Q1 2020 Earnings Call
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Thank you operator, good morning, everyone and welcome to Hudson Pacific properties first quarter 2020 earnings call.
Earlier today, our press release and supplemental were filed on an 8-K with yes, you see Oh, sorry, all available on the Investor section of our website Hudson Pacific properties Dot com.
Audio webcast of this call will also be available for replay by phone over the next week and on the Investor section of our website.
During this call will discuss non-GAAP financial measures, which are reconciled to GAAP financial results in our press release and supplemental well also be making forward looking statements based on our current expectations. These statements are subject to risks and uncertainties discuss our FTC filings, including various ongoing developments regarding the cobot 19 pandemic.
Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update.
Moreover, today, we have added certain disclosure specifically in response to the Fccs direction on special disclosure of changes in our business prompted Bayko that 19, we do not expect to maintain this level of disclosure when normal business operations for them.
With that I'd like to welcome Victor Coleman, our chairman and CEO, Mark Wallace, our President Alex We believe our COO and CIO I heard your Marianne Rcs, though no. They will be joined by other senior management during the Q and a portion of our call Victor.
Thank you, Laura or everyone and welcome to our first quarter Twentytwenty cool.
As we all know these are very unprecedented times in our Hearts go out every one impacted by Kobin 19, and we're grateful for all the frontline workers, who are enabling us to say safe and healthy and to keep doing what we do albeit remotely for many of us I.
I like to start off by saying the entire Hudson Pacific team has done an absolutely phenomenal job over the last several weeks, we came off a very solid first quarter for our company and our markets and will cover all those details are of course the call. Since then every team in every vertical whether its construction operations leasing.
There are other has swiftly adapted to the new realities, and we're well positioned and he really await the imminent reopening along the west coast.
I am incredibly proud of where we sit today as a company and what we built our leadership team second to none.
Under any and every circumstances, our employees tenants and shareholders benefit from their extensive expertise there resourcefulness and their passion for innovation and we've always maintained a strong balance sheet and excellent credit access and today, we have over a billion dollars liquidity our disposal.
We've invested capital wisely to modernize transform and build a premier portfolio in the countries, most dynamic and resilient office markets and we have high quality tenants, who are themselves innovators in adapters and many of our tech and media tenants like Google Netflix Amazon HBIO, and maybe see among others. They had to do quite well in the.
Current environment.
Further we had very little construction, which were substantially preleased fully funded development pipeline with limited remaining spent mark Alex on her route or going to provide further context on all the above later in the call.
You're headed by or Emergency response task force, which was put in place on March 2nd a multi disciplinary team of senior executives from operations Finance leasing HR I.T. communications and legal we successfully rolled out a business continuity plan across the organization most of our employees have been working.
From home since mid March and we're thankful to report that we are unaware of any cobot 19 cases, among our team to date, our properties remain open to operational and fully compliant with C. D C and D. C. D C guidelines I'd like to get a special recognition to our central onsite staff, our property managers engineers in janitorial.
Teams, they're doing a fantastic job.
Working and managing the day to day of or enhance safety protocols additional queens and proactive communications.
We're putting the finishing touches on a robust plan to enable our tencent employees to safely returned to work once stayed home orders are lifted and our reintegration program Leverages the expertise.
Both our own internal team and outside experts and we're focused on hygiene things like clean products and air filtering on health interventions like P.B.E. and testing, we're taking steps to ensure building access points common areas and onsite Americans are configured and properly managed to allow adequate social distancing and we're looking to variety.
Prop Tech solutions in collaboration with our partner at the venture from a fifth wall and taking in thinking about vendor management best practices for this new area, we've engaged leaving architects to incorporate the latest health and safety requirements and preferences into our design and best.
Practices.
Well exact timing for infantry Colombian implementation remains on clear and a variety across all of our markets will be ready to roll out. These initiatives seamlessly related Lee I've been asked a joint various local state and federal commute communities advising on best practices for opening up.
The economy and more specifically the commercial real estate sector I was particularly are by and have accepted a request from Merrill.
The married Los Angeles, Eric Our city to co chair the city's office in commercial working group I believe it's very important that we lender expertise, where we can especially during such extraordinary times to benefit the greater community and I have no doubt that my work with Mexico City. His administration other civic leaders will inform our path going forward.
Our markets throughout.
Before I turn the call over to Mark I'd like to mention that we recently released our 2019 corporate responsibility report.
Along with it we launched our new better blueprint DSP platform and over the last year, our VP of sustainability and social impact now we cheer work with our leadership team together feedback review data and why the leading institutions and local governments. Our goal was to build upon or existing initiatives to create an MSP program authentic.
Hudson Pacific and rooted in the issues that matter most to our businesses and stakeholders.
The concept at four are better blueprint comes from the understanding that the choices, we make reverberate in the lives of those who work play and live in and around our properties and ultimately our ability to thrive as a company is tied to the vibrancy and resiliency of these various communities and more broadly as an urban folk.
<unk> offers read our cities.
This process, we honed in on three foundational elements for focus areas sustainability health and equity in our 19 report, we outline programmatic highlights and 2025 goals for each of those I encourage all due to download the report from our website. It's a wonderful testament to our people our culture.
And our commitment and now more than import more importantly than ever to create a vibrant thriving urban space built for long term without them and turn it over to Mark.
Thanks Victor.
We're pleased to report that we've collected 93% of total April rents. This includes an impressive 95% of office rents and 95% of studio rents, which no doubt reflects the quality of these prospective tenants. We also collected 38% of storefront retail rents, which I will discuss more it alone.
With respect to the preponderance of uncollected rents, we've implemented a rent relief program.
Early in the pandemic as shelter in place requirements were beginning to disrupt many businesses.
Local jurisdictions throughout California in Washington adopted rent relief orders to protect commercial tenants.
Those orders afforded qualifying tenants essentially small and medium business is impacted by the pandemic with various protections with few exceptions. Our portfolio is covered by those governmental orders are program dovetails with the underlying rent relief orders typically by deferring near term rents, which really pay.
He meant requirements corresponding to local ordinances most of our deferrals have been about two months with repayment either before year end or amortized over there the remaining lease term.
To date, we granted deferrals equivalent to approximately $2.2 million or 4% of total April rents another approximately $1.3 million or 2.5% a total April rents remains in discussion for either payment or deferral.
