had positive net absorption in the quarter and supply, particularly in the core markets, remains very tight. In Hollywood and West Los Angeles, we're seeing single-digit vacancy for comparable product, with 1.9 million square feet under construction. At roughly 25% of it's pre-leased and nearly 850,000 square feet of positive in absorption, year to date, we expect the current demand, supply and balance to continue.

We're in dialogue with several tenants at our Fourth & Traction, NQ project, for 50,000 square-foot-plus requirements. I'll remind everyone that these are unique offerings. Q on Sunset Bronson's studio lot and Fourth & Traction are one of very few premier office buildings in the emerging arts district; therefore, we expect demand only to increase, as we progress with construction, which is typical for Los Angeles, by the way. We continue to evaluate all our options and interests.

In Seattle is all the right ingredients currently today for a long term growth, a deep down pool, strong population growth and lower costs of living. And office fundamentals continue to improve. Large tech companies already in the market, like Google, Facebook, Microsoft, Amazon, are rapidly absorbing big blocks of space, while those with major San Francisco, Silicon Valley presence are increasingly looking to establish a Seattle hub.

Vacancy in the Pioneer Square area, where software company, Avalara, signed Seattle's largest lease this quarter, dropped 130 basis points to 7.1%. Class A rents jumped over 3% in the quarter to $36 per foot, and we have interest in several high-quality tech and non-tech tenants for the multi-floor leases on the balance of 450 Alaskan Way, which is 55% pre-leased prior to breaking ground just two months ago. We expect supply in downtown to remain tight as the 8 million square feet of office currently under construction is north of 70% pre-leased.

I want to emphasize that the demand pipeline throughout our entire portfolio, including the Bay Area, remains robust with no quarter-over-quarter shift, in terms of tenant requirements. Let me take you through a break down of our lease in the first six months of 2016 underscore the quality and diversity of this activity.

Fully 56% of all leasing activity completed in the first half of this year was with Spire and other non-tech tenants, including many standup companies like Saltchuck and Lockheed Martin. Tech companies, largely in the Bay Area, accounted for the remaining 44% year-to-date activity, and nearly 70% of that activity was with public companies or private companies that have been in existence for at least 10 years.

Of the 30% executed with private tech companies in existence for less than 10 years, one-fifth was comprised of (inaudible) at least 50,000 square foot expansion in the first quarter of this year. Excluding that lease, less than 11% of our year-to-date leasing activity is represented by private tech companies in existence for less than 10 years. And, as so many of our newer tech companies in our portfolio are, many are extremely well funded and growing.

We remain very bullish on tech, which is the world's leading economic engine, as a key driver for long-term growth across our markets. Google, Amazon, Facebook, all posted stellar second-quarter earnings last week. Five of the top seven largest publicly-traded companies in the United States, Apple, Google, Microsoft, Amazon and Facebook are tech.

Financing is shifting and slowing, but companies, tech and non-tech alike, are flush with cash and taking advantage of lower valuations to pursue growth through acquisitions of later-stage and highly-complementary business.

Verizon's purchase of Yahoo, LeEco's purchase of Vizio, Oracle's acquisition of NetSuite, Tesla buying Solar City and Salesforce buying QUIP are perfect examples. In the last 30 days, we have seen more than $20 billion of tech and media-related M&A deals announced, with very little of it pointing to the contraction in terms of space. And, I've said before there are going to be winners and losers, but these acquisitions are an indicator of these sector's overall health and will provide balance to short-term, capital-driven correction.

A final note on capital recycling. We sold two former Blackstone portfolio assets in the quarter. One Bay Plaza, in Burlingame and Patrick Henry Drive in Santa Clara, which yielded total gross proceeds of $7.42 million. Macro conditions, coupled with significant demand for large public tech companies, continue to put upward pressure on asset pricing in the Peninsula and Silicon Valley, and both properties sold at premiums to our purchase prices.

We viewed them as non-strategic to our portfolio, One Bay, because of its Burlington location and Patrick Henry, because of R&D use. Right now, we're extremely focused on a locking, embedded value in our existing portfolio and only very selectively, evaluating opportunities to recycle capital into higher yield, more strategic assets and almost exclusively in the Los Angeles and Seattle markets.

The July purchase of our 83%-leased Corporate Headquarters Building, 11601 Boulevard, for $311 million, or about $620 a foot, is a good example of that strategy. Our purchase price of 11601 represents a notable discount to comparable trade in the market on a per-square-foot-basis. The Reserve and our 12655 Jefferson asset, both in Playa Vista, sold for $845 and $795 per square foot respectively. Colorado Center in Santa Monica just recently sold for $865 per square foot.

