Greetings and welcome to the Hudson Pacific Properties, Inc. Third Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host, Laura Campbell, Senior VP of Investor Relations and Marketing. Thank you. You may begin.

Thank you, operator. Good morning everyone and welcome to Hudson Pacific Properties third quarter 2020 earnings call. Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are available on the Investors 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 Investors 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 Lammas, our President; Alex Vouvalides, our COO and CIO; and Harout Diramerian, our CFO. Note they will be joined by other senior management during the Q&A portion of our call. Victor?

Thank you, Laura. Hello, all. Welcome to our third quarter 2020 call. I hope you are all healthy and well. I’m pleased to report that we’ve had a very safe and very productive third quarter. Our outstanding Hudson Pacific team, which throughout the pandemic has brought tremendous talent and expertise to every aspect of our business, continues to successfully navigate this complex environment. As an essential business we’ve had 100% of our workforce back in the office since Labor Day on a routine schedule with all the necessary precautions and some fantastic speedy gather again and productive. There is no doubt that we, like others in our markets, have been impacted by the extended shutdowns in California and Washington which have tampered the recovery we’ve seen accelerate in other parts of the country. Regardless, our buildings are fully operational with industry-leading health and safety protocols in place. Our tenants are paying rent, our office and studio assets are well leased, our leasing activity is starting to accelerate and our rent spreads were made at pre-covered levels. Our development pipeline is on time and on budget and we’ve got ample capital augmented by premier, well-aligned JV partners to operate and invest. The bottom line is we’re still poised to make visionary type strategic moves that consistently reinforce our position as one of the most creative dynamic players in our industry. We are, however, starting to see some positive signs throughout our markets. Last week San Francisco allowed nonessential offices to open, albeit at a 25% capacity. Los Angeles schools can now welcome back 25% of high-need students and this includes younger leaners, which in turn helps working parents return to the office. And physical occupancy at our office properties across our markets has reached about 15%, which was slightly higher in…

Thanks, Victor. As you noted, our tenants continued to pay rent. We collected 97% of total third quarter rents comprised of 98% of office rents, 100% of studio rents and 52% of our retail rent. To date in October we’ve collected 94% of total rent comprised of 96% of office rent, 98% of studio rent and 51% of retail rent. These percentages exclude rents contractually deferred or abated in accordance with COVID-19 lease amendment. If we included those amounts, our third quarter collections would have been 96% for total rent, 98% for office, 98% for studio and 48% for retail. Our October collections would be 95% of total rent, 96% for office, 99% for studio and 52% for retail. During the third quarter we deferred approximately $3.1 million or 1.8% of total rent. Another approximately $3.1 million or 1.9% remains in discussion for either payment or deferral. We abated only $1.1 million or approximately 0.7% of third quarter rents in connection with COVID-19 relief. Our success with collections is a testament to our high-quality office tenants and studio clients, which include many of today’s most innovative and creative growth companies. Over 90% of our office ABR is attributable to publicly traded or mature privately held companies in business 10 years or more. Only 3% of our office ABR is attributable to companies in business less than five years and each of these 53 companies contribute on average only 0.05% of our office ABR. So any risk from younger companies is well diversified. Among our top 50 tenants, which collectively generate about 60% of our office ABR, nearly 75% of that ABR is derived from publicly traded and nearly 55% is from large cap and/or credit rated companies. Beyond tenant quality, we believe other attributes make it less likely our tenants…

Thanks, Mark. We remain fortunate our markets entered the pandemic on very strong footing. Despite negative net absorption in almost every submarket in the third quarter vacancy remains in the single digits where in some cases it’s just over 10%. Thus far we are seeing minimal deterioration on rent, both more broadly in the market and within our own portfolio. Sublease space is on the rise in several of our markets, but the numbers tell a complex story, including the fact that some of the larger subleases were pre-COVID offering. Our stabilized and in-service office portfolios remain well leased at 94.5% and 93.5% respectively. We had a notable sequential uptick in leasing activity quarter-over-quarter signing nearly 185,000 square feet of new and renewal deals despite many tenants on pause and our very limited near-term expiration. This included a 42,000 square feet expansion lease with Google at Rincon Center in San Francisco. That fields the positive sign for how companies are thinking about office space, even when pursuing both in-person and remote work flexibility. Once again we achieved robust 41% GAAP and 29% cash rent spread. Only about 20% of our activity this quarter involved shorter-term extension, that is with a term of 12 months or less. Even excluding those deals, which typically entail a rent premium, our mark-to-market was still up pre-COVID levels, 38% on a GAAP basis and 25% on a cash basis. We’re seeing renewed tenant activity in our leasing pipeline, increased 40% quarter-over-quarter to 960,000 square feet. That’s fully in line with third quarter 2019 and now less than 10% of those deals were on hold. Our remaining expirations for 2020 equate to about 2% of our ABR and we have coverage on about 45% of those deals. Our 2021 expirations, for which we have about 40%…

