Hudson Pacific Properties Inc (HPP) 2017 Q4 法說會逐字稿

Greetings, and welcome to Hudson Pacific Properties Fourth Quarter 2017 Earnings Conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Laura Campbell, Vice President, Head of Investor Relations. Thank you. You may

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Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties Fourth Quarter 2017 Earnings Call.

Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investor Relations section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investor Relations section of our website for 90 days.

During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update.

With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our COO and CFO; and Art Suazo, our EVP of Leasing. Victor will give an overview of our performance. Art will discuss leasing activities at our markets, and Mark will touch on the financial highlights. Note they will be joined by other senior management during the Q&A portion of our call.

Victor?

Thanks, Laura. Hello, everyone. Welcome to our Fourth Quarter 2017 Call.

2017 was a great year for Hudson Pacific. We grew FFO by 11%, our same-store property NOI by 13% and our dividend by 25%. We had one of our best years for leasing. We signed 2.1 million square feet of deals with 34% cash and 50% GAAP spreads. We had 1.6 million square feet of expirations in 2017, yet our stabilized office portfolio lease percentage ended up 30 basis points for the year at 96.7%. Our in-service office portfolio lease percentage ended up 90 basis points at 92.1%. Our same-store media and entertainment portfolio trailing 12 lease percentage was up 160 basis points for the year at 90.7%.

We took advantage of the strong market conditions to improve our portfolio and sell $437 million of noncore assets, all were sold at premiums to our basis, making significant capital available for future growth. We delivered 754,000 square feet of development and redevelopment projects, nearly 80% preleased, and we expanded our Sunset Studio portfolio with the acquisition of Sunset Las Palmas at -- for $200 million. Through that acquisition, we gained access to an additional 500,000 square feet of studio-adjacent development opportunities in Hollywood.

Specifically in the fourth quarter, we signed 558,000 square feet of deals, 17% and 28% cash and GAAP spreads, respectively. Our biggest deal in the quarter was the 2-year extension of NFL at 10900 and 10950 Washington in Culver City. This deal has a smaller mark, about 11%, since we only recently signed their extension through 2021. NFL will now occupy these buildings through 2023. And this, along with the capital they've recently invested to upgrade interiors, is just another sign of their continued commitment to this asset. Also in the fourth quarter, we broke ground on EPIC, our third Hollywood development, for 300,000 square feet of office space, and we sold 65% interest in Pinnacle I and II in Burbank for $350 million, netting us $85 million of proceeds that we believe can be put to better use.

Before I'm going to turn it over to Art, I'd like to give you a little bit of our big-picture thinking regarding our markets and what's ahead for 2018. Our strategy has and continues to be focused on markets and assets that are the first choice for the best talent for the most cutting-edge firms and innovators. These locations and properties, we believe, have the best growth potential, the best chance for outperformance and, in the event of a downturn, the best staying power. Maturation and proliferation of tech, the rapid growth of cloud, AR, VR and data science, the growing dominance of streaming content creators, these are all trends we're watching and buying, selling, building real estate around our portfolio.

Our leadership in Silicon Valley and Peninsula markets is the heart of the strategy. It's the birthplace of tech. It's innovation clusters are impossible to replicate, and we believe that we will continue translate into growth opportunities for us. In Q4, Silicon Valley had the highest quarter on record for net absorption at 1.7 million square feet. The Peninsula had its highest annual total net absorption since 2011 at 1.3 million square feet.

Sublease space declined by 9% with decreases in every -- some market, except Palo Alto, where Theranos put its corporate headquarters on the market. Other construction projects are 60% preleased. Companies like Facebook, Amazon, Hitachi, Veritas are all taking down large blocks of both sublease and new construction availabilities. We're very well positioned in those markets. We bought well, and where needed, we've deployed capital to transform these assets for next-generation tenants. Some of the work continues, but they've generated superior cash flow growth for us, thus far, and we believe they will continue to do so in the future.

What Silicon Valley is to tech Los Angeles, especially Hollywood is to media. And the content revolution has, in effect, amplified the demand to be in these key markets. Our footprint and growth potential in Hollywood is unmatched. I mentioned EPIC earlier. There's no other project like it in Los Angeles in terms of building design, infrastructure and outdoor space. And given the demand we've seen, we're moving forward with designs for another 100,000 square foot development at Sunset Las Palmas, which we're calling [Harlow].

A few words about the Arts District. We own great assets in that submarket, but it's definitely taking more time than we anticipated for the neighborhood to activate. While there are tenants inquiring and touring, there's just not sufficient volume of quality users for large blocks. So we're actively evaluating our alternatives and are prepared to break up the space for smaller 5,000 to 15,000 square foot users, if that's what it takes to get momentum. Rest assured, Art and the entire leasing team will leave no stone unturned.

