Q4 2020 Hudson Pacific Properties Inc Earnings Call
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Okay.
Greetings and welcome to the Hudson Pacific Properties, Inc, fourth quarter, 'twenty and 'twenty earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
And if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as the reminder of this conference is being recorded.
And now my pleasure to introduce your host Laura Campbell Senior Vice President Investor Relations and marketing. Thank you you may begin.
Thank you operator, and good morning, everyone and welcome to Hudson Pacific properties fourth quarter, 'twenty and 'twenty earnings call yesterday.
Yesterday, our press release and supplemental were filed on and 8-K with the SEC. Both are available on the investors section of our web site Hudson Pacific properties Dotcom and audio webcast of this call will also be available for replay by phone and over the next week and on the investors section of our website.
During this call and we'll discuss non-GAAP financial measures, which are reconciled to our GAAP financial results and our press release and supplemental we will also be making forward looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including various ongoing developments regarding the COVID-19 Pandemic Act.
Cool events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update more of her today, we've added certain disclosure and specifically in response to the SEC's direction on special disclosure of changes and our business prompted by COVID-19, we do not expect and maintained its level of disclosure and normal business operations for you with that.
I'd like to welcome Victor Coleman, our chairman and CEO, Mark Lammas, our president and art Suazo, our EVP of leasing and.
And our CFO Victor.
Thank you Laura Hello, everyone and welcome to Hudson Pacific's fourth quarter 2020 earnings call.
'twenty and 'twenty, certainly presented everyone with unprecedented challenges and I remain extremely proud of the Hudson Pacific team and how we've navigated the pandemic to get to this point.
Draw on the vaccine and the new year gives us a line of sight on getting our tenants and employees safely back to their offices and as you know we believe the vast majority of the companies.
It's not a matter of if the win.
Where we specialize and leasing workplace to the world's most creative and innovative businesses and their success did not happen and a remote context. It happened because of the connections culture and facilities and gave them a competitive edge those environments designed to inspire and be infinitely better than your home off.
Attracting the best talent and fostered.
The optimum creativity.
And I expect everyone still working from home can probably of tests the hours of zoom calls from your couch just doesn't do the same thing.
Hudson Pacific didn't slow down in 2020 and of our accomplishments for the year on numerous even with many tenants on the sideline.
Leased over 800000 and square feet with strong rent spreads of 21, 5% GAAP and 14, 3% cash we collected 98% of our rents during the three quarters of 'twenty and 'twenty impacted by Covid, including 99 per set of office and 100 per cent of studio rents showcasing the exceptional quality of our tenants our portfolio remained open.
And fully operational as we swiftly implemented industry, leading health and safety protocols, we completed Harlow and kept Onewest site on time and on budget and August we monetize the portion of our Hollywood studio and office properties generating $1 $3 billion of proceeds, which further fortified our balance sheet and liquidity position.
We significantly expanded our Seattle, and Denny triangle footprint and our relationship with Amazon with the acquisition of 1988 capitalizing on the disconnect between public and private valuations, we repurchased over three and a half million shares of our stock and an average price of $23 and we continue to set ourselves apart as an ESG leader.
And the real estate circles and be on launching our proprietary better blueprint Pat platform, achieving 100% carbon neutral operations and earning energy star partner of the year Awards and the Grigsby Star Green Star Awards among other things.
As we look for 'twenty, one we're ideally positioned to capitalize on opportunities before us are markets are the center of gravity for media and technology industries, both of which have accelerated and as a result of the pandemic our balance sheet remains strong with no material near term maturities and ample liquidity and we also have excellent JV partners and we're actively evaluating.
A variety of opportunities both office and studio.
We're tackling our 'twenty, one explorations with good momentum and coverage to date and our nearly 600000 square foot fully onewest side leased projects will deliver in Q1 next year and our development pipeline contains some of the best sites and most exciting projects and our markets.
A large portion of which are fully entitled and we would be ready to break ground as conditions warrant in 'twenty. One we will take further action to ensure our cities and communities remain vibrant places to work live and play book.
True policy and advocacy impact investing philanthropy or other civic engagement this will especially be important as we recover from this pandemic.
Just last week, we pledged $20 million for five years to support innovative approaches to addressing the homelessness and housing affordability crisis, and our markets and southern California, especially there's been a lack of leadership from the business community on this issue and certainly not on par with what we've seen in the Bay area and.
Imperative that more la based Ceos and companies become part of the solution.
With that I'm going to turn it over to Mark.
Thanks, Victor our rent collections remained strong and the fourth quarter, we collected 97% of total rents, including 98 per cent per office of 100 per cent for studios and 51% for retail.
To date in January we've collected 97 per cent of total rents, including 98 per cent for office 99 per cent for studio and 48 per cent for retail again, our high quality office and studio tenants are continuing to perform its the storefront retail tenants that are struggling as they await building repopulation.
After nearly a full year of monitoring collections, we're seeing seen a clear trend that indicates our tenants have weathered the worst of the pandemic challenges and.
And the second quarter of last year, we deferred rents for 16 and tenants comprising 550000 square feet. The following quarter only 19 tenants occupying 120000 square feet needed a deferral by the fourth quarter. The number had dropped to a mere nine tenants and the 82000 square feet.
And for the collection of deferred rents, while we're still early and the payback period for most tenants we've already collected 54% of the $5 6 million of deferred rents nearly three quarters of which we received and the fourth quarter again. This highlights the improving the strength of even our most.
<unk> tenants.
On the development front and one west side, we have begun space planning with Google and the project remains on track to deliver in Q1 of next year, which once fully on line will generate nearly 43 million of annual consolidated cash NOI or.
