Greetings, and welcome to Hudson Pacific Properties Incorporated third quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Kay Tidwell, Executive Vice President and General Counsel. Thank you. You may begin.
Good morning, everyone, and welcome to Hudson Pacific Properties' third quarter 2017 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, November second, 2017. Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.
In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The company's earnings release, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors. 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 our third quarter call. We had a very strong third quarter. On the leasing front, we signed over 460,000 square feet of new and rolled deals at 32% cash and 46% GAAP rent spreads. That brings our year-to-date leasing activity to approximately 1.5 million square feet at 41% cash and 60% GAAP rent spreads. Fundamentals across our markets remain strong, if not exceptional. While I'll touch on each market in a minute, it's worth noting upfront that our demand pipeline stands at 1.6 million square feet. That's elevated, in fact, from our last call and driven by increased demand for availabilities in our Silicon Valley assets.
In addition to successfully executing our non-call public bond offering, which Mark will speak on in a moment, in the third quarter, we've moved forward on several disposition of its non-strategic assets. In September, we put our 65% joint venture interest in The Pinnacle 1 and 2 under contract to sell for a combined sales price of $350 million. Several factors led us to conclude our capital could be put to better use, including a joint venture partnership that had run its course, continued softness within the Burbank marketplace, and significant near-term roll of two of the building's largest tenants. We expect The Pinnacle transaction to close in mid-November.
Regarding dispositions, we're also exploring the sale of two of our Palo Alto assets, Embarcadero Place and 2180 Sand Hill Road, which are outside the sought-after Stanford Research Park, where the remainder of our Palo Alto holdings are concentrated. Should pricing prove attractive, these dispositions will also further our efforts to rebalance our portfolio in terms of the AVR generated across our core markets. Now to our markets. I'm going to start again this quarter in Silicon Valley. Bottom line, demand for high-quality tenants remains healthy. Silicon Valley had 115,000 sq ft of net absorption in the quarter and 1.6 million sq ft of gross absorption. Vacancy did increase 60 basis points to 10.3% in the quarter, and rents were essentially flat at $57 per sq ft.
While this could be attributed in part to new deliveries and sublease availabilities, there's good activity on both. The 5.9 million sq ft under construction in Silicon Valley is 70% pre-leased. We're also seeing significant absorption of large blocks of subleased space, which declined about 4% in the quarter. Since our last call, Amazon subleased 177,000 sq ft from Ericsson at Santa Clara Square. WeWork subleased 450,000 sq ft at The Village at San Antonio Station in Mountain View, and MapR took 80,000 sq ft of Palo Alto Networks, Santa Clara sublease. Downtown and North San Jose have quickly become a magnet for major tech companies.
In addition to Apple's up to 4.2 million sq ft campus and Google's bulk purchase of 16 properties for an urban transit-oriented village, Microsoft announced plans to build at least 380,000 sq ft on a large site it recently purchased in those markets. We expect that over time, this type of owner user acquisitions and development will displace existing and draw in smaller new tenants, which is ideal for our current assets in our portfolio. Small deal volume has remained robust. Over 60% of Silicon Valley's deals this quarter were below 30,000 sq ft. Our Techmart asset in Santa Clara is a good example of our ability to maintain leasing momentum despite larger block availability. In Q3, Techmart's leasing percentage increased nearly 500 basis points. Each of these deals average 6,700 sq ft.
In fact, since acquiring the property and making select capital improvements, we've increased Techmart's leasing percentage by over 1,000 basis points, even while 54% of the sq ft had rolled. Working diligently to position our San Jose assets to capture demand immediately as the market tightens, we completed our significant repositioning of Gateway about a year ago. Interior and exterior improvements, combined with the VSP or spec suites, which we built out as leases roll, have made that space very competitive. More than 66% of the sq ft at Gateway has rolled since mid-2015, yet we still had 230 basis points of net absorption. We build out VSP spaces at our remaining San Jose lease-up asset, Metro Plaza. After seeing increased activity at Gateway, we're now pursuing plans to reposition additional common areas at Metro Plaza.
Demand is also healthy further along north of the peninsula. Quality tenants continue to enter the marketplace. The 2.6 million sq ft under construction is 75% pre-leased. Like Silicon Valley, vacancy rose 20 basis points to 7% because of new supply. Asking rents still increased 550 basis points to $72 per sq ft. Next week, we're holding our grand reopening ceremony for Palo Alto Square. Improvements at that asset include modernized lobbies and conference rooms, a new fitness center, and upgraded indoor, outdoor amenities, and common areas. Market conditions in Palo Alto are among the best in the nation, with sub 4% vacancy and $100 per sq ft rents. 76% of Palo Alto's sq ft has rolled since mid-2015.
