Q4 2021 Hudson Pacific Properties Inc Earnings Call
Keith. Please note. This event is being recorded I would now like to turn the conference over to Laura Campbell Executive Vice President Investor Relations and marketing. Please go ahead.
Good morning, everyone. Thanks for joining us with me on the call today are Victor Coleman, CEO , and chairman Mark Lammas, President Darragh, Marion CFO and art Suazo EVP of leasing.
Yesterday, we filed our earnings release and supplemental on an 8-K with the SEC and both are now available on our website an audio webcast of this call will be available for replay on our website.
Some of the information we will share on the call today is forward looking in nature. Please reference our earnings release and supplemental for statements regarding forward looking information as well as a reconciliation of non-GAAP financial measures used on this call and in those materials. This morning, Victoria will discuss macro trends across our markets and our 2022 priorities Mark will review 2000.
'twenty, one business highlights along with upcoming opportunities and <unk> will discuss our fourth quarter financial results and provide initial guidance for 2022 thereafter, we'll be happy to take your questions Victor.
Thank you Laura and good morning, everyone and thanks for joining us HUD specific accomplished a great deal in 2021, staying true to our core strategy. We further expanded our office and studio portfolios within global centers of innovation, we delivered an exceptional value, creating redevelopment opportunities like one way side, we grew our studio plot.
<unk> by acquiring new production service lines as well as by adding another large scale purpose built studio to our development pipeline and all of this while successfully capitalizing on our office leasing explorations and maintaining a strong and flexible balance sheet.
The long term outlook for the unique type of properties and experience visitor provides for a studio and office tenants, who has never been brighter for over a decade, we remain diligent in our focus on high barrier to entry markets propelled by growth of Tech and media, where the related industry infrastructure be it capital flows talent.
For services is entrenched we've.
We've also put ourselves at the forefront of owning and operating production studios, which operational complexity and unique relationships also creates significant barriers to building a platform at scale.
Our strategy is proven out and remains well intact as the pandemic has only accelerated pre leasing demand trends driving abundant amount of capital to the tech and media industries venture capital investment reached $330 billion in the United States last year. This was the highest year on record and almost double the prior year with California.
Leaving the lion's share more than three times in the other market. We expect this to continue with venture funds raising nearly 130 billion last year up 50% year over year and eclipsing the $100 billion Mark for the first time ever software and other non biotech investments surged in 2021, which coupled with <unk>.
Increased early stage fundings are poised to further drive leasing velocity at our smaller focused peninsula and Silicon Valley office assets, where we're already seeing demand accelerate content production spend for the addressable U S U K and Canadian markets totaled approximately 170 <unk>.
$5 billion in 2021, that's 14% increase from the prior year with studios like Comcast Disney Netflix, Apple and Amazon spending more than 100 billion.
Production spend is anticipated to increase again this year as the battle for streaming service subscribers further intensifies the U S and global markets alike. This bodes very well for the demand at both our studios and our strategically located office assets. Several of these companies have sizeable requirements not only for Los Angeles, where the location quality.
<unk> and studio adjacency of our office portfolio and development pipeline as a match, but within our other markets as well.
Proving the public commentary around return to work is beginning to reflect the reality of our tenant discussions and has accelerated leasing activity across all of our markets.
For media and tech tenants and creative office companies, where culture and collaboration is essential the terms hybrid and flexible are not translating into less workspace in fact, Fang type tenants, which have long been the bellwether on workplace trends had been accumulating large blocks of space throughout the pandemic.
This activity has accelerated in the most recent months as meta platforms, Linkedin, Pinterest upstart Zillow Amazon Twitter, Indeed riot games and Roku of all signed significant leases across our markets Big picture with this favorable backdrop in 2022 Hudson will.
And to do what it does best creating significant shareholder value by transforming underperforming real estate and global Tech and media markets and leasing that space to meet the modern workspace needs of today's and Tomorrow's leading companies. We are specifically focused on five key objectives. This year first to successfully address.
Our 2022 office lease explorations, while capturing double digit mark to market on rents.
To execute successfully on our near term value creation office and studio developments, including sensing Glen <unk>, and Washington, 1003rd to recycle capital from non strategic asset sales into high yielding strategically line acquisition opportunities be it office or studio assets production service business.
<unk> or repurchase shares.
Fourth to maintain a strong flexible balance sheet with ample liquidity to run and grow our business and finally to continue to undertake innovative and impactful ESG endeavors that further differentiate our company Hudson Pacific in the areas of sustainability health and equity with that now I'm going to turn it over to Mark. Thanks Vicki.
Our strong performance in 2021 speaks to the resilience of our strategy as well as our team's incredible ability to execute across all our verticals last year, we signed over one 8 million square feet of office leases with healthy, 14%, GAAP and 7% cash rent spreads GAAP and cash rent spreads were further.
Elevated in the fourth quarter at 16% and 11% respectively for the 448000 square feet of deals signed which contributed to the 150000 square feet of positive net absorption today, even after signing nearly half a million square feet last quarter. Our leasing pipeline comprises nearly 2 million square feet of deals.
And leases Lois or proposals a level of activity, 35% higher than our long term average our 2022 expirations are 12% below market.
Regarding our largest expirations we're in late stage leases for 100% of the NFL space in Culver City, we backfill KPMG space with Amazon and Denny triangle.
We plan to reposition the Burlington coat space as office in San Francisco, enabling us to capture a very significant markup on the sub $10 annual rents were already in discussions with both or its health and Stanford to renew along the peninsula for upcoming fourth quarter explorations and we now expect our quality.
Com, which expires in the third quarter will vacate their space, which we will look to reposition as we marketed for lease.
Excluding known Vacates Qualcomm <unk>, New code, we have 45% coverage that is leases Lois or proposals on our remaining 2022 expirations as well as another 25% in discussions.
