Hudson Pacific Properties, Inc. (HPP) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Hudson Pacific Properties' First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Laura Campbell, Vice President, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties' First Quarter 2018 Earnings Call. Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investor Relations 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 Investor Relations 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 filings. Actual events 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; and 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. Note, they will be joined by other senior management during the Q&A portion of our call. Victor?

Thanks, Laura. Good morning, everyone, and welcome to our first quarter call. We had a productive first quarter, driven by our success in leasing, capital recycling and refinancing activities, all of which lay a foundation for a strong, consistent growth in 2018. Fundamentals across our markets remain among the best in the nation and, in many cases, are strengthening even further. This is particularly true in downtown Seattle and San Francisco and Silicon Valley, reflecting the strong environment, while leasing activity was positive and consistent. We executed 556,000 square feet of new and renewal deals at a 34.9% GAAP and a 15.7% cash rent spreads. 47 of the 55 deals, consisting of more than 72% of the square footage, were in the Bay area, which is very much in line with our availabilities. During the first quarter, we tackled 2 major renewals well in advance: InvenSense for 139,000 square feet at Concourse in San Jose, which would have expired in 2019 and had a 13% mark-to-market; and Trailer Park for 91,000 square feet at 6922 Hollywood in Los Angeles, which would have expired this year and had a 14% mark-to-market. This trend of addressing significant expirations early has carried over into the second quarter. We recently renewed and expanded Nutanix, one of our top 15 tenants, for 292,000 square feet at 1714 Technology, Concourse and Metro Plaza, all in San Jose. That yield further exemplifies both the momentum we're seeing right now in the San Jose Airport market as well as our ability to retain and grow tenants within that portfolio. We are confident in our ability to tackle our 2018 lease expirations, which totaled 824,000 square feet across all of our markets. Rents associated with these expirations are 22% below market, and so we expect these to be a significant source of organic growth through the end of the year. As Art is going to discuss in more detail, we've already renewed, backfilled or negotiating a significant portion of those leases. Now turning to dispositions and capital recycling. We've consistently taken advantage of favorable market conditions and sold assets to recycle capital into more attractive opportunities. And in the first quarter, we closed on the sales of three San Francisco Peninsula assets: 2180 Sand Hill, Building 6 at Pacific Office Park and Embarcadero Place. And these transactions yielded over $240 million of gross proceeds to the Company. We invested minimal capital on all these assets, and our sales prices demonstrate significant value on the buy. Collectively, those transactions, we achieved a weighted average of 11% premium to our GAAP basis and a 19% premium to our allocated purchase prices. It's in part because we've been so active recently on the asset sales that we were very well positioned to capitalize on opportunities for growth in our core markets. We're taking these on a select basis, and relying on our deep market of knowledge and expertise to weigh potential risks and rewards of each deal. One deal we are particularly enthusiastic about is our joint venture with Macerich to acquire and convert Westside Pavilion into approximately 500,000 square feet of creative office space, while maintaining about 100,000 square feet of the existing retail. This opportunity is squarely in our wheelhouse and a perfect project to take on at this point in the cycle from both a capital requirement and a time-to-market perspective. The property's existing entitlements and infrastructures are as good as it gets in terms of streamlining its adaptive reuse, and many of the buildings' features perfectly align with what tech and media tenants in the market are looking for. It's really the only true campus opportunity for large users in West Los Angeles. And to highlight that fact, we've recently received multiple unsolicited proposals or inquiries for all or significant portions of the project. In addition, as of the first quarter, we have over 400,000 square feet of new studio-adjacent office projects under construction in Hollywood. This includes EPIC for 300,000 square feet across Sunset Gower and Bronson, which commenced in the fourth quarter of last year, and now Harlow for 100,000 square feet at Sunset Las Palmas. And we're seeing good interest in both projects currently. In Los Angeles, between stand-alone office and studio-related opportunities, we're in a class of our own in our ability to generate organic growth going forward. Recent transactions at sub-4% cap rates only further highlight the value of both our existing portfolio and the development and redevelopment pipeline. And finally, we're always looking to ensure our balance sheet remains strong, and that we're optimally positioned for the current economic climate in the event that the market shifts. And part and parcel with that, this quarter, Mark and his team completed a successful recast of our unsecured credit facilities. And this increased our debt availability and term at all lower rates. Mark's going to discuss this further. And now I'm going to turn the call over to Art for the first quarter leasing and market highlights.

