Kay Tidwell - EVP, General Counsel Victor Coleman - Chairman and CEO Mark Lammas - CFO and COO.

Craig Mailman - KeyBanc Capital Markets Blaine Heck - Wells Fargo Securities Nick Yulico - UBS Sumit Sharma - Morgan Stanley Rich Anderson - Mizuho Securities Alexander Goldfarb - Sandler O'Neill Jamie Feldman - Bank of America.

Greetings. And welcome to Hudson Pacific Properties First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

Good afternoon, everyone. And welcome to Hudson Pacific Properties first quarter 2016 earnings conference call. With us today are the company’s Chairman and Chief Executive Officer, Victor Coleman; and Chief Operating Officer, and Chief Financial Officer, Mark Lammas.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that could cause the company’s business and financial results to differ materially from these forward-looking statements are described in the company’s periodic reports filed with the SEC from time to time.

All information discussed on this call is as of today, May 5, 2016, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures.

The company’s earnings release, which was released this morning and is available on the company’s website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

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

Victor?.

Thanks, Kay. Good afternoon everyone, and welcome to our first quarter call. We had a terrific first quarter across the board, but particularly in terms of our leasing results. We’ve also had no activity on the disposition front in the first half of the year which I am going to get to in a moment.

And we’re going to keep our prepared remarks relatively brief this morning – sorry – this afternoon. We’ll have a bit more time for Q&A and we’ll be digging in a lot more at our upcoming investor days in Los Angeles on May 24 and 25.

If you’d like more information about this event, please reach out to our head of IR Laura Campbell whose contact details can be found on our website. In the first quarter of 2016 alone, we executed nearly 820,000 square feet of new and renewal leases across our markets.

Not only this is on track with the pipeline of executed and renewal lease deals that Mark discussed on our last quarter’s call, but it's our best quarter ever in terms of leasing both on an absolute and a pro-rata basis.

And even more impressively, in a testament to our ability to push rate and maintain velocity, we achieved phenomenal cash and GAAP rent spreads of 66% and 73% respectively. In terms of earnings reported thus far this quarter, none of our office peers are posting these kind of results.

We pre-leased a significant proportion of our development and redeveloped pipeline. Netflix leased the balance of ICON, Saltchuk took 55% of 450 Alaska Way and a deal with WeWork took 12655 Jefferson to a 100% leased. The activity along the Peninsula and the Valley this quarter has been robust.

And we're going to keep providing a deep dive at our upcoming investor day on these results. But in the first quarter we completed over 350,000 square feet of new and renewal leases in those markets at rent spreads on par with the larger portfolio.

Noteworthy deals, both in Palo Alto, including 22,000 square foot lease with Toyota Research Institute, Toyota’s R&D division focused on the autonomous cars, and Lockheed Martin's 43,000 foot renewal for our entire 3176 Porter Drive asset.

We also executed a 25,000 square foot renewal with Virtual Instruments, the world's leading IT analytics company at Metro Plaza in North San Jose. We're making excellent progress with regard to our upcoming expirations as we alluded to on our last call.

We've now executed a renewal lease with Qualcomm for 365,000 square feet at Skyport Plaza in North San Jose. But we're not going to discuss all of our second quarter activity today.

This deal, a credit to our leasing team’s proactive approach, addresses our 2017 expirations and brings our year-to-date total leasing activity to north of 1.2 million square feet.

The terms of this renewal executed nearly 16 months before the expiration include a 40% mark-to-market on cash rent effective as of April 1 of its year and extend to expiration of July of 2022. Overall conditions across our markets remain positive.

And Los Angeles has the right ingredients for a strong to medium near term performance -- a high level of investor interest, modest new construction, stable employment growth and reinvigorated media entertainment industry. Our primary Los Angeles markets continued to perform well across all key metrics in the first quarter.

We’re currently in discussions with a pipeline of media related tenants representing around 350,000 square feet of requirements for our 90,000 square foot queue [ph] development to be delivered in mid ‘17. We're also seeing a pickup in activity at all of our studio stages as a result of Netflix.

And since our last call we kicked off a formal marketing efforts for our 120,000 square foot for contracts and redevelopment. We're seeing growing interest from potential tenants, particularly as the sub-market continues to gain recognition.

