Q2 2020 Hudson Pacific Properties Inc Earnings Call
[music].
A question answer session will follow that.
All the phone presentation.
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It's now my pleasure to introduce your host the floor Campbell Senior Vice President of Investor Relations and marketing.
Please go ahead. Thank you operator, good morning, everyone welcome to Hudson Pacific properties second quarter 2020 earnings call.
Earlier today, our press release and supplemental were filed an 8-K with the FTC. Both are now available on the Investor section of our website Hudson Pacific properties Dotcom, an audio webcast of this call will also be available for replay by phone over the next week and on the Investor section of our website.
During this call we will discuss non-GAAP financial measures, which are reconciled to GAAP financial results in our press release and supplemental we will also be making forward looking statements based on our current expectation. These statements are subject to risks and uncertainties disgusting or FTC filings, including various ongoing developments regarding the cobot 19th.
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've added certain disclosure specifically in response to the Fccs direction on special disclosure of changes in our business prompted by Cobot 19, we do not expect to maintain this level of disclose.
Sure when normal business operations with you.
Yeah, I'd like to welcome Victor Coleman, our chairman and CEO, Mark Lama, our President Alex is leading our CLL and CIO and hurt your Marianne Rcs out no. They will be joined by other senior management during the Q in a portion of our call Victor.
Thank you Laura good morning, everyone welcome to our second quarter 2020 cool I.
I hope everyone is staying safe the healthy during these difficult times and let me start by saying once you got to how incredibly proud I am abroad specific team.
With deep experience.
Nobody in adaptability is enabling our company to successfully navigate current circumstances.
Despite the unpredictability of this pandemic shifting government mandates and evolving protocols, we continue to run our business efficiently and effectively.
As a central business all of our property remain open or operational <unk> fiscal building occupancy remains low remarks going to touch on that or conversations with tenants indicate they have every intention of returning to the office, it's simply a matter when and how Google is a perfect example of this although they're now targeting 2020.
You want as a return date.
Buildout of our.
Our unabated one Westside asset is absolutely on target and then near term most of our cats are leveraging the lower occupancy that remote work force, coupled with temporary solutions like moving debts and selling barriers and staggering schedules to see if we reintroduced a portion of their workforce.
This is exactly what we did starting in June with our employees targeting 50% utilization at our corporate and regional offices and there's no doubt the requires people to get a custom new seating configurations Pops of travel acquired P.B.A. BB use and the likes.
What we fully intend to avoid or the pitfalls of work from home, which I've been talking about for months and which trip cutters piece of the Wall Street Journal Orchard doing very well just last week things like impaired efficiency lack of Mentorship poor communication limited creativity are all factors the company's long term success.
Yes, and viability as they've been for our.
Companies have been recognized recognize this already they will soon enough and hopefully before it's not too like I suspect that this article the Wall Street Journal signal an important ship in the mindset as the realities of a prolonged time away from the office begin to set up.
And the second quarter, our rent collections were exceptional 90% of our office and 100% of our studio tends to pay rent and again marching to discuss this in detail, but the quality of our Tennessee shines during difficult times and in terms of industry exposure, the resilient and innovative nature of tech.
As I cyclical nature of media well continue to serve us well.
Specific to credit quality, 85% of our top 15 tenants are publicly traded are owned by public parent well over 60% or either large cap for investment grade rated.
Already geography, nearly 75% of our FBR is derived from less public transit.
Pendant markets like Los Angeles Peninsula, and Silicon Valley and ask for asset type. The preponderance of our assets are low to mid rise product our buildings or eight stories on average so they didn't ingress and egress and further essentially all of our properties has been substantially repositioned or upgraded or all redevelopment or new construction project.
From optimized air filtration, the Apple outdoor workspace, our portfolio is well positioned to meet any new cobot related requirements.
By far our biggest milestone in the quarter was the M. announcement of our latest partnership with Blackstone and the Genesis of this transaction will predated coven related conversations with multiple interested parties, but yet as far back in December 19, and not surprising we had a tremendous amount of interest in this portfolio, which we built over more than a decade.
Through strategic acquisitions operational and capital improvements World class development and phenomenal leasing success.
Through the years, we assemble the largest collection of independent stages in the United States. We built the first class a office building in Hollywood in more than 20 years, we signed two the largest office leases ever in Hollywood and created the only headquarters for two global media companies.
We have all design urban verb vertical campus and push boundaries and sustainability delivery Los Angeles first off is going to the solar facade and a record amount of functional outdoor space.
We're still at 49% to Blackstone arguably the preeminent institutional real estate investor provides validation to the stock market, which they had not.
Around the value of the portfolio our views on content creation, our expertise as an operating partners well clearly we also chose them as frequent partners in kilometers they're less.
Execution risk as we seek to explain or perhaps platform, our and we're well aligned with our vision going forward after financing without which Alex will provide some details on as well we'll have about $1.3 billion gross proceeds at our disposal to bolster our liquidity position and further fortify our back.
Don't shoot, especially now that we've reduced our funding requirements for future development, we're nimble and poised to take advantage of market dislocations in the current environment to expand in office as well as studios.
We continue to closely monitor various ballot measures in California, and the state of Washington, That's passed would increase taxes for businesses.
There's no doubt.
Local and state Minister properties of results of the economic shutdown are suffering meaningfully by the declines in revenue, which Dan to for spending cuts in priority programs and initiatives at the same time, there's a renewed engagement as the corporate level.
<unk> for real estate firms, such as ourselves and all of these processes and wall product for 15, well beyond the ballot in California. In November we continue to believe the bill will be effectively repeated SB nine threenine and the Seattle had tax were book recently defeated but there's no new payroll tax considered and under consideration in.
Seattle.
So what the pandemic dynamics at play continued to evolve we will remain engaged in provide leadership as it as necessary.
Before I turn the call over to Mark I do want to touch on diversity equity income inclusion initiatives, which we were working hard for sometime and we're right. We brought to four in the last quarter. As you know in March we lost launched our better blueprint, which has three focus areas stability health and equity specifically our commitment to echo.
He is grounded in the notion of opportunity for all the recognition that we use a company need to do our part to eliminate racism and promote diversity and inclusion both internally and where possible externally and our communities at large or HR and social impact teams are spearheading multiple initiatives to accelerate and strengthened this.
