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Edited Transcript of HPP earnings conference call or presentation 2-May-19 6:00pm GMT

Q1 2019 Hudson Pacific Properties Inc Earnings Call

LOS ANGELES May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Hudson Pacific Properties Inc earnings conference call or presentation Thursday, May 2, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur X. Suazo

Hudson Pacific Properties, Inc. - EVP of Leasing

* Laura Campbell

Hudson Pacific Properties, Inc. - SVP of IR & Marketing

* Mark T. Lammas

Hudson Pacific Properties, Inc. - COO, CFO & Treasurer

* Victor J. Coleman

Hudson Pacific Properties, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Greetings. Welcome to Hudson Pacific Properties, Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Laura Campbell, Senior Vice President, Investor Relations and Marketing. Thank you. You may begin.

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Laura Campbell, Hudson Pacific Properties, Inc. - SVP of IR & Marketing [2]

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Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties' First Quarter 2019 Earnings Call.

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

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

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

Victor?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [3]

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Thank you, Laura, and welcome everyone to our first quarter 2019 call. Year-to-date, without exception, we're seeing very strong demand for high-quality tenants for both our existing operating properties and our innovative development and redevelopment projects.

On the heels of a record leasing year, we signed over 1 million square feet of leases in the first quarter with exceptional GAAP and cash rent spreads of 33% and 25%, respectively. Noteworthy deals this quarter included 2 major leases at our redevelopment projects. We signed a 584,000 square foot lease with Google for all of our One Westside. And more recently, we completed a second lease for the balance of Maxwell, such that WeWork Enterprise will now lease all 95,000 square feet of office space at that project.

Our 1.1 million square foot pipeline of under construction and near-term planned value creation projects is now 90% preleased. And these projects have an 8.1% weighted average estimated initial stabilized yield. In the first quarter, we maintained our stabilized and in-service lease percentages of 95.2% and 92.9%, respectively. Accounting for renewals and backfills and deals and leases, LOIs or proposals, we successfully addressed 65% of our remaining 900,000 square feet of 2019 expirations, which are 17% below market.

As indicated in our fourth quarter call, in addition to continued strong demand from small sub-10,000 square foot tenants in the San Francisco Peninsula and Silicon Valley markets, we're seeing a resurgence of midsize requirements. That is deals in the 10,000 to 25,000 square foot range. In the first quarter alone, we completed 30 deals totaling 260,000 square feet in those 2 markets, with GAAP and cash rent spreads of 35% and 26%, respectively. This includes several notable 20,000 square foot-plus deals across our Foster City and Redwood Shores assets, which, in aggregate, increased our in-service lease percentage in those markets by 330 basis points to over 80%.

Our studio business continues to thrive as major content companies race to build global streaming brands and drive monthly subscriptions. Netflix has the early lead and is expected to spend $15 billion on new content this year. Apple, Amazon, Disney+, WarnerMedia, Comcast-NBCUniversal and CBS All Access are also rapidly expanding amidst favorable consumer and industry trends. And we expect aggregate spend among all content players to more than double in the next 10 years.

In turn, as major studios like Warner Bros., Paramount, NBCUniversal push to generate more content, those stages will no longer be available to competitors. This will directly benefit our studios, particularly as we have long-standing relationships with 2 largest players, which are Netflix and ABC-Disney. We're also a primary resource for HBO's West Coast productions and a host of other streaming companies, like Amazon and Apple. And over the last 3 quarters, for which all of the 3 same-store studio properties is available, our trailing 12-month lease percentage increased 430 basis points to 92.4%, and rents increased nearly 2% to $39 per foot.

In terms of capital recycling, we continue to add strategic valuation and creation -- and create opportunities to our portfolio. At our Investor Day a year ago, we discussed our interest in expanding both our office and studio portfolios in Vancouver. The city is one of the top markets for tech and media job growth for a variety of reasons, including proximity to Seattle; high quality of life; abundant near colleges and universities; and a favorable immigration policies.

Vancouver has experienced very strong population growth, yet achieved record-low unemployment with companies like Microsoft, Amazon and Apple rapidly expanding in the city. Office fundamentals in the city and particularly in the downtown area are extremely strong. Vacancy is very low, less than 3%. Class A -- AAA rents grew 13% year-over-year. Supply is in check, with under-construction projects delivering in 2022 over 50% preleased. As such, in the third -- in the first quarter, we were thrilled to announce our JV with Blackstone Property Partners to acquire the 1.45 million square foot Bentall Centre, which we expect to close later this quarter.