Thanks, Victor. I'll start off with the Bay Area. Silicon Valley, which for the purposes of this discussion includes markets south of Palo Alto, had yet another very strong quarter with positive net absorption of 1.8 million square feet of Class A vacancy – with Class A vacancy down 62 basis points to 12%, and rents up 1.3% to $67 per square foot. Large 100,000 square-foot-plus deals are compounding already strong demand for smaller tenants, and the 5.7 million square feet of office project under construction is 75% preleased. We have very good activity at Campus Center in Milpitas. We are negotiating on three separate deals totaling about 800,000 square feet, and we're tracking another 2.6 million square feet of active requirements. I'll also mention our 41,000-square-foot lease with the Santa Clara Valley Transportation Authority at Gateway in San Jose. That deal had a 40% mark-to-market, and yet another great example of how tightening market conditions in downtown San Jose are augmenting demand at the airport. Our 302,000 square feet of 2018 expirations in Silicon Valley are 19% below market. And as we stand today, we've renewed, backfilled or are negotiating on 52% of that square footage. Further north, along the Peninsula, Palo Alto is as hot as ever, with 213,000 square feet of positive net absorption, Class A vacancy down 20 basis points at just over 2% and rents flat at $117 per square foot. We've made significant capital improvements to reposition Palo Alto Square in the marketplace, and it's now attracting a wider range of tenants, including tech companies. In the first quarter, we signed Orbital Insight for 41,000 square feet. As a result, I'm pleased to report that asset has reached stabilization at 92.8% leased, and we expect even further improvement in the coming quarters. The San Mateo and Foster City submarkets each had about 100,000 square feet of negative net absorption. As a result, Class A vacancy ticked up in San Mateo and Foster City to 11.9% and 14.4%, respectively. But rents were unchanged at $71 and $66 per square foot, respectively. Even so, we're still seeing elevated activity at Metro Center after launching our full repositioning to the market in March. It's been very well received. Our 334,000 square feet of 2018 expirations along the Peninsula, which again includes everything from Palo Alto North, are 34% below market. And we've renewed, backfilled or are negotiating on about 50% of that square footage. In downtown San Francisco, we're expecting the return of rent growth, given strong demand and limited supply. There are just very few, say, 30,000-square-foot blocks of quality space available. Positive net absorption of 641,000 square feet correspond with Class A rates increasing nearly 1% to $77 per square foot. Vacancy fell 30 basis points to 4.8%, and 77% of new supply is preleased through 2019. As anticipated this quarter, BofA vacated 85,000 square feet at 1455 Market, of which 15,000 square feet was immediately backfilled by Uber. The remaining square footage essentially comprises of old space, which we're in the process of repositioning and have good activity on, with the opportunity to get deals done at a significant mark-to-market. Our San Francisco portfolio is 95.1% leased, with in-place leases 32% below market. We have 120,000 square feet of 2018 expirations that are 6% below market. And we've renewed, backfilled or are negotiating on 50% of that – 54% of that square footage. In Los Angeles, we're seeing very strong activity from large media and tech users with demand for big blocks of space. The preponderance of this activity is in Hollywood and West Los Angeles. These two markets had a combined 256,000 square feet of positive net absorption. Hollywood had more momentum in terms of fundamentals with a 260 basis point decline in vacancy to 10.8% and a 2.2% increase in rents to $56 per square foot. West Los Angeles vacancy and rents were essentially unchanged at 11.4% and $59 per square foot. We have significant interest in EPIC from who's who of media and tech tenants for blocks ranging from 30,000 square feet to full building users. In the Arts District, with neighboring AT MATEO project fully leased to Spotify and others, Fourth & Traction and Maxwell are the best Class A alternatives for mid to large users in that market. Activity has picked up, and we have approximately 160,000 combined square feet in leases, LOIs or proposals for these properties. Our Los Angeles stabilized portfolio is 98.2% leased, and we have very little in the way of expiration this year. Finally, in Seattle, well-known tech brands are continuing to expand in that market. Coincident with 614,000 square feet of positive net absorption, downtown Seattle had an 80 basis point drop in vacancy to 8.1%, and rents increased by 1% to $46 per square foot. 6.5 million square feet under construction is 61% preleased. As of the first quarter, upon signing 25,000-square-foot lease with Lyft at 83 King, we have backfilled a significant portion of the 133,000-square-foot Capital One space. The deal with Lyft had a mark-to-market of about 50%. And they had already leased another 20,000 square feet at 83 King, so they continue to grow that asset, which is great. And as you know, we have two full floors remaining at 450 Alaskan, which is directly impacted by the viaduct for the time being. Even so, we still have good activity with an aggregate of about 200,000 square feet of interest. Our stabilized portfolio in Seattle is 96.8% leased, and in-place leases are 14% below market. I'll now turn the call over to Mark for financial highlights.

