Q3 2020 Hudson Pacific Properties Inc Earnings Call
[music].
Greetings and welcome to the Doctor Pacific properties third quarter 2020 earnings Conference call.
Time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Laura Campbell Senior VP of Investor Relations and marketing.
Q, you're maybe thank you operator, good morning, everyone and welcome to Hudson Pacific properties third quarter 2020 earnings call.
Yesterday, a press release and supplemental were filed an 8-K with the FTC. Both are available on the investors section of our website Hudson Pacific properties Dotcom, an audio webcast of this call will also be available for replay by going over the next week and on the investors section of our website.
During this call we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental there will also be making forward looking statements based on our current expectations. These statements are subject to risks and uncertainties are discussed in our SEC filings, including various ongoing developments regarding the COVID-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 added certain disclosures specifically in response, the fccs direction on special disclosure of changes in our business Comped up I covered my team, we do not expect to maintain this level of disclosure when normal business operations.
With that I'd like to welcome they tripled and our chairman and CEO Mark Wallace, our president I like to believe that our COO and CIO and heard through Marriott. Our CFO note. They will be joined by other senior management during the Q and a portion of our call Victor Thank.
Thank you Laura Hello, welcome to our third quarter 2020 call I Hope you are all healthy and well.
I'm pleased to report that we had a very safe and very productive third quarter horse down even Hudson Pacific team, which throughout the pandemic has brought tremendous tone expertise to every aspect of our business continues to successfully navigate this complex environment.
I was in a central business, we've had 100% of our workforce back in the office since labor day on a rotating schedule with all the necessary precautions and it's fantastic to be together again and productive.
There's no doubt that we like others in our markets have been impacted by the extended shutdowns in California, and Washington, which have tempered the recovery.
Weve seen accelerate in other parts of the country.
Regardless, our billings are fully operational with industry, leading health and safety protocols in place or tenants are paying rent or Austin city losses are well leased our leasing activity is starting to accelerate and our rent spreads were made a pre covered levels. Our development pipeline is on time and on budget, we've got ample capital capital augmented by Premier.
Well the line JV partners to operate and invest the bottom line is we're still poised to make visionary type strategic moves that consistently reinforce our position as one of the most creative dynamic players in our industry.
We are however, starting to see some positive signs throughout our markets last week, San Francisco allowed non us central office to open, albeit a 25% capacity Los Angeles schools can now welcome back 25% of heightening students and this includes younger learnings, which in turn helps working parents returned to the office and physical office occupancy at our office properties across.
Our markets has reached about 15%, which was slightly higher than the U.S., sorry, slightly lower in the U.S. and slightly higher in Canada.
We're in constant dialogue with all of our tenants in claims we know that the spike bold statements regarding work from home and seemingly for a return to the office states, particularly by Tech companies. Most are simply on hold to figure out how not whether to use their space.
Should cities open sooner than anticipated, we not be surprised to see C O accelerate at least a partial return to work.
Further the media has really focused on permanent work from home shifts when the reality as many companies. Most recently, Microsoft are simply making moves towards a more flexible schedule. For example, working while four or two out of five days a week at home.
Our office tenant base is made up of the world's most creative innovative companies that build their businesses their competitive edge around culture creativity collaboration and our work environments that are so dynamic that their exponentially better than being at home.
And then there are types of work that you simply can't do at home security infrastructure. For example, our major issues for Tech companies do you ever toured our element La campus in West Los Angeles. It perfectly exemplifies all these aspects. This is the type of office space, we provide throughout our entire portfolio.
As for our studios dislike despite some delays getting content producers guilds and unions on the same page about health protocols production Recompete.
We commenced in late August.
On 10 of our stages and we're expecting to have 34 or 35 stages active by next month.
Currently utilizing the stages include a who's who of major media CBS Fox Netflix Disney a b C and H.B.O. and to date Weve experienced no further shutdowns given the pent up content spend a production, particularly the non feature film single camera episodic dramas perfect for screening for which our.
Her stages are ideal we anticipate demand to remain extremely robust. The bottom line is we would leave check immediate will lead. This recovery digital has only accelerated during this pandemic spring major VC investment in cyber security and the cloud ecommerce health care business services, Fintech and AD Tech at 38 billion.
Third quarter 2020 was the third highest quarter for U.S. VC investment in a decade surpassed only by the second quarter 2020 also during the pandemic and the fourth quarter of 2018.
Software companies still dominate allocations money has flowed to pharma and biotech, but its a fraction 2020 shaping up to be a good you're also for first time venture financing and the money keeps coming fund raising is also has already surpassed 19 levels at 56 billion and so far it making 2020 the second highest.
Your ever also in the third quarter pent up demand for Unicorn led to near record U.S. IPO activities in terms of valuations and these trends are expected to continue and are extremely positive for tech and the resiliency of office demand across all of our markets.
At this point, we also had first hand knowledge of the incredible pent up demand for streaming content, Netflix Amazon Apple plus who move Disney plus in each field Max had tens of millions of new subscription subscriptions. This year now 80% of U.S. concerns consumers subscribe to at least one streaming.
Service nearly a quarter of them have also streamed a first run movie with 90% likely to do it again nearly half haven't participated in some sort of dreaming activity as well these disputes or even higher for gen Z and millennials even pre covert. This these six streaming companies I mentioned intend to spend approximately 35.
<unk> billion dollars on content for 2020, so the demand for backlog for stages and support space is huge in the near term.
In the mid to longer term it bodes incredibly well for Los Angeles studio and office space at large as he productions and gave me companies continue to grow.
Before I turn the call over to Mark I'd like to highlight our corporate responsibility initiatives as most of you know in May we launched our industry, leading yes cheap platform better blueprint, but.
Pandemics challenges have only increased the value and importance of making bold moves across three focus areas sustainability health and equity and we've done just that on the heels of rolling out our new diversity equity income inclusion programs adopting the fifth walls.
