Q2 2021 Hudson Pacific Properties Inc Earnings Call
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And.
Greetings and welcome to the Hudson Pacific Properties incorporated second quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce Laura Campbell Executive Vice President of Investor Relations and marketing. Thank you you may be.
Ken.
Thank you operator, and good morning, everyone and welcome to Hudson Pacific properties second quarter 2021 earnings call.
Yesterday, our press release and supplemental were filed on and 8-K with the SEC. Both are available on the investors section of our website Hudson Pacific properties Dotcom and audio webcast of this call will also be available for replay by phone 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.
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 those associated with 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, this quarter. We once again included certain disclosure prompted by COVID-19 business changes, which we won't maintain business operations normalize.
With that I'd like to welcome Victor Coleman, our chairman and CEO, Mark Lammas, our president and Richard <unk>, Our CFO. They will be joined by other senior management during the Q&A portion of the call Victor.
Thank you Laura.
Good morning, everyone and welcome to our second quarter 2021 call. We had a very strong second quarter in terms of our financial results. We've also had a very busy start to our third quarter executing on our growth strategy for Sunset Studios, and I'll talk a little bit about that more and a moment the big picture the tech and media industries continue to flourish and our.
And markets venture investment and fund raising alright record levels.
IPO market is strong tech employment and hiring and have recovered to essentially pre pandemic levels and media companies are spending billions to produce a backlog of content over the last few months, we've seen a real momentum towards the return of office and we're optimistic that's going to continue growing vaccination rates combined with statewide.
Reopening and California, and mid June and Washington at the end of June and forthcoming and Vancouver. After Labor day led companies to begin implementing and formalizing plans, we are still and a wait and see mode regarding any major adjustments space configurations or needs, but even with variance were expecting heading into the.
For most companies will move forward towards at least a partial we occupancy of existing space potentially coupled with vaccine mandates. We're already seeing this from a few of our larger office tenants.
Essentially all of our major studio tenants Netflix HBO CBS Disney ABC, Amazon have resumed and are scheduled to imminently resumed.
Active production or on our watch with safety protocols.
And place production is now and overdrive, given content demand and pandemic related shutdowns, particularly here in Los Angeles, where we're building a state of the art global studio portfolio to meet that demand.
To that and.
Sure. Many of you saw we made 2 very exciting major announcements over the last week around our expansion of our Sunset studio platform. The first Sunset Glen Oaks will be the largest purpose built studio in the Los Angeles area and over 20 years. The project is and Sun Valley minutes from Burbank, or Disney NBC, Universal and Warner.
<unk> are headquartered and many other production companies like Netflix are located we're going.
And to build approximately 240000 square feet, adding and another 7 stages to our portfolio for a total investment of approximately $170 million to $190 million, we're finalizing plans and budgets that could start construction as early as fourth quarter of this year and.
<unk> fleet the project in the third quarter of 2023.
This is a 50.50 joint venture with Blackstone.
And we are on point for development leasing and property management.
The second transaction, which we announced on Monday March Sunset studio's first expansion out of the U S into the U K.
I've often noted was on our agenda.
UK has a long history of global production and and media Center.
It is a deep pool of talent crews and services to support productions regional infrastructure and generous and longstanding tax credits and further investment and the UK film and TV investment has grown dramatically over the last 5 to 7 years, while supply and purpose built studios remains limited.
Or and the entitlement and planning stages to build what will ultimately 1 of the 3 largest purpose built studios in the U K and 1 of the highest quality production facilities globally for television and film.
The site comprises 91 acres on undeveloped land about 70 miles north of London and box born Hertfordshire minutes from public transfer transit and closer to the Heathrow Airport as well as Central London. This facility will provide great access to other major studios production houses crew and talent.
We purchased the site for 120 million pounds through a $35.65, JV with Blackstone and although it's early we anticipate a total investment of around 700 million pounds will be responsible for development oversight leasing and property management and we're setting up a local office and a small team to manage the day to day reporting.
And to our team here and Los Angeles part of what's so exciting about the Sunset studios newest la and UK locations is we're reimagining how studio facilities can best support future productions via true architectural design and high Tech infrastructure are sustainable buildings and operations.
And we're at the very positive.
Preliminary marketing conversations with major production companies related to both projects and we can either master lease or multi tenant. These facilities. It is still early and we have a lot of interest and flexibility so far.
Finally, I want to congratulate the Hudson Pacific team on winning the <unk> 2021 development of the year Award. It's 1 of the industry's most prestigious awards and <unk> highest honor. Its also reflection of our company's leadership and innovation across every aspect of our business Naps recognition is especially meaningful given us.
It's based mostly on our exceptional performance throughout 2020, which of course was a very atypical and challenging year. So again very very proud of the Hudson Pacific team with that I'm going to turn it over to Mark.
Thank you Victor are second quarter rent collections remained strong at 99% for our overall portfolio and a 100% for office and studio properties.
We've collected 100% of our deferred rents due to day.
Fiscal occupancy at our office building currently ranges from 5% to 55% depending on the asset.
At the lower and our properties largely occupied by tenants communicating and end of summer or early fall return.
And as physical occupancy has improved so has our parking revenue, which grew 12% and the second quarter compared to the quarter prior.
Office leasing activity continues to accelerate across our portfolio and markets, especially in terms of inquiries and tours.
This activity translated into strengthening fundamentals more so in some markets like Silicon Valley, which and the second quarter had stable rents declining vacancy and significant positive net absorption.
In line with these trends our deal pipeline that is deals and leases Lois or proposals stand slightly above our long term average at 1.4 million square feet, that's up 75% compared to the second quarter last year and 35% year to date, despite our having completed over $1 million.
