Q1 2022 Hudson Pacific Properties Inc Earnings Call
Good morning, and welcome to the Hudson Pacific properties first quarter 2022 conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's.
Presentation, there will be an opportunity to ask questions.
We entered the question queue at any time. Please press the star key followed by one on your Touchtone phone if youre using a speakerphone note you will need to pick up your handset before pressing the keys. 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, thanks for joining us with me on the call today are Victor Coleman, CEO and chairman Mark Lehmann President.
Maryann, 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 that.
That would be information, we'll 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 the reconciliation of non-GAAP financial measures used on this call and in those materials.
Today, Victor will touch on our strategy and capital allocation priorities, Marc will discuss our first quarter business highlights and upcoming opportunities.
I'll review, our first quarter financial results and outlook thereafter, we'll be happy to take your questions Victor.
Thank you Laura and thank you everyone for joining us today.
We had a productive first quarter focused on our 2022 priorities that include capitalizing on leasing opportunities progressing our development pipeline pursuing capital recycling opportunities maintain a strong balance sheet and furthering our ESG leadership.
On today's call, we'll provide updates on each of them.
At Hudson Pacific Our long term strategy is to create shareholder value by selectively growing our real estate portfolio as we meet the needs of the secular growth and increasingly convergent tech and media industries.
<unk> had great success at the forefront of this multifaceted shift delivering tech campuses, along studio launched and finding ways to innovate physical design and to streamline leasing and operations for these synergistic types of space as Tech and media business models have expanded so has our opportunity set.
We will continue to build our portfolio around pure play office in urban West Coast Tech hubs, which attract significant talent and capital like the Bay area and Seattle.
Major global media markets like Los Angeles, and the U K, we're focused on synergistic studio and office campuses and pure play studio facilities.
Our fully vertically integrated platform gives us the ability to allocate capital in several ways to generate long term shareholder value by delivering an operating world class and monetized and sustainable workplaces for tech and media tenants. Our primary focus remains executing on embedded opportunities in identifying attractive.
Value add projects targeting stabilized yields of 6% to 8% or more over.
Over the last 10 quarters alone through projects like epic Harlow Onewest side, we've demonstrated our ability to identify and invest capital in unique office and studio related opportunities that generate returns in line with our well in excess of those yields.
Going forward, we expect to take advantage of even more embedded development related growth opportunities as well as identify and pursue capital attractive acquisitions in a disciplined manner, we have a significant existing value creation pipeline, most of which is studio or studio related office development.
More than half of which we expect to have the ability to commence construction by mid next year.
There are two types of compelling opportunities, we look to pursue one is our core plus opportunities targeting stabilizing yields of 5% to 6% or more to purchase assets that are accretive and strategically aligned with our long term growth objectives in the right markets with the key tenets of our acquisition of an Amazon anchored Denny triangle.
Fifth in Bell last year is an example of that we will also look to grow our studio production services offering to further differentiate our facilities and deepen our relationships with key tenants from a return perspective, these profitable businesses expand our media derived revenue and operating margins in it.
Increase our studio portfolio stabilized yields.
Continuing to return capital to shareholders remains an option as well as part of our balanced approach to shareholder value creation and over the last four years, we've repurchased $380 million of our common stock, which will reach $580 million or approximately 15% of our market cap at the conclusion of our accelerated share repurchase.
In the third quarter of this year to date. During this period, we also paid approximately $543 million if.
<unk>.
Our ESG platform better blueprint is a major differentiator for our company and over the last several years has become essential in the increase alignment with the medium tech tenants that we serve ESG is now fully integrated into our strategy and capital allocation priorities at both the corporate and property level.
In terms of the E. In ESG. We're ahead of the game our operations are already fully carbon neutral and we have the highest percentage of LEED certified buildings amongst our direct peers, we manage climate risks in accordance with TC FTE in the Paris agreement and were readily able to comply with the FCC's recently proposed climate really.
<unk> disclosures.
Our approach to the S prioritize real impact on issues, we view as integral to our stakeholders, we're very focused on DDI and much like our approach to sustainability.
Not satisfied with simply just checking the box in addition to diversifying our leadership and board our heads of GI and ESG are building on a variety of existing internal and external facing initiatives and we recently launched an innovative impact investing platform echo blue to leverage our expertise to promote dei holistically.
<unk> in our industry and communities, we look forward to sharing more on these initiatives in the coming quarters and as we look ahead, we'll continue to work to execute on the multiple levers we have to maximize value for our shareholders, our niche expertise and deep relationships with a secondary synergistic converging media engine businesses.
We will create many long term cash flow enhancing opportunities. We also continue to weigh these growth opportunities against return of capital to shareholders again with the ultimate long term goal of maximizing shareholder value.
Now with that I'm going to turn the call over to Mark.
Thanks Victor.
We're making good progress on our 2022 priorities, we signed over half a million square feet of leases in the quarter with a 12% GAAP and five 8% cash increase in rents from prior levels. We signed bank of Montreal's 100000 square foot plus approximately 11 year renewal and expansion lease in Vancouver at that call Center.
