For those of you who don't know me, my name is Laura Campbell, I'm Head of Investor Relations for Hudson. As you can see, we have a full agenda of management presentations today. You're going to get a lot of information. Just so you know, the presentation materials, you can download them from our website, and the webcast will be available for up to one year as well. Just a reminder, since we are live, to put your phones on vibrate. We're going to keep the introductions for each speaker short because we've put a full bio for everyone in your folder. There will be two 10-minute Q&A periods, one after Arthur Suazo and one after Mark Lammas, so please hold your questions until that time.
There will be two 10-minute breaks as well, one after our fireside chat with Bruce Richmond and the other one after our first Q&A session. We're going to do our very best to stay on track because I know a lot of you have flights to check. Before we kick off the presentations, I'd just like to turn things over to Kay Tidwell, our Executive Vice President and General Counsel, who will comment on forward-looking statements for this presentation.
Management may make forward-looking statements during this presentation. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially. Forward-looking statements include statements related to our future economic performance, plans and objectives for future operations, and projections of revenue, net operating income, funds from operations, discounts to net asset values, and other selected financial information. For a further discussion of the risks and uncertainties related to our business, see our Form 10-K for the year ended December 31st, 2015, filed with the Securities and Exchange Commission on February 26th, 2016, and subsequent filings with the SEC. This presentation also contains non-GAAP financial information. Explanations and reconciliations to net income are included in the appendix.
Thank you, Kay. As you all know, Mayor Garcetti had intended to join us today, but unfortunately, he had a conflict at the last minute, so he was very kind to film a brief message for all of you, welcoming you to the city of Los Angeles. Let's take a look at that, and then we're also going to show you a little something specially put together on HPP.
Good morning. I'm Mayor Eric Garcetti. I'm thrilled to welcome you to the City of Angels, a city where unprecedented investment is fueling an exciting transformation. It wasn't long ago that many were writing Los Angeles off, saying that we couldn't compete with the culture of New York or the entrepreneurial spirit of San Francisco. When people talked about growth opportunities, they were mostly talking about the time that we spent in traffic. Today, we're proving the doubters wrong. Giving birth to new industries, our skyline is expanding thanks to $7 billion in active development. We're ensuring that every Angelino has access to opportunities that foster success. We're creating new jobs, 112,000 since I took office. We've cut our unemployment by more than half. That's just the beginning.
Over the next decade, we're spending billions of dollars to modernize our port, to remake our airport, our transportation network, and our city streets. We're raising the minimum wage, the first major city in the country to do so. We're competing to bring back the 2024 Olympics here to America. We're even welcoming the L.A. Rams back home and opening world-class museums like The Broad and the Petersen and constructing the tallest building west of the Mississippi. Los Angeles today is standing on the world stage as a model of what the 21st-century metropolis can and should look like. We are investing in the present to shape our future. By all measures, that future looks very bright. Anything worth accomplishing is never accomplished alone. I want to personally thank Victor Coleman for his vision and for his leadership.
He is a great advocate for the city of Los Angeles and our people, a dear friend. Hudson's strategy and expertise has uniquely positioned the company to participate in L.A.'s evolution. I'm proud to call them a partner now and going forward as we continue this journey of helping our city achieve its limitless potential, one brick and one job at a time. Thanks for having me. Enjoy your day.
Everything that is. Everything you see. Started with an idea. An idea that someone dreamt up. Jotted down. Mapped out and made real. Those are the people we build for. We dream with the dreamers. We create with the creators. We innovate with the innovators. We build for the builders. At Hudson Pacific Properties, we build as we grow our teams, deepening our roots with diverse talent, loyal and collaborative, unified in vision and purpose, supporting one another with a generous spirit and an open heart. We build stunning spaces unlike anything seen before. Beautiful and functional, filled with energy and light, giving people the inspiration they need to create, expand, explore, and succeed. We build trusted relationships with our tenants, investors, and stakeholders, because trust is our currency. People count on us. That's our proudest achievement.
We build the future by embracing change and challenge, by attending to every detail while never losing sight of the grander vision. By instead of saying no, saying, "We'll figure it out," we're dreaming up. At Hudson Pacific Properties, we build what's next. New spaces, new relationships, new opportunities, new dreams.
With that, I give you our Chairman and Chief Executive Officer, Victor Coleman.
Welcome, everybody. It's a pleasure that I'm here, and it's a pleasure that you guys came to see The Cure last night, for those of you who went to The Cure. The funny thing about The Cure is, we decided to string this sort of thing together, and so we're going to have our Investor Day. One, we had no clue how difficult it is to have an Investor Day, so we're going to only have two a year going forward instead of just one. We picked the date, and it just so happened to be right after ICSC, and that's why we have such a spectacular turnout for a lot of you guys who came right from Vegas to detox here in Los Angeles. Figured we'd take you to the Hollywood Bowl as a true L.A. experience and The Arts District.
I made a comment, I said, "We had no idea who was going to be playing." We just figured, we're going to go to the Hollywood Bowl. It could've been The Sound of Music, it could've been a much worse night. The reality is, I saw some diehard Cure fans. I actually knew two songs myself, so I felt pretty good about myself, so. Anyways, welcome. I want to just take a second before I get into our presentation here today. I want to take a second and just recognize Laura Campbell and her entire team, for all the work they did to put this together. Laura and your team, please stand. Natalie, Alyssa, thank you, guys. Thanks for traveling with us today. As Laura mentioned, we have an exciting day. We've got some great things that you guys are going to see.
That video, every person in that video was a Hudson employee. There was no marked individuals that were good-looking. We have good-looking people at Hudson, and I'm proud to say that. This is really our first real Investor Day. We did this four years ago, with sort of a shoestring portfolio and a small tour. This is, I think, going to be very impressive, and I'm pretty excited. It's a great opportunity for us to dig in as a company and share with you not only our past performance, but really what speaks to the future and where we're going. We're going to do some unique things today, and you're going to, as I said yesterday, you're going to see some pretty interesting aspects of the company. Many of you know us as a growth story. That's what we are. We are a growth company.
We're in the West Coast markets, facilitated that growth and performance. Really, we're a story of execution, and that's our company's motto. Execution at the absolute highest level. Those spaces are all the spaces that we've built and many, many more, and we've executed, I think, with an exceptional team and a team that's carefully honed in on their skills, carefully dealt with their core disciplines and priorities and made this company what it is today, and I'm very proud of that. Our markets are the strongest markets in the country. I'm excited for you to see today how we're prepared, not only just for where we're currently at today, but where we're going to go in the future. Let's get started, and we'll get into it. From its inception, we have a senior management team. We've assembled an exceptional team, a team that has a diverse background.
For the most part, that team has all the right capabilities at all the levels to perform at the highest levels. Four characteristics of our senior management team are the industry veterans, local sharpshooters, a multidisciplinary expertise, and focus on building and maintaining the right relationships. The two keys in that right now is repeat key business, it's relationships, it's how we treat others and how others treat us. I'm not afraid to say the phrase local sharpshooters because that's who we are and what we've executed on countless occasions. Together, all these characteristics as a company have formed a foundation by which we have seen successful aspects of acquisitions, dispositions, and development, and execution throughout the portfolio. This, you're going to hear, is carried throughout today. Let's just take a quick look back at what we've accomplished since going public in 2010.
At its core, as I said, we're a growth company. Over the past six years, we've demonstrated our ability not only to recognize opportunities, but to execute at a pace and accuracy that very few, if any, could match. We've been the most active public company acquiring the West Coast office markets post-recession, executing over $5.6 billion of transactions since our IPO. Our portfolio has grown almost five times since the IPO, from a small three and a half million square foot portfolio to over 17 million square feet. Impressively, our market cap has also grown from only a half a billion dollars to over six and a half billion dollars, all while maintaining a very conservative balance sheet. On a leverage basis, consistently as a company, we've been 30% leverage across the board, which is unheard of.
We really have never gone over 35, and we've gone down as low as 25. Needless to say, as a company, we've been very busy over the last six years. I think it would be understatement if people have asked us multiple times, what markets are we going to move into? We have stayed true to our markets and core to our markets, only investing in what we believe are the clusters of knowledge and innovation in our society today. These markets have certain key characteristics that create high barriers to exit and facilitate outperformance over the long term. An example of this, as you can see in the slide, on the Fortune 500 headquarter companies, growing highly educated young professionals, leading universities with outstanding STEM programs, capital, not only just VC money, other capital, but R&D funding.
Four of the top 10 schools in terms of funding are allocated to R&D, are in our markets. Stanford, University of Washington are on the top of the list for federal R&D grants, receiving billions of dollars. The West Coast itself has performed greater than anywhere else. If you look at this, Silicon Valley, Seattle, San Francisco, all recovered very quickly. Other than Boston in this slide, our four core markets are the highest performers in the country by far. As you know, here in Los Angeles, after hearing Eric, after what you all know what's going on right now, the growth that we're seeing, the momentum in Los Angeles is key. We've come out of a little slower than others, the growth factor is big. As a result, you can see what we've done on a leasing basis.
You can see what we're doing on our redevelopment, development basis, yields are proving themselves out. We've been strategic as a company, not only what we bought, how and where we've done it. It's not easy to enter these markets, I want to make sure people understand that. When people come to these markets trying to amass quantity and quality real estate, it's not easy. If you have a foothold, you have a huge advantage. That's the phrase of local sharpshooters. Markets like Los Angeles and Seattle and the Peninsula and the Valley, you can grow to scale if you're people like us. You're not going to get in these markets today. Quality real estate is already taken. We've done it time and time again, consistently throughout our portfolio. 2 million plus sq ft in Hollywood, including our development properties.
2 million plus sq ft in San Francisco, in SoMa. 1 million sq ft in Pioneer Square in Seattle. 8.2 million sq ft in Palo Alto, Peninsula, Silicon Valley. We've been able to do this in large part because, as I mentioned earlier, we've got unparalleled relationships, those relationships are cherished by us and the people we have them with, allowing us to access all these deals others never even get an opportunity to see. 80% of the deals we've done in this company have been off-market related deals, over 12 million sq ft. Nobody can say that. Relationships, as I said, for off-market transactions, are everything. Execution, performance, the ability to assemble properties based on who you are and what you can do. Hudson's done that countless times.
If you look at our dominant position in gateway markets here, these holdings are the most sought after sub-micro markets in the country. Pioneer Square. Alex did his presentation yesterday, and raise your hands. SoMa, Mid-Market, Palo Alto, now North San Jose, Hollywood. They're all part of what become the landlord of choice that we have established ourselves as a company for the leading growth companies in America. Companies like Amazon, Uber, Google, Netflix, want and need to be in the markets that we're in because they are the clusters of knowledge and innovation. Simple, stated. They're not moving from these markets. They're expanding in these markets. It's proven. It will continue to be that way going forward. Let's take a look at how these factors out for unique competitiveness, strategies, and executions that are impacting our results.
As you can see here, from our IPO to today, we've achieved a mark-to-market cash rents of 26%. That's 1,800 basis points above the next highest performer during the same period. It's not even close. When I speak publicly, we go on road shows and non-deal road shows, and we tell people our performance, the numbers speak for themselves. As you all know, who follow us closely, our markets trend the way our leasing trends. Right now, our portfolio also has a first quarter 16 mark-to-market cash rents exceeding 65%, which Mark and Art are going to get into later on today. This is in part because of the performance of our target markets.
When we pick the markets, we pick them because the reality is, when you see things like when we purchased the Blackstone portfolio, which is A-plus portfolio, execution is only part of the acquisition process. It's taking it from that level and then leasing it up. A little later, Art's going to dig in on our strategy and how we accomplish this. I can't tell you how many people, after we bought that portfolio, and we took it from 80% to 85% in the first six months, they said, "Well, it's low-hanging fruit." I said, "Well, if it's low-hanging fruit, why these other guys didn't do it?" Execution is key. He's going to dig in and tell you what we do differently from our leasing team. Our process significantly gives us a competitive advantage. You'll see how we work through that.
We are setting the bar for this industry. We're proud of it. In terms of value creation, just to give you a little bit of an example. You're looking at two things here, our development project, Icon and Cue, our Element project here, both in Los Angeles. These projects are very successful from our standpoint. As you can see, we've created over $270 million of additional shareholder value from two projects alone. Mark-to-market on these assets, people look at what our cost bases are, but the value creation is based on what we've done with the leasing and renovation. That story is consistent throughout our portfolio. At the same time, we've diligently managed our development and redevelopment pipeline. This is key. A lot of people say, "You're going to get over your skis in development." We say, no.
We've been less than 10% consistently on new development. We only develop in our cycle on assets or properties that we own. We've never bought a piece of property land-wise, gone through the process, and then developed it. Every piece of property we have in our future development going forward are assets that we have as a result of buying a portfolio. We have additional FAR in the portfolio here as a company. We've maintained this, and as you all know, going forward, our projects like Cue, Icon, 405, 450 Alaskan Way, largely, these assets had been pre-leased prior to us even breaking ground on these assets at higher rents than markets have seen in the past. This is a consistent story with us, and we'll be consistent going forward on our future developments that we are about to announce in the near future.
These actions and decisions, our timing, our market strategy, our capabilities have allowed us to outperform our peers in terms of cash flow growth. FFO per share has grown 54% since our IPO. As you can see here, every office REIT on this level, and we're number 1. To conclude, before we dig deep on this process, we offer an impressive track record of execution and value creation. Risk management, we believe we're the best-adjusted risk return among all of the office peers out there. We've been telling our story consistently, and we'll open it up to questions, and we'll tell you what we think and why, as the day goes on.
You're going to see a lot of great insight on our cash flow, on our ability, on our inner workings of this company, and especially, as I gave you a little teaser yesterday, Mark's little bridge to success, which will be a first time anybody's ever done something like that, so it'll be kind of cool. I'm confident you're going to walk away today with a better understanding of our company, our growth prospects, and exactly where we are today and where we're going to go tomorrow, and how we're positioned for this cycle moving forward. I'm excited, and I appreciate you all being here. I think, the Hudson team is excited and appreciate you all being here. Let's get going. Okay?
Thank you, Victor. With that, I'm going to turn it over to Bill Humphrey, our General Manager of Hudson Pacific Properties.
Morning, everybody. Lights, camera, action, please. We're going to roll a little video for you. Live television.
We are going on a trip around the world.
You say I'm always getting mad. I'm always such a drag. I'm not like that. I know that I'm too hard to find. I don't mind. I'm just like that. Ooh. Hold me back. I don't wanna be a drag. It just makes me mad. When you turn me around. I don't wanna be a drag. Ooh
Okay. That was fun. Just a note first. For all you alternative rock experts, of which there's only one in the room, I was unable to find the appropriate Radiohead song for our video background. I went with Day Wave's instead. The conversation around real estate these days is often focuses on New York, San Francisco. It's so easy to forget about Los Angeles. 15% of Hudson Pacific's base rent comes from L.A., and the convergence of media and technology, Silicon Valley streaming companies migrating south, is now a significant driver of the L.A. market. Today, I'm going to talk about how HPP is uniquely positioned, particularly among public REIT peers, to capture this increased demand through a blend of facilities and specialized services.
This demand is not only about the new players like Netflix or Amazon Prime, but traditional players like ABC and CBS and branded networks like HBO and HBO Go. Our recent deal with Netflix is a perfect example of the broader tech media phenomenon and of how our portfolio of skills and real estate and facilities allowing us to build relationships to continue to grow and add value beyond our initial leases. Let's take a closer look at what's going on here today. In this first slide, West Coast streaming companies have significantly increased demand, period, in Los Angeles. 845,000 square feet of additional incremental space for creative and production office. Many of these companies are continuing to grow in L.A., as Victor noted. Exemplified by Netflix, for example, expansion relocation from Beverly Hills to our Icon project in Hollywood.
Major networks continue to create content with an emphasis on dramas, which require significant resources, stages, and office space. Branded networks
have expanded production to provide exclusive content supporting global brand recognition. That word exclusive is important because each of these brands that you watch on TV or you stream are really important that you create a relationship between the brand and what they're showing. Digital entertainment jobs, there's 8,000 that were added in L.A. in 2015. A 6.5% increase over the previous year, three times higher than private sector jobs in L.A. County. Again, all these companies that were pretty much in the San Francisco area, Seattle area, have driven down here because they need the talent, they need the people. Los Angeles, especially Hollywood, have attributes that are difficult to replicate. L.A. is where all the talent lives. It's where they reside. It's where they want to be. It's where the production people are. It's where the post-production people are.