<unk> response module and directing significant charitable giving to populations most impacted by the current levels, we've achieved 100% carbon neutral operations guarding the recognition of the World Green building Council as one of the first major religious organizations to do so.
We don't really anticipate achieving this milestone in 2025, but given the increased energy associated with COVID-19 health and safety measures, we moved quickly and creatively to get this done now.
Our solutions to eliminate all scope one into GHG emissions by leveraging our energy efficient portfolio. The use of onsite renewables and a combination of renewable energy certificates and carbon offsets what we've got a lot more to do we're pursuing additional onsite renewables and innovative technology solutions to reduce further operational carbon.
We're also working to reduce our scope three GHG emissions from non operational carbon specifically building materials. So as they said much more to come we will continue to lead the industry on this and other related fronts with that I'm going to turn it over to Mark Thanks Victor.
As you noted our tenants continue to pay rent, we collected 97% of total third quarter rents comprised of 90% of office rents, 100% of studio rents and 52% of our retail rents.
To date in October we've collected 94% of total rent comprised of 96% of office rents, 98% of studio rents and 51% of retail rents.
These percentages exclude rents contractually deferred or abated in accordance with COVID-19 lease amendments.
We included those amounts are third quarter collections would have been 96% for total Rad, 98% for office, 98% for studio and 48% for retail.
On October collections would be 95% of total rent.
96% for office, 99% for studio and 52% for retail.
During the third quarter, we deferred approximately $3.1 million or 1.8% of total rents I.
Another approximately $3.1 million or 1.9% remains in discussion for either payment or deferral we.
We abated only $1.1 million or approximately <unk>, 0.7%, a third quarter rents in connection with COVID-19 relief.
Our success with collections is a testament to our high quality office tenants at studio clients, which include many of today's most innovative and creative growth companies over 90% of our office Hbr is attributable to publicly traded or mature privately held companies and business 10 years or more only 3% of our.
The CBR is attributable to companies and business less than five years and each of these 53 companies contribute on average only <unk>, 0.05% are off the CBR. So any risk from younger companies is well diversified.
Among our top 50 tenants, which collectively generate about 60% of our office hbr nearly 75% of that Hbr is derived from publicly traded and nearly 55% is from large cap and our credit rated companies.
Beyond tenant quality, we believe other attributes make it less likely our tenants will give back space in the near to mid term. There is no doubt that smaller office and retail tenants have struggled the most during the pandemic, but we've always focused on larger credit tenants and longer term leases today, our average lease size is over 15000 square feet.
With the remaining term of five years further we specialize in creative flexible work space, which means our tenants operate at very high densities pre pandemic typically around 150 to 180 square feet per person. So even if a company decides to keep a portion of its work force from home.
Longer term, we expect the physical distancing and lower density requirements in a range of 230 to 250 square feet per person will buoy, both demand for an occupancy at our properties.
Finally, we own and operate it premier portfolio through.
Through industry, leading development and redevelopment and strategic capital investments, we've always focused on providing the most modern safest healthiest work space in the market. We have a young portfolio. Our average effective building age is 16 years, we own predominantly low to mid rise product, which is eight stories on average.
Reducing the need for elevator access nearly 85% of our portfolio has functional outdoor space, including patios courtyards elevated and rooftop decks and essentially all of our properties have state of the art, each fact systems, including murder 13 air filters or higher but.
Before turning the call over to Alex I'll provide a brief update on the various ballot measures this year.
Potentially impacts to our business.
States and cities across the country are facing rising deficits, resulting from the pandemic and Washington, and California are no exception.
As a result this election season, we're facing several proposed tax increases.
Crop 15, if path would be the largest property tax increase in California history with major implications for large and small businesses alike and ultimately as this is likely part one of two California homeowners.
We've taken an active leadership role in opposing prop 15, and there has been a steady decline in both in favor.
Colleen shows a dead heat at 46% to 46%. However, if past the measure won't take effect until the 22 23 tax year and EPS history has shown implementation will be incredibly challenging and take years to complete.
As a result, we believe any near to mid term impact to operating expenses will be nominal potential long term impacts will depend on future asset revaluation.
Given the recent reassessment age of our California portfolio, we enjoy a comparative advantage relative to competing landlords looking to preserve operating margins.
San Francisco, specifically faces three new ballot measures to raise additional revenue at the city and county level.
The business tax overhaul to increase gross receipt taxes or prop F will minimally impact our San Francisco portfolio.
While the proposed increase to the real estate transfer tax or prop hi, it's significant it it's only relevant upon the disposition of an asset. So it would have limited applicability to our portfolio edition.
Additionally, the impact is relatively insignificant when compared to the underlying value of our San Francisco assets.
The business tax based on top executive compensation or prop l. does not directly impact our company's taxes, but would place additional tax burden on certain San Francisco based company.
Finally in Seattle in July the City Council passed the payroll tax expense also known as the head tax with veto proof majority vote.
Even so there is a concerted effort amongst the business community, including ourselves to push for local and state solutions to the measure that maintain Seattle's competitiveness as a business destination and now I'll turn the call over to Alex.
Thanks, Mark we remain fortunate our markets entered the pandemic on very strong footing. Despite negative net absorption almost every submarket in the third quarter vacancy remains in the single digits or in some cases, just over 10%. Thus far we're seeing minimal deterioration on rent both more broadly in the market and within.
Our own portfolio sublease space is on the rise in several of our markets, but the numbers tell a complete story, including the fact that some of the larger subleases were pre cobot offerings.
Our stabilized and in service office portfolios remain well leased at 94.5% to 93.5%, respectively. We had a notable sequential uptick in leasing activity quarter over quarter, signing nearly 185000 square feet of new and renewal deal. Despite many tenants on pause and are very limit.
Good near term expiration.