With that, I'm going to turn the call over to Mark, who is going to touch of touch on some of our second quarter financial highlights.

Thanks, Victor. Funds from operations, or FFO excluding specified items for the three months ended June 30, 2016, totaled $62.9 million, or $0.43 per diluted share, compared to FFO excluding specified items of $68.4 million, or $0.47 per share, a year ago.

Specified items for the second quarter of 2016 consisted of acquisition-related expense of $100,000 or $0.00 per diluted share. Specified items for the second quarter of 2015 consisted of acquisition-related expense of $37.5 million or $0.26 per diluted share. FFO, including specified items for the three months ended June 30, 2016, totaled $62.9 million or $0.43 per diluted share, compared to $30.9 million or $0.21 per diluted share a year ago.

As of June 30, 2016, our stabilized and in-service office portfolio was 96.5% and 91.1% leased, respectively, up from 95.8% and 90.7% at the end of the first quarter and 94.7% and 88.8% a year ago. The trailing 12-month occupancy for our media and entertainment properties increased to 85.3% from 76.5% for the same period a year ago.

As many of you know, April 1 marked the one-year anniversary of our acquisition of the EOP Northern California portfolio. On account of that milestone, our financial statements now reflect a more comparable portfolio for quarterly year-over-year comparison purposes.

Moreover, effective in this earnings period, we have adjusted our same-store reporting to provide a quarterly comparison of all properties owned and included in our stabilized office portfolio as of April 1, 2015 and still owned and included in the stabilized office portfolio as of the end of the quarter. As a result, you will find that our quarterly same-store comparison now includes 30 office properties, while the year-to-date comparison continues to include 21 office properties.

With that said, net operating income, with respect to our 30 same-store office properties, for the second quarter, increased 15.5% on a cash basis and 6.6% on a GAAP basis. Net operating income at our same-store media and entertainment properties increased 26.2% on a cash basis and 13.6% on a GAAP basis.

During the quarter, we continued to proactively manage our balance sheet, further improving our debt-maturity schedule and access to capital for future requirements. On May 3, we drew all $175 million of the 5-year and $125 million of the 7-year, unsecured, term-loan credit facilities, entered into, in November of last year.

We used loan proceeds to repay floating rate indebtedness, including the $30 million loan secured by 901 Market Street, $60 million of outstanding balance under our revolving credit facility, $110 million of the outstanding balance under our loan secured by Sunset Gower, Sunset Bronson and $100 million of our unhedged existing 5-year term loan.

On June 6, we fully refinanced project-level financing associated with Pinnacle Two in Burbank, with a 10-year, $87 million loan, bearing interest of 4.3% per annum. The refinancing successfully replaced the loan previously secured by Pinnacle Two, which was bearing interest of 6.31% per annum, fully 200 basis points higher than the replacement financing.

With the repayment of the loan secured by 901 Market Street and refinancing of the loan secured by Pinnacle Two, we addressed our only loan maturities for this year and next. Indeed, we have only one loan maturity of approximately $100 million at our Rincon Center property all the way through calendar 2018.

On July 6, we completed a $200 million private placement. We applied $150 million of 3.98%, 10-year, senior guarantee notes, to fund the 11601 Wilshire Boulevard acquisition and expect to access the remaining $50 million, consisting of 3.66%, 7-year senior guaranteed notes on or before September 15, 2016, to repay amounts under our unsecured, revolving-credit facility or for general corporate purposes.

All of this successful financing activity has furthered our efforts to significantly lower our cost of funds, extend our loan maturities and provide the Company with ample capital to fund projected 2016 and 2017 leasing, development and redevelopment expenditures.

Turning to guidance, we are increasing our full-year 2016 FFO guidance from the previously announced range of $1.68 to $1.76 per diluted share, excluding specified items, to a revised range of $1.71 to $1.77 per diluted share, excluding specified items.

This reflects our second quarter FFO of $0.43 per diluted share, excluding specified items, as well as the transactions mentioned in our press release and on this call, including the previously announced sale of 12655 Jefferson in the fourth quarter and the anticipated funding of $50 million of 3.66% senior guaranteed notes on or before September 15, 2016, to repay amounts outstanding under our unsecured, revolving-credit facility or for general corporate purposes.

This guidance also reflects the elimination of the ineffective portion of the interest rate swaps relating to $650 million of our 5- and 7-year term loans, due April 2020 and 2022, respectively. through an increase in the underlying fixed rate by a weighted average of 12 basis points per annum. This guidance assumes full-year 2016, weighted average, fully-diluted common stock in units of 146,415,000.

