Hudson Pacific Properties, Inc. (HPP) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Hudson Pacific Properties Second Quarter 2019 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Laura Campbell. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties Second 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 Investor 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 section of our Web site.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. These statements 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. Welcome, everyone, to our second quarter 2019 call. We had a very strong second quarter, signing over 500,000 square feet of office leases, an exceptional 48% and 27% GAAP and cash rent spreads, respectively. And this brings our year-to-date leasing activity to 1.5 million square feet, with 41% and 29% GAAP and cash rent spreads, respectively, putting us on pace for one of the best years ever for leasing activity within our office portfolio.With Maxwell now delivered for tenant improvements, our nearly 1 million square foot pipeline of active development and redevelopment projects is 89% leased. As such, our leasing activity this quarter centered around our stabilized and in-service assets, and the lease percentages for which both ended the quarter up about 150 basis points at 96.6% and 94.5%, respectively. While we had great activity throughout all of our markets, 80% of the deals we signed were our Bay Area assets, and 70% or 350,000 square feet of deals we signed were our Peninsula and Silicon Valley assets.Notable deals include approximately 40,000 square-foot lease with Google backfilling the balance of the SS&C space at Ferry Building as well as the 55,000 square-foot lease with Heritage Bank at Concourse in North San Jose, with a 27% mark-to-market.Further, accounting for deals renewed, backfilled, in leases, LOIs or proposals, we had successfully addressed currently 65% of our remaining 800,000 square feet of our 2019 expirations, which are currently 16% below market. In terms of our Sunset Studio's portfolio, we continue to benefit from demand well in excess of supply for stages and production offices in Los Angeles as content providers increasingly look to lock up studios under long-term agreements. We recently had two new increase from major TV producers for long-term stage and production office leases, even as we actively work to accommodate existing clients like ABC, Disney, WarnerMedia, HBO, CBS, Viacom and Amazon on an ongoing basis.Our same-store studio portfolio was 92.6% leased over the last 12 months, in line with the overall Los Angeles studio market with average rates over the last 12 months were up 5.6% to $39 per square foot. We also had a busy quarter in terms of acquisitions and added several new value creation repositioning and development opportunities to our pipeline of projects.We closed our purchase of Bentall Centre with Blackstone, where we will capture upside from both modernizing the existing 1.45 million square foot collection of assets and building one of the last remaining approximately 450,000 square foot development sites in prime Downtown Vancouver.We also formally opened our Vancouver office, led by seasoned real estate executive and Vancouver native Chuck We, providing us with the same strong local presence that we benefit from all of our other markets. We're actively looking for other opportunities in Vancouver which could possibly be in partnership with Blackstone, both on the office and the studio side. We also funded the deposit of an $86 million purchase of condo rights to build an approximately 538,000 square-foot office tower in Seattle's Denny Triangle neighborhood, which we're calling Washington 1000. This is an exceptional site particularly as it is adjacent in another construction of a $1.8 billion Washington State Convention Center expansion totaling 1.5 million square feet.It would literally transform this neighborhood, bringing both new residential and retail amenities and over $50 million of streetscape improvements. With Washington 1000, our Denny Triangle portfolio totals more than 1 million square feet across all three assets. And we would be in a position to commence construction for this project mid-2021 upon delivery of the office towers podium.In terms of dispositions, we closed sales of both the Campus Center improvements and land for a combined $148 million, which represents another successful execution by our team on the capital recycling front. And Mark's going to provide some more additional commentary on these transactions later in the call.Finally, I'd like to mention several ESG-related milestones for the company year-to-date. We recently published our inaugural Corporate Responsibility Report, highlighting our 2018 accomplishments, and added ENERGY STAR Partner of the Year and Green Lease Leader to our 2019 accolades. And last week, we welcomed Natalie Teear to our team as Vice President of Sustainability and Social Impact. And she's going to be working with all levels of our organization to find innovative ways to expand further our ESG platform and strong alignment with our business strategy and core values.With that, now I'm going to turn it over to Art for further commentary on our leasing end markets.