In many ways, Seattle speaks for itself. PricewaterhouseCoopers' Emerging Trends in Real Estate report just named the city as #1 market to watch in 2018. And I've said this before, but Seattle tops every list every day that you pick up the paper. We're finishing lease-up on our recently delivered 450 Alaskan development and actively looking to grow our downtown Seattle footprint. Our head of that region, who's new, Andy Wattula, has strengthened our Seattle presence and is closely working with Alex and his team on multiple potential deals.

What can our investors expect for us in 2018? Well, we're still taking advantage of our strong markets to sell noncore assets. We already closed 2 sales, Embarcadero Place and Building 6 at Peninsula Office Park, and we have 2180 Sand Hill Road and 9300 Wilshire under contract and is scheduled to close March 1. That's another $255 million of dispositions at an average of 20% premium to our basis we've completed or keyed up. We're also taking a serious look at multiple value-add acquisition opportunities across our markets, and I'm confident we're going to find ways to strategically grow our portfolio this year.

Other than EPIC, we have 2 redevelopment projects under construction, our 99,000 square foot Maxwell Building in the Arts District and a 32,000 square foot 95 Jackson project in Pioneer Square, which is already 80% leased. In all, that's 431,000 square feet or $225 million of remaining project cost, which is equivalent to about 3% of our total market cap. We're typically at 10% or less of the total market cap in terms of ongoing construction spend. So we have a lot of room to take on more, such as Harlow.

And finally, we have 1.1 million square feet of expirations to address in '18, which are 21% below market. We've renewed or backfilled 24% of that square footage already, and we're in leases, LOIs or negotiations on additional 26%. Occupancy gains in our lease-up portfolio, as we approach stabilization, will also provide us with continued cash flow growth.

With that, I'm going to turn it over to Art for some additional commentary on our markets and our assets. Art?

Thanks, Victor. In Silicon Valley, large deals are supplementing small deal activity and driving absorption. Even with 3.9 million square feet of new deliveries, Class A vacancy of 11.7% and asking rents of $66 per square foot remained unchanged in the quarter. Deal volume was up 63% quarter-over-quarter and 145% year-over-year at 2.4 million square feet.

We've got great activity at Campus Center. Last call, we referenced 6 proposals, representing 1.4 million square feet of net new requirements. This was before we've even completed improvements to adequately show the asset. Those deals went elsewhere, but they were all signed in Milpitas or adjacent Silicon Valley markets. Outside those proposals, we've seen another 6 million square feet or 22 large block deals in the market, all net new demand and mostly targeting Santa Clara or north or downtown San Jose, about 2 million of that sign, which takes even more product off the market. So right now, we're looking -- we're working with 15 requirements representing an aggregate of 4 million square feet. Those range from about 50,000 square feet to full building users, truly our sweet spot. So we're well positioned as we get ready to formally launch Campus Center into the market with a huge broker event in mid-March. The asset has been transformed and shows exceptionally well.

A couple other comments about the Valley. Over the last several quarters, we've consistently seen lots of demand for smaller sub-10,000 square foot users. We've completed 29 deals at those assets this quarter, and the average deal size was about 4,000 square feet. But now, we're also seeing resurgence in demand for medium-size blocks. We have 12 10,000 to 25,000-square foot spaces for lease with about 82% of those in proposals, LOIs or leases. In San Jose, we're working with large tenants on renewals and expansions, and we've got great activity over at Gateway. So we're activated on all fronts, and we feel good about addressing our 354,000 square feet of expirations in the Valley this year. Those are about 20% below market.

As Victor noted, we also have good activity further north along the Peninsula. This was the fourth consecutive quarter of occupancy gains with 162,000 square feet of positive net absorption. Class A vacancy fell 80 basis points quarter-over-quarter to 6.9% and 210 basis points year-over-year. Class A asking rates were flat in the quarter, but still up 11% year-over-year and at $84 per square foot.

Palo Alto Square is a great success story for us. We've now completed our significant capital improvements, and we've really modernized the facility, both in terms of design and amenities. Historically, as you know, this property appealed to professional service firms, but our improvements have allowed us to tap into tech demand. Post Q4, we signed a 40,000 square foot lease with tech company Orbital Insight, and we brought in Specialty's Café & Bakery for about 5,000 square feet. And the property is now 89% leased. We still have significant wood to chop this year in the Peninsula as we have 496,000 square feet of expirations, but those leases are at 26% below market. So we've got room to get deals done.