As always, 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 advanced reference in our press release and on this call, but otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activities or similar matters.

With that, I'll turn the call back over to Victor.

Thank you, Mark. Just a reminder for those less familiar with our story or those of you who missed our Investor Day in May, the webcast and presentation are available on our website for reference. You'll find great information therein about our Company's unique positioning and the stock's embedded value. You should reference Mark's section, in particular, which outlines our ability to achieve a 12% annualized NOI growth in both 2016 and 2017. Also, feel free to reach out to our Head of IR, Laura Campbell, with any questions.

As always, I'd like to thank the entire Hudson Pacific team, our talented senior management for their great work for this quarter and the quarters behind us and going forward. And, everyone on this call, we appreciate your continued support for Hudson Pacific and look forward to updating you next quarter.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Nick Yulico, UBS.

Thanks. Couple of questions. One, on the over 15% cash same-store NOI growth in the quarter, if I look, the average occupancy was down for the same store year over year, so it seems like a lot of this was driven by the burn off of free rent for leases. Can we get some perspective on that?

Yes. You're right. We had a contributor to the difference between the ending lease percentage and the lower average occupancy were basically two leases that had commenced, but were leased space, but not net commenced. One was NFL, at 10950, for 30,000 feet, backfilling old SDI space and SalesForce, for 24,000 feet, backfilling the in track. So, that's where the difference lies between the lease per percentage and the occupancy.

In terms of the drivers, one of the two items is a difference between cash and GAAP, namely at Element LA, the free rent associated with Riot Games in the first, in the second quarter of last year burned off and full cash rent commenced by, obviously, before then, but certainly by second quarter of this year. So that's one of the contributors.

The other big contributor is not a cash GAAP difference, it's just Uber's expansion at 1455, contributed another $1.5 million. That's a big driver of the cash pickup, but not a difference between the cash and GAAP.

The next one down, that's a difference for both GAAP, GAAP and cash, is at Foothill -- I'm sorry, for just GAAP, difference is at Foothill Research, namely, the free rent associated with the Google lease went from GAAP to full-cash paying and that was about $1.8 million contributor to cash, as opposed to GAAP. Those are the three main ones, Nick.

Okay. That's helpful.

One other thing, Nick, if I could just -- I wanted to clarify. In your earlier note this morning, you had mentioned the notion that maybe the same-store improvement was sort of artificially high because of uncommenced leases.

There's some veracity to that, in so far as not so much a matter of commencement, but, rather, cash-versus-GAAP rent and, so far as there was free rent on a couple of the leases, but you attributed it to the EOP Northern California portfolio, but, in truth, at least two of the three big contributors to the same store improvement on a cash basis were actually not EOP assets at all; they were legacy assets. So that was one thing I just wanted to sort of clarify.

The other thing probably worth clarifying is, just to make sure people are following, you know, the real lease-up opportunity in the Northern California portfolio tends to be on the lease of assets, not on the stabilized assets, whereas, the same store comparison is only picking up assets that were already stabilized back in April of 2015.

So, not a lot, not much of the pickup is really happening on the lease up front, if you will, on the Northern California portfolio.

Okay. That's helpful. Thanks.

Then, just going to the, you know, the Silicon Valley and the old EOP portfolio, can you talk about, you know, the activity that you're getting and, you know, on leasing? You know, how much of that is tenants expanding? Why do you think, you know, your assets are being competitive in the market?

And, then, maybe you can talk a little bit about, you know, how much pricing power you really think you have or if you're just sort of benefiting from, you know, filling up vacant space at market rents and maybe just remind us where you've seen sort of market rents for that portfolio in the last year. Thanks.

Sure. I'll start and then I'll let Art jump in. So, the overall portfolio has a lot of legs in it, in that, I think Mark just commented on it, you know the stabilized portfolio is stabilized and we have allocated our time and resources to specific assets that have lease up that have already been part of the same story and that's, you know sort of quant, where we see the market right now.

You know, I think a couple of things are apparent. First and foremost, our rolling market to market on those assets in that portfolio are still in the, you know, in the high teens to low 20s across the board and what we're finding is, consistently, you know, we are seeing a flow of activity on virtually all the space.

So our inflow of inbound tenants that are looking for space in the in The Valley is still very consistent and Art can sort of jump in and talk about that a little bit, but, for the most part, we're seeing that, so I don't think it's unique to [to us] in terms of where the market is.