A testament to the success of our substantial repositioning of that asset over the last three years. We also expanded global production firm company three approximately 11 year 60000 square foot lease at Harlow, such that they now lease the entire 130000 square foot LEED gold <unk> certified.
Building Harlow state of the art design and location at the Sunset Las Palmas studio lot, where a major draw for company three as they look to unite Hollywood employees, and a highly collaborative environment and enhanced proximity to content production clients.
Our in service office portfolio ended the quarter at 91, 1% occupied and 92, 3% leased our current leasing pipeline, including deals and leases Lois or proposals comprises $2 2 million square feet of activity still up about 35% from our long term average or.
<unk> 2022 expirations are approximately 10% below market.
Excluding Qualcomm, we are in leases Lois or proposals at 55% of the balance.
We have another 15% or so in discussions largely comprised of smaller tenants along the peninsula and in Silicon Valley with late year exploration, who will engage more fully in the coming quarters.
We continue to deliver on our value creation pipeline tenant improvements are underway at both one west side in Harlow GAAP rent commenced.
November of 2021 for one Westside and in April 2021 in January of 2022 for the original and expansion leases respectively. At Harlow. Upon stabilization. These projects will generate a combined $45 million of additional NOI annually.
Our under construction and near term planned studio and office development projects total over $2 3 million square feet.
Instruction at Burbank adjacent since that point.
Our seven stage 241000 square foot purpose built studio.
Remains on budget and on schedule to deliver in third quarter 2023, the project will generate another $15 million of NOI annually upon stabilization and were building it to a seven 5% to 8% stabilized yield in comparison to recent studio trades at sub 4% cap rates.
We're making good progress on entitlements for our 'twenty, one stage $1 1 million square foot Sunset Welcome Cross studio development. This project is located just north of London, where demand for stages continues to notably exceed supply sunset.
Sunset Glen Oaks, and Sunset Welcome Cross together will double the size of our studio portfolio on a square footage basis and to a total of 63 stages.
We expect a near term closing on the podium for our 546000 square foot, Washington, 1000 office development in Seattle, and our plan is to commence construction in second quarter 2022 with delivery in early 2024, the Denny Triangle Lake Union, Submarket, where Washington 1000 is located.
Our thriving and vacancy remained sub 10%, Washington 1000, sustainable healthy design is state of the art and highly differentiated and we believe it will have considerable appeal for the global Tech companies looking to grow in that market. Upon stabilization, Washington, 1000 will generate approximately 2000 <unk>.
$7 million of NOI annually.
We're also working on entitlements for our 450000 square foot Berard exchange hybrid mass timber office building in Vancouver, with very positive feedback thus far as the tallest such building in North America. This groundbreaking project once again showcases Hudson Pacific's innovation and leadership.
In terms of World class sustainable design and development.
Market fundamentals are ready extraordinarily tight pre pandemic remained strong with sub 6% vacancy.
We're marketing for sale all four non strategic assets, we identified as held for sale last quarter. These include 69, 22 Hollywood del Amo Northview Center at Skyway landing and we view them as not strategic based on location tendency in asset quality.
Based on buyer feedback and momentum to date, we anticipate dispositions of these assets before the end of the third quarter of this year.
We will initially use the anticipated $325 million to $350 million of proceeds to pay down our credit facility and ultimately to fund our development pipeline as required.
Expected pricing represents an annualized GAAP cap rate of approximately 2.25% on the collective sales and now I will turn the call over to Harris.
Mark compared to first quarter 2021, our first quarter 2022 revenue increased 14, 7% to $244 5 million, our first quarter <unk>, excluding specified items increased three 3% to $75 2 million and 3% $2 50 per diluted share.
Specified items in the first quarter consist of a trade name impairment of $8 $5 million or <unk> <unk> per diluted share and transaction related expenses.
$3 million or zero cents per diluted share the <unk>.
<unk> name impairment is unrelated to our operations. It instead reflects the write off in accordance with GAAP accounting rules and the NAREIT definition of <unk> of the value associated with the Dio studio services name, which we retired upon folding that production service business under Sunset studio Brian .
Our <unk> grew 11, 8% to $58 6 million and our same store property cash NOI was up one 4% to $123 million.
This quarter, our press release and outlook present, a combined same store property cash NOI for office and studio.
This change reflects the growing synergies and similarities we and other institutional players see between our office and studio assets, including increasing similar if not identical tenancy and credit and length of lease term it.
It is more in sync with our long term strategy and vision for the company and brings our same store reporting in line with peers, who also own and operate non office assets be it residential retail or hotel.
At the end of the first quarter, we had over $800 million of <unk>.
Total liquidity comprised of $137 $6 million.
Unrestricted cash and cash equivalents and $665 million of Undrawn capacity on our unsecured revolving line of credit. We also have access to $147 4 million of Undrawn capacity under our one westside construction loan and $90 $2 million of Undrawn capacity under our Sunset Gower.