And we now have demand for pipeline for about -- for both of our two Sisters [ph] projects for nearly 500,000 square feet. In Seattle, the market remains very strong -- sub-lease activity than 1% and fundamentals improving across the board.

50% of the projects currently under construction are pre-leased almost entirely by tenants expanding to the marketplace new and renewed. And while we're closely monitoring new supply for companies looking to locate in the rapidly transforming Pioneer Square, options for class A space remain very limited.

Specifically our 450 Alaska Way development is set apart by already having a creditworthy anchor tenant as well as adjacency to the progressing Seattle waterfront redevelopment. We're in active conversations with both tech and non-tech tenants representing nearly 400,000 square feet of demand for the remaining four floors.

In the Bay Area, we're seeing some signs of moderation. Asking rates for the CBD, Peninsula and Valley, all increase slightly with incremental increases in vacancy and in general slowing absorption.

Sub-lease vacancy in the CBD ticked up and while we suspect this is a result of some of the tech companies right-sizing, demand for this type of space remains very strong. We're keeping a close eye on supply but our portfolio is well positioned in the market which has experienced feverish growth in the recent quarters inevitably cools [ph].

Leasing momentum at our properties remained very solid and we're seeing nice activity at assets with some of the larger vacancies like Metro Center. We will be digging in here much more at our upcoming investor day.

We've completed a number of non-strategic asset sales and year to date we've closed or put under contract nearly $315 million of deals, and I am going to walk you through those now.

Our previous announced dispositions of Bayhill Office Center in San Bruno to YouTube and Patrick Henry Drive in Santa Clara to KT Urban generated a combined $234 million of gross proceeds.

Like our fourth quarter sale of the Bay Park Plaza in Burlingame, these assets were also on an all-cash off-market transactions at premiums to our original purchase prices. As I mentioned, we're working on a couple of other dispositions and we've recently placed 12655 Jefferson under contract to sell.

After successfully pre-leasing the building and our only holding at Playa Vista we received a reverse inquiry from a qualified buyer, that highly value the asset’s location, redesign and tenancy.

The agreed upon $80 million sale purchase price represents a 30% increase over our projected future basis, and the buyers’ good faith deposit is just now non-refundable and a portion of it has been released to the company. This deal is expected to close in the fourth quarter of ’16 after we complete all the tenant work.

With that, I am going to turn the call over to Mark who's going to touch on our first quarter financial results, including how strong our performance has led us to raise our one year full guidance, even though we have pending dispositions. .

Thanks, Victor. Funds from operations, excluding unspecified items, for the three months ended March 31 2016 totaled $63.2 million or $0.43 per diluted share compared to FFO, excluding specified items, of $18.5 million or $0.23 per share a year ago. There were no specified items for the first quarter of 2016.

So we had $6 million or $0.08 per diluted share of acquisition related expense in the first quarter of last year. FFO including the specified items for the three months ended March 31, 2015 totaled $12.4 million or $0.16 per diluted share.

As of March 31, 2016 our stabilized and in-service office portfolio was 95.8% and 90.7% leased respectively, up from 95.3% and 90.1% as of the end of last year. The trailing twelve months occupancy for our media and entertainment properties increased to 81.6% from 71.6% for the same period a year ago.

Net operating income with respect to our 21 same-store office properties for the first quarter increased 8.5% on a cash basis and by 6.4% on a GAAP basis. Net operating income at our same store media and entertainment properties increased by 47.9% on a cash basis and 36.3% on a GAAP basis.

As many of you know, April 1 marked a one-year anniversary of our acquisition of the EOP Northern California portfolio. Beginning next quarter, our financial statements will reflect a more comparable portfolio for quarterly year-over-year comparison purposes.

Consistent with our same store reporting policy, the EOP Northern California portfolio asset owned as of January 1, 2017 will be added to our same store office portfolio beginning with our 2017 report.

Before turning to guidance, we would like to walk you through our recent loan activity which has improved our debt maturity schedule and our access to capital for future requirement. On May 3, we drew all $175 million of five year and $125 million of seven-year unsecured term loan credit facilities entered into in November of last year.

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

The repayment of the loan secured by 901 Market Street addresses one of our only two loan maturities scheduled to occur this year. I will discuss the other maturity in a moment.