Thanks, Alex. In the third quarter, we generated FFO excluding specified items of $0.43 per diluted share compared to $0.51 per diluted share a year ago. Third quarter specified items in 2020 consisted of transaction related expenses of $0.2 million or $0.00 per diluted share and onetime debt extinguishment costs of $2.7 million or $0.02 per diluted share compared to transaction-related expenses of $0.3 million, or $0.00 per diluted share. The sale of a 49% stake in our Hollywood Media Portfolio, lower parking revenue stemming from COVID-19 impacted occupancy, reserves against uncollected rents and lower service and other revenue at our studios largely offset gains associated with lease commencements at EPIC, Fourth & Traction, Foothill Research Center and 1455 Market drive the year-over-year decrease. Third quarter 2020 FFO excluded specified items, includes approximately $0.02 per diluted share of revenues against uncollected cash rents and approximately $0.02 per diluted share of charges to revenue related to reserves against straight-line rent receivables. This resulted in a total negative impact of third quarter 2020 FFO of approximately $0.04 per diluted share some or all of which may be ultimately collected. Third quarter 2020 FFO also reflects approximately $0.03 per diluted share decrease in parking revenue some or all of which will resume with tenant reintegration. Simultaneous with closing our JV with Blackstone, the partnership closed a $900 million mortgage loan secured by the property – by the portfolio with an initial two-year term and annual interest rate of LIBOR plus 2.15%. We received $1.2 billion of gross proceeds and used approximately $849.5 million to fully repay our unsecured revolver, our Met Park North loan and term loans B and D. We also repurchased – we also purchased $107.8 million of the loan secured in Hollywood Media Portfolio which bears interest at a weighted…

Thanks, Harout, Mark, Alex and Laura. I’m going to close by saying this. We do not take lightly any of the hurdles that California is placing or proposing to place on its businesses and all of its residents. In many ways, and I’ve said this before, this unfortunately is nothing new. And while we’re optimistic Californians we will thrive in spite of these obstacles, as we have for years. We plan to do everything in our power to help California continue to lead to be a great place to do business, a great place to raise a family and simply a great place to live. And again I want to express my appreciation to the entire Hudson Pacific team for all their hard work and dedication. And thanks for everybody here listening today. 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 up for any questions that are applicable.

Thank you. Our first question has come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey. Good morning out there. Just been a long earnings week. So, two questions. First, if you could just give a little bit more color, the stock buyback, good thing. Obviously, the stock is incredibly depressed, but your stocks trading at an implied 8% and you guys bought a piece of the media loan that was at 3.3%. So if you could just walk through that, because it would have – it would seem like that that capital would have been better used to buy back your stock at a higher yield. So just want to hear more about how you guys viewed the transaction.

Yes. Alex, hey, it’s Victor. Thanks for the question. So, Alex, you’ve personally asked this several times and the answer has been the same. First of all, it was a – it was a LIBOR plus 3.3%. And yes, it is a far cry from an implied 8%, even though today stocks were probably trading at a forward-looking implied 10.5%. So the answer to your question is we will always buy back our stock at these levels. We couldn’t buyback our stock during that transaction because we were closed out initially, as we are right now. But as of Wednesday, we will start buying back our stock at these levels and continue to do so. But as I’ve said countless times before, we’re not going to look to miss out on opportunities. We have – fortunately in a very, very nice situation with capital that’s accessible for us to invest in multiple factors, stock being one and asset being another. Specific to this, we just know that the credit being that it’s Blackstone and ourselves and the opportunity on there was a mess, we could take it ourselves and have this as an opportunity to park this for a period of time, since we had a need for capital to be invested and we had nothing else at the time to be invested. That’s what we chose to do. And it was a small amount.