It's where creatives meet to spark new ideas, to do deals, to execute those deals. L.A. has historic studios that are over 100 years old, built in a time where land was cheap. Many may not know, but Sunset Gower Studios, for example, was where Columbia Pictures started when they moved from New York. There's so much land, they had a huge ranch where they could do cowboy movies. The traditional studio model, as you've probably all read in the paper and watching TV, has been disrupted by technology. Sounds familiar. 20 years ago, look at the music business and where it is today. The streaming model, from Netflix to HBO Go to Amazon Prime, is driven by technology and focused on global distribution, consumer brand recognition. These companies focus their capital on content, brand, digital infrastructure, not owning physical studios as traditional studios have done.
Their organizations are non-hierarchical, open space environments that stress the value of collaboration. Let's talk about Netflix as our example. They wanted a different facility reflecting their culture, their business direction, their brand, which led them to our Icon building at Sunset Bronson Studios. Netflix is growing quickly. They distribute to 190 countries, 600 hours of programming announced this year. Just yesterday, they announced an exclusive U.S. pay window with Disney, which includes Marvel, Lucasfilm, and Pixar. It's amazing stuff. When I entered this business a long time ago, I didn't understand the magic. I was a back office guy. This magic of L.A. and how it concentrated here. Now I do, and it really does happen here. The intangibles of the vibe of Hollywood, the buzz, it can't be measured, but believe me, it's real.
It's so important to creating the new next big hit TV show or movie or game. Netflix understood this value. Sunset Bronson, the original home of Warner Bros. Studios, and Sunset Gower, the home of Columbia Pictures, provides creative environment for Netflix that they were looking for. Icon neatly fits in with Netflix's need for this open space, allowing for collaborative culture to flourish. Hudson Pacific, and specifically Hudson Pacific Media, provides a service that is essential to closing that deal with Netflix.
We're able to talk details with people about real estate, of course, finance, brokerage with Art and his team, construction engineering with Chris, and all aspects of production, ranging from how do you do an audience show for a talk show or for a judge show or a game show, or, geez, how do we do fiber routing for 4K cameras in the future? The whole bottom line is Hudson Pacific Media is all about catering to this convergence of media, technology companies. What started off as an office deal became a lot more. We work with Netflix almost every day right now, both on finishing the building with Icon, but also on stages. What Netflix really wanted was, hey, they wanted to walk out the door of the Icon building, walk right onto a stage, and they wanted to walk into production offices with their contracted talent.
Netflix's new show, "Girlboss," Sophia Amoruso's rags to riches story of founding the Nasty Gal label when she was a 27-year-old, just moved into Stage 9 at Sunset Bronson Studios. They're also committed to Stage 4 for another really big show that I can't note right now. That results in another 67,000 sq ft of stage and support space and 26,000 sq ft of office space incremental to the Icon project. Let me spend a few minutes on the bigger picture beyond Netflix. The bottom line is the demand for studio production office is increasing as network spending increases. You can see in this slide, Netflix is leading the way, $5 billion was spent in 2016. What's everybody else doing?
Well, as you can see in the little quote from Broadcasting & Cable, rival programmers are mounting a strategy to fight fire with fire. We're going to spend more money well into 2020 because the proliferation of this distribution network through the internet provides a lot more ability to get content. More content is needed to fill those pipes. Literally right now, we're turning away work, unfortunately. We're doing a lot of tours, but we're so full in terms of both our office space and our stage space, there's no place for people to go. This trend may seem a little crazy, but it's really rational. Let me tell you why. First, Millennials. They're the growth market. They're the future. You see the data on them being the biggest majority part of the workforce now or in a few years. Think about the data.
94% of millennials stream, 56% of millennials watch TV shows and movies, but not on TV sets. 20% solely watch on mobile devices. Secondly, streaming technology is constantly improving, allowing for the distribution model to expand globally. As the U.S. becomes more saturated, Europe, Latin America, Asia will continue to drive this appetite for digital content. Everybody's jumping on board. Time Warner Inc. just announced that Turner Classic Movies is going to create an exclusive old movie network that's going to be streamed. Supply is not going to increase. Look at the economics. For example, to build a 22,000 sq ft, three-story building with one floor, no columns, unique air conditioning, and soundproof in the middle of L.A., it just doesn't pencil out. As this chart notes, we see production hours dramatically increasing, but the numbers of stages remain stagnant.
In fact, we believe that the number of stages is going to be decreased. Example, Universal Studios with the new Harry Potter and the theme park are taking stages out of commission to basically go for higher and better use. Paramount Pictures just got their approval yesterday for their master plan. They'll be converting stages to creative office space that they really need. The supply and demand curve's in our favor. Most shows are made in L.A. or New York. The California $400 million tax incentive, which now provides an effective competitive program for New York, other states in their new political climate are reducing or eliminating tax incentives. We have upside. We have studios, we have the support. We have a 1.1 million sq ft pipeline to meet demand on our studio lots or adjacent to our studio lots in Hollywood.
Chris is driving forward on the Cue construction and 5901 Sunset approval, which is the best development site left in Hollywood. We also have significant development potential at Sunset Gower, too, as you can see in this slide. We're really well-positioned to produce architecturally compelling, creative production office that satisfies the convergence of technology. The Silicon Valley whiteboard culture, as I call it, the entertainment creative Hollywood culture. We really get it. In short, there's no other public REIT that's better positioned to capture and monetize this increased media and entertainment demand. We're probably the only company, not only in the REIT, that deeply understands real estate and production, the culture of media and technology. We're positioned to provide the facilities. We're deeply rooted in media entertainment. We certainly know real estate, and we're ready to meet demands of the L.A. market.
Thanks so much for your time.
Thank you, Bill. Now we're going to have our first fireside chat with Victor Coleman, who will be chatting with Bruce Richmond, Executive Vice President of Production for HBO.
Bruce, where do you want me?
Fantastic. You pick your seat.
I thought I would run around the room like Hank.
It's interesting. Bill gets to highlight all the Netflix stuff, and then we bring up an HBO guy.
They do a lot of work with us, Victor.
They do a lot of work with us. Bruce Richmond.
I know. That way I felt like I had a good Netflix-
[inaudible].
Exactly.
Bruce Richmond is the Executive Vice President of Production at HBO. He's been there since 1995, right? Long time.
Yeah.
Can you count that back?
I believe it's 1992.
1992. There you go.
Yeah. I've been there a long time.
He oversees all aspects of production of all HBO original series, miniseries films, as well as Cinemax's original series. He's done overseeing the production of all the successful shows on HBO Go, including "Game of Thrones," which if anybody's a "Game of Thrones" fan, we may get a question out of him today or two. Shows like "Veep," "Boardwalk Empire," "Girls," "True Blood," which was a show that filmed at our studio, and "Newsroom," which filmed at our studios. Also just because I like to say people get awards. He was a Golden Globe recipient, Emmy.
Yeah.
Producers Guild.
Yeah.
Yeah. Feel good about yourself?
No, I had forgot about that stuff because I was a producer back then.
There you go.
I got lucky. I got to produce some stuff.
We're going to ask him a couple questions. At the very end, I'll let people, if they got anything you want to shoot out there, just raise your hand and I'll get a couple questions if we have time, okay? The evolution of HBO, the model that you created
Yeah
which is really the first of its kind
Yeah
indicative of what's going on more broadly in the entertainment industry.
Yeah.
How has that changed? Talk about that.
Well, listen, I think we've been through. When you look at HBO, which starts in early '80s, late '70s with original program, with a stand-up George Carlin special. We go through traditional MSO. We go from being like many starting companies, certainly in some of the companies like Netflix in their first year, from a place that licenses only their content, then has a window and puts it up, then doesn't really worry about the back end, to a place that over time, obviously has owned its IP, owned all of the distribution streams.
Right.
We were one of the first companies to do that. Now you find yourself in a place where the traditional viewing habits of the public are changing. What you don't want to do is ever be in a position where you can't reach extra additive subs. I think, as we looked at the landscape, it became clear that to have a product that was more friction-free, developed, populated, marketed
Available would be something that would be critical in our evolution as a primary content supplier. I think we had certainly been developing HBO Now and HBO Go for some time, and we've had several iterations and I think that we've been lucky to get here at this time, having a fully featured product that is
Right
monetizable and not
Controllable
not only controllable, but doesn't eat the existing money thoroughfares
Sure
that exist from traditional broadcasters
Mainstream, right.
which is a very important part of the business. Unlike, I think, a Netflix that's starting out from scratch, they don't have those types of relationships, and they can kind of bypass how they're going to deal with the MSOs until the MSOs are coming in later in the game after they're successful, and that's kind of an opposite evolution, but I think we continue to do that, and you have to do that. I was listening to a little bit of the presentation prior to this. By the way, there is no fireside here.
Where is it?
You could call this like a coffee chat, really. I think you hit it on the head, which is ultimately what it does is there's Oh, there's the fireside. Here we go.
See? In the bottom right corner.
That's better. I think everybody is doing stuff. I think that's really what you find right now is that traditional internet plays that were more interested in the transactional financial gain from being a content provider versus we're going to make some of our own original programming because we know that that drives things. Because it's opened up so much, you see things like "Transparent," which is Amazon.
Sure.
Fantastic show. I think not only are you seeing more get made, but you're seeing more get made at a quality level-
Well, that-
on the narrative that is-
That's an interesting point.
You know?
If you look at the Golden Globes this year, right?
Yeah.
There was not an ABC, CBS, NBC winner across the board, and there wasn't even an NBC nominee for a television show.
Yeah.
Yet you guys dominated by far.
Yeah. Listen, I think awards are funny things. A lot can happen. I don't know how much you know about the voting boards, but they're not the most-
Manipulative. I get it.
Yeah. They're not working. They're usually the folks who are like kind of, they're at the governor's board, and they're kind of have been out a little bit. Anything can happen at those things. It was amazing, and we all kind of looked at each other and said, "Will we ever relive a moment where you get to dominate all categories?" It was just fantastic. I suspect that we will not have that type of showing next year, just because we've skipped the-
Right.
Yeah.
Let's just talk a little bit about global strategy, expansion strategy.
Yeah.
The impact to L.A., because I know people are going to want to sort of hear about that on production and-
Yeah
How it's come back here and the support around it.
Yeah. Listen, I think whenever I see kind of a new infrastructure being built, it gets me very excited. Listen, we've built a bunch of studios globally that we had to throw up. When I was doing "Band of Brothers"-
Right. Got it
we went into Hatfield Aerodrome, which is a gigantic space, and we needed a mill space. It just so happened that one of their hangars was a mill space, but then you get into the infrastructural needs of heating 1 million square feet of space, whatever the fuck it was.
Gone.
Yeah. When we were doing From the Earth to the Moon, right? I figured, let's fireside.
From the Earth to the Moon.
As long as I can have one swear. The kids aren't here, so I can swear once. When you go to "From the Earth to the Moon," we needed to create a 40,000 sq ft moon stage. The only place to do that was at the El Toro Zeppelin hangars. Well, you get in there and you realize, oh, I got to black out all the windows. Oh my God, that's $1 million for this space. We certainly find ourselves, even in "Game of Thrones" with Titanic Quarter, developing studios where they don't exist. The one thing that I tell everybody is when you do this, you have to have a couple of things for it to be lasting. A, you have to have an incredibly vibrant community. Don't expect to go into a place and build a community in a place that doesn't have an incentive.
That's why we get stuck having to build like pop-up shop versions.
Right
of a real studio. A place like Los Angeles, New York, even Georgia, which has had These are places that are interesting because the incentive money is driving production there, and now there's a lot more production. Again, some of this incentive money has caps on it depending on which kind of a setup you're in, whether it's credits or whatever. I do think we want to shoot everywhere, but the one thing that we always look for, or the four things we always look for after we read the script and know that it takes place on Mars or the Earth, is we look for places with incredible infrastructure, places with really good, obviously, hubs of travel, because sometimes we're traveling people in and out.
We look for a place that's got a vibrant filming community because of the level of work we're trying to do. Also, it has to be whether a financial incentive or how we cross stuff out, we always have those things that we then balance into the world. I do think that.
Just hang on that. We go check, check, no check in L.A. until recently now, right?
Again, I think L.A. does
Because it's got check, check for the first three for sure.
It wasn't like we weren't shooting in L.A., but the truth of the matter is, "Mildred Pierce," which was a show about L.A., was cheaper to shoot in New York than in L.A. We shot it in New York. Okay? Now also we had some actor things that made it better for us to shoot in New York. That allowed us to do that. It doesn't mean that we don't have a vibrant We've been shooting with companies that.
Well, a shameless plug, you want to go Sunset Gower and Sunset Bronson. They have to be your favorite places.
They are.
Bill just told you that, right? Because he.
No, before even Bill. We've been shooting here, I've been working in that little area most of my adult life. Whether you look at our first long show, "Six Feet Under," which I feel like.
Yeah
is the first one we really got to experience a nice, long, great seven-year run of a show and watch the thing kind of, watch the facility kind of, not grow around us, but form around us.
Absolutely.
You know?
It was a shithole before that.
Yeah.
It was. I'm telling you. I know.
I know. When we bought it was.
That was unbelievably successful. Let me ask you about this. Would you guys ever consider, because I know everybody here this is their million-dollar question, would you ever consider owning your own studio?
Here's the thing. We're not in the business of owning our own studio. I think that although there is a place for owning your own studio when you're Warner Bros., Sony, blah, blah, the truth of the matter is that how we film stuff doesn't give us. We don't want to have our flexibility encroached on. I don't really want to be in the studio business. Actually, I know I don't want to be in the studio business.
Got it.
places like yours are key.
A lot of our investors don't want me to be in the studio business.
I know, they've told me that.
For years they've been telling me that.
We did a suggestion box earlier.
Yeah
It's very full. No, I think, we don't want to have CapEx that's going to studios. We need CapEx that's going to our friction-free products.
Right.
Again, we shoot at Sony, we shoot at some of the big studios, but those are studios that generally are a little less nimble in how they would form around a show, and that's partly just because they have big departments that they have formed over the better part of 100 or 200 years.
Sure
whether it's in wardrobe, this, that, lighting, that.
You're a little bit of a second-class citizen.
Yeah.
Right? I mean.
I mean, in life, yes. Whatever.
If they have their show.
You're like, "Hang out in my house.
Yes.
Totally.
Exactly.
I think that's it. They're feeding a beast, right? We want to be somewhere where we can have the flexibility to get the show the resources it needs. Obviously, we understand that you pay somewhat of a premium to have someone else build that infrastructure for you. To the extent that the infrastructure is moldable for the show, I think that's one of the things that you'll find with all, hopefully, with all these shows, particularly with companies writing checks to people.
Yeah
wildly, is that each one of these shows is its own entrepreneurial business. Because it's a kind of commerce-meets-art endeavor, you never know whether it's going to come out subjectively good and you have a "Game of Thrones," or you have a "John from Cincinnati.
Right. Which is what?
Huh?
Exactly, right?
Yeah.
Which is what? Exactly. We don't know it, right?
Right. I think because of that, you wind up wanting to create these productions melded to these showrunners, and each showrunner works a little differently, particularly when you're spending a bunch of money out and getting all these new people who may have worked in theater and never done anything here or may have done movies and never done anything in the series space. You want to build a business, a stage, a production plan that's around that particular business.
It's funny you say that because when we started this business, of course, we went through the strike, we went through the writer's strike, then the unions and the whole thing. I can't tell you how many people asked us about-
I love writers, but there are times where I just wish I could ask them to put the pencils down.
Go away.
Instead of them telling me they're putting the pencils down. "No, put them down now. You guys have been writing this script for six years. Remember, put the pencils down.
Well, people would say to us, Dexter was our show.
Yeah, Dexter. Great show.
It was a great show for everybody, and it's like, "How'd you guys get so lucky?" I said, "Well, we're not talent guys. We rely on HBO.
Yeah.
We rely on you.
Yeah.
credit, I'm not saying this, but I think people who know our business, the credit is 100%. Every single one of you guys, nobody's ever been late, nobody's ever not paid.
Oh, God, yeah.
If you did that, you wouldn't get the stages, you wouldn't get the access.
Well, we're also inside a publicly held company.
Not just you.
I'm pretty sure we can't
The entire industry. It's great credit.
