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spk02: Greetings and welcome to the Hudson Pacific Properties, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Campbell, Senior Vice President, Investor Relations and Marketing. Thank you. You may begin.
spk00: Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties' fourth quarter 2020 earnings call. Yesterday, our press release and supplemental were filed on an 8K with the SEC. Both are 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, Art Suazo, our EVP of leasing, and Harut Dhiramarian, our CFO. Victor?
spk07: Thank you, Laura. Hello, everyone, and welcome to Hudson Pacific's fourth quarter 2020 earnings call. 2020 certainly presented everyone with unprecedented challenges, and I remain extremely proud of the Hudson Pacific team and how we've navigated the pandemic to get to this point. To roll out the vaccine in the new year gives us a line of sight on getting our tenants and employees safely back to their offices. And as you know, we believe the vast majority of the companies, it's not a matter of if, but when. We specialize in leasing workplace facilities to the world's most creative and innovative businesses. Their success did not happen in a remote context. It happened because of the connections, culture, and facilities that gave them a competitive edge. Those environments designed to inspire and be infinitely better than your home office attracted the best talent and fostered optimum creativity. I expect everyone still working from home can probably attest that hours of Zoom calls from your couch just doesn't do the same thing. Hudson Pacific didn't slow down in 2020, and our accomplishments for the year were numerous. Even with many tenants on the sideline, we leased over 800,000 square feet with strong rent spreads, 21.5% gap, and 14.3% cash. We collected 98% of our rents during the three quarters of 2020 impacted by COVID, including 99% of office and 100% of studio rents, showcasing the exceptional quality of our tenants. Our portfolio remained open and fully operational as we swiftly implemented industry-leading health and safety protocols. We completed Harlow and kept One West Side on time and on budget. And in August, we monetized a portion of our Hollywood studio and office properties, generating $1.3 billion of proceeds, which further fortified our balance sheet and liquidity position. We significantly expanded our Seattle and Denny Triangle footprint and our relationship with Amazon with the acquisition of 1918-8. Capitalizing on the disconnect between public and private valuations, we repurchased over 3.5 million shares of our stock at an average price of $23, and we continue to set ourselves apart as an ESG leader in the real estate circles and beyond, launching our proprietary Better Blueprint platform, achieving 100% carbon neutral operations and earning Energy Star Partner of the Year awards, and the Green Star Awards, among other things. As we look to 21, we're ideally positioned to capitalize on opportunities before us. Our markets are the center of gravity for media and technology industries, both of which have accelerated as a result of the pandemic. Our balance sheet remains strong with no material near-term maturities and ample liquidity. And we also have excellent JV partners, and we're actively evaluating a variety of opportunities, both office and studio. We're tackling our 21 expirations with good momentum and coverage to date, and our nearly 600,000 square foot, fully one west side leased project will deliver in Q1 next year. And our development pipeline contains some of the best sites and most exciting projects in our markets, a large portion of which are fully entitled and will be ready to break ground as conditions warrant. In 21, we'll take further action to ensure our cities and communities remain vibrant places to work, live and play, be it through policy and advocacy, impact investing, philanthropy, or other civic engagement. This will especially be important as we recover from this pandemic. Just last week, we pledged $20 million over five years to support innovative approaches to addressing the homelessness and housing affordability crisis in our markets. In Southern California especially, there's been a lack of leadership from the business community on this issue, and certainly not on par with what we've seen in the Bay Area. It's imperative that more LA Bay CEOs and companies become part of the solution. With that, I'm going to turn it over to Mark.
spk15: Thanks, Victor. Our rent collections remain strong. In the fourth quarter, we collected 97% of total rents, including 98% for office, 100% for studios, and 51% for retail. To date in January, we've collected 97% of total rents, including 98% for office, 99% for studio, and 48% for retail. Again, our high-quality office and studio tenants are continuing to perform. It's the storefront retail tenants that are struggling as they await building repopulation. After nearly a full year of monitoring collections, we're seeing a clear trend that indicates our tenants have weathered the worst of the pandemic's challenges. In the second quarter of last year, we deferred rents for 60 tenants comprising 550,000 square feet. The following quarter, only 19 tenants occupying 120,000 square feet needed a deferral. By the fourth quarter, the number had dropped to a mere nine tenants and 82,000 square feet. As for the collection of deferred rents, while we're still early in the payback period for most tenants, We've already collected 54% of the $5.6 million of deferred rents, nearly three-quarters of which we received in the fourth quarter. Again, this highlights the improving strength of even our most challenged tenants. On the development front, at One Westside, we've begun space planning with Google. The project remains on track to deliver in Q1 of next year. which, once fully online, will generate nearly $43 million of annual consolidated cash NOI. Our future development pipeline comprises nearly 3.2 million square feet, of which over a million square feet is fully entitled. This includes our state-of-the-art 538,000 square foot Washington 1000 project in Seattle's Denny Triangle, which we've designed to be at the forefront of health and wellness and any COVID safety-related considerations. It also includes approximately 480,000 square feet of net new development at Sunset Gower Studios, obviously ideally positioned to cater to growing demand from content producers. We're perfecting designs and our entitlements for other unique sites and projects in Hollywood, West LA, the Vancouver CBD, and North San Jose, too, as Victor has mentioned, ensure we're ready to move forward with tenant interest. And now I'll turn it over to Art. Thanks, Mark.
