Q4 2019 Earnings Call
Greetings and welcome to Hudson Pacific properties fourth quarter 2019 earnings Conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance or on the conference. Please press star there on your telephone keypad.
Please note. This conference is being recorded I would now like to turn the conference over to your host Laura Campbell Senior Vice President Investor Relations and marketing. Please go ahead.
Thank you operator, good morning, everyone welcome to Hudson Pacific properties fourth quarter, 20, Nike earnings call.
Earlier today, our press releases supplemental were filed an 8-K with the FCC. Both are now available on the Investor section of our website Hudson Pacific properties Dot Com audio webcast of this call will be available for replay by thought over the next week and on the Investor section of our website.
During this call we will discuss non-GAAP financial measures, which are reconciled to GAAP financial results in our press releases supplemental we will also be making forward looking statements based on our current expectation, which are subject to risks and uncertainties discussed in our FTC filings actual events could cause our results to differ materially from these forward looking statements, which we.
We undertake no duty to update.
With that I'd like to welcome Victor Coleman, our chairman and CEO, Mark Wallace, our President I heard your Marianne our CFO Mr. will give an overview of our performance Mark will discuss the same trends in our markets.
It will touch on financial highlights note. They will be joined by other senior management during the Q and a portion of our call Victor Thanks, Laura Hello, everyone and welcome to our fourth quarter 2019 call.
The fourth quarter rounded out another very strong year fraught specifics first lets touch on our 2019 financial and operating highlights we grew up AFFO per diluted share excluding specific items by 9.1% to $2.03 and achieve same store and studio cash NOI growth.
Six and a half <unk> and 10.7% respectively.
We saw in more than 25 million square feet of office leases with GAAP and cash rent spreads of 37% and 23% respectively. And this included foreign 35000 square feet in the fourth quarter, GAAP and cash rent spreads are 41% and 24% respectively.
Fourth quarter actually also reflects an 85000 square foot lease with Google Foothill Research Center in Palo Alto, bringing that asset to 100% leased and 71000 square foot lease with shopify.
Our deal with Shopify back filled two thirds of that former Deloitte space. It Bentall center at a 48% Mark to market. This will be Shopify is first permit office space in Vancouver, as they intend to move.
Thousand new hires into that space reinforcing our investment thesis regarding downtown Vancouver's draw for innovative companies. We're now leases to backfill the balance of the 90000 square feet Deloitte space with additional tech tenants.
Our stabilized portfolio lease percentage ended the year up 100 basis points at 96.4% and our in service portfolio.
Was up 210 basis points to 95.1% even more impressive we achieved this meaningful increase in lease percentage with over 1.2 million square feet or 9% of our in service office portfolio expiring in 2019 as of the ended last year year over year or same store studio response.
Got it was up 64 basis points to 92.3% with approximately 7% growth in rents to $41 per square foot. We continue to drive about 50% of our hbr from long term leases, providing more stable cash flow with continued potential for upside.
As for.
Active value creation pipeline, we delivered two projects during 2019 totaling over 400000 square feet in Prime Los Angeles markets, both were 100% pre leased and once stabilized.
They will collectively contribute approximately 26 million of cash NOI annually.
These include our state of the art Epic project in Hollywood, which we delivered a netflix at the start of the fourth quarter that project was fully pre lease 14 months prior to completion.
But its design from infrastructure to amenities sustainability attributes sets the standard for what the office of the future can and will be in the fourth quarter. We also commenced construction on our groundbreaking 584000 square foot one west side mall to creative office conversion in West Los Angeles, which you recall, we fully pre.
At least to Google just nine months after purchasing the asset.
[noise] and a full three years prior to completion, including Harlow, which will completed the second quarter. This year, we were and where we have very good leasing activity. We will have a 690000 square feet under construction in Boston in Los Angeles, which has an aggregate 85% preleased.
Our pipeline a future development opportunities in Los Angeles is unparalleled.
We could add another 1.3 million square feet of office space, two thirds of wishes uniquely situated on the studio lots in Hollywood the balance in Prime West Los Angeles, We're moving forward with entitlements for about 420000 square feet at Sunset Gower, which if it all goes well we could be receiving it by the end of this year.