<unk> construction loan our weighted average loan term with extension is for nine years now I'll turn to guidance as always our guidance excludes the impact of any new opportunistic acquisitions dispositions financings and capital markets activity.
We're narrowing the full year 2022, <unk> guidance to a range of $2 <unk> to $2 <unk> per diluted share.
Excluding specified items and maintaining our midpoint at $2 <unk> per diluted share specified items consist of the noncash trade name impairment of $8 $5 million and transaction related expenses of <unk> 3 million Boe.
Both of which were identified as excluded items in our first quarter <unk>. We expect same store property cash NOI growth in the range of 2% to 3%, which includes the full impact of all kinds of exploration without renewal or backfill of their entire space at Sky Park Plaza adjusted for Qualcomm expected.
Store property cash NOI growth would be three 5% to four 5%.
Our guidance assumes the successful disposition of our four held for sale properties before the end of the third quarter. This year for gross proceeds in the range of $325 million to $350 million now we'll be happy to take your questions operator.
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 if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
The first question comes from Jamie Feldman with Bank of America. Your line is open.
Great. Thanks for taking my call I guess just to start.
Just thinking about some of the sequential portfolio metrics in the quarter. So the change in leasing or the change in same store NOI presentation can you talk about.
Outlook changed at all or.
Why are you why youre blending those now and kind of how much office has changed and how much studio has changed to get to that two to three.
Hey, Jamie this is <unk>. Thanks for the question. So we made the change now because it's the first quarter and we decided to simplify our financials. It happened that there is a sequential down quarter over quarter, but it's not material I think 50 basis points in total and attributable to both office and media.
Nevertheless, just a cash cash same store NOI so.
The impact quarter over quarter.
Can you talk about what drive what drove that.
Yes.
Maybe tying into that.
Thank you for us at least the decline I know a lot of it with Dell EMC, maybe just give a little bit more color about anything that's changed in the core outlook.
Whether we can see if the guidance or not.
Alright, maybe nothing since I don't know.
Sure ill address the why I think I addressed in my prepared remarks, but ultimately we wanted to simplify our financials, we want to be in line with our peers. We think the businesses are synergistic that exact same tenants long term leases all those pieces I mentioned before and Thats. The why in terms of how it's impacting our guidance on <unk>.
Actions, even though cash same store NOI down a little bit.
It is not.
Impacting the total <unk> NOI dramatically, primarily because it's just a while let me backtrack first.
Reason for the decrease from rigs that we have some leases that we were we had some tenants that we were in leases with that ended up not closing and we've deferred the lease up of that but ultimately that's the driver of it is just some delayed leasing even though an arc and touch upon this on the leasing program.
Okay. That's helpful. So maybe just talk can you talk more about the leasing market it sounds like maybe art.
Yes, hi, Gail with sure.
Hi.
Listen I'm still very much encouraged that our markets have continued to show positive momentum that is starting with demand that that drives everything in gross leasing.
Our active deals in negotiation grew in the same period of time that we're talking about grew 280000 square feet quarter over quarter. So the demand is there.
I think all markets showed a little bit of a slowdown in leasing velocity of those deals signed in the early part of the year early part of the quarter.
And then as we started working through Omicron, we really saw a big pop.
Ourselves included in active leases signed I think the majority of our leases signed in the month of March So no I don't there's no slowdown in terms of demand and.
And active deals in the market, we've actually seen.
Three quarters of very positive demand and if you look back year over year, its not even close.
And would you say that pickup in the pipeline.
Is it small tenant is that large tenant what markets what types of sectors.
I mean, I think I think across all markets.
Cheaply deals over 10000 square feet, although we are seeing an uptick in interest in tenants under 10000 feet in particular Silicon valley, but I would attribute to if you think about the demand growth.
The two markets, where we've seen the most demand growth or Silicon Valley and the peninsula, we picked up 40 basis points on $5 7 million square feet.
Just in the quarter and we've got another.
That kind of 280000 square feet 200000 was attributable to the valley and the peninsula. So we feel really good there and then the other was west L. A or excuse me la where we're already kind of close to 99% leased.
We've got 30 day 30.
35000 square feet to lease in this building, but the demand okay.
Ross L a including Hollywood has picked up.
Okay, and then just to clarify that the change in percent leased sequentially.
How much of that was Dell versus other other buildings or other tenants.
Yeah, well Dell was 95 basis points and the sequential decline this marks was.
It was 50 basis points. So you know, but for the known vacate of Dell, We actually had positive net absorption.
Roughly call it 40 ish basis points.
So it actually would have been up without that it would've been 50 50, but yes. It would have been <unk>.
50 basis points is right.
Okay, Alright, that's good.
Alright, and then I guess just to shift gears to Washington, 1000, I know you.
Can you just talk more about that investment what gives you comfort in starting that project what are the leasing pipeline look like in that market.
Well I mean in terms of comfort sounds like Victor you were going to jump in I don't go ahead sorry.
Yeah in terms of comfort I mean, I think we've mentioned this in the past.