spk04: In the fourth quarter, our stabilized and in-service portfolio held steady at 94.5 and 93.5 percent leased, respectively. We signed nearly 280,000 square feet of new and renewal leases, our best quarter for 2020 in terms of volume, at gap and cash rent spreads of 4.9 percent and 4.7 percent, respectively. Gap and cash rent spreads would have been 9.9 and 9.2 percent, respectively, but mostly for a 44,000 square foot renewal we completed with 24-hour fitness at Met Park North in Seattle. And as Victor noted, our gap in cash rent spreads for all of 2020 were 21.5 percent and 14.3 percent respectively, which would have been even higher, 22.3 percent and 15.4 percent respectively, but for short-term deals. Tenant interest, tours, and activity continue to accelerate in the new year across all our markets. For example, we're seeing increased interest from larger tenants, particularly in Los Angeles. We are now in discussions with multiple multi-floor users at Harlow. We also had a notable uptick in tours and proposals from smaller tenants in Redwood Shores and North San Jose. Our deal pipeline, that is deals in leases, LOIs, or proposals, increased quarter over quarter, more than 30 percent to 1.1 million square feet, and aligns with our availabilities across our markets. As of the end of Q4, we had 10.7 percent of our ABR expiring this year, with a 13 percent mark to market. We have about 45 percent coverage on those expirations that is deals in leases, LOIs, or proposals. For expirations over 20,000 square feet, we have 65 percent coverage. Our two largest expirations by far are Google at 3400 Hillview in Palo Alto and Dell EMC at 505 First Street in Pioneer Square. Renewal discussions are underway, and addressing these two leases alone will reduce our ABR exposure for 2021 to 7.6 percent. We also have nothing expiring of significance in either Los Angeles or San Francisco this year. I'd like to reiterate that our lease economics have remained intact during the pandemic. Our average net effective rent for 2020 actually increased slightly year over year, just over a percent, to $46 per square foot. Comparing Q4 2020 to Q4 2019, our net effective rent was up 14% to $42 per square foot. One of the immediate impacts of COVID was shorter-term leases, particularly for renewal deals. However, since Q2, we've seen a sequential uptick in lease term across the board. Our Q4 2020 new deals were on par with Q1 with an average of six-year term. For our Q4 2020 renewals, the average term was 3.8 years or up over 100% from Q2. Now, I'll turn the call over to Haru.
spk06: Thanks, Art. In the fourth quarter, we generated FFO excluding specified items of 44 cents per diluted share compared to 55 cents per diluted share a year ago. Fourth quarter specified items in 2020 consisted of one-time tax reassessment manager costs of 5.5 million or 4 cents per diluted share and one-time prior period net property tax savings of $700,000 or 0 cents per diluted share compared to transaction-related expenses of $200,000 or zero cents per diluted share and one-time debt extinguishing costs of $600,000 or zero cents per diluted share. The year-over-year decrease in our FFO resulted from the partial sale of our Hollywood media portfolio, lower parking revenue due to COVID-19 impacted occupancy, reserves against uncollected rents, and lower service and other revenue at our studios, partly offset by gains from lease commencements at Epic, Fourth Attraction, Foothill Research Park, and 1455 Market. Fourth quarter 2020 FFO excluding specified items includes approximately two cents per diluted share of write-offs against uncollected cash rents and approximately one cent per diluted share of charges to revenue related to reserves against straight line rent receivables. This resulted in a toll negative impact to fourth quarter 2020 FFO of approximately $0.03 per diluted share, some or all of which may be ultimately collected. Fourth quarter 2020 FFO also reflects $0.02 per diluted share decrease in parking revenue, some or all of which will resume with tenant reintegration. Despite the pandemic, we continue to post relatively strong same-store NOI, cash NOI growth within our office portfolio. We have same-store office NOI growth of 4.2% in Q4 and 0.6% for the year. However, adjusting for prior period property tax expense, our same-store office cash NOI would have been 5.7% for Q4 and 0.9% for the year. Following our 1918 acquisition, as well as repurchasing another 900,000 shares of common stock in Q4, we have $1 billion in liquidity. We have no material maturities until 2023, save for the loan secured by our Hollywood Media portfolio, which matures on Q3 2022, and has three one-year extension options. Our average loan term is 5.8 years. In short, as Victor said, we have ample capital to manage our properties, complete our development projects, and pursue new opportunities. Once again this quarter, we've had a steady and meaningful AFFO growth. Specifically, AFFO increased by $11 million or 27% in Q4 2020 compared to Q4 2019. This occurred even while FFO declined by $22.6 million for the same period due to temporary impacts of both our Hollywood Media JV and COVID-19. Similarly, our UOVR 2020 AFFO increased $55.9 million or 40% despite a $32 million decrease in FFO for the same period, largely due to RJV and COVID. In both cases, this positive AFFO trend reflects the significant impact of normalizing leasing costs and cash rent commencements on major leases following the burn off of free rent. We're providing guidance for Q1 2021 FFO of 45 cents to 47 cents per diluted share, excluding specified items. At the midpoint, This is two cents per diluted share higher than our Q4 2020 per diluted share excluding specified items. The increase is primarily driven by the following Q1 2021 compared to Q4 2020 items. We expect our office gap NOI to increase approximately 5.5% excluding the $1.6 million one-time prior period property tax expense that occurred in Q4 2020. The 5.5% increase is primarily due to our acquisition of 1918-8. We expect studio gap NOI to increase approximately 7.5% excluding the 2.2 million one-time prior period property tax savings that occurred in Q4 2020. This 7.5% increase is primarily due to heightened production activity. We expect our G&A to decrease approximately 1% excluding the $5.5 million one-time tax reassessment management costs that occurred in Q4 2020. We expect interest expense to increase 2.8% as a result of our loan secured by 1918-8, which commenced mid-December 2020. Finally, we expect our FFO attributable to non-controlling interest to increase approximately 23%, again, as a result of our acquisition of 1918-8. Our 46 cents per share Q1 2021 guidance midpoint and the underlying components just outlined provide a helpful reference for forecasting our current full year expectations. More specifically, we're expecting both Q1 2021 office and studio gap NOI to remain consistent throughout the balance of the year. We are, however, anticipating some improvement in a few key components of full year 2020 FFO compared to Q1 2020 guidance annualized as follows. G&A is expected to be $2.5 million lower, and interest expense is expected to be $3.6 million lower. And now I'll turn it back to Victor.
