Greetings and welcome to the Hudson Pacific Properties, Inc. Fourth Quarter 2020 Earnings Conference Call. At this all participants are in a listen-only mode. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Laura Campbell, Senior Vice President, Investor Relations and Marketing. Thank you. You may begin.

Thank you, operator. Good morning everyone and welcome to Hudson Pacific Properties fourth 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; Art Suazo, our EVP of Leasing; and Harout Diramerian, our CFO. Victor?

Thank you, Laura. Hello everyone, and welcome to Hudson Pacific’s fourth quarter 2020 earnings call. 2020 certainly presented everyone with unprecedented challenges and I remain extremely proud of the Hudson Pacific team and how we’ve navigated the pandemic to get to this point. To roll out the vaccine in the New Year, gives us a line of sight on getting our tenants and employees safely back to their offices. And as you know, we believe the vast majority of the companies. It’s not a matter of if, but when. We specialize in leasing workplace to the world’s most creative and innovative businesses, their success did not happen in a remote context. It happened because of the connections, culture, and facilities that gave them a competitive edge. Those environments designed to inspire and be infinitely better than your home office attracted the best talent and fostered optimum creativity. I expect everyone still working from home can probably attest the hours of Zoom calls from your couch just doesn’t do the same thing. Hudson Pacific didn’t slow down in 2020 in our accomplishments for the year when numerous. Even with many tenants on the sideline, we’ve leased over 800,000 square feet with strong rent spreads, 21.5% GAAP and 14.3% cash. We collected 98% of our rents during the three quarters of 2020 impacted by COVID, including 99% of office and 100% of studio rents showcasing the exceptional quality of our tenants. Our portfolio remained open and fully operational as we swiftly implemented industry-leading health and safety protocols.

Thanks, Victor. Our rent collections remain strong. In the fourth quarter, we collected 97% of total rents, including 98% for office, a 100% for studios, and 51% for retail. To date in January, we’ve collected 97% of total rents, including 98% for office, 99% for studio and 48% for retail. Again, our high quality office and studio tenants are continuing to perform. It’s the storefront retail tenants that are struggling as they await building repopulation.

Thanks, Mark. In the fourth quarter, our stabilized and in-service portfolio held steady at 94.5% and 93.5% leased respectively. We signed nearly 280,000 square feet of new and renewal leases. Our best quarter for 2020 in terms of volume at GAAP and cash rent spreads of 4.9% and 4.7% respectively. GAAP and cash rent spreads would have been 9.9% and 9.2% respectively, but mostly for a 44,000 square foot renewal we completed with 24 hour fitness at Met Park North in Seattle. And as Victor noted our GAAP and cash rent spreads for all of 2020 were 21.5% and 14.3% respectively, which would have been even higher at 22.3% and 15.4% respectively but for short term deals. Tenant interest tours and activity continued to accelerate in the New Year across all our markets. For example, we’re seeing increased interest from larger tenants, particularly in Los Angeles. We are now in discussions with multiple multi-floor users at Harlow. We also had a notable uptick in tours and proposals from smaller tenants in Redwood Shores and North San Jose. Our deal pipeline that is deals in leases, LOI or proposals increased quarter-over-quarter, more than 30% to 1.1 million square feet and aligns with our availabilities across our markets.

Thanks Art. In the fourth quarter, we generated FFO excluding specified items of $0.44 per diluted share compared to $0.55 per diluted share a year ago. Fourth quarter specified items in 2020 consisted of one-time tax reassessment management costs of $5.5 million or $0.04 per diluted share, and a one-time prior period net property tax savings of $700,000 or $0.00 per diluted share, compared to transaction related expenses of $200,000 or $0.00 per diluted share and one-time debt extinguishment costs of $600,000 or $0.00 per diluted share. A year-over-year decrease in our FFO resulted from the partial sale of our Hollywood Media Portfolio, lower parking revenue due to COVID-19 impacted occupancy reserves against uncollectable – uncollected rents, and lower service and other revenue at our studios partly offset by gains from lease commencements at EPIC, Fourth & Traction, Foothill Research Park and 1455 Market. Fourth quarter of 2020 FFO excluding specified items includes approximately $0.02 per diluted share of write-offs against uncollected cash rents and approximately $0.01 per diluted share of charges to revenue related to reserves against straight-line rent receivables. This resulted in a toll negative impact to fourth quarter 2020 FFO of approximately $0.03 per diluted share, some all of which may be ultimately collected. Fourth quarter 2020 FFO also reflects $0.02 per diluted share decrease in parking revenue, some or all of which will resume with tenant reintegration.

Thanks, Harout, Art, Mark and Laura. To close, at Hudson Pacific, we’ve always operated a premier portfolio and through the years we’ve strategically invested in unique and highly accretive growth opportunities. These through development, redevelopment or repositioning and doing so, we’ve ensured we own the best assets and attract the best tenants in prime West Coast tech and media hub. There’s no doubt that we have political hurdles to overcome in both California and in Washington. But the West Coast professional networks and talent clusters were built over many decades and thus are difficult to not – if not impossible to replicate. We like our peers will be fully engaged and committed to ensuring our markets continue to thrive, that they are favorable for both businesses and residential like. And once again, I want to express my sincere appreciation to the fantastic Hudson Pacific team for all their work and dedication this year. And thanks to everyone for listening today, and we appreciate your continued support. Stay healthy and safe, and we look forward to updating you next quarter. And operator with that, let’s open the line for questions.