Thanks, Victor. Big picture in terms of fundamentals, the second quarter was characterized by significant, even record-setting positive net absorption across our market as global tech and media firms vie for large blocks of space. Our office leasing deal pipeline remains strong at over 1 million square feet even with our robust activity in the first half of 2019.In Los Angeles, tech and media usage continued to expand and the market had 5 deals over 100,000 square feet in Q2. In Hollywood, for the quarter, Class A vacancy dropped 310 basis points to 6.8% and rent increased 2.2% to $60 per square foot, with 71,000 square feet of positive net absorption. We have multiple tenants, both full and partial building users interested in Harlow, which delivers in the first quarter of next year.Our 140,000 square feet of remaining 2019 expirations in Los Angeles are 11% below market and mostly comprised of Saatchi & Saatchi's 113,000 square foot lease at Del Amo. Saatchi is a known vacate and we are proactively marketing the asset to full and partial building users. Our stabilized Los Angeles portfolio is 98.8% leased and in-place rents are 14% below market.San Francisco exemplifies the abundance of large-block tenant demand with 11 deals over 100,000 square feet signed in the first half of 2019. This is driving asking rent and pre-leasing even for projects still in the planning stages as the city's development pipeline is fully leased through 2022.In the city, for the quarter, Class A vacancy dropped 40 basis points to 2.5% and rent increased 2.4% to $90 per square foot, with 210,000 square feet of positive net absorption. We have virtually nothing left to address in that market in terms of expiration. Our stabilized San Francisco portfolio is 97.5% leased and in-place rents are 32% below market.The San Francisco Peninsula, which for the purposes of this discussion includes Palo Alto, had another strong quarter, led by notable activity in the Foster City and Redwood Shores submarket. Along the Peninsula in the quarter, Class A vacancy was down 20 basis points to 7.5% and rent increased slightly to $89 per square foot, with 182,000 square feet of positive net absorption.We have coverage on 65% of our 286,000 square feet of remaining 2019 expirations along the Peninsula, which are 16% below market. We are now negotiating with the tenant to backfill 2/3 of Stanford Health former 63,000 square foot space at Page Mill Center. And after renewing Baker McKenzie at another Class A building, we are in leases with the tenant to backfill the former 34,000 square-foot space. Our stabilized Peninsula portfolio is 90.8% leased, and in-place leases are 10% below market.Silicon Valley had an exceptional quarter with 2.8 million square feet of positive net absorption, the largest quarter of occupancy gains in that market's history. North San Jose, where all but one of our valley assets are located, had a particularly strong quarter. And global technology firms like Adobe, Google and now Uber continue to take down large blocks of space.In North San Jose, in the quarter, Class A vacancy dropped 800 basis points to 11% and rents increased 3.8% to $49 per square foot, with 787,000 square feet of positive net absorption. We have coverage on more than 70% of our just over 200,000 square feet of remaining 2019 expirations in Silicon Valley.These are comprised mostly of small sub-10,000 square-foot leases and in aggregate, 17% below market. Our stabilized Silicon Valley portfolio is 97.6% leased, and in-place leases are 8% below market.Downtown Seattle remains sought after by tenants, with its access to talent and mix of amenities and retail. There are no 100,000 square-foot block of available block at existing assets in the market. And companies with large requirement must look to under-construction projects, which are substantially pre-leased. In Downtown, for the quarter, Class A vacancy was essentially stable at 6.9% and rents increased 3.9% to $40 -- $47 per square foot, with 490,000 square feet of positive net absorption.While there are two years out from starting our construction on Washington 1000, we feel very confident about the project's leasing prospects given its location and design as well as the combined 5.5 million square feet of 25,000 square-foot plus requirements for the Seattle and Bellevue markets. We have very little in the way of remaining 2019 expirations in Seattle. Our stabilized Seattle portfolio is 96.9% leased, and in-place leases are 17% below market. In Vancouver, we continue to see strong interest from both Canadian and U.S. based technology tenants with several major deal announcements anticipated in the city in the coming months. Supply is the major constraint to absorption with sub 3% vacancy and a well-leased development pipeline.For Downtown, in the quarter, Class A vacancy fell 30 basis points, 2.8% and rents increased 2.6% to CAD 61 per square foot, with 64,000 square feet of positive net absorption. We have coverage on essentially all of our 118,000 square feet of remaining expiration at Bentall Centre, which are 27% below market. Deloitte's 93,000 square-foot lease is a known vacate. And we feel good about the interest that, that space has on full users and single floor tenants as well as the 1.5 million square feet of active requirement in that overall market. Bentall Centre is 98.2% leased and in-place leases are 21% below market.Finally, I'd just like to frame up the status of our lease up portfolio. Three properties, Fourth & Traction, Metro Plaza and ShoreBreeze, are either over, at or just shy of 92% leased, essentially stabilized. Other than two small repositioning redevelopment assets, 95 Jackson and 10850 Pico, we had two remaining lease up assets, Metro Center and 333 Twin Dolphin. On a combined basis, 80% of the square footage in Metro Center and Twin Dolphin has rolled since purchased, yet we have increased the lease percentage by almost 1,000 basis points.In addition, we have increased NOI at those two properties by over 130% in aggregate. So while we're not fully stabilized, both continue to be a source of meaningful NOI growth. And with that, I will turn the call over to Mark for financial highlights.