The strength of the tech industry is very evident in downtown San Francisco. Expanding tech companies were responsible for 14 of 30 large lease transactions in 2017. That's a record 3.9 million square feet of deals, contributing to 762,000 square feet of positive net absorption. Class A vacancy ended the year down 90 basis points at 5.1%, and asking rents stayed flat at $76 per square foot. Clearly, with 2018 construction deliveries already 84% preleased, the city is going to continue to be a landlord-favorable market. Our stabilized portfolio is 98% leased in San Francisco and have about 113,000 square feet of expirations, which are about 10% below market.

In Los Angeles, Q4 occupancy gains were driven by 7 large deals north of 100,000 square feet. Several of those were tech and media-related. In Hollywood, vacancies stayed flat at 13.4% while Class A asking rates were up 2% in the quarter and 5% year-over-year at $55 per square foot. For EPIC, our demand pipeline now exceeds 3 million square feet, including multiple full building requirements. At Fourth & Traction, we have about 100,000 square feet in proposals, LOIs or leases ranging from 5,000 to 75,000 square foot requirements, and we had another 500,000 square feet of tours and inquiries to date. We're feeling a comparable amount of activity from Maxwell, and we're still targeting large users for that project. Our stabilized portfolio in Los Angeles is 98% leased. We have about 133,000 square feet of expirations this year, and those leases are approximately 15% below market. That's a great spread, particularly for Los Angeles.

Downtown Seattle is still driving the overall Seattle office market. Vacancy nudged up 80 basis points to 8.9% in the quarter due to new projects delivered. But rents were up 3% to $45 per square foot, and the market had positive absorption of 351,000 square feet as supply remains in check. Projects delivered in the last 12 months are largely spoken for, and under construction projects are 65% preleased. Although the lease commenced on November 30, our anchor tenant, Saltchuk, moved into 450 Alaskan in January. It's really a stunning, custom build-out, and that project is currently about 70% leased. We have 2 full office floors remaining to lease. Right now, the views on these floors are obstructed by a viaduct, which will come down early next year, but we're seeing interest pick up as that date approaches. Obviously, there are advantages to holding to rate, but we still have over 130,000 square feet of tours and inquiries from high-quality tech and non-tech tenants. Our stabilized Seattle portfolio is 96.8% leased with very little in the way of expirations this year. We're already in negotiations with tenants to backfill a significant portion of our 133,000 square foot Capital One lease, which expires in 2019 at 83 King. Those deals are in a blended 54% mark-to-market.

With that, I'll turn the call over to Mark for financial highlights.

Thanks, Art. FFO, excluding specified items for the fourth quarter 2017, totaled $81.7 million or $0.52 per diluted share compared to $68 million or $0.46 per diluted share a year ago. Specified items for the fourth quarter 2017 include a $1.1 million write-off of original issuance costs associated with the paydown of 2 5-year term loans in connection with our October public debt offering and the sale of our interest in Pinnacle I and II. There were no specified items for the fourth quarter of 2016. FFO, including specified items, for the fourth quarter of 2017 totaled $80.6 million or $0.52 per diluted share versus $68 million or $0.46 per share a year ago.

At the end of the fourth quarter, our stabilized office portfolio was 96.7% leased, up 80 basis points relative to third quarter. Our in-service office portfolio was 92.1% leased, up 60 basis points compared to third quarter. Our cash same-store office NOI increased 7.9% in the quarter and 13% over the year. On a GAAP basis, those percentages were 10.2% and 9.9%, respectively. The trailing 12-month lease percentage at our same-store media and entertainment properties ended the quarter at 90.7%, up 10 basis points in the quarter. Our cash same-store media and entertainment NOI increased 15.5% in the quarter and 13.1% over the year. On a GAAP basis, those percentages were 12.9% and 7.4%, respectively.

At the end of the fourth quarter, after accounting for asset sales, the remaining 20 former EOP properties were 88.3% leased. If you factor in our lease with Orbital Insight, a fairly significant deal signed just after the first of the year, those assets were 88.9% leased. As a point of reference, those same 20 properties concluded the third quarter at 88.5%, and we had 270,000 square feet of expirations at these assets in the fourth quarter. Note that we're giving you the stats for these 20 assets only because we naturally tapered our leasing efforts with respect to the dispositions well before they were under contract. More importantly, cash NOI for the former EOP portfolio continues to improve. From Q2 2015 through Q4 2017, we've generated over 21% cash NOI growth, and we've now sold or are under contract to sell 8 assets or close to $620 million. That's nearly $100 million of gross profit at an average 19.5% premium to our original purchase prices.