Amendment, including ongoing training sessions research groups in a virtual library for employees I also joined Los Angeles is mares pledged to address racial equality equity.
And align with CEO action for diversity, and inclusion, which among other commitments provides a network of other companies with which to share best practices. We also read record a portion of our annual corporate giving donating to the community coalition here in South Los Angeles, and pledging thousands more in micro grants to smaller organ.
Positions Chappie racial equality across our markets.
As you can see we're investing heavily not only because it's the right thing to do but because it's essential to our confuse this as an industry leadership.
It's well established that welcoming different cultures ideas and skill sets yield better business outcomes and I expect every Hudson Pacific employee to model these values and in doing so well make our culture and our company even stronger without a turned over to mark.
Thanks, Victor it's Victor highlighted our rent collections remain exceptional during the second quarter, we collected 97.3% of total rent comprised of 99% of office rents, 100% of studio rents and 48.7% of our retail rents to date in July we.
Collected 94.8% of total rent comprised of 96.9% of office rents are 100% studio rents and 31.4% of retail rents.
These percentages exclude rent contractually deferred or abated in accordance with cobot 19 lease amendments. If we were to include those amounts as we've done in previous public disclosures, our second quarter collections would've been 94% for total rent 96% for office 93.8.
8% for studio and 44% for retail our July collections would've been 93.4% of total rent, 96% for office, 89.5% for studio and 31% for reach out.
During the second quarter, we granted deferrals equivalent to $4.2 million or 2.7% of total rats, another approximately $4 million or 2.5% remains in discussion for either payment or deferral, we abated only $1.1 million or 0.7.
<unk> percent of second quarter rents in connection with Cobot, 19 relief and another $200000 <unk>, 0.1% due to a settlement in connection with a non coded related litigation matter again.
Our strong collections are a reflection of our high quality tenant base and even more so the strength of our large tenants are 50 largest tenant account for over 60% of our quarterly rents three co working tenants within our largest 50 China's comprise one third of all uncollected rents.
We deferred rent spread only one non co working tenant within our 50 largest.
The remaining nearly two thirds of uncollected rent, what's traceable to small tenants, including her storefront retail the average size of which is approximately 6800 square feet. It. It's precisely these tenants which were afforded relief under the various state and local went collection moratoriums.
Understandably many of our storefront retail tenants, which comprise only 2.8% of our total hbr are struggling we recognize the value they provide for office tenants and the surrounding community whenever possible, we're working closely to support them and find a solution to keep them in the space, which incurred.
Recently involves some sort of percentage rent arrangement. There are however, a handful of tenants where will agree to take back that space and re purpose. It for backfill with another retail use or potentially even an office use up a loud.
Regarding our studios stage demand remains strong with only three of our 35 stages available for lease all of which are subject to active discussions with multiple major studios for Commencements in the coming months asked for production activity delays among content producers the guilds and union.
It's representing act actors and crews in adopting cobot 19 protocols, mainly on frequency and methods of testing have pushed production Commencements. We now expect production of phase in over the next month with essentially all stages in use by September as we've discussed previously try.
Lens bode well for an increase in stage demand and production activity in Q4 and and into 2021. Returning shows are asking for additional space to de densify cast and crew at any given time location shoots are being replaced with stage sets to increase protection for actors.
Shows will go straight to series and forego pilot testing and multi season shows will skip hiatus periods and shoot without interruption.
Bottom line production must resume as safely and as soon as possible content creators are now under significant pressure to refresh their pipelines at the risk of losing subscriber interest.
As previously noted in May we launched our tenant reintegration program, which we've developed in accordance with local government guidelines and in close coordination with our larger tenants and internal and external subject matter experts our priority has been to create the safest unhealthiest work environment possible. We're.
Focused on proactive multichannel communication enhance safety focus cleaning and operating procedures and efficient building access. We're also asking tenants do their part and thus far the program has been very well received question generally center around air filtration and ventilation and options for an.
Hands cleaning of office suite, which we are well equipped to address indeed tenets are slowly re populating our buildings right now physical occupancy stands around 5% to 10% in the United States and 15% to 20% in Canada. This is up 5% to 10% across the board over the last few weeks Eva.
And so many large tech tenants include including most recently, our top 10 at Google have announced extended but still temporary plans to work from home most until year end. Some companies are staying flexible and modifying plans based on local conditions for example, Amazon Seattle employees work from home until year end.
But there Vancouver counterparts will return to the office. This ball clearly the situation remains fluid and we're ready to pivot accordingly to support our tenants through these challenging times.
And now I'll turn the call over to Alex.
Thanks, Mark in the second quarter stay at home guidelines, along the West Coast continued to mute office leasing demand. The good news is better markets began the pandemic on very strong footing. They can see at historic lows rents at historic highs limited and nor pre leased by an absorption muted only by constrained availability.
Despite negative absorption and increased sublease supply across our markets in the second quarter outside the <unk> San Francisco CBD rents were stable and vacancy ticked up only rub 50 to 250 basis points Tech media lifetime healthcare and government tenants drove demand.
We remain vigilant regarding the impact of continued shutdowns in the potentially more protracted impact to the San Francisco's CBD, given its density and greater reliance on public transit.
In general our portfolio is outperforming current trends and we feel about is well positioned as any to weather. The next six to 12 month.
Our stabilized an in service portfolios ended the quarter, 95.1% and 94% leased respectively. Our second quarter leasing activity reflects both slowed demand due to coated and our portfolios limited remaining 2020 expiration.
3.6% of our office he'd be are we signed 107000 square feet of leases in the quarter about half were related to short term 12 month or less extension at or around in place rents, including some kogan 19 lease amendment.
We'll terms for the remaining 50000 or so square feet of activity.
In line with prior quarters include including an average mark to market, a 17.7% on a GAAP basis and 21.4% on a cash.
Although we've seen an uptick in activity and tours, what the initial lifting up stay at home orders tenants are still for the most part on the sidelines.
We have about 800000 square feet of deals in our leasing pipeline that is deals and leases otherwise we're proposal.
As a slightly less than reported in prior quarters and again in large part because of our limited expiration.