I mean, a combination of I think.
Uh huh.
Forces give us confidence around it one we are in it is.
Greenlee attractive level in terms of all in costs at roughly $6 50, a foot I mean anything.
That well that quality and that market is trading well north of itself a $1000 a foot I mean, theres 11, even $200 per square foot comps and we're going to be all in with Lan included at $6 50, a foot. There is also a really strong indications of a good tenant demand there is at least 10.
<unk> three tenants north of 100000 feet that we are already in discussions on Theres, a growing pool of other large requirement at 75000 foot requirements that are also in the market as we speak the South Lake Union.
Submarket has sub 10% vacancy.
They can see and even below that for premier quality. So.
I think all the forces of our aligned to make that project just what could be a screaming success and Jamie Mark if I can add to that.
Put a finer point on the demand I mean, we've seen four quarters of elevated demand in Seattle.
Sin.
Deals over 100000 square feet, there were probably three a year ago now there is closer to eight.
And on top of that.
The demand.
The demand is probably about 85%, maybe 90% of pre pandemic levels that as demand in the market right. So.
In the Submarkets that we operate in.
There was positive absorption quarter over quarter.
The drag on an absorption was simply all in the CBD and so South Lake Union, Denny triangle, and even pioneer square, where all positive. So that's that's the sentiment on on where demand hits com.
Okay, alright, thanks for the color.
Thank you Mr Feldman.
The next question is from the line of John Kim with BMO capital markets. Your line is open.
Thanks, Good morning can you.
Yes.
Explain again, why you combine office and studio guidance.
Does that mean that studio is less predictable.
Then office, essentially and maybe bigger picture with Netflix or issues in.
I guess the company being more cost conscious it seems like we've reached peak content spend does that change your development plans at all for a studio.
John Eighth Victor.
I'm going to answer the question for <unk>.
As simple as what he said.
The combined is what every other company has done in our peer set of non peer set and we've done the same thing there's no hidden secret to it if you look at companies that have offices in life Science you report the same office and multifamily. They report the same office and residential they report the same mixed use in office. They report the same so there's no hidden secret here.
So, let's just move on from that point, Okay. In terms of your question on Netflix.
Clearly if you if you want to go back and look at the transcript of tensor Randos claims.
Ted surrounds is co CEO of Netflix that his spend on content is going to be equal or more than they've done in the past and so the streaming companies perception on this as a downturn is absolutely not relevant to first of all the demand that we have in our studio space, one and two the amount of.
Capital Thats being put into the marketplace I think the quality is what they're focused on on the content versus quantity and theyre prepared to spend equal or more money on that so but I would suggest as opposed to looking at Hudson and what we're saying I would just suggest going to the transcript based upon what Netflix is directly about their company as probably youll hear from Amazon and Azure.
When everybody else.
And Victor you mentioned about how some of your developments.
We will be started in the next I guess next year can you give any.
Figures as far as dollar amounts of Capex.
And how do you plan to I didn't mentioned half of our developments because what I meant what I mentioned in my prepared remarks is that two of our developments.
What Mark just walked through which is Washington 1000.
We will commence because of entitlement processes and what I mentioned was is that we should have broad exchange, which is our Vancouver development for approximately $5 million.
And our Sunset Walton Cross, which is our million square foot.
$1 billion.
<unk> will have entitlements by hopefully by summer of it if not by the end of third quarter. The commencement of those two projects have yet to be determined but that is not all developments I mean, we have another half a million feet at sunset Gower, we have half a million feet in the peninsula. We are at 1 million feet at Sunset Las Palmas, and we have other development opportunities that we have not disclosed.
<unk>, yet, but are coming out of the ground in terms of the capital amount for those projects I mean, it's all outlined in our supplemental so you can take a look there.
And how will it be funded through additional asset sales or play.
As we mentioned in our prepared remarks, the funding of the development will be through asset sales that was outlined in Mark's prepared remarks.
After.
The amount of capital the availability of capital we have on our balance sheet. Currently today all the developments that we are talking about are going to be funded with capital that is already accessible and available as well.
I would just add that we have a construction loan for Glenn else all of that.
So all of the construction costs for Glenn OS are already accounted for in a construction loan.
Yeah.
Great. Thank you.
Thank you Mr. Kim.
The next question is from the line of Manny Korchman with Citi. Your line is open.
Hey, everyone.
So art, maybe one for you on the Companys III expansion for those lease terms the same for the expansion space as the original lease at Harlow.
Yes, the lease terms were the same as well as the term.
Okay and then.
Going back to same store and know Victor don't Yell at me I'm not asking for guidance.
The.
I want to start we're going to be under it.
I would say this would be the first call on like three of them that you are not asking for it. So thank you.
[laughter] Zion Starwood ligands when do those come into the same store pool.
So because they are not office our studio properties we.
We don't consider them same store, so they'll always be sitting outside of same store.
They are not actual real estate.
Okay. So no stores so they wont come in.
And then.
Just the same store in the quarter for studios, which was weaker than I'd anticipated.
