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spk07: Good morning, and welcome to the Hudson Pacific Properties Second Quarter 2022 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. To answer questions, queue at any time. Please press the star key followed by one on your touchtone phone. If you are using a speakerphone, note, you will need to pick up your handset before pressing the key. 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.
spk00: Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman, Mark Lamas, President, Harut Jarmirian, CFO, and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on an 8K with the SEC, and both are now available on our website. The audio webcast of this call will be available for replay on our website. Some of the information we'll share on this 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. Today, Victor will touch on our strategy and the macro environment. Mark will discuss progress on leasing, development, and asset sales. And Harut will provide more detail on our second quarter financial results and outlook Thereafter, we'll be happy to take your questions. Victor?
spk10: Thank you, Laura, and thank you, everyone, for joining us today. Day in and day out, every level of our organization is committed and focused as we work to make the right decisions that move our business forward in alignment with our core investment theses. We'll continue to evolve in line with the synergistic, converging, and secular nature of the tech and media industries, leveraging our unique ability to deliver world-class office and studio facilities that position us to outperform over the long term. The fact that we're making progress against the persistent pandemic backdrop and rapidly evolving economic environment is a testament to our team's efforts and dedication. Office utilization throughout our portfolio continues to rise and is now in the mid 40s to 50% range, up from its low at about 5% to 10% in the height of the pandemic. For most of our office tenants, it's clear executives want employees back in the office in some capacity. Not only are they witnessing the deterioration of culture, collaboration, and mentorship, but there's also growing evidence of reduced productivity and accuracy among key functional groups. Companies including Google, Amazon, and Netflix, three of our largest tenants, operate with a very long-term perspective and have continued to lease, build out, and or occupy well-located, high-quality, sustainable, and collaborative workspace. like we have in our portfolio. We believe that for competitive reasons, our leading tech, media, and creative companies, if they have not already, will ultimately follow suit. Despite historically low unemployment, it's challenging to predict the precise near-term net impact that hybrid work, capital constraints, and potential layoffs could have on office demand. For the second quarter overall, in several of our markets, we saw tenant requirements and gross leasing grow, sublease space stabilize or decline, and positive net absorption in the six figures. Yet the swelling demand and activity we witnessed at the beginning of the second quarter tempered in June and July as some of the companies paused to digest the impact of increased market volatility and the possibility of a recession. Benefiting from our diversification at our studio assets, we continue to see robust demand for our integrated offering of Class A office, high-quality stages, support space, and production services. While our on-lot ancillary production office space is leasing up, albeit slowly, our stages and support spaces are essentially fully occupied. Our studio facilities are ideal for the type of original content that streaming and other media companies will continue to rely on to win subscribers. Currently, we can accommodate only a fraction of the inbound stage and support space related inquiries, which ultimately bodes well for our on-lot Class A and production office space. Pro-business leadership and policies appear to be gaining momentum across all of our markets, and this is very positive in terms of development. Most recently, California has proposed to establish an annual property tax surcharge on properties valued at over $4 million. The latest effort to repeal Prop 13 failed to garner the requisite signatures to be included on the November ballot. From Seattle to San Francisco to Los Angeles, we're seeing greater support for pro-business candidates with an emphasis on cleaning up cities, supporting police, and ensuring urban centers remain open for business. At the end of the day, regardless of the changing macro or regulatory environments, we're doing what is within our control and what we do best, leveraging our expertise and relationships, staying laser-focused on leasing, and making strategic enhancements and additions to our portfolio to capture tenant demand now and in the future. We're in front of every relevance-based requirement in our markets. We're effectively determining where repositioning and other capital improvement dollars can have the greatest impact, and we're recycling out non-strategic assets while executing on select projects within our development pipeline. And we're pursuing only studio and studio-related acquisitions that are synergistic and accretive to our existing platform. Finally, I encourage all of our investors to check out our latest corporate responsibility report, which we've published during the quarter. I'm proud of our continued accomplishments and of the value of our Better Blueprint ESG platform and its creating value for our stakeholders. Today, we have the highest percentage of LEED certified properties among our major office REITs. Our operations are carbon neutral and we have further reduced emissions by 25%. And to address homelessness, we've invested and donated a total of $4 million towards supportive housing solutions in our communities. And we've also strengthened our commitment to diversity, equity, and inclusion, hiring a DEI head and launching an innovative impact fund, EquiBlue, to support these efforts within our industries and our communities. With that, I'm gonna turn it over to Mark.