With construction at the property either anticipated or ongoing, it's been challenging to show or lease space. Those headwinds should now subside over the coming quarters. We've already seen an elevated demand in pipeline, and in particular, a growing interest from tech tenants that previously overlooked Palo Alto Square. Broadening that asset's appeal was the key component to our repositioning efforts. Our other lease-up assets along the peninsula, Peninsula Office Park in San Mateo, Metro Center in Foster City, 333 Twin Dolphin, and Shore Breeze in Redwood Shores share a common theme. Vacancy is being comprised of more outdated and/or larger, say, 20,000-25,000 sq ft spaces. There's a need to upgrade, and in many instances, break up the space to appeal to robust small tenants' demand in those sub-markets.
Collectively, at these assets, we have good activity on about 50,000 sq ft of VSP suites and approximately another 40,000 sq ft in the pipeline, which should hit the market between early December and the end of February. We'll reload our VSP suites as tenants vacate and lease-up continues. In San Francisco, large tech tenants are still driving demand in an increasingly supply-constrained marketplace. Asking rents were flat for the quarter at $72 per sq ft, vacancy dropped 40 basis points to 6.3%, in line with over 340,000 sq ft of net absorption. Two breaking leases were signed, Facebook for 436,000 sq ft and Dropbox for 736,000 sq ft. Our stabilized San Francisco portfolio is now 98.5% leased.
That includes 33,000 square feet with Snap at 875 Howard, which had 110% mark-to-market on rent, and our renewal and expansion with HotelTonight at 901 Market, which had a blended 84% mark-to-market rent. We have over 300,000 square feet of expirations in 2017 and 2018 combined, which are now 58% below market. Turning to Seattle, I'm pleased to announce a terrific addition to our team, Andy Wattula. Andy joins us as Senior Vice President, Pacific Northwest. He most recently was at Beacon Capital, where he ran Seattle's operations, asset management, acquisitions, and development. I'm confident Andy's expertise, relationship, and Seattle tenure will give us a competitive edge as we push to grow our platform in that marketplace. I suspect you'll all have a chance to meet him. You'll equally be impressed.
Seattle's fundamentals continued to improve in Q3 as tech companies flock to the city's urban core. Vacancy in downtown Seattle fell 20 basis points to 8.8%, along with over 430,000 square feet of net absorption. Class A asking rates hit $44 per square foot, up nearly 1% quarter-over-quarter. The 5.3 million square feet under construction is 54% pre-leased, with more than 1 million square feet delivered thus far this year is 99% leased. In terms of our assets, Hill7 is fully leased following our 54,000 square foot deal with WeWork for the bottom 2 floors. Likewise, our 20,000 square foot lease with Lyft at 83 King brought that building to 100% leased. Subsequent to the quarter, we leased 25,000 square feet at 95 Jackson and 21,000 square feet at 450 Alaskan. That brings Jackson to approximately 80% leased and Alaskan Way to approximately 70% leased.
We're seeing great activity in all of our availabilities in that marketplace. Shifting to Los Angeles, organic growth in media and tech and the convergence of those industries continues to fuel demand for office space. West Los Angeles office conditions remain very tight. Rents increased over 3% to $60 per square foot, and we saw a second straight quarter of net absorption north of 100,000 square feet, despite having vacancy being up 130 basis points to 12.2%. Even so, in Q3, we quickly re-leased all 44,000 square feet of our 604 Arizona building to ZipRecruiter at a 46% mark-to-market on our rents. In Hollywood, vacancy is down 190 basis points to 13.2%, and class A rents of $54 per square foot are up 2.5% year-over-year.
Year-to-date net absorption of 515,000 square feet well outpaces other Los Angeles sub-markets. We're tracking nearly 1 million square feet of demand for our newest Hollywood construction project, Epic. These are all high-quality streaming content creators, and our ability to deliver premier office space and studio access makes our portfolio uniquely qualified to meet their needs. Amazon's recent decision to take 280,000 square feet at Culver Studios highlights the importance of access to sound stages and production offices for this user type. In terms of future development pipeline, we're finalizing designs for our entitled 106,000 square foot office development at Sunset Las Palmas Studios, and we expect to break ground as early as Q2 of 2018, with delivery of that project approximately 18-20 months thereafter.
We're also working on master plans for entitlements for an additional 823,000 square feet of office at Sunset Gower and Sunset Las Palmas, and approvals related to these two projects and additional square footages are approximately two years out. I'm going to turn the call over to Mark, who's going to walk through our third quarter financial highlights.