spk07: Thanks, Arut, Art, Mark, and Laura. To close, at Hudson Pacific, we've always operated a premier portfolio. And through the years, we've strategically invested in unique and highly accretive growth opportunities, be it through development, redevelopment, or repositioning. And in doing so, We've ensured we own the best assets and attract the best tenants in prime West Coast tech and media hubs. There is no doubt that we have political hurdles to overcome in both California and in Washington, but the West Coast professional networks and talent clusters were built over many decades and thus are difficult, if not impossible, to replicate. We, like our peers, will be fully engaged and committed to ensuring our markets continue to thrive, that they are favorable for both businesses and residents alike. And once again, I want to express my sincere appreciation to the fantastic Hudson Pacific team for all their work and dedication this year. And thanks to everyone for listening today, and we appreciate your continued support. Stay healthy and safe, and we look forward to updating you next quarter. And, operator, with that, let's open the line for questions.
spk02: Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Nick Ulico with Scotiabank. Please proceed with your question. Thanks.
spk16: Hello, everyone. So I guess just first off in terms You know, the full year, you talked about, you know, first, it sounds like first quarter is a good kind of run rate to think about for the year. Maybe you just give us a feeling for, you know, how you guys are thinking about, you know, occupancy and, you know, in terms of releasing on the lease expirations for the year, how we should think about kind of occupancy trending for the year.
spk04: Hi, Nick. It's Art. Yeah, so, I mean, as I said in my prepared remarks, I mean, we've got – so we start the year with $1.5 million worth of expirations. It's encouraging. Early in the quarter already, we've got 45 percent coverage on those expiring tenants. The two largest, obviously, Google, 207,000 square feet in Palo Alto, and Dell EMC, 185,000 square feet in Seattle, were well in front of and were down the road with those tenants. I think if you look at our uptick in pipeline activity just from the beginning of the year, we probably pushed that 45% number closer to 50% of coverage early, and we're still having conversations. I think we're early. Tenants are starting to experience kind of a renewed confidence as they look beyond the vaccine and schools opening, and I think that's exactly why the numbers are increasing quarter over quarter.
spk15: And Nick, just on your initial question, you know, as we completed budgets right towards the end of the year and kind of looked ahead to where they pointed on a lease percentage by year end, it looks to us like we should be able to maintain our lease percentage. You know, as we ended the year, we should be able to maintain that throughout the year. So we don't expect to see any deterioration in that number.
spk16: Okay, great. Thanks. So it sounds like you guys feel pretty optimistic about getting the lease explorations, you know, renewed with Google and Palo Alto and Del and Pioneer Square. Is that fair?
spk07: I'd say this, Nick. It's Victor. How are you? I'd say that we feel very good about our lease expiration timeline that's coming due in 2021. And of the big two, we are in leases on one right now, and the other one we're negotiating back and forth on paper. So we feel pretty good about it.
spk16: Okay. Appreciate that. Thanks, Victor. I guess just one other follow-up is as we think about You know, the expirations this year, you know, you do have some more waiting in Silicon Valley, which, you know, some of this is, you know, smaller tenant market. Think about that portfolio where you've got, you know, you've had, I think, a little bit more tenant churn over the past couple of years. Some of that's planned because you're repositioning assets. Actually, kind of think about some of the smaller tenant, you know, leasing trends right now that you're seeing in the portfolio. Yeah.
spk04: Sure, Nick. Absolutely. I think you hit it on the nose in Silicon Valley and on the peninsula. It's a smaller tenant market. The churn that you're referring to was larger tenants that had either rolled out or downsized, and obviously it takes time to release it with smaller tenants. We're going to continue to successfully deploy our VSP program, which has been super successful for us, not only in those markets, but across our portfolio. And you know, with the uptake in tenant, small tenant activity, you know, we're going to be poised to capture that activity.
spk16: All right. Thanks, Art. Thanks, everyone.
spk07: Thanks, Nick.
spk02: Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.
spk01: Great. Thank you. I guess, can you guys talk about what you're seeing in terms of space usage, any changes? I guess as you're working on the Google and Dell leases or anything else large, are they kind of rethinking how they want to use their space?
spk07: So, hey, Jamie, listen, right now, you know, because the preponderance of our tenants are not back, but now they're preparing to go back and we see the light, not just because of the vaccinations, but the activity and the schools coming back and all the positive news that, you know, we're not out of the woods, but we're seeing it. You know, people are looking at The existing utilization and to date, you know, when we've been saying this all the way through, you know, the reason we're collecting at 97%, people are not giving back space. I mean, they're looking for the next gen office space going forward and there's a number of factors that run around between safety and protocol. You know, obviously the opportunity to, you know, reimagine the future space connectivity with personnel, climate change, All the protocols that they've been working through the last, you know, multiple months are being enacted. But I think, you know, the back-ended answer to what your question is is that we're not seeing in our instances with the tenants that we're talking to right now, tenants coming back and saying we're giving up space with the exception of one large tenant in our portfolio has said, you know, we may end up restructuring and giving back space. But, I mean, the numbers are well in our favor of tenants that are keeping the existing footprints.