Square feet of deals so far in 2021.
To that and we've signed 510000 square feet of deals and the quarter. Once again in line with our long term average.
With 19% GAAP and 12% cash rent spreads.
Our weighted average trailing 12 month net 12 month net effective rents are up close to 10% year over year.
There are 2 primary drivers of this increase first our effective rents are up slightly about 8% and second our annual <unk> per square foot are down 30%, mostly due to ex executing more renewal leases.
Separately, our trailing 12 month lease term for new and renewal deals also increased from 4.5% to about 5 years year over year and term has also extended from pandemic lows.
Our deal activity. This quarter was split relatively equally between the bay area with a preponderance along the peninsula and in the valley and and Pacific Northwest that is Seattle, and Vancouver, with a handful of deals and Los Angeles we.
We maintained our stabilized lease percentage at 92, 7% our in service lease percentage dip 30 basis points due to the inclusion this quarter of Harlow, which we delivered a company 3 and April.
But for Harlow, which is 54% leased our in service lease percentage would have risen and 40 basis points to 91, 8%.
We have 4.4% of our ABR expiring over the rest of the year with about 55% coverage on that space.
Our remaining 2021 explorations are about 12% below market.
For explorations, we address and the first half of the year, we renewed or backfill and close to 70%.
Touching on our office developments, we're on track to deliver 1 Westside and Google and the first quarter and next year potentially sooner. We're also set to close on the podium for Washington, and 1000 late in the fourth quarter at which point, we will have a year to further evaluate and tenant interest and broader market conditions and the final.
<unk>, our time line to start construction and now I will turn the call over to her route.
Thank you Mark and the second quarter, we generated <unk>, excluding specified items of 49 per diluted share compared to <unk> 50 per diluted share a year ago second quarter specified items consist as well.
And $1.1 million or <unk> <unk> per diluted share of transaction related expenses.
And <unk> 3 million or zero cents per diluted share.
And 1 time prior period supplemental tax expense related to sunset Gower, compared $2.2 million or zero cents per diluted share of transaction related expenses a year ago.
<unk> beat our own expectations at the midpoint of our guidance by <unk> <unk> per diluted share and this was primarily due to the reversal of reserves against uncollected cash rent and straight line rent receivable.
And savings on operating expenses, some of which we expect to incur and the second half of the year.
Second quarter NOI at our 44 consolidated same store office properties decreased 2.1% on a GAAP basis, but increased 4.9% on a cash basis.
For our 3 same store studio properties NOI increased 17% on a GAAP basis, and 29, 3% on a cash basis I.
Adjusting for the onetime supplemental property tax expense at Sunset Gower NOI.
For our same store studio properties would have increased by 22, 8% on a GAAP basis and $35.8 on a cash basis.
At the end of the second quarter, we had.
$9 billion and liquidity with no material maturities until 2023, but for the loan secured by our Hollywood media portfolio.
This loan matures on Q3.2022.
And had 3.1 year extensions.
Our average loan term is 5.2 years.
And late July and preparation of funding our UK Blackstone JV, we drew down $50 million on our revolver, resulting in $550 million of Undrawn capacity, we funded our remaining pro rata and acquisition costs with cash on hand.
Our <unk> continuing to grow and the second quarter, increasing by $11.4 million or nearly 24% compared to Q2.2020.
This occurred even while <unk> declined by $3.6 million for the same period again. This positive <unk> trend reflects the significant impact of normalizing leasing cost and cash rent commencement on major leases following the burn off of free rent now I'll turn to guidance as always our guidance excludes the impact of unannounced.
Our speculative acquisitions.
Physicians.
<unk> financings and capital market activity. In addition, I'll remind everyone of the potential COVID-19 related impacts to our guidance, including variance like Delta and evolving government mandates and clearly the uncertainty surrounding the pandemic makes projecting the remainder of the year difficult and we assume our guidance will be treated with a high degree.
We are cautious as noted many companies are still determining work returned to work requirements and the impact on space needs because of this for example, our guidance does not assume a material increase and parking and other related variable income overall, we assume full physical occupancy and related revenue as well.
Not returned to pre COVID-19 levels in 2021.
That said, we're providing both full year and third quarter, 2020, 1 guidance and the range of $1.90 to $1.96 per diluted share excluding specified items and 47 to 49 per diluted share excluding specified items respectively.
Specific items for the full year 2021 are the $1.1 million of transaction related expenses and the $1.4 million of prior periods supplemental property tax expense.
Referenced and our second quarter SEC filings.
There are no specified items and conjunction with our third quarter guidance and now I'll turn it back I'll turn the call back to Victor.
Thank you our route as always and want to express my appreciation to the entire Hudson Pacific team for the exceptional work this and every quarter and thanks to everyone for listening and today. We appreciate your continued support.
Stay healthy and safe when we look forward to updating you next quarter operator with that let's open the line for questions.
Thank you we will now be conducting a question and answer session.
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1 moment, please while we poll for your questions.
Okay.
Thank you. Our first question is coming from the line of Craig Mailman with Keybanc capital markets. Please proceed with your questions.
Hey, everyone.
Victor maybe a 2 parter on the studios.
Just curious the structure of these a little bit different.
In terms of your ownership stake versus the original deal with Blackstone is there a reason for that and then separately could you just talk about.
The equity commitment ACP would need to make versus kind of the leverage you may the partnership may put on these assets, yes, I'll, let mark talk about the latter Craig first of all good afternoon to you I hope you're doing well. Thank you for the questions So listen on.
R R.
Sunset Sun Valley asset Gwent and <unk>, we are the same terms and conditions as our Twilight project and that's pretty much standard for the deals that we are doing here in the U S and and.