In terms of capital recycling for 19, we sold our noncore campus Center asset MLP is we also added a million square feet of development opportunities in our portfolio, which will enable us to meaningful meaningfully grow our footprint along with Cascadia innovation innovation quarter. This will include our joint venture purchase with Blackstone for Ben.
Until center in Vancouver, which in addition to the 1.5 million square foot existing office repositioning affords us an adjacent approximately 450000 square foot development opportunity, which is one of the last sites in prime downtown Vancouver. We also added a 538000, Washington in 1000 side adjacent to a nearly 2 billion.
Invention center expansion and Seattle's Denny triangle rounding out our downtown <unk> downtown portfolio cost trend in that neighborhood and pioneer square.
No I chain, we also made great strides in formalizing in disclosing our E.S.G. initiatives, we issued our inaugural sustainability report hired <unk> head of sustainability, and social mobile and social impact received multiple accolades for our accomplishments in U.S.G. with recognition, including groceries, five star and Green Star destination.
Energy Star partner, the year Green lease leader and they read leader in Light Award.
During the process of refining and fully integrating our corporate responsibility platform. So that remains authentic to who we are in supports and strengthens every aspect of our business with much more to come on this in 2020 now I'm going to turn it over a mark for further details on our leasing and our markets. Thanks, Victor our West Coast Mark.
It's performed exceptionally in 2019 fueled by continued expansion of leading an innovative companies an attack and media industries like.
Last year media companies Bad 121 billion to produce original content. The top five producers Disney Comcast Netflix Viacom CBS and ATM T are all active Sunset studios clients and comprised over 70% of that spend Facebook Amazon Apple and go.
Goal.
Which are just ramping up on content production comprised only 13% increase production of course continues to drive very strong demand for soundstages in production space, Yeah inventory remained stagnant with stages with stages in Los Angeles, Vancouver, New York in London, All essentially fully occupied 20.
19 was also another record year for VC investment with nearly 127 billion investing in the U.S. with 40% of those dollars directed towards the west coast and our markets.
There were also a record number of unicorn birth or companies that achieved valuations of 1 billion plus more than two thirds or over 70, we're in the U.S.
Hi, the IPO market remains open with a surge in mature companies ready and able to exit and with another 76 billion in fund raising last year, we expect VC capital flows along with corporate venture in R&D to fuel continued growth.
Big picture at year end, our markets had vacancy rates at record lows. Most in the very low to mid single digits further contributing to a supply shortage shortage, particularly for a large blocks of space.
Robust demand resulted in both significant positive net absorption in rent growth year over year with Submarkets like downtown Vancouver, and North San Jose, even posting rent growth in the high teens supply remains in check for the foreseeable future with under construction project, 60% to 75% pre leased and year to.
From deliveries fully preleased dust aside from any macro issues and the U.S. and or globally, and we would expect market fundamentals to remain favorable into 2020.
Specific to the fourth quarter market conditions were very tight with minimal fluctuations in vacancy rent and absorption in Los Angeles class a office in West L.A. in Hollywood remained in high demand Hollywood vacancy was up 10 basis points, I mean, sorry, 100 basis points to 7.4% and.
Since were stable at $61 per square foot was essentially flat absorption.
It's still a vacancy dropped 40 basis points to 10.1% and rents rose by about 4% to $64 per square foot with 140000 square feet a positive net absorption in San Francisco class, a vacancy tightened 20 basis points to record lows of 2.5% with rents reaching $92 per.
Sure square foot and about 89000 square feet, a positive net absorption along the peninsula class a vacancy remained stable at 7.4% and rents increased 1.5% to $92 per square foot with 109000 square feet of positive net absorption.
In North San Jose.
Class a vacancy dropped 110 basis points to 9.7% in rents were stable at $50 per square foot 70000 square feet, a positive net absorption absorption in downtown Seattle class, a vacancy dropped 30 basis points to 6% with rents up nearly 6% to $50 per square foot.
And positive net absorption of 277000 square feet, finally, and Dan downtown Vancouver Class a vacancy was stable at just 2.6%.
With rent up 3.5% to $64 per square foot and about 10000 square feet of positive net absorption.