Yes. I would just add, the $900 million loan on the $1.650 billion is 55% leverage, the purchase of the $107.8 million not only did it allow us to delever to effectively 40%, which is much closer to our target leverage, but we delevered purchased at LIBOR plus 3.31%, which is significantly higher own class of debt. So, if we want to relever, we can relever much cheaper than that debt. So there’s – it makes a host of sense – I mean, there’s a lot of reasons why it makes a lot of sense.

Okay. And then the second question, Victor, and you’ll love it because I’m playing the typical sell side analyst, which is on one side, I hate something, on the other side I like something. So there was a recent Silvercup trade here in New York that I think created sort of low five and it would seem like these transactions, these studios are a rare breed. They come up every now and then. It’s like buying sort of a Ferrari GTO from the 1960s. There are not a lot of them, when they come up they command big money. Low 5 has been still pretty cheap for an asset that – it’s hard to replicate, very few of them around. Obviously, right now your cost of capital isn’t great. The Blackstone JV makes it better. But what are your views on where cap rates for studios are going and why they shouldn’t continue to go lower in which case the low-fives for silver cup end up looking cheap. Just some color on – your thoughts on these trades?

Yes, sure. You want to get that call?

No, it’s from Washington, D.C.

I’m just kidding. So no, listen, I think cap rates are definitely going to be compressed in that field. There are a lot of eyeballs on it. The competition I think has obviously increased. That asset is a great asset. It’s an asset that we did play in the field of trying to purchase. We didn’t at the time and the sole reason we didn’t become more aggressive is because we were in the middle of our process with our JV with Blackstone. And so timing just didn’t work. Those assets are still going to be sought after. Hudson and Blackstone in our venture are going to continue to expand that platform. We’ve talked about it. We have several deals that we’re looking at right now and we’re going to continue to be aggressive on that. And I think you’re absolutely right. I think those kind of cap rates are good cap rates and the market is even going to get tighter on this stuff, because there is very few of them out there.

Okay. Thank you, Victor.

You got it.

Thank you. Our next question is coming from the line of Dave Rodgers with Baird. Please proceed with your question.

Yes. Good morning out there and good afternoon, everyone. I guess I heard it in Alex’s comments that maybe you guys are really focused on core transaction today. And I guess I just wanted to verify the thought process around that. And additionally where you’re comfortable buying assets? Obviously a lot of changes in the market today, quite a bit also on the legislative front. I mean, are you comfortable buying core assets in San Francisco proper today? What’s your thought process around that, Victor?

It’s a good question. Listen, core assets for long-term cash flow stability is something that we will look at and tenant quality, geographic location, economies of scale, our cost of capital, our JV partners – if we were to look at with a JV partner, their cost of capital, all those factors, David, are going to come into play. Listen, are you asking me directly are we going to buy an asset today in San Francisco, I would say the answer is probably not. That’s not a marketplace that we are comfortable at this level. As Alex said in his remarks, right now we’re not seeing the spread for buying value-add assets in any of our markets to speak of. They are still priced at levels that I think we believe are too high. Given the lease-up activity in our markets is a lot slower than it was last 12 months ago, clearly. So, but there is always going to be unique opportunities and synergies that we have to take into account. And we like – we have in various different times in our lives, as Hudson for the last, what, 14 years have looked at various times in the cycle and capitalized on it. And they already say that we’ve made some mistakes, but not a lot. And so we’re going to continue with the same premise moving forward.

I think you also made a comment – maybe it was Alex that made it on the 40% or might be Mark 40% coverage on the 2021 lease expirations, 14% mark to market on that. Is it much harder to have those conversations today if you don’t have a first-half maturity? So do you have good visibility on the tenants that want to remain in place or those that might be peeling out next year? And I’m thinking probably some of the smaller tenants versus larger tenants and do you have anything that you can share on that?

Sure. This is Harout. As we said, as we said, we have a pretty good handle so far on the 2021 expirations. If you recall, two of those tenants make up 25% of the $1.5 million and we’re in discussions with them and moving those along. So, yes, I mean we do. The rest of them are, it drops down to about 40,000 feet at that point and then we are in active negotiations with a couple of those tenants. So, yes, we feel pretty good about where we sit and the mark-to-market is going to be very strong.