And that's been based upon the capital source of Blackstone.
The UK deals that we've announced and net we're also working on are a different structure based on the capital structure of Blackstone and the different entities that they are contributing to this and that's why we're doing it that way so theres no.
There's no magic around it I think uniformly we will see some variation of that at various different types of pain on the deals that we win.
Sourcing most of them are off market transactions. So they either have maybe and additional capital partner or JV partner that would have to alter the structure, but.
Suffice to say I think most of the Twilight structure that was the initial deal and the platform. We're working on it is going to be what we're going to see here and the U S. Mark you want to talk about the capital structure, Yeah. So Craig.
The <unk> deal.
Pretty close in terms of.
Ratable ownership and that's a 50.50 deal we had taken the land down a while ago and you can see how much.
We on a consolidated basis put in the land, but that's the.
And the expectation is we're going to finance out the rest of day call it about $150 million.
And depending on the start date through Q3 of 2023 and on a gross basis, where 50% of that but we think we'll do end up doing about 60% asset level financing and so the total remainder remaining spend for us over the next.
And 2 years is only like $30 million box.
And so that that gives you kind of the capital structure for that 1 on the London deal The Park Plaza deal.
Thank Victor mentioned.
Land has already been taken down a 125 million pounds. Our piece of that is like 45 million pounds. The remaining spend growth to us is about 200 million pounds that goes out call. It I'll call. It between now and 2025 similar to the guano steel, we're thinking that's going to be 60% to 65.
And 5% financed on the construction side. So the total remaining spend net of financing and for us phasing in over 5 years or so is about 80 million pounds.
Okay Alright.
Not a huge sum so.
About $110 million kind of on your share over the next 4 to 5 years correct.
And then.
Could you just give us a sense and I know you guys have done a little bit of a read of.
Third sunset kind of studio Bob.
I don't recall, you guys doing ground up on studios, maybe im mistaken, but just kind of what kind of returns are you targeting is there a big difference between the UK and NOI.
Yes.
These deals will the UK deal.
Returns are.
Very attractive.
I mean, I'm not going to get into the actual numbers until until we're prepared to sort of release them, but we wouldn't be doing that deal unless its significantly better than what we're seeing here, but we haven't we haven't done any pre leasing yet we've only had indications of interest.
Are you referring to our sunset Las Palmas steel, we have not built south Asia, but clearly rebuilt Harlow and our returns there were very very very good.
And have proven out better than we did.
And then when you initially underwrote it at.
We are looking at some new development of stages here in California other than than ours are.
And most recently.
And Glenn Alex announcements on existing assets that we own and those returns are also penciling out and the <unk>.
7% to 8% range and.
And so they are also very attractive.
And then just 1 last 1 if I could the decision behind the 46 million of ATM doesn't seem like you guys needed the cash and the stock price.
You've been vocal that it's.
Undervalued relative to what you guys think it's worth and what we think it's worth just the decision there.
I think thats helpful.
And some context.
2020, and 2021, when the stock was at a considerably lower level, we bought back.
More than $4.1 million share as Ed just a touch over 23 Bucks a share.
And that used about $100 million of liquidity at the time.
And this recent issuance under the ATM fracs.
Fraction of that in terms of the size is only $1 million and a half shares and it said it was just shy of 30 Bucks a share so $7 premium per share on a 1.5 million shares of reissue adds.
We're using the ATM.
And the way, we've always used it to fund customary corporate cash requirements.
And we mentioned we had some spend on these recently announced studio transactions. So we just view it as a.
1 of our sort of a prudent measure of cash management, and a weighted and continue to maintain our liquidity and balance sheet for future requirements and.
And we thought it was a timely.
Issuance, given where the stock was.
Recently and <unk>.
And I mean doing small transactions like this.
Hey at that lower level, but we're not going to issue.
Big amount.
Large equity issuance at these numbers, especially at today's number.
That's helpful. Thanks, guys.
Thanks, Craig.
Thank you our next questions come from the line of Manny Korchman with Citigroup. Please proceed with your question Hi.
Hey, everyone. Victor last quarter, you spent some time talking about value add opportunities that youre seeing and I think both the office and studio side are those progressing and just haven't closed yet and so we should just wait for those to happen or has something changed there and maybe those opportunities have fallen out no. We are.
Actively pursuing several of those opportunities.
On the office and the studio side.
The majority of those are off market. So there are a little bit more complicated there is.
A couple of marketed.
Studio properties that we're working on right now and both our value add and.
And.
Im not in a position to say, whether we get them or somebody else catch them, but.
It's just a continual process I do think many.
It is taking longer to close transactions.
But.
Like the UK deal I mean, we've been working on that deal for.
6.7 months or something like that and so it's just taken a long time to come to fruition and that wasn't example of an off market development deal, but it's something that we've been pursuing for a long time.
Thanks, Victor and then just turning back to the capital sources conversation and that same light our dispositions something that we should think more about especially if you land and some of those deals or would you go and maybe tap the equity markets, even though it hurts anyone.
Why didn't hear who would tell you that no.
Yeah.
Listen I think we've talked about the diminishes and the portfolio. Currently today, we have been approached on some assets.
A large number of them.
And I think.
It will be basically on an EBIT basis, but theres nothing earmarked right now imminently on a disposition for the remainder of this year.
Thanks, everyone.
Thank you. Our next question comes from the line of Mickey <unk> with Scotiabank. Please proceed with your question.
Thanks, Hi, everyone, so and in terms of the guidance for the rest of the year and maybe even just kind of a preview heading into next year.
Should we think about your office leased rate it did slightly improve this quarter you had some positive net absorption how should we just think about future quarter leasing volume.
Heading forward and whether your leased rate at this point, you think has kind of stabilized and hit a bottom.