We have very little in the way of expirations next year with only about 860000 square feet Rowley.
Roughly 6% of our portfolio and we already have coverage that is lease deals and leases Ela wiser proposals on approximately 45% of that space. Our two largest expirations are both approximately 40000 square feet, one with wells Fargo at Skyway land, either redwood shores and the other with J.
At 60, 922 Hollywood, we have good activity on both spaces already.
Collectively our 2020 expirations are 17% below market and are in place leases are 14% below market, providing us with the ability to continue to meaningfully drive NOI growth throughout our in service office portfolio.
Finally, I'll briefly comment on the potential repeal of prop 13 tax protection for commercial properties also known as the split rolled measure while split roll may make it onto the 2020 ballot. We believe as do our advisors that we will reduce that it will receive significant opposition and is light. Unlike.
Lead a pass we are however, proactively monitoring conversations around.
Around its passage.
As we've stated consistently consistently due to a lack of visibility around timing of in process for implementation as well as the natural evolution of our portfolio and tenancy. It remains impossible to accurately quantify the measures potential impact on operating income for individual assets should we received newer.
Information or circumstances change, we will be sure to provide an update however.
But a higher level. It is important to note that Hudson Pacific is very well situated relative to most property owners given that much of our portfolio has been recently reassessed for example, based on publicly available data the weighted value of our California assets.
Is eight years younger from a reassessment perspective than our West Coast office peers.
We will therefore in fact be at a competitive advantage should split will pass given that all property owners will be incentivized to preserve margins by increasing rents land lords like ourselves with less reassessment expense impact will be better able to preserve those margins.
As I turn the call over there to her root for financial highlights I'd like to say a few words about her roots recent promotion from chief accounting to Chief Financial Officer as many of you know from first hand experience. A route has commendable. He led all accounting functions since our inception and been instrumental to.
Our growth as we've expanded our access to capital markets I speak for all of us in congratulating or route on his well deserved promotion, our finance and accounting practices are in great hands.
Thank you very much mark for the kind words and support in the fourth quarter, we generate FFO, excluding specified items, a 55 cents per diluted share compared to 49 cents per diluted share a year ago.
Or a 12.2% quarter quarter increase specified items in the fourth quarter consisted of transaction related expenses of two month 200000, or zero cents per diluted share and onetime debt extinguishment costs of 600000.
Our zero cents per diluted share compared to specified items, consisting of transaction related expenses of 300000 or zero cents per diluted share and lease termination revenue of 3 million or two cents per diluted share a year ago.
In the fourth quarter and why at 35 seems to our office properties increased 6.8% on a GAAP basis, and 10% on a cash basis for 12 months 2019.
Our same store office NOI increased 9% on a GAAP basis, and 6.5% on a cash basis, our fourth quarter same store studio and Hawaii decreased by 3.1% on a GAAP basis, and 1% on a cash basis, primarily due to a onetime property tax escaped assessment at our Sunset Bronson related.
Since our Bronson property related historical periods full year 2019 same store studio anti increased 9.2% on a GAAP basis, and 10.7% on a cash basis.
Through capital recycling and refinancings.
We further strengthened our balance sheet and fynineteen ending the year with over 800 million of total liquidity note that this amount excludes.
Project specific financing such as our recently completed one west site construction loan.
We successfully issued 900 million of public bonds.
Three separate offerings and recast 235 million studio loan into a revolving facility, which has now secured by sunset Bronson icon and Q at lower rates with more favorable terms subsequently in the fourth quarter.
Created by Moody's from BW, three two BW too.
With a stable outlook, reflecting both the continued strength of our balance sheet and the high quality of our management portfolio end markets leverage remains low at 33% of market cap only 50% of our debt secured and only 6% this floating rate.
Other than our 65 million dollar loan secured by met Parc, North, which we intend to pay off when available for prepayment in the second quarter of this year, we have no material maturities until 2022.
Turning to guidance, we are providing full year 2000, 20-F, AFFO guidance and the range of 2014 cents to $2 in 22 cents per diluted share excluding specified items.
You'll note that our official guidance midpoint represents a 7.4% year over year FFO growth for 2020.