Sale and financing activities throughout last year, and especially over the fourth quarter, significantly improved our balance sheet, debt metrics and future access to capital. On account of relief of asset-level indebtedness in connection with the sale of Pinnacle I and II and paydowns of our 2 5-year term loans in connection with the October public debt offering and the Pinnacle sale, we reduced our total consolidated indebtedness by more than $216 million in the fourth quarter, extended our weighted average loan maturities from 4.8 years to 6 years and reduced our floating rate indebtedness from 22% to 7%. All of these metrics improved with only a modest increase to our weighted average interest rate from 3.56% to 3.75%.

Our unencumbered portfolio and debt capacity also continues to improve. Unencumbered NOI increased from 78% to 83% from the third to the fourth quarter and further increased to a current 86% upon the February 1 repayment of the loans secured by Rincon Center. We have no indebtedness maturing in 2018. And upon the completion of the pending asset sales, we expect our revolving credit facility to have all $400 million of total capacity.

Turning to guidance. We are providing full year 2018 FFO guidance in the range of $1.87 to $1.95 per diluted share, excluding specified items. Specified items include the write-off of approximately $700,000 of original issuance costs associated with the anticipated recast of our unsecured revolving credit facility and 5 and 7 year term loans. As always, our full year 2018 FFO estimate reflects our view of current and future market conditions. This includes assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in our press release and on this call. Our estimate excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters.

I'd like to give you some perspective around our same-store cash NOI 2018 guidance. Our final 2017 office and media and entertainment midpoint guidance was 9.5% and 9%, respectively. By comparison, our 2018 office and media and entertainment midpoint guidance is 3.5% and 4.5%, respectively. To some extent, this is the result of our own success. Our 2.1 million square feet of leasing activity at 34% cash rent spreads drove our strong same-store office performance in 2017. Specifically, last year, in our 31 asset same-store office portfolio, we had 1.4 million square feet of total lease expirations with renewal and backfill activity getting done at 46% cash rent spreads. Not surprisingly, we have lower expirations in our 29 asset same-store office portfolio for 2018 with only 547,000 square feet expiring at approximately 29% cash rent spreads. So by nature of the leasing we've completed, a decrease in the same-store office pool and lower 2018 lease expirations, we have relatively less opportunity in 2018 to drive growth within our same-store office assets.

We have a similar effect within our 2018 same-store media and entertainment portfolio. We improved occupancy at Sunset Gower at Bronson by 160 basis points to 90.7% and rents by 6.3% to $35.26. These assets are now approaching maximum occupancy under longer-term, higher-rent leases. With this improved stability comes moderation in our same-store media and entertainment cash NOI growth.

But if you look back at our operating history, our same-store has never fully captured the NOI growth potential. Our 12 non-same-store in-service office properties and our non-same-store Sunset Las Palmas Studios property are poised to contribute cash NOI growth in 2018 in excess of 15% and 135%, respectively. Two development properties, CUE and 450 Alaskan, and 2 redevelopment properties, 95 Jackson and Fourth & Traction, are projected to contribute $3.9 million or approximately 100 basis points of additional cash NOI this year. In aggregate, our non-same-store properties will comprise 31.5% of our total projected cash NOI for 2018 and, thus, a substantial portion of our growth compared to last year.

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

Thanks, Mark, and thanks, Art. The fundamentals of our markets remain very strong. We are well positioned to continue to realize value from within our existing portfolio and look forward to taking on some exciting new growth opportunities in 2018.

As always, I want to take the time to thank the entire Hudson Pacific team, especially our senior management, for their hard work and dedication for this quarter and for the entire last year. And to everyone listening, we appreciate your support of Hudson Pacific Properties, and we look forward to the upcoming quarters to come throughout 2018.

And with that, operator, I will turn it over to you for the line to be opened for questions.

(Operator Instructions) Our first question is from Alexander Goldfarb with Sandler O'Neill.

Just 2 questions here. Yes, and certainly, Victor, the perennial, where you guys are trading and certainly how the market hasn't been kind to REITs year-to-date, so as you guys think about the disposition proceeds, the $255 million, how do you weigh that about looking at a stock buyback? And then also just given how the stock has been depressed for the past year, how has this changed your investment hurdles and your thoughts on new capital allocations?