I'll start and just talk about from a general level.
And your last comment is the accurate comment I mean, we've seen some flattening we only have 4% remaining for this year.
We've already identified the known Vacates and so I think we're pretty comfortable with that.
Trends, obviously, Nick have gone up both from a rate term and and activity standpoint, I mean art can jump in and sort of just talk a little bit about that but I mean, we're not we're not least leaning towards the fact that we're seeing anybody on the horizon of size that it was going to vacate that we know of at this time that you want to jump in and yes, that's true.
Nick.
Always as it always does come down to net new leasing right on what we have and the pipeline, which has been continuing to increase.
Over the years certainly over the last 60 days.
To kind of backfill or.
Lease up.
Some of those holes from the known Vacates and so I think there's still a lot of wood to chop on the explorations. This year I can't Peg a number for you on lease percentage, but we're starting to see with the new kind of new leases in the pipeline.
On the backfill side, we're starting to see some good progress.
Okay. Thank you that's very helpful. I guess just a follow up question on that is as you think about.
Ill return to office.
Getting delayed a little bit and some markets now.
And also some new mass policy is in place I guess, how does that kind of change the dynamic.
Of the leasing market out there, where you had some of those provisions getting removed.
Now there is some more concerned with delta and just any thoughts on.
That's kind of playing out and a real time basis in terms of and does it delay leasing volume leasing tours et cetera.
It's impacted us in terms of volume and tours.
I think we've all sort of anticipated September 1 data and Thats pushed 30, 60, 90 days, it's not going to impact decision, making trees that were seeing right now at least at least to date I mean real real time, right now and it just hasnt, we've got very strong activity and the third quarter and and some pretty good line of sight and the fourth quarter as well and.
And we have as I said, some known Vacates and some larger space.
That we've got activity on as well.
I do think the.
At the moment to moment and.
News and information that keeps coming out is not going to detract the larger users, which is predominantly our portfolio mix from them, making decisions that are 7 to 10 years down the road and effectively move ins and <unk>.
3 to 9 months sort of thing and so if it moves them up 30, 60, 90 days, we shouldnt, we shouldnt be impacted that dramatically.
I appreciate it thanks Victor.
Thanks, Nick.
Thank you. Our next question is coming from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.
Hey, good morning out there.
So 2 questions Victor the first question is.
As you guys think about the U K and certainly great movie market, but what script additional risks do you include a.
Because I'm guessing, it's probably not as efficient to run U K as it is obviously and additional studio and inside Valley and.
And on the North side. So what are the additional returns that youre looking for both to compensate for.
And the lack of efficiency, because it's overseas and to just the foreign and the FX risk.
Well listen I think first of all we're super excited about and opportunity like this and if you read the release and the press around that I mean, this is going to be a.
A world class facility and so I do think that there is going to be.
Obviously since its a ground up project, Alex a startup costs are going to be fairly front ended that being said I mean, we're making a commitment.
Personnel office and the likes of that which which will then go in line with economies on our sales and back office team, that's going to be based out of Los Angeles, So whether it's and in the U K, whether it's in Vancouver, whether it's in New York or here in Los Angeles, I think youll see some some very impressive economies from the opco side of it in terms of the.
A.
The capital side.
And I do think we have to be cognizant of.
The spread between the.
The pound and and and the U S dollar and it's no different than what we're aware of and Vancouver between the Canadian dollar and the U S dollar.
At this time, it's early and.
And theres not a lot of capital spend as we get into deeper capital and the structure around debt and equity.
Im assuming that Arun Mark will come to me and we'll discuss hedging and the likes of that and material dollars, but at this time, it's just too early to evaluate that.
I would I would say that we are we are going to make a.
Our conscious effort of building our platform over and the U K and this shouldn't be the only deal that we would be doing there. So we're going to we're going to continue to do more.
Okay. The second question is on the domestic studios the occupancy rate and the quarter was 88%.
It's actually down a smidge from the first quarter just given all of the you know the ramp up in production and we're out there recently toward the lots were full like filming filming filming I would've thought this occupancy would have been higher so is it just you know.
And sometimes I mean, it's hard to believe that there's any downtime might there be and everyone is binge watched and watched every sort of rerun.
That you can out there so it's hard to believe that studio spaces being used $20.7 and so how do we look at the at the actual dip in occupancy versus it being something more and the and the nineties yeah Alex.
160 basis point sequential debt is about 20000 feet just shy of 20000 feet.
And as you point out it has nothing to do with stage usage.
All committed.
And the office utilization associated with the stage usage is high but there is about 235000 feet spread across the 3 studios that are really on their office use unrelated to stage use and as we sit today, that's about call it 63% utilized and it.
And really just a direct byproduct of.
People Covid people not working in offices.
And so we've seen a bit of.
Give back of some of that square footage.
For the last.
5 quarters of Covid as people get back in the office, we expect.
That occupancy.
Kick back up to its historical norm now.
<unk> plus percent occupancy, but we need the casting agents and other entertainment related tenants that want to be on location to start coming back to the office.
And when you say that youre not this isn't like that.
And the Netflix type office. These are those small little office suites that are next to the studios where that people go to like sitting right script or do whatever they book with their age and whenever these rather small little offices.
Yes.
Non media. They are typically media companies that are non stage users that want to be and immediately like proximity to other media companies that are stage users.
Okay. Okay. Thank you.
Thank you our next questions come from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thanks. Good morning, I was wondering if you could provide more commentary on the demand environment for new studio space and the UK and how you plan to position your studio.
And the existing competition, whether it's just by price point and also the type of tenants seem to be targeting.