Our future development pipeline comprises nearly $3 2 million square feet of which over 1 million square feet is fully entitled and this includes our state of the art by 538000 square foot, Washington, and 1000 project and Seattle's Denny triangle, which we've designed to be at the forefront of health and wellness and any code.
And then safety related considerations.
It also includes approximately 480000 square feet of net new development at Sunset Gower Studios, obviously ideally positioned to cater to growing demand from content producers.
We're perfecting designs enter the entitlements for other unique sites and projects and Hollywood West L. A the Vancouver, CBD and North San Jose to as Victor has mentioned and sure we're ready to move forward with tenant interest and now I will turn it over to art. Thank you, Marc and the fourth quarter, our stabilized and in service portfolio.
Steady at $94, five and 93, 5% leased respectively. We signed nearly 280000 square feet of new and renewal leases, our best quarter for 'twenty and 'twenty in terms of volume at GAAP and cash rent spreads of four 9% and for 7% respectively.
GAAP and cash rent spreads would have been $9 nine and nine 2% respectively.
But mostly for 44000 square foot renewal, we completed with 24 hour fitness and met park, North and Seattle and.
And as Victor noted, our GAAP and cash rent spreads for all of 2020, or 21, 5% and 14, 3% respectively.
Which would have been even higher at 20 to 22, 3% and 15, 4%, respectively, but for short term deals.
Tenant interest tours and activity continue to accelerate and the new year across all of our markets. For example, we're seeing increased interest from larger tenants, particularly in Los Angeles, We are now and discussions with multiple multi floor users at Harlow and we also had a notable uptick and tours and proposals from smaller tenants.
And Redwood shores, and North San Jose our deal pipeline that is deals and leases LOI or proposals increased quarter over quarter more than 30% to $1 1 million square feet and aligns with our availabilities across our markets.
As of the end of Q4, we had 10, 7% of our ABR expiring this year with a 13% and mark to market.
We have about 45 per cent coverage on those explorations that is deals and leases LOI to of proposals.
For explorations over 20000 square feet, we have 65% coverage on.
Two largest expirations by far our Google at 3400 Hill view, and Palo Alto and Dell EMC at five O five first street and pioneer square.
The renewal discussions are underway.
And addressing these two leases alone will reduce our ABR exposure for 'twenty and 'twenty one.
The seven 6%.
We also have nothing expiring of significance in either of Los Angeles or San Francisco This year.
I'd like to reiterate that our lease economics have remained intact during the pandemic of.
Our average net effective rent for 2020 actually increased slightly year over year, just over a percent to $46 per square foot.
Comparing Q4 2020 to Q4 of 2019 on net effective rent was up 14% to $42 per square foot.
One of the immediate impacts of Covid with shorter term shorter term leases, particularly for renewal deals. However, since Q2, we've seen the sequential uptick and lease term across the board. Our Q4 2020, new deals were on par with Q1 with an average of six year term.
For our Q4 2020 renewals. The average term was three eight years or up over 100% from Q2.
Now I'll turn the call over to her route.
And the fourth quarter, we generated <unk>, excluding specified items of 44 per diluted share compared to 55 cents per diluted share a year ago fourth quarter of specified items. In 2020 consisted of one time tax reassessment manager costs of $5 5 million or four cents per diluted share and.
The one time prior period net property tax savings of $700000 or zero cents per diluted per diluted share compared to transaction related expenses of 200000 or zero cents per diluted share and onetime debt extinguishment costs of 600000 or zero cents per diluted share.
The year over year decrease and our <unk> resulted from the partial sale of our Hollywood media portfolio.
Lower parking revenue due to COVID-19 impacted occupancy reserves against uncollectible uncollected rents and lower service and other revenue at our studios, partly offset by gains from lease Commencements at epic fourth and traction Foothill Research Park and pocket of 55 markets.
Fourth quarter of 2020, <unk>, excluding specified items includes approximately <unk> <unk> per diluted share of write offs against uncollected cash rents.
And approximately <unk> <unk> per diluted share of charges to revenue related to reserves against the straight line rent receivable.
This resulted in a total negative impact the fourth quarter 2000, 20-F, <unk> of approximately <unk> <unk> per diluted share from all of which may be ultimately collected.
All of the collected fourth quarter of 2020, <unk> also reflects <unk> <unk> per diluted share a decrease and parking revenue.
All of which will resume with tenant and integration.
Despite the pandemic, we continue to post relatively strong same store NOI cash NOI growth within our office portfolio, we of same store office and.
The growth of four 2% and Q4 and <unk>, 6% for the year. However, adjusting for prior period property tax expense, our same store office cash NOI would have been five 7% for Q4 and zero of <unk>, 9% for the year.
Following our 1918 eight acquisition.
As well as repurchasing repurchasing another 900000 shares of common stock and Q4, we have 1 billion of liquidity, we have no material and mature maturities until 2023 safe for the loan secured by our Hollywood media portfolio, which matures on Q3 2022 and.
And has three one year extension options and our average long term is five eight years and short as Victor said, we have ample capital to manage our properties complete our development projects and pursue new opportunities.
Once again this quarter, we've had a steady and meaningful <unk> growth, specifically Ava for increased by $11 million or 27% and Q4, 'twenty and 'twenty compared to Q4 2019.
This occurred even while <unk> declined by $22 6 million for the same period due to temporary impacts of both our Hollywood media JV.
And COVID-19.
Similarly.
Our year over year, 2020, <unk> increased $55 9 million or 40%, despite a $32 million decrease and <unk> for the same period, largely due to our JV and Covid and.
And both cases this positive <unk> try and reflects the significant impact of normalizing leasing cost and cash rent commencement of major leases following the burn off of free rent.