The market is strong. We keep telling people that we see it's strong. We still see a number of requests and we're negotiating deals at numbers that are exceeding what our initial underwriting and our modified underwriting is. In terms of the differentiator between these assets and others, I don't think there really is.

I can't sort of point to saying, other than we have some available space in markets that don't have it, there is nothing pertaining to that marketplace today that is unique, our assets versus the marketplace. And the returns on those assets, I think, are exactly what we thought they would be. Art, do you want to jump in?

Yes. So the demand -- the first part of your question was organic growth. Yes, we're seeing a fair amount of organic growth, obviously. But I think where we're making a difference is, we're taking advantage of the demand of the velocity in the market.

There's a lot of space in there that, you know, was really not desirable at all. We've gone and we've spent the money. It's speed to market, right? So, we're taking advantage of the speed to market, getting tenants, due to space, getting in faster and that's where we're making up the difference.

Okay. That's helpful. I guess, just to follow up, is sort of rent growth, you know, for that portfolio, you think, for the market in the last year, where do you think it's been?

Yes, I mean, listen, 2016 and 2017 is like between 20% and 25%, basically.

That's our current mark to market. Rent growth, obviously, is going to vary. There's five different sub markets within that Northern California portfolio. So, each one of them is going to have its own individual assumption, but I think it's fair to say, you know, we see every one of our sub markets experiencing rental growth, some probably approaching high-single digits, a little bit more moderated in the lower-single digit range.

Thanks, everyone.

Thank you.

Our next question comes from the line of Jamie Feldman with Banc of America, Merrill Lynch.

Great, thank you. I want to go back to the comment, Victor, you made and, obviously, something we've all been seeing in the press on tech M&A. Can you give us some color on what you're seeing on the ground in terms of some of these deals we're hearing about and what that might mean for the acquired company's office space and whether we're going to see sublease come back to market? I know it's deal by deal, but it seems like we've seen several of them, several big ones already.

Okay. So, yes, Jamie, let me sort of give you a little bit of broad brush. I mean, in my prepared remarks, you know, I referenced six dealings, the Verizon, Lieko, Oracle, SalesForce and Tesla and then the other Verizon deal they did with Fleetmatics. And, those were all, since, really, the 25th of July.

Subsequent to that -- and so I want to comment on that. As soon as we heard about these deals, our leasing team in the directed markets went out and said, you know, what impact does that have? And, specific to those deals, we're finding, obviously, it's a little early to see what Solar City and Tesla is going to do, so we don't really have a clue there.

Solar City is in the market today for a couple of hundred thousand feet in the Peninsula, so it's going to be positive absorption, or flat. Obviously, Lieko, Verizon is part and parcel of them expanding Lieko, so that's a positive.

SalesForce and Quip, we don't know, but these cloud-based deals typically have been positive and enhancing; there's no loss of employees on that side.

I can't really comment on the Verizon-Yahoo deal, because they haven't made any comments and we don't have any exposure, but, overall, you know, it would impact everybody on the Yahoo side, but it looks like, from what our guys on the ground are saying, that seems to be a push and maybe some space coming back.

The one that's concerning to us, obviously, is the NetSuite deal with Oracle. Typically, every deal that Oracle has done, they've kept the space and I think, as a result, we're pretty comfortable since the majority of our space doesn't expire until, I think, 2022. But, we think that's going to be intact, throughout, on Oracle's side.

If you go back, Jamie, and you look at the bigger deals, you know, the Dell-EMC deal, GM and Cruise Automation deal, the SalesForce-Demandware deal, the, obviously, Symantec-Blue Coat deal, zero impact on the large -- those large deals.

The one that I think people are waiting on and nobody seems to have any bearing yet is the Microsoft-LinkedIn deal and what happens there, given that Microsoft is in the Pacific Northwest and LinkedIn is not.

So the larger deals that have been, say, from the first quarter through June, we're getting some indication that there seems to be no movement at all and no space coming back. The newest ones, I think we're pretty comfortable with all of them, with the exception of maybe the Oracle-NetSuite, because we don't know what's happening there, but everything else is positive on that basis. It gives you a little bit of a smattering as to where we see.

The last point I've made to you and others along the way, you know, we're going to see this and this just shows the strength of the marketplace. The interesting thing is, we've not even M&As and the banter around businesses going out of state. The M&As are on the west coast right now.

Another one that we didn't mention down in LA is Starz being acquired by Lions Gate and Lions Gate is increasing their space to accommodate Starz's growth. And that's here in LA. So, we're seeing it as a positive to flat, at best.