Thanks, Art. For the second quarter, we generated FFO, excluding specified items, of $0.48 per diluted share compared to $0.46 per diluted share a year ago. Higher occupancy and rental rates across both the office and studio portfolios, together with asset acquisitions, specifically 10850 Pico and the Ferry Building, were the primary drivers of this year-over-year increase. There were no specified items in the second quarter of 2019 or 2018.In the second quarter, NOI at our 32 same-store office properties increased 12.7% on a GAAP basis and 11.1% on a cash basis. Given these strong results as well as our expectation of that portfolio's continued performance through year end, we are increasing our full year same-store office cash NOI guidance for the second consecutive quarter from a 3.5% to a 4.5% midpoint.Our same-store studio NOI decreased by 8.1% on a GAAP basis and 9.3% on a cash basis. While second quarter same-store studio cash NOI came in below the 5% midpoint of our previous full year guidance range, we have in fact increased our full year same-store studio cash NOI guidance midpoint to 5.5% given our expectation of the studio's performance through the remainder of 2019. In terms of capital market activity during the quarter, on June 14, we completed an additional public offering of 150 million of senior notes under our February 27, 2019, indenture, pursuant to which the operating partnership had previously issued $350 million of 4.65% senior notes due April 2029. Both issuances have substantially identical terms.Net proceeds for the additional offering were approximately $155.3 million, $150 million of which we used to pay down our revolving credit facility. As Victor mentioned, on June 5, we successfully closed our joint venture purchase of Bentall Centre. From an accounting perspective, this acquisition marks our first significant unconsolidated real estate investment. As such, in addition to the information historically provided for our consolidated portfolio and our supplemental report, we have added financial and property information for the company's share of both consolidated and unconsolidated investment. We hope you find this useful. Before turning to guidance, I want to provide further details regarding the recently completed Campus Center sale.As Victor mentioned, on July 24, the company sold the Campus Center improvements for approximately $70.3 million before credits, prorations and closing costs and applied $70 million of proceeds to pay down our revolving credit facility.On July 30, we sold the Campus Center land for approximately $78.1 million before credits, prorations and closing costs and paid down an additional $75 million on our revolving credit facility. As for the earnings impact of these sales, you may recall that we reclassified both these properties as held for sale in the first quarter, which required us to recognize the anticipated loss associated with the improvement but not the anticipated gain associated with the land. With both sales now complete, we expect the gain associated with the land to essentially offset the first quarter impairment loss. Our third quarter filings will provide the final accounting for these dispositions.Turning to guidance. We are increasing and narrowing our full year 2019 FFO guidance range from $1.96 to $2.04 per diluted share excluding specified items, to $1.98 to $2.04 per diluted share excluding specified items, thus raising the midpoint from $2 to $2.01 per diluted share.Specified items consist of those identified in connection with our first quarter results. It otherwise excludes the impact of unannounced or speculative acquisitions, dispositions, financing and capital market activity. As noted earlier, we have again increased our office and studio same-store cash NOI growth assumption midpoint to 4.5% and 5.5%, respectively. With that, I'll turn the call back over to Victor.