John and it's a great question listen the demand right now over and the U K is voracious and all of our relationships, we've reached out and surveyed the demand levels and desire levels and every 1 of the new content players are looking for space and and.
And the utilization there is extremely high right now there has not been a new facility built there like there hasnt been a new facility built here and a very long time and.
So we are very confident that.
Purpose build best in class is going to succeed on a dramatic basis.
The Pinewood Shepperton and is the most recent but it's and add onto the existing facility, which is literally probably the world's best facility and.
So that's what we're sort of trying to follow suit and the reaction around this has been very very positive in terms of our relationships and those we're looking to get a foothold for a long term lease.
And so we're confident that we'll be capturing a nice percentage of that demand.
And as far as the other.
<unk> opportunities and the other potential entry markets, Toronto, Vancouver, and New York.
And I think you alluded Victor to some core plus opportunities and studios, but is that how you expect to enter those markets or would they be more development focused I think it's a combination of both John we're looking at development opportunities in multiple markets and we're looking at core opportunities and multimarket and at the same time.
Got it.
Okay.
Okay.
Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, and good morning out there a lot of my questions have been asked but I guess, just taking a bit of a step back Victor clearly I think the focus for you guys on the growth side of things has been good.
Growing through the studio business and I think we've talked about this before but can you give us any update on how big and part of the portfolio you think the studio business could ultimately get to kind of at your share of NOI.
Well listen Blaine.
Blaine.
Great question.
You know you've covered us a long time, so you've seen from the inception, where people were trying to understand what the studio business was and how much negativity, we got around it and to know it being sort of 1 of the darlings of alternative real estate.
It's an area that we can capitalize growth on and I think we're committed to growing our portfolio.
And our game plan through our Sunset brand with Blackstone. The commitment is uniform and I believe that youll see us substantially increase our NOI over time in that and that.
Product type and it's not going to detract us from maintaining and growing and the office business and.
Our portfolio around office, and we've got development opportunities there coming out of the ground in the office portfolio that I think are very attractive and and we'll sort of go hand in hand.
If youre asking sort of from you to ballpark what is it a 2 to 1 or 301 I don't know, but I can tell you. We are right now monitoring and underwriting and working earnestly on more studio deals and we are and office deals.
Alright, and Thats fair and.
No I don't have to say it but the capital structure. Its just a better structure right now for that.
High demand on on that.
And very very I mean, we never shot pricing around the debt on studio businesses, the studio industry and business around the Opco side that we're seeing now I mean, the numbers are spectacular and so it's encouraging to see that that.
Market is coming and.
And becoming educated around that and obviously, we've got a great partner.
Great very helpful commentary, and then just a little bit more specifically on the occupancy and lease rates, maybe for Mark or art. I know you guys have yet to formally get back the Doe and.
EMC space and October but.
And then it's going to be 1 of your largest blocks of space I wanted to ask whether you guys have any and early interest there and and whether you think there's demand for that large box from a single user or will you be splitting up that space. Sure. This is art. That's a great question and remember the floor is the floor.
About 45000 square feet a piece.
And so it breaks out large floor plates are in demand.
Interesting you start we've seen.
And they have taken and interest from the beginning of the year, mostly over the last 60 days.
Seattle kind of leads the way with that uptick and interest and.
Tenants and the market.
And then.
3 million almost $2.5 million square feet now.
We are seeing specifically and pioneer square and with that opportunity, which I think the market would be and kind of north of 40%.
We've got about 200 call. It 250000 square feet of activity, just really and that pioneer market is low and Thats. The final Party Inc.
95, Jackson and so forth. So the activity we've seen over the last 60 days has really come on and when I say over 200000 feet I don't mean, just tours I mean in negotiations with so we feel pretty good about that space and it's.
Yeah.
Pretty impressive space actually sales results.
And about that.
Great. Thanks.
Okay.
Our next question is coming from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Great. Thank you.
I guess, just sticking with occupancy I think Mark you had said, 55% coverage and the remaining explorations for the year.
Has there been any change in either tenants you think that are staying our tenants. We think that are moving out.
And we get to that number and.
And maybe if you could just talk about the largest blocks I know you talked about Dell, EMC, but and maybe a little bit more color on.
And so the backfill or anything that's changed.
And our covered the backfill question on gallium see there's really only 1 decent sized exploration on top of that we've got it and we've got 21 of the 24000 feet right.
And with Mcgraw.
Mcgraw Hill and other than that we're really talking about very small expirations for the balance of the year and and.
And we're currently 55% covered on that.
On that on that remaining footage right. So.
It's really just about getting those deals over the line and then as art pointed out towards the beginning of the call.
Net new absorption on.
The difference there.
And anyway.
Yes.
So.
And that 55 and Mark markets covered.
You think about the kind of the full year, we were over $1.4 square feet.
On the prepared remarks, we also indicated that they were pretty close to 70% from 69%.
Coverage on full year. So this is really again the remaining piece.
The balance of which are maybe average of 5 to 6000 square feet and so theres still a lot of decisions to be made we have.
Really converted over the last 60 days converted some likely to vacate into retention and we're going to continue to work through it again, there's a lot of and probably get up close to 100 tenants to deal with and the team is hard at work trying to.
Get those over the goal line.
Okay. That's helpful.
And then as you think about net effective rent and.
And would you say they've moved at all and the market yet and also what's your what are your latest thoughts on your mark to market.
Well.
For the remainder of the year, our mark to market is writing about.
13%.
What percentage of that 30%.
On a net effective that we are out really kind of trailing 12 and market had indicated and the remarks.
<unk> because of our rent we've been holding our base rent.
And remained very steady coupled with the fact that we are spending less on Ti is mostly because of the renewals.