In terms of the composition of deferred grants, we have granted about $600000 have deferrals to storefront retail tenants. These smaller shops cafes in restaurants have been hardest hit but only comprise a little over 3% of our total monthly grant.
Well there not a large portion of our revenue were nonetheless, working diligently to keep these types of retailers in place as they provide amenities to both local communities and our soon to be returning office tenants. Consequently, we expect our storefront retail to recover relatively quickly as office buildings become occupied again.
The ferry building marketplace. The company share of which comprises just 36000 square feet and represents 18% of storefront retail rents may take longer to return to normal operations.
We have granted about $1.1 million of deferrals to co working tenants.
We abated 250000 of April rent at Maxwell in connection with an opportunity to recapture some or all of that co working space. Meanwhile, we weren't paid rent at all other locations within our portfolio and has indicated it intends to continue doing so.
The company share of true co working throughout our entire portfolio comprises just 2.6% of our monthly rent with another 1.3% attributable to enterprise co working.
We believe there is a continued role for traditional co working space, albeit modified for social distancing, but enterprise clients may create opportunities for us to go direct should deferred rent become delinquent.
In terms of small and it's a small office in studio tenants, we have granted about $500000 of deferrals.
As previously only 160000 of studio rent has been deferred or or abated, which equates to just 0.3% of total April rats.
This highlights as we've always noted both the underlying credit of our studio tenants and the fact that a prolonged shutdowns impact is most likely to be seen in production related revenue not rent.
That aside we believe one shelter in place restrictions are lifted we'll see a normalization in production related revenue and perhaps even acceleration as studios look to catch up with content demand.
For example, we're hearing that productions May go from a typical four to five deal we schedule to a seven day, we schedule, which may enable us to recoup loss revenue over time.
We also expect Los Angeles, So we'll be the first major studio market to resume production, bringing a surge in demand for our stages, particularly as shows and films look to curtail travel for the foreseeable future.
In the first quarter. We also saw an immaterial pullback in non contractual parking revenue across garages in Seattle, San Francisco in Los Angeles, Peru will provide more color in connection with our guidance on the expected decline in non contractual and transient parking revenue stemming from the.
Various shelter in place measures.
One final word on tenant improvement delays jurisdictions across our portfolio adopted policies ranging from carve outs for construction as an essential service to more restrictive measures that temporarily delayed some of our tenant improvement projects thankfully only nine tenant improvement.
Projects involving approximately 41000 square feet all in northern California have experienced temporary delays. They may push back. These deliveries while it is too early to gauge the impact of such delays if any we expected to be relatively minor Fortunately, both San Francisco and Seattle This week.
Lifted said restricted measures so going forward tenant improvements in these markets along with those in Los Angeles should continue unabated and now I'll turn the call over to Alex.
Thanks, Mark we entered the current crisis I'm very strong putting across our west coast market, which had as of the ended the first quarter for the most part vacancy in the mid to low single digit record rent and limited available new supply are stabilizing in service office portfolios from 95.9% 94 point.
8% leased respectively.
It was on the heels of completing nearly 230000 square feet of new and renewal deals at very healthy GAAP and cash rent spreads of 31% and 20% respectively. We made additional progress on our 2020 expirations as of the ended the first quarter, we had only 560000 square feet or four point.
98% of our Hbr remaining to address with no material leases expiring through the balance of the year.
We have approximately 50% coverage that is deals in leases otherwise we're proposals on that stays and thus far the deal terms related to those conversations have not changed as of our fourth quarter earnings call in February our leasing pipeline was about 1 million square feet today, it's around 900000 square feet with.
And that interest diverse across industry size and market.
Only about 20% of those deals are officially unfold, while others are moving slowly.
We've seen towards resume, albeit just a few over the last week or so only a handful of deals have actually died the bigger tech companies were talking to are still moving forward with in process deals and trying to sort things out like density.
Typically those conversations revolve around how they can that fewer people on the same space, where they need to expand while most of our efforts right. Now we're focused on renewals were working on some new deals and expansion and we've signed over 130000 square feet of deals since activity first began to slow in early March again, we've seen no mature.
I will shift in terms that includes rate lease length, we're concessions.
We only have two under construction development and redevelopment project Harlow in one what side, which collectively total 690000 square feet. Both are in Los Angeles, where construction is deemed essential thus far there have been no material delays or supply chain issues and the projects are progressing with our onsite team.
It was wearing appropriate pp.
Our LOE is on track to deliver in late second quarter. This year, we recently and rather swiftly under the circumstances receive sign off from the department of water and power.
One Westside remains on schedule for first quarter 2022 delivery.
Between these two projects we have about 364 million of remaining spend which is fully funded in aggregate. These projects are 85% pre leased with one westside fully pre leased to Google We think that Harlow continues even in the current environment and we pivoted to multi tenant strategy.
With that I'll turn the call over to hurt.
Thanks, Alex.
And the first quarter, we generate FFO, excluding specified items of 54 cents per diluted share compared to 49 cents per diluted share a year ago, the commencement of significant leases at epic and fourth and traction as well as several other material tenant expansions and lease commencements throughout our north.
California office portfolio with a primary drivers of this year over year increase.
First quarter 2020 specified items were <unk> point, 1 million or zero cents per diluted share of transaction related expenses, and 2.6 million or two cents per diluted share from onetime straight line rent relief.
Reserve related to.
Transitioning a co working tenant to cash basis reporting.
That's why the items in the first quarter of 2019, where point 1 million or zero cents per diluted share of transaction related expenses, and probably 1 million or zero cents per diluted share of onetime debt extinguishment costs.
As Alex mentioned at the end of the first quarter, our stabilized and service office portfolios, where 95.9% and 94.8% leased respectively. Our same store studio trailing 12 month lease percentage was 92.4%.
The first quarter and NOI at our 39 same store office properties increased 1.7% on a GAAP basis, and 7.9% on a cash basis, our same store studio and Hawaii decreased by 12.2% on a GAAP basis, and 10.6% on a cash basis, but would have increased 6.7%.
And 9.5%, respectively, if not for the impact of a 1.85 million onetime inactive fee payment we received in the first quarter of 2019.
As Victor commented, we have 1.1 billion and liquidity and no maturities until 2022, except for our 65 million dollar loan secured by MEP, Parc North, which we intend to pay with our revolver. This gives us ample liquidity as we preserve capital and manage our buildings in the near term and as we deliver.