This included a 42000 square foot expansion lease with Google at Rincon Center in San Francisco that feel the positive side for how companies are thinking about office space, even when pursuing both in person and remote work flexibility. Once again, we achieved robust, 41% GAAP and 29% cash rent spreads only about.
20% of our activity this quarter involved shorter term extension that is with a term of 12 months or less even excluding those deals, which typically entail a rent premium our mark to market was still a pretty cold mid level, 38% on a GAAP basis and 25% on a cash basis. We're.
We're seeing renewed tenant activity in our leasing pipeline.
Increased 40% quarter over quarter to 960000 square feet, that's fully in line with third quarter 2019, and now less than 10% of those deals are on hold our remaining expirations for 2020 equate to about 2% of our Hbr and we have coverage on about 45% of those deals are 22.
Anyone expirations for which we have about 40% coverage equate to about 11% of our hbr, our mark to market on in place leases remains about 14%. So we still have some cushion even with continued pressure on Iran.
We had several major milestones within our development pipeline over the last four months, our low received a certificate of occupancy we topped off structural steel at one west side, which remains on budget and on track to deliver in the first quarter 2022, and we received unanimous approval to build another nearly 480000 square feet.
Sunset Gower.
We alongside our partner Blackstone can now commenced pre leasing efforts, we fully intend to replicate our success at Sunset Bronson and will revitalize this historic lot when the time is right.
Now more than 50% of our 2.7 million square foot pipeline of future development projects, which contain some of the best sites in the country Best office market is fully entitled and we'll be ready to build as we emerge from the current crisis.
In terms of new acquisitions over the last quarter, we've been primarily focused on growing our studio platform with Blackstone in Los Angeles, New York, London, Toronto, and Vancouver, We're looking at both development and redevelopment opportunities for straight up office deal flow remained slow there are virtually no value add or opportunistic deals with near term.
Lease up risk the bid ask it too far apart there isn't any this yet in the market for instead evaluating best in class properties, where the rent roll is made up of long term credit tendency Gil pricing, sometimes at or above pre tobin level, but with our strong liquidity position, we're actively looking to redeploy capital scale and generate attractive.
Risk adjusted returns and now I'll turn the call over to her.
Thanks, Alex and the third quarter, we generated FFO, excluding specified items of 43 cents per diluted share compared to 51 cents per diluted share a year ago.
Third quarter specified items in 2020 consist of transaction related expenses.
Point 2 million or zero cents per diluted share and onetime debt extinguishment costs of $2.7 million or two cents per diluted share compared to transaction related expenses of <unk> point, threemillion or zero cents per diluted share.
The sale of a 49% stake in a hollowed media portfolio lower parking revenue stemming from COVID-19 impacted occupancy reserves, I guess uncollected brands and lower service and other revenue at our studios largely offset gains associated with lease commencement.
Epic fourth and traction Foothill Research Center, and 40 55 market drive the year over year decrease.
Third quarter 2020, FFO, excluding specified items.
Includes approximately point too.
Two cents per diluted share of revenue was against uncollected cash rent and approximately two cents per diluted share of charges to revenue related to reserves again straight line revenue. This resulted in a total negative impact to third quarter 2020, AFFO of approximately four cents per diluted share some or all of which may be ultimately collect it.
Third quarter 2020, AFFO also reflects approximately three cents per diluted share decrease in parking revenue some will all which will resume with tenant re integration.
Simultaneous with closing.
Our JV with Blackstone departure of clothing $900 million mortgage loan secured by the property by the portfolio with an initial two year term annual interest rate of LIBOR plus 2.15% we are.
Saved 1.2 billion of gross proceeds and used approximately 849.5 million to fully repay our unstick unsecured revolver are met park north loan and term loans be ending we also repurchased we also purchased $107.8 million of low and securing the hard media portfolio.
Which bears interest at a weighted average annual rate of LIBOR plus 3.31%.
In addition, we repurchased 1.2 million shares of common stock at an average price of 22 point 57 per share.
To date, we repurchased a combined 2.6 million shares of common stock at an average price of $23, an 89 cents per share under our 250 million share repurchase plan.
We now have 1.3 billion in liquidity consisting up.
65.3 million of cash and cash equivalents 600 million of capacity on our unsecured revolver and $339.5 million of capacity on our one wesco construction.
We have no maturities until 2022, and a weighted average term of maturity of 6.1 years.
Yes, we have ample capital to manage our properties complete our developed projects and ultimately pursue new opportunities before.
Before turning to guidance I'd like to highlight a very positive emerging trend relating to our FFO. Despite a 12.7 million decline in FFO quarter over quarter, resulting from the temporary impact of our hollered media portfolio JV.
We actually generate a modest increase in AFFO for that same period. This reflects the combined combination of normalizing leasing costs, along with the transaction transition from non cash revenue to cash rent commencements. Following the burn off of free rent under significant leases as indicated by the $9.1 million.
Compared to last quarter.
What's more striking as the increase in Jordan.
So which is over 45% higher than AFFO.
In the prior year.
To emphasize this trend occurred in spite of temporary impact of our latest JV to do significant lower leasing costs and transition to cash rent Commencements and is an important milestone, which we have often noted in connection with prior period leasing activity.
On May 5th we withdrew our previous 2020 earnings guidance due to the uncertainty around business disruptions related to the COVID-19 pandemic given these uncertainties given these uncertainties persist we have not reinstated guidance.
For the balance of the year. We are however, once again, providing following details ill do a formal guidance weve basis information on what we know today to help you assess our potential earning results for fourth quarter 2020.
Due to the continued impact of COVID-19, we expect our fourth quarter 2020 operation to be similar to that of the third quarter 2020 that said for the fourth quarter compared to the third quarter office NOI is expected to increase approximately 1.5% immediately NOI as is expected to increase approximately 5.5% third.
Third quarter operating results include the impact of the new holiday media portfolio JV for two months, whereas the fourth quarter, we will fully reflect this transaction.