Our renewals are going to probably carry today and we will have about 2 thirds of our deals will be renewals going forward until we will see a reduced level.
And on tenant improvements, but we feel good about it because a lot of market Inc.
And the lesser quality space, you're starting to see a very competitive situation.
Where appropriate and trophy to new assets are kind of 5% off on a net effective basis and.
And you start to grow into non non view super commodity space, which is like 15%, maybe 20% below net effective. So we are doing exceptionally well in that regard.
And Jamie I'd using.
It's been a little bit surprising and all of US how little focus has been on some of these trends I mean, no matter how you skin. It on net effective rents are are higher and it's not just on a trailing 12 month comparison basis, it's even better if you look at the 5 quarters most effected by.
Covid compared to say that all the way back to the 2018, the trend is even better than that and that.
That translates through both at the effective rent level. It translates through on the tenant improvement level and I think theres a tendency to focus on just the quarter and lose track of how these numbers have trended over.
Almost any period of measurement how favorably they've trended and then I think the other thing too that.
We've tried to comment on that doesn't maybe hasnt gotten I don't think it's as much focus as we would have thought is the how that's translated through on the <unk> trend I mean on a percentage basis, our <unk> per share is.
It's up.
And now 30 plus percent and.
It's surprising at least I think to all of us.
How that seems to have gone and overlooked.
Yes, it's a good point I was actually going to ask you about cash flow and general and that I mean, now that you are starting to put some capital to work and the studios.
What do you think the cash flow trajectory and I guess distribution growth or distribution coverage trajectory looks like.
Based upon what we've seen and I think that's pretty consistent with our comments in previous quarters.
We think this <unk> trend is going to continue and at a certain point, we are going to revisit the dividend distribution.
The amounts and then.
Fairly soon and I mean net within the next 12 to 24 months.
And that's kind of the direction is headed.
Okay, and then finally and just tied to the leasing market and we've seen a lot of capital raised and the Bay area and I guess, perhaps out of your west coast markets.
How are you seeing that translate into demand and what do you think's going to happen here I guess, maybe if you could talk about the individual submarkets, yes.
<unk>.
It's interesting.
We worked on and analysis on the correlation between VC fund, raising and how that ultimately translates into tenant demand and it.
Going back.
Sure.
A decade, and it's clearly correlated.
So there is a lag effect, but if history holds.
VC fundraising and should continue to drive tenant demand throughout the Bay area.
Aye.
Im not sure.
And how people how closely people are talking but if you look at just <unk>.
Funds raised through.
The end of the second quarter.
And the Bay area. There has been a 130 funds that have closed and they have raised more than $30 billion and to put that into context.
And prior to 2018.
The Bay area had never raised more than $30 billion and an entire year and so 2019, and 20 were pretty exceptional years, but if.
If you just think about where we're trending and fundraising today and where that's likely to have and up in 'twenty..1 we're talking about you know.
Maybe not record breaking fundraising, but pretty close to it and our view and then that will ultimately translate into deals closed and in fact, we're on a record pace right now in the Bay area 500 completed so far which is a record.
Breaking pace so.
In terms of VC fund raising and deals closed we think all the ingredients are there too.
To drive tenant demand.
And do you think that benefit and CBD, San Francisco or Silicon Valley are and they.
Both.
Okay, great. Thanks for your thoughts.
Thanks, Jamie.
Thank you our next questions come from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your questions.
Hi, there I just had a quick 1 maybe on the weighted average lease term. It seems like it is shorter than it's been in the past. So wondering if there was any other kind of detail and reasoning it could give for this and your outlook for it lengthening going forward.
Yes.
It depends on kind of what period of time, you look at it and it's definitely been trending longer terms have been trending longer since the onset of the pandemic. So.
So it is up.
On a weighted average basis.
Looking back trailing 12 months compared to the prior trailing 12 months, it's up about 7%.
<unk>.
So it's trending and the right direction, although if you go back further than that the durations have shortened up a bit and art.
Yes, if you just let you just looking quarter over quarter.
Right.
Because there were 2 actually 2.
Deals and 2.
And new deals.
That 1 was 140.145 months. The other was 100.100 and close to under 20 months.
We see the number up but we have been over the year, we've been trending up as Marc said and then on the renewal side again.
And deals that made up a little over 2 thirds of the square footage that were.
60 months, plus and that's kind of how you that numbers.
Look if you're just looking quarter over quarter, Yes, I would just say generally speaking I think this has been the case for everyone. In this sector and you can kind of see it and exploration tables annual expiration tables. There is a somewhat higher than normal amount of renewals that are getting done that are shorter in term 12.
Or less and.
And that obviously reflects a degree of uncertainty for some amount of the renewal tenants on kind of what their long term space needs are but we expect as people get back to work.
And that.
And are elevated short term renewal amount will start to trend down.
Got it Okay and then.
Congrats again on the announced plans with Blackstone and I was wondering if you could just mentioned for the 1 and the U K.
Your current expectations, if you have them yet in terms of timing for that project and what the first maybe milestone to watch out for between now and then would be maybe it's something on preventing or approvals or pre leasing or something else that might be relevant yes, we've been and close close contact from the last several months with a local approval process and.
That would be the first hurdle that youre going to youre going to see and it's somewhere between.
Right around 12 months from now I think you'll see some major aspects around that so yes.
We're really excited and we're moving and the right direction. Thank you.
Got it thanks.
Thank you. Our next question is coming from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yes, and everyone art, maybe start with you a derivative on some of the earlier questions. You guys have talked about large floor plate leasing.
And pretty strong demand from tech tenants on the larger side, but you've got a pretty decent sized portfolio of smaller tenant assets, obviously throughout the peninsula and down into Silicon Valley. So can you talk specifically about what youre seeing is that where youre seeing the shorter term rollover are you seeing a build of demand from those tenants I guess, just specifically addressing kind of that specific part of the portfolio.