For the $110 million pay-down of our Sunset Gower and Sunset Bronson loans, we arranged with the lender a right to re-borrow these proceeds thereby enabling us to reduce our current interest expense while providing yet another committed source of capital.

The $100 million paydown of our existing five year term loan effectively extends the maturity on $100 million of our term loan indebtedness by weighted average of 1.25 years. And finally, repayment of our credit facility provides us complete access to all $400 million of our revolving loan facility.

Our only other 2106 loan maturity is at Pinnacle II where we have already selected a lender and begun documentation to fully refinance the existing $86 million loan on or duly before the scheduled maturity in September.

We will provide more detail as we get closer to finalizing this loan but we anticipate tenured financing at a rate as much as 125 to 150 basis points lower than the existing loan.

As a result of our successful disposition and loan activity, our already conservative leverage levels continue to improve while providing the company with ample capital to fund all projected 2016 and 2017 leasing development and redevelopment expenditure.

Even if we assume, no future dispositions we expect to have in excess of $250 million of capital available, net of operating asset aside and after accounting for all 2016 and 2017 capital requirement.

The successful completion of targeted disposition, including the sale of 12655 Jefferson could increase that projected availability to more than $380 million. So in short we are very well positioned to fund our future capital requirements while remaining highly liquid. Now turning to guidance.

We are increasing our full year 2016 FFO guidance from the previously announced range of $1.65 to $1.75 per diluted share, excluding specified items, to $1.68 to $1.76 per diluted share, excluding specified item.

This reflects our first year FFO of $0.43 per diluted share, excluding specific items as well as the transactions mentioned on this call, including the sale of 12655 Jefferson.

We have also assumed the sale of another asset yet to be announced for approximately $50 million later this second quarter with proceeds going to repay a corresponding amount of our unhedged existing five year term loan.

This guidance also reflects the funding of the $175 million five year and $125 million seven-year unsecured term loan credit facilities and the repayment of indebtedness I described earlier.

We have assumed the new $175 million unsecured five year credit facility remains unhedged through this guidance period while the $125 million unsecured seven year term loan becomes fixed as of June 1 through an interest rate swap at a rate of 3.03% to 3.98% per annum, depending on leverage and/or amortization of deferred financing costs.

This guidance assumes full year 2016 weighted average fully diluted common stock and units of 147,118,000.

As always the full year 2016 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rate, occupancy levels and the earnings impact of events referenced in our press release and on this call, that otherwise excludes any impact of future unannounced or speculative acquisition, dispositions, debt financing to repayments, recapitalizations, capital market activity or similar matters.

And now I'll turn it back to Victor. .

Thank you, Mark. Once again I'd like to thank the entire Hudson Pacific team and our talented senior management for their fantastic work this quarter. And to everyone on this call we appreciate your continued support of Hudson Pacific Properties and look forward to updating you next quarter. Operator, with that, let’s open the call for any questions. .

[Operator Instructions] Our first question comes from the line of Craig Mailman from KeyBanc. .

Victor, maybe just on your comments about San Francisco moderating.

Could you just clarify, is that just you’re seeing growth moderated or you're starting to see cracks?.

Well, I think, listen, Craig, good to hear from you. Thanks for calling in. I think it's a couple things. First of all, we've had quarter over quarter, year over year tremendous growth. And so we’re not seeing cracks by any means and the activity is still fairly consistent.

But what I think we're starting to see a little bit is deals are just – specifically larger deals are taking longer to get done. Now we had a phenomenal quarter and executed a lot of stuff. But a lot of that stuff was being worked on in the fourth quarter and we got done in the first quarter.

So I just believe that, that's just a sign of brokers intent, it's taking their time to get deals done, and that's what I'm inferring. .

So you're not seeing any weakness in rents or anything like that, maybe just a little bit more sublet space. But you're not seeing a huge impact from a moderating pace of VC funding yet. .

No, absolutely not. .

And then moving on to the leasing, so you guys are basically 75% of the way through the 1.6 million you laid out last quarter.

Could you just give an update on what the pipeline looks like, has it grown at all from that 1.6 million in terms of backfilling it, and what you think are reasonable volume of leasing for the full year could end up being?.

I think the pipeline remains exactly [ph] around 1.2 million across the portfolio even after doing the volume that we've done. It still remains. We've gone out over the last thirty days and we’ve picked up some deals that went on the radar. Still here we are 1.2 million in the pipeline. So I feel very bullish in all markets. .