Last maybe on co-working, you guys have addressed the WeWork in some of the leases there in earlier quarters. I know Regis has filed the bankruptcies and there has been some articles in the press about you guys in San Francisco and others. I guess the question is, do you feel like you’re making any progress with some of those transactions and ultimately do you feel like you’re appropriately reserved at this point for some of those flexible negotiations that you’re having?

Yes, this is Mark. Yes, we are definitely appropriately reserved. Everyone of our co-working location with the exception of Shack 15, which is a relatively small location and Maxwell, the WeWork – one of five WeWork locations where we did – we switched to a percentage rent deal, they’re all current. We are working on a little bit of an adjustment on Regis for some of the footage up in Seattle that they will pay, in effect, 100% of the rents on the 450 and give us some of the footage back at 95 Jackson. We think that’s a real opportunity to dwell those out and it kind of allows us to recapture space. So that’s contiguous. And so the overall picture is very healthy, actually on the co-working side with just a couple of adjustments that I just outlined and we are fully reserved against all of that.

Appreciate all the color from everyone. Thanks.

Thank you. Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Great. Thank you. I want to get an update on your thoughts on just the relative demand across the Bay Area submarkets. Are you seeing any trend in Silicon Valley versus Peninsula versus CBD? Just as your leasing pipeline starts to pick up a little bit more?

Sure. I think it’s interesting. So the pipeline has picked up quarter-over-quarter kind of back to early – early year pipeline levels. Chiefly there is some – believe it or not, there’s some expansions in there, there is tenants who have taken the finger off the pause button to reengage and some of these are early 2021 now coming back and engaging with a plan. So that’s the reason for the increase in the pipeline. Relative to the markets I would say Peninsula and Silicon Valley are stronger than the city. The city, I think the active requirements has dropped from levels of about 6 million square feet to about 2.8 million square feet. So that is to say that there is still activity out there. But all that activity is on the sidelines. I feel encouraged going forward as people get clarity, tenants get clarity on how they can utilize space and when they’re going to utilize space that some of that is going to stick. And again, that’s very encouraging to me as we’re seeing – we’ll start to see more and more demand.

Okay. And then in terms of a shift like maybe more of a focus on suburban satellites or hub-and-spoke any of these things – heard about in the last couple of months. Do you see – doing that?

Listen, it’s not that we are not seeing that. We just don’t have the space in either area that people are seeing some massive shift one way or the other. We just did our Google deal with Citi. It wasn’t like you were seeing it’s going to go into city, they’re going to go in the valley. They have different requirements for each marketplace. We don’t have a lot of space in the city that we’re going to be comparing to people say, no, we’re going to go here or there. I think it is as it has been in every different types of cycle when people said the valleys being crushed and the Cities doing great. There is demand for whatever those markets are that we’re seeing. We’re not seeing a massive exodus to the city to say we are going into the valley and now like we did before. And so at the end of the day it’s been constant, clearly as Harout said, we have a lot more activity in the valley right now. And people are more interested in trying to make deals in a much more expedited manner.

Jamie, it’s. Alex, just to add on what Victor said, I think the West Coast is slightly different than maybe what you’d see in New York, where there is a high reliance on public transportation. This idea has maybe spread out geographically. We were already doing that. If you think about our markets whether it’s Seattle and then Belvieu in the East side, if you think about the tech companies that were both in the city and had their footprint down all the way to San Jose and then LA in particular as you know is a relatively sprawling city. So, I think that trend has already existed in our market pre-pandemic. And so we’re not seeing any further shift to say, hey, we’re going to pull out of one specific area and continue to spread. I think a lot of the companies that were driving growth in the markets were already pretty well spread out throughout the West Coast and the markets that we are in.

Okay. That’s helpful. And then I thought the VC numbers you shared were pretty impressive. Any thoughts on how that translates into demand and what’s the market that might help?

Well, listen, we can’t quantify that demand, but obviously the capital is there. It’s going to get you, as I said in my prepared remarks, from anything from stabilized companies who want to go public to our new range of unicorn. So space is going to get absorbed based on the growth prospects of those companies. But then again there is a lot of talk around some of the VC companies investing in tech or all the other ancillary businesses around tech, which is the highest demand clearly, but they may not only invest in companies that are going to stay here in California. They are looking at all markets obviously given what’s going on and I think after we sort of settle out in the next few weeks post election and see where things are going to shake out at the beginning of the year we’ll get much clear of a picture of companies growing and surviving in California.