Carlo and build out one west side for Google. It should also provide us drive enough dry powder to pursue new opportunities at some point in the future.
Specific specifically after our remarks draws on our revolving credit facility, we have over 390 million of unrestricted cash and cash equivalents. Another 110 million of Undrawn capacity on our revolver. We also have 230 million of excess capacity on a separate revolve our secured by CMS.
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What you can access at our discretion.
We also have nearly 409 million of Undrawn capacity on our one left side construction loan, which will more than sufficiently funded entirely about project.
Due to the ongoing disruption and uncertainty related to cover 19, we are offering the following assumptions into a formal guidance.
We have based these assumptions on what we know today to help you assess our potential earnings results for the remainder of 2020.
We expect our really program to have a minimal impact from a GAAP perspective in terms of cash we have deferred approximately 2.2 million of April cash rents across all segments with another approximately 1.3 million.
Remaining and discussion for payment or deferral additional deferral, maybe appropriate over the coming months to duration the duration of deferred cash rents will depend on various shelter in place time frames across the portfolio.
As previously mentioned, we abated approximately 400000 of April cash rents.
Which we expect will continue throughout the year.
Noncontractual parking income totals approximately 1.2 million of NOI per month.
As with deferred cash rent, we expect the duration of the impact of this income to coincide with a shelter in place timeframe.
With respect to our studios, we anticipate some delay in occupancy on a handful stages I felt the Las Palmas, resulting in approximately $1 million production and then why compared to our original guidance due to the temporary shutdown and productivity and production activity across our studio portfolio, we anticipate an approximate Lee.
3.5 to 4.5 million reduction in NOI compared to our prior expectations, depending on the acceleration and activity as content production resumes and intensifies.
While our leasing pipeline remains healthy we currently estimate that the slowdown and leasing activity stemming from shelter in place ordinances, excluding parking and other impacts already mentioned could result in a 2.5% two or 3.5% decline and the company's share of full year animal I compare to our original guidance again.
Depending on the duration of shelter in place ordinances.
As Mark and Alex noted.
We've had minimal delays in terms of tenant improvement projects and we're on track to deliver and recognized revenue at Harlow once leased and one west side, even though even though as of this call construction has resumed and or continues across all our markets ongoing shelter in place requirements may still impact timing and now I'll turn the call back.
Outwards Victor.
Thank you her route Alex Mark and Laura and again I want to applaud the entire Hudson Pacific team and thank them for their tenacity adaptability, an unwavering passion for excellence even in these challenging times I know, we're all looking forward to being back in the office together in some form or fashion extremely soon and to everyone listening we apply.
We should your support stay healthy in safe and we look forward to updating you next quarter operator with that let's open the line for questions.
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Our first question comes from Nick Yulico with Scotia Bank. Please proceed with your question.
Oh, thanks, everyone. So I appreciate the the numbers you gave on some assumptions here I guess in terms of the 2.5% to 3.5% decline in full year and why that's I think you said a leasing and why.
Excluding studios and parking stuff like that is that is that mostly just a a vacancy you know decline that's driving that numbers do you might do you mind, just unpacking that a little bit.
A little bit this hurt a little bit, it's more delayed and delays and leasing as companies try to figure out their space needs. So that slowed down the leasing a little bit.
Okay. So so effectively it's just I mean, it's some assumption on a just less less backfill of expirations or something something along those lines not less just slower I think companies are taking a bit longer to make decisions on their future space needs.
Okay got it and I know you guys said earlier that you know you think your markets are benefiting from little new supply.
Can you just talked about what you're seeing in terms of sub lease space in your market and even in your own.
Portfolio I'm, whether you're seeing any a pickup in sublease your question, particularly I'm thinking about some of your exposure to smaller tech companies, maybe not as well capitalize haven't been a hadnt been around as long.
So I'll, let archer sort of jump in but this is Victor Victor Nick.
At the end of the day, we're looking at is San Francisco from our standpoint had some sub lease with Hubert that's still in the market. That's the largest piece of of sub lease up and down market Street, not just our asset affords me 55, but others. There's been no not a lot of material change in the peninsula I think this.
Suddenly spaces is increased to about 3 million square feet, but it's still the low as it's been in three years, we've seen no subleased material changes here in Southern California, Oregon, Washington, or in Vancouver. So overall I think on a general basis, we've not seen much at all of sublease space increase.
And I'll add just and certainly not in the smaller tech rail as you mentioned.
Okay. I guess, just lastly, I mean can you remind us where the portfolio stands right now in terms of exposure to yeah Tech companies that are.
You know haven't been that arent public private smaller NYSE will capitalize it means that the piece of the portfolio, where you wouldn't worry more about in this environment and what's your exposure like there.
I think mark was 40% of the companies are either public or larger than the 100000 square yeah, our or you can see in our industry diversification table, Nick and if you want the latest breakout, but yeah I only a small percentage of our overall tech exposure are privately.
We held companies I've been in existence for less than 10 years.
So and I don't think theres any indication judging by say April collections that.
On tech is somehow more vulnerable indeed, I would say one indication of how strong tech has been is if you look through regardless of size.
At our overall, Barry exposure, which is where the predominance of R. Tech exposure is while it comprises 65% of our Avi are only 58% of what we didn't collect which isn't a big number to begin with but if you just want to the non collection number I'm only 50% is in that area portfolio.
And then and just to take it a step further.
The barrier portfolio also happens to have a disproportionately large amount of storefront retail, which is making up a disproportionate amount of the non collected rents, which means that regardless of size and we've got quite a bit of smaller tech tenants throughout the northern California portfolio, They performed extremely well.
In the midst of in its the early going on it but in the midst of this pandemic they've been really reliable in terms of rent paying tenants.
Okay. Thanks, everyone.
Thanks, Nick.
Our next question comes from Alex Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning out there.
And.
Just a few questions here first marketing hurry just from a modeling perspective.
You threw out a bunch of numbers, both on a GAAP and on a tax basis and some of those were monthly some of those sounded like it was Ed you will so just big picture and I guess easier from a GAAP perspective, because that's what we model off but for asset, though what is that sort of net impact that we're looking at 'cause it sounds.
Like a lot of the Brad that you're deferring, you're actually going to recapture so from an Epo perspective, what's the gap impact yeah, right. So [laughter] right. That's a great you're just trying to cut to the check the I mean, we obviously gave you some tools for the tool box because we were not providing a fall.