Are those discussions represent smaller sub 10000 square foot tenants, along the peninsula and Silicon Valley with late third or fourth quarter explorations, who would be unlikely to engage more fully until later in the year that said among all of our markets Peninsula and Silicon Valley fundamentals are tightening.
Swiftly, including a combined $2 6 million square feet of positive net absorption in the fourth quarter.
We continue to create value through our pipeline of exceptional redevelopment projects at the end of last year, we delivered onewest side, a $19 <unk> Eris shopping mall, we converted into a spectacular urban campus nearly two months early and fully leased to Google for tenant improvements from start to finish. This project serves as a case.
Study for visionary and sustainable adaptive reuse where in leases and expect to sign imminently with a tenant for the balance of Harlow are studying 130000 square foot office development on our Sunset Las Palmas studio lot upon stabilization anticipated year end 2022 for Harlow and mid 2023 for Onewest.
These projects will generate approximately $45 million of combined NOI annually.
We've taken advantage of opportunities to acquire high quality strategic and immediately accretive assets like <unk> and bell in Seattle's dynamic Denny triangle submarket in less than three years through a series of acquisitions, we've tripled the size of our Denny triangle portfolio to over one 9 million square feet and added Amazon to our top tenants.
We now own some of the best assets in that market, which continues to benefit from itself Lake Union adjacency as well as the $2 billion, Washington State Convention Center edition and related retail public space and streetscape improvements all set to deliver in less than a year in January of 2023, we're awaiting the converge.
<unk> centres delivery of the podium for our fully designed and permitted 538000 square foot, Washington, 1000 office development after which construction should take about 18 months.
Upon stabilization, we expect this project will generate another approximately $27 million.
NOI annually, we successfully accelerated the growth of our studio platform in 2021 as well our goal has always been to build a premier forward looking studio portfolio uniquely positioned to meet future demand from leading content creators VA through location, the right product fit for stages and production.
Office fully integrated service offering or a combination of all three our ability to vertically integrate our studio business to not only deliver an operating studio facilities alongside strategically located office assets, but to acquire and run operating companies like star wagons, and Zile studio services all.
Under one global brand greatly enhances our ability to meet tenant demand and create value combined star wagons desire, it's generated $32 million of EBITDA last year significantly above our underwriting and in 2022, we expect EBIT to grow to approximately 35% to $37 million <unk>.
Construction is now underway at our Burbank adjacent Sunset, one of which we expect to deliver by third quarter 2023, and generate approximately $15 million of additional annual studio related NOI. Upon stabilization. We're also making progress on public approvals for our Sunset Welcome Cross development in the U K.
<unk>, which we could receive by year and collectively. The addition of these two studios will expand our global platform to five facilities and over 60 stages. We've continued to opportunistically repurchase our stock under our $250 million share repurchase authorization, taking advantage of pricing.
Okay.
Alongside pursuit of embedded and external growth opportunities in the fourth quarter, we repurchased another one 3 million shares of our stock at an average price per share of $24 seven.
Throughout the entirety of 2021, we repurchased a total of one 9 million shares at an average price per share of $23 and 82.
As of year end, we have identified four non strategic office assets for potential disposition.
These include 69, 22, Hollywood and Hollywood del Amo in Torrance, Northview Center, and Linwood, and Skyway landing and Redwood shores for all these assets either the location tenancy or asset quality, it's no longer a fit for our strategy and we believe our capital is better allocated to higher yielding investments whether it would be.
Funding, our development pipeline, making strategic acquisitions or continuing to repurchase our stock with that ill turn the call over to Arun.
Thanks, Mark fourth quarter <unk>, excluding special items was <unk> 52.
Per diluted share compared to <unk> 44 per diluted share a year ago fourth.
<unk> fourth quarter specified items consisted of transaction related expenses.
$1 5 million or <unk> <unk> per diluted share and a one time prior period supplemental property tax reimbursement of $700000 or zero cents per diluted share compared to specified items totaling $4 8 million or <unk> <unk> per diluted share a year ago.
I'll note that last year. Despite the pandemic challenges we achieved the high end of our 2021 <unk> guidance range with full year <unk> of $1 99 per diluted share.
Fourth quarter <unk> once again grew significantly compared to prior year, increasing by $19 3 million or 37% compared to <unk> increases by $16 8 million or 27% during the same period again this positive trend.
Trend reflects the significant impact of normalizing lease costs and cash rent commencements on major leases following the burn off of free rent fourth quarter NOI at our Florence, you've consolidated same store office properties increased four 6% on a GAAP basis, and two 8% on a cash basis, whereas full year NOI increase.
7% on a GAAP basis, and four 9% on a cash basis.
Fourth quarter NOI on our three same store studio properties decreased nine 5% on a GAAP basis, and 73% on a cash basis. However, adjusting for the one time prior period, probably tax reimbursement NOI would have increased by 17, 7% on a GAAP basis and six 9% on a cash.
Cash basis.
If you are and our in service portfolio was 91, 8% occupied and 98% leased representing 120 basis points, and 160 basis point quarter over quarter increase respectively.
Following the $1 1 billion refinancing of our Hollywood media portfolio in late summer, we returned to the capital markets in the fourth quarter to further fortify our balance sheet and increase our liquidity, we raised $413 million through a successful preferred stock offering, which we used to repay a $25 $2 million loan.
Secured by $2 million 50, Washington, coming due March 2022, along with amounts outstanding under our credit facility with additional funds available for other corporate purposes. We also recast our credit facility, increasing availability from $601 to $1 billion in.
And extending the term until the end of 2025.
At the end of the year, we had 1 billion in liquidity with no material maturities until 2023 and average loan term of four eight years. In addition, we have access to $263 9 million of Undrawn capacity associated with construction loans for Onewest side, and Sunset close now I will turn to guidance.
As always our guidance excludes the impact of any new opportunistic acquisitions dispositions financings and capital markets activity. In addition, I'll remind everyone of potential COVID-19 related impacts for our guidance, including gains in government spending.