Less than 10 deals representing approximately 75000 square feet died due to coated and only a portion of requirements and our pipeline about 20% or officially on hold.
The rest are just moving very slowly tenants regardless of size are working to understand and balance near term work from home density requirements with the larger longer term speed and group.
Note that of the 3.6% of our office he'd be are subject to expirations. This year, just 0.6% is attributable to the San Francisco CBD.
Our 2021 expirations represent 10.6% of our office HDR and San Francisco CBD expert expirations represent only 0.4%.
Most of our exposure next year about 80% of our office CBR isn't the peninsula and valley, given stronger fundamentals and the low rise recently modernized nature of our portfolio in those markets. We're optimistic tenant demand for majority of our forthcoming availabilities will be resilience.
[noise] work continues unabated or two construction projects.
Our lowest substantially completed with only corn shell close out work, where meaning we expect full completion in Q3 and discussions are moving slowly with a handful of potential users to leave all were portion of the speed.
One west side, it's fully funded and Preleased and on track for delivery in Q1 2022.
One final note regarding our Blackstone studio JV, we expect the transaction to close imminently. We also expect to close a 900 million mortgage loan secured by the portfolio. The non recourse loan will be interest only with initial annual interest slate of LIBOR, plus 2.15% and a two year.
Term with three one year extension option.
The ruble provides further detail as to the use of proceeds from both the sale over 49% interest and our share of asset level financing and with that I'll turn the call over to hurt.
Thanks, Alex and the second quarter, we generated FFO, excluding specified items, a 50 cents per diluted share compared to 48 cents per diluted share a year ago.
Second quarter specified items in 2020 consisted of transaction related expenses of $200000 or zero cents per diluted share.
But no specific specified items in 2019.
The commencement of significant leases that epic fourth and traction and Fort Hills research, partially offset by the Lhamo by the dilemma project and portions of paper Mill Center being taken offline for repositioning or primary drivers of this year over year increase.
The second quarter 2020, FFO, excluding specified items includes approximately two cents per diluted share of reserves against uncollected cash rents and approximately one cents per diluted share of charges to revenue related to the write off of accrued straight line rent receivables, some or all of which may be ultimately collected.
Finally second quarter 2020, AFFO reflects approximately one separate diluted share decreased in parking revenue, some or all of which will resume with tenant we integration.
And the second quarter and Hawaii. So nine same store office properties decreased 5.2% on a GAAP basis, and 3.7% on a cash basis, a onetime property tax recovery at brink on center and to 75, Brendan reduced operating expenses and the second quarter of 2019 by approximately 3.2 million dollar.
Adjusted for this onetime amount net operating income and cash net operating income would have decreased 2.3% and 0.4% respectively.
The cash net operating income decreased also reflects that is does not include approximately approximately 1.7 million of cobot related.
Contractually deferred rent and recoveries adjusted for the onetime property tax recovery and the covered related deferred brands and recoveries cash net operating income would have increased 1.5%.
Our same store.
Studio and Hawaii decreased by 21.3% on a GAAP basis, and 26.7% on a cash basis, largely due to a decrease in service and other revenue stemming from shelter in place measures disrupting production activities and stage utilization note that revenue reclassifications in accordance with assay.
42 increased rental revenue.
With a corresponding decrease in service and other revenue and the second quarter of 2019 adjusting for these reclassifications second quarter 2020 rental revenue would have been modestly higher well they correspondingly higher decrease in surface and other revenue compared to second quarter 2019.
We have 1.1 billion and liquidity comprised of 445.1 million of cash and cash equivalent Florida million of capacity on our unsecured revolver 20 to 30 million of capacity on our revolver secured by Sunset Bronson I caught in Q and 380.800 million.
I've capacity on our one west side construction loan again, we have no maturities until 2022, except for a $65 million loans secured by met Parc North, which we intend to repay with our revolver upon closing our JV with Blackstone, what Alex mentioned, we anticipate eminently our total balance sheet balance.
Do you think cash liquidity will increase significantly to about 1.6 billion falling full repayment of our unsecured revolver and terminals BMD further the transaction is expected to improve many of our credit metrics, including reductions in company share of net debt to market capitalization and adjusted annualized EBITDA to consolidate.
Net debt.
Needless to say, we have ample liquidity to manage our properties complete our development projects and ultimately pursue new opportunities as they arise we withdrew our previous 2020 earnings guidance on may 5th due to the uncertainty around business disruptions related to the covert 19 pandemic given that these uncertainties persist we have not.
Reinstated earnings guidance for the balance of the year. We are however, once again, providing the falling details and little formal guidance. We prefer we base. This information on what we know today to help you assess our potential earnings results for the second half of 2020.
We expect our rent really program to have a minimal impact from a GAAP perspective in terms of cash we've deferred Apocalypse, we deferred approximately 4.2 million of second quarter cash rents across all our segments with another 4 million remaining in discussion for payment or deferral additional deferral, maybe appropriate over the coming months.
During.
The duration of deferred rents will depend on various shelter in place measures and tenant reintegration plan across our portfolio as Mark previously mentioned, we've made at approximately 1.3 million of second quarter cash rent most of which we expect to continue throughout fear.
Parking income decreased approximately 2.25 million and the second quarter compared to last year as with the deferred cash rents. We expect the duration of the impact of this income to coincide with tenant integration timeframe.
With respect to our studios notwithstanding the delay in occupancy on a handful stages at something Las Palmas previously mentioned by Mark We anticipate approximately 400000 more rental revenue and the second half of this year compared to the first half most of which will occur in the fourth quarter.
Similarly.
Due to temporary shutdown in production activity at our studios, we anticipate and approximately one to 2 million dollar decrease sorry, I want to $2 million increase in second half.
Studio and why stemming from surface and other revenues less expenses compared to the first half most of which will occur in the fourth quarter.
Well, while our leasing pipeline remains healthy we currently estimate that the slow down and leasing activity could result in a 3% to 4% decline in consolidated second half and why compared to second quarter run rate.
Exclusive of parking and other impacts already mentioned again, depending on the duration of shelter in place measures and tenant for integration plans. Please be aware that all estimates are provided based on the assumption that the Blackstone joint studio joint venture will be treated as a kind of so as a consolidated.