Thanks, Victor. Funds from operations or FFO, excluding specified items for the three months ending September 30, 2017, totaled $78.9 million, or $0.50 per diluted share compared to FFO, excluding specified items of $67.4 million or $0.46 per share a year ago. Specified items for the third quarter of 2017 consisted of transaction-related expenses of $600,000, or $0.00 per diluted share. Specified items for the third quarter of 2016 consisted of transaction-related expense of $300,000, or $0.00 per diluted share. As of September 30, 2017, our stabilized and in-service office portfolio was 95.9% and 91.5% leased respectively, versus 95.6% and 90.8% in the second quarter of this year. The primary drivers of these increases were our 54,000 square foot deal, which we work at Hill7, our 33,000 square foot deal with Snap at 875 Howard, and multiple deals at Metro Center totaling roughly 29,000 square feet.
Net operating income with respect to our 32 same-store office properties for the third quarter increased 12.3% on a cash basis and 6.2% on a GAAP basis. The trailing 12-month lease percentage for our same-store media and entertainment properties ended the second quarter at 90.6%, up 70 basis points in the quarter and 320 basis points year-over-year. This upward trend in studio lease percentage continues to reflect the heightened demand for stages and production offices. Same-store media and entertainment net operating income during the third quarter increased by 15.7% on a cash basis and 2.5% on a GAAP basis. This was again due to higher occupancy and production at both Sunset Gower and Sunset Bronson. Before turning to guidance, I'll touch on a few other items.
First, I will comment on the 90% and 85% year-end lease targets for the 22 former EOP Northern California assets and the eight remaining lease-up assets. As of the end of the third quarter, the former EOP assets were 87.4% leased, up 30 basis points over last quarter, despite over 3.5% of related square footage expiring in the third quarter. We anticipate continued positive net absorption at the former EOP assets through year-end, even as we address fourth quarter expirations representing 2.4% of their leased square footage. Regarding the eight lease-up assets, as of the end of the third quarter, these properties were 79.8% leased, up 80 basis points in the quarter, despite 5.5% of related square footage expiring in the third quarter. Looking ahead, we expect the lease percentage on the eight lease-up assets to improve through year-end.
However, with fourth quarter expirations affecting 3.9% of the leased square footage, we have significant leasing to do to approach our lease percentage target. With over $2.6 million of our $3.4 million total Silicon Valley square footage located in San Jose, we thought it useful to briefly touch on our success in that sub-market. Our five San Jose assets were 90.8% leased as of the end of the quarter, up 60 basis points over last quarter. That is essentially in line with the 91.3% lease percentage when we acquired them in the second quarter of 2015. During our ownership, we have maintained the lease percentage of these assets even as nearly 40% of the square footage has expired. At the same time, we have improved cash NOI by more than 21%.
Remember, although lease roll inherently slows the attainment of a 92% stabilized threshold, it's precisely what's generating such significant NOI growth. I'll also touch on the balance sheet following our successful public offering of $400 million of senior notes in early October. The offering, priced at 99.815% at par value with a coupon of 3.95% and a 10-year term, was more than five times oversubscribed. As part of that transaction, we repaid the entire balance of our revolving credit facility, as well as a portion of our five-year floating rate debt. Between cash on hand, $400 million of line availability and capacity under our Sunset Gower, Sunset Bronson facility, we have north of $600 million of immediate liquidity.
Together with the debt relief upon the upcoming sale of Pinnacle One and Two, our percentage of floating rate debt sits at only 4% of our total indebtedness, with only 18% of our indebtedness being secured. In short, the offering exemplifies our commitment to having a strong balance sheet and superior credit metrics, along with the flexibility to access a variety of high-quality capital sources to grow our business. Finally, with focus increasingly turning to 2018 and potentially impactful items on the horizon, I'll note that we don't have any sizable expirations in 2018. As of the end of Q3, less than 10% of our portfolio's square footage totaling 1.3 million sq ft, is scheduled to expire next year, about 70% of which is along the Peninsula or in Silicon Valley.
Burlington Coat Factory at 875 Howard in San Francisco is the largest square footage expiration next year at about 95,000 sq ft, but the impact would be minimal on our ADR. Plus, they have an extension right, which we expect them to exercise. Note further details on lease expirations over the next eight quarters are on pages 34 and 35 of our supplemental. Turning to guidance, we are narrowing our full-year 2017 FFO guidance to a range of $1.93-$1.99 per diluted share, excluding specified items, maintaining the previous midpoint of $1.96 per diluted share. This was compared to our previously announced range of $1.92-$2 per diluted share, excluding specified items.