Our guidance includes same store cash NOI growth assumptions of 4.5% to 5.5% for office and 5% to 6% for studios. In addition, we expect to derive cash NOI growth from our 10 non same store office properties in excess of 50% as a reminder, our guidance always it.
The impact of unannounced or specs of acquisitions dispositions connect financings and capital markets activity and now I'll turn the call back to Victor. Thanks Route Thanks, Mark and thanks Laura.
Hudson Pacific is well positioned for a very successful 2020, 510 conditions, along the west coast and particularly in our markets remain incredibly tight.
We've already made great progress on our more than limited Twoq 2020 office lease expirations, which are significantly below market, our active value creation pipeline of office development or redevelopment projects is substantially preleased and as a root discussed our balance sheet has never been stronger we have ample liquidity.
To run and grow our businesses as always I'd like to thank the entire had specific properties team for their passion dedication and exceptional work each and every quarter and to everyone listening. We appreciate your support of Hudson Pacific properties, and operator with that let's open the line for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tomo indicate your line is in the question Q.
You May press star to if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before press in the Starkey one moment. Please what we poll for questions.
My first question comes from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you.
I guess can you start by just talking about where you think rank growth will look like in your markets. This year across the major markets.
Course.
So, let's just start to look back at what we sort of looked at last year versus versus what we predicted versus what happened and then we'll sort of tell you what we think about.
[music].
For 2020, so our predictions last year were 16% in Los Angeles, and they came out at about 7.5% servers. So you're right in the middle of that which was which was good.
We're thinking that L.A.
We would be about 4% to 5% for a for 20 in San Francisco, we predicted 10%.
Actually it was about 11% through third quarter through third quarter, but it down and so the year ended up about seven so we are off there we're looking somewhere around 3% for for San Francisco next year is what is what our guys are telling us. The peninsula. We thought was sort of five plus percent. It ended up being like six to eight we.
We kind of think that four to six is that range again next year in Seattle, We thought it was going be six to eight it was seven.
And we certainly think it's maybe about five to six and Vancouver. We thought was seven we were way off there was 17, and we think it's going to be closer to 10 to 12, so that sort of gives you a parameters as to where we think the year will end up in the 20 Jamie.
Okay, and with San Francisco tightening, so much and proppant eliminated it sounds like property can limit even more do you think that three why do you think people are saying such a pullback in rent growth there.
I think you're being conservative I do think there is been a little bit of increase in sublease space, which is good theres still is not a lot of space in the marketplace I.
I mean, if any size.
But you've seen some sublease space come to market, which is going I think help.
The tightening that's currently in place today.
And I think our guys.
Yes, I am not pulling these numbers out there we go to our our team and where they think they're seeing deals and we have very little role. So we're not we're not going to see the impact as much.
But at the end of the day I just think our guys are being a little conservative as to what's been going on but that seems to be the answer.
Okay.
And then as you look ahead on the investment pipeline I mean, what are your thoughts on potential acquisitions. This year, especially in the studio business and your appetite to move beyond any of your current market.
So you know as we said in her prepared remarks, you know we've got we're very well positioned our balance sheet, we've got a lot of capacity.
We are looking at various deals both studio deals and core office deals and value add office deals and all of our markets.
I think our appetite its consistent to what it's been in the path.
And I'm excited about some of the prospect deals that were looking at right now that should probably be no that is a little stronger we've got a couple of our off market deals. We've got a couple of marketed deals, but my guess is by mid year, we'll have some appetite that hopefully will be executing on some new deals.
Ted in your core market does that mean, you're not really looking beyond your core markets. Your current markets.
On the office side, we're definitely not looking beyond our core markets.
Okay.
It is potentially.
Yes, well, we've always talked about that.
Okay.
Alright, thank you.
Thanks, Jamie.
Our next question comes from Manny Korchman.
Please proceed with your question.
Hey, everyone.
On one west side it looks like your yield on that project came down a little bit but costs remained the same and obviously you sign at least Google So what would drive the yield downward without an increase in costs.
Yeah.
Also to take the topline and then in the market getting into the details. So so listen when we when we gave the initial yields you know our construction was not from at the end of the day. We you know we did it out and there's a tremendous amount contingency in that number so I think you'd be into the date some of the costs have gone up slightly.