spk04: Yeah, to put a finer point on it, Victor, you know, what we're reading, what we're all reading, we're all reading the same things, and what we're hearing, and granted it's kind of a smaller subset of that, is some of the tenants are still building for maximum density. I mean, for sure they need to solve in the short term, but their plans on, I would say, larger blocks of space are for, you know, kind of pre-COVID densities. if that's an indication for you.
spk01: Okay. So even if they're keeping the same footprint, are you seeing a different type of usage, like less desks, more meeting space, or you can't really even see that yet?
spk07: It's hard for us to sort of see through that right now. As I said, we're still running it. I think we're maybe occupancy, physical occupancy in the assets are you know, now in the low 20s. So it's too hard to see. And the bigger guys are not back yet. They're getting ready to come back over, you know, several months, all the way through till fall. But, you know, we don't have a clear line on that yet.
spk01: Okay. And then, Art, you talked about a pickup in L.A., smaller tenants in Redwood Shores and North San Jose. Can you talk about what's driving that? We've seen a lot of capital raised in the Bay Area. Is that a big part of it? And then how do you think about CBD San Francisco, since it seems like the Southeast space seems to still be on the rise there?
spk04: Yeah, so in L.A., it's chiefly in Hollywood, I'll say. It's a really kind of larger tenant field, and we're obviously – it's bolstering our efforts at Harlow. In Silicon Valley and the peninsula, it is small tenant activity. I think it's renewed confidence. I think some of these tenants kind of got to the end of the year. They're starting to see the light at the end of the tunnel, and they were on the sidelines. We've talked about kind of the decrease in tenants in the market. Well, a lot of those tenants were on the sidelines, and I think those tenants, you're starting to see the front end of those tenants come back and start to kick the tires again and reengage. And in San Francisco, believe it or not, there's been about a 20% uptick in activity in San Francisco. We don't have, as you know, we don't have any exposure. We're 98% leased. We've got maybe 50,000 square feet expiring this year. So we're in really good shape. But it's refreshing to see that some of those tenants have come back into the sidelines in San Francisco. The sublease space, as you know, we've seen a deceleration, right, in the sublease space that's being put on the market. And, you know, obviously we feel confident about the direction it's going.
spk01: So would you say CBD San Francisco is seeing a similar pickup to these other submarkets or not necessarily?
spk04: Inactivity?
spk01: Yeah.
spk04: Yeah, yeah, no. So like I said, we've specifically seen, you know, their tenants in the market, you know, it dropped to about 2.8 million square feet off of 6 billion feet. We're back over 3.5 million feet. So, yeah, we're starting to see some of those tenants reengage.
spk01: Okay. All right. Thank you.
spk04: Thanks, Jamie.
spk02: Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
spk09: Thanks. Good morning out there. So in terms of future development projects, you guys have been able to build to some pretty solid yields over the last few years and added to your land bank. I guess, can you talk about that shadow pipeline? I'm guessing you'd be more willing to build something with a studio component rather than traditional office at this point. But, you know, what do you think could be the next development, sir? When could that happen? And what level of pre-lease, if any, would you need to start something in this environment?
spk07: Yeah, well, Blaine, listen, I think you know, given our pipeline right now, I think, you know, it would be the both ends of our market. So, you know, in Vancouver at Ventol Center, we're evaluating – A half a million feet, the demand in that marketplace seems to still be as consistent as it was pre-COVID. And so we're looking through design right now and deciding at the opportune time in pre-leasing, we've got some activity with some larger tenants that are currently in the marketplace and expanding the marketplace. We have Washington 1000. That is a planned, fully entitled billed for 23 for us to start. We could start earlier if we wanted to, maybe as early as end of 22. I do think that that's going to be based upon a pre-leasing component. We have not seen the two or three tenants that came to us initially have been on the sidelines during this timeframe, but I think our team is fairly confident that that for us to break ground there, we will have a level of pre-leasing. As to the percentage amount, not really sure. You know, then you come down to Los Angeles, and we are in the final stages of our Sunset Gower development, which would be two development opportunities, about a half a million square feet. We are, you know, a year away from being fully ready to break ground there, and that would also depend on some pre-leasing component, and that's going to be a combination of office and studios. And the activity there has been fairly stable with our existing tenants and new tenants in the marketplace that want to expand.
spk09: Great. Thanks, Victor. That's helpful. And just to circle back, on your Washington 1000 asset, if my recollection is correct, I think that project is, you know, somewhat tied to what goes on with the convention center expansion there, which seems to be delayed and kind of over budget. Can you just comment on what effect, if any, that has on your plans there?
spk07: Yeah, I mean, listen, it's slightly delayed, and the budgetary aspects are not our issue. But when it's delivered, we'll be compelled to do at least initially complete the podium through the retail component there, which is part and parcel of our commitment. After that, we will have a timeline that can extend a little longer than our anticipated timeline to build the tower. And so we're not concerned about the state of Washington completing it. And, candidly, it actually works in our benefit. If the timeline works that we have some pre-leasing component done, we can hold off on us breaking ground until they're completed.
spk09: Great. That's helpful. Last for me, in terms of studio acquisitions, obviously interest in the property type has increased recently, and there have been, you know, a couple of studios that have been on the market or traded recently experiencing I'm sure you guys looked at those assets. Was it just pricing that held you back, or was there any other reason? And I guess, what are the main features that you guys are looking for in studio assets and acquisition opportunities?