We're providing guidance for Q1, 'twenty 'twenty, one and <unk> 45 to <unk> 47 per diluted share excluding specified items at the midpoint. This is <unk> <unk> per diluted share of higher than our Q4, 'twenty and 'twenty.
Per diluted share excluding specified items.
The increase was primarily driven by the following Q1 2021 compared to Q4 2020 items.
We expect our office GAAP NOI to increase approximately five 5%, excluding the $1 6 million dollar of onetime prior period property tax expense that occurred in Q4, 'twenty and 'twenty.
The five 5% increase is primarily due to our acquisition of 1918, Inc.
We expect the studio GAAP NOI to increase approximately seven 5%, Inc. Excluding the $2 2 million one time prior period property tax savings that occurred in Q4, 'twenty and 'twenty.
This seven 5% increase is primarily due to heightened production activity.
We expect our G&A to decrease approximately 1%, excluding the $5 $5 million of onetime tax reassessment magic cost of that occurred in Q4, 'twenty and 'twenty.
We expect interest expense the increased two 8% as a result of our loan secured by 1988, which commenced mid December 'twenty and 'twenty. Finally, we expect our <unk> attributable to non controlling interest to increase approximately 23% again as the result of acquisition of 1988.
Our 46 cents.
Per share of Q1, 'twenty 'twenty, one guidance midpoint and the underlying components just outlined and provide a helpful reference for forecasting our current full year expectations more specifically, we're expecting volt Q1, 'twenty 'twenty, one office and studio GAAP NOI to remain consistent throughout the balance of the year. We are however, <unk>.
<unk> some improvement and a few key components of full year 2020, <unk> compared to Q1, 'twenty and 'twenty guidance annualized asphalt G&A is expected to be $2 $5 million lower and interest expense is expected to be $3 $6 million lower and now I'll turn it back to Victor.
Thanks for route art, Mark and Laura to close and Hudson Pacific, We've always operated of premier portfolio and through the years.
Strategically invested and unique and highly accretive growth opportunities through development redevelopment or repositioning and doing so we've ensured we own the best assets and attract the best tenants and Prime West Coast Tech and media hubs. There is no doubt the we have political hurdles to overcome and both California and in Washington, but the West coast.
<unk> networks and talent clusters were built over many decades, and thus are difficult and not and if not impossible to replicate.
We like our peers will be fully engaged and committed to ensuring our markets continue to thrive. They are favorable for both businesses and residents alike and once again I want to express my sincere appreciation to the fantastic Hudson Pacific team for all of their work and dedication this year and thanks to everyone for listening today and 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 for questions.
Thank you, ladies and gentlemen at this time and we will be conducting a question and answer session.
If you'd like to ask the question you May press Star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star two of you would like to remove your question from the queue for.
And for participants using speaker equipment and may be necessary to pick up your handset before pressing the star King.
Our first question comes from the line of Nick usually go with Scotiabank. Please proceed with your question.
Thanks, Hello, everyone.
So I guess just first of all concerns of.
Yeah, the full year you talked about.
The first it sounds like for <unk> for first quarter of the good kind of run rates and think about for the year.
Maybe you can just give us the of.
Our feeling for how you guys are thinking about occupancy and.
And you know in terms of releasing on the lease explorations for the year, how we should think the bad kind of occupancy trending for the year.
Hi, net guitar, yes, so I mean as I said in my prepared remarks, and we got so we started the year with $1 five worth of explorations.
It's encouraging early early in the quarter already we've got 45% coverage on those expiring tenants the two largest obviously Google.
207000 square feet of Palo Alto and <unk>.
<unk> hundred 85000 square feet, and Seattle were well in front of and we're down the road with those tenants.
I think if you look at our uptick in pipeline activity just from the beginning of the year.
Probably pushed it at 45% number closer to 50% of coverage early and we're still having conversations I think we're early tenants are starting to to experience of kind of a renewed confidence as they look beyond.
The the vaccine and schools opening and I think that's that's exactly why that the numbers of increasing quarter over quarter.
And Nick and just on your initial question you know as we completed budgets right towards the end of the year.
And.
And kind of looked ahead to where they pointed on our lease percentage by year end.
It looks to us like we should be able to maintain our lease percentage of.
As we ended the year, we should be able to maintain that throughout the year.
Uh huh.
So we don't expect to see any deterioration.
And in that number.
Okay, great. Thanks for so it sounds like you guys feel pretty optimistic about getting the lease explorations.
Renewed with Google and Polyol, Palo Alto, and Dell and partner and square that for.
I'd say this Nick it's Victor.
How are you I would say that we feel very good about our lease exploration timeline, that's coming due in 2021.
And of the Big two we are in leases on one right now and the other one where we're negotiating back and forth on.
On paper, so we feel pretty good about it.
Okay. Appreciate that thanks, Victor I guess, just one other follow up and as we think about the exploration this year.
You do have some more waiting in Silicon Valley, which is some of this is a small smaller tenant market and thinking about that portfolio, where you've got you've had I think of a little bit more tenant churn over the past couple of years, sometimes plan because your repositioning of assets how should we kind of think about some of this.
Smaller and then.
Leasing trends right now that you're seeing in the portfolio.
Sure Nick.
Absolutely I think you hit it on the nose and.
Silicon Valley and on the peninsula, the smaller tenant market. The churn that you are referring to was larger tenants that have either rolled out or downsized and obviously takes time to kind of re leases with smaller tenants. We're going to continue to successfully deploy our VSP program, which has been super successful for us not only in those markets, but across our portfolio and.
With the uptick and tenant small tenant activity, which we're going to be poised to capture that activity.
Alright, Thanks, alright, thanks, everyone. Thanks.
Thanks, Nick.
Yeah.
Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Great. Thank you.