You said LinkedIn-Microsoft is still too early to tell?

We haven't -- Art, do you want to comment on that? We haven't seen anything.

No.

We haven't seen any results on the LinkedIn-Microsoft. I think our guys are on top of it, but we haven't seen any direction.

And it looks like you're getting kind of cluster hubs here for tech in these markets. Are the certain sub-markets within the Bay Area that you think are winners versus losers, or where more and more of these larger companies want to be clustered?

Listen, I think they're all winners right now, right? Between San Jose and San Francisco, the amount of transactional business that the big four are taking down or looking at right now is just insurmountable and what we're finding is, there seems to be clusters around, the Googles, the Apples and the Facebooks today and you see that there's not enough space nearby where they are, so they're going to wherever they can find space.

Okay. That's helpful.

Turning to expirations, you took care of Qualcomm, can you remind us for the rest of 2016 and the rest of 2017, your next largest expiration? Did I hear speak directly, 20% to 25% mark to market?

Well, 2016, 2017 expirations average out to be -- well, in Northern California, the EOP is like 22%, but, if you want the across-the-board mark to market on the whole portfolio, it's about 40%; that includes 17 expirations in San Francisco, which is contributing a lot to that higher mark to market. That's a weighted average for what's remaining in 2016 and all of 2017.

In terms of giving you an idea of the actual bigger expirations that are coming, that are on the horizon over the next two years, Jamie, rather than try to, you know, point you to specific expirations, I would point you to page 29 of the supplemental.

What you'll see there is any sub market that has more than 100,000 feet expiring in any quarter, we've identified specifically the three largest contributors to that square footage and, so, you can eat easily trace to the larger expirations.

Suffice to say, there are a couple of decent-sized expirations on the horizon in 2017; really nothing significant in 2016. There's AIG in 2017 and, then, at the very end of 2017, we've got some expiration with BofA, as you know, at 1455, very low-rent bank space.

There are some other smaller expirations that are decent sized and you can see it summarized in the footnotes starting on page 29.

Okay. And, then, just last, you know, I was surprised that there wasn't any leasing progress in the development pipeline, so maybe if you could tell us what's happening at Icon Number Two?

So, I was surprised at your comment on that, so we were both surprised. We just broke ground three weeks ago at 450 Alaska Way and we're 55% pre-leased there and we've got activity and, probably, my guess is, somewhere around 300,000 to 400,000 feet of deals that we are working on and Q just broke ground like 60 days ago.

We haven't even gotten out of the ground yet and we're building out, just started building out July 1 PIs for NetFlix and, so, I don't, you know, I don't know what's the expectation on that basis, Jamie, but those are the only two deals that we have that are development deals right now and I think we basically told you exactly what's going on with Q. I mean, the demand is over half a million feet for 90,000 feet of development.

So, there's no change in the demand pipeline?

No, not at all.

Okay. All right. Thank you.

Thank you.

Our next question comes from the line of Craig Mailman with KeyBanc.

Hey, guys. I was just hoping you could give us an update on the leasing pipeline. Obviously, you've blown through the $1.6 million you talked about two quarters ago. Just curious how big it is now and, you know, maybe where you moved the goal post to on the goal for the year.

So, listen, we've done about $1.8 million now for the -- halfway through. I think -- we didn't give a guidance as to where we thought we would be at the end of the year. You know, clearly on the renewal basis, we've exceeded our expectations. In the backfill basis we've exceeded our expectations. On the new leases, I think we're right on line.

I think, as I just mentioned to Jamie, the velocity is as strong as it's been ever for us, and, so, we can't say that we're not seen in trading paper. You know, we're also negotiating deals to get the best possible rate and it's proved out that our mark to market and where we're rolling, Craig, on that basis.

I think Art and his team are looking at another million-plus feet, maybe, for the rest of the year. It seems like a number that would, obviously, well exceed our expectations, but I think he's probably comfortable with that. Do you want to speak to that, Art?

No. I mean, as we've rolled and done deals, we've actually done renewals and new deals. The pipeline remains right about where it was. It flows a little bit, but kind of in the $1.3 million range is where we sit now, after doing $1.8 million the first half of the year.

Great. And, then, NerdWallet, any update on them? I've heard they're looking for space in the market?

So, yes. So NerdWallet, you know, occupies 50,000 feet at our 901 Market and the space is the best space in that building. I think they're roughly around $60 a foot. Market rents there, Art, is close to about $70, $70-plus.