So you guys could top 2 million for the year..

I don't want to give a number of what we can and can't top but I think right now with the 820 in the Qualcomm deal, we've got other deals that we executed this quarter. We're well on our way to 1.5 million plus. .

And then just lastly, with Netflix being more active at the studios.

What kind of I guess -- how much do you think you can push rents and push revenues at the studios versus what you guys thought was a more historic kind of top out level?.

Well, I think, listen, this is indicative of this quarter. I mean the numbers are as best as we've ever performed. A lot of it is the stickiness of having Netflix, I think we're also going to see some more stability in the sound stages around Netflix and tenants like them who are taking longer term, not just show to show or year to year.

And that's going to prove out to see some proven revenue over a multiple year period. I'm comfortable with the numbers the way they are right now.

I do see that -- our media team has seen a large pickup in desire for office space there and virtually we are full on office which bodes well to our queue development and the kind of activity you are seeing around that. So even though it's a small number right now we're pretty excited about the opportunity around the growth..

Thank you. Our next question comes from the line of Blaine Heck from Wells Fargo. .

Thanks. Just a couple for Mark here. It looks like your office operating margins have shown pretty vast improvement. You guys averaged margin margins of 58% to 59% in 2013 and 2014. Over the last five quarters that’s been closer to 65% to 66%.

But you think that’s mostly attributable to the addition of the EOP portfolio and is it fair to assume these margins can pull up the rest of the year, is there anything that might put pressure on, either the revenue or the expense side?.

Yeah, you're looking at the GAAP margins, right. And I don't attribute that – and that’s flowing through same store which does not include Redwood. And so it's really indicative of the 21 office assets flowing through that number.

I think what you're really seeing there is stabilized occupancy kind of leveling off – well, it’s [ph] free rents, because that's flowing through to GAAP.

I think what you're really just seeing is improved operating efficiencies in that 21 office portfolio and a leveling off of towards what I think is a normalized operating margin, which it should be somewhere in kind of a low to mid 60s. .

Okay, so no kind of headwind for the season [ph] that might be changing..

No, I think we ought to be able to maintain that margin on a stabilized portfolio. .

And then just looking at earnings going forward, you guys will have a little FFO pressure from sales. But it behoves [ph] done early in the first quarter, Patrick Henry and 12655 aren't really generating NOI, so the biggest rent I guess is going to come from 50 million coming in later this quarter.

Your guidance implies that each of the next three quarters averages about $0.43 a share, which is equal with the first quarter, and that seems like to me -- I'm just wondering if there is something else I'm missing that's going to keep it out of –.

You’ve got it. I mean there is going to be some delusion on NOI from that assumed sale. But we've got to pick up in no small part from Qualcomm, we did an early [ph], planning to extend on that effective as of April 1. so that that offset the dilution from the sales, more than offset the dilution. .

So I mean, how should we think lumpiness as far as – kind of trending throughout the rest of the year?.

I don't think it's going to be very lumpy. I don't get any precise in terms of diving on that quarterly basis, obviously it’s not – we don’t that but it won't be particularly lumpy. .

And then just one more for me, can you just -- maybe for Victor, can you talk about some of the largest vacancies in the lease-up portfolio, specifically Metro Center, Foster City and ShoreBreeze and Redwood Shores?.

Yeah, I mean, listen, we've got – in the last few months we've got a lot more interest in Metro, which is really our biggest on GAAP and we've got a couple of full floor tenants that we're looking at. We're now looking at also subdividing one of the floors on a multi-tenant basis. And the activity seems to be pretty stable.

Redwood Shores, the same thing. There's virtually nothing in the portfolio on the Peninsula of the large vacancies that we're not having at least some activity on at or better than our underwriting numbers. So we're pretty comfortable with the flow and the pipeline, as Art mentioned. .

Thank you. Our next question comes from the line of Nick Yulico from UBS..

Can you guys just remind us where you think your in-place portfolio rents are and the overall San Francisco Bay Area versus market rents today?.

Well, the markets are quite a bit different between CBD and say, Peninsula and Silicon Valley but – if you're focusing on the CBD, judging by the deals that are getting done we're anywhere -- we're probably over 50% below market.