That said, we're providing initial full year 2022, <unk> guidance in the range of $2 <unk> to $2 <unk> per diluted share the midpoint of which represents a 6% increase over that of our initial <unk> guidance last year.
There are no specified items in connection with this guidance.
We expect same store office cash NOI growth of 2% to 3%.
Which includes the full impact of qualcomm's exploration without renewal or backfill of their entire state that Skype for plaza adjusting for this exploration we would have guided to three five to four 5% growth. We expect same store studio cash NOI growth of 15% to 16% note that are.
<unk> full year guidance reflects for the first time, the full year benefit of certain transactions and milestones our acquisition of Starwood and <unk> studio services, both of which occurred in the third quarter and our purchase of <unk> and the delivery of one westside to Google for tenant improvements both of which occurred in the fourth quarter.
Now, we'll be happy to take questions operator.
Thank you.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
The first question is from the line of Craig Mailman with Keybanc capital markets. Your line is now open.
Hey, guys.
Victor.
One quick one I know in the news there's been some talk about the $150 million tax incentive.
The Governor Newsome past.
As Glen Oaks.
<unk>.
Are you guys anticipating getting any of that allocation for Glen Oaks is that sort of in that seven 5% to 8% yield expectation.
So it's not in the 758.
You have an expectation.
Hi, Craig.
The amount is a greater amount that the $1 50 is for development allocated for studio development and we will apply for that not sure do fall into the category I'm not sure of the status that would really fall under Chris Chris Pearson and Chris Barnes.
Area, but the answer is yes, we will apply for it I'm not sure if we'll get it or not but it is not part of the yield.
Okay.
And then the assets held for sale how far are you guys along in the process.
On those few assets you guys put in the bucket there.
I know you guys have been pretty steady capital recyclers.
As we think about maybe what's in guidance for this year kind of what level of these noncore assets could be in there versus maybe some joint ventures of your better kind of lower cap rate assets.
So, let's not assume that we're going to do any JV is at this time and we've had conversations.
On a few of the assets under the auspices of the direction that youre going but nothing is reflected obviously in guidance here.
<unk> pointed out but that being said of the four.
In no particular order I think.
The Lhamo. Our final offers are coming in next week I think it's Tuesday 69 22, today's the first day of offers.
I think our team is expecting somewhere between <unk> <unk>.
Six to 10 offers or so so those two are relatively imminent.
North you I believe is slated for March one.
For the for the packages to go out and then they'll probably call for offers first round offers my guess is near the end of March and we are evaluating a couple of alternatives around Skyway and I believe the date is exactly the same it's March one, but there is an interesting sort of play around that around life Sciences.
Been approached us and so we're going to evaluate that with the tendency in the available vacancy in the transformation of that asset so.
<unk>.
I think if everything goes really well end.
And a second quarter everything should be closed and so it will be impacted in the second half of the year I guess, maybe how you guys would think about it yes, just to be clear, but in our guidance. We assumed we hold them for the whole year, just because we don't know the timing of the guidance reflects owning those assets throughout 2022.
And I don't know if you guys have run this but just assuming maybe something happens in <unk> or late <unk>.
Relative to maybe your expectations, there as a way to give a blended.
Essential impact I wouldn't kind of giveaway, what your pricing expectations are.
You guys have like a sense of what what the drag could be if you execute on.
So almost <unk>.
Drag.
A suggestion would be on the range of growth proceeds.
It's somewhere between call it $3 25, and $3 75 proactively.
Recall that del Amo have no current tenancy and then you can gauge through the percentage leased on the other three kind of what the leasing status is.
You could grow relatively low cap rate at the number of pretty low cap rate assume you disposed of those.
Asset sometime within the middle of the year, you would get pretty darn close to kind of what the NOI associated with those assets.
And then the real question is what do we do with the proceeds right do we redeploy quickly into a new acquisition and so forth, but that should give you a pretty good way of.
Estimating the impact.
No. That's really helpful. And then just one last one for me on the Burlington space kind of whats.
What are you guys envisioning there as the redevelopment play does it stay I know you said it goes office.
How much do you think you have to spend in <unk>.
What type of tenant.
Does that include like a lot a lobby refresh and maybe kind of the second floor tenancy kind of what's the play there.
Hey, Greg it's Bart here.
The project is 95000 square feet.
All retail, it's going to be have virtually half and half half often have retail.
For probably big box user down below.
And the rates, we're looking at mind, you I think we've kept saying that our gross rent on that asset.
We're close to $8 annually in that ballpark and we're looking for kind of a low <unk>.
Low <unk> rent on the office portion.
Okay and is that not.
Politics into because that location.
Third well with everything going on in San Francisco.
Our retail shoplifting type.
Issue like will be easy to get a retailer in there.
The ground floor as do.
Or do we need a little bit of cleanup.
And then we went to bank.
Yes, absolutely there is it's a great location and film.
<unk>.
Theres been ink there've been inquiries about big box retail there.
And office in that in that class. So we feel really good about.
The activity with kind of the higher end space in Soma.
Great. Thanks.
Thank you Mr Manley.
The next question is from the line of John Kim with BMO capital markets. Your line is now open.
Thanks, Good morning.
I just want to clarify are you, suggesting that guidance can come down based on dispositions or.
It is.
Our base case, just given the timing and the likely low cap rate.
And you can sell it.
So.
I guess the answer is it can go down or up because if we redeployed.
The amounts into accretive assets that can actually go up so that's why we don't guide either way because we don't know the timing and we currently don't have the use of proceeds.
Figured out yet.
So it can go down if we sell it sure, but if we buy back stock per se that might be much more accretive than the underlying <unk> that it was providing.
Yeah.
Okay that makes sense.
Your 'twenty two aspirations you discussed having 45%.
And coverage another 25% in discussions excluding the known Vacates.
How much of that is renewal leases versus new leases, where there might be some vacancy downtime.