After adjusting for onetime debt extinguishment fees in the third quarter, we expect interest expense to be approximately 4% higher reflecting the full quarter impact of interest when they entered a new hobby media portfolio low. We also anticipate an increase to AFFO attributable to non controlling interest of approximately 20% compared.
The third quarter and now I'll turn the call back to Victor.
Thanks, Andrew Marc Alex and Laura I'm going to close by saying this we do not take lightly any the hurdles that California is placing we're proposing to place on its businesses and all of its residents in many ways I said this before this unfortunately is nothing new and while we're optimistic Californians, we will thrive in spite of.
These obstacles as we have for years, we plan to do everything in our power to help California continue to lead to be a great place to do business a great place to raise a family and simply a great place to live and again I want to express my appreciation to the entire Hudson Pacific team for all their hard work and dedication and thanks for everybody.
Here listening today, we appreciate your continued support.
Stay healthy and safe and we look forward to updating you next quarter and operator with that let's open the line up for any questions that are applicable.
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Yes.
Our first question is coming from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey.
I.
Good morning out there just.
I've been a long earnings week.
So two questions.
First.
If you could just give a little bit more color you want to stock buybacks. Good thing obviously, the stock is incredibly depressed, but your stock trading at an implied eight and you guys bought a piece of the media alone that was a three rate. So if you could just walk through that because it would have.
It seemed like that that capital would have been better used to buy back your stock at a higher yield. So just want to hear more about how you guys view the transaction.
Yes, Alex Hey, Victor.
Thanks for the question. So you know Alex you view you personally asked this several times in the answer has been the same first of all it was a it was a LIBOR plus three three and yes. It is a far cry from an implied a even though today stock were probably traded a forward looking implied 10 and a half so.
The answer to your question is we will always buyback our stock at these levels.
We couldn't buyback our stock during that transaction, because we were closed out.
Initially as we are right now, but as of Wednesday, we will start buying back our stock.
At these levels and continue to do so, but as I've said countless times before.
We're not going to look to.
Miss out on opportunities we have Fortunately, we're in a very very nice situation with capital that is accessible for us to invest in multiple factors stock being one and assets be another specific to this we just know that the credit being that it's Blackstone ourselves.
And the opportunity there was a mess we would take it ourselves.
And have this as an opportunity to park. This for a period of time since we had a need for capital to be invested and we had nothing else at the time to be invested that's what we chose to do and it was a small amount, yes, I would just add that.
900 million dollar loan on that billion 650 image is 55% leverage the purchase of the 107.8 million not only did it allow us to de lever to effectively 40%, which is much closer to our target leverage, but we de levered purchased at LIBOR plus three third.
The one which is significantly higher than our own cost of debt. So if we want to re lever we could re lever much cheaper than that debt. So there's.
It makes.
Post a sense for me, there's a lot of reasons why it makes a lot of sense.
Okay and then the second question, Victor and you'll love it because I'm playing with that goal sell side analysts, which is a one sided something on the other side of it like something so there was a recent silver Cup trade here in New York that I, I think created sort of low fives.
And it would seem like these transactions. The studios are a rare breed. They come up every now and then it's like buying sort of a Ferrari GTL from sixtyv or not a lot of them when they come up they command big money low fives seem still pretty cheap for an asset that.
It's hard to replicate very few of them around.
Obviously right now your cost to capital isn't great. The Blackstone JV makes it better but what are your views on it you know where cap rates for studios are going and why they should continue to go lower in which case the low fives for Silver Cup may end up looking cheap just some color on the on your thoughts on on these trade.
Yes, sure you want to get that call.
Got it.
No it's from Washington DC.
Thank God I'm just kidding so.
So no listen I think cap rates are definitely going to be compressed in that field.
There are a lot of eyeballs on it the competition I think is obviously increase is that asset is a great asset its an asset that we did play in that in the field of trying to purchase.
We didn't at the time and the sole reason, we didnt become more aggressive is because we were in the middle of our process with our JV with Blackstone and so it timing just didn't work those assets are still going to be sought after hudson in Blackstone in our in our venture are going to continue to expand that platform. We.
Talked about it we have several deals that were looking at right now and we're going to continue to be aggressive on that and I think you're absolutely right. I think those kind of cap rates are good cap rates and the markets even to get tighter on that stuff because there's very few of them out there.
Okay. Thank you Victor.
You got it.
Thank you. Our next question is coming from the line of Dave Rodgers with Baird. Please proceed with your questions.
Hey, good morning out there and good afternoon, everyone I guess I heard in Alex's comments that maybe you guys are really focused on core transactions today, and I guess I just wanted to verify the thought process around that and additionally, where you're comfortable buying assets, obviously a lot of changes in the market today.
Quite a bit also on the legislative front I mean are you comfortable buying core assets in San Francisco proper today, what's your thought process around that Victor.
It's a good question listen core assets for long term cash flow stability is something that we will look at paying tenant quality geographical location economies of scale, our cost of capital. Our JV partners. If we were to look out with the JV partner their cost of capital all those factors, Dave are going to come into play.
Listeners are you asking me directly are we going to buy an asset today in San Francisco I would say the answer is probably not.
Thats not a marketplace that we are comfortable.
At this level as Alex said in his remarks right now, we're not seeing the spread for buying value.
Value add assets in any of our markets just because they are still priced at levels that I think we believe are too high.
Given that the lease up activity in our markets is a lot slower than it was last 12 months ago, clearly, so, but there's always going to be.
Unique opportunities and synergies that we have to take into account and the like we have in various different times and in our in our lives as Hudson for the last what 14 years have looked at various times in the cycle and capitalized on it and dare, we say that we've made some mistakes, but not a lot and so we're going to continue that same premise.
Moving forward.