Bentall Centre is one of the city's most prominent office properties. It's a perfect opportunity to enter the Vancouver market in scale and with the potential to add significant value. The location is fantastic, situated in the center of the city's financial core with direct access to the SkyTrain and numerous urban amenities. The property is fully leased with strong leasing tenancies. The in-place rents are more than 20% below market, and 60% of the square footage rolls in the first 5 years. Thus, we will capture a meaningful rent upside facilitated by our signature lobby and common area renovations as well as the repositioning of at-grade and subterranean retail. Bentall Centre also affords us the opportunity to expand in Vancouver by building another by-right, approximately 500,000 square-foot office tower, although the exact scope and scale remain to be determined.

Finally, brief update on Campus Center. We placed the office campus and the adjacent land under contract to sell with both expected to close in the coming weeks. Based on the current pricing, we anticipate our gain in the land will largely offset our loss on the office campus. Mark's going to provide more detail as to the mechanics of this transaction in just a moment.

With that, now I'm going to turn it over to Art for further commentary on our leasing end markets.

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Arthur X. Suazo, Hudson Pacific Properties, Inc. - EVP of Leasing [4]

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Thanks, Victor. After signing over 1 million square feet of deals in the first quarter, our leasing pipeline, that is, deals and leases, LOIs for negotiation, remains essentially unchanged at 1.3 million square feet.

Let's take a closer look at our core market. In Los Angeles, we've had back-to-back quarters of signing multiple full building deals with major tech and media companies at our value-creation assets. Only Harlow, our 106,000 square-foot office development at Sunset Las Palmas in Hollywood, remains to be leased. The project won't deliver until first quarter 2020, but we've already -- has activity on the entire project with full-end multiple uses.

Fundamentals in Hollywood remained very favorable, in line with 19,000 square feet of positive net absorption this quarter. Vacancy in Hollywood was stable at 9.4% and down 230 basis points year-over-year. Class A rents were up 5.1% to $59 per square foot year-over-year.

We have coverage, that is, deals, renewed backfills and leases, LOIs or proposals on 59% of our remaining 150,000 square feet of 2019 expirations in Los Angeles, which are 14% below market. This is primarily Saatchi & Saatchi's fourth quarter 113,000 square foot expiration at Del Amo. The Saatchi & Saatchi is likely to downsize or vacate. We are actively marketing the asset, even as we evaluate a potential sale. Our stabilized Los Angeles portfolio is 99% leased, and in-place rents are 12% below market.

San Francisco has a supply shortage, particularly in terms of large block space. Brokers estimate there are over 7 million square feet of requirements in the market, about 300,000 square feet in excess of available supply. First quarter alone had 585,000 square feet of net positive absorption. Vacancy fell 50 basis points to 3.6%, and rents increased 2.1% to $87 per square foot. We have nothing of note in terms of remaining 2019 expirations in San Francisco, and we're in negotiations with multiple tenants to backfill the remaining 38,000 square feet of SS&C's former space at the Ferry Building. Our stabilized San Francisco portfolio is 95.4% leased, and in-place rents are 34% below market.

We're seeing continued positive momentum along the San Francisco Peninsula, which for purposes of this discussion, includes Palo Alto. Vacancy remained stable at 6.7% in the quarter, with Class A rent increasing 2.1% to $88 per square foot, in line with 375,000 square feet of net positive absorption. We have coverage on 71% of our remaining 407,000 square feet of 2019 expirations along the peninsula, which are 16% below market. Stanford Health, 63,000 square foot lease at Page Mill Center, is a known vacate, and we're finalizing plans to reposition that space while evaluating additional building and common area upgrades. We're in negotiation on 2 of the largest expirations: 34,000 square foot space at Clocktower Square and 35,000 square foot space at 555 Twin Dolphin. Our stabilized peninsula portfolio is 89.9% leased, and in-place leases are 11% below market.

With Campus Center held for sale, 90% of our Silicon Valley footprint is in North San Jose, where rents increased 8.3% in the quarter to $47 per square foot. Vacancy remained stable at 15.1% despite 166,000 square feet of net negative absorption. We have coverage on 55% of our remaining 262,000 square feet of 2019 expirations in Silicon Valley, which are 17% below market. These are mostly smaller sub-10,000 square foot leases, and as Victor noted, we're seeing an increase in mid-size 10,000 to 25,000 square foot requirements, including some from high-quality users new to the market. Our stabilized Silicon Valley portfolio is 95.9% leased, and in-place leases are 9% below market.