Okay. Thanks. And can you talk about the leasing prospects at Harlow? I know you got your Certificate of Occupancy buildings.

I think for a project like that it’s a fantastic project. Right now as tours are still limited, people still not in the existing footprint. we view that as a project that’s by growth for a tenant. And I think until we get tenants back into the space that they lease as you’re seeing a lot of the deals getting done tend to be renewals right now versus new deals and expansion. So, we love the project. We think it’s fantastic project. We now have our CFO. So everything is ready to go, but I think we’re being patient because of the current situation.

Okay. And then last from me. Interesting point on AFFO pop in the third quarter and over 2019. How are you guys thinking about the dividend and having to raise it at some point?

Yes, I mean, we’ve talked about that, where Mark can get into details, but clearly this is a signal of what’s to come, which we’ve been talking about, I mean with our collections, the way they are at right now, which has been consistent since March at 95% the obviously impact on this is going to be dividend is going to increase. And we’ve always said, it’s going to probably increase sometime in 2021 or maybe early or maybe middle of. But I mean Mark is pretty confident given that the FFO impact is something and thanks for picking that up. Mark do you want to comment?

No, I’m glad that you appreciated the commentary. I mean, we’ve been foreshadowing this for quite a long time. And if we look ahead, we think this third quarter result will carry forward pretty dependably and as Victor said we will be monitoring the dividend. We have good coverage now at the $0.25 a quarter and we will be monitoring and look for the next opportunity where it clearly makes sense to make a bob.

Okay. Thank you.

Thanks, Jamie.

Thank you. Our next question is coming from the line of Manny Korchman with Citi. Please proceed with your question.

Hey. Good afternoon, everyone. Victor, I mean you started off the call on a really positive note and fundamentals aren’t necessarily reflecting that. So what are you guys looking for on the ground, I think, at more positive or negative that would make the – we as investors or analysts and your stocks relatively falling?

Well, let’s talk about, so just basic fact, Manny, right. I mean, so this thing started now were going since March. We’re now on November 1st this weekend. We’ve been consistently collecting at 95%. We’ve probably come off our occupancy levels by 1%. So what people are now sighting is the worst time in our lives after all the cycles that we’ve all seen, we’re seeing our fundamentals are stable. They haven’t moved, they are not like we’ve seen volatility in rent collections or volatility in occupancy. The key is going to be the things that are clearly out of all of our controls and at the end of the day it’s getting kids back to school in Washington and in California, like they are in Vancouver and seeing the occupancy in the buildings go up. So, we see our – the stability of our buildings go from 15% occupancy back to some normalized number. Is work from home going to dominate? I think you already know that position and everybody is saying the same thing and whether it’s – the tech companies, the fire-related companies, the CEOs in America have said, hey, we’re going back to work just when people are comfortable. So this is a – it’s a timing game. But it shouldn’t – what I guess what our sort of take is at Hudson our quality of portfolio has not changed. We have a phenomenal quality of assets and we’ve got stable playing very, very high quality tenants. So why are our values, trading at 11 caps when private markets are buying stuff at fours and fives or threes, fours and fives, right. I mean, so there is such a massive disconnect and I do think that people inherently are using the tone of saying office has…

Thanks for that, Victor. And Harout thanks for the pieces of guidance going forward here. I was a little bit surprised the studio income wouldn’t recover faster now that things are shooting. Is that just a magnitude issue and people aren’t paying those ancillary fees because sort of just the scale of the shooting isn’t there. Is there something else that I am not looking at?

Let me jump in before Mark is going to talk about some of the facts around it. First of all the shooting just started. It prepped in late August that means that the stages were being built, people were getting back, protocols are being put in place and it was slower than we anticipated. Let’s be candid, and I mentioned that in my prepared remarks, I mean the unions and the PPE agreeing to getting people back to work has been a lot slower, but now they are up and running and so we’re 95% active in our portfolio right now in terms of the studios. So you’re going to see a massive uptake in the ancillary revenue that they weren’t paying before. Mark, you can get into it.