Specific driving that and then how does that recover through the year.
Yes, Andy I wouldn't really think of it.
As weakness per se in the.
In the first quarter of this year I mean, you can see expenses are essentially identical.
The revenue was a bit lower but thats really more a reflection of a very very strong first quarter of last year, a very high level of production activity and as you know it doesn't take much to move the needle on the studios I mean, your denominator is pretty small there. So you know relative small differences.
Say topline revenue.
Can make a fairly big difference on a percentage basis. When you look at it on a same store.
Hey, Victor.
Yes, Hey.
Victor just a question on sort of capital allocation you have the.
200 million accelerated buyback, which I would assume should be done shortly.
Well net out there probably somewhere on the 25 $26 range when all of a sudden done north of a seven cap, which is pretty hard to replicate.
Like you really have some exciting development opportunities and some stuff that you wanted to accelerate so perhaps additional capital there.
How do you sort of balance the development some of these value add core plus core acquisitions.
With potentially re upping your share buyback, even under an accelerated basis.
Well I think listen I've mentioned this before.
It's not it's not a simple science, it's one versus the other if there are opportunities as I mentioned in my prepared remarks on stabilized assets that we're looking to.
To buy whether its value add or core plus.
The numbers are going to be in the six to eight range.
On the value add in the five to six range on the core plus and the development deals as you can as you pointed out taking a look at the supplemental in Mark's remarks.
The ones, we're talking about right now specifically, Washington 1000 in the next will be.
Walton Cross and broad exchange I mean, these are seven and eight.
And so that falls in line with the yield structure of buying back stock. We just did $200 million when youre right. We are 90% of the way done virtually with that I mean, the remainder of <unk>.
Coming due in the next in the next couple of months and so we're always looking at the alternatives around that and as I mentioned.
As Mark mentioned and we've got about 300, and approximately 350, maybe a little bit more of dispositions that are going to close in the next 90 days or less.
Alright, so you'll be flushed with cash to be able to go do something.
Can I come back just on.
Think about the studio and office.
Split and I don't want it to get hostile because I think it may.
People have read it perhaps the wrong way Youre when you report Youre going to continue as you did in the first quarter.
Without all the numbers report same store Youre just from a guidance perspective will say look we're going to forecast. Our total same store NOI pool, which has a multitude of different business lines that have a lot of similarity using credit to them and we're going to give you a total number but when we report we're going to break it all out for you and we're going to call out in the future.
I suspect please confirm this.
That we're going to call out if there's going to be some volatility given the.
The studio business is a little bit more volatile than your office business, which in itself could have some issues either delay on timing on leasing or other variables can you can you talk through some of that.
So listen I think consistency is key right and being consistent which we've done in the past and then transparent which we have in our supplemental.
We will have all the information that you will need to determine we're not we're not here to say on good quarters versus bad quarters. This is how we are reporting this will be consistent going forward. If you really look at the materiality, which Mark mentioned Youre talking the same store on the studios was 12% versus 15%.
<unk>, Okay. So it's still a big number and but if you look at the dollar amount as Mark said it was it was inconsequential, specifically and the fact that we only own half of it versus two years ago, we owned 100% of it so.
The information, we will all be there and it will be able to decipher on for anybody who wants to do the work but to be consistent with with what we think is easier for reporting as I as I mentioned and to be consistent with what our peers are doing going forward you will see one number but all the backup information will be available.
Alright, thank you so much.
By the way at the same token as I mentioned.
Nothing to do with <unk>.
Timing of specific reporting its just that we did it for this quarter, it's going to be going forward. It would have been the same thing if the studio was 25%.
<unk>.
And the office was 3%, we still would've done it so right.
No difference is just the fact is we're doing it for this for this quarter going forward.
As a learning lesson and I know you've had you've been in the public markets, a long time and you've been extraordinarily successful.
I think the change in hindsight hindsight's 2020.
Probably deserved a little bit more explanation in the press release and if it wasn't in the press release, given the notes that came out overnight and the way the stock was reacting probably something that could have been more eloquently addressed them with public public comment.
Including the numbers, an impact and just putting it away because unfortunately negatively affected your stock.
And so hopefully that's a good lesson learned for the future.
Thank you.
Yeah.
Thank you Mr Korchman.
Next question is from the line of Alexander Goldfarb with Piper Sandler Your line is open.
Hey, good morning out there.
I'll try to ask some lighter questions.
<unk>.
So going on to studios in the office.
Appreciate your comments on the occupancy decline that we should worry but my question is as you guys look to the.
The office leasing demand.
What's the breakout between demand for traditional office versus non stage users, who would want office on the studios and I guess, what I'm getting at is are.
Are the economics to you guys better because people for whatever reason, even though theyre not states they want to pay up more and maybe the <unk> or the same or is it truly different leasing trends such that we could see strong general leasing per office that may not necessarily correlate with the demand that we would see at the same time for non stage users of <unk>.
<unk> office.
There's a lot going on in that question, Alex So forgive me if I am not.