Downtown Seattle remains tight with 138,000 square feet positive net absorption this quarter, 7.5% vacancy, down 150 basis points year-over-year and Class A rents of $45 per square foot unchanged year-over-year. New supply has been quickly absorbed, and brokers estimate over 4 million square feet of tenant requirements for the broader Puget Sound region. With office space at our delivered 450 Alaskan and 95 Jackson projects fully leased, we're focused on our remaining 53,000 square feet of 2019 expirations in Seattle, which are 35% below market. We have coverage on 81% of those leases. ADP's third quarter 29,000 square foot lease at Northview Center is the largest expiration. They are likely to downsize significantly, but we have activity for multiple users on the entirety of that space. Our stabilized Seattle portfolio is 96.1% leased, and in-place rents are 18% below market.

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

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Mark T. Lammas, Hudson Pacific Properties, Inc. - COO, CFO & Treasurer [5]

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Thanks, Art. In the first quarter, we generated FFO, excluding specified items, of $0.49 per diluted share compared to $0.45 per diluted share a year ago. Higher occupancy and rental rates across both the office and studio portfolios, together with asset acquisitions, specifically One Westside, 10850 Pico and the Ferry Building, were the primary drivers of this year-over-year increase. Specified items in the first quarter consisted of transaction expenses of $100,000 or $0.00 per diluted share and onetime debt extinguishment cost of $100,000 or $0.00 per diluted share compared to specified items consisting of transaction expenses of $100,000 or $0.00 per diluted share and onetime debt extinguishment cost of $400,000 or $0.00 per diluted share a year ago.

In the first quarter, NOI at our 31 same-store office properties increased 7.2% on a GAAP basis and 2.3% on a cash basis. While first quarter same-store office cash NOI came in below the 3% midpoint of our previous full year guidance range, we have, in fact, increased our full year office cash NOI guidance to a revised midpoint of 3.5%, reflecting our view of stronger same-store office performance through the remainder of the year.

Our same-store studio NOI increased by 25.3% on a GAAP basis and 23.8% on a cash basis. By way of reminder, Sunset Las Palmas, which was acquired in mid-2017, now qualifies for both quarterly and year-to-date 2019 same-store studio comparisons. Our strong first quarter same-store studio results were (inaudible) by our leasing success at Sunset Las Palmas, which increased occupancy year-over-year from 77.6% to 89%.

In terms of capital markets activity during the quarter, in addition to the $350 million public bond issuance described in earlier press releases and public filings, we also recast our Sunset Gower, Sunset Bronson loan previously scheduled to mature March 4, 2019, into a 5-year fully revolving $235 million loan now scheduled to mature March 1, 2024. We also reduced the interest rate by 90 basis points to LIBOR plus 1.35% and removed Sunset Gower as collateral, leaving Sunset Bronson and, by extension, ICON and CUE as collateral.

Before turning to guidance, I want to provide further color around the impairment loss running through our first quarter results. As Victor noted, we have placed Campus Center's office campus and the adjacent land in development rights under separate contracts to sell. Accordingly, we reclassified both properties as held for sale, and we anticipate these sales to close at or around the end of this second quarter. The impairment loss is due to the fact that GAAP accounting standards require us to recognize the anticipated loss associated with the office campus upon its designation as held for sale but not the anticipated gain associated with the adjacent land, which we expect will largely offset the loss.

Turning to guidance. We are increasing our full year 2019 FFO guidance range from $1.95 to $2.03 per diluted share, excluding specified items, to $1.96 to $2.04 per diluted share, excluding specified items, thus raising the midpoint from $1.99 to $2 per diluted share. Specified items consist of those identified in connection with our first quarter results. Our estimate also assumes the successful disposition before the end of this second quarter of Campus Center, including the adjacent land in development rights, for approximately $150 million, with proceeds to be applied towards repayment of our revolving credit facility and other unsecured indebtedness. It otherwise excludes the impact of unannounced or speculative acquisitions, dispositions, financings and capital markets activity.

One final word about guidance. In light of the recent acquisition of One Westside and 10850 Pico and the anticipated joint venture acquisition of Bentall Centre, we have added further full year guidance detail to our earnings press release. You can now find guidance estimates for corporate-related depreciation and amortization to identify the estimated amount of depreciation and amortization not added back to FFO. We have also included estimates for both interest expense and interest income, largely to provide further detail regarding projected interest income associated with our in-substance defeased debt. Lastly, we have added estimates for the company's share of FFO from unconsolidated joint ventures, primarily to assist you with estimating amounts stemming from our ownership and management of Bentall Centre or any other future unconsolidated joint ventures. With that, I'll turn the call back to Victor.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [6]

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Thank you, Mark. To summarize for the quarter, our portfolio is concentrated in markets that are heavily populated by our economy's highest-growth industries. Our first quarter results showed that this strategy has continued to propel our leasing success.