I guess can you guys talk about what youre seeing in terms of space usage and any changes I guess as you're working on the Google and Dell leases or anything else large or are they kind of rethinking how they want to use their space.
So hey, Jamie listen right now.
Because of the preponderance of our tenants are not back but now they are preparing to go back and we see the light.
Not just because of the vaccinations, but the activity and the schools coming back and all of the positive news.
We're not out of the woods, but we're seeing it people are looking at the.
And the existing utilization and to date, we've been saying this all the way through you know the reason we're collecting at 97% people are not giving back space I mean, the theyre looking for the Nextgen office space going forward and there's a number of factors that run around between safety and protocol.
Obviously, the opportunity to re imagine the future space connectivity with personnel climate change.
All of the protocols that they've been working through the last multiple months are being enacted but I think the.
The back ended answer to what your question is is that were not seen in our instances with the tenants that we're talking to right now tenants coming back and saying, we're giving up space with the exception of one large tenant and our portfolio has said we may we may end up restructuring and giving back space, but I mean the numbers are.
Well in our favor of tenants that are keeping the existing footprints aren't yet to put a finer point on and Victor.
What we're reading what we're all reading, we're all reading the same things and what we're hearing and granted it's kind of a smaller subset of that is some of the tenants are still building for maximum density I mean, they need just for sure they need to solve and the short term, but the plans on I'd say larger blocks of space or for kind of pre.
The Covid densities, if that's the indication for you.
Okay.
Okay.
Even if they're keeping the same footprint or are you seeing of different type of usage like less less desks more of collateral more meeting space or.
And you can't really even see that yet.
It's hard for us the sort of see through that right now as I said and we're still running it I think.
We're maybe occupancy physical occupancy and the assets are now and the low twenty's. So it's too hard to see and and the bigger guys are not back yet.
And they're getting ready to come back over several months all the way through till fall, but we're not we don't we don't have a clear line of on that yet.
Okay.
And then art you talked about a pickup in L. A smaller tenants and redwood shores and North San Jose.
Can you talk about what's driving that is it we've seen a lot of capital raised and the Bay area is that a big part of it and then how do you think about CBD San Francisco since it seems like.
The sublease space seems to still be on the rise there.
So in la and cheaply and Hollywood all for edge of really kind of larger 10 of deals and we're obviously.
It's bolstering our efforts at Harlow and.
And Silicon Valley and the peninsula. It is small tenant activity I think it's renewed confidence I think some of these tenants are kind of got to the end of the year. They are starting to see the light of the end of the tunnel and.
They were on the sidelines, we've talked about kind of the decrease in tenants and the market well a lot of those gains were on the sidelines and I think those tenants youre starting to see the front and of those tend to come back and.
The start to kick the tires again and re engage.
And in San Francisco Francisco, the there believe it or not yes, there's been about a 20% uptick in activity and San Francisco, We don't have as you know we don't have any exposure, where 98% leased we've got maybe 50000 square feet expiring. This year. So we're really good shape, but it's refreshing to see that some of those tend to come back in the sidelines.
And in San Francisco, the Sublease space as you know we see the deceleration.
And the sublease space, that's being put on the market and obviously, we feel confident about the direction it's going.
So would you say CBD San Francisco seeing of similar pick up for these other submarkets are not necessarily and activity.
Yeah, Yeah, Yeah, no. So I like I said, we've specifically seen.
Their tenants and the market it dropped to about $2 8 million square feet off of 6 million feet were back over three and 5 million feet. So yeah, we're starting to see some of those tenants reengage.
Okay alright, thank you.
Thanks, Jamie.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks, Good morning out there.
So in terms of future development projects, you guys have been able to build to some pretty solid yield yields of over the last few years and it's added to your land bank. So I guess can you talk about the shadow pipeline I'm guessing you'd be more willing to build something with the studio component and rather than traditional office at this point, but you know what do you think could be the next developments or when could that.
Happen and and what level of pre lease if any would you need to just start something in this environment.
Yes, well listen I think I think you know given our pipeline right now I think it would be the bolt ins of the of our markets, So and Vancouver advent All center we're evaluating.
Half of million feet and the demand in that marketplace seems to still be as consistent as it was pre COVID-19 and so we're looking through.
The design right now and deciding at the opportune time and pre leasing we've got some activity with some of larger tenants that are currently in the marketplace and expanding and the marketplace. We have Washington 1000.
That is a planned fully entitled and built for 'twenty three for us to start we can start earlier, if we wanted to.
Maybe as early as end of 'twenty, two I do think that that's going to be based upon.
The pre leasing component.
We have not seen the of the two.
Two or three tenants that came to us initially had been on the sidelines. During this timeframe, but I think our team is fairly confident that that for us to break ground. There. We will have a level of pre leasing as to the percentage of Mount not really sure and then you come down on Los Angeles.
And we are and the final stages of our Sunset Gower and development, which will be two <unk>.
And two development opportunities, but of half a million square feet, where and we are a year away from being fully ready to break ground there and that would also depend on some pre leasing component and that's going to be a combination of office and the studios and the activity. There is been its been fairly stable with our existing tenants and new 10.
And the marketplace and want to expand.
Okay. Thanks, Victor that's helpful and just.
Just to circle back on your Washington, 1000 as at the mine.
Recollection is correct I think that project is somewhat tied to what goes on with the convention center expansion, there, which seems to be delayed and kind of the over budget can you just comment on on what effect if any of that has on your plans there.
Yeah that the English is slightly delayed.
And the budgetary aspects are not our issue, but when it's delivered.
And we'll be compelled to do at least initially complete the podium through the retail component, there, which is part and parcel of our commitment. After that we will have a timeline that can extend a little longer than anticipated timeline to build the tower and so we're not concerned about the state of Washington and completing it.