spk11: Thank you, Victor. This quarter, as part of our ongoing focus on leasing, we signed over 700,000 square feet of new and renewal office leases, including nearly 500,000 square feet of deals in the Bay Area alone. This includes two significant renewals. Stanford renewed the entirety of its 43,000 square foot lease at Page Mill Center in Palo Alto through 2027. That lease was set to expire in Q4 of this year. We also renewed 199,000 square feet of Nutanix 2024 expiration and expanded them into another 16,000 square feet at 1740 Technology in San Jose. thereby extending about 50% of their current space through 2030. As part of this agreement, Nutanix early terminated 14,000 square feet at Concourse in May of this year, and we've already backfilled that space with another tenant as part of a larger new deal. Nutanix will terminate 67,000 square feet and another 42,000 square feet at Metro Plaza in January and June of 2023, respectively leaving 117,000 square feet to naturally expire in June of 2024. Gap and cash rents were up 16% and nearly 6% from prior levels. Our office portfolio at the end of the quarter was 90.8% occupied and 92.3% leased. Our leasing pipeline, that is deals and leases, LOIs, or proposals, is now approximately 2 million square feet, and we've just over 1 million square feet of inquiries and tours on top of that. Excluding known vacate Qualcomm, we're on leases or have LOIs or proposals on about 55% of our remaining 2022 expirations within our in-service office portfolio, with another 10% in discussions. Regarding Skyport Plaza in North San Jose, where Qualcomm's lease expires at the end of July, we're working on various reposition scenarios. including enhanced lobbies, common areas, and amenity and outdoor space for office use. There are some large office requirements in the market with only a handful of availabilities that can accommodate tenants in the 400,000 square foot range. So we feel that with strategic capital improvements, we will be competitive. We remain in leases with a single tenant to backfill the entire NFL space at 10900 and 10950 Washington in Culver City and we have interest from two other tenants for the entirety of both buildings. Block gave notice that they will vacate the entirety of their space at 1455 Market when their lease expires in Q3 2023. We're continuing our marketing efforts to backfill that space, which includes discussions with existing subtenants who are in about 125,000 square feet or 25% of Block space. Separately, we have had some recent interest on another 200,000 plus square feet, largely from a single tenant. We're also evaluating reposition ideas to meet market demand, and we're prepared to backfill this space with single floor and full podium users ranging from 25,000 to 90,000 square feet. That was our original plan to address B of A's rollout when we purchased the asset and prior to Blocks and Uber's rapid expansion. Turning to development. Company 3 and Google are building out their tenant improvements at Harlow and 1 Westside with GAAP rents already commenced and stabilization on track for Q4 2022 and Q2 2023 respectively. These projects will contribute a combined $45 million of additional NOI annually. Sunset Glen Oaks and Washington 1000 are under construction with anticipated delivery in Q3 2023 and Q1 2024 respectively. These two projects, upon stabilization, will contribute $42 million of additional NOI annually. We also recently received planning approval for two projects within our 3.6 million square foot future development pipeline, including Berard Exchange, a 450,000 square foot hybrid mass timber office building in Vancouver, and a 1.2 million square foot Sunset Waltham Cross Studios outside London, both in partnership with Blackstone. We now have the option to start construction on both projects next year. Finally, to provide an update on our held-for-sale office assets, we've entered into contracts to sell Northview Center in Linwood, Washington, Del Lamo in Torrance, California. Together, these transactions, which we expect to close before the end of Q3 of this year, will yield approximately $50 million of gross proceeds. We continue to market and have buyer interest in both 6922 Hollywood and Skyway Landing. We are also exploring alternative uses for these assets, 6922 as hotel or residential, and Skyway Landing as life science. And with that, I'll turn things over to Haru.
spk03: Thanks, Mark. Compared to second quarter 2021, our second quarter 2022 revenue increased 16.6% to $251.4 million. Our same-store property cash NOI grew by 7.3% to $125.2 million, primarily driven by the commencement of cash rents on various leases, including Khalifa Farms, Twitch Interactive, and WeWork at Maxwell, and Rivian at Clock Tower Square. Our second quarter FFO excluding specified items was $74.6 million, or $0.51 per diluted share, compared to $74.4 million, or $0.49 per diluted share, Best-fired items in the second quarter consisted of transaction-related expenses of $1.1 million, or $0.01 per diluted share, and a one-time property tax expense of $0.5 million, or $0.00 per diluted share, compared to transaction-related expenses of $1.1 million, or $0.01 per diluted share, and a one-time property tax expense of $0.3 million, or $0.00 per diluted share, a year ago. Year-to-date, AFFO continues to improve by $4.7 million, or 4.2%, or $0.05 per diluted share, or 6.6%. At the end of the second quarter, we had $781.5 million of total liquidity comprised of $266.5 million of unrestricted cash and cash equivalents and $515 million of undrawn capacity on our unsecured revolving credit facility. Our total liquidity as of the quarter's end includes proceeds from settlement of the U.S. government securities used to repay the $126.4 million of insubstance to fees debt subsequent to the quarter. We also have access to $143.9 million of undrawn capacity under our One West Side construction loan and $85.5 million of undrawn capacity under our Sunset Glen Oaks construction loan. Approximately 69% of our debt is unsecured and 66% is fixed rate. Our weighted average loan term with extensions is 4.7 years. Now on to the guidance. As always, our guidance excludes the impact of any opportunistic and not previously announced acquisitions, dispositions, financings, and capital market activities. We are updating full-year 2022 FFO guidance to a range of $2 to $2.06 per diluted share, excluding specified items. Specified items consist of 1.4 million of transaction-related expenses, 8.5 million of trade named non-cash impairment, and 0.5 million of one-time property tax expense identified as excluded items in our unit age 2022 FFO. Our revised guidance reflects the impact of higher interest expense associated with steeper LIBOR and SOFR curves compared to prior projections. It also reflects the anticipated disposition of Northview Center and Delamo by the end of the third quarter for gross proceeds of approximately $48.8 million, which we expect to use to repay outstanding amounts under our credit facility. Note that we increased our full-year sinks to our property NOI projection by 50 basis points to a revised range of 2.5% to 3.5%. which includes the full impact of Qualcomm's expiration of Skyport Plaza without renewal or backfill. The increase stems from improved leasing expectations as well as lower operating expenses compared to prior projections. Adjusted for Qualcomm, full year same store property cash and a wide growth projections would be 4.25% to 5.25%. Now we'll happily take questions. Operator?