You mean backfill to meet bats alone.
Yeah. So I would say, it's probably a third a third of it is backfill that we're already working on a really cross across the entire portfolio.
If I could just ask one more so the Dow I think you mentioned thats a known vacate so that was.
The lease was extended on a part time basis restriction basis from October two.
Earlier this year.
So.
I just want to clarify that that will be.
Leaving that space.
That's correct.
Well they are leaving three they are leaving three floors and then we have we're in discussions on actually one of those floors currently back to backfill in the markets the market's about 50, 52%.
Yeah.
Okay. Thank you.
Thank you Mr. Kim.
The next question is from the line of Manny Korchman with Citi. Your line is now open.
Hey, everyone.
Maybe this is a combination of sort of what <unk> talked about in.
Victor's comments at the beginning.
It sounds like Youre going to get a bunch of excess capital and from these dispositions.
Im not sure how big your acquisition pipeline is but you also did the perhaps see which brought a bunch of excess capital and so kind of what is the plan is it that you have a big acquisition pipeline is it that you just wanted to be.
Sort of the cash heavy at the moment or what drove you knowing that youre going to be selling these assets in this upcoming year to do the prep C, which brought so much capital.
Yeah.
So a couple of things Manny I mean listen we have we have.
Very extensive development pipeline that.
We are.
Aggressively pursuing and some we've announced and some we haven't.
That's one we do have.
Allocated dollars that we've not specified yet for.
Other accretive uses of capital.
And as always we have we have a very strong balance sheet to maintain flexibility I wouldn't read into one or the other I would read into the fact that we've always look too.
Capitalize on opportunities to access capital the four assets are not core assets to the portfolio.
Timing's right, hopefully pricing will be right and we will execute on those deals.
As <unk> said.
Well the question before or two ago I'm not sure.
If we don't get the right pricing of these assets, we're not going to sell so.
It's not it's not a fait accompli and you never know what happens as markets change and timing.
That's exactly why we haven't altered any any of our numbers for 2022.
And then Victor in the press release last night.
Pointed outgrowth in the studio portfolio as one of the focuses for the year, that's not that different than what you've said in the past but.
Is it is there a reason that it was sort of front and center.
Well I think theres a lot of opportunities that we're looking at right now in that.
<unk>.
I think relatively speaking, there's we're probably evaluate more opportunities with our JV in.
In that product type I'm, just sort of thinking off the top my head than what we're seeing in the office.
In our markets in the office sector. So yeah.
Thanks Victor.
Thanks Manny.
The next question is from the line of.
Jamie Feldman with Bank of America. Your line is open.
Great. Thank you I was hoping you can talk more follow up more on the comments you made at the beginning of the call about.
Capital flows.
Investment and how it's translating into better leasing, especially if you're a smaller tenant portfolio.
Can you talk about specifically the submarkets that maybe in the fourth quarter or even as you look at the leasing pipeline seem to be getting.
Actually improving and then as you think about the portfolio following needs for asset sales.
How do you think that trajectory and maybe even the exploration risk and start to look differently.
Yes, so I'll take sort of a top level and then I can let mark in our jump in a little bit Jamie, but if you think about.
The amount of capital that's just raised in California alone as I said in my prepared remarks I mean.
That's going to equate to the logical thought process of.
Being distributed to companies that want to be.
In close proximity to their capital providers and their partners or their investors and that's always been the trend and that's why people focus substantially on VC capital.
Sure.
Disposition deployment of capital.
Into first second third four stage investments right.
Just.
To take a look at it if you really narrow down in the valley I mean, we've got just just just alone we did I think 145 deals.
In Silicon Valley in 2021 relative to have that I think it was like less than <unk> 170, 74 deals I think it was in 2020. So the majority of those deals are this small tenant smaller relative to the large tenants that are out there that we're signing.
Top.
10, large tenants in the valley or Apple meta.
Net app <unk>.
<unk> three linked in those those were all in the 702 quarter of a million square feet and I'm, referring to the.
Tend to 30000 square footers, and so that's going to equate to I think what we're seeing and the activity on that alone not to mention by the way that the valley did I think.
About 14 million square feet of deals.
In 2020 , one so a lot more than people thought so there's a direct correlation to capital raise deployment and growth and we're seeing that on the ground on a granular basis and art can comment on that yes, we definitely see it on the ground, especially across the valley, where we've moved we moved that.
Portfolio by 130 basis points quarter over quarter, and that's all that's all deal volume.
In the kind of sub sub 10000 square foot range and again, we our market share is still.
Our market share is about 10% of all the deals that were done over the last two years, that's 2020 one.
In the valley, but.
Our footprint there is probably about 4%. So we're definitely doing more than our share of deals and then just just to top up your your trailing part of your question Jamie.
Skyway is the only asset in the valley.
Have we.
We have purposely.
Tried to vacate that asset for higher and better use either either as I said.
Four four.
<unk> life Sciences, whether we do it or somebody else does in the sale process, that's the higher and better use and the rents are going to are going to justify that.
So almost 100% because it's a small asset we've talked about it all along it's 100% vacant 69 22 has had some routine aspects there.
And we're hopeful that we're going to get the right pricing levels in the north views.
I'm going off of.
Mid <unk> or something like that something to that effect. So yes I think.
These four assets if we execute on it it will take some of the exposure away from.
Some of it some of the future vacancy in the portfolio.
Okay. Thank you and then I guess.
The comment I think a lot of sense based on.
VC funding, we've seen but you've also seen the stock market selloff in real concerns about growth stocks a growth company have you seen a shift at all in alright slowdown at all in leasing volume are deals falling out of bed or anything.
Based on what my broader concern I just walked you through I gave you a snapshot of the top 10 deals just in the valley alone.
$3 million over 3 million square feet of all the top.
Fang related tenants or ancillary related tech and media tenants that are signing space from that side.
