Caitlin Burrows: So you’re saying — sorry, the 45% is like what you know is going to renew, but additional might on top of it?
Arthur Suazo: That’s correct.
Caitlin Burrows: Okay. Got it. And then just back to the studio side. I think you commented that in the release that industry consolidation and shifting business models focused on profitability are also having an impact. So I’m just wondering how big of an impact do you think this could ultimately have how it could impact Quixote and does it suggest that returning to prestrike levels of income might not be possible or not?
Victor Coleman: I would not read into it that way, Caitlin. I think — listen, we don’t know what the impact is, but what the impact is clearly suggested that a series of development or predevelopment opportunities that were planned are no longer going to be executed. Therefore, the pipeline of new development is going to be a lot smaller. And as a result, the existing stages and availabilities that are out there are going to lease up I think, a lot quicker than people had presumed. So I would not read into a consolidation. I mean right now, we’re looking obviously at the Paramount situation, but they own their own lot. And they are in — on the CBS side, they are in lots of ours and others and stages and they’re going to continue to do so with their — whoever their new essentially could be.
Operator: Our next question comes from Tom Catherwood of BTIG.
William Catherwood: Maybe going back to 1455 Market, the large lease that you signed there last month has options to take substantially more space. What are you expecting in terms of the likelihood and timing of those options being executed. And would any expansion need to go back before the Board of Supervisors for approval?
Arthur Suazo: Tom, this is Art. Yes, so they’re not hard options to take or must take spaces. This is really the beginning of what was 12, 14 months of negotiation to amalgamate a number of spaces as they become available for the city. And so we feel that we’re going to very — soon probably third, fourth quarter, we will have good news about another larger block of space. And then there’s more behind that. There’s no hard timing behind what it is. We just feel very confident that very soon, we’re going to look back and see that we’ve signed several hundred thousand feet of space.
William Catherwood: Got it. Appreciate that, Art. And then last one for me. You mentioned in the prepared remarks, Victor, you mentioned 3 office assets that you’re looking to sell and another 1 to possibly recapitalize in the Bay Area. What are the timing expectations for those sales and recapitalizations. And given that sales weren’t included in the initial guidance, did the timing have any part in a decision to withdraw guidance this quarter?
Victor Coleman: No. I mean we don’t include dispositions or acquisitions in our guidance and the time line as to what we’re talking about. As we reiterated before, the only conversation around guidance is referred to around Quixote. Everything else is a stable business that we that we’ve currently put in place and that we discussed. In terms of the dispositions, I can say of the 3, one of them is being marketed. The other 2 are off-market transactions. And 1 of those is in contract right now. And in terms of the recap, that is in discussions as well. But we’re not going to give guidance and time lines as to what our expectations are in terms of timing and execution.
Operator: The next question comes from Vikram Malhotra of Mizuho.
Vikram Malhotra: Victor, I just wanted to clarify first, you talked about just the volatility in the business in studios and maybe considering something external, I’m not talking about timing or anything. But I just want to be clear, were you referring to the studio business in its entirety, Quixote. Just maybe give us some clarity on when you meant considering something external, what does that mean?
Victor Coleman: Yes. So I was referring to the studio business inclusive of Sunset and Quixote.
Vikram Malhotra: Okay. And that would be — that you would consider spin in its entirety or some sort of JV or something, I’m presuming?
Victor Coleman: We are looking at all different options right now and exploring alternatives.
Vikram Malhotra: Yes. Got it. That makes sense. And then just in terms of the pipeline, so leasing pipeline for office. I was just wondering, I know we had a lot of talk about last year, a few big AI leases. Now we’ve talked about — maybe it pinned out a little bit now, just talk of perhaps more. I’m just wondering, perhaps, Art, if you could just talk about in the pipeline today, the rest of the 45% or the 55% where you’re still looking for new leases or renewals. What does the AI contribution look like in your markets?