I'm pretty sure Jeff Bewkes doesn't want us going on a 190-day net when you're requiring us. No. I mean, I'm sure he'd like it, but I know that there'd be some major corporate financing rules broken.
I think our CFO would have a problem with that.
I know that.
Okay. No, talk about Hollywood.
Yeah.
Because you've been here, the transformation now of Hollywood.
Yeah.
You guys filming in Hollywood.
Yeah.
You're really focused a lot in that.
Yeah.
Tell us what you think about it.
Listen, it's a great place to shoot. I love it. We're doing more and more here. A lot of the times, it's always balanced with a couple different things, but it depends on what type of show it is. Comedies, by and large, you can put in most places.
Right.
People like to be home. Most people-
Talent kind of dictates a little bit?
They dictate.
More than a little bit?
They dictate. When you're looking at a thing and you go, "Okay, can I put them in L.A. or do I have to ship them off to Eastern Europe for nine months?" You're probably going to not get the same quality of
Got it
in Eastern Europe for nine months on a six-year rotation, right? That said, if we have an ensemble
Different
it's different, right?
Right.
L.A., right now we're shooting several pilots here right now. We're shooting the most pilots we've ever shot here. It just so happens that we got some products in where people were writing for places that were a little less character-driven. Sometimes you get art scripts come in and the location is part of the story in a big way, so it becomes a little difficult for us to sometimes true that up with where we'd like to shoot. We're back in L.A. I enjoy it. I enjoy driving around and seeing.
You're here.
No, it's true, the thing about it is that you do have the ability to forget when you ship out. New York is very vibrant, and Ireland is very vibrant, because we've been there. You forget that when you ship out, people who are in L.A., this is where everybody is who does this. This is where everybody is who's doing some of the best technology in visual effects. They're doing the best technology in cameras. This is the center of being on the bleeding edge of technology, for all of us who are trying to deliver the highest quality product, it's important that we're at the center of, and in the places where we can experiment like everybody else is experimenting so that not only on the distribution side, we're driving the technology process.
On the production and capture side, we're driving the technology process.
Sure.
being in L.A., it's nice to be here because it makes that stuff a lot easier.
give us your prognostication on
Oh, geez
on branded
Oklahoma City in four.
It's already been five, by the way.
No, I'm in the finals.
Oh, the finals. Okay. All right.
No, it's done.
Actually, that's interesting. This is where I was going. Live sports is the only thing you can't replicate, right?
Yeah.
Where do you think CBS, NBC, ABC network television's going in the future?
Listen, live sports events are clearly the driver of getting amazing ad revenue, and those live sports events drive how people negotiate long-term deals with NFL, NCAA, da, da. It drives how those networks are carried in a package for the major broadcasters and the carriage rights that go along with that.
You guys do it. You do boxing, you do MMA.
Right. Well, we don't do MMA, but I really wish we had, but we never did it.
You missed the boat on that one.
We had a chance, but that's it.
Again.
Listen, for us, it's great. I think we find that, and the boxing, Peter Nelson could speak more to this, I do think that we find that boxing is an incredibly vibrant sport, particularly when you've got fighters who are in the current mainstream that people are getting behind. That drives enough viewership, quite frankly.
Sure
You make a decision of whether it's going to be on Saturday night boxing or whether it's going to be pay-per-view.
What happens to Thursday night television? Must-see TV, right?
Listen, again.
I mean, it's over, right?
There's always going to be a place for live sports events, and there's always going to be a place for news, and there's always going to be a place for, quite frankly, things that are shorter as we see shorter in content level but are completely current. Topical-ness is definitely outpacing narrative against volume of programming.
Okay.
It's also easier to produce 100 episodes of Chelsea Handler.
Of course
than it is to do 100 episodes of "Game of Thrones.
Chelsea Handler is on our studio a lot now.
I know. At 98 episodes.
Exactly. Okay, let me ask you this one, because it's the "Game of Thrones," right?
Yeah.
It's the most successful, most expensive television show of all time?
No, that's not true.
What's your-
I won't talk about it, but it's not. I will say that-
Are you over $10 million an episode?
I'm not going to talk about the finances.
Are you over $12 million?
I'm not. I will tell you that.
I mean, they're huge numbers, right?
Yeah. Listen, it's a very big show based on the subject matter. I remember when we did the first pilot, and the Game of Thrones or Martin.
Yeah
They are a cult, and don't mess with them because they will kill you. I remember you'd see the comment section about, "Oh my God, those people at HBO have no idea what they're getting into. Have they even read the third book?" It's like, yeah, we've read it, and we're planning. Yes, we've lobbied very hard to get the film television high profile credit.
How many people watch "Game of Thrones?" Just to see. Look at that.
I know.
These are middle-age and up people, and they're watching this show.
It's great.
It's a good joke. I mean, it's crazy, right?
Okay, let's.
It's a huge show. It's huge.
We've also, to be fair, along the way, planned for incentives that rolled in into the third season.
Got it. Okay.
We're talking about-
You're on season five.
Six.
Oh, six. One more season to go?
No. I believe we announced that we're into another season.
Season seven, yeah.
Yeah.
After that, you don't know?
Yeah, there should be another season after that.
You're ahead of the books now?
Yeah. This was the fun I got to have last night, which is I was coming from day work, of course, you sit in a meeting of colleagues at the restaurant, you're hearing people talk while you're waiting for a person. They go arguing and arguing, they're comparing this season, which is off-book-
Right
to George R.R. Martin's book.
Which is the last five seasons previously.
No, the book he would've written.
Oh
How is this going to work?
Okay.
They're going through this whole thing of when he writes, how is she going to keep these characters straight, and they're off-book. I just leaned over to them, I go, "You realize you're comparing it to something that doesn't exist.
Exactly.
You'll see George's book.
Right.
George has been writing this book for a long time.
20 years.
Yeah.
So.
I love the question because, listen, we would've loved nothing more than to follow his amazing world and have that as a template. At some point, well, you got to continue. They are talking, and they talk a lot, and all the characters that are going on in this series are things that George is aware of. They understand what the mythology would be. My sense is if he ever gets to those books, they're going to be different just because of the nature of that narrative medium.
You've also created something maybe you want to go away from.
I think they're very symbiotic. I think that's the one nice thing about this show is between David and Dan and George, they're all caretakers of this story now, even though it's George's world.
Okay. I'm going to open up the questions in one second. What's the most surprising HBO series or show that you guys have done and said, "Wow, I didn't realize it would be that good"? Anything off the top of your head?
We never allow ourselves to say something's good, ever.
But like-
Because that's a bad.
Keep the doubt.
Yeah. We're always trying to go like, how is this show? We're always trying to smartly.
Like us performing on numbers, we.
Yeah.
We know we're never going to get there.
Yeah. I think that, Silicon Valley was an amazing kind of surprise.
Make all numbers, right?
Yeah. Even though you know Mike Judge is going to just kill a workplace environment thing. The thing about HBO is that we don't, and this is interesting as it plays into-
It's interesting you said Silicon Valley, right?
Yeah.
The whole anti-tech, Hudson, anti-tech, and now-
Yeah. It's meta-meta.
The meta show.
Right. Meta-meta. I do think that you always wonder. The thing about HBO is we don't pilot a lot. We don't have 25 pilots. This is kind of useful to you guys. When we come in to do a series, even though a couple haven't gone lately at Sunset Gower. Phil is going to shoot me death looks.
One in particular.
One in particular.
Right.
I got it. Where was I? Moving around. I'm not sure. No. I think we try to do a series that's going to be on for six years. Once we get to pilot, you know for the most part that we don't have the ability.
Well, I tell people all the time that.
Yeah. Once you prime our thing, once you pilot, we've invested a lot.
You're too in no matter what.
Yeah. No matter what.
Yeah.
The idea is to actually pilot what you want to make, and by the time you're done with the pilot and you're actually using it as a stepping stone to a better series. Game of Thrones came in, and it was not an impressive pilot. We reshot enough of that pilot to fulfill the DGA requirements to change director names.
Wow.
Please don't put that in any of your.
Don't worry, we're just live simulcasting.
That's okay.
We're okay.
By the same token, when we got the pilot at Silicon Valley, there were adjustments to make, major adjustments to make.
All right. We're going to ask a couple of questions. Bruce, anybody got any questions?
No. Fans.
Really?
There you go. Yes, sir.
I guess with the production down south, with Sydney and Baltimore not going anywhere, your desire to do stuff in L.A. if possible, do you guys think about putting stages out in [inaudible],? Going that kind of business model.
Well, again, I think because we're in a cyclical thing, what we try to do is when we get a show, we make a deal with these guys that has options for five, six years. Our intent is to come in. We never come in and say, "Hey, we're going to do this for a year.
Right.
Hey, we'll talk to you guys next year when we know what's going on." We always go in to make sure that, again, we go in thinking we're going to do a long season. We're always on the side of longevity versus trying to play this and that in the market. We have several times through life done [inaudible], to have a moment to make a decision, even, and we've done that more than anybody, even though you hate to do that because sometimes it doesn't go into the show. If it's that busy out there, and it certainly has been and had been, those are the types of things you do. I think unfortunately, because we can't control the narrative, we're only as good as the people who walk in the door and pitch to us, right?
We don't have the ability to say we're going to have X here. We have to be fluid about where those scripts come in because oftentimes, if it's a period piece or whatever, even though we probably aren't developing as many of those now, you don't want to have locked yourself into something that you can't produce. Yeah.
You mentioned earlier about those other cities being more competitive, production states, Atlanta, New York. This is clearly the entertainment capital of the world, and I know what HBO is trying to show here is that feeding content is a very important part of growing. Maybe to see what growth for production, do you feel like L.A. is going to capture more of that growth or other cities with major incentives could be waiting for an out-of-L.A. production?
L.A. will always get a huge part of the growth just because of the load leveling of the type of production, right? Because people are going to push more money out into the space, there will be the 30%-40% of stuff that has to go somewhere because that's this higher-level show, and it's written for Sweden, so we can only shoot it. Then there's the rest of the production, which is the kind of stuff we're doing as well, which is Bill Simmons, which is Jon Stewart, which is Bill Maher. This is the Chelsea Handler. This is the stuff where if you want to fill up a library, as someone who has a library of IP, these are the types of shows that really help you stay current.
Those shows will classically fall to L.A., and some may be to New York, but as you know, most of that stuff, it happens here. Because it's talent-driven, those shows can be talent-driven. They want to be in a place where all the talent is because it's easier for them to book. Sesame Street comes here once a year, right around the Grammy Awards, for a week to do all of their musical numbers. That's more efficient for them than it is. They're in New York on a big stage where, trust me, they're a revered place. Everybody would love. How many of you, if you were a star, would go, "Oh, I'm going by Hal's Place, and Sesame Street has this little stage where they do their musical numbers all the time. I'm just going to go check in." That's not how they do it.
They come here. I do think L.A. will always get a good portion of it, but places are trying to stay competitive. You always also have to watch out for the supply and demand curves that go into a new place. With any emerging market, you find that there is a kind of a pendulum effect of, here comes the incentive, now it's a great place to shoot, now it kind of load levels because it gets so busy.
We've seen that movie before.
All of a sudden, the premium for.
It's really New Mexico
good people, who, by the way, may not even live there, gets higher because the demand is so high and the supply is not enough. Supply really always helps us figure out how that incentive to actual dollar spent and what that dollar means for an HBO production. That moves back and forth. When you get to a place like L.A., there's enough going on here that you don't see that as much, and you like that. New York has definitely gone up to a place where the incentive covers, for the most part, the cost of being a busy New York.
Great. Bruce Richmond, thank you so much.
Thanks.
Is that all right?
I appreciate it.
Good.
Thank you, Bruce and Victor.
Thank you.
Now that Victor has called us all middle-aged, we will take a short break, 10 minutes. Let's meet back here at 9:45.
All right, everyone, if you take your seats, we're going to get started again. Next up, I'm pleased to welcome Drew Gordon, our Senior Vice President for Northern California. Take it away, Drew.
Thank you. I'm sure many of you have children, and my children are a little older, and I communicate with them via social media, primarily Instagram. I send an Instagram photo of The Cure last night, and my 12-year-old daughter responds. She goes, "Dad, I thought you were at an investor conference." I was like, "I am," and some obscure emoji afterwards. I have no idea what that meant. I'm still trying to figure out the emoji thing. Anyway, good morning, everybody. I see a lot of familiar faces, and I think this is a much better approach than the SUV, the taxi, the limo, the bus tours that we do in the Bay Area. This is much better, I think. I know there's a lot of effort that goes into it, so Laura's probably going to kick me afterwards.
What an amazing time to be in Northern California. Almost six years ago, when I joined Victor in Northern California, he really had two things that he wanted me to focus on. One was to help him grow the region, and two was to integrate with his team. I had no idea just how quickly we were going to grow in Northern California, but it's been an incredible ride. I've lived and worked in the Bay Area for almost 26 years, and I've never seen the market so vibrant and so healthy as it is today. There's been a lot of conversation recently about the health of the Bay Area economy, how we're doing. Many questions, very legitimate questions, about things such as VC funding, unicorns, my favorite subject, sublease activity, new supply, et cetera. From our perspective, the overall Northern California remains healthy.
VC spending had a very strong quarter this year. Job growth remains positive. Tenant demand remains strong. New construction product has been delivered with substantial pre-leasing efficiency. More importantly, though, Hudson's office portfolio in Northern California, we are very well positioned to continue our solid growth in occupancy with substantial mark-to-market rank growth, all while benefiting from a well-balanced portfolio of best-in-class properties and tenants. Our Nor Cal team is now fully integrated and energized to continue, I think, the great results and growth results that we've seen to date and feel very optimistic about the future. Let's start by discussing some of the strong momentum. Here we go.
Victor touched on this a little bit in his presentation. Obviously, the Bay Area has been one of the leading areas in the country in terms of occupancy, rent rate increases, asking rent growth, and remains one of the world's leaders for clusters for innovations and creativity. The important thing on this slide is the 5.2% vacancy rate in San Francisco, which is one of the best rates that you're going to find anywhere in the country. I think it's further evidence of the continued strength of that sub-market. Then for the Valley, rent growth, well, for both San Francisco and for the Valley, remains robust, as evidenced by the year-over-year increases. This is a good slide. It talks about Hudson's strong portfolio diversification, and it starts at the corporate level.
Obviously, our combination of our Seattle portfolio, Northern California, Southern California, and media properties that Bill spoke about. This diversification continues as we get to the Bay Area with a diverse breadth across San Francisco, Peninsula, and Silicon Valley submarkets, with our portfolio spreads at 25%, 40%, and 35%, respectively. Within this diverse geography we place, we further enjoy a solid mix of both non-technology and technology tenants at 53% and 47%, respectively. One of the, I think, the powerful outcomes of our purchase of EOP, we benefit that our competitors do not, is access to information. We are in all the major submarkets in Northern California. We know where the deals are happening, when the deals are going to happen, and we've been able to use that information tactically and strategically to help grow our market, to grow rent growth and occupancy as well.
This slide compares how our Bay Area portfolio is performing against the overall market in terms of percentage leased. Both our San Francisco and Silicon Valley properties are outperforming their respective submarkets. The Peninsula submarket, which is home to Sony's former headquarters in Foster City, and as many of you know, our single biggest vacancy, has also been one of our major lease-up priorities for the portfolio. Our efforts have included substantial and targeted capital improvements of the properties, which Josh and Chris will talk about shortly, as well as the deployment of our Vacant Suite Prep program that Art will speak to a little later as well. As a consequence of these efforts, we're starting to see the tide shift in our favor in the Peninsula.
First, we can now announce the new signed lease with BrightEdge for a full floor at 989 Hillsdale, our property for 36,000 sq ft. Second, we've seen a recent uptick in tours and activity for the balance of the vacant premises. We're very bullish on the Peninsula right now. Our portfolio also boasts a large percentage of mature investment-grade tenants such as Google, Qualcomm, Salesforce, Cisco, B of A, and others. 74% of all our Bay Area tenants by ABR have been successfully operating their businesses in excess of 10 years. Of all the technology companies in our portfolio, 68% have been operating for that equal duration. Lastly, this is a great statistic, of our top 15 tenants by ABR, nearly 60% are investment-grade companies, and two-thirds of those companies are located within the Bay Area.