For accounting purposes, as a result, Blackstone share of operating results and associated financing relate to the asset held and the new joint venture will be reflected as an increase to AFFO attributable to non controlling interests and now I'll turn the call back to Victor.
Thanks Route Alex and Mark I know, our marks remarks have been extremely likely today, but I wanted to get final moment to once again recognize our incredible Hudson Pacific team their health and wellbeing remain Paramount importance and we're taking every possible precaution to create a safe uncomfortable environment as our employees were turned to work I'm. So proud.
Out of that in the face of adversity and in some cases personal stripe they've risen in occasion and <unk>, each and every challenge in space and their willingness to go above and beyond and bring their eight game the task, both big and small pretty quickly and dynamic and involving situations and to work together, even when physically apart. It's all a testament.
In an amazing company, we've all built it's an RV part of this group and I applaud and want to thank each and every one of them and to everyone listening I. Appreciate your continued support we stay healthy in safe, we look forward to updating next quarter with that operator, let's open the lineup for any questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
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Oh, my ladies and gentlemen, our first question comes from a line of Nick Yoko with Scotiabank. Please proceed with your question.
Thanks, Hi, everyone a into you know I just wanted to.
Ask about the second half.
Of this year and Hawaii impact I think you said about a 3% to 4% decline versus.
Second quarter or or first half a year.
Tell us what what the assumptions are behind that I mean are you just not assuming much in the way of any sort of new leasing or new commencements that we'll.
Be able to backfill vacancy or explorations.
I'm not exactly it's more of a deferral or delay in leasing as tenants haven't.
Been able to make up their minds in terms of the state planning so that's.
The reason for the push so it's just delayed not.
Produce.
Okay and in terms of the deferrals I just wanted to be clear. It sounds like you guys are including you know that as a negative impacts when you're talking about cash NOI or same store cash NOI.
No I didn't mean and they have losses or do you mean the projections.
For both I mean, where it's for both of you know you're talking about the deferrals being a actual last piece of.
Cash cash NOI.
That's correct right. So when we defer the income that means we did not receive a cash NOI. So our cash NOI results reflect a lower number as a result of the deferrals. So we also biometric how do we included the deferrals as if we collected them and the onetime property tax adjustment.
Right here would be up 1.5%.
Okay. Thanks, I just wanted to be clearing out because they know companies are taking a different approach to this and it sounds like you guys are on the more conservative and I. Just just my last question is maybe you could talk a little bit more about you had a different type of demand in in your markets and I just wanted to hear a little bit more as well about.
Cisco versus the valley it sounds like you guys or.
You know a little bit more worried about leasing in San Francisco because of a it being city relying on mass transportation versus the valley, which is more of a drivable Mark and I guess Im just wondering is this something that I was just popping into your head as as a as a realistic theory or are you actually hearing this.
Type of dialogue coming from prospective tenants looking at San Francisco versus the valley. Thanks.
Sure Nick I'll start and then I'll have a our jump in so you know this is not something as pumping are ahead of listen I think at the end today right now the leases that were looking at that our large leases are actually in the city. We're negotiating a a couple of deals right now there's a fairly large deals that looked like well get them across the finish line next month or so.
So so we're seeing activity there I think this uniform thought is that we're just seeing a little bit more of our pipeline. That's in the valley right now because that's where the available spaces. We don't have a lot of space available in the city and so we're not seeing that theres, a true trend going away from San Francisco are not go ahead, that's exactly right. We don't have the vacancy in the.
I need to deal with Victor referenced the deals that you referenced are.
It leases right now have been goes on for some time and there's been no discussion about any trepidation about your concerns.
And we're certainly not hearing it even with the smaller tenants for the vacancy.
In San Francisco.
Okay. Thanks, everyone.
Thanks, Nick.
Thank you. Our next question comes from line of Craig Mailman with Keybanc capital markets. Please proceed with your question.
Hey, guys, maybe I'm sticking on the rental environment to some extent.
You know pre kogut, the mark to market seemed you know north of 20% in the portfolio just kind of curious if you look at at the remaining 2020 expirations to pretty minimal and 2021, how do you guys are viewing that mark to market, maybe with you know whatever.
Assumptions you guys have on market rents going forward.
Hi, sorry, yes, so I think they're going to be very similar I mean, a lot of the love the Mark to markets you saw on vacancy some of those deals. It just happens that they were very close to market.
But the deals that we have in our pipeline that we are continuing to get through.
That is to say an airline leases.
There's been no erosion on rents and those they're exactly the rents that we targeted for those spaces.
Okay, and our <unk> with the deals you guys have the pipeline that meet our tenants pushing back or trying to retrade potentially on on rents are pushing for increased concessions kind of whats the conversation to 10, it's been like yeah. So the deals that we have in the pipeline to continue to move forward that say, we've got about 125.
Thousand feet in leases.
On top of the deals we signed this quarter.
There's been no erosion in rent these are deals that need to get done I suspect.
They have been trying to push it through the decision isn't there not economic decisions there space utilization decisions and so we haven't seen that so far and certainly not an uptick in.
Tenant improvements on those same deal.
Okay and then just.
Moving to the investment landscape you guys have ample capital here post the Blackstone deal just kind of curious you could give a little bit of color on you know how much of this could be potential studio expansions.
Verse office and then maybe just the most recent update on a on one west side and then you know lasting start from three part question, but just how you think about deploying capital <unk>, even though you raised it at a pretty attractive yields here, but deploying it when the stock's trading where it is today that kind of how you you.
View that trade off yeah, so well I'll I'll jump in here first Craig. So you know we first of all the the Blackstone transaction. We've we've talked about the deployment of capital. Yes, we have ample liquidity, we really were looking at on on on a multiple areas clearly the first error.
Yeah that we've talked about and we're seeing some very good traction on is deploying that capital to enhance that business with Blackstone and grow that platform and with the announcement of the deal and some of the relationships. We've had in the past we're seeing a nice flow of product that that should help us accomplish that goal.
We mentioned before on the capital deployment, a you know our position has been if we can get and we are evaluating some some better yielding positions a pieces of paper on the med. Aside that's something you know we would be attractively looking to deploy capital on either alone to own or some sort of a hybrid mezz piece.