Yes. Yes, I mean it did on – from Q2 to Q3 the ancillary did tick up a decent amount. It didn’t get quite to Q1 levels, but if our own projections hold Q4 ancillary should be almost to Q1 levels. So that will be a pretty significant uptick from Q3 to Q4, which is a reflection of exactly what Victor is mentioning, namely the ramp-up that was starting to occur through Q3 and then it will really take all the Q4. And then as we – we will see in 2021 that that ramping-up continues beyond Q4 and we get to pretty significant levels – normalized levels in Q1, Q2, Q3, Q4. I would say the ancillary revenues looking forward would be even stronger than say 2019 levels, but we’ve got a little bit of uncertainty around control rooms because these live audience shows were not – it’s not clear yet whether or not we’re going to get as much control room revenue. And that does affect a handful of stages. That said, all the other stages are expected to be as busy as they’ve ever been looking ahead and we’ll start seeing the real impact of that in Q4. And then, Manny, I’m sure you can see it but base rent – rental revenue has held steady throughout the pandemic. I mean, we really saw no deterioration on that one.

Hey, Victor. It’s Michael Bilerman here with Manny. Just coming back to your commentary that things always revert back, you look at the retail, the mall business and that certainly hasn’t reverted back and I can remember so many conference calls of mall landlords saying that e-commerce and technology wasn’t an issue. You think about what type of doing. Would that be wouldn't happen for you if the mall industry didn’t change. So, what gives you the confidence that we are not – that office won’t become the next mall business?

Hey, listen I can’t prognosticate what will or won’t happen. I can only say what we’re seeing specifically with our tenants then the conversations we’re having internally with our own employees. Whatever this change has been, the impact has been to-date will be a young person’s change. And so the young people here are going to make the movement to make a decision to interact, socialize, be onboarded, learn how to move up the corporate ladders and strategies in companies. Clearly, there are going to be aspects of office businesses that don’t need to be in offices. But when you’re talking about creating value and working together and getting educated in building a platform everything that technology and media entertainment has built for the last, whatever 12 years since the inception of the growth of the Amazons, the Googles, the Facebooks, the Apples of the world, has been predicated on that. So why would we all of a sudden say or even assume to say that socialization is not going to be important therefore people can work from home. It’s not retail. Retail is a choice. People in this country are unfortunately not going have a choice whether they’re going to have to work or not. People have to go to work to end up putting food in the table and providing a livelihood for their families and growing the economy. And so that’s going to be around the office. And I think, personally there are a lot of CEOs in this country who politically today cannot make those statements because it’s not – the time is not right. We are not out of the woods on COVID and people are still concerned about their health and welfare of themselves and their employees as they should be. But when that shifts, that shift is going to happen and people will end up going back to some level of normality and whatever that level of normality is, where it’s three days a week or four days a week, people – young people want to go to work and they want to socialize and interact. And that’s how we look at it and that’s what we’re hearing from our tenants. They’re all saying the same thing.

Yes. Well, we’ve been back for the last three to four weeks and it has been a pleasure to be back together as a team and as colleagues after 6.5, seven months of being apart. So I agree with you on that part for sure.

Thank you.

Thanks.

Thank you. Our next questions come from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. Just curious here. It sounds like kind of the mark to markets are holding. I’m just curious, besides some base rents what your projection for net effect is given just kind of where concessions and CapEx are trending?

Yes. Greg this is Harout. I would say the deals that we’ve closed, granted our deal velocity is down but concessions are holding, we’re not giving any more free rents. There is not more tenant improvements on any package on our rents. Our take rents are at or a little bit above underwriting. And so this is kind of got over the last seven, eight months. And our face – our ask rates are flat. A lot of these deals have been in the pipeline for some time. They’ve had every opportunity to erode. They haven’t. And so I’m only speaking to deals that actually have been done in our portfolio. So we feel encouraged by that.

Okay. That’s helpful. Then, you guys have some of the sublease space available there just to go with Uber. Just kind of curious, that’s a shorter term left on it as you talk to them or hear about the demand for that, how is that kind of going relative and how could that impact the rents, the competitive rents here for San Francisco within your portfolio, if at all?

Craig, so first of all, it’s 2025. So it’s not short term and we still have four more years, a little more than four more years on that space. It’s great space and it’s open floor plans and there’s lots of excess space for employees and growth. Remember that space has been on the market pre-COVID. I mean that was the space that they looked at. There is a lot of decisions that Uber is going to be making about moving into their new space or if they even move to the new space where we sit with that. I don’t think our space is going to dictate values in the marketplace because it’s way below market in terms of where even if you want to go obviously below COVID – pre-COVID times its way below but even currently compared to the deal we just did with Google, it’s massive. Right, Harout?