Great, Alex. Thanks for the question. So as you know, and if you don't, you'll recall, we have a stock buyback plan in place. We're authorized to buy back stock at any given levels that we deem appropriate, and that will continue to be in place. And unfortunately, with the blackout windows that have occurred at these substantial downturns, we were not able to execute on that basis. But we will always continue to evaluate it based on our use of proceeds and the access to capital and what's more accretive for our shareholders, whether it's a development, redevelopment, acquisition or the opportunity to buy back stock. And that will never change. It hasn't changed, and they're not dissimilar or mutually exclusive. They're going to be one and the same. That being said, our return hurdles have really not changed much. I mean, we're buying to -- or redeveloping and developing to what we perceive to be Alex's theme as stabilize 7. That's sort of what we're looking at as a company. That's what our stock, ironically, I think was at the low point trading to right around a 7 cap. So I think they're -- as I said, they're not mutually exclusive, and we're going to look at those alternatives. And we still are evaluating redeploying capital from the dispositions as well as our existing capital outlay that we have excess capital right now for opportunities that are going to be very conducive to the existing portfolio.

But do you think, Victor, at some point, that you'd -- you start to weigh more -- I mean, you guys have been reporting in the press as maybe doing a deal out there with another REIT. But do you think -- at what point do you say, hey, look, buying back stock makes -- is the better use of capital than a new commitment that -- given the environment?

Well, as I said, I think if we're underwriting new deals north of that, it's going to be more compelling to use that capital. If we're not underwriting deals north of that, we will always consider buying back stock. And it's always -- it's definitely always on the table.

Okay. And then a second question is just more of a specific. The downtown L.A. project that you said you're going to take a different crack at by breaking up the space, was that just one of the buildings? Or is that both? And then how does that impact the economics of the deal if you have to break it up into smaller spaces versus leasing at bigger blocks?

So let me take the second question first. On the economic side, it won't change the economic return on the assets. The interesting thing -- so listen, I think our team should've taken a hit on the Arts District. I've been pretty challenging for the entire team, for management, through leasing of both internal and external leasing guys. They know what my feelings are and some opportunities that we've missed. A couple of things is -- the rental rate in that marketplace has not changed. So we've not lost deals off of rate. The first part of your question, I think, is related to both assets. At Mateo, we are looking right now -- there's an interest level for -- an entire tenant for the whole building. That's the building that I think we're still going to use a single user. Ironically, our prepared remarks were based on us breaking up the space at Fourth & Traction. We've got plans to do spec space, which won't change our game plan to break out from economic standpoint. And yet, as soon as I mentioned that this morning, we got a call, I found out, from a tenant who wants the whole building. So it's based upon the fact that there are less large users out there for Fourth & Traction that we had initially thought. Maybe we waited long to break up the space, but I'm confident with the amount of leasing activity they have for anywhere from 5,000 to 15,000 square-foot tenants, just over 100,000 of them right now. My guys are telling me that I shouldn't be wary. I think the optimism is on the plus side.

Our next question is from Dave Rodgers with Robert W. Baird.

Maybe start with Art, with regard to the Silicon Valley assets and just going back to your comments. I think you said something about 350,000 square feet of expirations, maybe 250,000 square feet of demand. But curious what you're seeing just in terms of kind of the need to use the VSP program and how much of that kind of expiration this year, in your mind, is going to have to be retenanted versus have much you could kind of make ground up on some of the underleased assets in that market.

Dave, I'm going to have Art run through that for you, okay?

Yes. So listen, just across the market, I mean, we're seeing an uptick in overall activity. And with our commitment to repositioning the assets that we've outlined and our VSP, which we've been really aggressive at, we're poised to take advantage of the increased market demand. We see that everywhere. We've started to see this quarter-over-quarter, and I feel like we've poised ourselves to do that. Listen, we've done 118 VSPs to date. We've leased 70% of those. Most of those are in our -- kind of our priority assets. And the balance of those, we've got somewhere in the neighborhood of 65% activity on, which means LOIs, proposals or leases. So we feel good. We feel like we've put ourselves in the right place, and we see a lot of activity.

And the other part of that was just on the expirations. What type of retention are you looking for in that particular -- those particular submarkets this year?

Well, we -- as every year, we have known vacates that come up. Right now, we're looking at -- as we sit here in February, we've got probably 16% of our known -- of our expirations either renewed or backfilled, so 16% already. We've got 32% of those in negotiation, right? And then probably another 30% that are in discussion, some level of discussion. But we feel good right now where we sit.

Yes. I mean -- just to cut -- I mean, maybe put -- reassemble that, Dave. It probably looks to shake out around 70% of renew and backfill relative to the 2018 expirations in the EOP portfolio.