It's a great story, right? This is a tenant that's now in San Francisco, building their portfolio and they're looking for as much as 200,000 feet. We can't accommodate them, so I think, you know, it's an opportunity for us to either keep them in place and have them go sublease a space or take it back if there's a user. It's early in the phase, but that's what we're seeing right now and I think we're very comfortable with that space.

That's helpful. And, then, Mark, on the Qualcomm lease, I think you had mentioned last quarter something about the free-rent periods being a little bit weird. Can you just give us an update on how that free rent trended in the second quarter?

Yes, again, this is satisfying because we've anticipated that question. If you look in our supplemental, you can see the detail on our, 2015 -- sorry -- on the upfront abatement page of the supplemental, which I'm just trying to give you the exact page, I think it's 28 or 27, maybe. You'll see -- sorry. 27 -- no. Shoot, where is it?

Well, we've outlined it in the supplemental exactly when the free-rent periods are for, under that lease. It's in the, you know, the page where we give you what the uncommenced -- there it is. There it is, on page 27. So look in the footnote there and you'll see exactly when the free rent applies under the Qualcomm lease.

Got you. Footnote three. All right. I see it.

Got it?

That's helpful. Yes. And, then, just lastly, on the Lieko mortgage loan, can you kind of let us know where that's priced and if you can't give that, just relative to the 11% you're losing on the Downtown LA?

Losing, we won. (Laughter) You mean replacing.

Yes. Replacing.

The Lieko land loan that we did is right around 10%. So it's -- I obviously can't walk through the specific details of it, but it's right around 10%.

Okay. So, you say that was a contributor on the guidance bump or did you guys already have that in the numbers?

No, that's a third-quarter transaction.

Well, no, but it's in the guidance. It is part of our full-year projection.

Okay. So, it was a bit of a bump for you, relative to last guidance range?

Yes. It's contributing. I mean, you know, there's ins and outs, Craig, but, suffice it to say, it's fully reflected in the number.

All right. Great. Thanks, guys.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Good morning out there. Victor, I appreciate your comments on the leasing and the breakdown of the tenants in the market that you went through, but just sort of curious, as you look at the price setters and as, obviously, we react to various news headlines, are the price setters, as far as rent goes in the market, more driven by the big users or is it the sort of smaller users on the incremental side, as far as rent direction goes?

Yes, it's a great -- it's a great question and I don't have a specific answer leaning one way or the other. You know, clearly, I think, Alex, at the end of the day, the large guys are in much higher need or, I would use the phrase, they're not necessarily desperate, but there are so few chances and opportunities for them to find space that the lead indicator for them is clearly going to be space. And, so, the market leading indicator for rent and the growth of rent is going to be secondary.

I've mentioned this before. You know, we still haven't seen, in this cycle, a push back on rate. And so that's not how we're winning or losing deals, or making or not making deals is not based on rate. We're making and losing deals based on the ability to get in, the time frame by which you can occupy the space and the layout by which we can deliver it.

So at the end of the day, clearly the smaller guys are going to be a lot more rate sensitive than the bigger guys because the smaller guys are going to have many more options.

Right. But, as you hear chatter from the different brokers, they, you know, their view is that, hey, as long as the big guys are out there, even if it's just renewal volume, that's enough to hold rate or you really need to see expansion volume and/or growth from the younger startup companies to really drive rate?

I want to comment? I mean, probably the expansion volume by which these guys are looking at it, and they're looking at it from a, you know, a short-term window, not a long-term window. People are taking, like you've talked about before, people are taking space that they need, not that they think they need, and so that's why they're paying the current rates, by which, are out there versus future.

Okay. And, then, the second question is, on the land loan, I think you guys just -- you had one that you just paid off, you made a new one. Is this something that's sort of a one-off business or is this something where, as the market gets tighter, we may see you guys involved in more of these?

Listen, I think -- I wouldn't project it as a core business for us. There have been opportunities with, you know, our Broadway deal in Downtown Los Angeles and now, with this Lieko deal, it's got to be the right type of real estate, it's got to be the right -- in the right market for us and the yield has to be good.

We're looking at double digit returns on short-term holds and, so far, these two look pretty good and the basis is very important for us. On the Lieko deal, I think, you know, the basis there is at 50% of value and, so, we feel pretty good about that and, then, when they just turned around and made their announcement just recently on Vizio, I think that enhanced it for us.

I wouldn't read into us deploying a lot of dollars one way or the other on that. I think if deals come up, we'll evaluate them; if they're appropriate, we'll execute.