spk07: I mean, other than the Raleigh studio that just was a portion of that that sold, there really has not been anything else in the market. There are several deals coming to market at market and several deals that we are – negotiating exclusively off-market. So I think it would be fair to say that our plate is going to be relatively full in that area in the near future, and announcements should be anticipated shortly. And so, you know, what we... We've been very disciplined into our markets. We're interested in the core markets that we've always talked about. And our venture with Blackstone is completely active right now. And I would venture to say that you'll see a number of deals come our way, both of existing deals and ground up.
spk09: Great. Thanks, Victor.
spk07: Thank you. Take care.
spk02: Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please receive your question.
spk03: Hey, good morning. Good morning, Victor, and everyone out there. Just, you know, a few questions here. I guess the first question is just sort of going back to Jamie's question. You know, we hear a lot about, you know, what's going on in San Francisco versus the peninsula, and it sounds like the peninsula is sort of like the Sunbelt of of sort of California where everyone's sort of either moving out of San Francisco to go live in the peninsula or business, whatever, totally different dynamics between the business situation there versus the political and business situation in San Francisco vis-a-vis lockdowns, et cetera. Do you see any of your tenants, so Victor, I hear you that you guys are committed to California, the West Coast, but are you seeing more tenants sort of rethink their San Francisco plans and instead focus on a peninsula And then are you seeing that translate to any actual discussions as far as leasing or development potential? Or right now, you know, people are just making decisions based on their existing holdings or existing square footage. And so far, it's not really translating into anything that's longer term visible.
spk04: Yeah, Alex, this is Art. We're not seeing that exodus out of San Francisco at all. In fact, our leasing teams are connected up and down from the city down to San Jose. All of these deals that are coming back are really deals that were on pause and are seeing a kind of renewed interest, but they're made independently of any of those things that you mentioned.
spk07: I think, Alex, You're spot-on on the peninsula. I think you'll be surprised to hear when we announce some of the renewals that we're working on at the terms and conditions they're at. The activity in the peninsula has picked up dramatically in the last 90 days, and our team up there is entertaining a number of deals that were pretty much stagnant all through spring and summer. And so, as Art said, they're coming back. In terms of the city, you know, listen, I think you're spot on in the political environment there. It's not a good situation. Does that mean you throw it out? The answer is no. The city will recover. It just depends on when. And, you know, we're just poised very, very fortuitously that we don't have a lot of expirations in the city. And those that are coming up, we actually have reverse inquiries by our tenants. that are asking to renew for longer term some of the larger tenants now in years 23 and beyond. So we've had some activity around that at the same time. So, you know, I'm not saying that the picture is absolutely spectacular by any means, but there is activity and people are planning for the future. The future is going to come on us pretty quickly. And I think these tenants understand that when they're back, they're going to be back on some form that's greater than it is clearly today, and maybe not as great as it was a year ago today, but they're pretty excited about the opportunities to get people back in the office. And that's the central theme.
spk03: Okay. And then, Haru, to put you on the spot, because I can't ask Mark this anymore because he gave you the CFO ring. It sounds like for the first quarter, it sounds like it's a pretty good number called 46 cents at the midpoint, which sort of annualizes above 85%. So if things are getting better, I think you said lower interest expense, but, you know, is there any reason that sort of $1.85 is not a good 2021 number that we should think about? Or are there some things, I mean, I'm sure there's some things that are variables, but it seems like, you know, they're all positives, right? There's uncollected rent, parking, there's studios, you know, retail coming back on. I mean, these are all sort of positives. So is there any reason that we shouldn't think about sort of $1.85 as as sort of being the sort of implied low end of a guidance range for the year?
spk06: Alex, that's, yeah, I think that implies basically the right thing. I think we did provide in our prepared remarks, there are some items that we feel would be even better through the remainder of the year, which was G&A and interest. So theoretically, if those do also come on by, the 185 is low. So I think If you want to start off with 185 as the lower end of the range, I think that works well.
spk03: Okay. So, I mean, all these other things sounds like they could come on sometime over the course of the year. That would sort of bring that up, meaning that from what you see right now, there are no negatives that would bring this, that would be a detriment, that are unforeseen, that would be a detriment to this number.
spk06: Right. I mean, the only negative is anything COVID-related, right? Right. Yeah, yeah. things like that, we can't control that. But so far, you know, we like the trend. I mean, just to be clear, it's not going to be straight throughout the year. There'll be ebbs and flows, right? The media business being an item, right? Q2s usually are slowest quarters, so just you got to factor that in. But ultimately, what you said is accurate.
spk03: Okay, and then just final question. Victor, you know, the announcement about a week or two ago, the departure of Alex and Josh, You know, obviously, we all got to know Alex quite well, great guy. But it does seem to be a trend that we're seeing, not just you, but some other REITs where people are going to the private side, just seeing the disconnect and opportunity, you know, comp and all that. Do you foresee this being a bigger issue? You know, is this going to lead to G&A pressure for you? Or is this sort of your more view is this is the natural ebb and flow and their departure allows opportunity for people to grow and therefore you don't see like a GNA issue or any sort of those sorts of things?
spk07: Well, first of all, Josh is a really good guy, too. I don't want you to think Alex is the nicest guy of the two that left. I think Josh is a pretty good guy. Maybe I'm in the minority, but I'm going to support him.
spk03: Well, Alex has a full bar cart in his office and You never put Josh on the sacrificial lamb in front of a public analyst.