So, yes, I would say.
Dave I would say the demand across the entire portfolio has been driven by kind of mid size to large tenants just everywhere.
With the exception of Vancouver, which is.
It's been a mixed bag right small and large tenants, but we are seeing those those larger and midsize deals driving the market.
Over the last like I said over the last quarter, we've seen an uptick in small tenant activity and the peninsula and Silicon Valley.
Which right now kind of translates into an early pipeline deals right and so it started with inquiries and tours and and then kind of early pipeline and so we will start to see we'll start to see some of those come to fruition.
<unk>.
And kind of later in the quarter and ended the fourth quarter, but it really again you said it started with the mid and large deals driving the market.
I appreciate that color. Thanks, all right and then maybe Victor and Mark just maybe the explicit question is are you changing any guideposts around leverage as you talk about development and levering up some of the joint ventures, and then maybe Victor. The implicit question is when you were buying studios a handful of years ago, you were using a lower office implied cap rate to do it now you've got.
And 95% of your weight toward office, which has a higher implied cap rate by and a lower cap rate assets I guess, how long does that work and how long before you think about maybe financing that a different way or are making that a standalone business.
So on the leverage side listen I think we've been very conservative and the leverage side and looking at the development.
I would look at the price development deals we've done for the most part we've been using leverage to develop and then taking that leverage out and based on the success ratio and so I do think that that's going to continue and so you can sort of expect that same pattern going forward and the studio side.
And you bring up a good question and it's obviously 1 that we've talked about we'll wait and see what the platform and some of the alternative.
Investments that we're making around this platform and as I mentioned before we've got a long runway with Blackstone.
And the and.
And the capital structure around Blackstone that we that is contributing to this as our partner. Obviously you know they have multiple buckets and we have we have and the twilight structure a bucket.
Longer in terms of the lifespan and so we have flexibility and around timing, but.
It is not lost on us to look at down the road paying on size and valuation and what we do with this platform and if we roll it out what's the best timing and execution. So that will always be part of our conversation as we continue to grow this.
Thanks Victor.
Thanks, Dave.
Thank you. Our next question comes from the line of Daniel Ismail with Green Street. Please proceed with your questions.
Great. Thank you.
Mentioned potentially starting and Washington, 1000 later this year or at least reviewing it and I'm just curious based on the trends youre seeing on the ground across the portfolio and so.
Office development is looking like a more attractive use of funds today than it was say last quarter.
Well I mean, Daniel I would look at it a little differently and.
Office development and the trends I would look at the demand for this asset and the activity and so.
We're not we're not making any announcements today, but.
But the demand and the activity that we're seeing.
Specifically for Washington 1000.
We'll make a determination at the appropriate time, whether we're going to break ground.
Okay.
Maybe just going back to the across your footprint.
Footprints is are you guys hunting for new development sites on the office side or should we expect studio space to continue to be the source of installing and going forward.
I mean, we've looked at.
Development sites that are.
That we bid on and them and in high demand.
And some of our markets.
Particularly in the Vancouver, and Seattle and and.
Jason and Seattle markets.
And I don't think.
Just going off the top my head I don't think we've done anything and in southern California in terms of.
Practice for office, and I know Theres been nothing and northern California that we've looked at from a development standpoint and recently.
So, yes, I would say I would say the opportunities are things that we'll continue to evaluate and the Pacific northwest on the office side, and then clearly portfolio wide and and the other markets on the studio side.
Great. Thanks, and just last 1 from me on the on the UK studio acquisition or development site.
Is there anything structurally difference between how studio studios are Brian versus and the U K for us is.
And the USA in terms of lease term or the splits.
Fixed revenue and variable revenue or anything that we should be aware of.
No no I mean it runs the same I do think that we are ever changing the model of short to long term leases and that will be part and parcel of what we're going to try to attract here that is that has permeated into that marketplace.
Most recent recently with Disney and.
And.
HBO and Netflix signing longer term leases over and the U K. So we're happy to see that trend.
Permit from the U S over there so we're hopeful that will be the same.
Great appreciate the color and Victor.
Thanks Danielle.
Thank you. Our next question is come from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions.
Thanks for taking the questions.
Victor Congrats on getting the U K.
And in the UK studio investments certainly are good and a big step I'm just wondering.
Is there room or potential plan to re create sort of the office studio combo that you have and early in the UK or more specifically, even just office and the U K.
Yes, I mean, there definitely is theres a demand for not just pure studio, but office studio.
Campus facility and and we are that's the attractiveness of our.
<unk>.
Our initial deal.
And box barn.
We are looking at another opportunity that is.
And is aligned with that that has a successful office component adjacent to.
Combined studio component there as well so yes that campus sort of style project that is purpose built is something that we're very very much focused on and I think the demand is very high for that.
And so and the initial permitting you are you might be getting.
I don't have the zoning work differently, but you'll be getting potentially zoning for both studio and office.
Correct.
Okay.
And then just in terms of the alternative investments that you mentioned sort of potentially exploring I'm wondering just about.
Automotive markets, maybe in the U S..1 of your peers, obviously, just quite a big portfolio and Austin.
Any chance you'd look at any of the sunbelt markets over the near term.
Not typical for us.
We spent time looking at markets.
And some of those markets that have been attractive, but I think we are we're still trying to build out.
Our west Coast portfolio, we're still trying to grow and Vancouver and.
And.
And the office portfolio and.
I think the <unk>.
<unk> of the combined studio office in the markets that we're looking at are going to be sort of akin to the media Tech world and so that that's pretty much the game plan for now.