Thanks, Art. Funds from operations, or FFO, excluding specified items for the first quarter totaled $70 million or $0.45 per diluted share compared to FFO excluding specified items of $71.9 million or $0.48 per share a year ago. Specified items for the first quarter of 2018 consisted of transaction-related expenses of $100,000 or $0.00 per diluted share and onetime debt extinguishment costs of $400,000 or $0.00 per diluted share. We had no specified items for the first quarter of 2017. At the end of the first quarter, our stabilized and in-service office portfolio was 94.4% and 89.7% leased, respectively, versus 96.7% and 92.1% at the end of last year. With respect to the 230 basis point decline in our stabilized portfolio, effectively all of that relates to 3 anticipated lease expirations, BofA at 1455 Market, Robert Bosch at Foothill Research Center and Cisco at Campus Center, the last of which has now been reclassified to redevelopment. Those same lease expirations were also the only material expirations within the in-service portfolio, but for which the in-service portfolio, as it existed at the end of last year, would have actually witnessed a sequential increase in lease percentage. However, we reclassified a handful of completed development projects, 450 Alaskan, CUE and Fourth & Traction, to in-service, which also contributed to the sequential decline. Outside of these events, we actually saw an increase in lease percentage throughout our portfolio, including a 140 basis point improvement in our Bay Area lease-up assets. Net operating income with respect to our 29 same-store office properties for the first quarter increased 5.8% on a cash basis and 1.1% on a GAAP basis. The trailing 12-month lease percentage for our same-store studio properties ended the first quarter at 90.2%. That's in line with the 90.3% trailing 12-month lease percentage year-over-year and just 50 basis points lower than last quarter. More challenging in terms of demand for stages in production offices are the same-store results. These increased in the first quarter by 36% on a cash basis and 39.2% on a GAAP basis. This was due to higher rental rates and production-related activity at both Sunset Gower and Sunset Bronson. As Victor mentioned, this quarter, we recast our unsecured credit facilities. You can refer to the 8-K filed on March 19 and today's earnings press release for more details, but let me briefly highlight certain key terms. Our revolving credit facility was increased from $400 million to $600 million. The interest rate for the revolver was reduced to LIBOR plus 105 to 150 basis points per annum, and the term was extended from April 2019 to March 2022 with an option to extend one additional year. The interest rates for our $300 million term loan maturing April 2020, $350 million term loan maturing April 2022 and $125 million term loan maturing November 2022 were all reduced to LIBOR plus 120 to 170 basis points per annum. We also added the right to extend the maturity date on the $300 million term loan maturing April 2020 for up to 2 additional 1-year periods. Finally, with regard to financing activities, we hope you've seen and will find useful our new debt structure and selected metrics on Page 13 of the supplemental. Turning to guidance. We are reaffirming full year 2018 FFO guidance in the range of $1.87 to $1.95 per diluted share, excluding specified items. Specified items for full year 2018 FFO guidance consist of transaction-related expenses of $100,000 and the write-off of deferred financing costs of $400,000 associated with the recast of our unsecured credit facilities. Both the transaction-related expenses and deferred financing cost write-off were identified as excluded items in our first quarter 2018 FFO. As always, our guidance estimates reflect management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of the events referenced in our press release and on this call. It otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. There can be no assurance that the actual results will not differ materially from this estimate. With that, I'll turn the call back over to Victor.

Thanks, Mark. Thanks, Art. Thanks, Laura. We accomplished a great deal in the first quarter, and we're firing on all cylinders as we head into mid-2018. Our markets continue to outperform, and we're laser-focused on addressing our expirations and tackling large vacancies in our portfolio, specifically Campus Center, and other delivered and under-construction development and redevelopment projects. We will have additional updates and perspectives on these initiatives, and much, much more at our upcoming Investor Day here in Los Angeles on May 22 and 23. So please reach out to Laura if you'd like to RSVP and get more info. Also, many of you already know this, but just a reminder that we will not be attending NAREIT this June as our Investor Day takes place just 2 weeks prior. And as always, I want to thank the entire Hudson Pacific team, and particularly our senior management, for their hard work for this quarter. And to everyone on their call today, we appreciate your support of Hudson Pacific Properties. And operator, with that, I'm going to open the call up for you for questions.