This slide continues our focus on public versus private companies, our Nor Cal portfolio boasts 60% of our tenants that are public. Additionally, 46% of our non-tech tenants are public entities as well, further evidence of the strength and stability of our tenant base. Unicorn, one of my favorite topics, both with my 12-year-old daughter and I'm sure all of you here. As Canadians call a unicorn a narwhal. We have some new experts on narwhals who will be taking Q&A during the next break. A unicorn is defined, not by Webster's, private startup company, $1 billion valuation or greater. As you can see, our exposure is only 7% of our total portfolio by square footage, but half of that 7% is Uber. Or put in other terms, we have seven one-horned whales, one of which offers ride sharing.
This is another great slide, it talks to, I think, one of the bigger issues, the questions that get posed to us quite a bit, that's what's happening with sublease activity in Northern California. Which is much less mythical. When comparing Hudson's NorCal portfolio against the overall market, we're obviously outperforming in the Peninsula and Silicon Valley sub-markets in terms of availability. I think the very interesting stat here is that in San Francisco, where we're showing 3.2% of available sublease, that is one single tenant, and it is our cash vault in the lower level of 1455 Market Street. If you were to take that one tenant out, our sublease availability goes to zero in San Francisco.
If you were to adjust that on the overall Bay Area, we drop from 1.9% to 1.1%, which is literally half of what the market rate is today. Though Hudson currently has no ground-up development exposure in Northern California, of the 16 million square feet of new office construction underway, 50% has been pre-leased already, resulting in only 4.2% of the total available inventory. An inventory rate well below historic averages. The delivery of the square footage actually runs through the end of 2018, so if you annualize that, you're talking less than 2% per year. Finally, with only 29% of our NorCal portfolio expiring by the end of 2017, we expect to experience substantial mark-to-market rent growth across the portfolio, as evidenced by comparing our expiring rents against significantly higher market rents today. Two points I want to make here.
One, Art and his team have been way ahead of the curve on handling our 2016 expirations. I think we've got commitments to 60% of our 2016 roll and about 30% of our 2017 roll. The stat which is most shocking here is 129% mark-to-market of our expiring rents over the next two years to where market is today. Look at it this way. If we're off by 50%, you're still talking about a 60% increase in mark-to-market rent adjustments. That's staggering. I think the third point that's worthwhile mentioning is the reason that spread is so high is because we bought so early in the market. As a consequence, our basis and our assets is very low, which gives us an additional competitive advantage over our competitors in San Francisco.
In conclusion, our portfolio has experienced no signs of weakness in any of our three sub-markets. Quite the contrary. We've seen strong demand in all of our vacant spaces and good health from all of our companies. Thank you for your time, and come soon.
Thank you, Drew. Now we'll turn to Seattle and hear from David Tai, Senior Vice President of Pacific Northwest.
Hello, and good morning. David Tai, Senior Vice President, Pacific Northwest. 2016 marks my 30th year in our industry. My focus has been on leasing, operations, acquisitions, dispositions, and leading teams. I'm a Seattle native and have been with Hudson Pacific Properties for 18 months. I have the pleasure of talking with you about our Pacific Northwest region, and specifically the Seattle market. The market primary drivers, the attraction of Pioneer Square, and how this contributes to our strong position there, both near and long-term. The Seattle MSA is a $300 billion annual economy with 3.7 million people. Seattle proper has a population of 668,000.
The Seattle Bellevue Eastside market has undergone enviable economic expansion since the early 1980s, and it's called home by companies like Boeing, Nordstrom, Microsoft, Costco, Weyerhaeuser, Expedia, PACCAR Inc., a host of technology and gaming companies, and most recently, a rapidly growing little technology and retail company called Amazon.com, who has chosen to reside in the heart of our city. This slide just lists some of the rankings and accolades for the city over the past year, 2015, and details some of the primary drivers for this high-growth gateway city. Let me stop here for just a minute. These rankings, we didn't have to spend hours on the Internet searching for that stuff. Check it out, as my friend Steve Jaffe and our Chief Risk Officer likes to say. Those are ones, twos, and a low number four. That's pretty cool. It's my hometown.
I have the best real estate job in the city.
To be working for this team here, our Seattle team on the ground, amazing group of properties at this time in Seattle's history, I feel very fortunate. It's an amazing time for our city. Some of the key drivers are shown here. Those drivers are leading companies, both in the tech and non-tech sectors that are located there, are expanding to have a major Seattle presence. A highly educated workforce, one of the top in the country. Exceptional employment growth since 2008, 2009 downturn. An esteemed national position for the University of Washington in securing R&D grant money, not to mention very strong VC funding over the last four years. In the quest for talent, opportunity, and a vibrant, energetic business environment, companies are focused on CBD and high barrier to entry adjacent CBD submarkets, like Pioneer Square, where our holdings are located.
Not only was our Seattle portfolio a good buy, Pioneer Square holdings afford significant value add opportunities currently and into our future. When talking about the Seattle market and robust fundamentals, we like to use the geographic area that spans from North Lake Union and the Ship Canal, home to one of Google's Puget Sound campuses, to the south of Pioneer Square into SoDo, inclusive of the CBD, South Lake Union Denny Triangle, Lower Queen Anne, the Waterfront, and Pioneer Square. Let me stop here for just a moment. Many of you probably read reports from the top brokerage firms and reporting agencies. Often, those reports include Seattle and the Eastside as one market, inclusive of Bellevue. They often include the Greater Eastside, which is Redmond, where Microsoft is, up to the north, where Bothell is. All of that gets labeled as Seattle.
The goal here is to orient you geographically with what we feel our market is, at least today. This slide references what we call our market. These numbers are drawing from our market. All our slides, market data, and comments relate to a 45-50 million sq ft market from the North Lake Union down through SoDo, which gets its name from the former Kingdome. That's just south of Pioneer Square and our holdings. I like to say that Seattle Bellevue Greater Eastside market is 100 million sq ft. The market with a Seattle address, which people appreciate, is a 50 million sq ft market. This slide highlights themes and characteristics of this market, as well as strong fundamentals, record absorption, declining vacancy, and rising rents. I'll hit that first and come back to the themes. Absorption, 2.4 million for 2015, up from 1.4 million in 2014.
Average annual office absorption since 2010, 1.8 million. 30-year average annual office absorption, 800,000 sq ft. The graph shown here details a tighter look at the market that focuses on just the CBD and Pioneer Square. A vacancy rate that has dropped from over 18% to a little over 9.5% Q1 2011, or five years in a healthy growing market. As a result, rising rental rates of approximately 35% or 8.75% a year over the same 4-year horizon. I've been in this business for 30 years. I've seen some rapidly increasing markets, and I've seen some high rates. This is the most solid, fundamentally sound market I've seen in Seattle's history over 30 years. Both traditional non-tech and technology tenants continue to drive demand. It comes from expansion of local companies and inbound publicly established technology tenants. We don't have startups.
I mean, we have startups, the growth and the absorption is from established publicly traded technology companies, many of which are coming from San Francisco and Silicon Valley. We view this as additive to our portfolio. In no way are we cannibalizing. These folks are not relocating from San Francisco. We're not robbing Peter to pay Paul. These guys are growing in our portfolio. We have strong asset sales and record values, $750 a sq ft to over $800 a sq ft in the last year. Finally, importantly, a growing appreciation for the urban feel of the city, demand for Seattle submarkets, and in-city living. That's important. Every month, the city looks and feels and becomes a lot more like San Francisco and Vancouver, B.C.
As you can see from this slide, the majority of our current holdings are in Pioneer Square, totaling 63% of our Pacific Northwest portfolio. When you combine that with our South Lake Union Denny Triangle market presence, you see that 82% of our holdings are in the urban core, in the vibrant adjacent submarkets flanking the CBD. With our Lynnwood asset, we are 93% leased with an average three-year remaining term, and as you can see, we are 96% leased in South Lake Union Denny Triangle with average expiration of 2023. This is a single-tenant leased asset to Amazon.com. As a result, we're focusing today on Pioneer Square, our assets that we hold there, and our ground-up development.
Pioneer Square is where Seattle began and was the flat spot on Elliott Bay, surrounded by tall hills, lots of trees, and a deepwater port, all of which were important to its early growth and which helps to define it as a gateway city for trade and export today. It is currently a 4 million sq ft office market characterized by older historic buildings, small tenants, and small floor plates. The district is just north of the Stadium District and immediately south of the CBD, but conveniently connected to not only the CBD but also the growing submarkets north of the Central Business District and along the waterfront. From afar, you hear a lot about Seattle, and a lot of it has to do with South Lake Union, the Denny Triangle. Gets a lot of press. Pioneer Square, not as advertised nationally, same kind of thing, maybe even cooler.
Got a lot more authenticity and a lot of history that's there that South Lake Union doesn't have. Our assets in Pioneer Square are blocks from the stadium. They're close to restaurants and retail, access to King Street Station and the streetcar, the rail lines. We're four blocks from the ferry terminal at the Colman Dock. We're three minutes from I-5 and Interstate 90 on and off ramps, and we're adjacent to a new waterfront. Also of note is the partial tenant roster. Let me go back for just a minute. Also of note is the partial tenant roster for this submarket. ADP, Getty Images, Paul Allen's Vulcan, EMC, to name a few.
Of note is the fact that both Weyerhaeuser, for 200,000 sq ft, and Saltchuk, for 90,000 sq ft, both longstanding Seattle companies, one in timber and Saltchuk a maritime company, they're both choosing to locate in Pioneer Square as the next generation of Class A office buildings comes to the neighborhood. This slide highlights some of the benefits of the neighborhood, speaks to the walking and bicycling friendliness, as well as lists over 30 eating and drinking establishments in a tight, manageable radius. Seattle also enjoys two of the finest outdoor sports venues in North America, both within walking distance, which adds electricity and vibrancy to not only the neighborhood but also the city and the region. I think the point is obvious from this slide, but I'll go ahead and make it.
This proximity to transportation, infrastructure, the historic flavor of the neighborhood, and the flat, walkable area with authentic retail, eating, and dining has made Pioneer Square the location of choice and preference for a number of established tech companies and traditional non-tech companies such as Saltchuk, who have recently relocated or are in the process of relocating here. Along with all of these beneficial assets, we are in the process of getting a new world-class waterfront. This slide shows both the before and after and lists a few of the key details. We chose the slide on the left because it shows That really changed, didn't it? Sorry about that. The slide on the left shows 505 First Avenue and our holdings there in Pioneer Square adjacent to the waterfront as it exists today.
The slide on the right is a rendering from the north, kind of give you a different perspective, shows the viaduct down with a new promenade and a city park. The waterfront project is currently under construction and consists of the undergrounding of State Highway 99 by means of a deep tunnel along the bay and under the city, removal of an obsolete elevated viaduct, and rebuilding of a seawall that's 100 years old. The Embarcadero in San Francisco, same kind of structure, obsolete. It's coming down in Seattle. We get with this a new boulevard, park streetscape, open access to waterfront that is in transition, and enhanced views for residents, visitors, and office workers.
It's a billion-dollar project with $700 million in committed funds, with a little over $300 million to be raised through a Central Business District Waterfront and Pioneer Square funded LID of approximately $200 million. They have commitments for up to $100 million through a philanthropy effort. That goes to speak to the commitment that people have in the private sector and the families of the Pacific Northwest, putting their money into this enhancement because they believe in the future and what this will do for the city. The estimated completion date comes in phases, but the majority of the project is estimated to be done in 2019 to 2020. It's an exciting project, and despite its complications, has tremendous support. It will get done. It will get done. I'm convinced it will be even better than people can now imagine. I grew up here.
We've got a working waterfront. It's got great, rich history. We put a freeway along the front of it like San Francisco did. It's going to be an amazing place. Often, people that are outside of the city see it with more vision and clarity than people in the city. We've got a lot of people in the city that see it with vision and clarity, but the world is watching us create this new world-class waterfront. It's going to be exciting. It's not only exciting for our city. Hudson Pacific, we're right where we want to be. We are right there, and we're going to take advantage of it. As Victor likes to say, we're going to have oceanfront property.
All the mentioned attributes of Pioneer Square, the solid, vibrant economy in our region, and our new waterfront translate to very good news for our existing portfolio, our ground-up development at 450 Alaskan Way, and our future acquisitions. By way of example, let's look at mark-to-market rent increases we are experiencing and forecast to experience in the next few years. The bottom line on the table puts forth management's internal expectations regarding the opportunity to grow in-place rents as the market continues to experience tightening and year-over-year rent growth. You can see from the top line that our expirations are relatively modest this year and for the next two years, we have significant opportunity out in 2019 with the expiration of Capital One lease that was signed by our predecessor in the depths of the 2008-2009 financial crisis. A very real opportunity to create added value.
Note the 43% below market today, then the 35% out in 2019. As part of the Merrill Place purchase in early 2014, HPP has demolished a two-story, 1980s non-historic garage and is underway with the construction of an eight-story, 165,000 sq ft Class A office building. The project is immediately adjacent to our existing holdings and will be the newest offering in our branded King Street Crossing, a two-city block urban campus. We are building into an incredibly geographically constrained market, limited existing Class A supply, no new office development since 2009. Very few development sites, a historic designation for most all of the buildings that sit in this district, which fuels a rigorous entitlement process, and all that equates to high demand for larger Class A office space in modern buildings.
The building will have a prominent Alaskan Way address, signaling the arrival of Seattle's new and much-anticipated waterfront. In part due to this, the views, waterfront location, and Hudson Pacific Properties' reputation, we've secured a 60% pre-lease for the building with Saltchuk, a maritime logistics and shipping parent company, active up and down the coast and around the world. Saltchuk is a respected old-school company that holds the number one position on the privately held Washington State companies list. The building will have a 6,000 sq ft penthouse, and you're seeing part of that right here. It'll have conference and tenant amenity space with sweeping views of the waterfront, city skyline, and Olympic Mountains. Page 19 of our supplemental lists details about our construction costs, land basis, and going-in yield, so feel free to refer to that.
We have a confidentiality agreement regarding the Saltchuk lease terms, I can tell you our lease is at some of the highest triple net rates in the market today. We are currently in discussions, today in fact, with interested parties that would potentially take the balance of the building. The project's reception in the marketplace speaks to the attractiveness of the Pioneer Square neighborhood for both tech and non-tech tenants, the excitement about the new waterfront, and the desire for modern, large spaces in a traditional, small market of historic buildings. When complete, we will have a one-of-a-kind urban collection of renovated historic and modern Class A buildings in a two-block waterfront location totaling over 800,000 sq ft. As Victor said, it'll be oceanfront property.
My hope is that in the few short minutes, I've been able to convey our excitement for Seattle, the strong economy, market drivers, along with the unique opportunities we have to create value both near and long term. We are creating a one-of-a-kind portfolio in a unique submarket that is in the beginning stages of becoming a truly special place that office tenants are attracted to and want to call home. Thank you for listening, and I look forward to seeing you in Seattle.
Thank you, David. We're going to hear from Joshua Hatfield, our Executive Vice President of Operations, and Christopher Barton, our Executive Vice President of Development and Capital Investments.
Good morning. Chris and I are going to take a few minutes and share with you how Hudson Pacific Properties has leveraged its vision to build and execute a comprehensive portfolio capital plan. HPP has a significant track record of success repositioning assets, demonstrated across submarkets, asset types, and project complexity. We believe this is attributable to the vision that exists across the HPP team. We see things that others don't, resulting from extensive years of experience, the vertical integration of the company, being closely connected to our markets and our customers, and having the license to take prudent risks. Take 1455 Market. HPP transformed an ugly, windowless data center into best-in-class creative office that tenants across San Francisco envy.
We recognized and exploited the momentum building in the mid-market area of San Francisco and redesigned the highest and best use for a 23-story tower with a lower podium the size of a full city block.
We had the vision to identify the opportunity and execution capabilities to deliver world-class creative office space. Now the world headquarters for both Uber and Square, enabling us to JV the asset for over a 300% increase to our investment. Staying in San Francisco, reference our success at 275 Brannan. This was a vacant food storage warehouse. Again, we identified an underutilized asset with a terrific location in SoMa. This building was converted into high-end creative office and 100% leased to a tech user paying top dollar rents. As Victor mentioned earlier, here in Los Angeles, you can look to our Element LA and 3401 Exposition projects. Both started as rundown warehouse lots, distinguished by their west side infill locations. You're noticing a theme. Having the vision to combine the potential of a well-located site with improvements that resonate in the marketplace.