I think you also made a comment maybe without that made it on the 40% or maybe mark 40% coverage on the 21 lease expirations, 14% mark to market on that.
Is it much harder to have those conversations today. If you don't have a first half maturities. So do you have good visibility on the tenants that want to remain in place or those that may be peeling out next year and.
You, probably some of the smaller tenants versus larger tenants and do you have anything that you can share on that sure. This is aren't as we said as we said we have a pretty good handle on so far on the 21 exploration. If you recall two two of those tenants make up 25% of the.
The million five and we're in discussions with them in.
Moving moving those long so yes, I mean, we do the rest of them are.
It drops down to about 40000 feet at that point and then we're in active negotiations with a couple of those tendencies. So yes, we feel pretty good about where we sit and the mark to market is is going to be very strong.
Last maybe on co working you guys have been addressed we work in some of the leases there in earlier quarters I.
Regis has filed for bankruptcies and there has been some articles in the press of it but you guys in San Francisco and others.
I guess the question is do you feel like you're making any progress with some of those transactions and ultimately do you feel like you're appropriately reserved at this point for some of those flexible negotiations that you're having.
Yes. This is mark yes, we are definitely appropriately reserved every one of our co working locations.
With the exception of shock 15, which is a relatively small location and on Maxwell. The we were one of five we were locations, where we did it we switch to a percentage rent deal they're all.
They are all currently we are working on a little bit of a an adjustment on regis for some of the footage up in Seattle that we'll pay it in effect a 100% of the rents on the 450 and give us some of the footage back at 95, Jackson, We think Thats, a real opportunity to its well built out and it kind of allows us to.
Recapture space, so thats contiguous.
And so.
The overall picture is very healthy actually on the co working side with just a couple of adjustments that I just outlined.
And we are fully reserved against all of that.
I appreciate all the color from everyone. Thanks.
Okay.
Thank you. Our next question is coming from the line of Jamie Feldman Bank of America Merrill Lynch. Please proceed with your questions.
Great. Thank you I want to get an update on your thoughts on just the relative demand across the Bay area sub markets are you seeing any trend in Silicon Valley Peninsula versus CBD Justice.
Your leasing pipeline starts to pick up a little bit more.
Sure I think it's interesting so the pipeline has picked up quarter over quarter kind of back to.
Early early year pipe.
Pipeline levels.
Chiefly it's there's some but believe it or not there's some expansions in there there is theres tenants, who have taken different about the pause button to reengage and some of these are early 20 ones now coming back in in engaging with the plan. So.
That's the reason for the increase in the pipeline relative to the market I would say peninsula and silicon.
Silicon Valley are stronger than the city. The city I think you know the active requirements has dropped.
You know from levels of about 6 million square feet to about 2.8 million square feet.
So that is to say that there is still activity out there.
But all that activity that's on the sidelines I feel.
Encouraged going forward as people get clarity tens get clarity on how they can utilize space and when they're going to utilize space that some of that is going to stick.
And again Thats very encouraging to me as as.
We are seeing.
We will start to see more and more demand.
Okay, and then in terms of a shift.
Maybe more of a focus on suburban satellite for hub and spoke any of these things.
Yeah, I heard about the last couple of months yeah.
Yes, listen it's not that we're not seeing that we just don't have the space in either area is that people are seeing some massive shift one way or the other we just hit our Google deal in the city. It wasn't like they were seeing is going to go in the city of they're going to go in the valley. They have different requirements for each marketplace. We don't have a lot of space in the city that were that were.
Going to be comparing to people, saying no we're going to go here or there I think there is as it has been in every different types of cycle. When people said all the valleys getting crushed in the city is doing great. You know there's demand for whatever those markets are that we're seeing we're not seeing a massive exodus of the C. you say, we are going into the valley.
No like we did before and so at the end of the day, it's been constant clearly as art said, we have a lot more activity in the valley right now and people are more interested in trying to make deals and a much more expedited manner, Jamie its Alex just to add on what Victor said I think the west coast is slightly different than maybe what you would see in New York, where.
Theres a high reliance on public transportation. This idea of the maybe spread out geographically we were already doing that if you think about our markets, whether its Seattle and Bellevue in the east side. If you think about the tech companies that were both in the city and had their their footprint down all the way to San Jose and then lay in Peru.
Peculiar as you know is a relatively sprawling city. So I think that trend had already existed in our markets pre pandemic and so we're not seeing any further shift to say hey, we're going to pull out of one specific area and continue to spread I think a lot of the companies that were driving growth in the markets, we're already pretty well spread out throughout the.
The west coast in the markets that where it.
Okay. That's helpful. And then I thought the VSI number you shared were pretty impressive any thoughts on how that translate it translates into demand and what submarkets that might help well. This is a well I, we can't quantify that demand, but obviously the capital is there it's going to get used to it.
I said in my prepared remarks from anything from stabilized companies want to go public to our new range of Unicorn, So space is going to get.
Absorbed based on the growth prospects for those companies, but then again there is a lot of talk around some of the VC companies investing in tech or all the other entry.
Sorry businesses around tech, which is the highest demand clearly, but they may not only invest in companies are going to stay here in California, they're looking at all markets, obviously, given what's going on and I think after you know after we sort of settle out in the next few weeks post election, and see where things are going to shake out to be a year, we'll get much clear of a picture of companies growing and surviving in California.
Okay. Thanks, and can you talk about the leasing.
Prospects at Harlow I know you've got your certificate of occupancy buildings.
Yeah, I think for a project like that it's fantastic project.
Right now as tours are still limited people still not in the existing footprint.
Yeah, we view that as a project that's by growth for tenant and I think until we get tenants back into the space that they lease as you're seeing a lot of the deals getting done tend to be renewals right now versus new deals and expansions. So we love. The project, we think it's fantastic project.
We now have our CFO, so everything's ready to go but I think we're being patient because of the current situation.
Okay, and then last from me.