With our active value-creation pipeline now almost entirely preleased from leasing perspective, we're focused on the following. First, the renewal and backfill of our remaining 2019 expirations, of which roughly 300,000 square feet remain unaccounted for as of the end of the first quarter. Second, the stabilization of our lease-up assets, which are few. By the end of the first quarter, we will require roughly 200,000 square feet of net positive absorption to reach 92% lease. And third, lease up of our 100,000 square foot-plus Harlow development, for which currently we have strong tenant interest and will not deliver it until 2020.

In terms of capital recycling, quarter after quarter, we've uncovered exceptional value-add transactions, like the Ferry Building, One Westside and now Bentall Centre, while pruning our portfolio of noncore assets and markets. These deals leverage our unique repositioning and adaptive reuse expertise to generate high-quality future cash flow, and we feel confident in their value-creation potential. We will continue to evaluate opportunities that play to our strengths and make financial and strategic sense.

As always, I'd like to thank the entire Hudson Pacific team for their excellent work this quarter. But most importantly, I'd like to particularly commend our operations and sustainability teams whose exemplary efforts have most recently earned Hudson Pacific Properties the EPA's coveted ENERGY STAR Partner of the Year award. Congratulations to all. And to everyone listening, we appreciate all your efforts and support, and we look forward to updating you next quarter.

Operator, with that, let's open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Can you talk a little bit more about the driver of the increased same-store NOI guidance in office? Is that a better occupancy assumption? And what pieces of the portfolio are driving that?

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Mark T. Lammas, Hudson Pacific Properties, Inc. - COO, CFO & Treasurer [3]

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Yes. I mean, just to give you a quantification of that. The increase from the prior 3% midpoint to the 3.5% midpoint is about $1.4 million. The key drivers of that, it's made up of a number of things. We picked up some ground at 83 King in Seattle. That contributed about $0.5 million better NOI for the year than previously expected, parts of leasing-driven but a few other things contributed there, too. The other thing, we picked up a fair amount of ground on was the recovery of Prop C. You'll recall that there's a measure that taxes on rents. I'm talking about the June Prop C, not the November Prop C. And the team went through in sort of great detail on what recovery would look like with respect to that incremental tax. And we think we're going to do better there than we previously expected. And so those are really the key contributors to that $1.4 million increase from our prior guidance.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. That's helpful. And then as we think about the lease-up assets in the valley, you actually got some good leasing done in Foster City, Redwood Shores. Those have been slower markets. I mean, how are you feeling about the lease-up trajectory for those assets there for the rest of this year?

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Arthur X. Suazo, Hudson Pacific Properties, Inc. - EVP of Leasing [5]

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Yes. I feel good about it. I've been saying a long -- listen, with all the programs we've been implementing on the ground, the VSP program, amenitizing all of the spaces and having market-ready space, we've seen this trajectory for several quarters. So all of them kind of fills the 300 basis point movement in those collective buildings. The pipeline behind them [going by] building by building, 333's got probably 20,000 square feet of deals in the pipeline, Metro Center has probably about 75,000 square feet in that active pipeline, and ShoreBreeze has another 20,000 square feet. A lot of these are VSP spaces that we've completed. So I feel really good.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And then just one last question on Vancouver. I mean, could you just talk about what the ultimate capital outlay in that city could be? You have the initial JV. There's a potential development right. And then I think you guys are also maybe looking at other assets to buy in the market. So how should we think about ultimate investment in Vancouver?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [7]

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Nick, I mean, listen, I wouldn't think about it until we tell you there's something to be talking about. I mean, Seattle's a good example of that. We joined the Seattle market almost exactly the same size, and we probably almost tripled our footprint there. It's going to be based on opportunities. The difference here is -- you touched on it. We have an absolute right to build almost 500,000 square feet. We're going to evaluate timing the marketplace through design and demand. It's going on there. We probably have another, potentially, if we push it, maybe initial 400,000 square feet. So we have almost 900,000 square feet on that asset alone if we do certain things. I mean, there could be some retraction. We're looking at other deals. But I could assure you, we're going to be an active player in that marketplace. We're very excited about it.