And Alex and his team has seen a and starting to see more of those deals come to market as we see we feel in the third and fourth quarter quarter that would be the case I'm not dissimilar to what I've said in the past at various levels, where the stock's trading and art our best performance. It you know whatever the cap rate.
As trade out today, you know we will also entertain buying back stock as we always have and it's not mutually exclusive to that aspect. So.
We are in a very enjoyable position to be able to use that capital, we think we'll be able to deploy it efficiently.
Oh and when we do you guys will be the first to know.
Gotcha, and just kind of update on one west side, Oh, Yeah, sorry. It was a five part question another four of our crusher.
Oh, one west side, we Eric are completing the throws of it there's been no change in terms of their construction pipeline or interest level of of Google The for the most part the design that we head or put in place with Gensler and.
With Google has as held up to a post cobot world.
Lots of outdoor space as you know on when we showed it lots of accessibility for a walkways and safety and security and that that is now starting to shape up a for us to look at look at that asset and in terms of timeline I literally think we're a week or two behind with literally nothing.
We've lost we've been building all the way through this process, Alex actually just sort of yesterday, you want to jumping on that at all just a further what Victor said you know we've been successful keeping the project on track. During this this this current environment. It's looking great is progressing and we're super excited to keep the project going in to deliver.
It's a Google as Victor mentioned, the bones of the the project a pre cobot.
Really positions at strong for what we think the world's gonna look like coming out of the low rise building lots of indoor outdoor space natural air light, it's going be a fantastic project that were super proud of.
That's helpful. But guess what was getting at is just talks with matrix about buying their remaining interest any any update on that kinda process.
You know this.
We talk about this before so this is this deal has got a lockout period.
And so we would we would have to agree on a on this transaction its at our option at the end of the day. The intent is eventually to own 100% of this asset that's always been clear and given where they sit today and their capital needs. They know where we sit so we've had open conversations and dialogues and I think.
No there won't be inappropriate time, where we will sit and make and make a transaction, but it's not eminent.
Great. Thanks, guys.
Thank you Sir our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey.
Good morning, wanting out there.
Mark or just a if we get just go back I think to next question on the on the impact in the back half just just super clear, maybe maybe I need to be clear.
If we start with the second quarter as a base and then add back the write offs of add back the 4 million.
Then the beat the teams, but we would make quarterly run rate for the back half. It sounds like are just the other potential for an additional 4 million of write off.
And then be upsets in the fourth quarter.
Yes, I think you mentioned basically one to 2 million of one part of income from the studios and another 400000 that from the studios and I'm not so that's only in the fourth quarter work that then flows into next year, but Oh I just want to make sure I have the correct as we think about how the back half of this year to date.
Yeah, I mean, I think maybe the easiest most direct way to.
Piece together those component parts is really look it.
Third quarter, I mean, sorry, Fremont Ash actuals for second quarter start with your office rental.
We've already dealt with the service and other revenue through the commentary around a the parking and other revenue so ignore that service and other revenue line item. So just start with office rent all back off office operating expenses right. Because those then they're both on a GAAP basis and.
Then the commentary is the adjustment is that three and a half that three to four or a midpoint of at three and a half a decline in the second half relative to that amount right. Because that's your second quarter run rate right. The rental left the expense and then you back off that number.
Say three to half in the back half.
And then they're going after the quarterly rate right bark not not not in totality for the back.
Yeah in totality, yes, yes.
Oh, the total number yeah as if as if you had annualized in effect that that second quarter.
Okay, Okay, and then we'd giving you the studio P. separately and we'd giving you the parking p. separately another way to think about the parking pieces just take your service and other revenue and run it through in other words, just keep it level at second quarter levels for at least Q3, and then assuming that.
All these get home measures.
Got lifted after Q3, then it when you back up to what we normally have presented yeah. So a conservative you would be to keep it flat is that there was no pick up on parking revenue relative to second quarter aim somewhat less conservative view would be maybe to start in you know showing some increase in that revenue on the theory that.
Park as tenants reintegrate and transient parking resins that maybe we do better on parking.
And then I think anymore color on the studio in terms of.
What to look for outside of 2020, I think market mentioned, we expect as the studio filming but had been delayed as a result of the several measures again.
We expect Q4 to be stronger and that will roll into 2021, because don't need more time to felt.
Okay, but hurried the 400000 and the one to what the one to 2 million backed in aggregate. The basically studios in the fourth quarter looking to be up one half basically two and a half is that correct.
Yes, that's been that's a good way to look at it right. The third quarter is it maybe it is a tick higher than second quarter, because we're going to see we think some production activity phasing in starting in August and then maybe more fully should we should be basically in full production in September. So you can see some of that pick up on.
Within the third quarter, but the majority of that will hit in the fourth.
Okay and then the second question, maybe I missed comments on Maxwell, but can you just update at the Max well, we work and what's going on there.
Yeah sure I mean listen this is we will discuss this on our last quarterly call 'em. We work is paying ranjan all of their locations with the exception of Max while at the time were negotiated deal we signed that deal with them and it's going to be more of a percentage rent a transaction. It also will enable us the deal has enabled us for us to take over the asset.
With some notification.
Period, where were now evaluating some of the other tenant uses and interest level down there and so we are we the numbers that the guys have quoted had been based on a percentage rent. It's the only deal that we have with any of our co working entities and that looks like a you know it will be a wait and see based on the interest level and we clearly have in.
At this level of somebody existing enterprise tenants in new tenants in that marketplace I want to expand into it.
Okay. Thank you vector.
Thanks.
Thank you. Our next question comes from the line of Alain.
Wells Fargo. Please proceed with your question, Hey, I believe its Blaine.
You Gotta Victor.
My father, there that correction.
So just just following up on that on the Blackstone JV. Victor you you just talked a little bit about deployment, but I guess just out of curiosity.
You know are there any targeted studio asset, but you know maybe you've been looking at that that wouldn't have you wouldn't have wanted to do just on your own balance sheet, but but we'll within the JV structure and if so you know any geographical or other color you can give us would be helpful.