spk07: We will now begin the question and answer session. As a reminder, to ask a question, you may press star 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. The first question comes from the line of Alexander Goldfarb with Piper Sandler. You may proceed.
spk08: Good morning. Good morning out there. Two questions for you. Victor, let me just ask bigger picture on the studios. There have been some announcements recently, and I think these are all separate, but you'll correct me and let me know if these are actually all the same. But there was like Atlas that had something, East End Capital, and I think there was one other. There have been a number of studio announcements. Are the economics for studios in L.A., changing and becoming more advantageous? Or is there just so much demand that people can make the numbers work regardless of cost escalations? Or how should we think about some of this increase announcements on the studio front from other people looking to either enter or expand their holdings?
spk10: Well, listen, Alex, I think it's specific to markets. If you're looking specifically at L.A., the demand for studios is still relatively high. You know, in our Suntech Glen Oaks, we've got multiple tenants who are interested in the whole thing or a series of stages, and the economics around our transaction are still very favorable. We went out and did a third-party study, which I'm sure our guys can share with you if you want to call them offline, to show supply-demand ratios in our main markets and some of the other main markets throughout the country and other parts of the world. And we're still seeing economics around building at the right price levels. I would caution sort of the banter around some people saying they're building studios. I think what was planned earlier last year and even to the extent at the end of last year, a lot of those deals are not going to materialize. I don't think there's a lot of debt on construction financing available for new development and unfettered groups who don't have a lot of experience. And so I still think we're in a very good position on the assets that we have already said that we're going to be building and the activity that we have around them is still consistent with the yield, even with cost increases.
spk08: Okay. And then Mark or Harut, on the interest expense, I think originally on last quarter's call, you spoke about 325 to 350 million of total dispos. You have 50 million now, so it sounds like there's still 300 million. You last time gave a two and a quarter gap cap rate just because of a bunch of vacancy. But now we have a higher interest rate environment. So, Ned, Harout, as we think, and I'm not asking for 23 guidance, but as we think about modeling our interest expense line and what debt balances we should be thinking about that are affected by rates, what do you think on your numbers, sort of the net impact of interest expense. Like some of the companies are giving absolute numbers like, hey, expect interest expense next year to be 40 million higher or something like that. Is there something that you can give us so that we can sort of be modeling in the ballpark for where your net floating rate will be and how much interest expense you think is going to increase next year?
spk03: Alex, thank you for the question. There's a lot of digest that we haven't provided anything in 2023, but maybe as a guidepost, I can give you a breakdown of our 2022 or our variable debt this year so you can get a sense of what the drivers are and then use that to model. If you look at our variable debt, even though it's at 34.5%, it's really comprised of the 14% of the total debt is $485,000 related to our line, which we find to be temporary. And once we sell these other assets, we'll buy that down pretty significantly. Another 6.1%, or $210 million, relates to construction financing, both at One Westside and South Lake One Oaks, which, again, is relatively temporary until those construction loans get taken out. And then you have another $328 million worth of debt that has some sort of cap on it, various caps. And then that really leaves you with $172 or $173 million of debt that's truly variable, meaning there's no caps. It's not temporary. So if you kind of break it down that way, you can look to use those numbers to project. Because ultimately, all we use are future LIBOR and SOFR curves. We don't have any other crystal ball to utilize other than those.