[Operator Instructions] Our first question is from Manny Korchman with Citigroup. Please proceed with your question.

Hi everyone, Victor, in your opening remarks, you touched on the transaction activity on the West Coast and deals going at low cap rates. How involved or how deeply have you looked at some of those deals? And sort of what are the criteria you're looking at before you buy an asset in, say, an environment that's sort of more stabilized rather than development projects?

Thanks, Manny. So listen, we look at any asset that's applicable in our core markets that would be a value add or even just a stabilized asset just to see where that asset would fit in and how the tenant mix and how the synergies are. So we've done that consistently, and we will do that consistently throughout. And in some instances, we'll get – dig deeper and get into a much more in-depth diligence process and evaluate those – the assets and see how it fits with Hudson. I think, today, what we're still looking at is how we can create additional value with the assets that we're looking to acquire in all of our markets. I can honestly say, though, that the pool of assets that we're currently and have been currently looking at really from the beginning of the year through until as I sort of forecasted out through mid this year have been a very limited pool. Alex and his team, they're focused on, I would say, a handful of serious assets and acquisition opportunities. We don't see a lot of depth in that marketplace right now. Alex, you want to comment on that?

Yes. I think as Victor mentioned, there's been a handful of assets that if you just took from a high level as far as location, quality of asset, tenant mix fits with our portfolio. That being said, we're only going to pursue the assets where we think we can create long-term value. So a handful of the recent deals, while maybe synergistic, we just didn't see the long-term value creation. And I think our record shows that if we see something where we think there's ample value creation, we're going to pursue it aggressively, and we'll continue to view investments with that perspective.

Great. And Mark, I have one for you. Your guidance remained unchanged, but your same-store numbers came up. I was wondering if there are just some offsets or if that just places you in a different part of the range that you presented?

Yes. Thanks, Manny. Actually, that question came up in a number of this morning's notes and practically every note. So I'll just spend a minute on it, and hopefully it will cover the field for everyone. And for the first – and your observation is correct, so I'll just try to deconstruct it a little bit, so you can follow the ins and outs. I suppose the first point to make about is the obvious one, which is cash NOI is obviously not the same as GAAP NOI for FFO purposes. And sometimes, that can even differ fairly materially. But with that said, if you look at the adjusted midpoint same-store growth and the noncash revenue new bid point, there, on a combined basis indicating about $3 million of improved potential GAAP NOI, you'll notice that the higher G&A is basically offset by the lower interest expense. So they're more or less washed. And then there's a little bit of adjustment coming through on the downside of our noncontrolling interest. So I'd say there's a little bit more noncontrolling interest at the midpoint projected. So the net effect of all that is about $2.8 million of, again, potentially higher FFO because it's a conversion in part of cash NOIs into FFO. But that's what the various new midpoints are signaling. The main offset is what you just anticipated, which is what's not in the grid, namely non-same-store assets. And that is basically a couple of items. One is somewhat lower GAAP NOI at Metro Plaza related to the Nutanix expansion at Concourse. We had originally budgeted them for a large footprint at Metro Plaza, and they decided they preferred to expand at Concourse. So we made up a bunch more compared to budget at Concourse, like more than $1 million of higher GAAP NOI, but we lost a fair amount at Metro Plaza, more than that amount. So, because they just took down less expansion at Concourse than we thought they would take down at Metro Plaza. The other one was we lost a bit of GAAP NOI at Metro Center in connection with the Queen Street renewal. They decided not to take down a floor that we thought they might take down. So, and then there were some smaller GAAP NOI amounts that run through the non-same-store. And so they more or less offset what was otherwise – what otherwise suggest a higher FFO amount if you were looking exclusively at the guidance grid.

Thanks Mark.

Our next question is from Daniel Santos with Sandler O'Neill. Please proceed with your question.

Hi, I was wondering if you guys could comment on Westside Pavilion, given that we're sort of at the end of the cycle into multiyear development. From what I understand, Macerich said on their call that they're only planning on investing $10 million to $15 million in the project. So I was wondering if you could comment on funding as well.

