Hudson Pacific Properties, Inc. (HPP)

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Hudson Pacific Properties (HPP)

Q2 2013 Earnings Call

August 05, 2013 4:30 pm ET


Kay L. Tidwell - Executive Vice President, General Counsel and Secretary

Victor J. Coleman - Chairman and Chief Executive Officer

Mark T. Lammas - Chief Financial Officer and Treasurer

Howard S. Stern - President and Director


Vance H. Edelson - Morgan Stanley, Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Craig Mailman - KeyBanc Capital Markets Inc., Research Division



Greetings, and welcome to the Hudson Pacific Properties Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Kay Tidwell, Executive Vice President and General Counsel. Thank you. Ms. Tidwell, you may begin.

Kay L. Tidwell

Good afternoon, everyone, and welcome to Hudson Pacific Properties Second Quarter 2013 Earnings Conference Call. With us today are the company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas. Howard Stern, the company's President, is also available to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, August 5, 2013, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.

In addition, certain of the financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was released this afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

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

Victor J. Coleman

Thank you, Kay, and welcome, everyone, to our second quarter 2013 conference call. The second quarter was an extremely active period for Hudson Pacific Properties highlighted by key strategic acquisitions, the recycling of capital with the disposition of the City Plaza property and a healthy leasing activity in our core markets.

During the quarter, we made significant progress on our strategic growth strategy with the acquisition of a 4-building 836,000 square foot office portfolio in Seattle, which we closed on July 31. We also completed the acquisition of 3401 Exposition Boulevard, a 65,000-square foot redevelopment project located in Santa Monica. And finally, our joint venture with M. David Paul/Worthe completed the acquisition of Pinnacle II in Burbank California. Located in markets that are among the strongest in the country, these properties fit squarely in our strategy of building a high-quality portfolio with an emphasis on catering to media, new media and technology tenants.

We announced the pending acquisition of the Seattle office portfolio in early July, which we purchased from Spear Street Capital in an off-market transaction for approximately $368.6 million. This best-in-class portfolio provides us immediate critical mass in the region. With almost 80% of the net rentable square footage located in the South Lake Union and Pioneer Square areas, the 2 premier submarkets in Downtown Seattle. This acquisition represents a unique opportunity for Hudson to gain entry into this exciting market.

Included in the Seattle portfolio are 505 First Street and 83 King, which are ideally situated along the waterfront and Pioneer Square. This 2-building, 472,000 square foot property combines a historic brick and timber building with a newly constructed creative office building. Originally renovated and developed by Starbucks, the property is currently 90% leased to high-quality tenants, including Capital One/ING Direct, EMC and Nuance.

A third property called Met Park North is located in the South Lake Union, the tightest submarket in Downtown Seattle, with a Class-A vacancy of approximately 2.4%. The property contains 189,000 square feet and is approximately 99% leased, with Amazon leasing 74% of the building through 2023.

Rounding out the portfolio is Northview Center located in Seattle's Lynnwood submarket. Considered the premier office building in this submarket, the property contains 174,000 square feet and is 89% leased to high credit tenants such as ADP and FEMA.

Seattle has long been a target market for Hudson. The region's underlying economic fundamentals are among the best in the nation, rivaling those of our 2 other core markets, San Francisco and West Los Angeles. According to Colliers International, Seattle's Class-A office vacancy has witnessed 4 consecutive years of net absorption and rental growth, with vacancy currently at 13.6% and Class-A asking rents up 3% year-to-date to $31.73 per square foot. These trends in this portfolio hold all the ingredients for this acquisition to be a strong addition to our existing portfolio.

First, this provides us with an opportunity to acquire portfolio of best-in-class assets at a basis below replacement cost and a substantial discount on a price per square foot basis toward similar trades that have recently been executed in the market. Strong portfolio occupancy to high-quality tenants provide stable cash flow over the near term. Importantly, overall portfolio rents are approximately 16% below market and 25% below market at First & King, allowing for NOI growth as leases expire. And finally, there are select value-add opportunities within the portfolio that enable Hudson to create additional long-term value through active management and our strengths in leasing operations in redevelopment/repositioning.

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