All right, great. And then maybe just a follow-up for Victor in combination with Mark as well. How much of the deals proceeds do you plan on kind of putting through the 1031 versus maybe just kind of putting back into the balance sheet? And when you talk value-add, Victor, how deep are you willing to go in some of these projects? Are you willing to convert some retail assets, et cetera, that have been in the news? Or is this kind of more lease-up assets in the office space?

So on the 1031, listen, we put it into an accommodator. Well, we don't have to accommodate. It's really at our option. Mark has managed the balance sheet to a point where these assets, that we will not have to 1031 if we so choose not to. So that gives us the freedom to use that capital for virtually everything. And we're seeing some very interesting opportunities in Seattle in the Bay Area and here in Los Angeles on the redevelopment lake on the -- and obviously, I'm not going to comment on any deals we haven't announced.

Our next question is from Jamie Feldman with Bank of America.

Great. So I appreciate your comments to start the call on Silicon Valley and the Peninsula. It sounds like you're going to be entrenched there for a while. Just how do we think longer term about your market concentration and how you're thinking about it? And how big do you want Silicon Valley and the Peninsula to be in terms of the whole company?

What -- Jamie, it's interesting. I think I'll take that a little differently. We've made a pretty clear determination on the office side. Seattle -- in the markets we're in, in Seattle, there's ample opportunity for us to grow. In San Francisco and the Valley, there's clearly ample opportunities for us to grow. And the particular markets that we are in Los Angeles, there's ample opportunities for us to grow and get a lot bigger, if we so choose to do so in those markets. And they're still, in our opinion, the best markets in the country for a company like ours to invest in, and the economics and matrix that we're looking at seem to support that. So we're not afraid of going to the Valley to continually buy assets. I mean, we're -- or sell assets in that marketplace to upgrade to find other assets. I mean, we're seeing deals -- Alex and his team are still seeing deals in Palo Alto that we think are opportunistic. And we just sold in Palo Alto or -- we're about to close another deal there. So we will consistently do that in the office portfolio, and I think the depth of those markets are going to show that we clearly have room to grow in those marketplaces, and we're comfortable with it.

Okay. And then as you think about projects, I mean, how large of projects would you go after here, in terms of like total size of your portfolio today, in terms of -- I mean, it sounds like you have some redevelopment projects out there. Just what's your appetite for magnitude?

Well, I -- listen, I think that's kind of -- I don't know, I think that's sort of an ambiguous sort of question. It's not the dollar amounts. It's going to be to project amount, right? So it's going to be the valuation of the project, that IRR that we think we're going to be able to obtain is going to lead. And so that could be $100 million or it could be $500 million project. I don't think there's a benchmark around that. Remember, we do have significant joint venture partners beyond our current relationship with CBP and that have come to us with opportunities that they want to share, and we'll evaluate each deal as it sits by itself and evaluate that with also our stock buyback program. So it's a combination of the entire totality of what's the highest and best use of our dollars today.

Okay. And then Art, you had mentioned 6 tenants looking at Campus Center that ended up signing elsewhere in the region and a nice pipeline behind that. Can you talk about where the 6 went and maybe how close they were on Campus Center, maybe what they like or didn't like?

Yes. I mean, I think a lot of it was timing, but it's -- without getting into specific detail, I mean, we can probably do it off-line, but it's all Greater Silicon Valley. And with -- again, timing, I think, was probably at -- we're in right in the middle of positioning, which will be finished, and we're going to showcase kind of mid-March with a huge broker event, as I said. And I think it's going to be poised to get a lot of traction.

Our next question is from Craig Mailman with KeyBanc Capital Markets.

Mark, curious, you kind of laid out, you all, the full line availability pro forma the dispositions. Just curious what you think your total kind of deployment capacity will be once the assets you have under contract close.

Yes. I think on a levered basis, it should stay within kind of the debt ranges that we target. There's about $600 million of total capacity funded on the debt side, either through the line or we have over $200 million of availability on our Gower Bronson facility as well, and we think we end up at a comfortable range at about that deployment level.

That's helpful. Then maybe a follow-up or just a way to ask Jamie's question. Victor, you laid out that there's some assets you're looking at in a bunch of different markets. We've referenced some of the bigger repositioning opportunities in L.A. Just curious how you kind of bucket stuff from a -- maybe just an easier lease-up or repositioning of an asset versus a longer-term redevelopment play that may have a higher magnitude over time and kind of how you look at -- kind of how much do you want to deploy today into each type of buckets and not have the balance sheet get to a point where everyone knows you're going to need to raise capital with where the stock price is today?