Blown.
Not really sad on F up right and and the reason why we've given you in some cases a monthly amount is because in some cases, if the amount of time in the amount of impact will depend entirely on how long. This shelter in place orders go. So for example, and there is no GAAP.
Operating cash difference between contracts with Noncontractual parking revenue. So we've given you a monthly amount on that because we don't know if the parking will restored and normalcy in a month, two three or four and and so that's why in some cases, you're seeing a monthly amount in some case.
It is we have reason to believe that you can you can get to a pretty good estimate of a full year impact regardless of how long the pandemic goes for so that's why we gave you a full blown.
Remainder of the year studio number that you can you can model in for the full balance of the year that 4 million box. That's that's a that's a look ahead to the ended the year and we get likewise.
On the on the overall leasing slowed down and that's your June after three and half percent adjustment on an ROI. So some are highly highly highly time dependent and that's why we try to give you a monthly amount because we don't know exactly when all of this shelter in place orders across the entire portfolio will will will get lifted.
There is in those cases, there's really no cash and GAAP difference. That's why we just gave you the and Hawaii impact and in some cases, we can forecasted in here.
So okay.
Just after that the served by the way.
You know.
The largest component of our FFO as our office at Hawaii. So.
You have the biggest piece to start.
Getting from 0.8 point B you layer omni the studio number and then you just make an estimate around the parking and I think you have almost all you need to make pretty decent estimate and.
So the building blocks at least to get you. There. So you know we're not providing direct guidance a reply will giving you the tools to.
Build your own estimate.
Right. So that's the point is from a gap AFFO perspective, it's our estimate of Mark the monthly parking revenue of 4 million studio the balance of the year, and then down two and a half to three and a half on an ally impact delayed leasing those that it's the components. Yeah. That's right. The building blocks, Okay and then switching.
Subjects, I mean everyone's been been binge watching.
Net like some probably waiting for them to restart production to get the new series going but it would seem like you know you guys from attack from a video game from a studio demand I mean, you guys should be seen I would think increased demand for your space. That's in contrast to other markets where people are worried about whether or not.
Please are going to go back to officers start leasing it would it would seem to be that you guys should be benefiting from here and that you would have even stronger demand in those three respective areas.
So yeah is that the case are we at this oversimplification or is this sort of the right way to think about it.
Alex No. Your your absolute I. I briefly read some of the pieces. This morning that various analyst day, just I can't remember, who but somebody had sort of said hey was a negative or something about you know it's a negative in the studio business I mean, it could not be farther from the truth.
Some touch points here are.
Has been reached out by virtually every production company, saying, we need off we need office space and we need studio space.
The demand for production right now is it the height. This effectively like it's a strike and so writers are writing they're doing virtual table reads. They can't wait to start filming they've already come out in said Amazon said all their domestic filming is moving in Los Angeles.
Netflix is saying all of their location shoots are now going to move to studio shoots they're going from three to four days a week trying to get the unions to a proven sag to approve.
Seven days a week filming the demand is going to be for ratios and so you're you're just looking at.
The obvious and I guess, I said I can't remember, who as Mark will probably tell me after I'd say, something but but but I mean elway will be the number one location shoot given the fact that talent does not want to travel or may not be able to travel for awhile and so the lock up around this when it opens and we've got a pretty good indication of when they're looking.
The open, but it's going to be beneficial for us and it's like the waterfall a production will absolutely proliferate hosted the fact that Netflix and all the others are running out of the content I mean, they're pushing their content through right now where they had back flow of content through this year in probably.
First half of next there is an interesting article by the way of them filming.
That's in the lead times, I think today or yesterday that Ted Sarandos wrote about their current filming already up and running in Japan, and I think in South Korean in Iceland, and what they're going to mirror to do here. So.
Okay. Thank you vector thanks.
Our next question comes from Craig Melman with Keybanc capital markets. Please proceed with your question.
Maybe just a two parter on the studios here just back of the envelope. It seems like its maybe 80 to 100 basis point drag on the studio business, which doesn't seem.
Very big relative to maybe some of the concerns out there. So just wanted to clarify that and then also.
Just from a the way the leases are structured Netflix is long term lease can you just kind of remind us how much ancillary fees there on the how important how that works. Some other times, so I'll take the beginning nodes or roll into it a little bit Craig. So, yes, it's roughly that number and I think a route has adequately.
He looked at.
That being the drag going forward, but as I as I mentioned when they start filming unlike rent, which is lawson cannot be recovered if you abate rent the engineer, who can get picked up by additional shoot days.
On the variability of the other aspect is we negotiated with Netflix and others, where I'm on the long term leases, where they have to pay us a fixed amount whether they shoot or not they have so many days a year that they get that they get basically they don't have to pay there.
Basically, earning those days out by not paying currently today and they will be able to pay you know, they're gonna have to sort of pay automatically going forward. So this is not to a complete loss at the end date. This would have been annualized who I don't know what the number is but annualized we would've had some impact of last day shoot anyways on the answer.
Larry and typically we've always had the antibody remarks like 30%, Yeah, and you know just to kind of take victors point and give you.
Sense of analytics around it.
If you're looking at say Q1 annualized cash NOI in the studios your that's about 36 million.
On any of you think as Victor points out about a third of that revenue is ancillary driven and a 20 of the 36 stages are under long term deals than just you know looking through those numbers you see that about 7 million a bit shy of 7 million of the ancillary revenue.
Under contractual long term deals that require as victor points out the tenant to pay on for production related services, even if they're not in production and so that gives you a sense of.
Kind of what is the contractual component of the ancillary revenue sitting inside the annualized NOI now.
Okay. That's helpful. Then just I'm, assuming that the $4 million drag does not assume seven day production schedule and then can you kind of tells how long that kind of assumes production shut down for the list I do think and I guess and I was going to say this when victory with giving you guys. The update on overall expectations regarding studio.
I do think it's Super important new rock remember that were when we're giving you a number we're giving you a number from here till the end of December 30, Onest and and there's going to me. This temporary lull in there and we're experiencing it now in production and we have 16 over a 36 stages not under under contract, which gives us a country.
Actual you know a severance that we're getting that production revenue, it's going to ramp up and it's going to ramp up quite a bit. It's just it's just we're not going to see the full benefit of that ramp up.