So the answer is yes, and clearly I don't want to go into the details of the ones that we're looking at but we are in the process right. Now is evaluating several some we would've done our own and ER and still would do it would have done and others. It make makes it a lot more compatible for us our venture with Blackstone.
You know Blackstone gets this business they've got it for a long time, we've been talking about this transaction with them for several years and.
Obviously, when you you know.
Covering us for such a long time, you understand this business clearly clearly the.
Content players is stays at play that is on the forefront of a lot of people even even some of our peers are looking to buy and build in in in that area as well and so it shows the validity of that business I. I think you know we're going to have some really good attractive transactions on the horizon, that's going to add to the value of this.
Portfolio.
Got it Okay. That's helpful. And then can you update samba and those ferry building. It obviously has a large retail component in there was a good amount of media coverage on whether its open or close and and how to characterize that space.
Just can you give us an update there on current operations and then future plans for that space, especially given you know the new social distancing norms.
Yes, well, let me, let me sort of make a couple comments about the variable in the first of all yes, there's a lot of retail space. There. It's approximately 70 580000 square feet of the total tally the assets. Yes. It also as we've always pointed out even though on the forefront. It looks like you know it's a retail asset has 200000 plus square feet of office, which is fully occupied at you know great rents.
In a great tenant mix, which supports which supports the building in terms of its current cash flow levels. You know, we announced a in conjunction with our partner. It all the onset we were going to revisit the entire retail component, including the indoor outdoor attributes that we which we were which are we are currently in the middle or.
Design.
As well as the nave, which is the interior aspects. This enabled us Oh unfortunate incident cobiz enable us to exploit that process to evaluate the the architectural design and plans around it and Ah. Yes. We've had we've had some interesting press around around the variable it as of late one being sort.
On the top filing bankruptcy, which is a prime corner and an area that I think we as a partnership with all the units in the operating partner are very happy to have the ability to get that back and hired better used with bear rents clearly would be the aspect there. The other aspect of the variability is we just got allocate.
And a the ability for the very willing to reopen during this timeframe because it's considered a transportation hub and a flow through with the ferry terminal and so we're just getting it up and running while we're in a shelter from home retail aspects. There. So I think you're going to see a pickup as well with the tendency there.
The third and fourth quarter, if things sort of stay constant and don't and don't move so I am optimistic there's a lot of good good things going to happen in the variable in the near future.
Great. Thanks Victor.
Thanks Helane.
[laughter].
Thank you ladies and gentlemen, our next question comes from line of Manny Korchman Citi. Please proceed with your question.
Hi, everyone.
The Mark and I would I appreciate all the details you gave earlier in the calling on sort of what the rest figure it looks like given that level of detail, what's preventing you from throwing out a guidance or or publish view of where the years gonna be are there other aspects the worst sort of nothing came out or not covering it and maybe those are either external growth or buyback.
Yes, or something that we havent spoken about.
Yeah.
Look I think we're very close here I think we would agree that we've given you all of the main moving parts, but look.
Good.
Dialing out a real level of precision a one would want to know or things like you know how soon our parking and other revenues going to resumed to a level of normal see on you'd want to have a pretty good handle on how well we do on the collection.
As a starting to occur or does it say tenants that were getting deferrals in the second quarter, and where there's amortization of that deferral into over the remaining terms at least is starting to occur we want to have some confidence around the success on the collections and then and there's a there's another big looming item, which I'll touch on but we also.
4 million Bucks in second quarter rents and county, where we still haven't cut a deal yet with tenants, it's mostly on the retail side, where we're seeing a you know you know struggle and we don't know the fate of that 4 million and so there's still a considerable amount of moving parts that would be a challenge to pin down in terms of guidance.
The downside your I would also add you know we are you know were eminently closing the JV with Blackstone, but we know what the initial debt pricing on that is but we know we don't ultimately know the final pricing because they are intending to securitize it and there's some latitude on final pricing in connection.
With the these securitization. So we don't know would pay interest expense areas and then we have an opportunity which if it comes to pass will give a further information around it.
But we won't know probably for the next 10 or so days to potentially bites and a piece of debt there and so there's just enough moving parts on the horizon here that it's not we don't think it's the appropriate time to provide specific guidance I'm just add to that while we're we provided guidance mostly on GAAP related matters.
There's a huge amount of uncertainty in terms of the cash right just because we.
The deal that we do deferred rent.
Transactions on from a GAAP perspective have very limited if any impact but on five full guidance by cash NOI amongst other amongst many other things and that is just really challenging to predict.
Right. Thanks, Victor maybe to follow up on on another earlier question.
Those studio deals that that you now think you can do with Blackstone has a larger entity and those are no may have been deals that were too big for you to swallow would those have been deals at Blackstone could it potentially gone on their own and so by forming this year just sort of you know the taken out the competition or searches made yourselves a logical buyer in all cases.
No Im Blackstone was ever intending to buying studios without an operating partner is an operating business. Many you know that this is much much more beyond just buying an asset and putting a player in place and this is a relationship business, but that is a full opco will show runners and relationships with all the studios that are going to be in place every single and everything.
Studio that we're looking at and nothing to do with that and it had nothing to do with the fact that is where assets that were too large for US you know their timing.
On what we were looking up this transaction with a partner that saw value I'm in a portfolio that candidly. The street has not seen guy and that was the bottom line and so we proved out where we were being price. It up you know in eight cap valuation at a at a much more attractive cap rate with a partner and then we will take those proceeds.
And I think the combined entity is much better going forward then than what was the perceived entity in place.
Great. Thanks, guys. Thanks Manny.
Thank you Sir our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Thanks for taking the questions just maybe.
If you can give us some some thoughts around.
Just San Francisco, specifically and your views on the kind of rent trajectory given where we've seen some of these rates go I know you talked about sub the leasing spreads are meeting held in the near term, but but can you give us sort of a sense. How do you how do you see this evolving as you mean.
The sub these rates remain kind of what if you can compare and contrast, with maybe what you saw what you what we saw last cycle, what what's different and where do you think the puts and takes off.
So thinking about jump in on this and then art art will look at as well so listen in the city right now as we said.