Thanks, Mark. To close, we remain bullish on the performance of our office and studio portfolios through year-end. The continued strength of our markets driven across the board by the outsized growth of tech and media tenants provide us with the perfect runway to execute on our business priorities, whether leasing, capital recycling, capital markets or otherwise.I'd like to close the call by giving special recognition to the Hudson Pacific team. As we head into our 10th year as a public company, I look back at the extraordinary growth across assets, markets and our borders. I'm so proud of our unique and vibrant culture, the exceptional talent that we have throughout the organization and how all of us strive to embody Hudson Pacific's vision and mission on our day-to-day responsibilities. It's truly remarkable.To everyone listening, we appreciate your support. We look forward to updating you next quarter. And operator, with that, let's open the line for questions.

Thank you [Operator Instructions] Our first questions are from the line of Jamie Feldman with Bank of America.

Great thank you. I guess just to start, can you talk about the decline in same-store NOI in the studio portfolio year-over-year? I know you had 1 studio out of service. I'm just curious what the number is going to look like and kind of a clean apple-to-apple comparison.

Well, everything was in service, Jamie, but the sort of simple explanation focused on the same-store. I think what you're saying is the Eleanor. Those two small properties are not flowing through the same-store, which is correct. That's roughly 52,000 feet. But the 1.2 million square feet running through the same-store, the year-over-year difference is largely driven off of partly elevated fixed cost.If you look at our MD&A, for example, we've enhanced certain services like our parking services, security services, janitorial services, in keeping with finding these longer-term deals and wanting to kind of elevate the level of service associated with that. And that's contributing call it on a run rate basis, about $0.5 million a quarter in higher operating expenses. It just so happens though in the current quarter, we also happen to have higher R&M expense that's probably not going to be as regularly recurring. So we had somewhat higher elevated expenses associated with that.Meanwhile, the other property related revenue was lower relative to the second quarter of last year, which is not that uncommon. We typically see a slowing in production activity in the second quarter in keeping with production cycles. It just happened to be considerably lower than last year but to the tune of about $2 million less in other property related revenue. So the combination of the lower production revenue and the higher elevated expenses contributed to that year-over-year decline in NOI on the studios.

And then switching gears to Silicon Valley in the Peninsula I mean very nice pickup in the market in occupancy this quarter and certainly, you guys sound a lot more upbeat than some of your peers. What do you think the follow-through is here? How much, how long can kind of improved market conditions continue? And if you look out the next year or two what do you think that market looks like?

Jamie, I mean the Peninsula currently today has seen rent growth quarter-over-quarter and a massive 10% decline in any subleased space in the marketplace. With the new product coming online, it's still on the 70% pre-leased basis. But if we're looking, we've been talking about this for a long time. I mean there is no space in the city, so it's moving down to the Peninsula. It's exactly what we said was going to happen is happening. And we don't see this ending anytime shortly. There's still a tremendous demand on the VC investment side. There's tremendous demand on cyber security, aerospace, logistics, AI. And the growth prospects are currently going there.I mean we're also seeing the future growth in the campus facilities, expansion around Google and Facebook as well so it's positive for the foreseeable future. At least the next 24 months, we don't see any decline at all.

And then are there other submarkets you'd want to expand into for more of a value-add stake?

In California? No.

Even on the Peninsula or in the Valley?

No. I mean I think we're pretty comfortable improving centers in San Francisco. I think that seems to be the area that we're going to continually focus on.

And then finally for me; can you provide some details in terms of timing and spend for Bentall and 1000 Washington?

Well, 1000 Washington, which is in the disclosure document right there on page 35. So it's right there. We are not starting the earliest, it's going to be late '21. And in terms of Bentall, we are in the early phases of evaluating the demand there as in the prepared remarks you heard. I mean it's sub-3% vacancy right now. The demand is very high in terms of it's 1.5 million square feet of current demand. And we're sort of that CBD Downtown Vancouver, 0.5 million square feet. We have a fully approved site, so we could break round. My guess is, I don't know, first quarter of '21, I guess, which is like 18 months from now maybe, something to that effect.

Our next questions are from the line of Nick Yulico with Scotiabank.

Just following up on development. Do you mind giving an update on a couple of other projects, Cloud 10, Sunset Gower, the future development there, when those might start? And I guess just overall, as we're thinking about the development pipeline and all these additional projects that could start, how you're thinking about funding those.