Yes.

Okay. And then just last one for me. You guys talked a little about buying assets here, I know the time may not be right, but assuming perhaps your stock price isn’t back to a level that makes it interesting to use as a currency and also doesn’t compare well to market cap rates and debt is still extremely cheap and the fact you guys have a decent amount of cash flow coming on the next couple of years, I mean, would you look to just use more leverage in the near term and then hopefully delever over time as that future cash flow comes on? Is that a consideration in order to just kind of choose yields in the near term?

That’s never been our model. There are instances where inviting a little bit more leverage say in a JV contract makes sense. But we’re not going to sort of stray from our discipline in terms of balance sheet management just to try to temporarily choose yields.

Okay. Thank you.

Thank you. Our next questions come from the line of Nick Yulico of Scotiabank. Please proceed with your question.

Thank you. I just had a question on – on Page 15 of the supplemental you give that stat on the ending leased percentage in the same-store office pool and it was down 280 basis points year-over-year. Can you just talk a little bit about what’s driving that and how much of that is a function of not doing as much lease up – lease up of existing vacancy versus maybe are you experiencing a lower-than-normal retention rate on renewals?

Well, Nick I wish there were just one easy answer but I literally wrote, I don’t know, six different contributors that account for that starting with Ferry. What’s being semantically is that we’ve seen retail – a decent amount of retail move-outs. We saw it at Ferry, we saw at 6922, we saw GSA move out at Rincon Center and some retail move-outs there. So there is no one sort of stand-out reason for it is. It is some combination of just relatively small tenants but nevertheless a combination of them and then retail move-outs that is really that driver of that period over period these percentage declines.

Okay. Thanks. I guess I’m wondering based on the visibility you have right now in terms of new leasing that could happen that’s in the works, expirations that are coming up where you have some visibility on renewing a tenant, I mean is that a number that’s going to stay under pressure just because mathematically you’re facing a lot of expirations and new leasing is subdued because of COVID or other reason?

Yes. Nick, it’s Harout. You are right. So actual lease velocity is down everywhere. So predicated on the lease velocity, we’ve been always doing a good job of backfilling and leasing our vacancy and so – though still some of these deals are still in the pipeline, we’re encouraged by that. It’s a matter of timing and getting them through – getting the tenants to feel more comfortable about decision making on how they are going to use their space and when they are going to use their space. So do we – if we had nothing in the pipeline, I’d say yes, shucks, I don’t know when. But it’s really getting these things – these deals through which we’re doing a good job of kind of marshaling all of our efforts to get them through. So we feel encouraged about the backfill and the lease-up kind of going into 2021.

Okay. And then. That’s helpful. And then I guess I just want to be clear on when you talk about 40% of next year’s expiration having coverage. Does that mean you actually have a lease in place right now or are you just confident that you’re going to get it done? And then, I guess I’m wondering as well is that number also applied to the next several quarters? I mean you have about 2% of your portfolio expiring every quarter over the next three, four quarters whether it’s 40% for the next couple of quarters or is the number higher for the next couple of questions?

Yes. Nick, if I kind of look at the year and that 40% represents the deals we have in negotiation and some of them are – a small percentage of those are completed already, but it’s really the totality of renewed and in well under negotiation. So we feel like we have a pretty good handle on it. And a lot of those tenants are – I mean, I think the average tenant size once you drop down is about 6,000 to 7,000 square feet. And so a lot of these tenants, especially now with no clarity on how they can utilize their space and when that window is very, very, very small before they would be discussing renewal nine to 12 months out. Even small guys now that’s shrunk to anywhere from three to kind of three, six months.

Okay. Thanks, everyone.

Thank you. Our next questions come from the line of Omotayo Okusanya of Mizuho. Please proceed with your question.

Hi. Yes, good afternoon, everyone. So, the comment that was made about the accelerated AFFO growth in third quarter and then just I think you said couple of financings to come. Could you just help us think a little bit through 2021 and maybe any big kind of like free rent burn-off or things like that that we should be aware of as we’re kind of started – trying to starting to figure out to 2021 what AFFO per share growth would look like?