By the time the calendar year that we gave you that number for comes and goes right. So you can see a ton of it in the first quarter and the second quarter next year. So we're going to make it all up its just said it's you know in a sense, we're going to got cut off both by the ended the year before all of that that real sizable ramp up occurs.
Right and just to add to that.
We do we so just to answer your question a little more clearly we have not included additional days of production in our.
Projections, we done.
Kind of a conservative number I'd say.
It really depends on.
We said earlier the stay at home measures, so one and if they come onboard we do have some catch up of ancillary production revenue but.
We were conservative in that assumption.
Okay. That's helpful. And then just switching gears to the co working.
You touched on Maxwell potentially getting some of that space back or all that back is that the spot aside.
Sorry, My daughter, just ran in here it [laughter] case and by you won't be working at home for long [laughter] or daycare disaster reopened.
I just was the Max was that the Spotify space and then could you just.
Go into just to defer or the cash accounting and I'm kind of is that on the any that on the 1.3 enterprise or is that all on the.
Non enterprise space. So let me just take the sort of top level on this on the on Maxwell that's not Spotify that's accenture.
And our deal with.
We work was agreed upon very early on in this process. It was in March that we had conversations with them and argue with them as they have seen every location with the exception of Maxwell where we have a rev share a component there and yes, we have the ability to take it back at our option over a period of time, it's a fairly short period.
It's like 45 days or something like that so whether we can make a deal with accenture, whether we make a deal with Spotify or whether we just take it back and reconfigure the space. So we have a very good resolution with we work and as I said. It was it was negotiated early on and they are one of only two deals that we did any abatement within the portfolio you want to walk through the economic.
Sure.
As a result of of switching over to a different type of lease agreement, we're required to adjust our straight line rent receivable as that straight line rent receivable is based upon their initial terms so.
That space is the only one impact it doesn't impact any other space and there is a small component of our.
20% I believe component of enterprise in that space that we can take back and go direct and and then you know the remainder would be what we'd have to deal with so it's only I'd say, it's a maxwell and it kind of ensures us the ability to make sure. The rest of the workspace is collecting and not impacted by this pandemic.
Great. Thank you.
Thanks, Craig.
Our next question comes from Jamie Feldman with Bank of America. Please proceed with your question.
Thank you.
I was hoping you guys can talk a little bit more of just about the conversations you're having with tenants and as they do start thinking about what longer term design changes might be implemented or even if you're working on any spaces now that people have already decided to change some of their designs before they move in any any color you can provide yeah, Jamie listen I'm sure you.
You been talking to other landlords, we've seen on my guess is probably similar to us.
The most part conversations we're having are all relatively positive conversations around higher density and even if a tentative decided specifically the texted tech tenants have decided to layoff people or or a lower their current staff needs nobody is giving a space back nobody's even indicated.
They want to give space back I think the misconception here is the increased density will be based upon the less lesser amount of people and so we're having those conversations and some some tenants or are working on their own configurations. We have engaged in two specific architects to design, what we would consider you know two.
Point zero space.
Post post everybody moving back in and we are going do prototype prototype one space, specifically and work on that we've been working with guns are exclusively on that.
It is going to be a lot higher level of dense densification and I think you know when people start thinking about coming back at the end of the day, there's going to be at some interesting attributes that we've already been reached out to you and arch has.
Obviously, you can see by our numbers, we have a very porous response to our retail tenants paying rent ground floor office retail will be attractive to office tenants tenants will want to have access to their own space without going into an elevator and arch already had people say if we stay put becomes available from an office standpoint.
We'd like to occupied and specifically tech check in tech related media attention to come to US and said, we want those space, which when before that space was quite frankly, the lowest denominator for office tenants interest levels due to be in our and our portfolio. So we're going to seen adaptability around that its got to be patient.
In terms of how we how we deal with it and I think it's going to be ever movie at the end of the day art you want to comment on I mean arts done some deals in the last 30 days, yes, we've done as mentioned in our prepared remarks, and we've got about 130000 square feet to deal with slowdown beginning in March.
We have not seen category, we've not seen a change it.
Any forward plans going kind of going back to the drawing board we doing.
Contextual anything of that nature, I think you know as we're talking too large and small I think and take you said you know it's going to be we'd see they literally don't know they don't know how their employees are going to react and so that kind of what they are waiting for and so.
We're standing by.
Okay. That's helpful and just to confirm Victor you kept saying higher density like so space trend for him.
I think everybody I've heard out lower density.
More space for less people.
Faceless okay.
And then as you think about the 4% of rents that Youve, given abatements too and then the 1% you're still working on it I mean, how do you think about just the long term credit risk of those tenants pay so let me just making it through the downturn what is what is the Jamie let's just clarify with a 4% has not abated, we've only abated two tenants in the hope.
Folio small very small not that's just rent relief. So are you know, but by law rent relief in Washington in California is two months and so the deals we've done our.
Our based upon if tenants qualify in some don't the deals. We've done is is enabled them to defer their rent, but they have to pay us back that rent over either a bullet or by year end or various different negotiated aspect. So the intent is that is that they will all pay us back and in terms of the question.
Around whether they defaults or not I mean, we don't have any indication at any candidates has come to us and said hey, we literally have not one tenant said here's the keys. So at the end of the day, so and of the two tenants. We talk to you about we work. The other tenant was in conjunction with pure abatement was a lawsuit that we settled and game a month and a half rent.
Based on the settlement of a lawsuit so.
There is no there's no indication that that we're talking any future abatement and that's April is that those are the numbers for April.
Okay, then I guess as you think through the rent roll and you know what May change coming out of this are you more concerned about the credit quality the portfolio or do you feel like everyone is pretty much button up I mean, 95% office knife represent studios pretty good from guys at a pace. So I think we're pretty comfortable with with what it is you know may may will be may will.
I have to see how that changes, but we.
We feel pretty good about our quality of tenants our quality portfolio and the responses that we thing you know received to date.
Okay.
And then I know you talked about thoughts on.
Smaller tech firms that maybe haven't been around very long.
But just as you think about CBD, San Francisco, the peninsula, and Silicon Valley and kind of compare those three how do you think those different Submarkets act throughout this downturn.
Based on the tenants that are there in the supply story and you know any other factors, we should be thinking about.