Arthur Suazo: That’s a very interesting question. Let me just start by saying, as we’ve talked about the AI deals that are out in the market in San Francisco, there was once upon time, 1.4 million, then we saw 800,000 feet get leased up. Now we’re back over slightly over 1 million square feet of AI expansion in the city, okay? In the Valley, it really started showing up end of last quarter. As a matter of fact, we leased — in the Valley alone, we leased 80,000 square feet of new AI tenancy, 50,000 of which was net new, and then the others were renewal kind of expansion kind of space. So yes, we are starting to see a lot more in the Valley, and we feel very comfortable it’s going to continue to grow in the coming quarters.
Operator: And our next question comes from Nick Yulico of Scotiabank.
Nicholas Yulico: I just wanted to turn back to 1455 Market. And I guess first question was, should we assume that the package you gave the city in terms of like it was one year free rent, $40 starting rent, $100 TI. Is that the type of package you would give for leasing for the rest of the building?
Arthur Suazo: Yes. I mean I think the market is going to dictate what it is, but I think that’s the basis. Remember, it’s — the concession package is based on 21 years, right? So yes, depending on where the lease term comes in, it would be commensurate with it, but wait and see. And by the way, in addition to — it’s a good question, why? Because it’s not just the city that we’re engaging right now. There’s probably another 125,000 square feet of interest, and we’re negotiating on one full floor with an AI tenant. So obviously, it’s just not a government use as it wasn’t before, and we’re starting to see kind of the beginnings of tech tenants coming down market street.
Victor Coleman: Nick, it’s Victor. I just want to clarify. I mean, obviously, this comp is out there for the city. Sure, the city is going to come back if the term is the same, they’re going to come back for similar terms. Obviously, the AI tenant that Art is referring to and the other tenants that they’re talking to are much different terms and will be probably different economics as well.
Nicholas Yulico: Okay. Got it. Yes. Just to follow up on that, maybe Victor is, clearly, this is an asset that, as you mentioned that you’re potentially buying back at the original basis, but there is a fair amount of leasing capital that needs to go into the building. So I mean, if we think about, I don’t know if the $100 TI is the right number for all the vacancy, but once Uber leaves, you’re going to have something like 700,000 square feet of vacancy there. And so you paid $45 million for the partner interest, you’re going to ultimately put in who knows? Is it $60 million of leasing capital depending, I guess, on the package. But how — maybe just hearing a little bit more about why you think it makes sense to reinvest that level in the asset?
Victor Coleman: So good question on that. Listen, I think the asset has proved itself to be successful. We originally bought that asset, and it was going to be BofA occupied asset. Obviously, we shifted and brought tech tenants in. Now we’ve shifted out, and we’re looking at, obviously, City of San Francisco and other entities that are affiliated with the City of San Francisco that are looking at it right now to the tune of 300,000 or 400,000 additional square feet, plus we’re looking at, as Art said, another 100,000 to 200,000 square feet of AI or business-related tenants. [Indiscernible] footprint and the improvements of the asset are very high. I would not read into this deal being the deal that is going to be throughout the entire lease up.
We’re confident that this makes a lot of sense on a price per pound. I think our IRRs and the yield hurdles at the end of the day when we disclosed them are going to prove out that this was an excellent acquisition for Hudson and a unique opportunity that you’re not seeing anywhere else in the city, even given where some of the other depressed real estate is in selling at or trying to be sold that it’s nowhere near at these levels.
Nicholas Yulico: Okay. And I guess just one quick follow-up. I mean you guys are confident in getting other users into the building besides the city. I mean, clearly, the city had a reason to support the asset and try and revitalize that part of the city, but in terms of other tenant activity, you do think that there is reason to be in that submarket within the city.
Arthur Suazo: Nick, if you recall, if you can think back 10 years, that this is exactly where we were. In the city, we did — we had — the first tenant in the building besides BofA was 125,000 square feet with the city. There were 3 different departments. And then, right, and then we started tracking tech tenancy. So there was beyond the city that was GSA and the building and so forth. And so — if you think about it, we’re kind of back to where we were. We are starting with the low-hanging fruit, which is governmental users that are in the neighborhood. And because I think we’re in a better spot. Why? Because if you think about the Square and the Uber space, there’s $3,000 — $300 a foot into that space. And so the residual value is very high and TI dollars and dollars out of their pocket are going to go a lot further. And if you also remember, we didn’t have windows on the podium, right? We installed windows on the podium that changed the game there.