Okay, final question. Mark, on the same store, did you say that now it's 30 properties, versus 21 previously, but, obviously you guys bought more than just 10 properties in the EOP, so what's the delta between the total EOP and the same-store, as of April 1?

Yes, so, under the same-store definition, a property has to be stabilized to even qualify for same-store. The adjustment we made was, rather than only including assets that were owned as of the beginning of 2015, which is what is running through the year-to-date, same-store portfolio, namely there's 21 assets that were stabilized and owned as of January 1, 2015, and still owned as of June 30, 2016. For quarterly-reporting purposes, we included any stabilized office asset that was owned as of April 1, 2015.

So, 9 additional office assets were added to the 21 that were running through the year-to-date portfolio, if you will. That leaves out a good nine or so assets that are in the in-service portfolio, that is to say that our lease-up assets that are not running through the same store portfolio and the reason why they're not included is because they haven't stabilized yet.

And, for changing the same-store pool, are you going to do it quarterly or will wait again for next year?

No, we'll continue with the methodology on a quarterly basis. That is to say, if an asset was stabilized at the beginning of the prior year's quarter, so, for example, next quarter, if an asset became a stabilized asset as of August, July 1, 2015, then it will be in the new same-store portfolio for the third quarter of this year, if you follow me.

Okay. That makes sense. Thank you, Mark.

(Operator Instructions)

Our next question comes from the line of Rich Anderson with Mizuho Securities.

Thanks. And good morning out there. So, Mark, that was good color. I just want to confirm, on a same-store basis, your definition is owned and stabilized in both periods?

That's right.

Okay. In terms of the word, velocity was used to describe what's going on in the Peninsula and Silicon Valley and I'm curious, does that word, velocity, also apply to the pace by which you're spending CapEx and I'm wondering if that $250 million bogey number is burning off faster than you thought?

Well, you know, we, Rich, to try to keep people kind of on the same page, relative to spend, we really are no longer attempting to reconcile back to that $250 million.

You know, the portfolio that three-year projection, which was an all-inclusive spend number, was originally attributed to was so markedly different than it was a year ago, when we first pointed to that number, so as it relates to the spend, I can tell you, the Pace Building spend, the non-TI and commission spend amount, was fully updated at our Investor Day and that amount, as of Investor Day, was about $63 million, with the all-in spend for the three-year, initial three-year hold period of the Northern California portfolio.

The update on that is, it's basically the same amount. We've managed to eke out a little bit of savings there. It's now about $62 million, of which we've spent $16 million, a little bit in 2015, and $2 million in 2015 and about $14 million, so far, in 2016, and we've committed another $32 million, so it's against the $62 million, three-year budget on the Northern California portfolio.

We've either spent or have committed about 77% of it and one, we're right on pace, I would say, from a timing point of view. Two, we're -- we continue to find incremental savings within that budget, as we adjust, from time to time, either for, you know, lease up of assets that may have had an earlier spend or other ways of finding savings. That's where we are in the base-building spend.

As it relates to GI and commission, again, as we've said in the past, it follows entirely from leasing and if we're ahead of schedule on leasing, then the TIs and commissions will naturally be ahead of schedule, too, and, so far, we've been pacing ahead of schedule over that three-year period.

Okay. Good stuff.

And, then, second question, you know, we talked about some of the M&A activity in the tech world and I'm just curious if you guys, you know, so far, that's pencilling out as neutral to positive, I guess, or maybe more positive, from your perspective, as it relates to your business, but, do you guys take cues from other corners of the business world out there, whether it's tech, M&A or even other asset classes, like lodging or apartments or anything like that, that you try to help your strategy and maybe change your strategy if you see things kind of moving in the wrong direction, maybe not in office, but in other parts of the economy?

And, I'm curious if that has happened at all and if it's caused you to be a little bit faster to get things done or maybe nothing has changed at all. I'm just curious how much you have your antennas up around you, outside of specifically leasing office space?

So, Rich, thanks for the question. I think it's -- you know, it's important to sort of know that, like any operating business, we're going to look at not just what's core around us, but parameters that may be corollary or effective in terms of our day-to-day decisions.

I don't think anything has changed in terms of our velocity, in terms of getting deals done or rushing to getting deals done, based on that. But, clearly, the external factors that are things that we would look at on an obvious basis is job growth and employment on the first level and, then, absorption on multifamily, right, and, where that sits.

You know, I do think that we're very astute as to what's happening in our core markets and, for the most part, you know, we've got a couple of areas that we are consistently monitoring. Speaking of the city of San Francisco and rent-rate movement there and absorption there and where it sits, and there seems to be a lot more banter around it than there are facts, but we're very cognizant of where those numbers are and where they may go to, from a vacancy factor.