Talk to our peers in the markets and you know what's going on in the marketplace. I mean, they are the most active they lease the most space I think they lead by by the markets that Theyre in for high quality real estate in zero.
Setback or pushed back on that I think also if you look at our portfolio and we don't have a ton of of those tenants that are expiring, but those that are looking to renew.
<unk> already exposed to market to the Dell.
The NFL and the Qualcomm, but other than that the next year down we are negotiating with existing tenants to renew.
And as Mark said in his prepared remarks, we are in leases on.
On two of those spaces anyways, yes, Jamie close to three quarters back when we started reporting that we've seen increase in strengthening in fundamentals and it really it starts with tenant demand in the valley 10 demand has been increasing steadily.
And the gross leasing is up.
Quarter over quarter sequentially.
We are.
If you look at our if you look at our deals Jamie our square footage from 'twenty to 'twenty, one increased 165.
165%, so I mean that speaks that speaks to the velocity and obviously, we're getting our share of deals.
Okay. So I guess it sounds like you're not you haven't seen any change in appetite based on what's going on in the stock market or our growth concerns no.
We're trying to.
What we're seeing is an acceleration in deal activity.
Okay, Alright, great. Thank you.
Thanks, Jamie.
The next question is from the line of Blaine Heck with Wells Fargo. Your.
Your line is open.
Great. Thanks, Good morning out there Victor you talked in your prepared remarks about using proceeds from sales to fund high yielding office and studio investments I guess, we've seen that strategy in play on the studio side with the acquisition of <unk> and star wagons on the service side. So is it more of that type of investment we should.
On the studio side, and then with respect to office most of the trades. We've seen thus far have been really high quality low yielding properties. So are you seeing more opportunity on that value add side that might eventually have higher yields or was that high yield comments directed more towards development.
Yes.
It was at the high yield let me let me take your first part of your question.
On the type of assets that we're looking at they are truly high yielding youre going to be more development related or operational related.
Which is consistent with what we are.
Rejecting.
On the studio side, but also on the office development side, I think no hidden secret that our projected returns for Washington 1000.
We're going to be one of the highest yielding development deals if not the highest and most recent history in in all of Seattle and the surrounding areas.
That sort of falls into that category.
Going going to your office comment.
Do you think that.
The core deals are trading at relatively.
Aggressive cap rates and if they're really not aligned to kind of stuff that we typically are in the past.
We are starting to see.
Some value add deals that I think makes some sense.
And so we're not projecting we're going to do one or 10 of them, but we are obviously evaluating them as they come in and hopeful that we'll see more.
Okay, great helpful commentary there.
Maybe for Mark or route.
Respect to the timing of Google revenue recognition can you just walk us through the major milestone there I think based on the note in the supplemental I guess my understanding is in turn the property over to Google to build out their tenant improvements and then hopefully in the third quarter. The GAAP rents will commence and then essentially nine months later cash will come in.
Correct.
How are you feeling about Google getting that completed by the.
Third quarter of this year.
So.
Couple of points there so we did deliver the space.
December so we did start GAAP revenue recognition at that time.
And from a GAAP and <unk> perspective, that's going to continue regardless of the timing of their build.
And so that's.
That answer in terms of their build in their cash rent payment. That's on them. They have that amount of time, if they were to build sooner or later than that their cash rents still starts it doesn't it's not affected by there.
The ability to complete the work and you are right. After nine months, we do have cash cash rents starting and then there's a free month.
I'm sorry go ahead, Mark sorry, you have one month of free rent that starts in the third quarter of 2000.
One month of SAR, one month of cash rents that starts.
The third quarter of this year and then they have eight months of abated rent and then all of the cash rents.
Begin again after that eight months of abatement.
It's a little confusing because there's a big gap in terms of.
Cash rent, but for GAAP purposes immediately upon delivery as one recognizing the revenue.
Yes.
Great that's clear thank you.
Can see by the way in footnote 14.
On page 28 of the supplemental in case you.
You want to reference that you can see that description.
Yes.
Sure.
I appreciate it Mike.
Mhm.
The next question, what's been the line of Caitlin Burrows with Goldman Sachs. Your line is now open.
Hi, Good morning, maybe just starting with the broader one on return to office. So I think some of the data shows that this is improving.
Once again I was wondering if you could just go through what are tenants, telling you in terms of their latest plans and maybe more importantly, how do you think that's evolved over the past six months and what could be different now.
Well I think listen we're all in the same position as to as to where we see it it's a.
Day to day literally a day to day moving target with the mass mandates being lifted virtually everywhere, but the city of Los Angeles.
There, Jason place and I think thats been the catalyst and kids going back to school and the vaccination increasing for children has led us to be.
<unk>.
Fairly.
Fairly much in communication with all of our tenants on the larger scale that they have a game plan and it is imminent and some as early as March one and so it seems as if this is a.
A real starter versus the last delta or <unk> that has that has maybe delayed I also do think Caitlin you're finding that companies are not coming out with statements. They're just bringing people back because they don't want to say the start stop theyre not going to do that again, and so but we specifically have our largest tenants and the poor.
Folio are all actively engaged to come back immediately.
Alright, and then maybe just a question on the studios you had positive same store cash NOI growth in the fourth quarter and your guidance assumes an acceleration in 'twenty two but it does look like same store occupancy is down. So I was just wondering if you could go through how same store NOI and revenues are accelerating.
Even if occupancy is declining.
Yes that occupancy decline.
And by the way take much on $1 two square feet.
To sort of move the needle, but that occupancy decline has been kind of.
The driven off the same basic.
<unk>.
Sort of dynamic if you will throughout the pandemic, namely its non stage using office tenants. So some of our <unk>.
Space is occupied by.
Tenants that want proximity to the stages like casting agents for example, and we've seen.
Throughout the pandemic as tenants haven't been coming to office some of that tenancy has trailed off having said that the real driver of revenue at the studios is the stage utilization or utilization of the services and then all the support that goes with that and so you can easily continue.