In terms of our portfolio, we don't have a lot of aspirations, but we do have it a fairly big piece of sublease space. It was in the put on the market last fall, which is hoover's a space and I believe we've got four years or maybe for four to five years left in our lease terms. So any tenant is going to look at that there's going to come to us because they're going to want to have some.
Form of extension on that on that clearly the subleases been a on the forefront of San Francisco in terms of the amount of space that has come or is there is projected to come on the market in terms of cycles between the last cycle. In this cycle. This is clearly a much different characterization of tenant mix size of the 10th.
In the marketplace and the desirability to be in the city versus beat because of the lack of space. You know we've seen an increase in occupancy vacancy in San Francisco, that's almost doubled from where it was two quarters ago to where it is today I mean, I think it was it right around 6% and it's close to 11% right now.
And so you can clearly see that that's going to have some downward pressure on rate and negotiate ability for for the sublease space. The kid to somebody space, though Vikram is who is the master tenant you know as a landlord that's who we are looking to credit to the tenants that are in place and their obligation to us is a landlord.
Yeah, we're we have not changed our too.
Pre covert to post covered you know it would take an exceptional amount of negotiation and quality of tenant for us to let the existing tenant off the hook from the obligation both of the lease term and the security for us to make a determination that we wanted to go with the sub debt. It. So I think this game is TB played out.
The good news is if there is some silver lining. This process is there's very little new construction in the city or new product them outlets cities, it's already not pre leased rate ago and so we think you know this is it's going to be interesting time, and hopefully we'll see the outcome of the a positive one in the process art, Yeah. I mean, if I can say that where we're positioned pretty well right now with no.
They can see very little vacancy in the city and if you look in next year, we I think our exploration to less than 1% of FBR well less than what percent of FBR and so we feel pretty good about that your comment about the last cycle is.
Having been through a few cycles myself.
What we didn't see was there was demand there's still demand out there is a wait and see approach on demand maybe it was 6 million feet and it's about three and a half million feet still still looking for moving a glacial speed before there was no demand right and so some of these tenants were out there still trying to make a decision on stakes utilization.
Our waiting to see what's going to happen next and so I feel good about reengaging with those those tenants that are out there in that to San Francisco, but in all the market.
Okay. That's a that's there and then this quarter there was a write down that you took <unk> and non real estate investment in the technology Fund.
You had given some color in the last quarter skew a on on investment you had made can you give us some color what what was that kind of what what loans what led to the write down.
So for accounting purposes, we're required to.
Effectively mark to market our investments as information comes available. So we got regular statements from a the fund and we adjust our valuation as a result of that so it's just current valuation on the underlying investments.
And which can move up or down in the future as things progress.
But is this I mean, there was a it's pretty public that there were lots of investor that thing can fit well is this that investment no. There's a forced does a small portion relate to that but there is the other portion that's driving this is our investments and zoo.
A a car Manny I Thomas car manufacturer that used to be a tenant. They recently were purchased and that mark to market valuation.
<unk> down now historically, there was a valuation that brought it up so our underlying investment wasn't.
Didn't deteriorate, it's just we had market up based upon other metrics in the past and then when the transaction occurred we aftermarket down to reflect that transaction.
Okay.
And then just lastly, I wanted to clarify you mentioned that you've obviously taken with you've written down some straight line rents and you've taken some reserves.
But you said there might be a need sort of going forward to reassess and there maybe you know kind of more reserves can you sort of just give us a little bit more color on first of all the <unk> some assets because I think there's also comment that they're different companies using different strategy. Some companies have said you know if we had challenges we're just going to.
Kind of removes or write downs straight line rent than going a cash basis, others have decided experts and needs that treatment can you give us a little bit more color on how you're thinking about that sure. So our philosophy is if we cut a deal with them.
And we are and they're keeping to that deal we're not going to write down the straight line rent or go to cash only because we have something in place. However, if we don't have a deal with the tenant and these are all I.
I mean, 90% of our retail we don't have a deal with a tenant or they're not able to meet the agreements that we have put together then we will reserve or write down the straight line rent, but those items, because there's a lot of uncertainty and effectively push them to cash basis, yeah, and the cash rents I would add theres really little noise between the amount we pay.
And in reserve.
And the amounts that we've cut deals on that isn't say, we collected roughly 40% of retail rents in the second quarter and if you look at the roughly 60% uncollected, what you'd see is.
Only a small fraction of the of those amounts are even subject to contracts right now on because most of our of the uncollected retail tenants are looking for some form of relief. They haven't just committed to say two months a deferral, they're looking to go to a percentage rent deal or self worth and so you wouldn't see.
Not much different than the number either way.
I would add to just so we don't lose perspective on it we're talking about two or 2.8% of our Avi are and if you look through that 60% uncollected, we're talking about a really in significant difference in the amount that we reserved for based on what is under contract versus what's not in America.
Contract, it's still almost insignificant.
Okay, and then just last one if I made the we work the specific we work restructuring the Max Little building.
Is that I'm, just trying to understand like <unk> <unk> that is just a very unique situation or the reason I ask as we've now seen different landlords are addressed this in different ways. Some are you know some it said that there might be needs, where we want to get back space. In other cases, we've heard we work Austin for 10% kind of abatement going forward.
And then there was this this unique deal that that you've talked about just just your perspective on on the on coal working and how that how the arrangements are changing.
Thank you because I know this is a specific deal we did directly with Sandeep. He he had reached out very early on in this process. It just took us a long time to executed on a on the premise. If we look at each of our assets with them and the quality of the tenancy and the occupancy levels in their desire to be there.
The one that are sort of stood out that he had not least is much. They just got to space from us completed in the first quarter of this year and only it side a portion of it to and an enterprise tenet and so that enterprise tenant is occupying and paying them and so we just look at this is an opportunity for us to either.
So keep that faced with them and see where the world goes or turnaround and take that space back at a later date and and transact on our own leasing in terms of your your latter part of your question. You know we think there is an opportunity whether it's we worker regis or anybody else for that matter on co working because I think the.
The validity of co working in a post covert world could have a lot of interested smaller tenants, taking small space, that's including themselves variable basis and have the optionality of moving into their own space down the road. So it's a good stop gap and how long is less than the extent by which there's interest level. We states we still think.
That theres, an opportunity here and a good opportunity for them to be part of it.