Today, these projects provide full-service campus environments for Riot Games and Deluxe Media. Most recently is our repositioning of The Landing on Jefferson Boulevard in Playa Vista. We acquired this asset early in the transition of Playa into Silicon Beach, and have subsequently invested to upgrade the quality of the building and 100% pre-leased it to WeWork and Dentsu, ultimately enabling a sale of the stabilized project at a substantial gain to our all-in basis. The direct benefit of these examples for everyone in this room is that HPP's vision is a distinct and ongoing competitive advantage that is not easily replicated, and that benefit has and will continue to create substantial value. The next application of these elements that made these past investments so successful is happening right now across the portfolio that we acquired last year from Equity Office in Northern California.
I'll now spend some time providing you with insights into how this capital plan has come together, and Chris will deep dive into a sizable piece of the plan where we are fundamentally changing the positioning of one of the assets in the airport sub-market in San Jose. Regardless of the size of the project, the HPP process for evaluating the demand drivers and leasing benefits that support the rationale for doing the job is fundamentally the same. Specific to the creation of the repositioning strategy for our NorCal acquisition and executed as a critical component of the integration, we applied a detailed cross-functional approach to create a comprehensive 10-year capital investment plan. This process involved teams across the company from operations to leasing. To further support our internal evaluations, we engaged key brokers to understand their perspectives on where specific asset-level investments would resonate the most with our customers.
Lastly, we evaluated tenant needs and desires through a portfolio-wide tenant survey. The plan incorporates two basic components, building infrastructure, which includes structural components and engineering systems, and elective capital, which is comprised of the common area upgrades. More simply, think of it as back of the house and front of the house. The plan contemplates the overall market, sub-markets, and individual micro-market positioning to further support where investment dollars are best deployed. This is a dynamic living document designed to evolve with the changes in the marketplace, asset dispositions, leasing velocity, and systems performance, with a detailed refresh incorporated into our annual budgeting process. An example of the dynamic nature of the plan is the evolution of Page Mill Center in the Stanford Research Park.
Our team leased up the 60% occupied asset with Toyota and Stanford, eliminating the need for a planned $2.5 million reposition, allowing us to reallocate the dollars elsewhere. It's our belief that these prudent capital investments defend asset value through improved infrastructure and systems performance, and enhance NOI generation by improving the current and future leasability of the asset. Much focus has been applied over the past year to our investment profile for the former EOP Northern California portfolio, and specifically how it supports HPP's business plan and lease-up for that acquisition. As such, I'll spend a minute or two focusing on our execution of this portion of the capital plan, or how we translate data in a spreadsheet to swinging hammers at a property. Here's how the plan lays out over the first three years, 2015 to 2017.
We're focused on deploying $63 million of capital over that period, 70% on elective capital and 30% on building infrastructure. It's important to note that the $63 million is a subset of the $250 million total capital spend. That includes both TIs and LCs that we've shared with you in the past. Of the $63 million investment, 15% has been spent during the first 12 months through March of this year. The rate of the spend will accelerate over the remainder of the year as the teams push hard to deliver the improvements deemed most impactful early in our investment period, while also leveraging delivery of upgrades into a strong market. Keep in mind that invoice payment lags actual project progress, so a material piece of these 2016 committed dollars are payments in arrears for work that tenants are enjoying today.
It's also important to realize that we're extracting value from future jobs today. Immediately upon finalizing the plan, our leasing and marketing teams created a campaign targeting the key tenant rep brokers in the market to highlight that Hudson was committed to investing more than $100 million over 10 years to significantly enhance the portfolio to the benefit of their clients. Our team continues to reinforce this message with specific examples of pending projects on an ongoing basis. How does this achievement of this magnitude happen? For the elective capital work specifically, the teams have developed four phases of bundled projects. This execution structure strikes a balance between bulk pricing economies and construction team bandwidth, overlaid across in-depth asset-level knowledge that supports project priorities at those assets which most critically demand the investment. Phase 1 of the common area work launched shortly after the close is now complete.
19 individual projects totaling $5.6 million. 75% of this work went into much-needed restroom upgrades. These restrooms were really bad. Many had carpet. Most had 2-inch salmon and aqua-colored tiles. They all looked and smelled like the '80s. The renovation of these restrooms involved developing a set of standard restroom design templates that takes cues from the hospitality world. This standardized approach also drove architectural cost efficiencies, a consistent look and feel, and greatly aided the speed of execution. Phase 2 is in process. 20 projects totaling $5.8 million, with scheduled completion in June of this year. 40% of this investment is going into lobbies at assets that require near-term leasing momentum. Architectural work has started on Phase 3, 20 projects, $3.5 million. This work will carry us through the remainder of 2016. Half of the phase is more restrooms and lobbies predominantly focused on our San Jose assets.
Phase 4, to be executed in 2017, is 28 projects, $4.6 million, predominantly rounding out the portfolio restroom work. To reiterate, vision is a defining attribute of this company, a fundamental value-creating differentiator that is not easily replicable by our competitors and is aligned and resonates with our customers, the next generation of office users. This vision extends beyond multimillion-dollar complete repositioning projects and is equally effective when applied to smaller upgrades. Everyone should appreciate the scale of the achievement to date. In the span of 12 months, the team developed a strategy, built an execution plan, worked through the design, pricing, and permitting process, and then completed the first $9 million of the investment, all during a period of significant change related to the integration of the acquisition. This stands as a testament to the execution ability of the Hudson team.
I'll close by reminding everyone of the primary goal of this capital plan. Like the repositioning investments that have come before, these projects will deliver enhanced income generation across a broad cross-section of the HPP portfolio to the direct benefit of all of our stakeholders. Let me now turn it over to Chris, who will detail the single largest project in the plan, where we are repositioning one of our assets in the airport market in San Jose from being yesterday's plain vanilla commodity space into a truly unique asset to host the forward-thinking tenants of tomorrow.
Great. Thank you, Josh. Good afternoon, everybody. Hudson's had tremendous history of success with our value creation on development, redevelopment, repositioning projects in Los Angeles and in downtown San Francisco. We're now looking to take that unique vision and expertise and bring it to San Jose. Looking at this slide, you might think that Hudson's moved into the discount motel or the residential business, but I can assure you that it's only the result of a really bad idea. Fortunately, I can say it's the only HPP asset with a pool as its centerpiece, but that's what we had to work with to start. Gateway Place is really the ugly duckling of the EOP portfolio acquisition, and we value this property at the lowest cost basis per sq ft in our San Jose portfolio, but it's possibly going to end up being our best asset.
The asset is part of our 2.6 million sq ft of North San Jose properties. North San Jose is booming. It's experiencing a race for space. We've all seen what's happening with the proliferation of the autonomous vehicle market. Some of the most compelling deals in the Bay Area are happening here right now with the likes of Apple, Google, and others. This property has five buildings that make up 609,000 sq ft, and it was built in the early '80s. When we acquired it was 80% occupied with approximately 80 tenants. Therefore, you have a lot of tenants, but smaller tenants. The average size tenant actually is about 5,000 sq ft. It's in an excellent location in the North San Jose market. It's right next to the San Jose Airport. It's at the intersection of the 101 and 87 freeways.
It is right across from the 86-acre new Apple site, which was just acquired, and it is walking distance to restaurants, retail, and hotels. The property as was, could really be defined as commodity space with its dated interiors and exteriors and its lack of amenities other than the pool. So its appeal to the creative tech tenant was really limited. However, there were many opportunities and potential that the property offered, including concrete construction with large floor plates and attractive slab-to-slab heights. It was a real opportunity to create a campus with its large courtyard that fronts all the buildings. Lastly, it has outstanding visibility and signage opportunities. We had to come up with a plan. We looked at our existing tenant base and the companies in the market we are trying to attract to Gateway Place.
We then identified architectural elements, amenities that tenants wanted in their workplace, and we came up with a detailed project design tailored to attract these tenants to the property while executing our strategy at a cost-effective and timely manner. In order to do this, we knew we had to make a distinctive impact on the property. We knew we had to make some bold decisions that might be controversial. While others would have likely engaged a local design team, we engaged Rios Clementi, an established architect from Los Angeles that is well known at creating exciting work environments for tech and media tenants. We also engaged SWA, a renowned landscape architecture firm with numerous high-profile projects on its resume. We had the vision to create a mix of local and outside design consultants to make something really special.
The improvements encompass many aspects of the property, including comprehensive lobby renovations that will be architecturally compelling, extensive facade improvements, a striking landscape courtyard with outdoor meeting spaces, play areas, and an outdoor cafe. Last, we are also instilling new tenant amenities, including a conference center, state-of-the-art conference center, a fitness center that faces the courtyard, that includes showers and lockers and bike parking. We initiated project design soon after the acquisition of the property, and went to the city for permits by the end of 2015. After receiving our permits in February of 2016, the property has been under construction, and we are anticipated to be substantially complete before October 2016.
As you can see, with the $8.5 million budget for this extensive reposition project, we think the funds have been effectively targeted on the property to really drive rents. Since nearly all these improvements, they are actually front-of-the-house improvements.
They are not infrastructure or back of the house. When we look at this from a macro view, we believe we will have created substantial value to this property, while only modestly increasing our basis from $243 a square foot to $257 a square foot. Upon completion, we will have a superior product in the San Jose market at a relatively low basis. Also, the incremental rental rates that we expect to achieve after completion is going to far outstrip the incremental cost basis that we realized. Gateway Place is only one of the many projects we have had the vision to pursue and execute our strategy. We continue to look at other similar opportunities within and outside our portfolio, as we have the acumen and the expertise to complete complex development, redevelopment, and reposition projects that create value for our shareholders. Thank you for your time.
Now we're going to hear from Arthur Suazo, our Executive Vice President of Leasing. He wants to come here.
Okay. Hi. I'm as disappointed as you are to hear this morning that I'm not the headliner today. I heard it for the first time. That's not cool, Victor. I'm excited to be here to talk to you. We talk often, but I don't get the chance to really share with you what we do on a day-to-day basis. Something that I'm so passionate about, something that we've been really successful about. I now get the opportunity to do it. I could go on for hours. I've been told I only have a few minutes to speak, and that may be a good thing. I'm also excited to share with you how our unique strategy and process helps drive and define our HPP brand throughout the market.
We're going to talk about Northern California, but we've been reaping the tremendous and really unparalleled benefits from this process since the very beginning. I got to say, in the 25 years I've been in this business, that I've never been associated with a process that yields such tremendous results. I've been on the tenant rep side of the business, and I've been on the landlord side of the business. Let's move forward. Oops. There we go. I really think that Jonathan Gray from Blackstone said it at the outset best. He said, "We choose to take a major stake in a high-quality portfolio, outstanding management team, and attractive prospects for growth." What I heard, and I have impeccable hearing. What I heard was, we choose to take a major stake in Hudson given its high-quality portfolio and outstanding leasing team.
That's what I heard. Either way, it's a resounding vote of confidence for us. It's a challenge, I think that we've been more than equal to, and we will continue to be more than equal to going forward. The next few slides I'm going to talk about, it really gets in the meat and potatoes of what we do and how we've been successful. Somebody wanted me to say it's our secret sauce. I hate that expression. It's really a well-thought-out strategy that's executed on the ground. I'm pretty sure that secret sauce was just Thousand Island dressing . It first starts with accelerating the leasing process. Streamlining the negotiation. Everybody gets into the leasing process. It starts with a skilled leasing team.
The skilled leasing team really means, it doesn't just mean the leasing professionals on the ground that are top-shelf for us and have tremendous experience. It involves the property management teams, the engineering teams, the construction teams, the legal teams, and so forth. We get them involved early in the transaction, meet with the tenants. What do we do differently? We listen. We listen really well. We try to get the really salient issues out of the way and on the table first and foremost. Get the ugly
Ugliness of the deal on the table, we don't get bogged down later on in the transaction and maybe get leveraged for it. We do a really good job of setting up the deal. It's not about pushing paper. All other landlords just are content pushing paper. We're not. We set up the deal so that we can close quickly, and we set up that expectation. Secondly, it involves strategic third-party partners. What does that mean? Well, yes, we have the right roster of team members, but we want to have the right personnel on the field. Oftentimes, we'll get out in front of it. We'll find out if our attorney has worked with a tenant's counsel, with the tenant's broker, with the tenant, and they have some insight on the deal. Perhaps the architect has worked with them. They understand the build-out that the tenant is requiring.
Or maybe it's a broker. Maybe it's a third-party broker that we use in a special circumstance to streamline that part of the negotiation to help speed it up. I use the example of the right personnel on the field. I have to go back to the '85 Bears. They get down to the goal line. Who's coming into the ballgame? The Fridge, to ensure that we get over the goal line. No, I'm not The Fridge in that situation. Oftentimes it's Victor, I got to be honest. Timely financial review. A lot of deals get bogged down with the financial review, and they do it at the end of the transaction. We do it as early as possible. We have two third-party groups that we work with, that are best in the business. Our turnaround time is two to three days.
It's a very comprehensive financial review, in addition to our own financial or our finance department at Hudson, we shave a lot of time off of it. Next is local signing authority. We realized early that 90% of our deals are 8,000 sq ft and below, we give the local team members the signing authority on the ground. Number one, it does speed up the transaction, shave some time off, but it also empowers them with the people they're negotiating with. They know that the guy across the table is the guy signing the lease. That was me shaking hands to close the deal. It works. They know that these are the right guys on the field. Now, all of this would be for naught if our ultimate goal wasn't to get rent paid early and fast. That's the seamless delivery.
Everybody working early in the transaction to get the space delivered to the tenant and the rent check quickly. Next part of the branding process is the broker outreach program. The premise is, and a lot of landlords, most landlords don't get it. The premise is, it's a broker-driven business. It just is. We accept it. Many of us were ex-brokers. We take care of the brokers, in many ways. We do broker incentives that keep them happy. We usually target challenging markets, challenging buildings, challenging spaces on a one-off basis to make sure that they're compensated properly. We also do Gosh, we have a $100,000 giveaway party that we've been doing for years, and it's the talk of the brokerage community.
They work all year to get an opportunity to win $100,000 by the volume of deals they bring us, and it's a black-tie event at the end of the year. It's fantastic, and I believe it pays for itself several times over. You'll see later when I start talking about the pipeline that it's starting to create and help us maintain a robust pipeline. Lastly, on the broker incentives, it says expedited payment. Obviously, they want to put some shekels in their pockets quickly, but there's surety to payment. Surety to payment goes hand-in-hand with expedited payment. There's a lot of landlords out there, let's be honest, it's six to five, and pick them whether you're going to get a commission check and how fast you're going to get it. We really take care of them on that front.
It's a courting process with the brokers. We have a lot of events. We have road shows. We have one-off events. We have, you name it, these really intimate events with them so you can understand what they're doing, where the tenants are coming from. It's all about the information, and they're willing to share it with you if you're in a quiet setting, not with 50 other brokers at some conference or whatever. What happens is, that information helps us on deals, helps us on tenants in the market, and it helps us on understanding what the other landlords are doing and how we can be strategic on a deal-by-deal basis, how we can be strategic to beat that landlord. It gives us first and last look. Think about that.
It gives us first and last look on many deals, which means that we really have the pick of the litter. One example I can use right now, two examples. Two examples, two deals totaling 500,000 square feet in San Francisco never saw the light of day. Think about that. Never saw the light of day, and we struck those two deals because of the relationship that we nurtured with the broker. What do these two things do? It creates an advocate versus adversary environment. They know that we're looking out to do a quick deal. They have surety to close, and it's a really solutions-oriented approach that drives our leasing and our retention. These strategies work, you really have to have The space and the space ready to go. Speed to market is everything, and we want to make sure that the first impression counts.
We have two programs in place that were alluded to before. One is the VSP program, the Vacant Suite Prep, and the other is the Lease Ready program. The VSP program, so it is two-pronged. The first prong is, really, it is improving substandard space, it is building out spec suites, and it is reducing our static vacancy. It is important to note that it is a forward spend of our TI dollars. We are spending it in advance so that they can envision the space, and move in quicker. We have two phases going. The first phase, we have built out 119,000 sq ft and we already have 82,000 sq ft spoken for.
Now we are launching phase 2, which will be about 176,000 sq ft. The Lease Ready program, it is our kind of 2,000-5,000 sq ft suites that we are just doing cosmetic improvements to. We are maximizing the existing buildout.