The more important aspect of the cost of marks a major details we had negotiated to build a parking structure.
With our new Ari eight conversation with with the neighbor and so were contributing to that which was not was it was an unforeseen costs that we're going be putting to play there, but it's not going to affect the economics of the deal. The NOI right. That's a perfect segue. Many a few knowing that the the asset is fully pre lease so that we have.
Pretty strong line of sight on the and Hawaii that really is a component that didnt change. It's just that as we looked at where the midpoint was falling on that range of cost that we continue to show the midpoint was starting to feel a little light now not by a lot. So let me just run the math if you if you.
You lower the midpoint on the yield by the 25 basis points, knowing the Deanna why is the same it implies that the mid point, if you will order or the cost is no longer at the 525 level. It's implied it more like the 540 level, so call it $15 million or so higher.
And Bob but it's still the 540 still falls within the range. So we didn't change the range. It's just so we wanted to give ourselves some room at the midpoint on the yield that's the essence of it now as Victor was alluding to we could easily still come out within the old range on the yield right.
Right because if we don't spend every dollar contingency and so forth will easily fall back within the old range. You just wanted to give ourselves a little bit a room in light of the fact of the costs were a tick higher [noise].
Got it thanks.
When you bought Bentall I thought that part of the plan there was to do a big repositioning of the retail space, but not sure you've talked about it since could you give us an update on what's happening there maybe timing in costs.
Yeah, we don't have costs, but it's an absolute plan. We are engaged architecture design right now for a complete redo your absolutely accurate of the retail it's going to be smashing how it's come out right. Now. The initial design is good to be more than impressive I think it's going to view I.
A very unique repositioning because what we're attempting to do is take all the ground floor retail and bring it up to the main level and then connect all the building buildings, both outside and inside and so all new space will be all leasable space on that basis higher yield on that space, because it's going to be it's going to be street level.
This is below grade and the plan will be for us to maintain the below grade for access to the transit system and maybe some bikes storage and some open building storage. So we haven't run the numbers on the economics as to how the rent will increase but it's going to be an impressive development.
And to reposition and it's going to come in line with Us building.
Proximately half a million feet, because we're designing the same time and how that's going to connect all with the retail. So it's all part of the plan, but we don't have a cost yet.
When we do I promise you many you'll be the first to know.
Great. Thanks, guys.
Thank you.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning out there.
Just a few a few quick questions.
We're just going back to the tax on on Sunset Bronson odd.
If you can go through a little bit of the of the tax reset on that Yo and it sounded like it it's not.
Just a prop 13, it sounded like it something older. So maybe you could just go through that and do you think that there are other buildings in your portfolio that could be subject to a similar yes reassessment.
Sure.
The adjustment for the studios relates back to the IPO.
And the back and forth, we've had with the assessors office too.
Got a number so we don't.
We don't think that number where we are disputing that number but you know until we have a resolution it comes in.
As far as if there are other properties.
More likely than not if there are other adjustments there will be going the other way, meaning they will be.
Last month, Reassessments going down as opposed to up.
Because of the accounting, we're supposed to take the higher of the too in this case, we didnt have.
Inside in the past for this amount and now we do so but the skin highlights the problem with.
Prop 13 in general which is this is an assessment going back.
Almost 10 years, yet it's only now being.
Resolve on the cities and or the count that's what end and I'm not sure how they'll do it with everything as opposed suggest a change of ownership.
Okay, and then on that same line to what you said earlier in the call I think Mark said it on the portfolio age all the taxes are sort of pass through right either it's on a triple net basis or on a gross over the base year basis. So wouldn't any tax increase whether it's at sunset Gower or any of the other properties most of that would flow to the tenants.
As opposed to as opposed to HBP.
Well no not from a historic recapture point of view right. I mean, it's possible you could go back under leases, where you can do a cam reconciliation for their historic period.
Maybe some of this tax increase as it relates to Bronson, we can do that on some of it but and so yes is the answer to some extent, but having in the case in these unusual instances, where you're getting hit for us and escaped assessment dating back a decade.