spk11: Alex, let me just to respond to your question about the held for sales and impact on debt. You know, if you cut through it, even if you assume kind of higher underlying SOFR or LIBOR rates on, you know, which on the curve peak out in December and then start tapering back down, even if you assume kind of the higher end of that curve, The NOI generated by those assets, right, which until sold will continue to contribute, roughly offsets and, you know, it differs between 6922 and SkyWay Lending. But collectively, they basically offset the savings associated with the debt repayment. So that, you know, it's more or less a neutral outcome, whether you sell it and pay down the debt or keep the assets and carry the debt.
spk08: Okay. Thank you.
spk07: Thank you. The next question comes from the line of Michael Griffin with Citi. You may proceed.
spk04: Thanks. Maybe stepping back to talk again about the leasing in the San Francisco area. Obviously, it was driven by the Nutanix and Stanford renewals, but kind of for that other half of the leasing, what really drove this demand? Was it new leases, expansion of tenants, you know, any specific sector that's kind of driving it?
spk02: Yeah, this is Art. It's really a mixed bag, which is promising, right? I mean, the valley and peninsula, greater valley and the peninsula has shown quite a bit of lift in the greater markets. There was roughly 3.1 million square feet of gross leasing, 2 million square feet of net absorption, and we've seen that driven four to five quarters in a row, right? And you know, relative to our portfolio, it is, it's not just, it's not just tech, but it's been law firms, it's been a fire sector and so forth. So it's very pleasing to see that it's coming really from, from all sectors.
spk04: Great. That's helpful. And then just wanted to get a sense on the, the subtenant exposure in the portfolio. I think Mark kind of touched on this in the parent remarks, but could you see some of these go direct as, as future prospects, you know, for space in the future?
spk02: Yeah, absolutely. I think Mark alluded to 1455 in particular, which we're working with those tenants to keep them in some capacity. But across the portfolio, we're in front of every single one of our subtenants, and we'll keep them in some way, shape, or form.
spk04: Gotcha. Could you put a number around that subtenant exposure, you know, kind of quantify it?
spk02: Total sublease in our portfolio? Yeah, yeah. Probably about, we're talking about probably 400,000 square feet, a little bit more.
spk04: Okay, great. That's it for me. Thanks for the time.
spk07: Thank you. The next question comes from the line of Jamie Bellman with Bank of America. You may proceed.
spk13: Great, thank you. Victor, I want to go back to the comment you made at the outset of the call about It sounds like, you know, just tech in general and, you know, overall demand, it still seems like it's there. Can you just talk more broadly about, you know, I know we're seeing the headlines and, of course, the press is focusing on the negative, but, you know, what do you think the FANG tenants and the largest tech tenants are thinking about their long-term space plans today?
spk10: Yeah, Jamie, listen, I, you know, I don't have a crystal ball, as I'll use, you know, Harood's phrase here, but I I think you've seen in the marketplace, and I appreciate the rhetoric around negativity seems to have the highest highlight, which we've seen. But the preponderance of the stable tenants, even though there may be a pause or a hold back, have a vision beyond 24, 36 months, right? I think the encouraging aspect of the, I'll use Google as an example, because we're seeing it in our own portfolio. They've come back to us on some space and said we want to extend leases and the likes of that for, you know, 10 years out. That's their vision. And I think that's the encouraging aspect, even though other tenants are saying, you know, we're going to wait and see and we're not going to renew or we're going to downsize. And so the overall rhetoric around some of the strong Ken, it's FANG-related or not. We're staying put in certain assets, and we know which ones in our portfolio they're staying put at. There are certain assets in our portfolio we have exposure, but we know they've reached out and said, we want to renew early or we want to restructure our lease so we have longer term. I think the silver lining, if there is one on that, is the term that they're looking at is not a three, four-year term. It's more a seven, eight, nine-year term longer. Art wants to comment on that.
spk02: Yeah. And, you know, not only term, but you've seen through even the depths of the pandemic, Jamie, you've seen the FANG tenants taking additional space, even with us. But even as we speak now, the tenants that are driving, the large tenants that are driving the market, Apple, you know, still doing large deals in Silicon Valley, just at almost 400,000 square feet. You know, Microsoft doing 450,000 square feet in Vancouver. and the likes of those, we're still seeing those across the markets.
spk13: So can you quantify the size of that leasing pipeline, the stuff that's probably on hold for now, but on a longer-term view, probably gets leased at some point?
spk02: Well, I do know that one of the markets that has some caution right now with regards to demand and leasing activity is Seattle. I know there's There's four tenants close to about 100,000 square feet that are tech tenants that have really hit the pause button. They've not left the market, but they're still in the market. And for Seattle right now, I think that's kind of our chief concern. But I couldn't give you a market-by-market breakdown of tenants who have hit the pause button recently.
spk13: Okay. So maybe using them as an example, what do you think they're waiting for? Is it The economy, is it understanding how they're actually going to use space? Is there something else?
spk02: Yeah, I think it's a little of everything, really. But really, they're still working through what does, you know, return to work look like, right? And with kind of recent economic news, I think they're looking at it and being more judicious about what they're going to take in the new market.