So let me -- there's sort of 2 points that I want to make. One related back to Jamie's, but your last point is, listen, we have 0 intent to raise capital at these levels, and we've been very strict in terms of our process and policy. And we raise capital when we need the capital and the stock is at a point where we think it's opportunistic for us to deploy it. And that is not clear, even remotely, at these levels. So -- and then going back sort of -- back to your point, but first of what I sort of -- maybe Jamie was going at. Listen, we've talked about building up the diversification in the Seattle marketplace and the Los Angeles marketplace to get those barbells to a point where they're more closely aligned to the Bay Area. If that means we sell more assets in the Bay Area, that's what we do and redeploy the capital in those markets or if we buy in the Seattle and Los Angeles marketplace to help grow those portfolios. But remember, I mean, our portfolio is going to take a little bit of a change when we have EPIC online and when we have Fourth & Traction and 405 and Harlow online. CUE is coming online now. And so the size of that portfolio will change, and I think the numbers will be determined as to seeing more weight in those markets. Specifically to the redevelopment, development side, we've made it clear, Chris and his team have gone out and filed for the expansion of Sunset Gower for us to get an additional 0.5 million square feet. That's public now. That's a multiyear process for us to get done. We're doing the exact same thing at Sunset Las Palmas for an additional 450,000 square feet. We're breaking ground on 100,000 square feet at Harlow, which is a small building, and Bill and his team there have already had reverse inquiries from multiple tenants that want to take that production space. From a redevelopment standpoint, there's some unique opportunities of taking existing assets and repositioning the creative office, campus style that we typically look at, both in Seattle and Los Angeles, and we're going to continue to look at those based on the yield requirements and the tenant needs. There's been very little new development and development in the Bay -- in the Los Angeles area that have those type of assets, and there's a huge demand and backlog of existing tenants that are looking for space in the next 2, 3 years and beyond. And we've got a pretty aggressive leasing team that knows who those tenants are when the expiration schedules are in play, and we're going to try to capitalize on that with whether it's EPIC or something else that we do.

That's helpful. And just -- if you guys were to look at a mixed use, would you -- I know with KeyArena there, it could've been some resi and retail involved. Are you guys comfortable, if you find something, to do that on your own? Or is that where you're bringing more of a strategic partner versus the money partner?

I think we have full capacity in the development team here to tackle and be extremely successful in a mixed use process and so we're not going to shy away from it. It's not something that we're looking to do if it comes with -- that's something we'll evaluate at that time. I mean, currently -- you referenced the KeyArena. That was a unique opportunity with -- the preponderance of that was going to be office, and there was going to be some resi. And we would've done that alone with our partner at the time, which was AEG, who has capacity and capabilities that would be aligned both on a capital side. The stuff we're looking at right now, I can only think of one project that has got a mixed use component on it, and we're not even remotely close to doing that deal. So I don't think we're going to cross that bridge right now.

(Operator Instructions) Our next question is from Rich Anderson with Mizuho Securities.

Mark, you said in your remarks that there's 547,000 square feet expiring in the office portfolio in '18. Is that -- I some look at your lease expiration schedule. First part of this question is I see over 1 million square feet. Is that -- have you done some stuff already this year to tackle that? Is that the net number?

Rich, sorry. That -- I was referring specifically in the prepared remarks to the same-store portfolio. You're seeing the numbers exactly right. That is to say it's a 1 million portfolio-wide. It's just in the 29 asset, same-store, it's the 547,000.

Got you, okay. So leading to my next question, maybe as a way to enhance the same-store growth profile. To what degree do you think you guys will start looking or going to include early lease expirations, in other words '19 and '20 then expiring leases? I know you do that as a normal course. But I'm wondering how significantly those rents are below market and if there's a chance to see the same-store growth profile kind of accelerate as you go through the year because of that dynamic.

Rich, this is Art, yes. So in advance of '19 -- well, we're in '18, so in advance of '19, we're already talking to some of the large movers. You'll see kind of posted -- that are coming up, and we've got a lot of traction on those. So yes, I mean, we're out in front of that already, even kind of the late '18 renewals that kind of go out as far as 1.5 year really, especially if they're large tenants, right, multi-tenants, we're always talking to these guys.

Rich, just a little -- just a follow-on there. I think if you recall, '19, we have some -- a couple of fairly larger guys, '19 and '20 in Seattle and in Technicolor in Los Angeles that are fairly below. And so those already in conversations now.

But not considered at this point in your guidance?

No, no, no.

Okay. In terms of CapEx and, specifically, that which we would use to derive an AFFO number, do you see that sort of trending down now on a year-over-year basis? Or where do you think CapEx lands just maybe up or down versus '18 versus...