And candidly it actually works and of our benefit if the timeline works that we have some pre leasing component of done we can hold off on on us breaking ground until they're completed.
Great. That's helpful. Oh, the last for me in terms of studio of acquisitions, obviously interest and the property type has increased recently and there have been you know of.
All of the studios the that had been on the market or treated recently I'm sure you guys looked at those assets was it just pricing debt held you back or was there any other reason and I guess what are the main features that you guys were looking for and and studio assets and acquisition opportunities.
Other than the Raleigh studio that just was.
A portion of that debt sold there.
And there really has not been anything else on the market. There are several deals on.
Coming to market at market and several deals that we are negotiating.
And negotiating exclusively off market.
No.
I think it would be fair to say that our plate is going to be relatively full in that area in the near future announcements should be anticipated shortly and so what we.
<unk> been very disciplined into our markets.
We're interested in the core markets that we've always talked about and our.
And our venture with Blackstone is completely active right now and.
The venture to say that you'll see a number of deals come our way both of existing deals and ground up.
Great. Thanks, Victor thank.
Thank you take care.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning, good morning, Victor and and everyone out there. So just you know a few questions here.
And.
And I guess the the first question is just sort of going back to Jamie's question. Yeah, We hear a lot about what's going on and San Francisco birth of the peninsula and it sounds like the peninsula is sort of like the Sun belt about.
Sort of California, where everyone sort of either moving out of San Francisco to go live and the flow of business whatever totally different dynamic between the business situation there versus the political and the business situation and San Francisco will be the the Lockdowns et cetera, do you see any of your tenants. So Victor I hear you that you.
We're committed to California, and the West coast, but are you seeing more tenants sort of rethink the San Francisco plant and instead focus on the peninsula and then are you seeing that translate to any actual discussions as.
As far as leasing or development potential for right. Now you know people are just making decisions based on their existing Holdings, Inc.
Existing net square footage and so far it's not really translating into anything that longer term visible.
Yeah. Alex This is art I know, we're not we're not seeing that that exited the status and Francisco at all I mean in fact wore our leasing teams are connected up and down from the city down to San Jose.
All of these are they are being you know all of these deals that are coming back of really deals that were on pause and and are seeing of kind of renewed interest, but we're not.
They are made independently of.
And any of those things that you mentioned I think Alex you.
You're spot on on the Peninsula, I think you'll be surprised to hear when we announced some of the renewals that we're working on and the terms and conditions are at the activity and the peninsula has picked up dramatically and the last 90 days and our team up there is entertaining.
A number of a number of deals that were pretty much stagnant, all true spring and summer and so they're coming back in terms of the city and listen I think you're spot on and on the political environment. There is not a good situation.
Does that mean you throw it out the answer is no. The city will recover it just depends on when and where just poised very very for tuition that we don't have a lot of explorations and the city and those that are coming up we actually have a reverse inquiries by our tenants that are asking to renew for longer term some of the larger tenants now.
And in years 'twenty, three and beyond so we had some activity around that at the same time so I'm.
I'm not saying that the picture is absolutely spectacular by any means but there is activity and people are planning for the future and the future is going to come on pretty quickly and I think these tenets understand that when they are back theyre going to be back on some form that is greater than it is clearly today and maybe not as great. As it was a year ago today, but they are pretty excited about.
The opportunity to get people back on the office and that is the central theme.
And then how route to put you on the spot because I can't ask Mark that's anymore because the he gave you the CFO range the it sounds like for the first quarter.
It.
Like it's a pretty good number call. It 46 tenths of the midpoint, which sort of annualized at the Buck 85.
So if things are getting better I think you said.
Lower interest expense, but.
Is there any reason that sort of a $1 85 is not a good 'twenty and 'twenty. One number that we should think about or are there. Some things I mean I'm sure. There's some things that are variable, but it seems like you know, they're all positives right. There's uncollected Ryan parking their studios you of retail coming back on and these are all sort of positives.
Is there any reason that we should think about sort of a $1 85 of us as sort of being the sort of implied low end of the.
The guidance range for the year.
Alex.
Yeah, I think that implies.
And basically the right thing I think we did provide and our prepared remarks. There are some items that we feel would be even better through the remainder of the year, which was G&A and interest.
So theoretically if those do also come on by the 185 is low so I think if you want to start off with 185 of the low end of the range I think that that works well.
Okay. So I mean, all of these other things it sounds like the could come on and sometime over the course of the year that would sort of bring that up meeting that from what you see right. Now there are no negatives that would bring the that would be a detriment debt or unforeseen that would be a detriment to this number right I mean, the only negative is anything COVID-19 related right.
I think if the right.
And things like that we can't control that but so far no.
We like the trend I mean, just to be clear, it's not going to be straight throughout the year there'll be ebbs and flows right and the media business being on item right Q2 is usually our slowest quarter. So just you've got to factor that in.
But ultimately.
What you said is accurate.
And then just final question Victor on you know the day.
And I've spent about a week or two ago, the departure of Alex and and Josh.
You know obviously, we all got to know Alex quite well great Guy.
But it does seem to be a trend that we're seeing not just you, but other some other Reits where people are going to the private side, just seeing the disconnect and opportunity pop and all of that do you foresee this being a bigger issue.
And you're just going to lead the G&A pressure for you or is this sort of.
More view of it this is the natural ebb and flow and their departure of allows the opportunity for people to grow and therefore, you don't see like the G&A issue or or any sort of of those sorts of things.
Well first of all Josh is a really good guy too.
We'd never.
I don't know I don't want you just think Alex is the nicest guy of the to the left I think Josh is a pretty good guy and maybe I am and the minority, but I'm going to support them.
