Hudson Pacific Properties, Inc.

Greetings, ladies and gentlemen, and welcome to Hudson Pacific Property's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Ms. Laura Campbell, Senior Vice President of Investor Relations and Marketing. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties' second quarter 2020 earnings call. Earlier today, our press release and supplemental were filed on an 8K with the SEC. Both are now available on the investor section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the investor section of our website. During this call, we will discuss non-GAAP financial measures which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including various ongoing developments regarding the COVID-19 pandemic. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. Moreover, today we've added certain disclosures specifically in response to the SEC's direction on special disclosure of changes in our business prompted by COVID-19. We do not expect to maintain this level of disclosure when normal business operations resume. With that, I'd like to welcome Victor Coleman, our Chairman and CEO, Mark Lamas, our President, Alex Vivalides, our COO and CIO, and Harut Dhiramirian, our CFO. Note they will be joined by other senior management during the Q&A portion of our call. Victor?

Thank you, Laura. Good morning, everyone. Welcome to our second quarter 2020 call. I hope everyone is staying safe and healthy during these difficult times. And let me start by saying once again how incredibly proud I am of our HUD-specific team, whose deep experience, ingenuity, and adaptability is enabling our company to successfully navigate current circumstances. Despite the unpredictability of this pandemic, the shifting government mandates, and evolving protocols, we continue to run our business efficiently and effectively. As an essential business, all of our properties remain open and operational. While fiscal building occupancy remains low, and Mark's going to touch on that, our conversations with tenants indicate they have every intention of returning to the office. It's simply a matter of when and how. Google is a perfect example of this. Although they're now targeting a 2021 as a return date, build out of our unabated One West Side asset is absolutely on target. And in near term, most of our tenants are leveraging the lower occupancy that remote work affords, coupled with temporary solutions like moving desks, installing barriers, and staggering schedules to safely reintroduce a portion of their workforce. This is exactly what we did starting in June with our own employees, targeting 50% utilization at our corporate and regional offices. And there's no doubt it requires people to get accustomed to new seating configurations, paths of travel, required PPE use, and the likes. But what we fully intend to avoid are the pitfalls of work from home, which I've been talking about for months, and which Chip Cutter's piece at the Wall Street Journal articulated very well just last week. Things like impaired efficiency, Lack of mentorship, poor communication, limited creativity are all factors in a company's long-term success and viability as they've been for ours. If companies haven't recognized this already, they will soon enough and hopefully before it's not too late. I suspect that this article in the Wall Street Journal will signal an important shift in the mindset as the realities of a prolonged time away from the office begin to set in. In the second quarter, our rent collections were exceptional. 99% of our office and 100% of our studio tenants pay rent. And again, Mark's going to discuss this in detail. But the quality of our tenancy shines during these difficult times. And in terms of industry exposure, the resilient and innovative nature of tech and the anticyclical nature of media will continue to serve us well. Specific to credit quality, 85% of our top 15 tenants are publicly traded or owned by a public parent. while over 60% are either large-cap or investment-grade graded. Regarding geography, nearly 75% of our ABR is derived from less public transit-dependent markets like Los Angeles, the Peninsula, and Silicon Valley. And as for asset type, the preponderance of our assets are low- to mid-rise products. Our buildings are eight stories on average, facilitating ingress and egress. And further, essentially, all of our properties have been substantially repositioned or upgraded or full redevelopment or new construction projects. From optimized air filtration to ample outdoor workspace, our portfolio is well positioned to meet any new COVID-related requirements. By far, our biggest milestone in the quarter was the announcement of our latest partnership with Blackstone and the genesis of this transaction well predated COVID. Related conversations with multiple interested parties as far back as December of 19, and not surprising, we had a tremendous amount of interest in this portfolio, which we built over more than a decade through strategic acquisitions, operational and capital improvements, world-class development, and phenomenal leasing success. Through the years, we assembled the largest collection of independent stages in the United States. We built the first Class A office building in Hollywood in more than 20 years, and we two of the largest office leases ever in Hollywood and created the LA headquarters for two global media companies. We evolved the design of our urban vertical campus and pushed boundaries and sustainability, delivering Los Angeles' first office building with a solar façade and a record amount of functional outdoor space. Our sale of 49% to Blackstone, arguably the preeminent institutional real estate investor, provides validation to the stock market of which they had not. Around the value of the portfolio, our views on content and creation, our expertise as an operating partner as well. Clearly, we also chose them. As frequent partners and collaborators, there are less execution risk as we