So Daniel, the answer is no. We're not in a position now, and I know there was some conversation behind the lines with Mark and some of the other guys who cover us as to why we're not disclosing it. I can just tell you, it's not a secret, but there's a loan in place that needs to be defeased. And if we sort of talk about the numbers in terms of what we paid for it and what everybody's contributing to it, it's going to be a little problematic. We're going to have to defease the loan anyways possibly by the end of the year at the latest. But my guess is, given the activity and the leasing interest that Art and his team has right now, we are in conversations and LOIs with several tenants right now for all – and as Art mentioned in his prepared remarks, and most of the space. So I'm confident that we'll have a full budget out, and you'll be pleased with the process. I'm not sure what Macerich was referring to on the $15 million. They own 25% of the asset, so they're going to contribute 25% of the costs. And we have talked about the asset roughly being about $400 million to $500 million in that range of total capital, inclusive of our purchase price, which is going to be in the $100 million range – sorry, $200 million range anyway, so give or take. So I don't know what that's referring to. So there may be a little bit of passing in the wind on that aspect. But that's where we're at with that. And I think as we have mentioned before, Alex had indicated, the market indicated that's going to be a fairly strong going in cash yield.

Okay, that's helpful. And then I was wondering if you guys could comment on stock buybacks, given how depressed the stock has been relative to NAV. Has your thinking on that changed?

Well, I think we made that comment, I believe, on our last call, and we had in subsequent meetings. We will always entertain stock buybacks given where we're at. I believe, today, we've got a $250 million approval to buy back up to that amount, which we increased that from, I think, it was $100 million or $150 million or so. So it's gone up. We just had that increase at our most recent board meeting. And we'll actively pursue that given where we are with alternatives and capital alternatives at the same time.

Thank you.

Pleasure.

Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Great. Thank you. I guess, another question for Art. You sound pretty upbeat on Campus Center. Can you maybe talk about some of the leases that are – or some of the tenants that are interested? I think you said negotiating 800,000 square feet and tracking I thought you said 2 million square feet more, but maybe I misheard it.

Yes. No. Thank you. Yes, so 3 active deals, really, which means we're in negotiations with from single building to the entire campus. The 2.6 million square feet I referred to is really the active prospects in Silicon Valley. The repositioning is complete, which is another reason we're all high on it. And we're seeing all of the Silicon Valley requirements that are 100,000-square feet-plus, right, that are getting through. They're looking at it. So that's why there's such optimism.

But you said there's 3 active deals for – that add up to 800,000? Can you talk about where you are in the stages?

They're all in proposals right now. So we – as you know, we track our deals status by status, 2s, 3s and 4s. 4 is being in leases, 3 is in LOI and 2 is in just simple negotiations or early negotiations, I should say. They're all kind of 2 to 3 status.

And can you talk about – I mean, is it the kind of numbers and tenancy we're thinking when you went forth with the redevelopment plan and the design of those?

Yes. The universe of tenants is precisely what – who we're talking to and negotiating with right now.

When do you think you might have something signed?

That's a very good question. If the process continues at the pace that we've been going, I would like to say in the next few months.

Okay, great. And then the Silicon Valley demand, maybe can you talk more about how that might impact the lease-up portfolio, where exactly those requirements are looking in terms of submarkets, and maybe what we can expect to see.

Yes. I mean, listen, these large requirements are looking all over Silicon Valley. But as you know, there've been a lot of big deals, a lot of positive net absorption over the last quarter. You had Facebook at 1.1 million at Moffett Towers. Synopsis was another 360,000 square feet in Sunnyvale; Analog Devices, 440,000; Hewlett Packard Enterprise's for 220,000. I mean, these are big tenants that are landing all over Silicon Valley, various product types. So I mean, all of that bodes well for us with the universe of tenants that are still out there actively looking.

Okay. And then maybe just talk about L.A. kind of away from the studio and media space. Like what are your thoughts on how the more traditional L.A. – West L.A. submarkets are performing?

Well, again, yield goes back to, we don't have really small blocks of space. But the large tenants out there are looking greater Los Angeles, West Los Angeles, Hollywood, downtown, wherever they can find 100,000-square-foot-plus blocks, which is getting harder and harder to find. There's quite a demand for those users right now. That's where I'm seeing a preponderance of the activity.

Okay, alright thank you.

Our next question comes from Nick Yulico with UBS. Please proceed with your question.

This is Frank on with Nick. At Fourth & Traction, what are your current thoughts on breaking up that space versus going with like a one large – larger user?