Interesting point on the AFFO pop in the third quarter and over 19, how are you guys thinking about the dividend and having to raise it at some point.
Yes, I mean, as we've talked about that for a market get into details, but clearly that this is this is a signal of what's what's to come which we've been talking about and with our collections. The way. They are at right now which has been consistent since March at 95% Unity, obviously impact on this is going to be given its going to increase.
We've always said, it's going to probably increase some time in 21, and maybe early maybe middle of but I mean March pretty confident given that the FFO impact.
It's something and thanks for picking that up Mark you want to comment well no I'm glad that you appreciated the commentary.
I mean, we've been foreshadowing this for quite a long time.
And if we look ahead, we think this third quarter result will carry forward pretty dependably on as Victor says, we'll be monitoring the dividend. We have good coverage now at the 25 cents a quarter and we will be monitoring it looks for the next opportunity.
Makes sense I think about.
Okay. Thank you.
Thanks, Jamie.
Thank you. Our next question will come from the line of Manny Korchman with Citi. Please proceed with your question.
Hi, good afternoon, everyone.
Victor I mean, you started off the call in on a really positive note.
And the fundamentals aren't necessarily reflecting that but so what are you guys looking for on the ground trying to get more positive or negative.
That would make the that we as investors or analysts in your stock should also be falling.
Well, let's let's talk about it just basic facts many right I mean, so so this thing started now we're we're going since March we're now November 1st this weekend.
We've been consistently collecting at 95%.
We probably come off our occupancy levels by 1%. So during what people are now citing is the worst time in our lives. After all the cycles that we've all seen we're seeing our fundamentals are stable. They haven't moved we were not like we've seen volatility in rent collections revolver.
Building occupancy, but the key is going to be the things that are clearly out of all of our controls and the end of the day, it's getting kids back to school in Washington.
And in California, like they are in Vancouver, and seen the occupancy and the buildings go up so we see our our stability of our buildings go from 15% occupancy back to some normalized numbers.
Ours is work from home going to dominate I think you already know that position and everybody is saying the same thing and whether it's the tech companies or the the the fire related companies Ceos in America have said, Hey, we're going back to work just when people are comfortable. So this is a it's a timing game, but it shouldnt impact.
What I guess what are sort of take is at Hudson our quality of portfolio has not changed we have a phenomenal quality of assets.
And we've got stable playing very very high quality tenants. So why are our values trading at.
11 caps when private markets are buying stuff at fours, and fives or threes fours and fives right. I mean, so there is such a massive disconnect and I do think that people huntley are using the tone of saying office is changed forever and never going to change forever things always revert back it may look at.
I'll defer to maybe it's a four day work week, but doesn't mean, we're not seeing any impact on the ground by any of our major tenants have said, we want to get back space or we're looking to reconfigure our space. So we have less space for the same amount of people or or all the sort of staying apps that people are feeling in hearing in the market today. So I think that part of the Pos.
Does it have attributes it's just it's just how we see it from our position at the end of day now now also we don't have an issue Im sorry, we don't want to.
Sort of paint a brush around the issue of the political environment and I'm not talking about the federal environment I'm talking about California environment, we have some major issues in the state that we're going to have to tackle, but it's not going to be a process by which you're going to see a mass exodus set of California, California is California, Despite itself and if you listen to our calls for the last 10 years, we've talked about the same way people.
We're here for a reason and they're going to stay here for the reason and so we're optimistic that this is going to pass it will be adjusted.
That's I think thats, where the tone is from our standpoint Manny from from the ground that we look at it from.
Thanks, let Victor.
Thanks for the the pieces of guidance going forward here.
I was a little bit surprised the studio income wouldn't recover faster now that.
Things are shooting is is that just a magnitude issue and people arent paying.
Paying those ancillary fees because.
So just the.
The scale of the shooting isn't there or is there something else that I'm not thinking let me jump into Mark's going to talk about some of the faster revenue front first of all the shooting just started it crept in late August which that means that.
The stages were being built people were getting back protocols are being put in place and it was slower than we anticipated lets be candid and I mentioned that in my in my prepared remarks, I mean, the unions and the.
The PPD PPD agreeing to getting people back to work has been has been a lot slower, but now they are up and running and we're 95% active on our portfolio right now in terms of the studios and so you're going to see a man.
Massive uptake in in the ancillary revenue that they weren't paying before mark now get into it yes, I mean, they did on it from Q2 to Q3, the ancillary did tick up a decent amount it didn't get quite to Q1 levels, but.
If our own projections hold Q4 ancillary should be.
Almost to Q1 levels, so that will be a pretty significant uptick from Q3 to Q4, which is a reflection of exactly what pictures mentioning namely the ramp up that was starting to occur through Q3, and then a really take hold in Q4, and then as we will see in 21 that that.
Ramping up.
I didn't use beyond Q4, and we get to pretty significant levels.
Normalized levels in Q1, Q2 increase Q3, Q4, I would say it would the ancillary revenues looking forward would be even stronger than than say 2019 levels, but we've got a little bit of.
Certainty around control rooms, because these live audience shows.
We're not it's not clear yet whether or not we're going to get as much control room revenue.
And that does affect.
Ample the stages that said all the other stages are expected to be as busy as they've ever been.
Kind of looking ahead, and we'll start seeing the real impact of that in Q4, and then Mary I'm sure you can see it but base rent rental revenue has held steady throughout content and make it we really saw no deterioration on rental revenue.
Hey, Victor its Michael Bilerman, Eric Manny.
Just coming back to your commentary that things always revert back you look at the retail the mall business and that certainly has reverted back and I can remember so many conference calls of the mall landlord thing that ecommerce and technology wasn't an issue you think about what I can tell you that that deal Wouldnt have happened for you.
If the mall industry Didnt change so what gives you the confidence that we are not that office won't become the next mall business.