Let's get it gets understandably harder to expect that you're going to be able to successfully go back to all that tendency in recovery at all and we'll see but for now we're reflecting the higher operating expense and we'll see what we can you on recovery by the way I think al. It's just it's worth quantifying this a little bit because I think it's getting a little more.
Because the necessary it is through the on either on a fourth quarter year over year basis, we showed a negative 1% decline in same store growth, but the dollar amount that we're talking about property taxes flowing through is $960000.
On a one time only basis and if that number hadn't kid in that particular quarter the year over year Tas difference would have been instead of negative 1%. It would have been almost 9% positive same store and so it takes the point about the studios that I think everyone has to keep in mind when they think of these percentage changes is that.
Denominator is so little that it doesn't take hardly anything on an absolute dollar basis to really move the needle.
Significantly and then one more item.
In terms of the Reassessments in general.
At the studios for the most part there is no recovery the studios are different than the office.
We do have some recovery the studio as it relates to Bronson for the most part there is no recovery and for the office properties, you're right. There is a recovery component and the that we would get if there was a reassessment, but again if it's every assessment on a go forward basis.
Yes, now be passes the tenants and we will pay only our share of any vacancy, but if it's on a historical basis. The biggest challenges if attends the longer in the building trying to go back and collected from a 10 thats not there as.
Pretty close impossible right. Okay and then the second question is on the capital you said at mid year to Jamies question midyear, you may be looking to acquire some things.
Is there any yes match funding so should we think about dispositions offset or how do we think about capital plans, whether its buttons for development spend or funds to purchase for acquisition any this coming from dispositions or all this would be sort of free cash flow line of credit new new financing et cetera.
Yeah.
I mean.
I was just as it goes we don't we said this before there is no assets on any material substance that we're looking to dispose of so everything is is that we're looking to do going forward will be on free cash flow in and.
Our opportunities with what we currently have in the balance sheet.
And we have plenty of liquidity as we stated earlier.
Okay.
Great. Thank you.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question is from Rich Anderson with SMBC. Please proceed with your question. Thanks, Good morning out there so with.
Relatively low expirations. This year do you expect us to you know, perhaps proactively look too early renew or do you think you'll have some tenants come to you.
And try to cut the deal earlier, if they're not expiring until next year thereafter.
Hi, Rich is art, yes, I mean, thats always the case, where we proactively looking beyond the current year, we're even looking into 22 on some of those expirations for the exact same reasons you just mentioned right now so we've got about 850000 square feet expiring. This year, we've got about 45% coverage on those and if you look into 21, we've already got about.
20 kind of 20% coverage on those expirations.
Cheaply the larger ones.
And is that coverage like that's about where it should be about this early in the year or you kind of way ahead of schedule.
Yes, I think we're ahead, we're ahead of schedule for sure Okay.
I asked this question last quarter, and maybe just rephrase it and see if there's an update but on on the Capex line tea and maintenance Capex, where do you see the numbers falling in 2020 versus 2019 is do you see a a trend down and your capex spend or is it about equivalent to last year.
Thanks, Rich so the way in terms of true capital that's not the issue here is the biggest driver of that spend is ti dollars and that's directly relate to either the leasing activity that we generate or the timing of the tenant reimbursements, which is very challenging too.
Got it.
Being said.
It's hard to really focus on one particular quarter.
In that sense and so the way we see it is on an average basis, we do see that coming down over the next roughly two years.
Depending on the timing of the tenant activity and the tenant reimbursements and maybe lumpy over that time, but we definitely see it coming down as you know.
Indicated by our lack of.
Expirations coming up and a lot of the.
Activity that is.
It is driving the capital is also going to generates.
Revenues that aren't reflected right now because it's all front loaded so you combine the capital spend in the future would the revenue generated from those leases and the burn off of the free rent of those leases the impact to AFFO, which is really the more important point is going to be very.
Very impressive and thats going to be large it's just the timing issue one that Ti is gonna be spent okay. Thank you last question for me.
Look back at your your.
Fourth quarter 2018 outlook.
For 19, and you guided same store NOI.
Office growth it 3% you did 9.1% so like night and day kind of results versus.