Specified items for purposes of this revised full-year 2017 FFO guidance consists of the write-off of approximately $900,000 of original issuance costs, such as deferred financing costs associated with the repayment of $150 million of our five-year term loan due April 2020. It also includes the write-off of approximately $300,000 of original issuance costs associated with the anticipated repayment of $85 million of our five-year term loan due November 2020 upon the sale of our interest in Pinnacle One and Two. As always, our full-year 2017 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of events referenced on this call in our earnings release and in prior announcements. It excludes the impact of future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity, or similar matters.
For the sake of clarity, this guidance does not reflect the impact of a potential disposition of either Embarcadero Place or 2180 Sand Hill Road. There can be no assurance that the actual results will not differ materially from this estimate. With that, I'll turn the call back over to Victor.
Thanks, Mark. Excellent job. As we head into 2018, we are well-positioned to capitalize on the growth trends and positive fundamentals in each of our core markets. We have an unmatched pipeline of development opportunities in Hollywood, we have outsized mark-to-market on lease expirations in San Francisco. We're poised to expand our platform of value-add opportunities in downtown Seattle, and we're generating additional significant NOI through leasing along the peninsula in Silicon Valley. I'm confident that we've got the right markets, portfolio, and people to deliver additional value for our shareholders during the remainder of this year and next. As always, I want to thank the entire Hudson Pacific team, and particularly our senior management, for their hard work this quarter. To everyone on the call, we appreciate your support of Hudson Pacific Properties, and we look forward to updating you next quarter.
Operator, with that, I'm going to turn the call over to you for questions.
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Our first question is from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys. Mark, I just want to clarify. It sounds like you're walking back a bit from the 90% lease target for the Silicon Valley portfolio. Is that accurate?
No. First of all, what was the number you said?
The 90% target you guys had said last quarter.
No, not at all.
We're not walking it back.
What's your indication on that?
When Mark was going through the expirations and the impact on it sounded like you guys.
No, he was just giving facts. He is not walking back. He was just giving the facts.
Okay. All right. Just wanted to double-check. It looks like you guys need about 190,000 sq ft to hit that. Can you just kind of give-- you said of the 1.6 million, a good amount of that is Silicon Valley. Could you kind of give the breakout of maybe what percentage that could be?
What percentage of what?
The 1.6 million sq ft demand pipeline.
Yeah. Right now we're looking at, of the 1.6, since you're laser-focused, it seems like in the Valley. Between the Valley and the Peninsula, about 1 million square feet is in the pipeline of that. It's about 63%-64%, something like that. There's about 465,000 feet in Los Angeles and 100,000 or so feet in Seattle.
Great. Thanks for that. Mark, what was driving the better same-store NOI guidance on the studios? Is that Las Palmas doing better than you guys thought it would?
Well, Las Palmas won't be in the same store, right? It's really just better performance at Gower Bronson. They're trending incredibly well this year relative to last. I think our early expectation when we first guided early this year was maybe we'd get 3%-4%, and it's looking quite a bit higher than that as we're nearing year-end.
Great. Thank you.
Our next question is from Alex Goldfarb with Sandler O'Neill. Please proceed with your question.
Good morning out there. First, just sort of broader market. Just got off the Essex call. On there, they were talking about sort of a job slowdown in the fall of this year. They said it wasn't demand-driven. It was just sort of lack of people to hire. What do you guys see as far as demand from the tech companies and the employers out there? Do you notice a seasonality whereby it's maybe very strong in the summer then it cools off later in the year?
Well, Alex, we're not seeing an impact on the ground thus far. There's modest job losses through the Bay Area, I think in September, but year-over-year, it's still, I think, 50,000+ jobs. I do think that we are at or near full employment. Obviously, there is a housing crunch factor that sort of is built in there. I do think, before we sort of touch on the seasonality, which I don't think I'm qualified to talk about on a seasonality basis, because I don't think we see any definitive seasonality shifts. I can tell you that I do think that the availability of qualified tech job people seems to be a factor. Again, if you look up in Seattle, I think the number is 6,000 employees for tech jobs for the next two years.
Amazon's looking alone for their additional two million square feet that they need to populate. There's a similar sort of demand driver in Pacific Northwest with Facebook and Google and Apple for about 4,000 people. There's a lot of jobs that need to be filled. I'm not so sure where those people are coming from.