Yeah. It's a good question I mean listen into supply is limited and all those marketplaces and what is coming on the market is.
Virtually 80 plus percent preached anyways.
I think San Francisco has a lot of large tenants, obviously Palo Alto is very secure marketplace peninsula as well you know I would've thought we would have had more push back from some of the smaller tenants in those markets candidly I think the tenants it didnt pay in our marketplace Ironically were some L.A. related tenant.
That were financial related people. They asked for relief that we said no you don't qualify or those who asked relief that do qualify that will eventually pay they just wanted to break.
There's a there's going to be a couple of aspects around social shaming of tenants that should have paid that really running their business, there's going to be aspects of tenants. It just asked for something because they can't.
But I don't think that is going to be a long term.
Prospect there when they start coming back to working on a partial basis. If you want to comment on that yeah. I mean, Jimmy I think when you look at each of those markets. The preponderance of the tenants are still the large tech companies that are well capitalized healthy while there is a slow down right now and leasing it's for them really to take stock I think on how they want to re.
Configure space or they're going to be mandated by any of the cities or states and how they can reoccupy and what the space might look like but these are all growth companies and the conversations that we're having the long term plan. It's still for these companies to grow every conversation. We have had is around how they think they're going to go to a less dense environment.
You know, so whether or not even if they didn't hire another employee that would should equate to just use them using the same amount of space, if not more and theres been chatter about you know where people are going to keep working from home because they've grown a custom and we can prove that they can there's not one tenant we're talking to that large where they think that's going to be the norm. So many of the.
As companies, it's about the culture and having those their employees together you know to collaborate the creative thinking the dynamic environment. So these companies. So we haven't heard anything youre heading down that path. So I think you know when you look at supply demand just this conversation around people going to less dense work footprint and the content.
New weitian of them feeling like they have to still be in the office in some capacity, we think it bodes well for for our markets in particular and that the types of companies we have exposure to in the health of those company.
Okay. Thank you.
Thanks, Jim.
Our next question comes <unk> Emmanuel Korchman with Citi. Please proceed with your question.
Hey, I'm everyone. Good afternoon.
If we think about you know the concept of sort of going back to work and we think about the studio business.
Are there density issues or or sort of.
Occupancy issues there everything we've heard so far is 50% capacity. It can take while it's going beyond that you think about it sounds that as you think about a production guys are next each other act or certainly on stage or next to each other it's not doing things beyond that.
And so how does production resume under a different sort of occupancy scenario.
Well, maybe actually listen I don't think I think production is already resuming as I think I mentioned earlier I mean, there are filming in markets around the world already I don't think there's any correlation to whether it's 25 or 50% going to 75% to 100% of office occupancy in the production business how that correlates to.
To production production itself will be different there already there's already a road map by which they are doing that they are not going to have you know a mass you know a food line outside their having pre packaged food, they're not going to have 50, a union security people, they're gonna have 10, a they're not going to have to be.
Backup boon, guys and and grip people on the said, they're gonna have limited set as if they would more theyre doing.
Private sector, a new set optionality, where they were where they have less people on the set they figured this out already it's good it's there's still going to film I mean, it to to assume that that there won't be filming because of a 25 50 or 75% is zero correlation so they're going to figure out how they do that.
And and and I as I said earlier, they've they've already made the determination that they're going be filling more on said then on location because on location. They still have parameters by which they can't control set. They can so these are controlled environments and they're going to have less people, how they test and how.
They temperature control people and and they deal with that is not going to be similar to how athletes do with professional sports or how potential private company do having people coming in a space. So there's no magic around there they're going to make up their own rules, it's going to be driven based on talent and based on unions and.
Based on Sag organizations in the likes of that and they're going to execute that's what they're doing that.
And then if we if we go back to your comments on sort of the whether it be that the street level retail becoming officer or the less.
The less dense office layout, how does that come back to correlate with.
The rents and essentially the total rental.
Expense rather than maybe the per head rental expense that accompany has to deal with to provide that that level of.
You know lighter density.
I think us to be determined clearly you know right now Fortunately for Hudson, we have 4% of our tenants our portfolio is rolling this year in the next year's another light year, so tenants still have obligations under their current lease terms.
Going forward, how they negotiate that on the rent basis, we're going to have to see but we've got to a pretty good window through the end of 21 and for the most part and 22 before we have to sort of any effectiveness around that I can tell you that you know tenants aren't as I said earlier tenants are giving asking to get back space.
It's pretty near impossible to say, we want to get back partial space I'm on leases, but as you know as cases may or made on a rise we'll have to deal with those on a one off basis, but Fortunately now we don't have to and as Mark sorry, as art sort of intimated I mean, the deals that we've done and the deals there.
Back to us in the last few weeks that we're pretty much quiet and sheltered across the board you know.
Rent has not been a conversation we've not given on rent yet.
And then by the way that's not to say that we won't you know our objective is as a landlord is to keep every single tenant that we currently have we don't want always anybody I shouldn't say anybody because there's a couple of maybe we wouldn't mind, but but but for the most part we don't want to lose anybody and so we're trying to make every deal going forward as possible.
One final from me you guys mentioned, a a percent or maybe it looks more as a percent of tenants that.
You haven't necessarily differ but they haven't paid engine discussions what would be talking to the discussions are they willing for other forms of aid whether it be the government programs or are they deciding whether to pay it all at white wires, what are those up in the air rather than either.
And it's pretty much if you were sort of just not paid so that's a great question and answer for you and marching to jump in on this but the reality is as I mentioned earlier, we are under a shelter in place in California in Washington, where where the governors of both those states to said you.
You have two months of rent deferral and so some tenants have chosen to reach out to us we've chosen to reach out to others and there are there is a contingent of tenants that we just haven't gotten a hold of and they're not responded they don't by law. They don't have to respond and they will have to respond to the end of may.
As of June 1st, but they are not they do not disavow themselves of the obligation to pay the rent. They just don't have to pay it now okay. That's the number mark.
Just.
Most of them are in process.
Where we are discussing with them exactly what Victor mentioned, a deferral, they're things are been challenging logistically right. I mean, we have a lot of tenants, especially smaller tenants, which may not even be really using their space logistics has slowed down a little bit just on the ordinary routine.
I mean of cutting checks for rent and so forth. So even the numbers. We provided Manny are really just a moment in time April rents continue to to come through even as we speak on and those that ultimately don't come through our largely in process just to be documented as a deferral.