Hitting exactly in response, but let me try to illustrate.
There is a few hundred thousand fee.
What you would what we classify as office, but its on site alongside of the stages themselves and it's.
Its main use is for that.
Those associated with the stage.
Use that is to say that production part of the stage used to have a space to office in riders.
Postproduction people people that need space to operate from associated with the use of a stage. Okay. Historically that square footage has never been 100% occupied by stage users. We've we've traditionally had some amount of square footage available.
<unk> for other potential tenants that want to be located next to our two active studio what casting agents psychiatrist I mean, there's been all sorts of interesting different types of tenants like that okay.
They've never made up the majority of the tenancy in that in the office component associated with the sound stages. Okay. What we saw during the pandemic was because those tenants tended to be.
Under shorter term leases they like everyone else in the world. We're starting to work from home. There was also for a stretch there until production resumed again.
Last act activity happening on the lots we saw some lost some deterioration in tenancy of those tenants okay.
That's what you are seeing reflected in the sequential decline in the overall studio occupancy.
By the way that number is a trailing 12 month number so if you've had weaker prior quarters.
It shows up in the current quarter, but the current quarter number is not just that quarter. It's a number trailing behind at all the prior 12 months period. We've now seen we think we've turned the corner we are seeing a pickup in demand of the non stage using office tenants there is no.
By the way just to clarify another thing you raised there is no <unk> or commissions associated with that tenancy. We people approach us directly we have our own sort of internally driven marketing campaign, where we reach out through our contacts to potential dawn stage using office tenants that might want to locate there.
And we are seeing a pickup in that activity. So.
The expectation is.
As quarters roll forward here and that activity begins to roll through our trailing 12 month number we hope to see an improvement in that occupancy.
Does that address it better thats helpful.
Yes, yes, that's good.
Second question is.
You guys have about little over 800 million floating rate debt after you pay off.
With the proceeds later this year it would be call it $500 million on a floating rate is that you know.
I realize it's always a good mix that you want between floating and fixed is 500 billion that percentage of total debt is that where you'd be comfortable at or you would think about further reducing that just curious.
So let me have mark probably wanted to them, but let me address that.
All of our floating rate debt all of our floating rate debt with the exception of our line of credit is within joint ventures. So the ability for us to pay them down it's not as simple as just our decision. So that part of the challenge is the preponderance of it is in our media portfolio.
Yeah, I might just say if you look at the floating rate debt running our company share running through the.
Supplemental that 24, 6%.
Rudy is correct that the majority of it is associated with <unk>, but.
To put a finer point on it.
35% of the floating rate debt.
Relates to two JV assets.
You know we obviously.
C R.
Have to work with our JV partner on whatever the longer term goals would be with respect to that floating rate debt, but in total that amount of debt.
Only eight.
6% of our total indebtedness. So it's a small component and yes. There is another part in our JV.
Roughly 25% of our floating rate debt.
But in our JV, but that is construction debt and all of the interest on it is capitalized so it doesn't affect our earnings and the goal there would be two.
Replace that debt upon completion of the those construction projects, which is what you would typically do.
All of the remaining floating rate debt is the line, it's 40% of the floating rate debt and a 100% of that outstanding line balance is going to be addressed through the asset related.
Sales that pending sales so.
Alex.
Overall.
The goal of the company has always been to manage its floating rate exposure and you see it time and time again, where the majority of our floating rate exposure is often on the line and then we and then we pay the line back to zero, which is exactly what we expect to do here in the very near term.
There is sometimes some construction related debt all the interest is capitalized and then theres a little JV debt.
Okay. Thank you appreciate it thank you.
Thank you Mr Goldfarb.
The next question is from Nick <unk> with Scotiabank. Your line is open.
Thanks, just wanted to ask about the San Jose Airport Submarket, maybe you could talk a little bit more about types.
The demand you've seen for the Qualcomm asset.
Also as well you have cloud 10, which I'm sure that fits into some discussion as well as youre talking to some users down there about.
Looking at space in the market.
Sure Nick this is art.
Thanks for the question.
The market.
Mentioned before the demand across the valley. The demand has been up for several quarters now gross leasing kind of closing in on pre pandemic levels.
In our particular portfolio.
We're looking at about 120000 square feet of deals right now on new new new deals.
With this elevated demand that we've had a.
New deals that are in negotiation some form of negotiation at this point. So we feel really really good about that and most of that just.
Put a finer point on most of that is capitalizing on our VSP program that we put in place because tenants wanted to get an quicker or they don't want to.
Protracted build out period and so forth.
And so.
That's what our that's where our chief demand is in Silicon Valley.
Moving over to the Qualcomm Qualcomm space as you know they are out at the end of July we are still aggressively marketing the project to.
Although users' over over 100000 square feet.
Throughout the valley and beyond.
The work that we're doing the freshening up of the property will probably likely take us into end of Q1, which will again just to refresh your memory.
<unk> landscape Hardscape.
Yeah.