Let me just sort of reiterate. The Cloud 10 project, 400,000-plus square feet, we're in design phases now. But as we said, that's going to be a build-to-suit. We're not going to break ground there unless I don't know, Nick, what that percentage is, but it's substantial leasing. So I would say 50%-plus pre-leased before we would do that. We have a final design of that asset. And as you well know, that market has a lot of demand there right now. And so I think we're probably through the entitlement process right now. In the next 100 days or so, we should be completed there.In terms of Sunset Gower, the entitlement should be completed by Q2 of 2020 for both assets. If you recall, it's 165,000 square feet with studio facilities in one and then another 350,000 square feet in the tower on Sunset. That is currently today, our leasing team has got a lot of interest on that. And I think that also will be a pre-leased transaction before we break ground on that. There needs to be a number of other things that has to happen at Gower in terms of building parking and moving around some of the open space to accommodate the filming. And there's also some energy issues that we're working on as well. So with the combination of that, that should take us out, as I said, to 2021 where we can start that development at the same time. We're optimistic though. But by the time we're getting ready to go, we'll have that substantially or all pre-leased.Our balance sheet, Mark can dig into it. As you know, we've got a lot of capacity on leverage today. We've got, we're looking at other, we just closed, as we said, campus. We're look at maybe looking at an asset or two that may also fall into disposition category. We're very comfortable with that in terms of our balance sheet and the capacity going forward. And so we don't need any equity, additional equity, for the current projects that we're looking at right now.

It sounds like it's just I mean would you look to prefund some of that development? I mean as we think about kind of managing earnings dilution, how are you thinking about that?

You mean well, I mean other than architectural soft cost and some architectural entitlements. No, nothing else.

I just meant from like an asset-scale standpoint, you could try and tie that up with the development spend. Or could you look to sell assets ahead of what could be larger capital spend required for the development pipeline?

They're not mutually exclusive. I think we're going to -- Nick, we're going to look at the development opportunities going forward and the demand for the leasing around that. And as I said, if there's assets in the portfolio that we don't think are future accretion or there's an opportunity that we're not going to grow in the marketplaces, we'll sell those assets. But they're not mutually exclusive.

Okay. And that's helpful, Victor. And I just want to follow up. And you mentioned that you could have some, you're looking at some additional office and studio deals with Blackstone in Vancouver. How should we think about that relationship right now I mean is it only in Vancouver are you looking at other markets? What's, how should we view that partnership?

Hey, listen. I mean Blackstone and Hudson have a great relationship. But I think the appetite is mutually agreeable for us to do transaction together. Obviously, it makes a lot of synergistic sense in Vancouver. We have two other great JV partners in CPP and Allianz in the Bay Area and in Seattle that are looking for more deals with us.And so it's going to be project-by-project driven. It's not some programmatic transactional standpoint going forward. But I think we're fortunate to have some great capital partners who are engaged and want to do more business with Hudson.

All right appreciate it.

Our next questions are from the line of Alexander Goldfarb with Sandler O'Neill.

Hey good morning out there. Just a few questions, first, just Mark, really quick the land gain that you spoke about, that's not in FFO, right? That's just it's an accounting entry, but it's you're not including that in as part of FFO, right?

Correct.

And then getting to the studios, going back to Jamie's question I thought you guys were making a big push to do more annualized leasing with -- you don't have just a production schedule. They move in, do the shoot, move out. But they are renting the studio more full term. And I understand that you're increasing the level of service and that raises the cost. But I would think those two would sort of offset each other and that having more annualized revenue that's consistent would offset the elevated expenses. So maybe it's just year-over-year that you're ramping up those expenses and next year will level out. But just curious if you can comment a little bit more.

Well, you're, I mean you're dead on. And actually, if you look at the quarterly results, you'll see that revenues on a year-over-year basis for the second quarter were actually slightly higher even though we had a substantial decline in other property-related revenue, which is exactly your point. Those longer-term contracts are steadying and actually providing nice annual year-over-year increases in rental revenue. It's just that the rental revenue is different and the stability associated with that and the lack of downtime and all those benefits of long-term agreements is different from whether or not a tenant is actually in production.And it's the production activity that drives that one other line item, the other property-related revenue. So it is clearly providing the benefit. That is to say we saw no decline in overall revenue. It's just that we did not get the lift, if you will, of the higher revenue associated with production.