The kind of post the type of.
Return same store growth and the like based off of really really strong stage usage and everything that goes with that even if we see a little bit of weakness on these non stage.
Using office tenants.
Which is why you have to kind of.
Can coexist.
When things normalize and they are normalizing and.
Tenants start to return to the office more regularly that part of the.
The studios that that lends itself to these non stage using office tenants that will start to normalize too and they will come back and so there's definitely there's definitely more upside.
With the restoration of that tenancy.
Here in the near term.
<unk>.
Got it thanks.
Thank you Spiro.
The next question is from Rich Anderson with <unk>. Your line is now open.
Thanks, Good morning, Congrats on the Super Bowl for any Rams fans out there.
Thank you speak of the NFL.
The mark on that expect it to be assuming you can get what this late stage through to the finish line.
And I understand this doesn't expire until the end of this year.
The Ti build out and everything that we're really talking about this becoming a kind of a 2024 event from the standpoint of cash flows is that correct.
No. So this is our first of all the 170000 square feet. We are very close final lease negotiations here the Mark as we've mentioned before is about 26%.
For the bedroom banks right.
On the other.
The expiring rate, yes base rent, yes, that's right yes.
And then.
24, no I.
There was a eight months eight months build period from from execution.
Okay.
So 2023 of them.
That's right.
Welcome.
My question there is.
Whats the risk that this thing goes away Cisco did a few years ago.
And some time when you would expect it to have some good news from the vacate.
And ultimately it didn't quite work out I mean do you feel like the market is just in a different spot now and that you won't have a similar outcome with Qualcomm.
Well, let me, let me start with high level, Youre talking apples and oranges right I mean completely different market rich. This is a marketplace that earlier on in some of the questions.
As you walk through the 14 million square feet that was leased in the valley is all sort of akin to the type of real estate that this is it has nothing to do with campus center and the quality of real estate that was that was a that was a one asset in a marketplace that Ed.
And the best of times at zero.
Growth opportunities and activity and this is this is an asset that is highly sought after and so we're talking apples and oranges as I said I.
I do think the activity has been.
Never we didn't find out that they were really going to leave.
The only reason we found out is they never told US. So the date came and went and they didn't tell us and that was the end of December so so.
Under the assumption of 100% and now we're positioning it to be marketed and I think art will tell you that he's very confident.
Yes, so we have.
Victor you hit the nail on the head with the Apple to oranges, I mean, it's a great asset to building assets, it's new construction new construction, it's in a great market in north San Jose and <unk>.
Victor mentioned before.
There were 10 deals over 100000 square feet.
In 2021 now there is right now in the market. There's about 12 over 100000 square feet that we are at least in dialog with until we feel absolutely.
Positive about.
Really the prospect.
Getting looser and probably building by building if I had to guess rich if that was your next question rather than the two two building user.
Okay fair enough I appreciate that you.
You mentioned, the 37% <unk> growth in 2021, I'm wondering when you think of 2022, how much of that 37% with sort of.
<unk> unsustainable.
And really what we should be thinking about in terms of.
<unk> growth if you could provide any color on that for this kind of this year.
So I.
Im not sure if its unstable not it is directly attributable to a cash rents.
Coming up and all of our assets burn off of free rent. If you will and I think stabilization of Tis and Lcs I think.
Bruegel when that starts paying cash as mark walked.
The previous caller through.
That's going to really contribute to <unk> in the future now will it be a little bumpy. If there is a relatively large lease signed sure and for Ti, but I think obviously the benefit of that is will be more cash rents, but I think looking out it looks pretty.
I don't think the growth of 37% of sustainable every year, but I do think the level of <unk> that youre seeing now should be relatively sustainable.
Okay and then one last quick question for you Victor.
I was reading about the opening of the Great point Studios.
<unk>, New York I'm sure you guys noticed that.
That's 1 million square feet.
It seems to be moving along lionsgate.
These tenants.
But.
To what degree do you see sort of early stage opportunities like that where perhaps we're not quite into the entitlement stages, yet, but you could see a vision of growth.
And similar form to that and is that kind of thing that youre seeing that gets you kind of jazzed up about seeing more opportunities in the JV than you do even in your conventional office business.
Yes, listen I wouldn't sort of that facility.
There actually are ready to open some of that space and some of the office space March one.
Listen Thats, the kind of stuff that youre, absolutely right. I mean, we are looking at opportunities exactly like that or ground up.
Purpose built facilities in Vancouver in London.
In New York and here in Los Angeles, and so and there are other markets that were evaluated at the same time and so there are some very interesting opportunities.
I think the JV is going to be pursuing fairly aggressively.
And so.
Do you need to be a year early or in the case of a great point.
Example, right before you begin.
Yes, I mean, there are there are obviously entitlement issues on some of these in some of the ones. We're working on we're working through.
Those in the existing deals that we have not announced yet.
Yeah, Okay. Thanks very much.
<unk>.
The next question is from the line of.
Hello, Chuck with Mizuho Your line is open.
Thanks for taking the question. So maybe just I just wanted to clarify with.
The early delivery of Onewest side, just the impact to <unk> and then the impact to 2022 versus maybe what you had anticipated earlier I know theres, obviously the concurrent.
<unk> expense, you're going to start recognizing as well. So if you can just walk us through kind of the math on how much of.
How much did contribute to <unk> and then maybe to <unk>.
Sure thing so far.
<unk> fourth quarter, our share of <unk>.
Gave us roughly $300000 of additional <unk> in Q4, so it wasn't that meaningful license for one month of that.
Activity in terms of 2022.
There really isn't an impact it's just starting a month earlier from a GAAP perspective may be cash comes in.
A month earlier, but for the balance of 2022, there is no impact for.
For that early.
Delivery.
Yes, it was always expected as always in our numbers and that's what we had provided in terms of information in the past.
Okay.
And then just the spreads on the auto side still seem pretty robust I know you talked about some of the.