Deals that -- you saw our mark-to-market on the lease activity page of 66% cash and 70% GAAP, the deals that are driving that are things like Uber which signed at 69 compared to at least on a half of that space a rolling out base rent of 13.51, so that gives you some indication of just how significant the spread is between – in the CBD between market and in-place.

So 50 probably could be much higher than that. In the Peninsula and Silicon Valley, it’s in the high 20s, maybe a 30% mark-to-market on rents. And that’s also borne out by some of the bigger deals that are flowing through that leasing activity, that are closer to that range. .

And then, I recognize you guys don't give same store guidance, can you talk a little bit about how you think the same store trends might play out directionally for the rest of the year on a cash basis?.

I think first quarter that is probably -- think about this. I think it will probably stay around the levels that we posted in the first quarter at 6.4 on growth rate on a year-over-year basis. That's probably a fair -- we don't guide for it, so I didn’t isolate that number for the balance of the year.

But I would -- I think that's probably a fair expectation. .

And then that's helpful, and then just one last one – can you just remind us what's left on the capital spend for the EOP portfolio?.

Yeah, I sure can. We just -- because of the old number that people -- we spoke of in the very early going of the acquisition at $75 million or so.

With that’s being adjusted in no small part because of asset sales, so for that three year period, that is the period ending by the end of 2017, the total spend has been adjusted to $63 million, of that amount, we've already incurred about, let’s call it, 9.5 billion, that we, call it, 53 million or so of spend for the balance of this year and into 2017.

Of that we've already committed about $36 million. .

Thank you. Our next question comes from the line of Sumit Sharma from Morgan Stanley..

55% or 66% mark-to-market trend, I guess just wondering how much of this was driven by the demographics of leasing sort of tilted towards San Francisco? And I guess, as a follow-up to that, how much of this was, because you are expecting a lot of this to occur in 2017 based on previous schedule, how much of this sort of moves 2017's numbers upfront into the run rate?.

This was anticipated -- the only ‘17 movement that is inclusive, which we haven't posted on that number is Qualcomm. This is all ’16 related mark-to-market. It’s just – the leases have better performed than we thought. We knew where they were rolling at but for the most part we’re just getting higher rental rates on average across the board for ’16.

I mean the numbers in ’17 are looking the exact same way Mark just quoted in the 50% plus mark-to-market. That’s going forward for the remainder of this year and into next year it could even be higher. We've got some pretty substantial roll all of our market in the City and in the Peninsula and here in Los Angeles.

And then we start to roll in ’18, late ’17, ’18 in Seattle at well below market numbers. So I mean, he's throwing a 50% number out there. Our estimates are they're going to be higher than that, and specific instances, a lot higher in many specific instances. .

Yes, which was kind of in line with what we had originally forecast as well. I was just trying to see if there is an opportunity that some of the ‘17 sort of staggered mark-to-market had to move forward. Thanks for clarifying that.

I guess with regards to large Qualcomm leases there, anything about -- you can add about the tenant improvements or leasing commissions that were sort of different especially given what you're talking about in terms of the Bay Area moderation.

Any changes in that sort of -- in those statistics at all?.

On the leasing commissions, they were in line with what we underwrote the math. Obviously they are earlier because we didn't anticipate signing this until ’17, or closer to the expiration.

In terms of TIs, they were well below our underwriting in that there was very little that we thought that was going to be in place for that relative where the market was for us to have them be replaced clearly. .

Understood. Thank you so much for that. So it sounds like it's basically in line with your expectations, and possibly the market.

I guess my last question, besides the $50 million asset that you mentioned in your guidance, is there anything else that you're looking to sort of dispose a call from the EOP portfolio or actually more interestingly outside the EOP portfolio now?.

No, I think there's nothing of material levels that we are looking to dispose of in the EOP portfolio now left. There may be a smaller asset or two in the existing portfolio but we've not identified anything at this time. .

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

Thanks, and good afternoon, Victor. Thanks. My first question, which was the $50 million out of EOP, but it sounds like it's not.

So the second question is you mentioned sublease space trending up, can you put some numbers around that what you're seeing from the sublease space perspective in the Bay Area?.

So, Rich, let me clarify because I think you guys understood. The asset that we’re not going to tell any details on in the $50 million is an EOP asset. That he was referring to any additional assets outside of that one. So let me give you sort of a statistics surround sublease space.