seek to expand our platform and we're well aligned with our vision going forward. After financing, which Alex will provide some details on as well, we'll have about $1.3 billion of gross proceeds at our disposal to bolster our liquidity position and further fortify our balance sheet. Especially now that we've reduced our funding requirements for future development, we are nimble and poised to take advantage of market dislocations in the current environment to expand in office as well as studios. We continue to closely monitor various ballot measures in California and the state of Washington that, if passed, would increase taxes for businesses. There's no doubt that local and state municipalities, as a result of the economic shutdown, are suffering meaningfully by the declines in revenue, which stand to force spending cuts and priority programs and initiatives. At the same time, there's a renewed engagement at the corporate level, including from real estate firms such as ourselves, in all of these processes. And while Prop 15 will be on the ballot in California in November, we continue to believe the bill will be effectively defeated. SB 939 and the Seattle head tax were both recently defeated, but there is now a new payroll tax under consideration in Seattle. So like the pandemic, dynamics at play continue to evolve, and we will remain engaged and provide leadership as necessary. Before I turn the call over to Mark, I do want to touch on diversity, equity, and inclusion initiatives, which we've been working on for some time and were rightly brought to four in the last quarter. As you know, in March, we launched our Better Blueprint, which has three focus areas, sustainability, health, and equity. Specifically, our commitment to equity is grounded in the notion of opportunity for all and the recognition that we as a company need to do our part to eliminate racism and promote diversity and inclusion both internally and, where possible, externally in our communities at large. Our HR and social impact teams are spearheading multiple initiatives to accelerate and strengthen this commitment, including ongoing training sessions, resource groups, and a virtual library for employees. I also join Los Angeles' Mayor's pledge to address racial equality, equity, and align with CEO action for diversity and inclusion, which among other commitments provides a network of other companies with which to share best practices. We also redirected a portion of our annual corporate giving, donating to the community coalition here in South Los Angeles and pledging thousands more in micro grants to smaller organizations championing racial equality across our markets. As you can see, we're investing heavily, not only because it's the right thing to do, but because it's essential to our continued success and industry leadership. It's well-established that welcoming different cultures, ideas, and skill sets yield better business outcomes, and I expect every Hudson Pacific employee to model these values, and in doing so, will make our culture and our company even stronger. With that, I'm going to turn it over to Mark. Thanks, Victor. As Victor highlighted, our rent collections remain exceptional. During the second quarter, we collected 97.3% of total rents, comprised of 99% of office rents, 100% of studio rents, and 48.7% of our retail rents. To date in July, we've collected 94.8% of total rent, comprised of 96.9%, of office rents, 100% of studio rents, and 31.4% of retail rents. These percentages exclude rents contractually deferred or abated in accordance with COVID-19 lease amendments. If we were to include those amounts, as we have done in previous public disclosures, our second quarter collections would have been 94% for total rent, 96% for office, 93.8% for studio, and 44% for retail. Our July collections would have been 93.4% of total rent, 96% for office, 89.5% for studio, and 31% for retail. During the second quarter, we granted deferrals equivalent to $4.2 million or 2.7% of total rents. Another approximately $4 million or 2.5% remains in discussion for either payment or deferral. We have bated only $1.1 million or 0.7% of second quarter rents in connection with COVID-19 relief and another $200,000 or 0.1% due to a settlement in connection with a non-COVID related litigation matter. Again, our strong collections are a reflection of our high-quality tenant base and even more so the strength of our large tenants. Our 50 largest tenants account for over 60% of our quarterly rents. Three co-working tenants within our largest 50 tenants comprise one-third of all uncollected rents. We deferred rents for only one non-coworking tenant within our 50 largest. The remaining nearly two-thirds of uncollected rent was traceable to small tenants, including our storefront retail, the average size of which is approximately 6,800 square feet. It is precisely these tenants which were afforded relief under the various state and local rent collection moratoriums. Understandably, many of our storefront retail tenants, which comprise only 2.8% of our total ABR, are struggling. We recognize the value they provide to our office tenants and the surrounding community. Whenever possible, we're working closely to support them and find a solution to keep them in the space, which increasingly involves some sort of percentage rent arrangement. There are, however, a handful of tenants where we'll agree to take back that space and repurpose it for backfill with another retail use or potentially even an office use if allowed. Regarding our studios, Stage demand remains strong, with only three of our 35 stages available for lease, all of which are subject to active discussions with multiple major studios for commencements in the coming months. As for production activity, delays among content producers, the guilds, and unions representing actors and crews in adopting COVID-19 protocols, mainly on frequency and methods of testing, have pushed production commencements. We