spk13: Okay, thank you. And then just thinking about economics, I mean, are you able to push rents and what are the TI discussions like? I assume in a slower leasing market, you lose some pricing power.
spk02: Yeah, I mean, it's a mixed bag. Every market's different. In the Valley, rates have remained pretty stable. There's no pressure on concessions right now. As deal velocity starts to pick up, that's the Valley and the Peninsula. Vancouver's been very steady, steadily increasing through the depth of pandemic, so we're really in good shape there. I think the ones that we have Really keeping a close eye on is Seattle, where we're hyper-competitive, but we still have a pretty robust pipeline of deals that we're in negotiation, call it north of 200,000 square feet. Those rates haven't eroded, but we're still very competitive. And the biggest that we all know and talk about is San Francisco. We're in a market there where not only are we hyper-competitive, But we're going to have to go in and dig in. We have the best team on the ground and start to dig into the 14 million square feet of explorations across the city that are going to take hold over the next two years. So those are the two that we're keeping a really close eye on. And then as we move down to L.A., West Los Angeles, the tech and media tenants have been driving the market in a big way, and we haven't seen any deterioration in rents.
spk11: Hey, Jamie, Art and I did a bit of a deep dive on net effectives, and this might be interesting to hear. Of the million two feet that we've found so far, a million of it is in the peninsula of San Jose and Vancouver. And there's enough footage there to really start to get a real sense of net effectives. And if you look at those markets, Net effectives are up year over year compared to last year's activity in those very same markets, 14%. And interestingly, they're not just up relative to 2021. They're higher than 2019 and 2020 across all three of those markets. So just to get to your original question about rents and TIs and so forth, based on the activity today, where there's a good size sample of real activity signed, its rents are looking great.
spk02: Right. And, Jamie, if I can state the obvious that you mentioned before. Listen, tenants are paying up for premium space, and there's a lot of, you know, in the markets, we're not having to slug it out. There's a lot of premium space out there, and so we're the beneficiaries of them paying up to be in the asset.
spk13: Okay, thanks. So the 14%, is that in your portfolio or that's across the entire market?
spk11: No, that's our activity in our portfolio.
spk13: Okay. And then just housekeeping, it looks like the expected cost to build at Sunset Glow and Oaks is up about $5 million at the midpoint. Where does that come from?
spk11: Well, I don't think that's compared to last quarter, or is it?
spk13: I think it is. Are you comparing it to Q1? Yeah, I think that the high end is up 10 million.
spk11: We, I don't know. Well, I'll have to. I could be wrong. I don't know. Okay. All right. Thank you.
spk07: Thank you. The next question comes from the line of Ronald Camden with Morgan Stanley. You may proceed.
spk12: Great, just a couple quick ones. One is just on, just a little bit more color on the Nutanix deal that you guys sort of mentioned earlier on. Just maybe what they're looking for and how do their space needs change and what's the plan for sort of the release and any sort of CapEx needs there? Thanks.
spk11: Yeah, I mean, first of all, and Art will jump in here to answer, but You know, the team, first of all, got way out in front on this, and we're really proud of them. You know, they identified the long-term, you know, mechanics' long-term need. You know, they had experienced explosive, explosive growth. They were spread around three different assets. They were looking to kind of rationalize their footprint. and consolidate. They never really used a fair amount of the footage that they had taken down. They never spent TI dollars on it or anything. And so totally uninfluenced by work from home. They were just looking at what they think their long-term requirement is. And that's what got the team kind of focused and able to extend them on about 50% of their footage through 2030. I would add, by the way, that another almost 30% of their footprint doesn't expire until the middle of 24, and that's still in play. They just don't know yet what they want to do on that. So 75% of the footage is either extended to 23 or has the potential for further extension. I don't know if you want to add to that.
spk02: yeah no that's exactly right and then by the way the mark was you know six and a half percent which is a which is a solid mark going forward on on their premises and then the backfill portion the roughly about 15 000 square feet that was immediately backfilled um his quarter was at about a 13 uh it's over 13 mark so uh all in it was it was just a great deal great helpful and then my next question is just on the
spk12: you know, if you could maybe help us think about, there's a lot of ins and outs, obviously, with occupancy outside of, you know, I think the Qualcomm, which you just called out, but when I look at the lease expiration schedule over the next eight quarters, maybe from a high level, are you guys thinking about the occupancy bill, maybe as you sort of finish out this year and into next, given all the leasing that you've done so far?