Okay. The second question is, CBS Studios obviously on the market, it seems like a big price. Can you just talk about, one, how you guys think about that asset and doing it on your own, which would seem to be a little much just given where your equity is, so perhaps bring in a joint venture partner. Two, just given the Amazon news for their Culver City lease there, and others, it seems like the cat's out of the bag on studio space. If you can give your sort of expectations for how pricing may change on this versus when you guys bid on Las Palmas last year.
Well, I don't know what kind of cat you have, but I don't think there's any cat-out-of-the-bag concept on the studio business. They've been running the movie business since the early 1900s. I don't know what cat-out-of-the-bag concept that is, but I'll sort of leave that at that. In terms of Amazon moving into Culver, that's a fantastic thing for the industry. It's another feather in the Los Angeles cap for content providers. We've been talking about that we've known that deal's been coming down the pike as others are. I don't think that's a negative at all, and quite frankly, it's a positive. It's taking stages off the marketplace that are not allocated to specific owned studios of the big core guys. In terms of CBS, I don't know what expensive number you're referring to. There is no posted number.
If you want to read the regs, go ahead and read the regs and get your information off of that. It's inaccurate, and it's not at all, even remotely, what I think expectations are. We won't comment on deals that we're working on unless we've tied them up. Clearly, that's a deal that is a fantastic piece of property in a marketplace that we think we're well-suited to be the leaders and current leaders and future leaders in that industry. I'm not going to say anything else about that.
Victor, I appreciate it. Thank you.
Thanks.
Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Victor, all your responses so far seem pretty frustrated. Is there something else, any other message you want to get out here?
Jamie-
Just a question.
wow. I guess I'd be frustrated if you had some accurate comments in your write-ups today. That would be nice. I think you were the one who said we met. Is that right? If you looked at the consensus, I think we'd be. You shouldn't write so quickly before you read all your information. No, it's rainy in Los Angeles. I think that's probably where my frustration's coming from.
Okay.
What's your question? We can talk about feelings later.
Yeah. Okay. I guess I heard the same thing as Craig. You're saying on the EOP assets, you guys are still comfortable with the 90% target? Is that?
Yeah
the answer to his question?
Yeah.
The EOP assets, you sound like there, you're not quite as comfortable?
Well, we'll see. All we were trying to do is relay that relatively speaking, there's a higher % of deals have to get done in that eight assets than they do on the 22 assets. One thing I would add to that is, look, I guess there's a tendency to look at those eight assets and get a little myopic about it. Our goal here is to stabilize a portfolio in Silicon Valley that we bought that was underperforming, and that, in our opinion, should be looked at holistically against 22 assets. If we're moving in the right direction against that wider portfolio, we think, one, not only does it reflect the strength of our performance, but also it's a better reflection of the overall market rather than isolating some subset of assets.
By the way, we also provided commentary on just San Jose, and you can see how well those are doing. That's a bigger portfolio than those eight assets. One could choose to dissect whatever subset of assets they want as an indicator of performance. Our only point is we think the 22 assets is a better reflection of that, and we're not walking back those leasing targets on that at all.
Okay. That makes sense. Then on the construction pipeline, did I hear you say 450 Alaskan Way and 95 Jackson are both farther along now than is listed in the supplemental?
That's right. We did a deal, you'll see in the supplemental, in the footnotes, that was signed post-quarter. Naturally, it doesn't show up in the tables. We've given the information around that you can see what the impact of that is.
Okay. What about the downtown L.A. developments, Fourth and Traction? Can you talk about leasing progress there?
Yeah. Listen, I think the Fourth and Traction process, in terms of it's completed. We're really, right now, about 250,000 square feet of demand for that project. We've got one tenant for a very large piece that we're going back and forth on, and it's sort of the chicken and the egg, Jamie, whether we decide to wait on that or do a couple of smaller deals. I think we're very astutely aware of the spotlight on that asset not being leased. I'd say we have a lot of activity of smaller of scale. We could announce a couple of leases that would be signed maybe as early as the end of the year. Candidly, I think we're a little frustrated that we haven't signed leases at Fourth and Traction to date.
Maxwell's a different story because we're still in the construction process, and that's going to be one tenant or two tenants. Quite frankly, the activity on that seems to be even more surrounded about that comfort level of one or two tenants.
Okay. Did you have any appetite to sell those assets before they're leased and just move on?
We never really considered it. Nobody's ever come to us, there are no users that have come to us, I don't think that we would not be interested in selling to a user if they came. Obviously, we're not marketing those assets.
Okay. Any update on Campus Center? I think you said in your press release that that's part of the good demand you're seeing.