now expect production to phase in over the next month with essentially all stages in use by September. As we've discussed previously, trends bode well for an increase in stage demand and production activity in Q4 and into 2021. Returning shows are asking for additional space to de-densify cast and crew at any given time. Location shoots are being replaced with stage sets to increase protection for actors. Shows will go straight to series and forego pilot testing, and multi-season shows will skip hiatus periods and shoot without interruption. Bottom line, production must resume as safely and as soon as possible. Content creators are now under significant pressure to refresh their pipelines at the risk of losing subscriber interest. As previously noted in May, we launched our tenant reintegration program, which we've developed in accordance with local government guidelines and in close coordination with our larger tenants and internal and external subject matter experts. Our priority has been to create the safest and healthiest work environment possible. We're focused on proactive multi-channel communication, enhanced safety-focused cleaning and operating procedures, and efficient building access. We're also asking tenants to do their part, and thus far, the program has been very well received. Questions generally center around air filtration and ventilation and options for enhanced cleaning of office suites, which we are well equipped to address. Indeed, tenants are slowly repopulating our buildings. Right now, physical occupancy stands around 5 to 10 percent in the United States and 15 to 20 percent in Canada. This is up 5% to 10% across the board over the last few weeks. Even so, many large tech tenants, including most recently our top tenant, Google, have announced extended but still temporary plans to work from home, most until year end. Some companies are staying flexible and modifying plans based on local conditions. For example, Amazon Seattle employees will work from home until year end, but their Vancouver counterparts will return to the office this fall. Clearly, the situation remains fluid, and we're ready to pivot accordingly to support our tenants through these challenging times. And now I'll turn the call over to Alex. Thanks, Mark. In the second quarter, stay-at-home guidelines along the West Coast continued to mute office leasing demand. The good news is that our markets began the pandemic on very strong footing. Vacancy at historic lows, rents at historic highs, Limited and or pre-lease supply and absorption muted only by constrained availability. Despite negative absorption and increased sublease supply across our markets in the second quarter, outside of the San Francisco CBD, rents were stable and vacancy ticked up only around 50 to 250 basis points. Tech, media, life science, healthcare, and government tenants drove demand. We remain vigilant regarding the impact of continued shutdowns and essentially more protracted impact to the San Francisco CBD, given its density and greater reliance on public transit. In general, our portfolio is outperforming current trends, and we feel about as well positioned as any to weather the next six to 12 months. Our stabilized and in-service portfolios ended the quarter at 95.1% and 94% leads, respectively. Our second quarter leasing activity reflects both slow demand due to COVID and our portfolio's limited remaining 2020 expiration, just 3.6% of our office ABR. We signed 107,000 square feet of leases in the quarter. About half were related to short-term 12-month or less extension at or around in-place rent, including some COVID-19 lease amendments. Deal terms for the remaining 50,000 or so square feet of activity were in line with prior quarters, including an average mark-to-market of 17.7% on a GAAP basis and 21.4% on a cash basis. Although we've seen an uptick in activities and tours with the initial lifting of stay-at-home orders, tenants are still, for the most part, on the sidelines. We have about 800,000 square feet of deals in our leasing pipeline, That is deals in leases, LOIs, or proposals. This is slightly less than reported in prior quarters, and again, in large part because of our limited expiration. Less than 10 deals representing approximately 75,000 square feet died due to COVID, and only a portion of requirements in our pipeline, about 20%, are officially on hold. The rest are just moving very slowly. Tenants, regardless of size, are working to understand and balance near-term work from home and density requirements with longer-term space and growth needs. Note that of the 3.6% of our office ADR subject to expiration this year, just 0.6% is attributable to the San Francisco CDD. Our 2021 expirations represent 10.6% of our office ADR, and San Francisco CBD expirations represent only 0.4%. Most of our exposure next year, about 8% of our office ADR, is in the Peninsula and Valley. Given stronger fundamentals and the low-rise, recently modernized nature of our portfolio in those markets, we're optimistic tenant demand for a majority of our forthcoming availabilities will be resilient. Work continues unabated our two construction projects. Harlow is substantially completed with only corn shell closeout work remaining. We expect full completion in Q3 and discussions are moving slowly with a handful of potential users to lease all or portion of the space. One West side is fully funded and pre leased and on track for delivery in Q1 2022. One final note regarding our Blackstone Studio JV. We expect the transaction to close imminently. We also expect to close a $900 million mortgage loan secured by the portfolio. The non-recourse loan will be interest only with an initial annual interest rate of LIBOR plus 2.15% and a two-year term with three one-year extension options. Harut will provide further details as to the use of proceeds from both the sale of our 49% interest and our share of asset level financing. And with that, I'll turn the call over to Harish.