Expectations going in so I'm curious how youve, how you feel about your outlook for 2020 do you do you sense not that you're you know sugar or sandbagging, but do you sense is similar sort of dynamics or play today, whereas you set your guidance, but that's not so much.
A target as much as you've gotta it a bare minimum for this year is that a good way to think about it.
No.
I mean I appreciate the point and we were thrilled as anyone that we were able to increase our midpoint on same store and that we were even able to exceed it but when we go in a rich you know we go in with as much of a sort of a reasonable and transparent number as we.
We've got and so I.
I think our mid point coincides with where we're modeling out or number including our FFO and everything at all it all hangs together I would mention a couple of things out because I think it's really important to kind of keep track of what last year's relates to and what there. This year as relates to the last year was 31 assets.
Generated.
That was that was working off of the denominator, a a 2018 and align number of $280 million.
We grew that by the time of year was over by.
On the thus the final 6.5% this year that same store is no longer 31 assets its 39 assets and the starting and Hawaii is 100 more than $100 million higher on the denominator is it's $384 million and by the way we ended.
The year on those on that same store portfolio, almost 96% leased so and with very little role. So we're still generating a heck of a lot of then why growth.
It's just we're generating it against a much bigger denominator and with without that much expiration this year to work with or without much net absorption to work with so it's still a powerful engine event or why growth. It's just as we get bigger and bigger in the in the underlying starting point that's increasingly higher.
You can imagine it's that much harder to generate very very high same store percentage growth.
Perfect. Thanks very much.
Yes.
Our next question comes from Omotayo Okusanya with Mizuho. Please proceed with your question.
Yes, I just wanted to follow up firstly on richest point I.
I think there's a part of the of the HBP story about.
Again, lower recurring Capex better AFFO per share growth going forward in a better FHLB dividend coverage going forward.
Just with the 2020 guidance, it's it's a little bit hard to kind of quantify what that could potentially being.
And again I understand your comments about you know, it's all going to be lumpy on its kind of a two year.
I look forward, but is there any kind of.
Additional didn't guide into additional direction, you can kind of give us just about 2020 in particular are around that issue. Yeah. I mean, just to sort of piggyback off of what Heroux Hussein.
It's important and I know, there's a desire to really want to hone in on 2020, and that's what we just get guided to but as it relates to AFFO and recurring capex spend including T.I., There's a real danger in trying to hone in.
Within I'd say, a 12 month window.
We think it's far more productive to look at say eight or even 12 months out and if you looked at eight months and you kind of a normalized if you will sorry quarters to sorry, eight quarters out to you. So say two years out we are at a level, we think onyx average quarterly basis over that period Thats.
In line, if not maybe a tick lower than where we ended on a quarterly run rate basis for 2019. Meanwhile, FFO is growing in you know a very quickly I mean, even this year, we posted 7.4% year over year AFFO growth than we have all the engines to continue to see.
A lot of FFO growth.
Beyond 2020 into 21, and 22 and as a result of that on by the time, you sort of look at an average.
Our quarterly run rate of all recurring cap acts for 20 and 21 in comparison to 2019, we think there the f. AFFO potential growth relative to 2019 is in the mid 30% range or said another way if you average out the amount of recurring capex over the next day quarters.
We should see something like 13, 12% to 13% average AFFO growth per annum for that window. If you stretch that out another four quarters. It gets really.
Exceptional.
Because not only then or we've seen a slight decline in new overall recurring capex into 2022 average out over those 12 quarters are we're seeing an average decline. We're now FFO is really really moved and you're seeing something like mid.
60% AFFO growth.
Averaged out for the 12 ensuing quarters compared to 2019 or said another way more than 20% per annum AFFO growth over the next 12 quarters and the driver that as a combination of the drop in the AFFO, our sorry drop and the capital spend but also the burn off of a lot of upfront free rent.
And the Mark to market that we've been posting for a while finally being reflected.
Cash NOI.
Okay, that's actually very helpful context, I appreciate that.
Then the student my second question. The studios business again, just trying to understand a little bit more about changing dynamics in that business are you kind of drive higher percentages of of leases that are now longer term leases and then also around a lot of things happening, but net flicks kind of doing more into movie side are getting all these Oscar nomination.