And I just had the full bar cart and his office and you never put Josh on the sacrificial Lamb for and front of us public analysts.
Listen the they're both they're both great assets and they've been with us for a long time and I would say.
First and foremost, we wish and the greatest success and their new venture debt, they're launching hopefully imminently.
And any help that we can do as a company and friends, where we're going on we're going to support them.
The issue around.
Hudson, specifically and then generally.
I'll comment on it. This way. This is the first time, we've ever had any senior people leave the company. That's that's been by their choice not our choice I will say it that way and we've got a massive bench and great depth and the team here is energized and excited to take over and grow.
I think you point out and interesting dynamic and in that the public markets versus the private markets are constrained and when you have talented energetic individuals' this comes up and it shouldnt be expected debt.
This is a one time thing I think from our standpoint, the company doesn't anticipate any more exited but you never know what happens and time and that's why you're not run by one person you run by a team of professionals and the the team is ready to move forward on this.
As economic Asps.
Aspects change I think youre going to see gravitation to or from the public to private markets.
Okay. Thanks Victor.
Yes.
Okay.
Our next question comes from the line of frankly with BMO capital markets. Please proceed with your question.
Hi, Good morning, everyone I have a follow up on the studio business you mentioned the various opportunities Youre looking at can you talk about how competitive and how the buyer pool of change in markets, such as like Burbank, Culver City, and and the Valley and then longer term do you foresee any potential disruptions and this could have and your Hollywood market as supply increases.
Well I'll take the latter of first I mean listen our stabilized assets.
And in Hollywood and the best in class and there they were there.
And there are historical purpose built assets, so theres not going to be any any variability around that the demand is absolutely off the charts from from the competitive landscape. That's out there right now because because of of the growth and the product thats in the marketplace and as a result.
I think the the competition for <unk>.
And for sound stages is as high as it's ever been I do think that the.
And the.
The in terms of the competition, it's so ironic debt of.
Everybody who covers us for years, they didn't talk about this business and competitive and we were the only ones doing it and now that there is a competitor out there and it really is just a competitor it's all of a sudden of concern.
There is.
And our office side, which is 80 plus percent of the portfolio, we've got countless competitors.
And and Dolby seems to talk about that aspect. So I welcome. The competition I think the opportunities that we have are extremely impressive as I said I'm not worried about it I think it does validate our thesis that we've been publicly dealing with for 10 years, which has said from day, one there's massive values.
And these assets and the pricing around the mers not solely based on what we think the values of our other people are out there now pricing them. So I think it just proves that the markets of undervalued the value of this real estate and we have now and.
I would say, yes, the competitor but of benchmark and other.
Others that have come into the marketplace that are validating our values, which is currently trading way below what <unk> is by the private market valuation.
Okay, great and.
And then there's been some discussion of that San Francisco is looking to take more of the proactive approach and reducing property taxes, given the decline in property values from the pandemic.
I want to get your thoughts if you think other California markets Youre and could follow suit and if this plays out and there could be the potential property tax savings within your portfolio.
And we did announce that we had a great property tax saving interest recently on this quarter and I think I think there could be additional properties act savings throughout the entire portfolio and California.
And I do see that there is a little bit of a sea change with prop 15 getting defeated and.
And there is of pushback and there's political realization that it can't continue the way it has been the.
It's gotten us to this point right now so those are all positive.
Aspects of where the where I think people realize that business is in place.
Do you have some sort of control and aspects as to where values are put in place and then you can't continually tax the same entities going forward. So the coalitions for.
For our starting to are starting to build to the coalitions against and I think that's encouraging we still have a lot of room to go and I think more companies and more Ceos are become becoming more vocal and as a result, I think youll see a change, but it's going to take some time.
Okay. Thank you.
Thanks.
Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
And thanks for taking the question.
Maybe just going back to sort of the core.
Core markets, San Francisco versus sort of the broader Bay area I know you've talked about.
The overall demand sort of picking up the pipeline looking good.
Sublease space is high so I'm just sort of wondering if you were to if you were to sit here across sort of the key markets and particularly the city.
And given where sublease rates are today whats is there a bifurcation and what youre seeing in terms of the need for landlords to reduce.
And on what maybe tenants are looking for and how.
And how wide could that be like where what area of the you've seen sort of pricing all of rent to a hold of the versus what types of properties are you seeing.
And kind of rent rents needed to go down pretty dramatically to see incremental demand.
Yes Victor.
It's a great question and I do think that you have to look at.
Quality of the real estate first and then and then candidly if you are a landlord and in that marketplace like we are.
Our goal is to maintain occupancy so it depends how much pain do you want to take right and so if you've got a loan on the asset and you've got expenses that you need to hear too and you haven't got a deep pockets to protect yourself and the asset quality.
In terms of what's happening and you're going to be a little bit more desperate to lower your rent versus not I think all landlords and today's marketplace.
We're going to be dictated towards the demand of of tenant and so none of us want to lose tenants how.
How far down you are going to go on.
And I don't think there is a benchmark that says that I think the the irony of and we've made this comment before and it's important for me to highlight is that the tenants that are coming due today, whether it's 'twenty one 'twenty two whatever it is.
Typically have been tenants that signed and you know.
15, and 16, maybe even seven years back to 14, and so at 14 or 15 or 16, the mark to market is.
Still well above.
And we're even your reduced rent is so we're all still making more money than our current in place rents were as these tenants come into play. These arent mark to market deals that were 2019 and late 19, and obviously first quarter 'twenty, the where the peak of the market places. So when we look at some of our space from you.
You've been following us for a long time.