Well, I think it's excellent demand. There's a short list of about 1.5 million square feet of interest. Let's just sort of run through. I think we're ahead of schedule. I know we're ahead of schedule on our construction and the access to the space. Right now, our reposition is well underway. I think the first building, I was up there two weeks ago, the first building is looking great. The entire reposition is targeted for February of 2018. We got early access to the property even though they're still paying rent, so we're doing the work now. We're ahead of schedule on that. More importantly, of sort of the 1.5 million feet of top prospects, I'm looking at proposals on one tenant for 180,000 feet to 200,000 feet, and four tenants running between 300,000 feet and 400,000 feet each.
There's an additional 12 prospects for another 3.2 million square feet, with as small as 60,000 feet all the way up to 450,000 feet. The interesting thing is that whether it's us that lands these or not, these are tenants that are in the marketplace, and almost half of them are new and half of them are relocated. That's a great sign for the area that there will be some absorption, whether it's us or somebody else. We're not moving off of our underwriting of a third in 2019 of January, two-thirds in six months and 12 months thereafter.
Okay. All right. Thank you.
Our next question is from Nick Yulico with UBS. Please proceed with your question.
Well, thanks. A couple questions. First, on the lease-up portfolio, are any of those assets going to be entering your same store next year?
They won't. For the quarterly same store, they have to have been stabilized in the prior year. Since they're not currently stabilized, there would be no ability to put them in the same store, even if they stabilize next year. That is to say they could reach stabilization, but they won't qualify for the same store pool.
Okay. That's helpful. I guess just going back to some of the leasing you did in Seattle this quarter at the development and then also at the Hill7 building. It looks like you did some leasing with Regus and also with WeWork. What was kind of driving some of that, I guess, shared workspace demand in that market, and how do you think about your thoughts on that space?
Well, I'll start with, Regus was done this quarter. There's [their Spaces concept] , and that's over at 450 Alaskan Way. That's a deal that our team had been working on that deal for a considerable amount of time. There's a huge demand for small tenant use in Pioneer Square, and that space was sought after for that tenant. We focused on Regus for some time because we love their concept, and they took some space that was not what we would consider the best space in the building. It worked out well for us. In terms of Hill7, WeWork took that space. That's the lowest two floors of the building that made the building fully leased from that point on. I think at the end of the day, that deal was a very high rent. It was over $36 triple net rent.
It had a substantial amount of TIs included to it. Again, that serviced, just that building alone, both vacant buildings beside us, 100% vacant buildings beside us, just took leases to Amazon. The attractiveness to have that kind of co-working space, so having larger users have some sort of flex space to be next to Amazon or the other tenants in that marketplace made a lot of sense from our standpoint. I get where you're sort of going at, Nick. It does not go unnoticed. That's the only WeWork lease we have in the whole portfolio.
Okay. Have you done leases with Regus before?
Yeah. We inherited Regus in Northern California on two properties, is that right? Then also one asset here in Southern California.
Got it. Okay. Thanks, Victor.
Next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question.
Hey, Victor. Just wanted to ask you a couple questions following up on the campus center discussion in Backfilling Cisco. How much of the discussions that you're having there and the demand that you're tracking would be interested in kind of that excess land that you have for something other than office? Is that kind of a key component to any of your discussions today?
There's two parts to that question, Dave. Some of the existing tenants absolutely want the ability to expand. They're not all tech tenants, but one of the tenants is a Fortune-
Fortune 10
10 company that is not tech. They definitely want this for expansion. It would be office and office-related for a campus facility. I think, you probably heard Microsoft took the space right next to us almost. That's the space they bought, is literally within a mile away, that they're going to build their new campus on. You're seeing that desire in that area because of the access to transportation and the labor force and the likes of that. The second part of your question is, the interest level that we've also received on the excess land is for flex space. It's not necessarily pure office, it's flex. We've not underwritten it yet because we've not gotten close to those conversations.
Literally, if you stood on our campus and you looked across the field or the acreage or whatever you want to call it, where the berm is, the first thing you see is a development project that is building a two-story flex. It was building by a developer here in Southern California, and they broke ground and put it up, and it's fully leased already. That seems to be where the desire is on this sort of flex space. We're contemplating that. We're early on in the process, and we're going to evaluate the existing tenants that are sort of at the table now. The bigger decision's going to be from our standpoint is not who's going to take that, what the space is going to look like.
Are we going to split the project up, or are we going to sort of leave it for one tenant to take 300 to grow into 475?
Okay. Yeah. Thanks for the added color there. On Epic, I think you said 1 million square feet of demand. Is that just what you're tracking in the market, or are those current conversations that you're kind of having with three, four, five different tenants? What's the interest level for a near-term signing there?