Great. Thank you.
Thank you. Our next question comes to line up Dave Rodgers with Baird. Please proceed with your question.
Yeah, I just have one lapped it maybe I'll start with art and Victor I heard you can jump in on some of this but with the VIP program just kind of wondered about your experience now with collections as you move into August the demand negotiations with any of those tenants and I guess are you inclined to do more the given kind of the comments that you just made around we work and just.
Working in general just kind of your thoughts on that part of the business and how it performed sure. Its art I you know the VSP is cheaply. It's a lot of the smaller spaces that are kind of ready to go weve always built them out.
Less densified.
I would like Densified and allow tenants to.
Create the environment that they need and so we're on track with deals we have right now in the VIP program. During this period weve been able to.
Deploy our resources to build out more and this fashion and I think that that's going to be part of kind of the increase in leasing velocity going forward is having having the inventory and the.
In the proper markets.
Ready to go so yes, it's going to keep going to be part of our success is going forward as it has it.
What's the space modification.
What's your total exposure to that DSD that you might consider to be in the VIP program and what the availability as you sit here today or what do you how many people now.
So I think deployed ready to go right now we've got about 100, and probably about 120000 square feet. Again. These are smaller smaller tenants for smaller tenants. We've got into works, we've got probably another 75000 square feet.
In some process of.
Development.
Okay, great. Thank you.
Thank you [noise].
Your next question comes from the line Oh.
That's not yet.
Please proceed with your question.
Hi, yes, good afternoon.
So at some leases that were fine could you just talk a little bit about what the terms of move because our just trying to get a better sense of the flexibility around those things to be they become long somebody's laid on maybe opportunities to you. If you find them better tenants kind of move a tenant in there I'm just kind of curious what kind of flexibility and puts and takes out Rob.
Well I wouldn't are the ones, we called out so that we could give you a.
Clear understanding of what the true underlying mark to market is a 54000 square feet. A short term extension I wouldn't look at those as if they were on in connection with you know I'm sort of but I'd just desire to extend them for 12 months or less that was in connection with rent roll.
Leave programs that we that we were.
Granny new tenant that had a shorter term remaining on the lease so.
Oh I tend to come to us wants to months a deferral, we are willing to give them two months a deferral, but we want say turn beyond that period that they would that the bullet payment would arise or give them a little bit more terms. So that they have time to to amortize in the deferred rent and so this was it like a arm's length arrangement where attendant came.
Yes for a short term extension this was hand in hand, with an underlying rent granting of some form of rent relief.
Gotcha Okay.
And then a Harlow Oh commentary was made there that you know the cross I thought a lease it up is moving along but towards the when he was news I'm just kind of area.
In other uses the word smoothly as you kind of surplus of this multi tenant strategy, we get how how confident are you feeling that you got nice up there.
By a you know by opening all little bit also.
Well clearly given the fact that tours are not are not face to face their virtual is it has slowed by definition the process of the amount of people that actually can see to face. It has enabled us to finish it which we will be finishing it shortly it's almost complete I guess is by.
Into September it should be it should be ready a range it will be seen and hopefully when the.
When we see the lifting and people starting to come back we'll see a lot more tours, but that's the definition of slowing I mean, we just we're just not getting the physical towards right now for a full office building like that.
Thoughts.
Alright, thank you.
Thank you ladies and gentlemen.
Comes from the mine.
Why don't I understand.
Please proceed with your question.
Thanks, Good good afternoon, Salix sorry go on life without all star one trouble for some reason.
So just two questions first for her <unk> when you talk point through this sort of the guidepost for the rest of this year.
You talked about JV, and let's be kind of be consolidated so is it sort of a simple take 49% FFO previously somehow.
Minority interest Ducs or is that how we should think about it.
Partially that will be true for the.
Assets under Levered, but then you have to factor in the leverage over the 900 million and allocates for 9% of that debt to effectively offset a reduction of if I thought.
Okay. Okay.
Sorry, I missed out that and then a apart or question perhaps for.
[laughter], Victoria, just getting better.
Very yeah, but did you see the detail the densification out the studio somebody mentioned.
Along the way.
As as you know sort of content starts to.
Ramp back up I'm wondering if they do you densification studio in need more space, nor spread within the studios for health reasons and all that.
Actually extrapolated to how the office business generally might behave in the aftermath of all this do you see this gosh actually being and.
Resulting in an increase in office demand because of social distancing within the four wall so for those assets.
Well I think listen we've talked about that and rich and I think thats exactly what us another landlords are finding right now with the.
With companies during do you know doing lay offs and furloughs at the end of the day, we're finding that they're not asking for less space. There are actually keeping the existing space with less people and so that's exactly the case, it's happening in the studio business. What we're finding is that they are allocating more space for the for the same.
People that there'd be working there and we're feeling that and the deals that were negotiating right now that we're in leases as I mentioned earlier the call. There's a couple of him in San Francisco right now that are larger tenants square footage wise the amount of square footage has stayed the same and they're going to put less people in that space I think thats going to be a trend going.
Forward, and then who knows what happens if people start hiring again, and you know in 21 or or beyond and what they're going to do about that but I think is can be a combination of no existing space or more space and then flexible hours to gain people you know not coming into the same time or sharing space in a different form and function.
And then we've seen in the past. So this is an away fee.
And you know I think just taking that wants to further maybe maintenance capex starts trend down because not jamming. So many people in that area now that it's not it's not as much of a house party I mean, I'm not I'm kind of refund on this but it seems like there's perhaps another side to this argument is oh I definitely think that I definitely think that will fall into play, but I do think unifi be cautious.
On the on the on the on the maintenance and side you know when it comes to date borders in and out of office buildings, you're gonna have a lot more cleaning done on a regular pattern. During the day than you do that you would at night, so that could offset.
Yeah, Okay, great alright, thanks, that's all that.
Thanks Rich.
Thank you, ladies and gentlemen, first time that other questions I'd like to make a comment closing comments, yeah, I apologize that we've gone over by by or a lot of time, but I think it was a lot of information I appreciate the support for Hudson and we look forward to speaking at our next quarterly call and we hope everybody is safe. Thanks, so much.
[music].
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines. This time.
Yes.