You might call it plug and play, but it increases our hit ratio on these deals. Again, these 2,000-5,000 is really our bread and butter. We have approved 105,000 sq ft. We have built 40, and we have commitments for practically all of them. Now, when these things are done with the right combination, you can see how we begin to unlock value. This is four examples. These are real tenants, deals done in the first two quarters, renewal tenants. The mark-to-market is off the charts, 44%, 136%, 106%, and 77%, respectively. The strategy works. The bond and the building of the relationships with the brokers, with the tenants, also creates additional space opportunities with us because they want surety to close. They want to know that the ease of the process is replicated. I will share with you these three examples.
They are existing tenants, and there is a total of these three. There is a total of 150,000 sq ft of new deals as a result of just negotiating with these tenants at their current location. You might think, okay, big deal. 150,000 feet, three tenants. They are a captive tenant, where are they going to go? Not the case. Every single one of these is a tenant who has another requirement in another market, in another building, and they have decided that they are not going to take the deal to market. We are going to deal directly with us, and we are currently in the process right now. Next slide is I am actually most proud of this slide, because it is our pipeline. It is our lifeblood. You can see it starts January 15. When we took over the portfolio, there was roughly 750,000 sq ft of pipeline. We quickly grew it to about 1,200,000.
We have maintained it, we have grown it, and you can see all the way till today. It is just a little bit over 1,300,000 of pipeline. This is growing a pipeline at the same time that we pruned the EOP portfolio from 8.2 million feet down to 7.3 million sq ft. This does not seem like a slowing marketplace to me, based upon our increased pipeline. The other thing to note is our pipeline consists of deals in negotiation. It is not inquiries, it is not phone calls, it is not even tours.
This is all deals in negotiation at some level, and we are pretty proud of that. We have been busy, as you can see, with such a robust pipeline. In the last 16 months, we have executed 2.8 million sq ft. That is 1,600,000 in 2015, and that is 1,200,000 to the end of the first quarter in 2016, and there is much more to come.
Not just that, we're well out in front of our renewals, again, taking advantage of relationships. In 2016, we've got 1,100,000 square feet expiring, and we've got 62% accounted for. Many of those are already signed deals. In 2017, where we have 2 million square feet expiring, that's a big number, we've already got commitments on 33% of those. We'll just continue to chip away at that process. Now, of the deals executed this year, renewal deals executed this year, this astounding number, we were at 40.5% mark-to-market. Those are on just deals that were executed this year. The process is clearly working. It's not just vacant space, it's not just renewals. We're out in front of pre-leasing for development or redevelopment assets to the tune of over 900,000 square feet. These are just a few examples that you're probably aware of.
100% leased, six months early with Riot Games at Element LA for 284,000 square feet. Netflix at Icon for 323,000 square feet, five months early. [Applied this] at The Landing with 100,000 square feet. We pre-leased it three months before delivery with two tenants, Dentsu and WeWork.
As David mentioned, Saltchuk for 55% of the building, well over 18 months early. We still have a lot of activity going on there. Again, another statistic we're very proud of. As the process, we continue to work the process, we continue to do all the things that we feel like other landlords are not doing, that we're capitalizing it. There's no conclusion. We keep going. I want to leave you with this, that you know our team is out there working hard. There's just simply no deal out of reach. Yes. That's me.
All right. Now we're going to do 10 minutes of Q&A. If management, can you come up to the front here? We've got a couple mics to pass around, but for the sake of the webcast, if someone isn't mic'd when they ask a question, if management, if you're responding, if you can repeat the question into the mic so that everyone can hear it. Let's get started. Are there any questions? Sihan.
Yeah, I've got one for Drew. You mentioned that with the pipeline coming-
Yeah, grab the mic because you're going to be recorded for life.
All right, Drew. The pipeline coming online in San Francisco, you mentioned about 50% pre-leased, which would represent about 4.2% of inventory. Can you talk about backfilling for the part that's actually pre-leased? Because, with all the noise around the Dropbox backfilling, how much of that is pure expansion, and what's the challenge to fill what is just move around within that what's already pre-leased?
You're talking about the new construction-
Yeah
versus the sublease space?
Yes.
Okay. Well, on the sublease side, as I think you and I have talked about this before, the last nine months, we've seen aggressive lease up of sublease availability. I think it speaks to the strong demand that we've seen in San Francisco. With the Dropbox [inaudible] taking over almost 300,000 square feet from Schwab, on every sublease availability that's been in the market over the last 12 to 18 months, there've been multiple tenants backed up bidding, vying for that space. To date, that's still the case as far as what we've seen. Again, as the demand has stayed strong, it's been able to. I think one thing I want to say about sublease space, especially for San Francisco, it's an important and a valuable part of the dynamics of the market.
Because with technology companies, how they look at their growth, dynamic growth, quick, slow, what have you, sublease space, which has a variety of expirations and sizes, provides optionality for these tenants. We actually see it as a healthy element of the market in the city right now.
Anyone else? Are we that good?
They're all waiting for Mark.
All right. Well, we're running a little bit behind, so if there are no other questions right now, we'll take a five-minute break, and then we're going to keep going. Be back here in five minutes.
Yo, yo.
All right, everyone. In an effort to keep things moving and get everyone to their flights, we're going to get going again. We're now going to have our second fireside chat with Victor Coleman and Tim Kentley-Klay, Co-founder and Chief Executive Officer of Zoox, an autonomous car company. Victor and Tim, come on up.
Thank you, Laura. Tim, why don't you sit in the prime spot?
Thank you.
It's a pleasure. A huge "Game of Thrones" fan. No. Tim is the co-founder and CEO of Zoox. He founded it in 2013. He's a creative entrepreneur who founded three international design and technology-driven companies, Studios X, Y, and Z, Crayon, and Wheelbarrow. He earned 50+ awards within the creative industry. He's done a tremendous amount of global campaigns for companies like McDonald's, Comcast, Honda, Adidas, and Chrysler. We're very fortunate not only the fact to have Tim here today, but the fact that Tim is a tenant of Hudson's. We're trying to keep the theme. Before I get into the Q&A, Tim, tell us what's the proper language here. Is it autonomous cars? Is it driverless cars? Is it get screwed up and drive because you've been drinking and you can jump into somebody else's car?
What do people really think? What's your world? How do they classify this? Everybody talks about a different vernacular.
First of all, thank you for having me.
Pleasure.
Zoox was actually founded in 2014, July 29th, just for the record. Victor is very quickly becoming my favorite landlord in the entire world. I think autonomous mobility is about making getting around wonderful again. It's pretty negative at the moment. It's congestion, it's not safe, and it's generally a hassle that if you get distracted, you have an accident, that sort of thing. I think freeing the driver and the people in the vehicle having to worry about what's happening around them is actually going to enable a wonderful lifestyle experience for people moving around cities.
Great. Listen, I know, just for the record, there's a lot that, as you all know, that's evolving in this business and proprietary IP and R&D, there's only so much in a parameter that Tim's going to be able to share with us, but we're trying to do a little bit of a deep dive here. When you and I initially talked, I remember you used the phrase, what you're creating really is a robot with wheels.
Is what you said.
Yeah
sort of accurate? Tell us about Zoox and what makes you different than any of the other autonomous car companies, or what sort of stands out and where your passion is.
Well, that's exactly it. We don't see ourselves as an autonomous car company. The car was actually first referred to as a horseless carriage because people didn't know what an automobile or a car was. Today we call it a self-driving car, we just think that's because people don't understand really what this technology is. What it really is a sensor system with an artificial intelligence compute stack that goes down to electromechanical actuation. In our view, that's actually a robot, or we actually call them mobots, which is mobile robots or mobotics. We actually see ourselves as a robotics company, not an automotive company. I think when you look at mobility through that lens, you start thinking differently around how to solve the problem.
sort of inception, where we are sort of today to reality, give me your timeframe, because I think people would love to think about that and when we think this is actually. It's moving fast, as we all know.
Why don't you talk about how fast and when does this become reality?
I think there's two broad trends that you'll see with this technology. One is incremental adaptation to the automobile. You're going to see more advanced ADAS systems. ADAS stands for advanced driver assist, so automated emergency braking. That's going to become mandatory around 2020 on all vehicles, and that's going to make them more and more safe. At the same time, you're going to see another breed of vehicles, if you like, which are fully autonomous, on-demand, point-to-point mobility services, essentially like ride-sharing companies like Uber and Lyft, but without the driver. There's kind of these two broad areas that are happening.
Right.
Zoox is definitely in the latter area. I think it's that latter area that we really get a societal-level change in how we move around our cities. In 2050, 70% of our world's population is going to live in cities, so this is really big. I think what happens in the next 10 years, sort of 2015 through to 2025, that timeframe is actually going to determine who the players are in the next 100 years in terms of on-demand autonomous mobility.
The players, we're going to get into Silicon Valley in a second, but everybody's there now, right? I mean
Yeah, it's like, who's not there?
Right.
Yeah
I've been talking about this for about two years now, is this revolution from a space demand standpoint, but exactly that. Who is not there? Every major car company is there for some R&D and IP, correct? They all need to be there for what reason?
Well, Fiat was the one company that wasn't there, and they're now dating with Google because Google needed a partner. They've said they're not going to develop autonomous technology, now they've teamed up to make 100 minivans.
Interesting. They actually said they weren't, but now they are.
Now they are.
Okay.
If you're a tech giant, if you're an auto giant, they're all thinking about this. I think everyone's seen what happened with Kodak and digital cameras. Everyone's seen what happened with the iPhone and BlackBerry and Nokia. I think all these large automotive companies, they can see it's coming, and they don't want to be the people that didn't adapt and change. I think it's very hard for them to adapt and change in reality because it's not actually a mechanical engineering vehicle dynamics problem. It's not about how you build an internal combustion engine. It's actually at heart a computer science problem, and it's having the most advanced scientists that can create the algorithms, that can create essentially a robot that can move through a complex urban dynamic environment flawlessly. That's never been done before. No one can do it on this planet today.
It doesn't matter if you have the manufacturing prowess of a Toyota. If you don't have an AI system that can do that, you can't ship. What we have at Zoox is a team now of over 140 people, over 40 PhDs, four professors, top universities, that we think can create an artificial intelligence system for a mobility vehicle that can actually deal with dense urban dynamic driving. If you create that, it's so powerful, you're going to be able to generate the capital to actually create the vehicle architecture in which that AI system sits.
You mentioned capital. Capital is racing to this, correct?
Yeah.
Without you getting into details on capital, I'm sure your door has been knocked on by every single person around who wants to give you money.
Yeah, we're well financially backed. We don't have any issues in that area.
Let's talk about Silicon Valley.
Okay? That's where you are. You're in one of the best buildings of all time in any portfolio. That's the greatest landlord ever. We all know that. We appreciate the plug. Landlords love me because I just inherently remodel, even though I get no TIs because you guys negotiate very well, and you have the upper hand. Just so you know, it was tobacco yellow walls. It looked like if you ran over a hedgehog, that was what the carpet looked like. We pulled the carpet out, painted the walls white-
All on your own dime.
make it nice.
See?
That's fantastic.
Got to keep the-
You reinvested in it or what?
Got to keep the crew happy.
Okay. Silicon Valley.
Why are you there?
I think it goes back to what I was saying is this is a computer science problem. Stanford University is actually one of the leaders in machine learning techniques. It's those techniques that are actually going to allow this technology to scale in the marketplace. I think there's a reason why this is happening in Silicon Valley. It's not because it understands mechanical engineering and those sorts of things.
Right.
It's because it actually understands sensors, perception, planning, all the things that you need for mobile robotics.
Let's talk about the downer of the business. State, federal regulations, the negative aspect. What's your concerns there?
At the moment, it's actually pretty positive in that we actually had NHTSA, the National Highway Traffic Safety Administration, come past our little startup a couple of weeks ago. The headline is that the regulators get this. They're not like, "Whoa, what is a self-driving car? How does this help society?" They have bought into the vision. They don't need to be sold past the close. The conversation is really around how do we bring this technology safely into the marketplace? There's some really core questions around that, because when you're talking about creating a machine that can move through the environment, if it screws up, it can cause a problem. You need to be very careful about how you deploy that. The good news is that they get it. NHTSA, its core mandate is safety.
The number one killer of young people in America today is actually automobiles. They know that this technology can change the statistic that 94% of accidents are actually from people driving, not mechanical failure. It's really about working with them, the regulators and the innovators, to create a pathway to deploy the technology in a safe way.
You're excited about this, right? I mean, it's got to be on the. Before we sort of talk a little bit about some of the mergers that are going on, just get your opinion, tell us about your vehicle, your robot. I know no steering wheel, no mirrors. Just explain that a little bit and how different it is with our mobile technology and the likes of that.
I think part of what attracted me to this space is, as a creative person, I understand that when you have a really powerful new invention or piece of technology, the previous paradigm and physical form factor of previous technologies will be really suboptimal. Just like when we had the horse and carriage, we were in that mobility paradigm for around 6,000 years. It was actually around 4000 BC, we domesticated the horse and put the axle on the wheel, and that was a really big deal in the day because we had to roll goods over the ground versus carrying them or dragging them. It's like 1/40 the amount of energy. It was the invention of the internal combustion engine that let us go from the age of the horse and carriage to the age of the automobile.
That didn't mean putting the internal combustion engine in the carriage and keeping the horse. People tried that. It didn't work very well. It meant getting rid of the horse, which wasn't a trivial thing to do. Interestingly, it wasn't the coach builders that figured out how to do it. These were the Fords of their day, these coach builders. These were big companies. It was actually new founders, people like Ford, Porsche, Benz, that understood mechanical engineering, which was state of the art at the time, that discovered what the automobile architecture was. We've been in the age of the automobile now since maybe 1886, when Karl Benz got the patent for the Model 1 Motorwagen. That architecture really hasn't changed from what's in our car parks today.
When you have a robotic system that is able to navigate the environment, it means that we should be changing the architecture of the vehicle to optimize for that reality, not human driving. We don't need a forward windshield. We don't need a steering wheel. We don't need side mirrors. We don't need windscreen wipers. We actually want to optimize the architecture for machine vision, not human vision. Then we can also change the interior experience to optimize for what we want to be doing, not for the business of having to sit behind a steering wheel and all this sort of thing. It gives you a wonderful opportunity as a creative person. When I talk about creativity, I don't just mean aesthetics. I also mean architectures. To ask the questions, well, how do we form this object?
How do we sculpt this in a way that is optimal and solves these problems? That's not a trivial thing to do because it's a highly regulated product.
Right.
There's a lot of different things you need to do, I really enjoy that challenge, what makes Zoox different, I think, than anyone else is a lot of people, I think, are just looking at trying to make a car self-driving, we think that's really suboptimal. What we're working on is sort of what the full realization of this technology might be in one to two decades from their perspective that make it today.
Very cool. Forward, backward, it doesn't matter, right?
I can't say too much.
Okay. I get the feel.
You can give it superhuman capabilities if you like.
Yeah. Got it. Very cool. All right. Let's talk about just the land grabbing that we're seeing right now. I just saw yesterday, Toyota just invested in Uber or did some sort of a marriage with Uber. We saw GM and Lyft. It's completely different than your sort of thought process here in that these guys are trying to marry up with each other. What's your thought about that?
To me, that's kind of like dinosaurs chomping on asteroid dust, telling everyone it tastes like truffle. There's a lot of carasaurus talk going on.
Carasaurus.
Yeah.
I use that.
I don't know. GM bought a 40-person company in San Francisco for $1 billion.
Right.
20 engineers, no diligence. I think they're panicking. I think they don't really know what they're doing, and they have management that's trying to just do something. Whereas at Zoox, the reason that we're getting the very best people is we have a very clear vision. We're marching to market, and when people see what we're doing, and they see that we're looking at it holistically and not just doing some little slice and trying to flip the business or license it to someone, that's a very rewarding thing to do because making a robot is also like raising a kid. When you write some code, you put it on and it goes down the street and it doesn't screw up and it stops for a pedestrian and understands a cyclist, stops for a car, it's magical.
This can be more about than just safety, as important that is.
Right.
It's also creating something that will bring wonder into how we get around our cities.
You see, the light bulb just went off. You got all these other guys over here, I don't want to say that you're the same, there's you and two others, which are the obvious two, Google and Apple.