So for the most part the sub-lease space has been a dominant conversation around CBD and San Francisco. And if you look at the Valley first and foremost there's really been no material sub-lease changes at all, it's very minimal and not noteworthy at this time which is good news.

I think if you started at the beginning of the year they were – on an average of 77 million square foot portfolio in the city is what they're benchmarking it off of, there is 1.7 million feet, or 2.2% of the market was available for sublease. That number today is about 3.1%, 2.4 million square feet of sub-lease space.

But what's important to look at is of that 1.7 million feet, about 730,000 feet is actually vacant. So about a million is available, so about 0.9% of the total market in the beginning of the year was vacant. That number has moved to about 820,000 feet vacant. So a little bit more than 90,000 feet, it’s immaterial.

And so it’s about 1.1% of the total market and those are the numbers that people aren’t focusing on. They're focusing on the total sublease space which is still very small relative to the marketplace. But what’s sublet and what is now occupied of the sublease space with tenants other than the tenants that are on the lease is really minimal.

And what's shifted from Jan 1 basically till May 1 has only been a 90,000 square foot increase. .

Sort of a theoretical question, would you sign a lease with WeWork if you weren't selling Jefferson?.

Well, we signed a lease with WeWork, without selling Jefferson. So I guess that answers your question.

Listen, I can tell you, I mean we spent a lot of time with WeWork and specific to Playa Vista, the reason we sold that asset is because we realized that we couldn’t be getting any more traction in buying any more assets in that marketplace valuations, one.

And two, the value of that asset relative to what we were into it for ended up being an exceptional deal.

WeWork business model in Playa Vista makes a lot of sense in that, Rich, Playa Vista has got a tremendous number of large tenants and there is no small multi floor creative space available for all the ancillary consultants and other administrative related co-working space requirements in that area.

They're the only guys and the demand -- when they decided to look at the space the demand that they've already had without even starting to market it but the tenor of which the market understood they were going there, it’s been incredible.

So it makes a lot of sense for a WeWork type operation, a co-working operation to be in a marketplace like Playa Vista with no other competition, and tenants like Google and YouTube and Facebook and the likes of that that are there and growing dramatically. There is a lot of need for them.

But to answer your question directly, we didn't get the yield and the terms until we signed that lease.

And when we were approached by an off-market buyer it was because of that lease and the renovation work that our team did and the other lease in the building, that got the value of the building to the pricing that we thought was indicative enough for us to sell. .

And then Mark, what was the rationale for leaving the $175 million floating? I know some of it would be paid down, but what was the thought process there?.

I mean, we reduced – we had 250 of unhedged and we want it leave ourselves some financial flexibility on some of these relatively near term facilities, so that depending on how proceeds come through, let's say, on dispositions, we have some availability if necessary to apply it against indebtedness and avoid too much dilution.

And with the reduction of the existing five year by the 100, and the introduction of the new 175 we incrementally ticked up on the on unhedged piece of it but we have other activity which is going to potentially generate proceeds and depending on whether or not we utilize that or not, we wanted to leave ourselves additional floating rate exposure – low repayment cost debt to apply that against if necessary.

And if you look at the overall debt picture, the floating rate amount is relatively minimal compared to the overall indebtedness. .

Do you have an interest expense number you have in mind for guidance?.

Well we obviously have an interest expense amount running through our guidance but I don't know that -- I mean I don't think it makes sense to isolate it at this call. .

Thank you. Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill..

Good afternoon. And first, thank you for releasing results before the open, today it made things a lot easier. So just a few questions here. Victor, on the tech you mentioned the moderation in San Francisco and then taking longer to do deals, but said it really is not having an effect overall.

Just sort of curious, is there no change in Seattle and Southern Cal, just curious how the tech is different in those other two markets versus what you're experiencing in Northern California?.

Alex, that's a good question. I think in Seattle we're really seeing no change at all. I mean the activity on a pre-lease basis for 450 Alaska Way and the activity there as well as our other vacancies, we have a fairly strong pipeline of tech and non-tech related tenants.

And so I think if you isolate to the tech side, you’ve seen no slowness relative to that marketplace. In LA, specific to our markets and the assets we currently have, we have the exact same amount of momentum -- I would actually say it’s even increased with the correlation of media and media related tech tenants.