spk07: Listen, they're both great assets, and they've been with us for a long time. And I would say, you know, first and foremost, you know, we wish them the greatest success in their new venture that they're launching, hopefully imminently. And any help that we can do as a company and friends, we're going to support them. The issue around Hudson specifically and then generally, I'll comment it this way. This is the first time we've ever had any senior people leave the company that's been by their choice, not our choice, I will say it that way. And we've got a massive bench and great depth, and the team here is energized and excited to take over and grow. I think you point out an interesting dynamic in that the public markets versus the private markets are constrained. And when you have, you know, talented, energetic individuals, this comes up. And it shouldn't be expected that this is a one-time thing. I think from our standpoint, the company doesn't anticipate any more exodus. But, you know, you never know what happens in time. And, you know, that's why, you know, you're not run by one person. You're run by a team of professionals, and the team is ready to move forward on this. As economic... aspects change, I think you're going to see gravitation to or from the public to private markets.
spk03: Okay. Thanks, Victor.
spk02: Our next question comes from the line of Frank Lee with BMO Capital Markets. Please proceed with your questions. Hi.
spk10: Morning, everyone. I have a follow-up on the studio business. You mentioned the various opportunities you're looking at. Can you talk about how competitive and how the buyer pool has changed in markets such as, like, Burbank, Culver City, and in the Valley, and then longer term, do you foresee any potential disruptions this could have in your Hollywood market as supply increases?
spk07: Well, I'll take the latter first. I mean, listen, you know, our stabilized assets, you know, in Hollywood are best in class, and they were, you know, They're historical purpose-built assets. So there's not going to be any variability around that. The demand is absolutely off the charts from the competitive landscape that's out there right now because of the growth and the product that's in the marketplace. And as a result, I think that the competition for sound stages is as high as it's ever been. I do think that the... In terms of the competition, it's so ironic that of everybody who covers us for years, they didn't talk about this business being competitive, and we were the only ones doing it. And now that there's a competitor out there, and it really is just a competitor, it's all of a sudden a concern. On our office side, which is 80-plus percent of the portfolio, we've got countless competitors, and nobody seems to talk about that aspect. I welcome the competition. I think the opportunities that we have are extremely impressive. As I said, I'm not worried about it. I think it does validate our thesis that we've been publicly dealing with for 10 years, which has said from day one, there's massive values in these assets, and the pricing around them is not solely based on what we think the values are. Other people are out there now pricing them. So I think it just proves that the markets have undervalued the value of this real estate. And we have now, I would say, yes, a competitor, but a benchmark and others that have come into the marketplace that are validating our values, which is currently trading way below what NAV is by the private market valuation.
spk10: Okay, great. And then there's been some discussions that San Francisco is looking to take more of a proactive approach in reducing property taxes, given, you know, decline in property values from the pandemic. Just want to get your thoughts if you think other California markets you're in could follow suit. And if this plays out, if there could be any potential property tax savings within your portfolio.
spk07: Well, we did announce that we had a great property tax savings just recently on this quarter. And I think there could be additional property tax savings throughout the entire portfolio in California. I do see that there is a little bit of a sea change with Prop 15 getting defeated, and there is a pushback, and there's political realization that it can't continue the way it has been that's gotten us to this point right now. So those are all positive aspects of where I think people realize that business is in place. do have some sort of control and aspects as to where values are put in place, and then you can't continually tax the same entities going forward. So the coalitions for are starting to build to the coalitions against, and I think that's encouraging. We still have a lot of room to go, and I think more companies and more CEOs are becoming more vocal, and as a result, I think you'll see a change, but it's going to take some time.
spk10: Okay, thank you.
spk07: Thanks.
spk02: Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
spk11: Thanks for the questions. Maybe just going back to sort of, you know, the core markets, San Francisco versus sort of the broader Bay Area. I know you talked about, you know, overall demand sort of picking up, the pipeline looking good. know, sublease space is high. So I'm just sort of wondering if you were to, you know, sit here across sort of the key markets and particularly the city, given where sublease rates are today, is there a bifurcation in what you're seeing in terms of the, you know, need for landlords to reduce, you know, rents on what maybe tenants are looking for, you know, and how wide could that be? Like where what areas are you seeing sort of, you know, pricing hold or rental hold versus what types of properties, you know, are you seeing kind of rents needed to go down pretty dramatically to see incremental demand?
spk07: Yeah, Victor, listen, it's a great question. And I do think that you have to look at quality of the real estate first and then candidly, you know, if you're a landlord in that marketplace like we are, you know, our goal is to maintain occupancy. So it depends how much pain you want to take, right? And so if you've got a loan on the asset, you've got expenses that you need to adhere to, and you haven't got deep pockets to protect yourself in the asset quality in terms of what's happening, you're going to be a little bit more desperate to lower your rent versus not. I think all landlords in today's marketplace are going to be dictated towards the demand of a tenant. And so none of us want to lose tenants. How far down you're going to go I don't think there's a benchmark that says that. I think the irony, and we've made this comment before and it's important for me to highlight, is that the tenants that are coming due today, whether it's 21, 22, whatever it is, you know, typically have been tenants that signed in, you know, 15, 16, maybe even seven years back to 14. And so at 14 or 15 or 16, the mark-to-market is still well above where even your reduced rent is. So we're all still making more money than our current in-place rents were as these tenants come into play. These aren't mark-to-market deals that were 2019 in late 19 and obviously first quarter 20 of it. or the peak of the marketplaces. So when we look at some of our space, and you've been following us for a long time, and supporting us for a long time, you've seen that, you know, we had mark to market in San Francisco at 50 or 100%. And so if those mark to markets are now 20% or 25%, it's still much greater than what the tenants were rolling at. So we still have some, what I would say is a floor or cushion or whatever you want to classify it to be. So we're not saying we're giving space away. So yes, it's a mark to market to where the peak was pre-COVID, but not necessarily to where the rent Started and where it even accreted to in place rents over the last five or seven years Okay, that's that's fair enough.