spk11: Yeah, that's a great question. Yeah. If the activity that's in the pipeline that we, you know, touched on in our prepared remarks, if you look at that activity and you kind of play it forward to year end, we lose Qualcomm end of July, as you know. You know, that's, we're going to experience a bit of a dip in both lease percentage and occupancy on account of that. And so, but there's ongoing activity, a lot of activity throughout the third quarter and into the fourth quarter. And it looks to us like if that activity holds, and by the way, there's potential even more favorable outcomes here if new requirements come around, which they always do. But if you just look at what's currently in process, if that activity holds, there's a very reasonable chance that we will end the year materially in line on a least percentage basis. The reason I focus on lease percentage, one, I think it's the more relevant between lease and occupancy. But two, we're going to be working on getting leases executed all the way to year end. And that may mean that there's a bit of a delay on that commencement. So we might experience a bit of an occupancy drag into year end, even as we've restored the lease percentage at or around the level it's currently at. So that's how it's looking. And I would say a fair amount, there's, you know, that we got to execute on the pipeline in Seattle. That's, you know, sort of, and there's, you know, there's 500,000 square feet of activity, mostly in Pioneer Square, and we're moving forward on that. But if that comes through, we could end the year kind of, you know, right around where we are right now.
spk12: Great. And then my last one is maybe just a bigger picture one. You know, I think you guys are in one of the few office reads with just pure West Coast exposure. As you think about, you know, I think all this commentary about tech pausing, you know, clearly your long-term focus, but what are, I mean, what are some of the things, what are the signposts, what are you guys thinking about in terms of, you know, making, sticking with these markets or whether there's opportunities to add another one or diversify, just, just, Maybe it's too soon now, but what are some of the things you should be thinking about and considering in terms of potentially adding diversification away from the West Coast? Thanks.
spk10: All right. Listen, I'll jump in on that. Listen, I think we've looked at multiple markets compared to where we're at. We still think the West Coast markets, even throughout some volatile times, also in high times and low times, is the areas and markets that we feel most comfortable with. If the world is accurate and we're going to see some dip in all these marketplaces and valuation shifts, it will only avail ourselves of the ability to actually go into those markets with the right stack and structure and enhance our portfolio with high-quality assets that are synergistic in the next two or three years to come. And so that would be the direction versus going somewhere else and doing external growth in other markets. Our intent is to maintain our position and possibly grow it depending on where the economy is on the West Coast.
spk12: Great. That's it for me. Thanks so much. Thank you.
spk07: Thank you. The next question comes from the line at . You may proceed.
spk06: Thanks for taking the question. Maybe just building upon the prior occupancy question, some of your peers have started maybe giving some signposts, guideposts, about 23, in the sense of not obviously a specific number, but thinking about the direction of SAMHSA and OI growth, the puts and takes on other line items. So I'm wondering if you can just give us a sense of what are the major kind of variables we should be thinking about as we sort of model and look forward to 23 and anything that may be known like the interest expense kind of if you assume where rates are today versus maybe where the real swing factors are for 23.
spk11: There's a lot in that question. I guess some guideposts are You know, we've already got, we've got a relatively, you know, sort of lower expiration year as we sit today, and it'll be even lower as we get to year end than, say, we did in 2019, 2020, 21. So a little less expiration as, you know, expected into 23. The mark on 23 expirations, as I said today, is almost 20%. So it's even better in 23 than it was, as I recollect, as we were heading into 22. So really healthy mark, a little less expiration to contend with than we've had in the past couple of years. As for interest expense, if you look at the curve, you'll see by the middle of next year or so, let's take SOFR for example, I think you're back right around 3% and it continues to decline from there. I think there's a real chance we won't have quite as much floating rate debt on the books anyway. But to the extent that we have some, you know, there's probably, In 23, you know, we'll start to see some sort of relief, if you will, on interest expense. Shoot, I'm not so sure I can remember all the, all your questions, Vikram. That gives you some garbage.
spk06: Yeah, that's helpful. Just more the big picture buckets going into 23, whether it's the core, the same store pool, the ins and outs. You talked about the expirations. the known move outs and the bumps. And then you talked about the rate environment, I guess like ancillary income or any other line items that.
spk03: Yeah, for sure. Just as a reminder, there's also a few of our assets that are currently, you know, the tenants are building out their space and their cash NOI will really start contributing in 23, the biggest of which is Google at one website. So in terms of cash NOI, No, annualized would be around $50 million on a consolidated basis.
spk11: Yeah. For Google. Yeah. And Glendale, I mean, Sunset Glendale will deliver, too. So that could be a contributor. And then you know the big 2023 expiration. It's square or block at $14.55, and we've already given you a sort of line of sight on that.
spk02: Right. And the next biggest we're in negotiations with, which is Amazon, for $139,000 square feet. Yeah.
spk06: Okay, that makes sense. And then just maybe one, Victor, a bigger picture question. Obviously, you've gotten very early on the studio business, created a lot of value through the combination with office. Still, obviously, there's a lot of demand for those high-quality assets. I'm just wondering, in the current portfolio, some would argue office is undervalued. Some would argue the studios are dramatically undervalued. Is there a thought of some, you know, you've done the JV with Blackstone. Is there a thought of something, you know, more strategic, either just monetizing studios in its entirety, or frankly, even just where things are? What other alternatives would you look to to create value at this point, whether even if it's considering a broader sale of the company?