The vacancy.
One of the vacancies, but still at a 50% mark.
But just stepping back given where market conditions are today, what what is portfolio wide mark to market today for the office segment.
It's it's just shy of 10%.
The spot Mark to market.
Okay, Okay and then.
Just last question I guess with all the capital now that you may have additional capital would be asset sales I'm.
I'm thinking of.
Specific kind of areas and wanted to get your thoughts maybe Victor on this one is.
Your peer has moved to maybe where some of their tenants are moving to Austin the sunbelt.
On the office side. So that's one area I would love to get your thoughts and second with this whole quality divide that spoke leading across market.
Whats the need or the desire to do a lot more.
More redevelopment of assets, including maybe a monetization.
Well vikram. Thank you so listen we've been asked the question about other markets in the office space and there are other markets that we might consider but right now we're sort of laser focused on our core markets be Vancouver through on the West coast, All the way down in Los Angeles, we're not considering.
Austin I think it's a great marketplace, but it's on a marketplace for Hudson at this time.
And we think theres going to be some ample opportunities in our markets and maybe some others as well.
That will evaluate and see how synergistic. It is in terms of your second question I mean, absolutely. We have spent the last two years during COVID-19 .
Looking at a number of our assets and spending a tremendous amount of capital on those assets both both on the outside and the inside.
And the inner workings of the assets on the systems and then on the the beautiful kitchen of the assets and the quality of space to adapt it to be.
Concurrent with our quality portfolio and our assets and the ones that were not unlike the four assets, we talked about that we're going to get rid of and dispose off so.
There is a flight to class and I think that's sort of proven out to our portfolio and why we're seeing the assets at least in our portfolio are the ones that we put a lot of time and money into or their newer quality assets.
So just to clarify you're saying you've spent two years sort of doing that and now are there any incremental assets that don't fit the bill.
Primary strategy as disposition.
No not to clarify that just the primary.
Strategy is to finish the work on some of the assets that we've been working on I think there are several assets that are lobby renovations and modifications of core space that are still in the works and we've got I don't even know the number the number of projects, but it's a substantial number of projects that are working.
Our that our redevelopment team is working on.
The assets right now that we're disposing of are those four there is no other assets that we've asked.
Identified at this time to put on that list.
Okay. Thanks for the color.
You got it.
The next question.
It's from the line of Ronald Camden with Morgan Stanley . Your line is now open.
Just a quick one.
Just can you talk about what the utilization of the portfolio is and as that sort of starts to get back to normal is there any sort of variable expenses that we should be mindful of as more people start utilizing the properties.
Well.
Yes, I mean utilization as Victor pointed out earlier when the question came up is definitely.
Improving.
And accelerating.
Somewhat quietly because.
Employers are actually having people come in even though they're not making bold announcements about it I do think.
This method that a lot of landlords I think we are using during the pandemic of gauging physical occupancy through elevators, swipes or parking and the like as we're bigger.
Beginning in recognize is really not going to be probably two useful methodology is.
We are witnessing.
Really the normalization of more of a hybrid flexible work model.
So.
We expect to see is <unk>.
<unk> will be in high utilization and so far as the suites will have.
All of the suites will have some amount of physical occupancy it will just be less debt.
Less dense occupancy rate so.
We think.
We're all going to need to recalibrate the way, we think about what it means to be on say fully occupied.
And.
And we're just sort of seeing the early stages of that now.
As for incremental.
Variable cost yes.
Yes, there will be no.
Not much I mean, all of our buildings throughout the pandemic remain fully operational.
<unk>.
They're there and including heightened janitorial services and so forth and we're not there's not going to be much more to incur.
On those variable services and as you know.
Even if utilities for example were slightly higher let's say after hours HVAC and so forth. It's all escalators and recoverable. So you won't really see much of that I think the real well.
What we're all sort of waiting on us for parking that really materialize. There is very little incremental variable expense associated with that a little bit for the parking operators, but more importantly, we are really not recognizing anywhere close to what normalized parking revenue should look like and so that's where I think you should be.
<unk>.
Sort of expecting the real impact to be felt.
Got it. Thank you all my other questions have been answered thanks, so much.
Thank you Mr. Camden.
The next question is from Dave Rodgers with Baird. Your line is open.
Yes, hi, everyone. Thanks for taking the time.
A follow up for you you guys quoted I think in the press release last night, and 41% leverage with the preferred so when you think about $350 million of asset sales at the midpoint to $100 million, maybe a cash flow. After the dividend gives you quite a bit of liquidity, but I guess from the perspective of three things one known capital spend known commitments. This year, how much is that.
That and then how do you kind of freezes in.
Your head the kind of the leverage of the company as well as kind of the buyback program as you had mentioned earlier.
Real quick on the leverage issue, it's not when the preferred is only the preferred unit.
That's not what the preferred C. The 41% just to be clear there.
Okay in terms of.
Well I mean, the leverage question.
We.
Can be a little unwieldy because it depends on what your underlying point of measurement is is it like equity capitalization and of course that'll be totally that's entirely unknown, we don't know where our share price is going to trend at the point in time that we've deployed that capital so, but if you looked at it in terms of say something more.
More predictable underlying gross asset value underappreciated book, let's say, that's quite a bit lower than 41 as we sit today, it's closer to the mid thirties and every dollar expected to be deployed on that pipeline development and so forth will cost an incremental dollar of.
Gross asset value so.
It will still remain a very manageable level looked at in terms of net debt to unappreciated book, probably maybe you might go up a 100 at most 200 basis points on that leverage level, but still in that manageable mid 30 range.
<unk>.
So.
I mean, I think that response to the question on kind of leverage trends right on it.
We Miss something else there David.
Yeah.
No Thats fair and I guess I'd add that also assumes that.
And buyback program would be somewhat constrained by that as well.
Oh, yes, I mean, well.
Yes.
There's limits on everything and I don't think any even very impactful buyback program is we're constrained.