Okay, and then maybe just last quickly a clarification on the occupancy for a route or Mark.
The <unk> move out can you just give us a sense of like what's the goal year end occupancy is there a range you can provide us that youre looking to hit in terms of leads our occupant or just occupancy.
Include and occupancy target as part of our guidance.
Information and you can.
See what we've provided and the press release, but I would say just sort of leveraging off of the earlier comments from art and.
Victor in terms of just coverage on remaining explorations and so forth Gen.
Generally speaking.
It does look to us that our leased percentage is pretty stable right now.
It could be a tick higher and maybe a tick lower by year end, but I think.
As we look through on explorations on and on activity relative to those expirations. It feels like we're at a pretty stable level right now.
Okay, Great and then sorry, just to clarify you mentioned the coverage you already have.
In terms of exploration. So I'm just wondering given the delta very increased surgeon is it fair to assume debt net of the recent.
Lease term periods, whether it's 60.70 80.
And at $60.70 months period.
On.
And on renewal.
Or maybe new leads and that sort of a good way to think about.
Near term.
Third quarter coated leasing in terms of.
In terms of lease term.
Yes, I mean, we might continue to stretch it out as we have been over the last 4 quarters.
And it can vary it really is if you look at it purely on a 1 quarter basis you could get.
1 big lease that distorts it so it's a little dangerous I think it's better to look at trends and as we pointed out we've been we've been getting to longer term then and.
And the last say 4 quarters.
Orders compared to.
And where we kind of started the pandemic at and.
And I Wouldnt I don't think we get to pre pandemic levels in terms of term over the next 2 quarters, but I think we will continue to stretch that out.
Great. Thank you so much.
Thank you our next questions come from the line of Manny Korchman with Citigroup. Please proceed with your questions.
Yes, Michael Bilerman.
And a follow up on a couple of things from the studio side and I recognize we spent 75% of the call talking about 5% to 10% and your business, but it is a fast growing 1 where you're allocating capital too. So I appreciate your.
Okay and on to answer them.
Can you just walk through just the role and responsibilities of HP, <unk> and Blackstone and does that differ by region. I E are they taking a different role and the U K given their presence there and long term history versus the stuff.
And just can you just talk about sort of how each partner and what they are responsible for and how it differs.
Yes, it did.
It's a very fair valid question given the differentiation.
On ownership, but.
Ours is loose consistently throughout and our venture with them to date and our ventures with them to date.
Both of the U K and with Twilight, and our Sunset brand as the operator the developer the manager.
Marketing and leasing.
David David Day to day operations of our ventures, together that being said.
There are other projects that we may take a lesser role and evaluate whether or not it's going to be the case, but as long as it's under the sunset.
And studio brand and the operations around the sensitivity of brand and that's <unk>.
That's what our operations is and so we are getting well compensated for that role and we will continue to do so.
And are you do you own the brand outright or your share and ownership of the brands no we share it.
Okay, and then like in Europe are they doing all the tax structuring and all that stuff like I'm, just trying to understand is Europe different than.
No no.
We are doing exactly what we're doing here there for this specific project.
And then just in terms of equity everything you have is obviously on balance sheet, but are they holding their equity and different parts of the firm example are they using the Europe fund to do the Europe deal are they using the <unk> to do the stabilized stuff. They originally bought or are they doing the opportunity fund to do the next develop.
And that you have going on and I'm, just trying to understand how consistent the ownership of their equity is to all of these individual project versus day larger platform.
Yes.
And I don't want to get into what equity sources, theyre doing and using because that's their business done ours I mean, we're comfortable with the capital structure, we're comfortable with our relationships that we currently have.
Suffice to say.
It's not all consistent.
To date everything under Twilight has 1.
The other projects, we're working on are going to be a combination of either twilight or something else, but it's not my place to tell which capital dollars that they're reporting.
And then Greg.
We're further out from a modernization of this business, but I guess with the different ownership structures on their side.
Could that complicate a.
A sale or a buy and by you or bringing in another partner or spinning it off or taking it public does that inhibit you in any way our cost your shareholders and any more money to sort of aggregate.
And I know, where youre going out with that and the answer is no.
A very consistent structure throughout with buy sell provision.
And exercisable on both sides and so.
Those those terms and conditions have not changed from deal to deal.
And so there is not going to be any.
Any positive or negative.
The ability for 1 transaction to be executed versus another and obviously, we will consider the totality of the portfolio asset by asset just like we would if we owned it and 100% and.
And going forward, that's always going to be the case. So just because the percentages are different doesn't mean that the Reits are different.
Okay, and then is there whats sort of exclusivity.
And each partner on studio deals that each fines.
I don't know if you found the planned or they found that line, but just how does it work are you effectively exclusive partners on the studio side once do all studio investments.
No.
I think it's.
It's easier.
If we look at it this way.
Its relatively complicated but.
Because theres different tranches under the Sunset brand.
We if we could not use the sunset brand.
I'm sorry, they could not use the sunset brand without us, but we could if they so chose not to do a transaction with us. So we control the brand, even though we own and collectively so I think.
And idea of that aspect and that's what we're going to be running off of that brand and that being said.
I think it's fair to say that.
If we brought them a deal and im.
I'm going off of memory here, but I think if we brought them a deal and they said no. We can still I know, we can still do it ourselves. They can't go do a studio deal without our approval.
Right.
Okay.
And I appreciate the color and.
Thank you so much.
Okay. Thanks.
Thank you there are no further questions at this time I would like to turn the call back over to Victor Coleman for any closing comments.
Sorry that we went over a long today, but I appreciate everybody's consideration and input and we look forward to.
Our next call next quarter.
Thank you that does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a great day.