spk10: I mean, that's, yeah, obviously a loaded question, Vikram, but I will say in terms of the studio business, both in the office and the soundstage side, I mean, the value upside that's not recognized beyond just your obvious comments of the commercial real estate and the soundstage undervalued based on where the perception is and the true value is, is the operating businesses. I mean, we We consistently outperform the op businesses and have acquired companies and will continue to do so in the future on the operating side. And, you know, the true multiple value and IRR value well exceeds what we're achieving just in stabilized office and stabilized studios. I mean, we're, you know, effectively double or more in terms of the returns. And so those aren't getting the values either. So the combination of all of that is nice to see that it's at least sitting there from our standpoint and pure cash standpoint. In terms of the greater picture, you know, I'm not in a position to make a comment on that on a public call with everybody.
spk06: That's fair. Fair enough. Thanks so much.
spk10: Thank you, Vikram.
spk07: Thank you. The next question comes from the line of . With courtesy, you may proceed.
spk01: Yes, good afternoon. Sorry to address this because I got on a call a little late, but for a broad exchange in Vancouver and Sunset, Waltham, Cross Studios, what would encourage you guys to start development in 2023, and what would be the thought around kind of funding those development sites?
spk10: That's a great question. So, I mean, listen, the encouragement level is what we're seeing right now on the ground. I mean, in terms of Berard Exchange, we have a tenant that has indicated some interest in the entire property. We've got another tenant that has indicated interest, I think, in about 200,000 square feet. So, tenant interest in that marketplace, given where the vacancy factor is, which I think is 4% or something to that effect approximately, you know, that market's a little different than what we would look at throughout other markets we're in. And I do think it's, you know, fundamentally a very unique asset in that it's a timber built and the desire around that is very high. And so we'll continue to look at the fundamentals in that marketplace, which are extremely strong. And I said, as I think maybe an outlier, In terms of Sunset Walton Cross, and then I'll go back to the funding in a second. In terms of Sunset Walton Cross, that's going to be a world-class soundstage facility in a marketplace that is still woefully in need of excess studio and office space. We also have had interest from single tenants for multiple soundstages and office space on that, and we just got approvals on that asset last Monday. a week ago Monday. And so that asset will be indicative of our pre-marketing that we're working on now. We are going through all of that, both here in Los Angeles and in London, in terms of entertaining tenants and educating them on the amenity-based project that we're going to be looking to build. In terms of the capitalization, I mean, remember how the cap stack is. We're a 75-25 cap. with Blackstone at Burrard Exchange, and we're at 65-35. Isn't that right? 80-20. Oh, sorry, 80-20 and a... Yeah, 35-65. 35-65-35 with Blackstone at Walton Cross. And so the capital structure from our standpoint for both those developments will be much more limited from Hudson's exposure, and it will be a mutual discussion with Blackstone... as to the right time to start the build. Yeah.
spk11: And, you know, Blackstone has indicated that they, you know, they'll want construction financing in connection with both. So, you know, when you think about just capital needs from our side, you know, the spend is, you know, very light for us.
spk01: Gotcha.
spk11: Great.
spk01: Thank you.
spk07: Thank you. The next question comes from the line of Daniel Isil with Green Street. You may proceed.
spk09: Great. Thank you. Maybe just staying on the timber front in ESG. Victor, you mentioned ESG in the opening remarks and a possible tenant interest in broad exchange. I'm just curious more broadly, are you seeing those ESG factors translating into higher rents or better tenant attraction or retention quite yet?
spk10: Oh, yeah. Listen, it's a great question. I think the awareness on the ESG side has finally come to fruition on the institutional quality tenants who are, whether it's any aspect of our assets that are upgraded on the ESG side have had an attractive level of certain tenants that will only go in those assets or those types of assets that have already been upgraded to that extent. So has it correlated specifically, excuse me, to increase rent, I don't think you can directly do that correlation, but I think the interest level outweighs the increased rent on that because we have a much higher interest and awareness level. I think that would be the most important aspect.
spk02: That's right. Even from a leasing perspective, this is Art, by the way. From a leasing perspective, we've seen over the last several years, it was a nice to have became a check the box to, gee, with these institutional tenants, you're not going to get on the short list. And that means everything.
spk09: Got it. That makes sense. And then just one more small housekeeping question for me. On the Sunset Waltham developments, Victor, I think you mentioned approvals coming in earlier this week. I just noticed on the supplemental an increase in the estimated square footage of the project. Was that related to the increase? Was that related to the approvals? Or was that a change in design? Or what's the increase in size?