Then, secondarily, would be Downtown LA, with the amount of units that are coming online and the absorption versus the return and how quickly those are going to get absorbed or not, which will indicate where the job growth is going to be.

So, those are factors that we're, obviously, always looking at. I think any prudent office company would have to do that in the CBDs that they're in.

And, then, lastly, is there any change, not so much in your guidance, of course, but just, generally, how you feel about dispositions or do you still basically feel the same way, opportunistically here and there, but no elevated need to be selling assets?

No, I think we're pretty consistent. If it's not core to the holding in the portfolio, we're going to look to alternatives by which we can dispose of those assets; or, if we feel there's an asset in the portfolio that has maxed its potential under the Hudson ownership, we'll do the same. But, we don't have a specific guideline based on the economic conditions that we have to dispose of X number of assets.

Do you have reverse inquiries coming in for certain assets that you've been turning down?

Obviously, yes.

Okay. Thank you.

Thank you.

Our final question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks. Good morning. Victor, can you talk a little bit about the future development pipeline and just maybe how would you handicap that with, as far as which ones you would expect to start earlier than others and, then, is there any color you can give on kind of those earlier developments, the potential investment you guys would be looking at?

The potential investment what?

You guys would be looking at for kind of total investment and the ones that might start earlier than the others.

Yes, yes, sure, sure, of course. So, I mean, the two major -- other than the two that Jamie mentioned, in terms of where we sit, that are coming out of the ground now, the two major developments for us would be our 5901 asset, which we're newly going to market it, name Epic, and it's going to be a 305,000-square-foot office building on Sunset Boulevard, across from Sunset Bronson.

It will be a very unique outdoor-indoor office facility that we are in final planning stages on and improvements and entitlements on our final design. I think that would be -- we've had a number of people interested in that asset on a pre-leasing basis.

So, we will launch that building and break ground on that building, depending on what kind of finalized activity we have, but, you know, I'm sort of thinking, sometime in spring of next year would be sort of a logical time frame, given pre-leasing and the likes of that.

The second asset that we have on a ground-up development is a smaller asset in Culver City for 160,000 feet that we're evaluating right now, which will also be a pre-leased asset, that we could potentially break ground sometime last quarter of this year.

Then the last would be our redevelopment projects, which is our 405 Mateo and Fourth and Traction. We have been there for Fourth and Traction; should be completed by year end of 2016 and we're just starting our full marketing there and 405 Mateo will be completed year end 2017 and we are just launching our marking this fall.

Blaine, on that Culver City office, just in case there's any confusion, we've had in it under contract for quite a long time and it's very far along in terms of our ability to begin to break ground, but we don't technically own it yet.

But, you won't find it listed in the development pipeline. It's fully entitled. All the design on it is done and like I - as Victor's saying, it's a near-term start. It's just not in our pipeline, because we don't technically own it yet and probably wise on our part to add it there, so people can at least track this potential future development.

That's helpful. I was looking for it. So, I guess, Victor, what amount of pre-leasing would you guys target to start some of these projects?

I think we're probably now in the range of a 30% to 50% sort of pre-leasing. I think 30% is sort of a comfortable number with the activity. It would depend, also, Blaine, on the pipeline, the interest level.

You know, 5901 is a big project. Our Epic Building is a big project and the amount of activity we have in Hollywood right now would probably enable us to achieve that.

On 9300, the deal that Mark was referring to, it's a much smaller building. There's a fairly large component of retail, so I think, you know, a lease or two there would really get us going.

Okay. And, then, just lastly on Epic, it seems like a pretty similar deal to one of your competitors has down the road. Do you think there's, I guess, enough demand for kind of both major projects to go forward in that market?

Yes. I mean, Hollywood is the hottest market right now in Los Angeles and demand there is very high. I think the reverse increase that we're fielding from media and entertainment companies, who need office, slash, studio space and production space is very high.

You know, the biggest differentiator is, is that we offer the media studio space that our peers and competitors don't have, the access to pre- and post production, as well as the production sound stages, nobody has that access and this is literally across the street, almost from both of our studios, so, it's a unique opportunity and I think that's what differentiates us for large blocks of space that tenants are looking at. We really sort of fit the only void for that.

Great. Thanks a lot, guys.

There are no further questions at this time. I would like to turn the call back over to Mr. Victor Coleman for any closing remarks.

Thank you so much for the participation and, again, thank you to the Hudson team in totality for another great quarter. We'll speak soon.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.