And then just finally, Victor, just going back last quarter, you mentioned your comments on Bellevue. But the articles that come out, the investment that Amazon is doing and presumably others will do in the Bellevue market seem to make it a big growth market. So are there things that would change in your view as far as the competitive set that would make it attractive to invest? Or are there certain limitations that as you guys look at that versus Seattle that it doesn't compare to what your potential is in Seattle versus starting to make Bellevue a point of focus?

Well, so as I mentioned last quarter, Alex, we are looking at Bellevue independent of Seattle. So it's not one or the other. We're actually currently looking at a project there right now. We did evaluate a couple of the transactions that have traded. And so it's a marketplace that we will consistently look at because of our presence in the Pacific Northwest. I think if you were asking preference, the preference would be in Seattle, which is more opportunities. There are limited opportunities in Bellevue. And so it's going to be a lot more competitive given the fact that there's limited opportunities. There are more opportunities that we are seeing in Seattle and we're going to continue to see and work on.

Our next questions are from the line of Blaine Heck with Wells Fargo.

Victor, I just wanted to ask about the longer-term strategy in Vancouver. Fundamentals seem to be great in the market. You guys have a little bit of work to do at Bentall with some of the renovation activity that's going to be happening there. And you have the opportunity to build. But I guess past that, are you guys seeing many deals on the market? And I guess how do you think about the opportunity to acquire more space in such a small and kind of tightly held office market?

It's a great question. As I said, we're looking currently today at a couple of office deals. We are spending more time on some of the studio deals there right now. And so we're going to be equally weighing our energy on that. I do think that we will have the opportunity to acquire more in Vancouver. The fundamentals, as you mentioned, Blaine, are excellent there. I think we do have a tremendous amount of work to do at Bentall. But part of it, as I mentioned in my prior comments publicly on this, is it's going to be some low-hanging fruit. And I think some of it's going to be us being a differentiator in the marketplace because the competition, dare I say, has really been resting on their laurels.And we're going to try to make an impact. And by doing so, we will de facto see deals. So I'm confident that we're going to grow that portfolio. I'm confident that we'll grow it both on the studio and the office side. And we're active there. And as you well know, at any new marketplace, when you enter a marketplace, the new guys sort of gets a shot at what's going on. And I think that's our advantage right now.

And then just a quick second one. I think Stanford Health had to move out this quarter but occupancy at Page Mill didn't come down. I guess should we expect that to be a little bit of an occupancy headwind in the third quarter?

So yes, you're right. They didn't move out, right? We're in the process of repositioning the space,the space, making it market ready. We're also doing improvements to the common areas, the interior, the exterior and an advertising space like we've done kind of across our portfolio. We have activity on two-third of property, 45,000 to 50,000 square feet of that space right now. We feel pretty good about that prospect.

Got it thanks guys.

And our next questions are from the line of Emmanuel Korchman with Citi.

Netflix has been out there talking about increasing their studio exposure in other markets. You guys in the past spoke about expanding for the market. Can we tie those two thoughts together and see if you have any interest in going outside of the ones you spoke about at your last Investor Day?

Well, no. Manny, we've talked and publicly said that we are looking beyond just Vancouver in studio markets. I mean we're looking in New York. We're looking in Toronto. And if that relationship is such that Netflix is looking in the same markets, clearly, we're in conversations with them. And we will continue to have those conversations. But it's not going to be because they're in those markets, we're going to look in those markets. I mean, I think right now, there are other than Vancouver, I know of three markets that we're spending some energy on. And all three of those markets, I'm sure that Netflix would be interested in expanding in. On the immediate desire, Vancouver is definitely one of them.It's not going to deter us from being in those markets, whether they want to do it or not. There is some interesting changes in some of the current markets here in the United States such as Atlanta and the impact of Atlanta, like we had projected. And it's moving now to L.A. It's moving to Vancouver. It's going to move to Toronto, to New York. So you're seeing that impact, and that's only going to benefit us.

And then if we think about Bentall for another second and with the capital commitment and the work that you have to do there to reposition that, can we just think about how much time that will take investing it into a fund are you going to own it for a while and think about sort of what's best for the asset and the market?

Do you say are we going to own it for a little while?

No. Are you going to -?