Yes. So we had indicated that a lot of demand. There's kind of the 5 maybe up to 15,000, 20,000-square-foot range. What we're doing is we're breaking up the space. We've got build-out for 10,000, 15,000 and 5,000-square-foot blocks if all combined. So you can get 30,000 if need be. We're not demising necessarily initially, but we're building it out, so we can capture everybody from 5 to 30. And on top of that, there's also demand for full-floor users, right? So you've got the upper floors that are still available, but we are negotiating. If our negotiations right now are correct, as to the market, there's everything from the small users to – up to 80,000 square feet, right? So that's where we get the 160,000 square feet that we're negotiating on.

Okay, great. And then for Mark, you mentioned on the last call, you had about 547,000 leases expiring on the 2018 same-store pool at the start of the year. Do you have a sense of where that number is at now and the potential mark-to-market on those remaining leases?

I wish I came on with that, Frank. We did indicate in the prepared remarks we still have that – we have about 824 expiring for the balance of the year at 22% mark, but I did not come into the room armed with just the same-store expirations. I do think – I mean, the same-store expirations, when we talked back in February, had a 29% mark at the beginning of the year. So I don't think the mark, in any way, has eroded. That is to say, I think it's higher than the same-store than probably for the overall year of expirations. And maybe next call, I'll come with that data. But I would think it's – I don't know exactly what the same-store expiration is by square footage, but I would say the market is probably still in the high 20s.

Okay, thanks. That is all I have.

Our next question comes from Blaine Heck with Wells Fargo. Please proceed with your question.

Hey, guys. So it was good to see you raise your yield expectation on both 95 Jackson and EPIC. Is that mainly due to raising rents that you're expecting to see for those projects? Or is there something else driving that?

Yes. No. 95 Jackson is a small asset. It doesn't take much of an adjustment. But yes, they're both rev-related assumptions. We – and on EPIC, not only did we bump rent a little bit based on what we're seeing in the market, but we also picked up a little bit of NOI on higher parking revenue. And in both cases, I think you'll see that the costs are materially in line with last quarter. So it's a revenue pickup.

So on the rent side, can you give us an idea of the process behind determining those rents? Is there any growth assumption built in?

It's based on sort of real-time input from the leasing team. They look at the deals in the market, who they're in, if there's active discussions going on, what the deal terms are that are being actively discussed. And then everyone gets involved. The investment team is heavily, heavily involved. Everyone gets involved, and we debate and arrive at what we think is a realistic rent assumption upon stabilization.

I mean, and it's captured in our disclosure, of course, that, that number is sort of a spot yield. That is to say, at the point of stabilization, it's a spot yield. There's obviously contractual rent bumps built in going forward.

Right. Okay. Helpful. Victor, there's been some press around the proposed head tax in Seattle and the potential for Amazon to halt their expansion there. Can you just give some thoughts on that proposed legislation, and what you think the effect would be on the leasing environment in general in Seattle?

Well, I listen. Thanks, Blaine. I do think that, clearly, Amazon is taking a stand and in our opinion they should on this head tax. I think they would be paying 1/3 of that tax, given where – the number of bodies they have in the city. And they've made a stand, and they've made statements that they're going to – that the city is going to target certain companies. And Amazon is obviously dead in the sights of what they're going to target. I can't comment on whether or not this is going to go through. It's going to be imminent, though. And I kind of feel that the city is going to – the council is going to push to make this happen. I understand the mayor is against it. And so maybe the mayor has some veto powers, which we're trying to evaluate whether their – the mayor is indicating that she will veto this, but that's not necessarily the case if it's going to go through or not. At the end of the day, Amazon is making extreme noises around their Denny Triangle 17-story building that they want to halt or slow the development. They're talking about their Rainier Square, 720,000 square feet, that they're going to stop on that as well. So I do think this is a material issue, and it's something that needs to be monitored. It's also going to reflect because Amazon's made the statements that they're going to lease more space in Vancouver and Bellevue in those 2 markets are going to get the positive tick-up. So we're helpful it won't happen, but the summation I just gave you is what we're hearing. And our guys on the ground are imminently sort of waiting to see what will take place.

Got it. Makes sense. Last one for me. Art, thanks for all the detail on the leasing you went through. You touched, I think, on the situation at 1455, but I'm not sure I heard much about the other major move down from Robert Bosch at Foothill. Maybe you can just talk a little bit about prospects for backfilling that space.