And supporting Us for a long time, you've seen that we had mark to market and San Francisco, and 50, or 100% and so those mark to market share now 20% of our 25%, it's still much greater than what what the tenants for rolling that so we still have some what I would say is a floor of cushion or whatever you want to classify it to be so.
We're not saying, we're given space away. So yes. It is a mark to market to where the peak was pre COVID-19, but not necessary to where the rent started and where it even accretive to in place rents over the last five or seven years.
Okay. That's that's fair enough that's helpful. Maybe one one for her.
We think about sort of the same store cash number for the year and maybe even just looking beyond a little bit.
The 18 months out.
You, obviously have the bumps you have some needs of these signs of some free rent converting.
But on.
Offset to that it sounds like and correct me, if I'm wrong debt on the exploration side, and maybe just and deciding the they may need net.
And if there is the occupancy likely and occupancy headwind.
And so.
With the bumps in the portfolio.
And occupancy and potentially occupancy headwinds.
How should we think about the trajectory of cash NOI over the next call. It four to six core of muscle.
For 18 months.
Well, what he said is accurate we do have those headwinds however.
To remind you. We also have below market leases. So we're going to renew of percentage of our tenants and they are below market. So that's kind of bring up our cash NOI on.
And I think we're pretty confident on our prospects.
But I think we.
We continue to see growth and cash NOI and <unk>.
May not be as high as the plus 6% we got this quarter after removing the one time items, but we still think we have a lot of upside.
As freeway and continues to burn off and.
For the bump start coming in.
Okay, and just maybe just to clarify like I know you are not.
We don't have specific numbers around it but just kind of high level to put kind of guardrails around the occupancy.
Kind of and your own budgeting, Hi, Hi.
Hi, and versus low and how should we think about kind of where occupancy could shake out towards the year end.
Well I think I mentioned Vikram. This is mark I mentioned that.
And completing year and budgets and looking at where we ended up on a leased percentage basis at year end and how it compares to where it.
We will trend towards the end of the the current year we were.
Really in line with those two numbers so.
Whether it's a common and it's obviously a combination of our renewals and the success on renewals plus.
Expectations on absorption of existing vacancy, but through the combination of that are and are in service portfolio appears to trend. So that we maintain our current lease percentage.
Also just a day.
As a reminder, on in terms of renewals and the largest renewals that we have are happening at the end of the year. So the impact on cash.
Cash same store NOI of at least for 'twenty and 'twenty one.
Isn't going to be that large for those tenants. So those are going to be more 'twenty, two and beyond in terms of headwinds.
That makes sense, okay, great. Thanks, so much thanks vikram.
Our next question comes from the line of of Teo, Oh, Kenya with Mizuho. Please proceed with your question Hi.
Yes, good afternoon, and most of my questions have been answered, but a quick one on studio.
For studio.
Right.
And kind of went down.
Quarter also went down in the Q I think and for you. The general impression was maybe it would be of positive trend as production for the coming back so just kind of curious and little bit about.
The <unk> and the outlook going forward yeah.
When we talk about the studios, we so often focus on stage of utilization because that's really the the driver of success of the studios, but it's so it's easy to lose track of little bit that there's about a third of the footage is office ancillary office footage that on.
Supports the studios, but it's not the office isn't entirely occupied by stage using 10 of inside as to say some of the office utilization is.
Is riders and the other production related of users, but some of it are people that simply just want to be honest studio lot casting and people and people like that and due to the disruption from COVID-19 some of those.
Users, who don't again are not there because of the stage use.
And who were under say shorter term leases or whose leases expired, we saw a bit of a pullback.
Pullback if you will on what would be of normal renewal rate for those users and as production has begun to resume again. Our view is we're going to see a lot of those non stage office users returned to the lot.
Just to be affiliated again with all of the other studio users.
Gotcha. That's helpful. And then just another follow up on the studio stuff again and regards to just the sunset.
Kudos on potential development, there did I hear you correctly that it's at least the euro.
And then on any potential and additional studio development.
And Oh, you mean on on Sunset Gower, Yeah, I think I think that would be an accurate statement, we probably would not break ground and until first quarter of 'twenty two.
And with 22, great. Thank you.
Thank you.
Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.
Hey, Good morning, Victor you talked about acquisitions on the studio side, but could you revisit your thoughts around acquisitions and investments outside of development on the traditional office side are you feeling any better there are you seeing more opportunities like you saw with Aes is that something you're interested and today and maybe juxtapose that against the buyback, which I know, it's not one or the other.
But maybe update us on your thoughts there and kind of the allocation of capital.
Yes, Dave no. Thank you listen the buyback position is still the same at these these levels when the opportunities avail themselves. We will we will consistently buyback and I think we've proven that track record out all through the last really 12 months plus and so that's going on that's going to continue.
We have not seen a massive inflow of trends of deals on the commercial side as of now.
And I do think that the team has been evaluating and a few value add deals and so our appetite would be consistent with.
And that given the opportunity that some of those value add deals are significantly <unk>.
Deeper than they were a year ago and so if we were interested in them.
That time why would we not be interested at this time, if there are accretive to the portfolio.
<unk> was of Great acquisition opportunity and we haven't we have of <unk>.
Great partner and CPP that we've done several deals with and their appetite.
As I mentioned on the prepared remarks as are our other two JV partners appetite and it's still very strong both for commercial assets.
And just maybe one follow up on the value add and obviously you saw deals last year, there's still and the market.
Are you seeing more having more off market conversations just about more of those deals happening I mean are we turning that corner, yet or is that still a little bit way in front of us.
I think youre seeing more value add deals now than when we maybe talked about it at our last caller for sure and our summer call. We're really nobody was prepared to put a value add deal because there were zero of bids out there and the price differentiation was so extreme there may be a little bit of what I would consider.