Yes, I mean it’s sort of getting ahead of 2021 guidance to get too granular about what exactly it looks like. Although I would say in preparing the commentary Harout and I did sit with the model to sort of reassure ourselves that this trend both sequential that is to say from, say, Q2 to Q3 and looking ahead into Q4 and beyond, is sustainable for the reasons we outlined in the prepared remarks, that is to say, the shift from free rent to cash paying rent this sort of normalization on recurring CapEx being the key drivers of that. So, it does appear that this is – we have reached the turning point that we’ve been long foreshadowing. Offhand, and Harout I don’t know if anything comes to mind, again I cannot think of vast significant leases we’ve experienced in 2020 shifting from free rent to cash paying rent. There is always some amount of it, but I think we witnessed a lot of it in half of 2020 with the likes of EPIC and our artistic and so forth. I don’t know that 2021 has that dynamic. But I do think it will benefit from the full-year of cash paying rent on all of those tenants as opposed to partial here.

What’s happening is the free rent portion is coming together for us. Obviously, if there is a large deal that we signed it’s going to be a leasing cost associated with that. But as we look out based up on our current portfolio the free rent burn-off will continue and I think there will be ups and downs, depending on the quarter. But ultimately, this is a trend that we are heading to.

Good. Okay. That’s helpful. Thank you.

Thank you.

Thank you. Our next questions come from the line of Rich Anderson with SMBC. Please proceed with your question.

Thanks. And just on the work from home. I agree with you. I mean if the young person is sitting in the interview chair says I want to work from home four days a week and the other equally qualified says, I mean every day, who is going to get that job? So I think you’re spot on with that, Victor. I mean someone of my age probably could have some of that flexibility, but younger generations are probably going to be led by the market. And the market is going to be back to work, in my opinion. I just wanted to kind of say that.

Thank you.

All of my questions have been asked and answered, except for one and that’s on the buyback. You said you’re going to be back to the market on Wednesday, maybe you’re saying that tongue in cheek maybe that was legitimate.

No, no, no. That’s not tongue in cheek. We’re really going back to the market this week. But obviously we are locked out until through end of business two days. So we will be back in the market Wednesday.

Okay. My question is, so I have a little hesitation on buybacks. I don’t know how often they really work mainly because you can’t really see the accretion particularly these days with mix of a pandemic and no guidance, but I don’t know how well they truly work. I understand them obviously buying at a 11 cap. But it does disrupt the balance sheet or has the potential to do so. So we may differ on the value of buybacks. But I’m curious if you guys can give us a sense of what the limit – like what your limitations are on that beyond what’s available to do in the current buyback program, like where could – where would you have to stop that in your opinion?

Richard, it’s a great question. I think you think the same way we do, which is it’s a moment in time and we’re taking advantage of the market conditions based on where our stock is being currently valued, where we know the real value is or what we perceive the value to be. And so, it’s always going to be a balance and whether it’s entering the market on a buyback basis or we – are we really look to do a tender those are going to take obviously precedence based on access to capital and use of capital and proceeds for other things. That being said, we have a $250 million approval process right now. We would go back to the Board. Rich, we could go back easily at any time and increase that. I believe we’ve already purchased about – I don’t know $110 million at various different levels. So we still got a little bit more room to go. So that would be the process right now is to fill out the $250 million and then look at exactly what you’re talking about. Metrics and use of proceeds and where our leverage levels are and how the balance sheet is impacted and where the stock price is. And I think that that will definitely be on the forefront of what we’re doing, given everything else we’re doing with the Company right now and other opportunities that we’re looking at. And so there is no finite number to say, hey, we need to buy X. I think it’s going to be accessed to where the markets will be pricing it at and where we think the opportunities are. But right now as we sit on October 30th and where our stock price is today, we will be buying back at least the remainder of the $140 million or so whatever Mark says we have going forward.

Okay, good. Stock is going up, just as you said that. So, there you go.

Still buying back.

All right. Thanks very much.

Thanks. Have a good weekend. Thank you everybody. I know we’ve run over time. So I apologize if we’ve not let anybody ask questions, but unfortunately it’s been a long quarter and a lot of time we tried to in tune as to only 12 o’clock West Coast time. So, I want to thank everybody for participating. And again, I want to thank the entire Hudson team who continue to excel during these challenging times. So, I’m proud of all of you and we look forward to chatting with you all on our next quarterly call. Thanks, operator. We will disconnect now.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.