Hardscape and refreshing of the of the common areas and the $1 billion of monetizing it quite substantially so we feel pretty good about those prospects and by the time, we're done with the work we hope to be kind of deepen and negotiations in terms of cloud 10, I mean, we've got some reverse inquiries.
As you know the demand for large tenants in the valley and specifically San Jose All the way all the way through Palo Alto is really large tenants and so cloud 10 has been that it's a new a new development that seems to be the attractive level here at most of these tenants.
And we're seeing.
Our fair share of inquiries on that right now and one of the competitive advantages, we do have with <unk>.
Qualcomm space.
<unk> is for users who see significant.
Growth in the near future. We've got cloud 10, we've also got another $2 1 million square feet to leverage across the airport.
For for that particular type of user.
Okay. Thanks, and then the other question is on the guidance for interest expense went up about $9 million. You know I guess you do have the higher line balance right now the curve shifted.
I guess I just wanted to be clear if there was anything else that was driving that besides those issues and then also I want to be clear that.
That guidance for interest expense does assume that as you mentioned the asset sales or paying down the line later this year.
Yes. So you hit on the head we are using asset sales to pay down the line and as a reminder, that's the gross interest expense and any portion related to our JV partners is also reflected the offset is reflected in there.
They're earning side of it so that the interest expense line.
That's a consolidated number.
And it does reflect.
The updated curve LIBOR curve.
Yeah.
Okay got it alright.
That's helpful. Thanks, I appreciate it.
Thank you Mr <unk>.
The next question is from the line of brownfield campaigns with Morgan Stanley . Your line is open.
Thanks for taking the questions just a couple of quick ones from me just on the Big picture. Following on a question that was just asked.
Just trying to bridge.
The guidance given at the beginning of the year. The 205 before and then the updated guidance is 205, just trying to figure out what what went up and went down.
A quick look looks like obviously interest expense was the big one on the upside can you just maybe walk us through really quickly what are the offset to get back to sort of the same level hopefully that question made sense.
Sure Yes.
Great question, so the biggest offset as our share repurchase so when we announced guidance back in February we didn't have that in our guidance and therefore.
We're effectively reaping the benefits of that by by offsetting the interest expense. That's the biggest piece there is other small pieces, but that's the biggest one.
Okay got it I figured.
Alright, so just a bigger picture question, just just taking a step back maybe.
Maybe if you can update us on what Youre hearing from sort of the return to office.
On the utilization is that something that.
What levels can we expect sort of by the end of the year or what are you hearing from tenants.
Yes listen.
Youre hearing what we're hearing and Youre seeing what we're seeing the large tenants in our portfolio are virtually all back.
And now we're seeing.
Fairly aggressive move on the small tenants to come back somewhere around three or four days a week.
Utilization has picked up dramatically in the last 30 days.
Oh really really since March one I guess.
We anticipate that sort of roll through.
Barring any other strain that may have people go back.
We're seeing it I don't think.
We're seeing the same kind of.
Transient parking numbers, yet come to fruition, but we're definitely seeing the actual parking and an office occupancy much higher and if I could if I could add to that the confidence that Victor talked about kind of beginning March one.
Throughout the markets is really is really.
Created this demand that I've been talking about I said that.
Beginning of the year started off a little slow because of omicron, but really started to pick up later it really tracks with this uptick in demand everywhere.
Tract with exactly what Victor said kind of that March one date.
Great and if I could sneak one more in can you just remind us how do you guys think about recurring capex for the business then.
How should we expect that to trend over the next I don't know 2345 years.
Well okay.
I'll start and I'll add.
In terms of how we think about it I mean, the main components of recurring capex or Ti commissions and so.
They you know they tend to track the level of leasing activity I do think you see in our numbers that arm as.
As we have kind of.
Projected some time ago.
Leveling off in recurring Capex, including in the most recent quarter.
I encourage you to kind of go back and look at where this how this quarter compares to kind of previous quarters.
But.
In the end you know.
What it's really done as.
Shown this steady improvement in <unk>, which on a trailing 12 month basis is up 25% year over year and I would add that.
That that is on top of more than 40.
The percent increase from.
From the prior year. So we've seen this leveling off on recurring Capex.
It's showing up.
Materially in F O I don't know what else to add about.
How else we see it.
The way we look at it is because it's you guys are very lumpy looking at one individual quarter can.
<unk> misleading, we have maybe a very large tenant that gets reimbursed all of their ti is a one quarter that doesn't mean, it's going to be repeated so we do tend to look at look out at it on a.
Ford.
Sure.
For it for a year or two year basis, just to see where it goes and when you look at that we see that our recurring capital is.
More normalized now than it has been in the past.
There'll be some bumps here and there primarily because if theres a large tenant who takes of RTI and thats going.
<unk> going to happen in one quarter and therefore come down in the following.
Great. Thanks, so much.
Thank you Mr. Camden.
The next question is from Rich Anderson with SMB see your line is open.
Thanks, Good morning still out there if I can make a quick comment and then a question on Netflix.
They're experiencing competitive challenges they are a company within an industry. This is not an industry conversation as a company.