spk10: Yeah, no, the increase in size is we bought an adjacent property that we can add some support staff space and some outdoor space. And so that in itself increased the square footage. It was, I think we purchased that in spring sometime. And so that's why it was increased in the supplemental. Got it. Thank you.
spk07: Thank you. The next question is a follow-up question. from Michael Griffin with Citi. You may proceed.
spk03: Hey, it's Michael here with Griff. Victor, I just wanted more of a clarification question. You obviously have an extraordinarily close relationship with Blackstone going all the way back to when you bought the EOP portfolio and they came on the board and obviously studios and everything. Is there anything in your relationship that precludes them from selling the shares they bought back at the beginning of 21 or for that matter, adding to that position, you know, given all of your relationships and ventures, whether it's up in Canada or the UK or the studio business, I didn't know if there was effective a lockup on those shares. And I'm just trying to understand if there are anything that's precluding that.
spk10: No. I mean, listen, their information from the standpoint of shareholders, like everybody else, it's publicly traded information. And in terms of their information on the partnership, It's also, you know, publicly held information, but there is no restrictions on the stock.
spk03: And so, and I recognize I could ask this of John, but, you know, they bought almost a $4 million share position at a VWAP back at 24, stocks at 14. You would think that there would be more interest at these levels given everything that you've been able to produce and all of your commentary on the call.
spk11: All right. I wonder if what you're referring to is the position that they carried back in connection with the contribution of the portfolio in 2015.
spk10: Is that what you're referring to?
spk03: Are you referring to open market binds or the – I think it's – Yeah, no, I mean, yeah, that was the open market purchase, wasn't the 3.8 million shares that they've just held since 2015.
spk11: No, they held a substantial position. Roughly half of the $3.5 billion purchase was carried back in equity in 2015. And then it took them, they were the lockout for a while, and then it took a little while for them to liquidate that position. I want to say three or four, but they held nothing at that point. And they've since done open market purchases, but
spk10: we're not, we're not, we're not part of those open market purchases. Yeah.
spk03: Yeah. And that's what, right. And I'm just trying to, I, I wanted to better understand because obviously the open market purchases were back earlier last year, right. As the stock had fallen off of, had recovered a little bit. And I just didn't know if there was anything precluding them from a selling that stock, given all the relationships. And I would see no information about your prospects. And if there wasn't, the opposite question that I asked was, well, shouldn't they be buying given all of the basis and value? So that's where I was trying to understand it better.
spk10: Yeah, as I said, there are no restrictions. And I think you could ask them if they want to continue to buy. We would love to hear your answer.
spk03: I'm sure you would. We only have the topic. Is there anything, and I recognize your comments about the overall marketplace, Anything that you're thinking about from dipping back into the stock, obviously you did the accelerated share repurchase. Hindsight's 20-20. You can't go back in time. At that time, you liquidated, you had proceeds, and you executed the trade. I guess, how are you thinking about furthering that? Do you feel like that was a good exercise to go through or sort of look at other ways to drive shareholder value and hope the stock price follows suit?
spk10: Listen, I think it was an excellent execution at the time, and it was something that we said we were going to do, and subsequent to that, we have been averaging down, so to speak, in the ATM structure on a daily basis up until the point where we were locked out. That will open up again sometime in early August, and I think the intent is for us to continue the game plan on that basis.
spk03: Do you have incremental asset sales to put to market to generate more proceeds to effectuate those purchases?
spk10: Yeah. I mean, we've commented on the two small ones that are selling, and we've got two more that are in active negotiations. And then we'll revisit market conditions and other assets that potentially may fall into that category.
spk03: Okay. All right. Thanks for the time.
spk10: Thanks, Michael.
spk07: Thank you. The next question comes from the line of David Rogers with Baird. You may proceed.
spk05: Oh, hey, just one follow-up for me. I think it was, Victor, you made the comment about strength in the studio and support business. Did see that Netflix had taken a charge on real estate, and I think that was related to Burbank, but I do think there were some questions around, did any of that impact you guys? Do you see any communication with them related to wanting to give back space, terminate space, or sublease it?
spk10: No, listen, that was out in Burbank. I believe that was maybe their animation group or something like that, right?
spk02: It was an office space.
spk10: Yeah, it was space that wasn't even, they hadn't even occupied, let alone build out. Yeah, we've had zero communication on that level that they're interested in giving back any space in any of our portfolio. And quite frankly, I've heard nothing in Hollywood in general from them at all, and other assets too.
spk05: All right, great, thanks.
spk07: We will now begin. That concludes the question and answer session. I would like to turn the conference back over to Mr. Coleman, Chairman and CEO, for any closing remarks.
spk10: Thank you, Operator, and participating everybody on the call today. I want to reiterate what Mark's comment was Hudson team and the great efforts that they make quarter in quarter out. And we look forward to speaking with everybody next quarter. Thanks so much.
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