Thanks, everyone.
Thank you.
Okay.
Our next question comes some Blaine Heck with Wells Fargo. Please proceed with your question.
Okay, great. Thanks, Victor or Alex you guys have talks about seeking out acquisition opportunities both on the office and studio side than recent quarters I guess, a couple of questions on your updated thoughts there number one do you anticipate there being more potential opportunities and better pricing later this year as a result of but.
Pandemic and number two I know you guys have the liquidity in debt capacity to invest but how does the weakness and your share price effect to your willingness to be aggressiveness, if those opportunities do arise.
So blatant listen and thanks for that question.
In addition to date effectively right now we have seen very few opportunity. There are some out there, but you know unless somebody super desperate, they're not going to bring in asset to market in our opinion you know now going forward I think we will see some opportunities and we are looking at some marketed in non marketed items transaction.
That may or may not come to fruition at the end of the day I think our game plan has always been the same Blaine I think you've heard me say this for many years and several quarters.
If theres an opportunity that part and parcel of additive asset that fits in our portfolio. We will look at it because it's part of how we are as a company got how we've gotten to where we are and where we're going to go going forward I would be hopeful to see opportunities right. Now I think it's just way too early to see any impact.
In cap rates in the likes of that write offs. Yeah. I think the you know there's kind of a wait and see in various markets on all transactions, whether that's new investment opportunities and leasing I think a big driver on the investment side. It's a debt markets has essentially been frozen for the time being so without financings people can transact I think we are hopeful and your store.
And to see it now that there could be some some deal activity starting to come about I think the studio vertical clearly those are unique opportunities. So I think it's an area. We want to continue to scale and gross if we see something that's compelling will take a look same on this on the officer.
We have a handful of markets, we have a a specific thesis and if something's accretive long term, we're going to spend time on it but right now there is new opportunities because of the current environment and a lack of financing option.
Alright, great that's fair and that can you just quickly update us on redevelopment or renovation plans of Penthol Center. Obviously, you guys had success on getting some leases done there recently the market was very strong pre cove it but it does this pandemic delay some of your plans there and.
And to what extent.
So listen that market is still really strong I mean, I think our asset now is 99% leased with the new deal I'm. So it's it's extremely strong it actually had a positive rent growth in the first quarter of over 4% or we are a in the design phase Interestingly enough Lane, we had we had in game.
Page and executed our design around the retail to be completely reconfigure, which will be a positive given where the world has gone to and so we were taking all the retail from the sub screen level and bringing up to the ground to the street level, a and then the other aspects are building building new Oh.
Office components, there on a pre lease basis, but we're still we're in that we are theres no change in terms of how we're designing this we hard configuring some things differently on ingress and egress and the likes of that we had means last week in the week before.
With with our Architecting, our construction team on that I do think that it we're still a ways away from finalizing design getting entitlements and then deciding to break ground. So I'm, assuming that's going to be part and parcel the process.
Got it thanks guys.
Our next question comes from Rich Anderson with SMBC Nikko Securities. Please proceed with your question.
You are in good afternoon. So first question somewhat maybe symbolic but for the 30% of retail you collected talk talk about what kind of retail is that how sticky is it in and how is it you know sort of fit in the 38% bucket is or risk that that could you know perhaps go away.
Well I.
I Kinda think it doesn't we had a couple of we got a couple of household name tenants that pay we got a couple of banks that are that have paid so those are pretty sticky and I think that seems pretty good you know listen and mark can get into detail you know rich the biggest exposure we have as our ferry building because its.
Maybe 75000 feet or retail number our retail numbers are really small overall, but yeah, 5018% of our storefront and if I mean, right I mean that San Francisco's like everywhere else is completely shut down when that opens up they're looking at as opposed to inside out flow Reid.
All right outside in but those tenants are already there they'll they'll come back and they'll have little service people coming from the outside so that that will be a big movement for us on that standpoint, the other retail component, even though they haven't paid are still I think we believe we're going to be fairly sticky in that their office component retails whether there.
Office amenity coffee shop like that when the office buildings start to populate again these tenants will come back because that's who their customers are so it's not like they're looking for outside customers. So we feel good about that clearly some of the restaurants and and some of the other related tenants potentially maybe a big one here or there again maybe problematic.
I think you know rich you were talking about roughly $600000 of April Reds collected from the retail that acts that paid so dissecting such a relatively small number it gets a little unwieldy, but.
As Victor points out we do have some big name tenants are they just they have a relatively small footprint. So for example, nordstrom rack, they paid or financial institutions that have branch.
Oh locations, they paid and and down the list. We only had one retail tenants that even breaks the top 50 and that was norstrom. So though that really then the deferred rents are I think as Victor points out you know these smaller tenants very building was pretty hard yet.
They are 18% of our storefront retail tenants, we almost you abated the lion's share there we did close some of the rents there from bigger brand names like sort of the top.
And then and it really so really this that 60% or so that didn't get collect it is really made up of a lot of small cafes and little shops that you know simply we're not getting any foot traffic and as soon as the buildings was resumed normal operations there will be.
Right back in business along with it okay.
Second question, I know, where it's only cinco de Mayo, but any sense on on may rents in the sense that perhaps there's a significant percentage. That's due on may onest I'm wondering if you have any observation that even at this point.
It's way too early to now I mean, even yeah look I it looks like it's tracking in their early days here pretty well, but until the full month is behind US. It you just way too early to now Okay Fair and then lastly, maybe a you know a bigger picture kind of.
So I'll give a lot of talk about lower density model in the future, which perhaps is easiest found in the suburbs I'm wondering if you see maybe for Victor you know you and all that many of you have been around California office realistic for long time, what about a systemic change to how office operates from standpoint of going from urban to more of a.
Suburban play because perhaps there's some space there ready for use even in your peninsula Silicon Valley type of you know portfolio. Just curious if you see that happening as a as an out outtake from all this.
You know rich, it's too early to see that but we don't see any light that way in terms of in terms of moving from the urban to the suburban marketplaces I think that you know remember.
And I think this is something that we all need to sort of take.
Take note of it's hard to move tenants are going to have a challenging time to move there is a lease obligation. They the there they are in place for whatever period of time, our average leases go for other like six to seven years. So it's not going to be aegis is service a pick up and leave and Thats. The assumption is that at the end it today.