No one wants to see Netflix stocked down, 68%, but isn't the silver lining or perhaps the silver lining for you as you expand.
Your diversification in that world and that ultimately would be a good thing in my mind and my my view like I think of Amazon scaling back in industrial that's actually a good thing for the industrial rates because it allows them to <unk>.
Expand and diversify their exposure in E. Commerce same rule would apply here I would think that you would expand your diversification in streaming and content providers is that a fair way to think about it.
Well rich listen Nobody said Hudson's only content tenant occupies our stages and office space as Netflix I mean, we have leased and my point exactly.
Yes.
Amazon Apple.
Disney and Warner Brothers, and HBO, I mean, yes, youre, absolutely right and they're not the only content spending even though they are saying that they're not going to slow their content. The others are saying they are increasing their causes youre absolutely right I mean competition is good.
I don't think anybody is implying that as Netflix goes Hudson goes so thank you for that.
Yes.
The point I was trying to make a second question is.
Everyone on this call recognizes that Hudson trades at a pretty steep discount.
<unk>, saying, 45% I don't know what your internal MTV number is but it's we can all agree that it's a discount.
Victor you sold art and back in I guess, it was 2005 and I'm not not going to.
Litigate a sale of the company or anything like that but you now have two distinct businesses.
They have synergies of course between them the studios in the office, but is there now an opportunity to find a way to unlock that value price discovery.
For some segment of your business and really sort of demonstrate to the market in inaction in a transformational way that could really bite into that that NAV discount that's I'm sure been a thorn in your side for a while now I'm curious if youre strategizing around that at all.
So let me make a couple of comments on that.
Firstly.
All.
Clearly without saying, but I will say at the discount to NAV.
Whatever number you put on it is large and it is not something that we're happy about and we've never said that we're happy about it and we're not going to be happy of course.
Second of all I think we have demonstrated the value of assets both on the studio side.
And on the office side that they are not valued today, what they would be if they were sold on a one off basis.
I think thirdly, which is even more importantly than us.
Is the value of the assets that the third party markets have come out and Youre seeing comps on single tenant office or multi tenant office or studios that are trading in combined numbers.
345 caps and Youre seeing independent evaluations from the likes of other people who are on this call like Green Street and looking at valuations of the portfolio.
Hollywood.
Four to five cap of four five to $5 whatever the number is so I don't think what what what youre seeing in order to validate I think the validation is there rich.
I think.
Its the desire of what we do next and the answer is as a fiduciary we will always and are currently always looking at alternatives that do not just maintain a status quo position, but in order to validate what.
What we see or what the market wants to see in terms of.
In terms of the asset quality and pricing.
And value of those assets I think it's done with in the company, but it's done a lot more outside the company now and the comps are there.
Yeah, Okay fair enough. Thanks.
Thanks, Rick.
Thank you Mr. Anderson.
The next question is from Daniel Ismail with Green Street. Your line is open.
Great. Thank you.
We're getting close to the top of the hour, but just wanted to ask a big picture question regarding rising rates.
Victor Mark I'm curious, if you're noticing any tangible impacts as you guys are out there either marketing those assets for sale or looking to acquire new assets.
Theres been any tangible move in pricing because of the rise in rates.
So Daniel I think it's a great question so on the disposition side.
Albeit we have two buildings that are multi tenant one building, which the market knows is an asset that is relatively worthless to us as a company and it's been vacant for a long time it doesn't fit.
The third is an asset that is going to be a complete repositioning.
I can say.
Sure.
Almost in contract were under letter of intent for all of them and contract and contract with a couple of them and there is no there's been no pushback on financing.
Now that being said I'm going off of memory here I believe two out of four or may be three or four have no financing contingencies at all they are all cash buyers.
I'm, sorry, none of them that financing contingencies, but theyre all cash buyers three year cash buyers and some self financing that being said.
It has not impacted us on the flip side there have been assets that we have looked at.
That are value add assets.
With stabilized yields as our prepared remarks stated that I think have been have been taken off the market.
Because they can't they can't execute at this time, but I think that is very far and few between from what we're seeing in the marketplace and transactions that are going to be announced or they have already been announced and so.
I'd say the easy answer is the impact yet today is still very minimal in terms of transactions both on the acquisition and disposition side with the movement of interest rates.
Got it that's helpful and no no.
No other impacts elsewhere in the business like tenant construction loans or anything like that in terms of what you've seen on some of the other ripple effects that rising rates could have.
No at this time no I mean every every everything we're looking at has been.
You know very very much intact, even though the rates have moved and I believe the reasoning is that the market already perceived that these rates were moving and so is already baked into people.
People doing business.
Got it thanks for the color.
Thank you Mr. Smith.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Victor Coleman, Chairman and CEO for any closing remarks.
Thank you so much for participating and we'll talk to everybody next quarter. Thanks, operator for the work.
The conference has concluded you may now disconnect.
Uh huh.
Yes.
Okay.
Okay.
Okay.
Yes.