I said 1.5 million feet. It's not 1 million. It's 1.5 million feet, and there are five tenants over 1.5 million feet that are specific for tracking in that area. Those are tenants that have toured and/or asked for RFPs, or we are in proposals on. The additional 12 tenants is another 3.2 million feet, and they are in that area and the marketplace, which is basically, I would say, South Palo Alto. It totals about 4.7 million feet. We hope to get our fair share of that.
Over at Las Palmas, I think you or Murch said that you'd start the next building fairly soon there, and then you're re-entitling the rest. Obviously, you have Netflix on campus and Amazon made a previous commitment. Do you think that either one of those precludes those same tenants from expanding in those areas? I guess maybe the alternate to that question is, do those commitments help you track tenants much more quickly? Are you seeing any of that?
Hang on, Dave. I'm sorry. You were asking about Epic. These guys are pointing out right before. I thought we were still talking about campus. On Epic, we have had one tenant that has requested a proposal for the entire building that's a expanding tenant in the marketplace that's going to come from, I don't know, Derrick, multiple locations, right?
They're moving from multiple locations and expanding from the west side. They're not currently in Hollywood. We've had three tenant increase up to 500,000 feet, and none of those are Netflix. Going to your Las Palmas question, on the 100,000 feet, currently right now, we are building that, as we've said in the past, spec. It's a small building. We're anticipating it to be a production-type building, so multi-tenanted, to enhance the studio space that we currently have, since there is really no what you even consider production post and pre Class A space at that facility. As we are converting that facility over to similar to what we did to Gower and Bronson, it looks like that would be the high-level demand there. We're not saying that we wouldn't have a single tenant, but we haven't even shown our renderings on that asset yet.
Hopefully our design review will go through in the next couple of months and we'll break ground by April 1 hopefully.
All right, great. Thanks for that clarity on Epic. That made a lot more sense. Appreciate it.
Sorry.
No, it's all right.
Our next question is from Blaine Heck with Wells Fargo. Please proceed with your question.
Hey, guys. Can you talk a little bit more about your decision to market Embarcadero Place in 2180 Sand Hill? Just want to make sure there's really nothing concerning about that market for you guys, and it's just more of a non-core to your portfolio. Second part of that question, specifically on Embarcadero, it's a little under 80% leased. Would it be beneficial to try to get that back to stabilization before selling it, or do you guys think the demand is good enough that it doesn't really matter?
Well, let me tackle your first question. Clearly Palo Alto is nothing concerning from our standpoint, or I think anybody else who owns or has real estate there. It's clearly the hottest market in the valley, and it continues to show the highest rents. We have now repositioned our building there. The activity that we're seeing and the rents that we're seeing are all consistent with what we perceptively have said the market conditions are. There's no hidden secret at Palo Alto, and there's no hidden secret as to why we're marketing those assets. The assets are non-core to our portfolio. Embarcadero is fortunately a Palo Alto asset, but it is sort of on the outskirts of Palo Alto.
It always was one of those assets we had a conversation on about its ability for us to maintain it or sell it, and we've always thought that that would be a great candidate for us to sell. I think, in terms of your vacancy question, I think we've got 100 packages, requests for packages out. The response so far on our pricing guidelines is from what Eastdil Secured is telling us is well in our comfort zone of what we would be able to transact on. We have no concerns on selling that with some vacancy. Quite frankly, I think it's attractive that we're selling it with the vacancy aspect there. Sand Hill Road is Sand Hill Road. This is a boutique building. It's small.
I think we're going to hit some historic numbers in terms of where we're going to sell this at, and if we don't, we won't sell it. That's plain and simple. It's such a small asset, and we do have a little bit of a role coming there, so it's attracting some high net worth owner users with Zoox coming out end of first quarter of this coming year. Again, I think that asset has got another 100 or so packages out, and I think we're calling for offers on that in the next 30 days.
Okay. Sounds good. Any sort of cap rate or range of cap rates you guys are targeting for that? Then also, I don't know if I missed, but was there a cap rate given on The Pinnacle sale?
The answer is, well, if I gave you a cap rate on this call, then we would cloud the pricing, right? Wouldn't that be kind of obvious?
Fair enough.
We're not going to talk about cap rates on that asset. In terms of The Pinnacle, no, we didn't disclose a cap rate on that, I don't think. Did we, Mark?
Well, somewhat indirectly, in so far as you've seen the impact of it in our guidance. I'm looking at Alex in terms of whether or not you feel that it would affect the sale or anything.
We haven't closed yet, we historically don't comment on things until things get closed.