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Operator [8]

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Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [9]

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Maybe just a follow up on Vancouver and maybe just generally your thoughts here on capital outlays. I mean, you guys have done a good job match funding with dispositions. I mean, is that what we should expect as you guys look to grow in Vancouver or elsewhere, that you'd want to recycle some capital first just to fund it, just given kind of where the stock is trading today versus the yields you buy back?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [10]

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I mean, Craig, we've been pretty consistent. Recycling capital, we've got a very strong balance sheet. We've got lots of access on that right now. We've got some opportunity with some increased debt. So I think we're very flexible in what we're looking at. And as deals come by, we'll figure out which is the most appropriate avenue to deploy capital. And we've really not looked at any assets currently today other than the ones we've mentioned, which is Campus and maybe -- which is a small asset, down in Torrance for us to dispose of at this time. But that may change depending on what the activity and the interest level is going to be, us finding some new deals.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [11]

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That's helpful. Then just want to go back to your commentary about seeing resurgence of midsize deals in Northern Cal, kind of the valley and peninsula. Just -- maybe just give some insight into what's driving that. Is that IPO-related or just pent-up demand? Kind of what are you guys seeing?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [12]

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Well, listen, I think we've been ahead of this, and I think our story has been pretty consistent. When San Francisco filled, we said that it's got to go somewhere. And there's really no other place to go. The midsize growth is part and parcel of what we have been seeing because that's what our portfolio attracts.

There's a lot of large size deals that are going on there, and I think that's been prevalent, really from the messaging that -- I guess now we're going almost on 2.5 years on -- starting with Google making their announcement that they're going to be 10 million square feet in San Jose. I mean, I would say our team feels, from the people running the ground, that the hottest market that we've seen activity is San Jose. And it's all based upon what -- where the drivers are, and our portfolio is indicative of that. We're as highest occupied in that portfolio now than we've ever been, and we're seeing some nice movement in rent growth and 0 pushback on transactions when it comes to rents that we're quoting.

I do think you are accurate. The IPO market is strong. Clearly, this is a big year. We've seen announcements and execution, and it looks like it's going to be pretty aggressive between now and the end of the year. And that's going to help. We do know, as we sit today, there are lots of large tenants, household-name tenants that are looking to take space in the valley of hundreds of thousands of square feet. And those deals will be probably announced between now and the next 2 quarters.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [13]

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Okay. No, that's good. And then just one last one, kind of bigger picture. You guys have done a little bit more leasing to WeWork. Just kind of your thoughts here on leasing to that third-party provider versus maybe taking it in-house and looking at a higher amenity or higher service offering. And maybe this is where office landlord could be trending to over time. I mean, you guys have this service level with the studios. So it wouldn't be a stretch for you guys. I mean, is that something that's potentially on the table versus just kind of giving the ups away to a WeWork-type tenant?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [14]

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Well, it's absolutely on the table. We've discussed it. We've made it publicly known that, that's an area of business that we will get into.

I think you had to classify it on a couple of levels. First and foremost, we're comfortable with the risk factor that we could step into that at any time. And I think the fact that we have the ability to execute on those assets in our portfolio with those tenants, I believe that that's something that we will do either independent of WeWork or in conjunction with. And so we're going to continue to look at it as we sit today.

It's not like we are in a position where we're looking at the business of the enterprise tenants and saying, "Oh, those are guys that come to us." We -- if we had an opportunity to do those deals, we would've. The enterprise tenants and almost uniformly, with the exception of 1455 in our portfolio, is 100% WeWork Enterprise. They never came to us. We have relationships. They have long-standing relationships with WeWork. They want to continue those relationships. And I think at the end of day, they know a landlord like Hudson will absolutely have the ability to transfer over the services. And it would probably be an opportunity for them, and my guess, to lower a little bit of rent and make the transition pretty seamless.

Currently today, we've had the conversations on multiple levels on -- saying we want to expend the capital for shorter-term leases, for higher risk of these tenants saying that they're going to leave and go somewhere else. And it's been -- formally, it's a decision that we'd rather go with the structure. We've commented on our unique structure with WeWork in terms of the leases that is different than most landlords have. And as a result, I think we're in a pretty comfortable position and confident that the tenants currently today can shift over if we decide to add those amenities.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [15]

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Do you think what WeWork's doing in the enterprise side, though, is going to change what you guys have to do from a lease structure to maybe be more flexible for those enterprise clients who are looking for that and being attracted to it? Or is that just a certain subset that's going to want that and the rest of the market?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [16]

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I think it's a good question. You know what? At the end of the day, the ultimate factor here is flexibility. And as these enterprise tenants are -- a household-name tenants are entering our markets, they're -- pretty much have a presence there. So it's not like they're entering a new marketplace. I'm not going to give you an example of a market. But the -- these West Coast markets that we're in, that these enterprise tenants are going to, already have a presence. And I think this is an adjunct and a growth aspect.