Yes. Rich, I can't tell you how satisfying it is to get a question we prepared for. It would seem like it was not part of our prepared remarks or anything like that, yes. So just to give you sense of it, on a year-over-year basis, for recurring TI commission, that actually -- it stands to trend down a bit, not quite 10%, somewhere between 9% and 10%. On recurring CapEx, that is to say CapEx that has a depreciable life of less than 10 years but is not TI or commission, that is -- there's a little bit of a trend upward on that, in part associated with some of our bundled projects and some of the other stuff we continue to do to enhance, say, the VOP portfolio. And on -- when you -- but as overall component, it's not that -- it's much of the overall spend. And so we actually are modeling about being more or less flat year-over-year on a combined recurring TI, commission and CapEx, so down about 1% year-over-year.

Okay. And then last question, maybe for Victor. It -- or anyone, I suppose. But it sounds like maybe a little bit of incremental activity in Silicon Valley and Peninsula. I know that's been an area of frustration for you guys in terms of getting the message out there. But is there a common thread to all this net absorption that you're seeing from tenants? Is there something maybe systemic or broad-based that is causing people to make a move? Or is there anything you could comment in terms of the conversations you're having with folks about why we're starting to see more activity in those 2 areas?

Well, I think a couple of things at -- Rich, first of all, there was a huge movement to large tenant users in the Bay Area -- I mean, into the city. And now there's very little space available for them, so they -- so we always talked about the larger users, even though our space was not as conducive, except for campus, to the larger users. And the numbers that Art just gave on the amount of square footage, of the 6 million square feet, those are all large users. 2 million have signed. 4 million are still in the marketplace because they can't go into the city, so they're coming back to the marketplace there. I mean, last year was -- as much as I think people were questioning the Valley, I mean, the statistics in the end of year proved out that the Valley was very strong. I mean, the numbers are the strongest what we've seen, and we've talked about that on our prepared remarks in many years. In some instances, it's been the best statistics that we've seen since before 2000. The interesting thing is if you look at the IPO and the venture-capital marketplace in the Valley, those are extremely strong. It's the strongest IPO start of the year so far, and there's very little change in that coming out. I mean, at the end of the January, companies raised over $8 billion, over 17 deals on that basis. And you don't have names like Dropbox or Spotify there yet, and that looks like it's going to go. And the most important statistic is the fourth quarter, the third straight quarter of $20 billion-plus VC investments. And it wasn't too long ago that people were questioning us and everybody else about VC's dead and there's no more VC capital. I mean, those statistics are very, very impressive. And '18 is expected to see the similar level of optimism with VC funding and is -- the gap in the IPO marketplace is starting to shrink. And so I think clearly, it's tech-related. It's the larger companies we've talked about. They're continuing to grow. And they have that vision of not 3, 4 or 5 years, but it's 5 and 10 years. And we're seeing that with the Amazons and the Googles and the Hulus of the world up in those marketplaces, and you're going to see more of that. And we're seeing that in the flow of traffic. And so it is -- it's nice to see that they're not leaving those marketplaces like people kind of perceive them to do.

Our next question is from Blaine Heck with Wells Fargo.

Probably for Mark. One of your West Coast peers recently talked about higher utility and payroll costs that were causing a headwind to their same-store NOI growth in 2018. Are you guys seeing those same pressures? And just generally, I guess, what's your outlook for expenses going through 2018?

I mean, we're not seeing it in terms of erosion to margin, which I think is where you would primarily discern it. I mean, union costs are -- tend to be trending up a bit higher, a bit higher. I don't -- I'm sort of looking towards Josh to see if he has some further commentary on that.

Yes. I think overall, union labor increases have gone up, but we largely recover these costs. So it hasn't been a material impact.

Yes. So answer is while we -- I don't know that we're seeing anything contradictory to that. I don't think we would note that as a particularly troubling trend or anything.

Okay. And then on a similar vein, the media margins this quarter were a good amount higher than they were in the fourth quarter last year. Seems like demand from content providers continues to grow. Do you think we should expect better margins from that business as we look forward?

Yes. I mean, I do. I think as we -- Bill and his team continue to just hit the cover off the ball and pushing rents, maintaining high occupancy, there's a natural opportunity to improve the margins, right, I mean, because your bigger expenses have a fixed -- are fixed, right, property and tax, insurance and so forth, largely fixed expenses. And so as we improve that top line, those margins, I think, can steadily improve.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back to Victor Coleman for closing comments.

As obviously apparent, I want to thank the team of people around the table here at Hudson Pacific and the entire company for all the support. And all you investors and people who cover us, thanks for participating today, and we look forward to talking to you on our next call.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.