Yes. So listen, the immediate need, and we have some detail on it. But the immediate need right now is going to be on the office side because we're doing the lease-up, and we're doing some repositioning in the lobbies. And so year 1 spend is about $25 million. Year two looks like roughly around the same. And then year three is about much smaller, $3 million. So that's typical of what we're doing. I think in terms of the retail, we don't have a plan in terms of a budgetary plan because when we decide to build, we're going to take our portion of the retail. It's going to go straight down.So we would not do that work on the retail now and then actually not have that space either way as we tear it out and build the tower because the tower is going in a portion of it. So I think the team is already in process of what the overall plan is for the retail and the common areas. And we'll come out with a budget on that probably by the end of the year.

[Operator Instructions] Our next questions are from the line of Daniel Ismail with Green Street Advisors.

Just more on the markets. Can you frame the rents you gave the rental information you gave out at the beginning of the call in terms of net effective rent and then maybe comment on year-over-year concession growth in those markets?

Yes. So Dan, typically every call, I sort of give sort of a state as to where we project rent growth is for the year. So we're halfway through the year. Obviously, we're more of, in terms of the call, we're halfway through the year. I can tell you that our rent growth numbers, and I'll just go region through region, is sort of in a range of L.A., we're still looking at a consistent 6% to 8% rent growth for the remainder of this year. San Francisco, we were at 8%, 8%-plus.I think that's sort of approaching the stuff we're doing right now, it's more like closer to 10%. It will look like a year-end projection rent growth of about 10%. The Peninsula, we had said it was sort of 4% to 5%. I think that's pretty consistent. What we're seeing maybe even a little bit higher, but I'm comfortable with 5% to 6% probably going forward on that basis. Seattle, clearly given the demand there right now, it was a 6% to 8%. I think it's closer to an 8% rent growth right now in that marketplace. And Vancouver, being that we haven't pegged it yet, I think we're going to sort of looking at a 5% to 7%. And we could be light on that, given the fact that it's sub-3% vacancy.In terms of the concessions going forward, I think listen, on both levels of concession, it's a constant in all markets, regardless of what's going on. Unless you guys tell me otherwise, it's a constant 1 month a year free rent. And so it's just we really haven't seen any movement on that. I do think that specific to Los Angeles and San Francisco CBD, we're seeing TIs now, which was closer to the $80, $85 number, as pushing up another $5 or $10, guys? You think closer to $90, $95?

That's about it.

And I think the Peninsula has been consistent at the $70, $75 number in TIs, maybe pushing to $80. But we haven't seen that number move much. I don't think the TI has moved at all in Seattle. And I don't think that we really put a benchmark on TIs in Vancouver. But they're substantially less than that, more like the new TIs are like $60, $65 a foot. So that sort of gives you a range.Obviously, Daniel, it's known that the space that we're talking about here is either new space or what we would de facto call new space, which is 10-plus years old. So there's a tremendous amount of money that we're putting in. But the tenants are also driving that factor because they're putting for the most part, our large tenants are putting in equal or greater than what we're putting in the space. So that's the enhancement of where that's going to go going forward.

I appreciate it. That's helpful. Maybe switching to the non-same-store portfolio. Can you give an update in terms of how that's progressing relative to your expectations at the beginning of the year and maybe expectations for cash NOI growth for '19 from the non-same-store office portfolio?

Yes. I think in the first quarter, we had provided some commentary around growth expectations surrounding the non-same-store. And I'm not kind of staring at our prepared remarks from February. But I can tell you that my recollection is we were forecasting somewhere in the mid-30% year-over-year non-same-store growth. And I can tell you as we sit today that we are tracking consistent with that level, somewhere in the mid-, maybe even high as 30% year-over-year cash non-same-store growth.

And then maybe just a quick last one for me. We noticed the expense growth on the office side declined a little bit. Was that a temporary phenomenon or a permanent expense savings?

Yes. No, there were some expense savings across the board. I wouldn't call it temporary. I think it will level off at a lower, It won't be quite as much as you're noticing in, say, the same-store year-over-year decline. Some of it will hold through the balance of the year though, perhaps not all on it though.

This concludes our question-and-answer session. I'd like to turn the floor back over to Victor Coleman for closing comments.

Thank you so much for the participation. And we look forward to speaking to you all next quarter. Have a good rest of your summer.

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