We've got ample room on the balance sheet to do a meaningful buyback if if that's where we choose to.
<unk> focused our capital.
And then maybe just lastly on the liquidity side known capital commitments for the year relative to kind of what youre anticipating bringing in.
Yes, I mean in terms of again, putting aside any speculative acquisitions, so it's not that much.
<unk> got a $90 million construction loan for Glen all that that covers all of the spend for the year on Glenn Alex We've got you can see in the.
Development pages of the supplemental we only have really the ti allowance and a little bit of retainers lepton, one Westside all of which is covered under that construction loans. So we're really just talking the only real meaningful spend which could hit and wont be March will be Washington, 1000, when we get underway there.
And I don't know exactly how much of it hits just in calendar year, 'twenty, two but I'm going to say, it's probably maybe I don't know if.
$70 million to $80 million at most.
No.
With the remaining purchase Oh, yes, we got to complete the purchase of $65 million at the point of acquisition and then.
Whatever incremental spend we have early on in the year, Let's say, maybe I don't know maybe it's more like 40 to 50.
By the end of the year. So maybe it's a 100 with that that take down the land on Washington 1000, that's the only.
Liquidity like something that requires current liquidity, that's not covered by existing constructed at.
The only other spend is just our ordinary.
<unk> and.
Commissions and recurring Capex, which you can get it.
Good idea kind of what the run rate of that looks like it's been roughly averaging over the past four years like $25 million a quarter.
Alright Thats helpful. I appreciate that.
Okay go ahead go ahead.
We're running late so I'm going to take a couple more questions out there. So we're just sort of running over cognizant of People's time.
Thank you Mr. Roger The next question is from Daniel Ismail with Green Street. Your line is open.
Okay.
Great. Thank you just one for me.
We've been discussing for a few quarters now the strength in Silicon Valley and on the peninsula, but I'm curious about if you think that translates into San Francisco CBD. This year.
Yes.
That's a great question I think.
From our standpoint, aside from Burlington as early termination.
Our our portfolio there is like 94% leased so we don't have a lot of exposure. So we're personally in good shape I think.
You've heard me say this before.
Feel relatively bullish on San Francisco, and the future San Francisco I think we'll swing faster than people than people believe it's going to swing and I think as a company perspective, we feel the same way.
Tenant demand is clearly on the rise there.
And I had this conversation a year ago. These numbers were dramatically different I mean, we've seen.
7 million feet of gross leasing in the city in the last 12 months and the sublease space has gone from I think it was as high as like a $9 $9 8 million square feet were down about $1. Three just from just from April really.
Yeah, I mean, so the trend is really a much better than I guess what.
What people are really seen but it's got some work to go I do think the political atmosphere is changing.
It is changing in all of our markets and I think that's that's helping people understand where the marketplaces on that basis.
But I believe that San Francisco still has some some issues that theyre going to have to accomplish in the next 24 months and that sort of the future that we're looking at the line of sight, but it still remains a tale of two markets right.
Faces that are highly monetized more desirable spaces winter started to tick back up less upward pressure on tis and free rent. So those are all positive signs that we're paying very close attention to.
Got it thanks, everyone.
Operator, we'll take one more question please.
Certainly the last question is from Nick <unk> with Scotiabank.
Your line is.
Thanks, guys, sorry, if I missed this but is it possible to get the occupancy growth that's assumed in guidance and I know Qualcomm by itself is about 250 basis points of vacancy. So any perspective, you can give us there.
Yes, we haven't provided that and theirs.
Theres been a lively debate that might be something we add because it's been asked quite a bit I can say we did.
The numbers on the heels of the completing the quarter end.
It looks to us that occupancy at by end of 'twenty. Two is essentially identical to where we ended on the on the in service portfolio at the end of 'twenty one.
Okay, and that's sorry.
Alright, thats inclusive of the Qualcomm vacate that's yes, that's for all of them.
The in service portfolio, which Qualcomm as part of.
Okay. Thanks, and just just to follow up on Qualcomm is do you have any insight there about what affected that leasing decisions. It sounds like it was kind of a breath, but at one point you said, maybe they would keep a building im not sure if flexible work impacted that decision for Qualcomm and then just separately in terms of the whole Submarket. There is where you have.
Now have some more vacancy.
So I'm wondering how that impacts cloud 10.
<unk> development.
Maybe just talk briefly about sort of demand in that market.
Sure Nick Let me start let me start so if you recall I mean, we were having these conversations a little over four years ago.
Tom was debating whether or not they were leaving or staying and so it has nothing to do with.
Yes.
Koby decision or a flagship or deciding to do it I mean.
We went back and forth with them they came to us at the last minute and say, we're saying so this.
This is just how they operate I don't think it has anything to do for us to sort of.
Assume that this is a market decision based on the last two years.
That being said.
I'll, let art jump in and sort of talk about that.
The middle part of your question, but I'll, just say cloud 10 ish is.
<unk> bin.
Discussed with two tenants right now who are very interested in and it's because it's a brand new project. It's a super cool campus designed by Gensler and I think there is theres going to be some continued interest demand and that and the timing around that is going to be different in terms of delivery, obviously for something like like like this yes.
Like we said.
There were about 10 deals done that were responsible for about $3 1 million feet across the valley and we're now tracking about 12 12 more.
Greater than 100000 square feet, and we said, it's going to be likely a single building user to single building users.
And we're currently in the process of repositioning the asset modernizing the amenities landscaping hardscape ing I'm, just making the tenant experience superior.
And so we feel we feel very very good about.
The activity in the market.
Capture that.
Okay. Thanks, everyone.
Thanks, so much.
I'm, sorry, I'm, sorry, we went over by 10 minutes I appreciate all the support and most importantly, I appreciate the dedication and hard work of all of the employees at Hudson and great quarter.
Accomplishment of 2021, we will see you guys all soon.
Yes.
The conference call has concluded you may disconnect.