Desperate and this from some sellers that want to get out.
And they are mostly youre spot on those conversations are off market, they're not marketed deals and so we're seeing more and there's a few attractive opportunities that we are underwriting so.
I mean, I'm anticipating that that could be a good opportunity for us.
On a company like Hudson.
Great. Thanks, and then maybe just follow up for art. If I could argue you went through the lease economics for the fourth quarter and then you talked about healthy economics overall look like there was the bigger kind of maybe Ti package of this quarter that hit the.
Maybe weighed on some portion of those numbers, but correct me if I'm wrong, and then maybe explain the outlier.
Sure Yeah, so if I could repeat the on the blended basis, where actually our Ti and leasing commissions were down $21. If you're focused on the on the new deals. Yes that was that was the Libyan deal which.
We were building the space from from really raw space up too.
Warm shell with the tenant took a preponderance of our of our space is not and that condition and it's usually kind of ready ready moving space. So that was the outlier.
That's helpful. Thanks, Paul.
Our next question comes from the line of the Emmanuel Korchman with Citi. Please proceed with your question.
Hey, it's Michael Bilerman here with Manny.
Victor just two questions. The first on Alex and Josh the did they not have noncompete or are they just not competing in the new venture with you.
And when you say youre going to provide them all of the support and are you capitalizing their venture and any way of providing them any capital.
And I just think this is mark and I just take the initial question and Victor the latter on non competes.
California does not it's pretty employees friendly state of the log goes and you.
You can't there is no sort of seen as enforceable non competes now.
<unk> arrangements and this would be the case not just with respect to Alex for Josh or candidly any executive.
We have standard non solicitations, we have standard confidentiality clauses and not that it would ever be necessary. In this case, because it's as Victor has outlined but all of our agreements also have things like non disparagement causes.
And the standard clauses, that's about what you can do on California, and that's what our typical agreements on yeah and then in terms of in terms of of the latter part of the question listen day, there are they're not looking at and our markets. Currently today. They are looking and the Sun belt and other marketplaces and the the answer to the capitalization is if they came to us with.
<unk> of course, since we trust them and like them, we would obviously entertained and that's not to say that we're going to do and any assurances that we would do it but we would obviously help him out of it anyway.
And then second question and just in terms of capital deployment and Victor I know Theres a lot of different buckets, you can deploy capital.
And obviously you've done the share buybacks given the significant discount to NAV.
You're obviously doing development and activating as much of the pipeline for the future as possible.
Development, you talked and the last question about these value add opportunities that youre looking at.
How does the buying of stabilized assets, even with a joint venture partner, how does that sort of marry up with really the value side of all of those other activities I guess why put money in is it is it a market share is it supporting your joint venture partner.
Help us understand that part of your capital deployment when all of those other activities that you have in front of you.
<unk> seen better or sort of return.
Opportunity.
Listen I know, where you're getting on on that and and specific to that I think each opportunity and will stand alone and we're going to make the right decisions and you're right. I mean, we are heavily weighted on value add and development.
Not going to dissipate in terms of our game plan.
And what we're currently working on as we speak in terms of eight.
And that was a conscious decision on threefold, one and no particular order it was a relationship with the tenant being Amazon and are on our exceptional relationship with them and it's enhancing that going forward, given what we have with them and in that market and other markets.
And it's a class a asset with them for 10 plus years and the new Ceos office is just happened to be and our project and it's.
It was a great opportunity for us to capitalize on to you.
Mentioned it as a JV structure within the existing partner that we are $55 45, which is the standard deal that we do with them and.
And three of the economics around that transaction.
Effectively great I mean, we did and L plus I think 170 <unk> loan.
And for 50% of the transaction for <unk>.
Secondly gets us our going in yield somewhere in the.
And in the mid sevens, or so going up and and the capital deployment is minimal for us for us over the next 10 years. So it wasn't hey. This is the stabilized yield why are you buying of bond. It was it was a combination of I think all three of those things.
Okay. Thanks for the color Victor you got it.
Our next question comes from the line of Rich Anderson with the SMB C. Please proceed with your question.
And thanks for hanging a little bit longer I just had a quick question.
Related to what you said Victor earlier, you're negotiating a bunch of.
Potential opportunities and the studio space.
And and you mentioned, both development and acquisition opportunities I'm wondering about kind of repurposed real estate of re entitled Real estate.
Is that something that you know studio with the studio business can kind of come to the rescue of Hudson.
The C thru assets that are out there whether it's.
The the anchor space of of depart the.
<unk> store and I'm old mall or or even on an industrial asset that is probably you know obsolete by now are these are these opportunities that you could see studios kind of expand that way or am I, just barking up the wrong tree.
Listen I think I think rich you are commented on something that people have been looking at I do and.
As have we and.
We have not.
And.
Look at it and said this is absolutely a non starter the cost return analysis for non purpose built studios is still very challenging and and the quality is challenging now.
I do want to caution and and this is in no way of me hedging that saying Hey, the does that mean Hudson is doing this or not the level of technology in the entertainment and media business that is evolving may avail of themselves for this given that smaller sized stages for certain types of technological filming and the likes of that could be applicable.
<unk> for conversion space like that but in terms of a quote unquote savior two.
The existing space that is not purpose built and at the end of the day is void.
And the change in the economic structure I don't see that as a as a mainstream for for that business. Okay. That's all I have thanks very much thanks rich.
There are no further questions and the queue I'd like to hand, the call back to management for closing remarks. Thank you so much and I appreciate.
The interest and Hudson again, this quarter and the entire Hudson team.
I appreciate all of the support by everybody on the call.
Great rest of the day and everybody be safe. Thanks, so much operator bye bye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.