Hey, listen I can't prognosticate, what what will or won't happen I can only tell you what we're seeing specifically with our tenants and the conversations we're having and internally with with with our own employees. This whatever this change is going to impact be impacted in today will be a young person is change and so the young people here are going to make.
The movement to to to make a decision to interact socialize.
Beyond boarded learn how to move up the corporate ladders and strategies in companies clearly there are going to be aspects of of office businesses that don't need to be in offices, but when you're talking about creating value and working together and getting educated in building a platform everything that technology media Entertainment has built over the last whatever 12 years since.
Since the inception of the growth of the Amazons the googles facebooks of the apples of the world.
It's probably been predicated on that so why would we all of a sudden say or even assume to say that socialization is not going to be important. Therefore people can work from home. It's not retail retail is a choice what you people in this country are unfortunately have a choice whether they're going to have to work or not people have to go to work to end up putting food on the table.
Okay and providing a.
The likelihood for their families and growing the economy and so that's going to be around office and I think personally there are a lot of.
In this country, who politically today cannot make those statements because it's not the time is that right. We're not out of the woods on Covidien people are still concerned about their health and welfare of themselves and their employees as they should be but when that shifts that shift is going to happen and people will end up going back to some level of normality and whatever that level in the Maui is Larry.
Three days, a week or four days a week people young people want to go to work and they want to socialize in Iraq and that's how we look at it and Thats what were hearing from our tenants and they're all saying the same thing.
Yes, well we've been back for the last three to four weeks and that has been a pleasure to be back together as a team colleagues.
After six and a half dozen months of being part so I.
I agree with you on that part for sure.
Thank you thanks.
Thanks.
Thank you. Our next question is coming from the line of Craig Mailman with Keybanc capital markets. Please proceed with your questions.
Hey, guys.
Just curious here it sounds like kind of a mark to markets are holding I'm just curious.
Aside from Ses rents what what your projection from that effect is is is given just kind of where concessions and capex are trending.
Yes, Greg this is art.
I would say the deals that we've closed granted our deal velocity is down but.
Sessions are holding we're not we're not giving any more free rent. There is not more 10 10 improvements on any package in our rents are take rents are at or little bit above underwriting and so this is kind of going over the last seven eight months.
And.
Our face our ask rates or flat. These a lot of these deals have been in the pipeline for some time, we've had every opportunity to erode the habit and so I'm only speaking to deals that actually have been done.
In our portfolio and so we feel encouraged by that.
That's helpful. Then so you guys have to have some of the sublease space available in San Francisco with the Burbs kind of curious that's a shorter term west on it as.
As you talk to them or or hear about the demand for that how how is that kind of going relatives and how could that impact the rents.
The competitive rents here for San Francisco within your portfolio is that all well Craig. So so first of all it's 25 so.
So it's not short term and we still have four more years, a little more than four more years on that space. It's great space and you know and it's open floor plans and theres lots of excess space for employees and growth remember that space has been on the market pre covance I mean that was the space that they looked at there is a lot of decisions that whoever is going to be making about moving.
There are new space or if they even moved to the U.S based on where we sit with that I don't think our space is going to dictate values in the marketplace because its way below market in terms of where even if you want to go obviously below cobot pre.
Creek overtime, its way below but even currently to compared to the deal. We just did with Google is massive well right art, yes.
Okay, and then just last one for me.
You guys talked a little about buying assets here and I know the time may not be right, but assuming perhaps your stock price is and back to.
A level that makes it interesting to use as a currency and also does compare well to market cap rates in debt is still extremely cheap and the fact, you guys have a decent amount of cash flow coming on next couple of years. I mean would you look to just use more leverage in the near term and then hopefully de lever over time as that future cash flow comes on is that.
Consideration in order just kind of juice yields in the near term.
It's never been our model.
You know there are instances where.
Inviting a little bit more leveraged say in a JV context makes sense, but.
We're not yet.
So straight from our.
Our discipline in terms of balance sheet management, just to try to temporarily juice yields.
Yes.
Okay. Thank you.
Thank you. Our next question is coming from the line of next Yellowstone of Scotia Bank. Please proceed with your questions.
Thank you.
A question on you on page 15 of the supplemental you give that stat on the ending lease percentage in the same store office pool and was down 280 basis points year over year can you just talk a little bit about what's driving that and how much of that is a function of.
Not doing as much lease sale lease up of existing vacancy versus maybe are you experiencing a lower than normal retention rate on renewals.
Well I mean, Nick I wish there was just one easy answer, but you know I literally wrote I don't know six different actions.
Contributor said account for that.
Starting with ferry.
You know one seeing schematically is that we've seen.
Retail a decent amount of retail move outs, we saw it very we saw it at.
69 22.
We sides USA move out at Rincon Center, and some retail move out there.
So on there is no one sort of stand out.
Reason for it it's some combination of just.
Relatively small tenants, but nevertheless, he knows.
Combination to them and then retail move outs that you know is really the driver of that on a period over period.
Lease percentage.
Okay. Thanks, I guess I'm wondering you know based on the visibility you have right now in terms of.
New leasing that could happen that's in the works.
Expirations that are coming off where you have some visibility on renewing a tenant I mean is that is that a number that's going to stay under pressure just because mathematically you're facing a lot of expirations and new leasing is subdued because of cold weather or other reasons.
Nick its art.
So its deal.
Actual leasing velocity is down everywhere totally.
Predicated on the lease velocity, we've been always doing a good job of of Backfilling in leasing our vacancy and so it is though it's still some of these deals are still in the pipeline. We were encouraged by that it's a matter of timing and getting them through.
Getting tends to feel more comfortable about decision, making on how they can use their space and when they can use their space. So do we if we had nothing in the pipeline I'd say, yes shucks.
I don't know when but it's really getting these things these deals through which we're doing a good job of kind of marketing all of our efforts to getting through it. So we feel encouraged about the backfill and the lease up kind of going into 21.