Who think the similar way. It may be different prototypes and it may be different types of engineering, they're thinking differently. They're not marrying up with these other guys. You've got your dinosaurs over here, which is our household names, who have all populated Silicon Valley now, as you know. They're all there and trying to figure out the R&D and IP, you've got yourselves and two others, and maybe somebody else out there, or a few others that I would know, that are doing this differently. Do you sort of see that segregating that way?
I probably don't want to comment too much about the competitors. I've only been living in Silicon Valley for a little under two years, and I've kind of figured out that everyone kind of knows what everyone else is doing. If you don't know what someone else is doing, it means they don't know what they're doing.
It's like the poker table, right?
It's like a bit of a blood sport to always be looking over the fence. What's that person doing that's rubbish or not? At the end of the day, the market's going to decide who wins and who doesn't. Alls I can say is, at Zoox, we're very focused on what we're doing and taking a leadership position in terms of how we think this technology should be made and deployed.
When you walk in your office with all your PhDs and everybody else, what's the most exciting thing that hits you every day? What are you thinking about?
Remodeling the kitchen.
Well, we can help you out with that, I think.
What it really is, my co-founder, Dr. Jesse Levinson, who's from Stanford, he did his PhD and post-doc under Professor Sebastian Thrun, who actually founded Google X and their driverless car program. When we first started Zoox, it was actually just Google, and then it was Uber, and now it's kind of everyone. It was a batshit crazy thing to do. It was a big leap for a startup to try and do something that's in such a capital-intensive area. To now be 140 people, I just respect everyone that I come to work with every day because if Zoox was a martini, we'd be equal parts brilliant and bonkers. It's crazy for a startup to be trying to do something so ambitious. At the same time, I think that's also its kernel of success and genius that actually makes it sort of work.
It's really these courageous makers, pioneers that I'm working with that want to try and do this against all the odds of tech giants and automotive giants and everything else, that actually inspires me to work with them to make it happen.
I think I know the answer to this, but I'm going to ask anyways. Then we'll open up to a couple of questions. Feel free not to answer them if you don't want to. Let's talk about what nobody else is talking about right now, which is manufacturing. Where do you see that? Is it domestically U.S.? Is it overseas? I know you guys aren't thinking about it here, right? Are you? I should ask that question. I thought you were thinking about it over in Germany.
Yeah. I'd probably prefer not to answer the manufacturing piece-
Okay
question. Yeah.
Suffice to say, it could be a challenge to be manufacturing in the U.S. relative to the rest of the world when the economy and cost, right?
Yeah. One of the nice things about what we're doing with our vehicle platform is we're actually reducing complexity. Automakers, it seems that they're keeping the automobile and then adding autonomy on top of that, and that's creating a really complex product. If you're trying to sell that at a price point to a customer, it gets even harder again. It's a level of technology now where you actually need to maintain software updates and everything in that. That's not my world, that's not my problem. By actually reinventing the architecture of the vehicle and getting rid of all the human-in-the-loop controls, we're actually fundamentally reducing complexity in the vehicle a lot, which I think simplifies the manufacturing piece of what we're doing in some really profound ways.
That opens up some new opportunities about how you may make these vehicles and what sort of state-of-the-art techniques you might actually be able to use to do them.
Well, I can tell you one thing. I think Hudson went like a half a dozen of them. Whatever we can get our hands on. Any questions? Anybody?
Is there going to be an emergency stop along the outbound?
Yeah, good question. The answer is yes. Yeah.
Can you talk about liability and risk assessment for the first movers and how that you think will change over time?
I went skydiving recently, I thought we just get that disclaimer where you just have to sign everything away. No. I think that on the insurance piece, we're working with Aon on that, who are really cool. I think the insurance model really shifts to the aviation model. When you book your plane ticket, a percentage of that fare covers your personal insurance and also product liability for the company as well. It's embedded in what you pay. It moves away from the model where you have to get your own personal car insurance because we don't sell our product. It's on-demand mobility. We own and operate it. These vehicles will be 99.99% autonomous when they're deployed in a city. Why would we go and put that back in?
Yeah, the insurance and the product liability will be covered in the fare of the vehicle.
Do you have any ideas about what this means for the professional industries?
It's interesting. I think there's two sort of counterposing things here. One in terms of the total addressable market. I think it's going to skyrocket with this technology. I think people are really going to like it. If you look at San Francisco as a use case, when Uber first started there around five years ago, I think revenue from mobility in the main city was around $130 million a year. More recently, it was $1.3 billion, and that's with the cost of rides going down quite profoundly. If ever there was a metric that people sort of didn't like the taxi experience and they love ride-sharing, it's that. The actual market is increasing because people like point-to-point, low-friction services. I think when you bring autonomy in, where you don't have to have a human driver push your phone, the cost is cheap.
It's going to go an order of magnitude again in terms of how much people love this technology. Through that lens, it's like, well, congestion could get worse. There's another lens where it can also get better. When you have a fully robotized fleet, you can use network fleet algorithms to create efficiencies in terms of where the vehicles are, how you redistribute them, when they're driving back empty, what back streets they take that will help. Ride-sharing is also becoming a very powerful thing. Today in San Francisco and Manhattan, there's Uber Pool and Lyft Line, and those services have only been going in recent history and actually make up around 50% of fares now in those cities.
That's really profound because you can start having algorithms that go, okay, you four people are being picked up from here, and we're taking you over here. You're getting 4 to 1 in the vehicle, which is obviously great for the individuals because they pay less. It's great for us because we actually make more because we have four people paying 60% of the fare or something like that. It's great for cities because you can really start driving some efficiencies through that lens. More broadly, I think when the technology really starts deploying, you're already seeing there's some cities where they're actually banning cars from CBD areas. From Melbourne City, they're starting to think about doing that in some of the areas. Places like Beijing, it's odd and even number plates.
In places like Singapore, there's a restriction on the amount of license plates that you can actually have. I think, given that we're living and working and breathing and jogging in our city centers, and this is zero emission technology, I think when it really takes bite, cities will be looking to really favor this technology as the primary way of getting around streets and creating disincentives for automobiles to come into the center of the city, which will also alleviate congestion. Because today in San Francisco, 40% of the congestion, this is nuts, 40% of congestion is actually drivers circling for car parks. That's incredibly inefficient.
Wow.
Barry.
How do you deal with the profound psychological change in loss of control? 14-year-olds have no problem with that sort of machine. You are competing with 40-year-olds who have a different perspective, and I know people in your business who say, well, planes are basically flying themselves, and so they may be, for example, [inaudible] .
The generation of people in this room grew up out of control, and there are people I talk to who aren't willing to get in and take a chance.
Yeah, it's a good question. I think you're always going to have that bell curve of early adopters and laggards, and then the general populace in the middle. With any new technology, that's the way it sort of happens. San Francisco is a pretty progressive city, hopefully, we have a lot of early adopters in a city like that. This isn't something that's going to be binary. It's not like overnight you have 10,000 fully autonomous vehicles in a city. This is something that's going to come in with a shallow ramp. Right? It's going to be done in pilot programs, in limited areas at limited speeds, there's going to be an opportunity for companies like Zoox to build trust with the people, with the regulators, with the city, and then enhance the domain of operation, the speed of operation over a period of time.
Yeah.
How important do you see is the manufacturing side of the business and the kind of computer science side of the business being in the same location? Or can they be totally apart and efficient? Or how do you foresee that going along?
Well, it depends with Donald Trump. We don't go there. There can be import taxes and that sort of thing that can create asymmetries irrespective of, hey, it might be cheaper and put this vehicle on a boat and bring it over. Typically, that's why automotive companies do manufacture locally within geographic domains is because of taxes that are implied on their vehicles if they don't do that. One of the things that I think I'm really passionate about and Zoox is really passionate about, our people who work there are, is this is just fundamentally a really good technology. It's going to be safer. It's going to be zero emission, but it's also a much better use of resources as well. The automobile is only used 4% of the year.
You put all that energy, minerals, chemistry into an electric or an internal combustion engine vehicle, it's not getting great utilization. Whereas this product is kind of halfway between private car ownership and public meeting in the middle. When you're not using it, someone else is. When you're in it's like a private car or better experience. Maybe one day even like a little bit of a jet experience. What was the question again?
Just more from a collaboration point of view.
Yeah.
Computer science or manufacturing, kind of because this business is just so tech-based-
-does that require those two sides of the business to be close, or is it purely going to be an economic decision on where it's cheapest to manufacture?
Yeah, probably a little bit more the latter, I would say. Go ahead.
Just to rush in on, I guess two parts. One is, obviously if you live in the suburbs, you can actually enjoy driving, the pleasure about it as well as, when you have a family, all your stuff's in there, you're not constantly moving it in and out.
Do you see the driverless car as more of an urban phenomena where instead of actually using ride share, that's where it's maximum? How do you see it breaking into areas where maybe you've got your car a few days or stuff, or you run errands or stuff like from. Is it the fact that it's relaxing to come home from the train, drive down a country road and unlock that performance relaxation kind of way? How do you see the autonomous car fitting into that versus just being a niche product for urban areas?
Yeah, it's a good question. I think there's definitely different demographics. I think average across America of car ownership is around two per household. If you go somewhere like Manhattan, it's 0.6. Young people living in cities, typically they don't want to own a car. They don't want to deal with parking, insurance, someone keying their vehicle overnight and smashing a window and grabbing something, they love the idea of on-demand mobility. I think people living around the cities Almost in the second phase of this technology, when these vehicles start doing a broader geographic domain, it might be that you see average car ownership drop a little bit over the course of a decade because you might keep that one nice SUV to go to Tahoe with your baby seat in the back and your skis and everything else.
Otherwise, it's just push a button and the kids are taken to school in an on-demand product. I think people who are living outside cities, you might see a more hybrid approach in terms of how the blend goes.
What do you make of Apple's investment in [inaudible], how many weeks or months do you know before they're not domestic?
I don't really have a comment about that too much. It seems that Apple's largely making that investment for domestic political reasons to get more into the culture and the community. Yeah, that's probably about as much as I want to say.
Last one.
From where you are today-
Yeah
getting to your flawless robotic mobility.
Just from your computer science, forget about the manufacturing for a second. In your vision, how long will it take do you think, how many people, you got 140 now-
do you have to double the size of your company roughly? What do you think?
Yeah, that's a good question.
That's a very good question, actually.
Yeah. What size property do we need in the Bay Area? Our publicly stated goal is 2020, to be ready with a pilot service with a ground-up vehicle. Small scale, nothing large. Our team size, I think would've doubled and then some by that phase. This isn't a trivial thing to do, and it does require a large team to do it. That's also what is really fun about Zoox, is that holistic approach from computer science to artificial intelligence, electromechanical engineering, but also through the lens of product experience. We don't believe that if you could make a car magically self-driving, it would actually work as a product in a city as a mobility service. What happens if someone just didn't shut the door fully when they got out of it? What does the vehicle do? Just sit there, drive down the street with the door flailing?
Does it try and accelerate and brake really quickly and slam it shut? You see what I'm saying? You actually need to change a lot to get the right solution. Yeah.
Great. How cool is this? Thank you. Very exciting.
Thank you, Victor and Tim. Now what you've all been waiting for, our Chief Operating Officer and Chief Financial Officer, Mark Lammas. Just I'll mention again that everything is on the website, presentation materials and webcast, so it's a lot of information, but you'll be able to access it again afterwards. Mark.
Boy, if I had known I had to follow these visions of the future and take you all the way back to the horse-drawn carriage, I think I would've begged to be a little bit earlier. That was great. That was really great. Good morning, everyone. I think you can tell how excited everyone at HPP is about what's going on in the company. I'm excited, too. I have the opportunity to take you through a couple of topics, which you all know are very near and dear to our hearts, our NOI growth prospects, and our current share price discount to NAV.
What makes this morning's conversation a little bit different from conversations we had with you guys in the past is we have an opportunity to reveal to you in much greater detail the contractual and non-contractual drivers underlying our NOI growth through 2017 and the building blocks of our intrinsic value and current NAV discount. We've attempted to strike a balance between providing enough specifics to clearly understand our assumptions and source data, hopefully won't mire you in too much detail. In most cases, the essential information underlying the analyses can be found in our supplemental reports. The footnotes and appendix to our presentation posted on the website also provide further clarity.
Now that I've hopefully whet your appetite to go through the only portions of this presentation when you actually came here to see, I'd be remiss if I didn't take you through quickly a current update on our capitalization, capital availability, and credit metrics. I'll keep it brief. Then we'll get to the good stuff. Since our inception nearly six years ago, we've executed a financing strategy consistently maintaining a conservative balance sheet, strong access to capital sources, and sustainable liquidity. We've always and continue to maintain low leverage, currently 33% debt to market cap, and historically averaging 30% to undepreciated book. Our debt maturities have and continue to be managed to avoid potential event risk.
Our interest rate exposure has been balanced to limit our impacts of rate volatility while affording us financial flexibility. We forge relationships with the country's strongest financial institutions to ensure access to a range of capital sources. These next slides will provide greater detail on each of these points. I think our track record is clear. We have grown our company around a commitment to a fundamentally sound and sustainable capital structure. Here you can see our current debt composition. As you can see on the left-hand side of the page, we have no near-term debt maturities. Beginning with 2020, we have carefully laddered our indebtedness to limit our exposure to capital market volatility. As indicated, only 16% of our outstanding indebtedness is floating rate, with all of that indebtedness housed within our five-year term facilities.
Not only does this allow us to take measured advantage of the current low interest rate environment, but it affords us considerable financial flexibility to repay and extend our debt maturities with little early extinguishment expense. One of our core financing objectives has been to move increasingly towards an unsecured debt strategy. As you can see, at this point, fully 75% of our portfolio is unencumbered. Attentive management of our capitalization of our assets towards creating a large, diversified, unencumbered pool of properties allowed us to obtain an investment-grade rating more than a year ago and within little more than four years after going public. This not only continues to drive down our cost of capital, but will facilitate capital availability in the term debt, private placement, and public issuance debt markets. This next slide clearly outlines our current capital sources.
A combination of cash on hand, a fully undrawn revolving credit facility and sizable accordion, loan availabilities under our Sunset Gower and Sunset Bronson loan, our ATM and target dispositions, the majority of which is already under contract, provides us with $1.6 billion of capital availability. Josh and Chris outlined our capital improvement initiatives for the former EOP portfolio, and our public filings summarize our current development and redevelopment spend for projects under construction. I think you will agree that our ample capital availability not only more than covers our near and midterm capital requirements, but provides considerable excess liquidity. Favorable credit metrics are the hallmark of a sound capital strategy. I think this slide says it all in terms of our credit quality. I do not want to move too fast past this slide. On effectively every measurement, we have stronger credit metrics than our office peers.
This from a company that has grown nearly tenfold in six years. Only the careful execution of our capital strategy, coupled with the successful execution by our investment, leasing, operations, and development teams could lead to this impressive credit quality. That does it for the discussion of our capitalization strategy and credit metrics. I'll turn to what I think you've been patiently waiting for, a rundown of our projected net operating income growth, followed by an examination of our current discount to NAV. We refer to this next portion of our presentation as our bridge to success. Many of you may recall conversations with us during recent non-deal roadshows and banking conferences, where we held out the promise of building what we coined then as this bridge to success at this investor day, and here it is.
This next handful of slides chart our projected net operating income growth drivers through 2017 and ultimately beyond. The team is understandably proud of our success. This next set of slides shows why they should be. We will walk through each of these components of growth. This first slide cuts to the chase for those of us with short attention spans. Importantly, we are projecting net operating income growth from the end of last year through 2017 of close to 25%, with fully 55% of that future growth generated from current contractual sources. Allow me to repeat that to ensure its significance is not lost as we begin to delve into the details. We are projecting close to 25% NOI growth through 2017, 55% of which is driven from contractual sources.
We believe very few REITs and none of our office peers have the growth potential that we do. In this slide, we provide the breakout of $41.5 million of embedded NOI growth from a combination of two contractual sources, signed, uncommenced, and backfill leases, and contractual rent bumps under existing leases. You can find the detail for our uncommenced and backfill leases and lease expirations over the next eight quarters on pages 27 and 28 of our latest supplemental. The first $28.5 million of NOI simply represents the estimated NOI growth resulting from those executed, uncommenced, and backfill leases. With respect to the backfill portion of those leases, only the mark-to-market impact of those leases is included. We've assumed an NOI margin of 70% with respect to the rents and other revenue associated with uncommenced and backfill leases.