So it is still very strong here and we're still seeing I think a flow of activity that we're pretty excited about where the rent comps are moving to. So I don't see the same correlation and I want to make sure you understand it.

The slowness of large tenants is just natural in the progression of -- right now I think tenants realize that they can take their time if there is space available. But that being said we have space coming to the market at 875 Howard hopefully.

And we have a tremendous amount of activity around that and mark-to-market rents that are greater than we even imagined. And I think we are equally being a slow to sign to make sure we actually do the right deal. So I think it's a mutual sort of process. .

But you mentioned like where Mark mentioned about the 50% mark-to-market later this year into next year's roll. How on your degree of confidence about locking that in, if this is the start of a trend in first it takes longer to do deals and then next people are backing out or downsizing et cetera.

How confident when you guys budget, I mean are you budgeting the 50% marks or you're budgeting something less than and leaving that to the upside?.

It's a good question. I think what we’re doing is we’re underwriting our assets on our budgets year over year. And so we don't sit back and reflect back in the middle of the year and say, because rates are moving dramatically, we’re going to underwrite a different budget. Clearly we're pushing for rate, term, concessions and TIs.

And so our deployment across the board is what we're going to be budging on. I think when Mark says 50% he is using that as across the board. There are clear indicators of numbers that are well in excess of that yet. We're going to try to capture on an ongoing basis. But that being said, you look at some of the renewals we've done early.

We've done those renewals at some great mark-to-market spreads. If we had waited, would we have got a better number? Who knows but we were pretty comfortable with the execution, so we took it. .

Alex, let me just underscore one thing. I was attempting to answer where the mark would be across the CBD portfolio. Not with respect to near term expirations per se, right. So I was giving an indication which would include even a mark that would reflect deals that were even recently signed.

You're going to see an elevated spread on near term expirations because those will be more disproportionately made up of leases that were signed longer ago, right.

So when you blend it out with those deals which are way way way below market and deals that were more recently signed, I think you're probably seeing that 50 plus percent range but you're going to see elevated amount in the near term. .

And just a final, Victor, did you say upfront in your opening comments you talked, it almost sounded like the next Hollywood development site, but then you mentioned the Arts District.

So were you mentioning two new developments or it was just your talking only about the Arts District?.

Only about the Arts District. The activity around, what we did was on four contraction and four San Mateo projects, we said that -- respectively would come out in mid ’17, late ’17, early ’18 with the two. We started marketing on the fourth contraction project. Now so all materials are ready to go.

And now we're just where we see new materials up to the marketplace. It's around that backlog that I referred to [ph]..

Our next question comes from the line of Jamie Feldman from BoA..

Thanks, good afternoon. I guess just starting out with Mark. So can you just walk us through the changes to the guidance in terms of, if you hadn’t done the sales, how much your core NOI or your quarter FFO would have gone up – trying to just [indiscernible] the two pieces..

So on the office component it probably would have been a pickup of something on it, from the last guidance of closer to $0.03, which is now being offset by that disposition assumption, which is maybe about a penny and half. And then we've got some interest savings as a result of that debt activity I walked through, Jamie.

And that's being partially offset by a little higher expectation of minority interest which is the noncontrolling piece that's offsetting by a penny. And then we have a little bit higher G&A just because we're trying to anticipate for the potential impact at year end about OPP.

And then one other item on the interest expense which should be more or less isolated Q1 if we put this in place. But you'll notice in our income statement, we had 2.1 million of hedge ineffectiveness.

That's a non-cash, in effect interest expense that stems from the unusual rate environment in the first quarter as we’ve actually seen interest rates go negative in certain countries.

And what that led to was, if you run a regression analysis against the 650 million of swap, there is actually now a mismatch in the swap and the underlying instrument, because the underling debt has a zero LIBOR floor. But there's an actual real value now in – there’s ineffectiveness in effect from the possibility that LIBOR could go negative.

So Q1 reflects that non-cash interest expense of $2.1 one million, that's mitigating our Q1 results. But one, we don't think that that’s likely to continue into Q2, and indications are that we're also looking at putting a floor into our existing swaps that we were to remove that inefficiency or ineffectiveness going forward. .

So it sounds like you would have raised $0.03, except for the sales, the higher G&A and the changes in interest expense?.

Yeah. I mean maybe I would say potentially $0.04 if it weren’t to the sale and the higher interest expense. .