Sure. Foothill – the Bosch deal's about, I don't know, somewhere around 72,000 square feet. They moved out. We're in the process of really reconditioning the space, updating the space, kind of part of our larger VSP program we're going to wipe off. The space was obsolete. It really beaded up. It really wasn't built for contemporary office users, that is to say the tenants that we're pursuing in that market, which continue to be tech. We're looking at autonomous cars. We're looking at life sciences. So those are the 3 major tenant groups we're looking at. We have a lot of activity, that is to say, probably 100 – probably 110,000, 115,000 square feet of early proposal.

Great, thanks every one.

Thanks Blaine.

Our next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question.

Hey, good morning out there. Art, maybe a follow-up for you on Campus Center. I think in the – it's not really guidance, but I guess, the outlook has been that the yield – GAAP occupancy or GAAP revenue recognition by the first of the year for at least 1/3 of Campus Center, so do the discussions that you're having today kind of still coincide with that time frame?

Yes. I think my answer earlier about getting this deal, getting a deal done imminently certainly support that.

Okay, fair enough. And then, Mark, just wanted to turn to you on kind of funding. If you talked about it, I missed it. But obviously, you've got EPIC. You've added Harlow. You're talking about the Westside Pavilion in terms of kind of giving overall spending there. It's quite a bit of capital. Can you talk about kind of the plan to spend there and how you'll raise that through the rest of the year?

One thing we have no sort of, I don't know, kind of problem accessing is capital. We mentioned we upsized our revolver to $600 million. We have $40 million on it today. So we're sitting on $560 million of net availability on that. We also have a loan that's secured by our ICON, CUE Bronson asset, which has $230 million of availability. We're actually in the process of renegotiating that and extending the term on that for another four years. So those two sources alone give us $800 million-ish of immediate availability, which is more than enough to fund our 75% share of the, call it, mid-400-ish to 500 on West side, which again won't layer in. That will take 2-ish years to layer in. And then, EPIC, we're in fairly far into it now. It's $200 million of total spend. By the way, there's a good chance that we may put construction financing if that's the direction Macerich wants to go. And we're certainly amenable to it. We can put dedicated financing on that. We could also, if necessary, put financing on EPIC for some or all of the costs there. So availability of funds to deal with CapEx is the least of our problems. And then on the balance sheet side, assuming you kind of spend all that, and it's all on the debt side of the balance sheet, which is – would be our base case assumption, we finished the quarter at right around 30-ish or so percent lease. If you look at our trailing debt to EBITDA, it's in the kind of the mid-5 range. So we've built in purposefully plenty of room on the balance sheet to be able to deploy debt if that's what we need to do to fund all of these capital requirements. Yes, the other thing, too, to mention, although we haven't certainly circled right now, is we're always looking at potential asset sales. And I mean, it's not unthinkable this year we could do an asset sale, which would, again, just further either provide liquidity or either immediate liquidity or we would further delever, and that would provide more room in the balance sheet.

Thank you.

[Operator Instructions] Our next question is from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hi, everyone. This is Laura Dickson here with Craig. Still just had a couple of questions on the development pipeline. You guys have mentioned that you're evaluating alternatives to lease up the Maxwell building in the Arts District. I just wanted an update there, and if you're getting any traction.

At Maxwell, right now, we actually have a tenant that's interested in – is it 80% roughly? About 80% of the asset because it splits up into 2 assets, so – in the entire main building. So Art and his team are leasing second-round proposals with this tenant, right?

Yes.

So we have a tenant interested in that now, and we haven't completed the construction.

Okay, great. And then for the Harlow development, I think on the last call, you mentioned you had some reverse inquiries on the production space. So I'm also curious on that one.

So I mean, Bill and his team have really looked at that as being overflow for 2 production space. We just don't have enough office space at Sunset Las Palmas now. And the activity in this stage is between what is currently there. And what he is about to sign is going to be a necessity for us to get his building up as soon as possible. I think the expectation is – and if you look at this past quarter's numbers, the office space rental rates have really increased at all the soundstages, specifically at Gower, and you're going to see the same at Las Palmas. And so on a short-term basis, I think that seems to be what we're looking at. I do know that our leasing team, who we brought on board, a third-party leasing group, have got about 160,000 square feet of initial prospects that have indicated interest for the whole building or majority of the building. And I do think it's good going to be one of those special circumstances that we're going to have to make a decision whether we want to go short-term with production space or a single tenant for the whole thing.