And things like that is that fundamentally changing.
Demand for that business utilization of space in that business and how you kind of taking advantage of that if that if that's the case.
Well listen I mean, we're taking advantage of because because the growth in the capital dollars that is going into the content.
Is growing on an exponential amount and so.
Business is just to be inception, even though I think the markets are starting to understand how much capital there you're talking about the growth in that business with all not networks with every single one of them.
The 100 billion dollar range right now new new content Thats coming across the board. So we as the largest independent owners of of studios are going to capitalize on that both as we've said in the past with the existing tenants. We currently have them long and mid term leases once we've alluded to enable ourselves flexibility for.
The short term leases to capitalize on mark to market movements.
We're very we're very bullish on that business, we're very bullish on the plan that we put in place 10 years ago, and I think it's proven way beyond anybodys expectations.
In the market says to as to how good it has been and now because it's going to be going forward.
Okay.
Thank you.
Thank you.
Our next question is from Dave Rodgers with Baird. Please proceed with your question.
Yeah, good morning out there I.
I got a couple of question then I'll just throw them all as you're right away. I guess first is spreads were really good in the fourth quarter overall economic limit there were a little bit lower.
Ben.
Can you update us on that and then the second question Harlow any update on.
Leasing timing.
That begin to expense in the second quarter 21.
Last question I guess would be just on the 230000 square feet of leases that expire in the last day of the year is that in your physical occupancy and all those go vacant. Thank you I appreciate it.
Okay. So, let's let's let's take the easy one first.
And let our jump in mobile talk about Harlow first before we talk about the spend and then we will talk about the though the lease up a little bit Lisa first for both on the Harlow side, we've got very strong leasing activity.
We are looking at end of second quarter.
Okay, hopefully hopefully have some meaningful comments as to who we're talking to as I've mentioned in the past.
There's very little new construction in Los Angeles, we've held off for a single building use your we've put off single floor users, we're going to hold that party line until we think otherwise not worried at all about the current yield returns in rates candidly I think I think we're probably.
The low on rate because we've seen from our initial underwriting that it looks it looks better but we're holding the line on that right now, adding and Ah. Yes. The answer is yes, if we can get somebody in the space.
Bye Bye bye a lease signed by let's say third quarter. It's a three to four months, maybe four to five month build out I think we expense should kick in end of first quarter, beginning second quarter of a of 21, yeah Victor's right I mean, so the activity has been consistent we've got we're in discussions right.
Now and in negotiations about for users to which are for the entire building. The rest are for kind of half the building.
So it remains stable and we'll just continue negotiating.
Right up until it delivers at the end of second quarter.
Yeah, I've lost track a little bit of the crushing looking to add one more thing about the Harlow I think you ask you know is going to start.
Expensing the answer as if it is.
If it is least yes, the accounting rules allow you to keep capitalizing up to one year. After the completion of development unless it's operating so I'm not sure if that answers your question, but that's how it works I think on the leasing cost question, then we're going to drill down, but if but I believe if I'm focused.
On the right number here, you're looking at the three month, maybe annual blended.
Hi, and commission cost and which is largely driven off as you can tell the new lease component of it and I think thats a direct byproduct of the biggest lease we signed in the quarter, which is.
Google right, which would've had not only exceptionally high rents, but high T.I.s that would so there is that as you might expect when you're in one of the best markets in the.
In the country getting among yeah, its Google Yeah, getting the best rents in the kind of among the best rents in the country. There is that sort of correlation that we're getting no. We're willing to give a bit better of the say an allowance right because they are highly amenitized in their space, So you're going to get up slightly higher per square foot and mouth, but again it goes hand in hand, with the fact that.
I've got 114 of flight or whatever and Rick.
So I think that's what you're seeing there.
Let the last point you had mentioned year end the preponderance of the year end vacancy was dilemma and that is vacant space.
So that carry through there's 115000 feet as a single user.
Great. Thank you.
Thanks, Dave.
Weve reached the end of the question and answer session I'd now like to turn the call back over the Victor Coleman for closing comments. Thank you so much for participating in our fourth quarter 19 call. We look forward to see you all and begin to you all the ended this quarter.
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