All right. That's all right. I can probably back into it. I guess with all the capital coming in, Victor or Alex, can you guys just talk a little bit more about the acquisition environment? You talked a little bit about CBS, but are you finding any opportunistic investments on the office side out there in general?
Yeah. Absolutely, Blaine. We're looking at right now, a nice off-market redevelopment, value add play that's a fairly substantial size project that we've been working on for a while. We've got a smaller project that we should be announcing shortly under contract in Seattle. We've got a bigger project in San Francisco, actually, that we're looking at. We obviously have that $1 billion number for CBS Studios that everybody thinks is a value add project. We have another Los Angeles asset that's also off market. We are finding our fair share. I think we'll get our fair share. I'm not going to give a timeline as to when they come to fruition. We are sort of at an interesting time of the year, right? Even if we were to tie up a project, you're not closing by year-end.
Everything that we're working on right now will be first quarter executed with maybe the exception of a smaller project up in Seattle.
All right, great. Thanks, guys.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment please while we poll for questions. Our next question is from Richard Anderson with Mizuho. Please proceed with your question.
Thank you. On the same store, Mark, I appreciate the explanation. You don't add assets until they're both owned and stabilized in the year-ago period, which is great. A lot of other REITs don't do it that way. They just need to own it in the previous period, so they get the benefit from occupancy upside. That's the more conservative way to do it and appreciate it. The question is at a 9%-10% guidance, adjusted 10%-11% for Weil, Gotshal and the Cisco lease term, how sustainable is this range?
Is there anything about 9%-10% or 10%-11%, or however you want to look at it, that isn't something we should expect five years from now, or is it just that you're getting so much roll in certain markets that this type of high single-digit type number is kind of foreseeable for a while?
Well, Look, if you look to 2018, 2019, which is where we're more focused on expirations, which is going to be the key driver on the stabilized portfolio. There's still lofty mark-to-market embedded in 2018, 2019. 2018 is right around a 24% mark-to-market on expiration. 2019 is in the high teens, and they blend to like 18%-19% mark-to-market. That is going to be the primary driver of the NOI growth. Those are cash numbers I'm giving you, by the way. Five years from now, I think, is beyond any reasonable sort of projection. But I think one year or two years from now, I expect to outpace our peer group in terms of cash NOI growth, and I don't know. Could we get to 10% year-over-year? It seems possible.
That's good color. The idea is while you don't have a whole lot expiring next year, I think you mentioned 10%. Would you maybe pursue a little bit more in the early lease or attack leases a little bit earlier and kind of capture some of this sooner rather than later?
We are doing that. We consistently do that, Rich. There's a couple of larger tenants that we are in conversations with right now that expire in 2019, and they have an option to go from there. We're doing that, of course.
Yeah. I was thinking more, I guess, than you have been.
We'll take advantage of whatever opportunities we can to blend and extend. BofA, by the way, we did a large blend and extend with them just last quarter. Oracle is an example. We're always looking for that opportunity.
Okay. Second question is, I attended the Boston Properties Investor Day. On slide 351, they talk about Silicon Valley. They identify a few things different than yours. I'm just see if you have any information on why they might be so different. They have pre-lease percentage of 38%. You mentioned 70%. They have sublease space going up. I think you said going down. I'm just curious, has there been some recent activity that maybe has closed the gap between what they see and what you see, or do you just have no comment because you don't know what their metrics are?
Well, listen. I didn't get slide 387. I didn't get slide 1 to 387 either. I can't speak to what their numbers include. I can tell you what ours do. First of all, ours include active construction projects that are going to be delivered, that have been approved. Ours include everything south of Palo Alto. Ours do not include R&D because it's not competitive to our space. We do include owner-user data on that basis. We're confident with the experts that give us that information on that. In terms of the sublease, I can go market by market in terms of San Mateo and Foster City, Palo Alto and Santa Clara as to where we see that is. We look at what's leased and what's coming into the sublease market.
Again, we are out there verifying the numbers that we are given by JLL and CBRE and the experts in those markets. I don't-
I think it might be just geographic. They even have lower under construction. They have 4.5 million sq ft. You said 5.7 million sq ft. I think it might be just geography differentials or something like that. I just wanted to see if you had any comment on it.
Yeah. Don't forget, we heavily look at San Jose and North San Jose. They don't. That's not part of their landscape.
Yeah, fair enough. Okay, thanks very much.
Ladies and gentlemen, we've reached the end of the question and answer session. At this point, I'd like to turn the call back to Victor Coleman for final comments.
Thank you so much for participating. Again, I'd like to thank the senior management team for their exceptional work and dedication to making Hudson Pacific what it is today. Have a good day.
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