I mean, Spotify is a great example, right? They took a building across the street from us, and now they need more space. They could've come to us, but they want the flexibility. And my guess is that so long as they're in business, they're going to stay there a long time and continue to grow.

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Operator [17]

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Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [18]

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Sticking with Maxwell. Can you talk about your long-term plans for that asset? And then just your latest thoughts on whether you want to grow more downtown or might harvest some of those assets.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [19]

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Yes. No. Jamie, listen, I think that asset is well -- both of the assets down there are near (inaudible) assets. They're going to be core to our portfolio. We are looking at some other opportunities [down] there. I think we've commented in -- publicly in the past, the ones that we're looking are either smaller redevelopments or ground-up development. There's not a tremendous amount there.

I do think that our story has proven out. The yields keep getting better. The returns on these assets are getting better. It took longer to lease up. But now that we are almost -- I mean, we're less than 6 months away from somewhere between 4,000 and 5,000 new employees being housed in that marketplace, it's going to be pretty interesting to see what happens. It may not be cheap at the end of the day, and that would be the bigger question. But it's close enough for us to operate, manage out of our Hollywood and other Los Angeles assets. So it's not that much of a burden. And they're pretty cool assets.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [20]

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Okay. And you talked about content spend doubling over the next 10 years. I mean, is there a way to get more aggressive into the business now? I know at your Investor Day, you talked about maybe growing at more markets. Just what are your latest thoughts on how you can get ahead of that wave?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [21]

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Well, the cat's out of the bag, right, Jamie? I mean, this is -- what was "an albatross" for us and people who questioned why we're in the business has now proven out to be a pretty good business strategy. And I'm not so sure there's going to be that many deals that are going to be coveted for us to turn around and buy and/or reposition that is not going to be public knowledge. There are opportunities in our markets here. We are looking at one currently now today. There are opportunities, we hope, in Vancouver. We are looking in at a few others that have come to our attention. I think we're pretty committed -- not pretty. We're very committed to the industry, to the business lines.

And I just think that the growth opportunities may shift a little bit around other markets. But you're really only looking. I mean, we told you we're not going to go to Atlanta. We have talked about opportunities potentially in New York, but there's nothing on the horizon that we're even closely looking at, at this time. I think Vancouver, hopefully, will be an entrée with the Bentall transaction to us, look at the studio business there and maybe a few more deals here as well.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [22]

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Okay. And then any thoughts on what the Warner Bros.' decision in Burbank for their office development's coming -- is going to mean for the sector overall?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [23]

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[Listen, look], there's a couple of points on that. First of all, there goes more soundstages that are not accessible to the content players that are vastly growing. So that's a positive. Obviously, the valuation of that asset and the sales price just proves our storyline and our evaluations. And I think what we carry are NAV valuations, the studios are still much higher than what these last 3 studios have traded at now, are a lot lower in terms of cap rates than what we carried them on. This was a long-standing transaction with Warner Bros. They had to get to their lawsuit on the AT&T side. And once that transaction was completed, this was something that was always going to take place.

It's just another business line of content players that are growing in the marketplace, and there's a desperate need that Burbank has to offer with development. And Jeff Worthe has the ability to build those buildings. It's a phenomenal deal.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [24]

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Well, you said the cap rates were for the studios?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [25]

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I didn't.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [26]

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Would you?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [27]

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No.

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Operator [28]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [29]

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Just going back to WeWork for a second. Just a two-parter on WeWork. One, if you can just comment on sort of the rent upside from the -- taking the Bank America vault space at 1455. And then two, Victor, you mentioned that your leases with WeWork are different from other landlords. And yes, maybe I missed the first part of that, but if you could just walk through what makes your leases different than your peers on the WeWork.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [30]

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So on the first question, it's a pretty easy one.

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Mark T. Lammas, Hudson Pacific Properties, Inc. - COO, CFO & Treasurer [31]

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Yes. Let me just do the quick math for you. You'll remember that Bank of America on -- sold us the building in a sale leaseback, and the rents that were in place at the time of sale leaseback expired in July of 2017 at $5.97 net. The deal with WeWork is over 1,000x higher than that expiring rent. So that gives you -- I don't want to get down to the dollars, specifically to WeWork. But suffice to say, it's 1,000x higher, which sounds crazy, but that's where the market has trended, obviously. So I don't know if you want to pick up more.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [32]

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Yes. Listen, I -- we have a unique structured lease with WeWork because it's a grandfathered into the regional deal that we did. Details by which is through a confi. But suffice to say, I am highly confident that our structured lease with them is different than most, if not all, landlords. And it has to do with the security enhancement.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [33]