spk11: That's helpful. Maybe one one for her route You know, we think about sort of the same store cash number for the year And maybe even just looking beyond a little bit, you know 18 months out you obviously have the bumps you have some leave with you signs or some free rent converting and But, you know, offset to that, it sounds like, and correct me if I'm wrong, that on the expiration side, and maybe just tenants deciding they may need less space, there is a occupancy, likely an occupancy headwind. And so, you know, with the bumps in the portfolio, you know, and potentially occupancy headwinds, you know, how should we think about the trajectory of, you know, cash NOI over the next, call it four to six, 12 to 18 months?
spk06: Well, what you said is accurate. We do have those headwinds. However, to remind you, we also have below market leases. So we're going to renew a percentage of our tenants and they're below market. So that's going to bring up our cash NOI. And I think we're pretty confident on our prospects. But I think, we continue to see growth in cash NOI. It may not be as high as the plus 6% we got this quarter after removing the one-time items, but we still think we have a lot of upside as free rent continues to burn off and the bumps start coming in.
spk11: Okay. And just maybe just to clarify, like, I know you're not, you know, we don't have specific numbers around it, but just kind of high level to put kind of guardrails around the occupancy kind of in your own budgeting, high end versus low end, how should we think about kind of where occupancy could shake out towards year end?
spk15: Well, I think I mentioned, Vikram, this is Mark. I mentioned that in completing year end budgets and looking at where we ended up on a least percentage basis at year end and how it compares to where it will trend towards the end of the current year, we're materially in line with those two numbers. It's obviously a combination of our renewals and its success on renewals plus expectations on absorption of existing vacancy, but through the combination of that, our in-service portfolio appears to trend so that we maintain our current lease percentage.
spk06: Also, just a reminder in terms of renewals, the largest renewals that we have are happening at the end of the year. So the impact on cash seems to, I don't know why, at least for 2021, isn't going to be that large for those tenants. So those are going to be more 22 and beyond in terms of .
spk11: That makes sense. Okay, great. Thanks so much.
spk06: Thanks, Vikram.
spk02: Our next question comes from the line of Amateo of Fania with Mizuho. Please proceed with your question.
spk13: Hi, yes, good afternoon. Most of my questions have been answered, but a quick one on studio. At the same store, Studio Levy Street, it kind of went down this quarter, also went down in 3Q. I think in 4Q, the general impression was, you know, maybe it would be a positive trend as production started coming back. So I'm just kind of curious a little bit about the 4Q stat and the outlook going forward.
spk15: Yeah. You know, when we talk about the studios, we so often focus on stage utilization because that's really the driver of success at the studios. So it's easy to lose track a little bit that there's about a third of the footage is office, ancillary office footage that supports those studios. But the office isn't entirely occupied by stage-using tenants. That is to say... Some of the office utilization is writers and other production-related users, but some of it are people that simply just want to be on a studio lot, casting people and people like that. And due to the disruption from COVID, some of those users who don't, again, are not there because of the stage use, and who were under, say, shorter-term leases or whose leases expired, we saw a bit of a pullback, if you will, on what would be a normal renewal rate for those users. And as production has begun to resume again, our view is we're going to see a lot of those non-stage office users return to the lot, you know, just to be affiliated again with all the other studio users.
spk13: Gotcha. That's helpful. And then just another follow-up on the studio stuff. Again, in regards to just the sunset studios and potential development there, did I hear you correctly that it's at least a year away before you break ground on any potential additional studio development?
spk07: Oh, you mean on Sunset Gower? Yeah, I think that would be an accurate statement. We probably would not break ground until first quarter of 22.
spk13: Great.
spk02: Thank you.
spk07: Thank you.
spk02: Our next question comes from the line of Dave Rogers with Robert W. Baird. Please proceed with your question.
spk14: Yeah, good morning, Victor. You talked about acquisitions on the studio side, but could you revisit your thoughts around acquisitions and investments outside of development on the traditional office side? Are you feeling any better there? Are you seeing more opportunities like you saw with APE? Is that something you're interested in today? And maybe juxtapose that against the buyback, which I know it's not one or the other, but maybe update us on your thoughts there and kind of the allocation of capital.
spk07: Yeah, Dave. No, thank you. Listen, you know, the buyback position is still the same at these levels. When opportunities avail themselves, we will consistently buy back. I think we've proven that track record out all through the last really 12 months plus. And so that's going to continue. We have not seen a massive inflow of deals on the commercial side as of now. I do think that the team has been evaluating a few value-add deals, and so our appetite would be consistent with that, given the opportunity that some of those value-add deals are significantly cheaper than they were a year ago. And so, if we were interested in them at that time, why would we not be interested at this time if they're accretive to the portfolio? You know, 8th was a great acquisition opportunity, and we have a, you know, great partner in CPP that we've done several deals with. And their appetite, as I mentioned on the prepared remarks, as our other two JV partners' appetite is still very strong, both for, you know, commercial assets.
spk14: And just maybe one follow-up on the value-add. Obviously, you saw deals last year. They're still in the market. Are you seeing more or having more off-market conversations just about more of those deals happening? I mean, are we turning that corner yet, or is that still a little bit ways in front of us?
spk07: I think you're seeing more value-add deals now than when we maybe talked about it at our last call or for sure at our summer call. where really nobody was prepared to put a value-add deal because there was zero bids out there and the price differentiation was so extreme. There may be a little bit of, you know, what I would consider, you know, desperateness from some sellers that want to get out. And they are mostly, you're spot on. Those conversations are off-market. They're not marketed deals. And so we're seeing more. And there's a few attractive opportunities that we're underwriting. So, you know, I'm anticipating that that could be a good opportunity for a company like Hudson.