Okay, that is helpful. That is it from me. Thank you.

Our next question is from Rich Anderson with Mizuho Securities. Please proceed with your question.

So Victor, I was struck by the comment of the absence of deals in the pipeline right now, and then thought of the ground-lease situation at Santa Monica Business Park. And I'm wondering if there's just a lot of hair on deals, if ground leases are like a no-touch type of situation for you guys or if you could just kind of talk about maybe specifically why the pipeline generally is sort of at a low point right now.

Listen, Rich, the ground lease is – obviously, there's some weight in them, but it is really not a material factor for us as we look at buying an asset with ground exhibits if we get access to an extension or access to acquiring the actual ground. So it's not scared us often. Quite frankly, I think it's put us in a favorable position to negotiate uncertain deals that a lot of other institutional investors would not look at. So it's not something we're at all fearful of or wary of at the end of the day. I do think it's going to depend on the asset quality. It's going to depend on what that deal fits and how it fits into our portfolio, and what we think we can accomplish with that asset. And that's the bigger picture.

Okay. And then just the absence of activity in the pipeline, is there anything that can explain that given the activity going under?

I do think – I think we've commented on this. There's just been a lot of transactional business done in the last four or five years, the preponderance of which are institutional owners that had no desire to sell. So they're not trading assets on a regular basis. I mean, literally, as we sit here today, Santa Monica Business Park and, obviously, Westside Pavilion was an off-market – or the other two largest deals that have been done in our marketplace. And there is not a large deal on the horizon that anybody can see, at least coming until maybe at the end of the year, we have been earmarking a couple of assets that may come out. We're not even sure. So Los Angeles is really going to be a fairly quiet transactional marketplace. And henceforth, that's why the activity around Santa Monica Business Park was the way it is. People know that if you don't get that one, there's going to be a few others out there. I don't think there's any other explanation, other than the fact that there's just not a lot of product in the market right now.

Okay. And then just a big-picture comment. Your NAV discount for your stock is well documented. We all got a 22% NAV discount. But then the cash flow multiple is one of the highest in the sectors at 27x, if you believe all those numbers. And I guess, my – and so if we're to move your stock price just hypothetically to 42%, which is the average NAV, then you're at a 35% multiple. The missing ingredient to all that math is growth in cash flow at the denominator and the cash flow math. So I'm curious if you're thinking – like you're doing a lot of creative stuff, development-wise, selling assets in Silicon Valley and all that stuff, which is great NAV-wise, but maybe temporarily dampens the cash flow multiple or cash flow potential of the company. So do you see 5 years from now that this is all – you might change your stripes a little bit and start thinking about growing cash flow and letting things matriculate to the bottom line and kind of resolving this valuation math for the Street?

So your first half of – your comments are dead-on accurate. And not a lot of people have actually figured that piece out, so thank you for sort of making that known rather than Mark trying to talk to – he's doing a face, of telling you that situation. We have so much embedded cash flow, whether it's the CUEs of the world, which are fully leased to Netflix, that are coming online in this year or when we lease EPIC or when we lease Campus or when we lease Westside Pavilion, which is all active cash flow coming down the road, or when we have mark-to-market rents that hit sort of a maturity level in 2019 and 2020, which we've seen year-over-year. As that sort of forecast for five years from now, we'll also have new assets that come in play. We'll have new redevelopment assets that come into play that will contribute to the multiple and bringing that multi-cash or multiple down, and you're going to see much more of a stabilized sort of portfolio of cash. And that's where the future value and the current value of Hudson is. And we've been proving that, I think, on a regular basis by the execution of the leases and the redevelopment deals that we're doing. And it's not a moment in time, Rich, as you pointed out, it is a long-term process. And we see the light at the end of the tunnel. I think you're going to see a much more stabilized flattening of cash flow.

Great, great color. Thanks very much.

Thank you.

Ladies and gentlemen, we reached the end of the question-and-answer session. At this time, I would like to turn the call back to Victor Coleman, CEO and Chairman, for closing comments.

Thank you so much. And as I indicated before, I always like to thank team, specifically the senior management team in Hudson, but all the employees for all their contributions for this past quarter. We're excited to offer up our Investor Day, which is going to be a very unique experience, and I think very entertaining in multiple ways as well as informative. And we're sorry we're not going to see you at NAREIT, but we will see you all at our Investor Day or in fall. Thanks so much.

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation and your interest in Hudson Pacific Properties. Thank you.