Okay and then it's helpful. And then I guess I just want to be clear on when you talk about 40% of.
Next years expirations, having coverage does that mean, you actually have a lease in place right now or you're just.
Confident that you're going to get it going and then I guess I'm wondering as well is that is that number also apply to the next several quarters. I mean, you have about 2% of your export portfolio expiring every quarter over the next three four quarters is at 40% for.
For the next couple of quarters or is that or is the number higher for the next couple of quarters negative for the site.
Kind of look at the year end in that 40% is represents the deals we have in negotiation and some of them are so.
Small percentage those are completed already but it's really the totality of.
Renewed and in well into negotiation. So we feel like we have a pretty good handle on it and a lot of those tenants are I mean, I think the average tenant size. Once you drop down is about 67000 square feet and so a lot of these these tenants, especially now with no clarity on how they can utilize the spacing.
In that window is very very very small before they would be discussing renewal nine to 12 months out even small guys now thats shrunk to anywhere from three to kind of three to six months.
Okay. Thanks, everyone.
[music].
Thank you. Our next question is coming from the line of Omotayo Okusanya of Mizuho. Please proceed with your questions.
Hi, yes, good afternoon, everyone.
The comment that was made about Valerie.
Growth in the quarter.
So I think you said that the final thing column can you just help us think a little bit through 2021, and maybe any big kind of like we rent burn off but things like that we should be aware of.
So I'm trying to starting to figure out 2021, what type of share growth could look like.
Yeah, I mean, it's so it's sort of getting ahead as you know 2021 guidance to get too granular about.
What what exactly it looks like I, although I would say in preparing the commentary hurried and I did sit with the model to sort of.
Reassure ourselves that this trend.
Both sequential that a safe from say Q2 to Q3 and looking ahead into Q4 and beyond.
It's sustainable.
On for the reasons, we outlined.
In the prepared remarks that is to say the shift from free rent to cash paying rent this sort of normalization on recurring capex being the key drivers of that so it does.
Appear that this is we have.
Reached a turning point on that we've been long for shadowing off hand in route I don't.
If anything comes to mind offhand I cannot think of a.
Significant leases we've experienced in 2020 shifting from free rent to cash team ran theres always some amount of that but I think we witnessed a lot of it in later.
Half of 2020 with the likes of epic in our Arts district gas and so forth.
I don't know that 2021 is has that dynamic, but I do think it will benefit from the full year of cash.
The rent on you know on all of those tenants as opposed to partial period.
That's about right Mark.
What's happening is the are the free rent portion is coming.
Coming together for us.
Obviously theres a large deal that we signed there is going to be a leasing costs associated with that but as we look out.
Based on our current portfolio the free rent burn off will continue and I think now there'll be ups and downs, depending on the quarter, but ultimately this is a trend that is heading to.
Great. Okay Thats helpful. Thank you.
Thank you.
Thank you. Our next question is coming from the line of Rich Anderson with SMBC. Please proceed with your questions. Thanks, and just on the work from home.
I agree with you I mean, if the young person sitting an interview chair says I want to work from home four days a week and the other equally call qualified says I mean every day, who is going to get that job. So.
I think you're spot on with that Victor I mean someone my age probably could have some of that flexibility, but younger generations are probably going to be led by the market and the market is going to be back to work in my opinion I just wanted to kind of say that.
All my questions have been.
I have been asked and answered except for one and Thats on the buyback you said you're going be back to the market on on Wednesday may be you're saying that tongue and cheek maybe that was that was.
No no no it's not not tongue in cheek, we will come back in the market. This week.
We are locked out until through end of business today. So we will be back in the market. When guys. My question is so I have a little hesitation on buybacks I don't know how often they really work mainly because you you can't really see the accretion, particularly use days within minutes of the pandemic no guidance, but.
I don't know how well they truly work I understand them, obviously buying at 11 cap.
But it does it disrupt the balance sheet or has the potential to do so so.
We may differ on the value of buybacks, but I'm curious if you guys can give us a sense of what the limited like what your limitations are on that beyond what's available to do in the current buyback program like where could it where would you have to stop that in your opinion.
Richard It's a great question. If you think the same way, we do which is it's a moment in time and we're taking advantage of the market conditions based on where our stock is now being currently valued where we know that the real value is or what we perceive the value to beep.
And so it's always going to be a balance and whether it's whether its entering the market on a buyback basis. While we are we look to do a tender those are going to take obviously precedent based on access to capital and use of capital and proceeds for other things that being said, we have a $250 million approval process right now.
We will go back to the board, which we could go back easily at any time increase that I believe we've already purchased about a 110 one.
110 million.
At various levels. So we still got a little bit more room to go so that would be that the process right now is to fill out the 250 and then look at.
Exactly what you're talking about metrics and use the proceeds and where where our leverage levels are and how the balance sheet is impacted in and where the stock price is and I think.
That will that will that will definitely be on the forefront of what were doing given everything else. We're doing with the company right now and other opportunities that we're looking at and so there is no finite number to say hey, we need to buy X I think it's going to be access to where the markets will will be pricing it at and where we think the opportunities are on but.
Right now as we sit on October Thirtyth.
Our stock price is today.
We'll be buying back at least the remainder of the.
140, or so ever Mark Mark says we have.
Going forward.
Okay. Good stocks going up just as you said that so there you go.
[laughter] still buying back.
All right. Thanks, very much thanks have a good weekend. Thank you everybody I know we've run over time, so I apologize if we've not let anybody ask questions, but unfortunately, it's a it's been a long along quarter and a lot of time, we try to we try to be.
In June as to only 12 o'clock West coast time, So I want to thank everybody for participating and again I want to thank the entire Hudson team, who continues to accelerate during these challenging times I'm proud of all of you and we look forward to chatting with you all our next quarterly call. Thanks, operator will disconnect now.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.