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Okay. That sounds good. And then second question is, could you talk a little bit about Bellevue? It -- I was hearing that Amazon -- and I don't know if this is accurate or not. But I heard that Amazon isn't expanding anymore in Seattle. They're looking maybe across to Bellevue. But it seems like that market is a growth market. And maybe just your thoughts on how you look at that market or if you think just staying in Seattle is the best course of action, given the -- where you see growth in the Pacific Northwest.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [34]

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Well, listen. I -- it's public knowledge. Amazon recently exercised a long-term renewal at 1918 Fairview. And the construction is underway for Tower 3, which is another 1.1 million square feet. So they're growing still in Seattle. The demand is still high. Yes, they are subleasing Rainier Tower, which is 720,000 square feet, but they have -- virtually, that entire building is completed with 2 tenants.

And so in the meantime, you're right. I mean, they are expanding in Bellevue. I think they've done about 2 million square feet at a couple of projects, and they're looking at a third right now. Bellevue is a great marketplace. I think people dumped on it pretty quickly, and it's made a quick turnaround. And the guys who have been there have done exceptionally well.

I don't know -- other than the deals that we looked at, that we've not been able to sort of jump on because we were outbid or other people came in, like Amazon and bought their own assets there, we never had an opportunity. I don't know how much more is there for guys like us to do that is not going to be absolutely ridiculously expensive.

I think it's fair to say that we're extremely aggressive on Seattle. We've got line of sight on a couple of deals, that we should be announcing one shortly. And then I do think that it will continue to see the robust demand in Seattle that is also outside of just what tenants like Amazon have done. I mean, Apple is in leases on assets, and Hulu is in leases on assets, and there are other active non-tech tenants that are in leases on assets. It just shows the growth of Seattle. I just think that -- Seattle marketplace in the past 2 years has really surprised a lot of people of the strength in the preleasing of the existing construction.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [35]

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And that one deal that you're looking at in Seattle, is that a development site, or that's an existing asset?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [36]

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We're looking at 2 deals in Seattle right now: one's a development, and one is in [renovation -- repositioning].

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Operator [37]

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Our next question comes from the line of Manny Korchman with Citigroup.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [38]

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Victor, going back to your opening comments about the studio business. Just given the amount of demand for content creation and the shrinking available supply, does that drive the content creators to find other ways to make the content, whether that be to do it somewhere else, whether that be more digital studio, whether it be share stages between 2 shows more often? What options are people going to have as everyone's chasing that quicker creation of more content button?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [39]

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Manny, it's an excellent question. I do think that technology will come into play here in a strong way, and you'll see maybe the need to have less stages more. And we've always said this, the biggest play that we see coming on the content is the post and pre-editing, and that means office space. And that's going to be where the technology comes into play.

I mean, you've heard me mention this before. Content -- the way people look at content, the way Netflix is having content is going to change, and you're going to see an increase in animation in content. So you don't need soundstages. You need green screens, a lot smaller square footage. You can do those in other places. Yes, I do think there is -- there's a worldwide demand for soundstage spaces. It's not just in Los Angeles or in Vancouver or in New York, but it is all around the world. And you're seeing these stages fill up everywhere.

Obviously, it could lead to people building more. It's going to be an economic decision as to where you can build. But I do think, at the end of the day, we're pretty confident that as this industry continues to expand and as these players solidify and pour money into content, the key market's going to be Los Angeles. And does that mean surrounding Los Angeles? It's yet to be sort of defined as that. But right now, Los Angeles is the key because that's where the talent is. And I reiterate always, it's not talent in front of the camera only. It's talent behind the camera.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [40]

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Mark, quick one for you on guidance. You added interest income, and you mentioned that, obviously, you guide to interest expense. Was there anything that -- specific that drove you to add those to that page? Or was that just you guys wanting to give us more color?

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Mark T. Lammas, Hudson Pacific Properties, Inc. - COO, CFO & Treasurer [41]

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Yes. We've always had the interest expense. I just didn't want there to be any confusion in mentioning that we added the interest income. We added it because there's a substantial amount more than we historically had because we continue to own the entity that houses the defeased debt associated with One Westside. And so as the bonds roll off and the interest associated with that and the notional underlying bonds term out, a fair amount of interest income is now hitting the income statement. And we thought it was material enough that we should give you and everyone else clarity around that.