Operator: Our next question comes from Dylan Burzinski of Green Street.
Dylan Burzinski: Just sort of wanted to touch on outlook for leasing. As we look at your quarterly leasing activity or call it, the last 18 months or so, it seems like 500,000 square feet is sort of the upper bound on the amount of leasing you can get done in any given quarter. I guess do you feel that sort of a good indicator or the max amount of leasing you can get done in any quarter absent any big tech or larger tenant leasing? And as sort of a parallel to that, I mean what is your expectation for when a lot of these large tenants come back to leasing markets?
Victor Coleman: Let me sort of start with — Dylan, I would be cautious to sort of look at saying like we’ve maxed out at a 500,000 square foot number. I think there was going to be ebbs and flows of larger tenants coming in the marketplace and going out. But at the end of the day, I think what’s consistent is as Art just said quarter after quarter is the pipeline is consistent. I mean we did more leasing this quarter than we anticipated and it looks like the quarter we’re in right now looks very good with startup of some renewals that we’re working on an existing deals that we’re working on and the stuff we signed. So I wouldn’t sort of lump it in to say, 0.5 million square feet. Therefore, it’s close to 2 million a year, that’s what it is.
I think it’s going to ebb and flow. And in terms of the larger tenants, it’s starting to open up in the city clearly, as we’ve talked about with us and some of our peers and with AI, and it’s starting to open up in Seattle. Clearly, Seattle has had a very strong run in Bellevue. Those markets go back and forth, and they have for decades, right? Bellevue gets hot, then the city gets hot, then Bellevue gets hot. And so we feel that with the amount of product that’s being leased in Bellevue, it will rebound back now to the city because the alternatives are equally as good from quality real estate for some of the new stuff that’s in the marketplace. But the availability is there that you’re not going to have as much in Bellevue. So I wouldn’t make a blanket statement on that.
I do feel comfortable that larger tenants are coming back. It is taking time, but they are coming back. Art?
Arthur Suazo: You nailed it, Victor.
Operator: Our next question comes from Camille Bonnel of Bank of America.
Camille Bonnel: I have two questions on the office side. I saw the team signed a lease to a biotech tenant. Just curious if you’re seeing any benefits from these life science companies trade down for certain functions from higher priced spaces in the Bay Area?
Arthur Suazo: Yes. I think over the last 2 quarters, we’ve seen — by the way, this is the largest, right, 36,000 square feet. We’ve seen an uptick in biotech. I would say that there’s more than 2 or 3 biotech tenants out there, again, of which this is the largest. I would suppose the benefit of it is it was almost a 50% mark. So they’re certainly willing to pay up.
Camille Bonnel: And are you seeing a pickup in — of those tenants in your pipeline?
Arthur Suazo: In the current pipeline, no. In our tours, in our tour activity, which I’ve also mentioned is an elevated numbers, yes, we have seen it in the early stage tour activity and mostly on the Peninsula.
Camille Bonnel: Okay. And on my second question, so not accounting for your ownership, but looking at the occupancy detail you provided in the supplemental, about 1/4 of the portfolio’s vacancy is about below 70%. So could you comment on the touring activity you’re seeing for these buildings specifically? And are any of these in your disposal bucket? Or what are your business plans for these buildings? Just trying to get a sense of the strategy there?
Arthur Suazo: Yes, I’ll answer the first part of that question, which is the tour activity that I’ve mentioned is really, it applies to all markets, in all buildings. I mean it’s really consistent. That’s the good news, right? It’s not just heavily weighted into the Valley or Vancouver. It’s literally — the numbers are consistent throughout our entire portfolio, again, which is a leading indicator of what we’ll be negotiating on.
Victor Coleman: Yes, Camille, It’s Victor. I think looking at the list, I think only one asset is in the disposition of that vacancy that you’re referring to.
Operator: Our next question comes from Rich Anderson of Wedbush Securities.
Richard Anderson: Stating the obvious full ownership of 1455 creates optionality for you. Is it at least a possibility the ultimate goal here is to get it leased up and sold? Or do you have a long-term view of ownership, for sure?
Victor Coleman: I think, Rich, we’ve got lots of options, and yes, and yes.