There's there's increased demand tenants today or are in place to where they are out there going to try to make it work you want to common else. Yeah. I was just going to add for our specific markets on the West Coast I think it's still comes down to where can these companies attract and retain talent and as long as the talent wants to still live in the urban hubs and.
We don't see that changing even in this environment right now I think those tenants will continue to have their offices. There I think in markets, where you're already seeing in the peninsula look at you know from San Francisco down to San Jose a lot of that's just driven based on the employee base I think market by market is still going to be about where they.
Ladies and wants to work and we don't see near term any any changes in the shift as far as where the geographic footprints of these companies are good.
Okay and real quick one are there any lease extensions being negotiated into these deferral packages they are providing.
In some cases, yeah, I mean, we did as a matter of sort of kind of the way we were looking at inbounds and ultimately collections look at leases that had relatively near term expirations and it became a part of the ongoing discussion.
With any tenant that fell into that near term expiration that we look to do extensions okay. Great. Thanks very much.
Thanks Rich.
Our next question comes from Omotayo Okusanya, What's Mizuho. Please proceed with your question.
Hi, Yes. Good afternoon, just two quick ones to me.
Just given the positive commentary you had.
Around around the media business under studio business can you just give us a sense of how the lease up of Harlow is shaping up I know your talks about go into a multi tenant strategy, but just curious what.
How you expect that's will unfold over the next quarter.
Oh, that's a great great question. So you don't Carlo we actually just and I think it was in our prepared remark. We during this time, it's challenging to get stuff done a good sign up from the city. The cities have been very positive on signing stuff often we just got DWP sign off so we're fully up and operational now we are virtually taurine hopefully.
We will we were moving back into tours are has seen a flat consistent amount of multi tenants, we actually change our brokerage grew just before this.
For the pandemic, we changed in January.
And we still have one tenant that looking at the whole thing you want to comment on no yet so it's still the same tenants obviously, they're evaluating their their space needs as we discussed and we feel good that.
Really.
Behind us that.
He's going to accelerate.
Okay. That's helpful. And then also any commentary at this point there was lots to prop 13 that role and you kind of new rumblings on the ground.
Well listen the the prop 13 role is it has been sort of put on the backburner I'm, assuming that it's still going to try to Gan about I think everybody knows our position at the end of the day, but I I think it's going to be very challenging for it to get approved as I made a comment I believe it was the last call and I believe.
Our peers, John and Kilroy, and Jordan and Emmett made the same comment I mean.
Real estate prices don't consistently go up as we're seeing today, whether whether you think where values are but virtually every everybody. In this call is readjusted, our NPV down that would that would mean that prop 13 went through at the levels that we were currently paying our taxes onto our they will the money there that they're going to get is gonna be less.
And I made that comment sometime ago, and that's going to be concurrent and so we'll see what happens there's a there's a massive up opposition group that has informed around it theres capital has been raised.
We'll see what happens over the summer months in terms of the battle around prop 13, but as I said, we're not concerned about the outcome at this time.
Great. Thank you best of luck. Thank you.
Our next question comes up from the line of Emmanuel Korchman with Citi. Please proceed with your question.
Yep.
Well now it's Michael Bilerman, So [laughter] well not many is on the phone if you want handbasket. He can but I had a few questions I want to follow up on.
Good afternoon Hope you guys are well.
So I guess just in terms of.
Buyback and whether I know you Didnt look like you had done anything in the quarter post quarter.
I know you Victor you were frustrated with where the stock had been even though it started to finally break out late last year and and early part of this year I still think there was a.
Frustration level in terms of where the shares are trading pre cove. It's.
And clearly.
This pandemic has caused the stock to to come down to pretty low levels.
So why not use any of the capacity to buyback or how are you thinking about that so.
So we did we we started to buy back up until the point, where we couldn't where we got we we got blacked out. So the answer is we did and I think we maybe about 50 million. You know this should we are definitely interested in levels that we got down to like $16 per share.
At the end of the day. So we were we were buying back and I don't know, what our average prices, but but mark will probably get back to you guys as to what it is calculated it out but yes. The answer is we did there was obviously we were.
Don't know if we were one of the first but we were early on this process and there was a little bit of a backlash in a public market that accompanies buying back stock as you know, but we were there and and when we were clearly a I'm excited about buying back our stock at those levels.
And then can you talk about the relationship you have with with Blackstone, Obviously, you go back to.
The big Rich transaction on the ERP portfolio, then coming into the stock I think they got out of the stock I think it was early 17.
And then you had been very building you did the joint venture with them on the Vancouver asset.
Going out there talking about going into the public markets can you talk a little bit about weather.
There are opportunities for you to work with them either as a stockholder or for for future purchases.
Listen I think there's opportunities for them and others that we've had multiple conversations with over the last year or so those conversations are consistent and I think it's both on the JV level for asset level assets, both our assets and a and new assets that we would look to as well as a public market structure around the stock.
Ah you know we're in attractive company. We have we have excellent assets. We've got a phenomenal management team that is performing well and and I'm confident that the opportunities will be such for Hudson, a that weve positive going forward.
On that one west side is there an opportunity to buy may switch out of the remaining stake is that on the table today eight to provide them liquidity that they need you're fortunate to have collected the matter. When do you have on the retail side you can imagine on them all time, it's extraordinarily less.
So is that a potential near term transaction, but you can execute on.
So we've been that venture with him for a little over a year, we had a two year lockout that both sides would have to agree on I'm, assuming that at the right time, there will be an opportunity for us to by they're piece out, but it's it's it's not a piece that anybody else can get so the timeframe would be based on you know desire and.
Opportunity.
Last one for me the line drive down the 415 that was just add an abundance of caution.
Or are there other needs for that capital in the near term no 100% about his passion and my guess is given where our rent collections were so high for this past month I'm, assuming that hurried marker probably going to pay that line down eminently anyways, because we have ample cash and our sources are already.
Allocated for what we need right now.
Great I appreciate the time thanks.
Thanks for jumping back in.
We have reached the end of the question and answer session. At this time I'd like to turn the call over to Victor Coleman for closing comments I appreciate everybody support for Hudson and your participation and we look forward to updating you throughout this quarter as well as at the end of the quarter.
This concludes todays conference you may disconnect your lines and thank you for your participation.
The conference call has ended.
Please disconnect your lines at this time thank you.