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Operator [42]

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(Operator Instructions) Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [43]

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Just sort of going back to sort of some of the comments you made around studio with the cat's out of the bag. I'm just wondering what sort of competition are you seeing as you look at different opportunities. And sort of helping us with our own NAVs, you made a comment about -- of your existing assets at much higher cap rates. Just curious, can you update us on what spread we should think about office versus studio? And maybe sort of a range -- like is there now enough depth to say what's high quality versus low quality?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [44]

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Vikram, I'll take the latter part first. In terms of the spread, we had this inherent 100 basis point spread between Class A office and studio. So we said that was where the cap rate spread would be. It's inside of that now, and the reason it is, is twofold. You look at the studios that we currently own and the ability for us to continue to expand on, which is Gower and over at Las Palmas, for about another -- almost 900,000 square feet or so, the office component has taken over the studio component. So there's no difference between having a Class A office building on a studio lot than there is across the street as an accurate example of what we have. So I think that's compressed down. And I do think that we're probably in the -- I would think we're probably in somewhere in the 50 basis point spread differential right now. And the second reason is on that is that we're signing these longer-term leases with absolute-credit tenants on the soundstages that are 3, 5, 7, with annual increases and with options for them to continue to take. And to date, the ones that we sign long term, nobody gives them back. They're not saying they're going to give us spaces. The -- you see actions contrary to that. They want to continue more, and they want longer-term lease term on it. So I think that would give you a 0 to 50 basis points now spread differential, and I think we would also very comfortable with that.

Competition is a good question. I would refer it to 2 points. The first point is, is that whoever owns them today now has a clear path to sell because we're the only "institutional owner" of them. But there's a lot of one-off owners and people who are looking to accumulate based on what they've seen our floor plate delivered and go out and execute on that.

I think the second part is now there's access to debt. When we first started buying these, there were 0 access to debt. And now new lenders see the validity of this product type, and they're prepared to go out and lend on it.

Lastly, it's become a development play. So the ones that are competing for these or the ones that we lost out to are ones that look to develop. And they're typically developing with large-demand tenants, credit tenants at the end of the day that are involved. And there's a lot of security around -- or comfort and security, I guess, around executing long-term leases, which maintains this is a viable option to invest in.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [45]

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Okay. Great. And then just sticking to sort of the studios, can you remind us or update us the incremental development opportunity that Sunset Gower and Bronson and maybe even in Las Palmas as well? Can you just update us on where we are, when we could see any potential incremental development?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [46]

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Yes. I mean, listen, at Gower right now, we're in design development phase for almost 500,000 square feet in 2 projects. And we're probably talking about 12 to 15 months before we get approvals on that. There is nothing left from our -- there's a small piece, but really, we're not -- we don't have anything on the docket for Bronson at the time. Las Palmas, we have almost -- at least under 500,000 square feet, and that's probably more like 18 to 24 months on approval. We're in early design phase there. So that gives you an idea where our pipeline is for the next 4 years.

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Operator [47]

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

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [48]

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Just one quick one, Victor. When you think about your acquisition options in Seattle, your possible spend on development in Vancouver or even additional acquisitions in Vancouver, can you give us any sense of the scope of these transactions and whether they're kind of mutually exclusive, given funding means you already have with development? Or would you think about going ahead with a couple of these things in the near future together?

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [49]

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So Blaine, listen, I think, recently, our numbers have proven out that from a development standpoint, our yields have been exceptional. And that's not my word. That's others. But -- beyond where we would be buying and repositioning. And so we're still very excited about the potential opportunity to develop in all of our markets. There's really not a market, with the exception of maybe Silicon Valley, that we would not develop on, other than Cloud 10, which we have not talked about today.

But I think, at the end of the day, it's not going to be mutually exclusive. It will be dependent upon asset quality, growth of the marketplaces, the tenant demand, our ability to execute on either existing or repositioning or ground up. And then, listen, we've been very vocal on the fact that we have capital allocated for future growth. But we also have 3 exceptional joint venture partners who are all aggressively trying to continue to do more deals with us in these marketplaces. And it will depend on their interest level, combined with our capital allocation, in growing these marketplaces. I don't see us slowing down. But I think we've been fairly particular in the assets that we've wanted to bring onboard. And we're going to maintain that discipline going forward.

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Operator [50]

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Ladies and gentlemen, since there are no further questions left in the queue, I would like to turn the floor back over to Mr. Victor Coleman for closing remarks.

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Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman, President & CEO [51]

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Well, I want to thank everybody for participating today. As usual, our Hudson team is exceptional, another great quarter under our belts. And we're onward and upward in quarter 2, and we look forward to catching up at the end of this quarter.

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Operator [52]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.