spk14: Great. Thanks. And then if you just follow up for Art, if I could. Art, you went through the lease economics for the fourth quarter, and you talked about healthy economics overall. It looked like there was a bigger kind of maybe CI package this quarter that hit and maybe weighed on some portion of those numbers. But correct me if I'm wrong or maybe explain the outlier.
spk04: Sure, yeah, so if I could repeat, you know, on a blended basis, we're actually, our TI and leasing commissions were down $21. If you're focused on the new deals, yes, that was the Rivian deal, which we were building the space from really raw space up to warm shell, where the tenant took it. Preponderance of our space is not in that condition. It's usually kind of ready move-in space, so that was the outlier.
spk14: That's helpful. Thanks, all.
spk02: Our next question comes from the line of Emmanuel Korchman with Citi. Pleased to see you with your question.
spk05: Hey, it's Michael Billerman here with Manny. Victor, just two questions. First on Alex and Josh, did they not have non-competes or are they just not competing in their new venture with you? When you say you're going to provide them all the support, are you capitalizing their venture in any way or providing them any capital?
spk15: Can I just take this, Mark? Can I just take the initial question, Victor? On non-competes, California is a pretty employee-friendly state as the law goes. There is no such thing as enforceable non-competes. Typical arrangements, and this would be the case, not just with respect to Alex or Josh or Kennedy. Any executive is, you know, we have standard non solicitations. We have standard confidentiality clauses and not that it would ever be necessary in this case, because it's. Victor's outlined that all of our agreements also have things like non disparagement causes. again, these standard clauses. That's about what you can do in California, and that's what our typical agreements have.
spk07: Yeah. And then in terms of the latter part of the question, listen, they're not looking in our markets currently today. They're looking in the Sunbelt and other marketplaces. And the answer to the capitalization is, you know, if they came to us with opportunities, of course, since we trust them and like them, we would obviously entertain it. Not to say that we're going to do any assurances that we would do it, but we would obviously help them out in any way.
spk05: And then second question, just in terms of capital deployment, and Victor, I know there's a lot of different buckets you can deploy capital. And obviously you've done the share buybacks, given the significant discount in AV. You're obviously doing development and activating as much of the pipeline for the future as possible. There's redevelopment. You talked in the last question about the value-add opportunities that you're looking at. How does the buying of stabilized assets, even with a joint venture partner, how does that sort of marry up with really the value side of all those other activities? I guess why put money in? Is it a market share? Is it supporting your joint venture partner? Just help us understand that part of your capital deployment when all those other activities that you have in front of you are seem better sort of return opportunities.
spk07: So listen, I know where you're getting in on that. And specific to that, I think each opportunity will stand alone. We're going to make the right decisions. And you're right. I mean, we were heavily weighted on value add and development. That's not going to dissipate in terms of our game plan and what we're currently working on as we speak. In terms of eighths, You know, that was a conscious decision on threefold. One, in no particular order. It was a relationship with the tenant being Amazon and our exceptional relationship with them, and it's enhancing that going forward, given what we have with them in that market and other markets. It's a Class A asset with them for 10-plus years, and the new CEO's offices just happen to be in our project. And it was a great opportunity for us to capitalize on. Two, you mentioned it, it is a JV structure with an existing partner that we are, you know, 55-45, which is the standard deal that we do with them. And three, the economics around that transaction were, you know, effectively great. I mean, we did an L plus, I think, 170 loan for 50% of the transaction, where it effectively gets us our going in yield somewhere in the, you know, in the mid-7s or so going up. and the capital deployment is minimal for us over the next 10 years. So it wasn't, you know, hey, this is a stabilized deal. Why are you buying a bond? It was a combination of, I think, all three of those things.
spk05: Okay. Thanks for the comment, Victor.
spk07: You got it.
spk02: Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.
spk12: Thanks, and thanks for hanging a little bit longer. I just had a quick question. Related to what you said, Victor, earlier, you're negotiating a bunch of potential opportunities in the studio space. You mentioned both development and acquisition opportunities. I'm wondering about repurposed real estate or re-entitled real estate. Is that something that the studio business can come to the rescue of some see-through assets that are out there, whether it's the the anchor space of a department store in an old mall or even an industrial asset that's probably obsolete by now. Are these opportunities that you could see studios kind of expand that way, or am I just barking up the wrong tree?
spk07: Listen, I think, Rich, you are commenting on something that people have been looking at. I do, as have we, and we have not looked at it and said this is absolutely a non-starter. The cost return analysis for non-purpose-built studios is still very challenging, and then the quality is challenging. Now, I do want to caution, and this is in no way of me hedging that saying, hey, does that mean Hudson's doing this or not? The level of technology in the entertainment and media business that is evolving may avail themselves for this, given that smaller size stages, for certain types of technological filming and the likes of that could be applicable for conversion space like that. But in terms of a quote-unquote savior to, you know, existing space that is not purpose-built and at the end of the day is void given, you know, the change of the economic structure, I don't see that as a mainstream for that business.
spk12: Okay. That's all I have. Thanks very much.
spk07: Thanks, Rich.
spk02: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
spk07: Thank you so much, and I appreciate the interest in Hudson. Again, as this quarter and the entire Hudson team appreciates all the support by everybody in the call. Have a great rest of your day, and everybody be safe. Thanks so much, operator. Bye-bye.
spk02: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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