And then going back to Victor's comment on the Bay Area and moderation, can you talk about the Peninsula and Silicon Valley, versus San Francisco, and how things might be behaving differently across the two different parts of the region?.

Well I mean I don't think we're seeing material changes at all in the Peninsula. And it's obviously evident by our numbers and the flow of activity and the leases we’re signing and we're negotiating on now. And I think the flow of leases going into the second and third quarter looks pretty strong. So I don't think we're seeing anything on that basis.

And I know people jump on comments of any moderation, and want to obviously assume that’s the end of the cycle. I'm clearly not saying that, I want to make sure -- I'm glad you brought it up because now you're the third guy out of the questions that have mentioned it. I am clearly not saying that we're seeing a slowdown.

We have virtually every space in the city and in the valley of material size, we have activity on. And so that is clearly indicative of the fact that we've seen quarter over quarter, year over year 5 plus years now in a row rental rate increases and growth.

And so those are all fairly aggressive signs as to what we're seeing in the activity I think that we're producing.

Combined with the fact that rental rates are moving still in our favour on a positive basis and we have a great amount of tailwind behind us on the basis of mark-to-market rents that even at a standstill are going to be very impressive numbers. And I've seen the new deals that are being worked on, they're consistent with the past.

So I don't see it in the valley. And by no means should it be interpreted that taking longer to make deals means it’s over in the city. .

But I guess, as we've seen -- I don't want to say more restricted. But if I guess the slower funding environment from VC, how has behavior or leasing patterns changed in terms of the kind of space people are looking at and the impact of buildings. .

So it's interesting, Jamie. A lot of focus on the VCs and a lot of focus on what they're doing now, in terms of funding that has short of impacted some of the tenants aspects.

One of the largest – Bill Riley [ph] one of the largest benchmark VC guys out there came out and said, you know, what we're looking at for supplying capital to our clients and the companies by which we're backing is for them to be much more cognizant of expense cutting, not of taking less space. Much more cognizant of how they run their business.

But that being said the flip side of that is $13 billion in capital was flowed into VC market in the first three months of this year which is the highest ever since 2000. And so I think there's some mixed messages there.

Like anything else, because they have the capital, maybe they're just deploying it at different levels and different tempos by which. But we're not seeing VC step in and telling decision makers in companies to say, don't take space or take less space or pay less rent. We just haven't seen that intervention. .

And then last from me, the Toyota lease. I think it's kind of a pretty interesting here that driverless car. Can you just talk about maybe around that building what the other opportunities are maybe in your portfolio for others in that sector.

And then maybe just more color on the leasing pipeline around there?.

Yeah, absolutely. So we're seeing -- you've heard our banter around that. We are seeing a definitive movement in the autonomous car from named companies and non-named companies. So we're seeing the Toyotas of the world, the Teslas of the world, BMWs, Mercedes, Ford now is out in the marketplace looking for space.

And so the name brand automobile guys for R&D and IP are looking for space in and around that area. And it seems to be a hot demand item. Volkswagen was in the marketplace for 200,000 feet. I believe they're going to be back in the market. They've obviously had a slowdown.

That being said, what we're also seeing is, we have tenants that are looking at expanding – they are not named tenants that you would -- the core brand names like Toyotas. We have a tenant in our portfolio, Zoox, they’re a driverless company. They are German backed. They've grown from one floor to almost three floors in a matter of seven months.

And they are paying top dollar rents. And they're backed by – not a capital company out of Germany as I mentioned. And so this is a wave I think that’s getting now some attention and some traction and we're pretty excited about the fact that we have availability. We're looking at right now two of those companies that are name related.

And I haven't even mentioned the 400,000 feet that Google is looking to take down and the 800,000 feet that Apple's looking to take down for their autonomous cars as well. .

And those last two, could that be in your portfolio or I know you haven't that much space but like any –.

We have the potential to attract one of those in one location in the portfolio, on a build to suit and we have a traction to look at one of those, depending on what happens with one of our vacancies in ‘19. End of Q&A.

Thank you. Ladies and gentlemen there are no further questions in queue at this time. I would like the turn the floor back over to management for closing comments. .

Thank you so much for participating in our first quarter call. We look forward to seeing all of you at our investor day May 24 and 25 right here in Los Angeles. .

Thank you ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..