With current NOI margins for a stabilized office of approximately 65%, 70% should be conservative margin on what is, after all, only incremental leasing. One additional item to mention about the uncommenced lease component of NOI growth is that it includes $1.8 million of incremental NOI associated with the burn-off of the non-recurring abatements reflected on page 26 of the supplemental. Turning to the $13 million of NOI growth from contractual rent bumps. This represents 3% contractual rent increases on our existing leases, adjusted for scheduled expirations. We assume a 70% NOI margin on this incremental income, which may seem especially conservative in light of the nature of this revenue, but we believe it appropriately addresses the impact of unrecoverable operating expense increases through 2017.
This next slide summarizes the $35.5 million of speculative NOI comprised of three sources, mark-to-market spreads on expiring leases, lease-up of existing vacancy in our in-service portfolio to 93% occupancy, and incremental NOI associated with our media and entertainment portfolio. I'll begin with the $1.6 million of NOI associated with our media and entertainment segment. This simply projects incremental NOI, assuming we achieve 5% annual NOI growth over our trailing 12-month NOI as of the end of last quarter. The remaining two components of our speculative NOI growth are essential to appreciating potential growth, so allow me to spend an extra moment to explain them. First, we are projecting approximately $22.6 million of NOI growth before downtime from the re-leasing of expiring leases not subject to backfill under existing leases. Or, sorry, executed leases.
This represents only the incremental NOI associated with the mark-to-market impact of re-leasing the space corresponding to the expiring leases shown on page 28, which had not already been backfilled. We have assumed 30% mark-to-market leasing spreads to the rents under the expiring leases, a conservative assumption considering our current weighted average mark-to-market on 2016 and 2017 expirations of close to 40%. Obviously, not all of the leases expiring over the remainder of this year and next will be renewed. The space associated with leases which are not renewed will experience downtime until backfilled. To account for this downtime, the $22.6 million of incremental NOI associated with the mark-to-market impact of re-leasing is being offset by $17.5 million described as re-leasing downtime, which represents the unrealized potential NOI growth on expiring leases based on a 70% renewal probability and nine-month downtime assumption on leases which are not renewed.
Finally, we reach the last component of the NOI growth through 2017, lease-up of existing vacancy. The $10.9 million of incremental NOI growth represents the NOI potential from the lease-up of existing vacancy within our in-service portfolio and approximately 107,000 sq ft of near-term availability at 875 Howard and 3402 Pico until we reach stabilization. To get there, we've assumed average absorption of 50,000 sq ft per quarter until we reach an assumed 93% stabilized occupancy by the end of 2017. In terms of aggregate square footage, this amounts to 387,665 sq ft of net absorption over the next 7 quarters or roughly 3% of the sq ft of our in-service portfolio. We have assumed that rents under leases on our existing vacancy are executed at 20% mark-to-market spread to the existing rents on the properties where we have vacancy.
We believe the 20% mark-to-market on our in-place rents and absorption assumptions are more than supported by our recent cash leasing trends and net absorption track record, appropriately adjusted for the composition of leases throughout our portfolio. Now for the final brick to complete our bridge to success. While we are projecting $410.5 million of NOI by 2017, the components are in place for NOI growth reaching $442.8 million beyond 2017. First, the realization of the $17.5 million of potential NOI growth on expiring leases, which we have excluded from the NOI growth through 2017, should occur in 2018. Also, our development and redevelopment assets offer the potential for nearly $15 million of incremental NOI if space is delivered in 2018. Approximately $2.1 million of that is contractual NOI from 50,000 sq ft of net plus must-take space at our Icon project.
The remaining potential NOI relates to our 90,000 sq ft Cue building, approximately 75,000 sq ft at 450 Alaskan Way, and 121,000 sq ft at our Fourth and Traction asset, all of which will be available for lease within 2018. Based on the high level of prospective tenant interest, we are optimistic about the NOI potential on these assets. One final word about this NOI growth projection. It assumes no unannounced acquisitions or dispositions, including the potential sale of the $50 million asset mentioned in our last guidance. We've made no adjustment for that potential sale to ensure consistency with the portfolio underlying the NOI as of the end of last year. That covers our NOI projection and hopefully provides everyone with a clear appreciation of why we believe HPP is positioned to deliver among the highest NOI growth rates within the REIT sector.
I'll turn to what might be the other topic you've been waiting to see, a discussion of our current discount to NAV. I want to stress from the outset that we've intentionally used conservative cap rates and benchmarks throughout the analysis so that the conclusions remain clear. By the time we go through it, I think it will be obvious just how steeply discounted our current share price is to any reasonable valuation for the company. The next set of slides detail the value of each component contributing to the intrinsic value of HPP. We begin with $6.1 billion of total capitalization based on Monday's closing price of $27.81. $235.9 million of our enterprise value is attributable to our media and entertainment properties, based on Q1 2016 trailing 12-month NOI for this segment at a cap rate of 6.5%. $84 million is attributable to our land properties.
You can find a detailed description of our valuation assumptions on our land assets in the appendix to this presentation posted on our website. I think you will find them very reasonable. $278.9 million of our enterprise value is allocated to our two ongoing development properties. Our largely pre-leased Icon and Cue and 450 Alaskan Way developments. You can find our cost and yield assumptions for those assets on page 19 of our supplemental. We've simply applied a 5% and 5.25% cap rate on the stabilized net operating income for those assets, respectively, then deducted the remaining cost to complete these assets. The resulting value has not been discounted to present value, as the cash flow associated with these assets prior to stabilization has been ignored to simplify the valuation. $251.8 million of our enterprise value is allocable to our redevelopment pipeline outlined on page 16 of our supplemental.
Our 12655 Jefferson asset is under contract for sale for $80 million. Page 19 of our supplemental reflects our project costs and stabilized yield assumptions for 3402 Pico and Fourth and Traction. Similar to our valuation of Icon and Cue and 450 Alaskan Way, we've applied a 5% cap rate to the NOI corresponding to the projected stabilized implied yield and reduced that value by our remaining costs. Finally, our 405 Mateo and Merrill Place theater building developments are carried at cost. The $1.89 billion attributed to the lease-up component of our in-service portfolio reflects the value of those 11 assets at a 4.5 cap rate on Q1 2016 annualized NOI. As of March 31, those assets were approximately 77% occupied. So we've applied a cap rate to appropriately reflect their stabilized value potential.
Upon projected stabilization, the implied value equates to just shy of a 6 cap on its stabilized NOI. The other components of our enterprise value, other assets and liabilities, and cash, tie to our Q1 2016 balance sheet. The rest is painfully obvious. Our stabilized office portfolio comprises $3.29 billion of our enterprise value. Q1 2016 annualized NOI on that portfolio was $260.2 million, resulting in a 7.9 cap rate on assets in the highest barrier West Coast markets, with among the strongest credit quality in the office sector and in-place rents more than 20% below market. I'm getting choked up. If Alex had the opportunity to acquire these assets at that cap rate, I can assure you, he wouldn't rest until they were ours.
If we assume these assets are appropriately valued, you can see that our shares would be trading at $37.62 at a conservative cap rate of 5.5%, and $39.16 at a closer to market cap rate of 5.25%. As of Monday's close, we are trading at a discount to NAV between 35% and over 40% at these cap rates. Of course, that's a value on historic NOI. If we use the full-year NOI for 2017 on our stabilized portfolio, the discount would be considerably higher. But don't just take our word for it. Our friends on the sell side of the aisle, some of whom are here today, figured this out long ago. This final slide says it all. Only one office REIT is expected to generate higher FFO growth through 2017 than HPP. That company enjoys one of the lowest discounts to consensus NAV among comparable office REITs.
Meanwhile, HPP sits in the unenviable position of having the third highest discount to consensus NAV among those same office REITs. That does it for my presentation. I hope you found the discussion of our NOI growth and NAV discount informative. Hopefully, you agree that the company is poised to deliver exceptional returns that support a considerably higher valuation than our current share price. Thank you.
We'll open it up to any questions on this or anything else before we exit. Questions, anybody? Yes.
Just going further to the NOI break, we're just looking at that valuation. With 80% of the portfolio up in Northern California and the Peninsula, and a lot of that mark-to-market is driving the NOI growth. How should we think about, as you guys pare some of that exposure, how that impacts the NOI growth going forward?
As we sit today, we have not taken any additional action on selling assets other than the assets that we've discussed, which is the $130 million of prospective dispositions. Assuming that that's the case, the paired allocation would be much more conservative as we sit today. If we were to sell assets at market rates, the cap rates we're talking about that Mark referred to are much lower. I think this is taking a much more of a conservative approach.
You won't see a material impact to the mark-to-market from the dispositions the ones we haven't specifically announced at this time.
Yeah.
Other than the development costs, we already kind of know from the supplemental. What kind of CapEx leasing costs are you assuming to get the incremental NOI from the bridge that's not development related?
Through the end of 2017, which is kind of the main measurement period, because at that point, it was largely stabilized.
The last update I saw on TIs commissions was gosh, already blocking $263 million of electric cap, some of which has already since been spent. I think it was $134 million within EOP Northern California portfolio. Yeah.
Talk about the elephant in the room, recent Blackstone selling of the stock, given their previous statements about the intrinsic value on NAV and what their future plans could be.
Listen, I don't know what Blackstone's plans are going to be. I'm not in the room with them. I am in the room in our board meetings, and the intrinsic value they see. They've been a fantastic partner. They've been very dedicated and loyal. It's not a surprise that they're selling, or that they will sell. All I can say is, the additional float has enabled us to have new investors in the marketplace, which has been very good for us in the last couple of weeks. I wouldn't be upset about it at all, and I think if they were to sell one more time, they're going to be slightly bigger than three of our larger investors. It's not something I'm concerned about. It's inevitable. I do think, quite frankly, it's flattering given the fact that there are other positions they have, they've done much worse on.
They've made a nice return on us, and I think this is a two-year process for them. If people want to perceive that to be an overhang on the stock, look at the numbers. The numbers speak for themselves. You're going to lose out if you think it's an overhang. That's what I say. Thanks.
Do you think the distribution growth is tracking the NOI growth at the same rate, or no?
In terms of distribution growth, I'd say distribution growth tracking NOI growth is probably slightly less, but not material to change, I don't think, in any manner.
The one topic we haven't really touched on too much today is external growth. Obviously, you guys missed out on one of the bigger transactions that was announced this week. With the stock trading at such a wide discount to what you guys view as value, what should we expect as some more of those Blackstone assets come to market or other opportunities come to market, your willingness to kind of take a run at some of those?
Yeah. Actually, that's an excellent question. I think whether we missed out or didn't miss out, I think that's for fruit to bear down the road based on how the structure of the deals are. I do think that the presentation today echoed two material issues. One, David's presentation about Seattle and our feelings about Seattle was not just his feelings, it was the company's feelings, and I believe that there's a marketplace there in Pioneer Square and opportunities that we will consistently look at. I think the flow of growth here in Los Angeles and the rental rate movement is also something that we're very happy about the upward mobility. If there are opportunities for us to participate in, and assets that we think are beneficial to extending the value of the portfolio, we're going to consider them.
We're not going to put our head in the sand and say we're not going to be future buyers of assets. We've said that. Earmarking for specific cases in those two markets have always been sort of our footprint. I think it would be bold of us to say that given our presence in the Bay Area today and what we have in some of the dispositions in that marketplace, that we would look there at this time. Anybody else? Yeah.
Just a follow-up. On the funding of a deal like the Boston Properties deal, how would you go about it with the discount that you guys trade at?
We wouldn't be raising equity, if that's your question. Yeah, we have a lot of capital and accessibility. Listen, we still have a tremendous amount of debt on the capacity, both on asset level as well as on the ability for us to go out and do a rated debt position. We have an untapped credit facility, which Mark walked you through earlier. We have 1031 exchange money coming due with a couple of dispositions. We have a full facility on an accordion feature. I'm not that concerned about our ability, but it would not be raising equity, if that's your question.
JVs.
Yep, JVs as well. Patient.
From a corporate governance standpoint, one could potentially argue that there might be a little bit of a disconnect in the boardroom now that Blackstone is selling. They perhaps have a shorter-term interest than perhaps other board members or management might have. Have you thought about having a conversation with them to accelerate the change in the board to make sure that you've got board members who are inherently interested in the long-term value maximization of the company?
It's a great question. By the direct merits, they chose to take one less board seat anyway at the end of the year, and they had the right to fill that seat, and they chose not to. I think that was indicative of their confidence level and their ability to execute and watch us execute at the same time. I do believe that the alignment of the board is complete, even with their recent disposition. Listen, they own a little more than 30% of the stock. Farallon at one point owned almost 45% of the stock. [Rocky Fried's] been on our board since the beginning, and the alignments, I think, are very, very transparent and very, very similar. The other aspect is that they're not in a position to quote, unquote, "dump stock" for the benefit of what they see. You saw it, they've seen.
They're not crazily out there saying, "Hey, we're going to dump stock." As I said, I don't think this is a short-term scenario. I believe this is a long-term scenario. First of all, they're limited to the number of transactions they can do. Second of all, they're committed to doing the execution based upon the right timing and the growth of the company. It's going to work out. I think it's less of an issue internally in the board. Conversations are very, very dynamic, and I believe that they believe in the intrinsic value as other board members have shared with them at the same time. Anybody else? Yes.
As you go through the NOI bridge, you're going to create a capacity as your leverage metrics come down. How should we think about, should we expect you to bring leverage even lower? Should that capacity be used for external growth or buybacks or things like that?
Yeah. I wouldn't look at it that way as a capacity issue, as our leverage metrics are going to decrease sub 30%, and therefore, we're going to spend capital to bring it up or incur more debt. It's a case-by-case scenario on external growth. It's absolutely going to be a fundamental business strategy of Hudson's in place today to have a debt level strategy around the 30%, consistent to what we've had in the past. I don't think that's going to be offset by any transaction or structure. As I said, I think we have access to multiple levels of capital and multiple accesses to debt that will manage those levels at the same frequency. I'm not concerned about increased NOI, therefore, our debt levels are going to go to 25% unless something got there, therefore, we're going to bring them back up.
It's going to be flowing based on need. The beauty is, Mark and his team have extended the capital structure out through 2018 for our needs. We know exactly how much money are going to be deployed for tenant improvements, construction, and external growth aspects, aside from any dispositions or new acquisitions. I think we're pretty comfortable with it at the levels we're at. Anything else? As you can see, first of all, these are pretty compelling numbers. We've been talking about these numbers on a consistent basis. We've been, as a company, on the road doing non-deal roadshows since January, more than I've ever done in a quarterly period in my entire history of being a public company, both in my prior associate company and at Hudson. We've been telling this story.
I don't think people have been listening, and we have not done it in the detail that we have today. We're excited about the prospects and understanding. Mark and his team are prepared to dialogue with anybody who needs additional material information or deep diving even further. He's always been accessible with that and will continue to be so. This is now out in the public. We have Nareit in two weeks. We have a complete full schedule, ironically, with a lot of you people who wanted to see us. We're now seeing other people. Sorry, you're kicked out. You had the opportunity of seeing us here. I think the message is going to be clear and concise, and we're excited about that. I want to thank the Hudson team. These people don't speak publicly. This is what they do for a living.
They did a phenomenal job. I'm very proud of them. They're passionate about what they do every day, and more importantly, they're passionate about what each other does every day, and that shows true based on what we see here and what we've seen here in the presentations. Laura Campbell and her entire team put this together. As I said, congratulations. You killed it. Knocked it out of the park. The next Investor Day, we'll be seeing Laura catch the ball with a Dodger uniform like Art did. Art's sense of humor is organic, and we appreciate that sometimes around the office, sometimes we don't. I want to thank our two guest speakers for coming out. It's not every day that you get to see a media entertainment and you get to see a technology person.
The most important thing is they're tenants of Hudson, so they're passionate, they're embedded. They believe in our company, and that's why they're there, and I think they're longstanding, and it says a lot to the company. Lastly, for everybody else who came here, it's not a bad place to come. Come to L.A. once in a while. The next one will maybe be up in Northern California, the likes of that. I appreciate the time, I appreciate the consideration, and more importantly, the following and the loyalty of HPP. Thanks very much.
Just a couple quick announcements as everybody is leaving. There are boxed lunches outside. We'll have a shuttle. There's two shuttles departing for the airport in about 10 minutes. There is a survey in your folder. If you could just take a few minutes to fill it out and give us some feedback, that would be terrific. Thank you so much. We'll see you in June