Thank you. Our first question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Thanks. Hello everyone. So, I guess just first off in terms of the full year you talked about, first it sounds like first quarter is a good kind of run rate to think about for the year. Maybe you just give us a feeling for how you guys are thinking about occupancy and in terms of releasing on the lease expirations for the year, how we should think of kind of occupancy trending for the year?

Hi, Nick, it’s Art. Yes, so I mean, as I said in my prepared remarks and we’ve got, so we start the year with a $1.5 million worth of expirations. It’s encouraging early in the quarter already. We’ve got 45% coverage on those expiring tenants, the two largest, obviously Google 207,000 square feet, Palo Alto and Dell EMC, 185,000 square feet in Seattle, or well in front of it, we’re down the road with those tenants. I think if you look at our uptick in pipeline activity, just from the beginning of the year probably pushes that 45% number, closer to 50% of coverage early, and we’re still having conversations. I think, we’re early tenants are starting to experience a kind of a renewed competence as they look beyond, the vaccine in schools opening. And I think that’s exactly why their numbers are increasing quarter-over-quarter.

And Nick, just talking on your initial question, as we completed budgets right towards the end of the year, and kind of looked ahead to where they pointed on a lease percentage by year end, it looks to us like we should be able to maintain, our lease percentage as we ended the year, we should be able to maintain that throughout the year. So, we don’t expect to see any deterioration in that number.

Okay, great. Thanks. So, it sounds like you guys feel pretty optimistic about getting the lease expirations, renewed with Google and Palo Alto, and Dell in Pioneer Square, is that fair?

I say this, Nick, it’s Victor. How are you? I’d say that we feel very good about our lease expiration timeline that’s coming due in 2021. And of the big two, we are in leases on one right now, and the other one we’re negotiating back and forth on paper. So, we feel pretty good about it.

Okay, appreciate that. Thanks Victor. I guess just one other follow-up is, as we think about, the expirations this year, you do have some more waiting in Silicon Valley, which, some of this is smaller tenant market. Thinking about that portfolio where you got – you had, I think, a little bit more tenant churn over the past couple of years, some of that’s planned because you’re repositioning assets. I should be kind of think about some of the smaller tenant, leasing trends right now that you’re seeing in the portfolio.

Sure. Nick. Absolutely, I think you hit it on the nose in Silicon Valley and on the Peninsula, it’s a smaller tenant market. The churn that you’re referring to was larger tenants that had either rolled out or downsized. And obviously it takes time to kind of release it with smaller tenants. We’re going to continue to successfully deploy our VSP program, which has been super successful for us, not only in those markets, but across our portfolio. And with the uptick in tenant, a small tenant activity, we’re going to be poised to capture that activity.

All right. Thanks, Art. Thanks everyone.

Thanks, Nick.

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

Great. Thank you. I guess, can you guys talk about what you’re seeing in terms of space usage, any changes, I guess, as you’re working on the Google and Dell leases or anything else large, are they kind of rethinking, how they want to use their space?

So, hey, Jamie, listen right now, because the preponderance of our tenants are not back, but now they’re preparing to go back and we see the lights, not just because of the vaccinations, but the activity and the schools coming back and all the positive news that, we’re not out of the woods, but we’re seeing it. People are looking at the existing utilization and to date, when we’ve been saying this all the way through, the reason we’re collecting at 97%, people are not giving back space. I mean, they’re looking for the next gen office space going forward, and there’s a number of factors that run around between safety and protocol, obviously the opportunity to reimagine the future space connectivity with personal, climate change, all the protocols that they’ve been working through the last multiple months are being enacted. But I think, the back end of the answer to what your question is, is that we’re not seen in our instances with the tenants that we’re talking to right now, tenants coming back and saying, we’re giving up space. With the exception of one large tenant in our portfolio has said, we may end up restructuring and giving back space, but I mean, the numbers are well in our favor of tenants that are keeping the existing footprints, Art?

Yes. To put a finer point on it, Victor, what we’re reading? What we’re all reading? We’re all reading the same things and what we’re hearing and granted it’s kind of a smaller subset of that is some of the tenants are still building from maximum density. I mean, they need this for sure. They need to solve in the short term, but their plans on, I would say larger blocks of space or for kind of pre-COVID densities, if that’s an indication for you.

Okay. So, even if they’re keeping the same footprint, are you seeing a different type of usage, like less desks, more collapse, more meeting space, or you can’t really even see that yet?

It’s hard for us to sort of see through that right now, as I said, we’re still running it. I think we’ve – we’re maybe occupancy physical occupancy in the assets are now in the low-20s, so it’s too hard to see. And the bigger guys are not back yet. They – they’re getting ready to come back over several months all the way through till fall, but, we’re not – we don’t have a clear line on that yet.

Okay. And then Art, you talked about a pickup in LA smaller tenants in Redwood Shores in North San Jose. Can you talk about what’s driving that, is it, we’ve seen a lot of capital raised in the Bay area. Is that a big part of it? And then how do you think about CBD San Francisco since it seems like the sublease space seems to still be on the rise there?

Yes. So in LA, it’s cheaply in Hollywood, I would say, it’s a really kind of larger tenant deals that we’re obviously it’s bolstering our efforts at Harlow. In Silicon Valley and the Peninsula it is small tenant activity. I think its renewed confidence. I think some of these tenants are kind of got to the end of the year. They’re starting to see the light at the end of the tunnel. And they were on the sidelines. We talked about kind of the decrease in tenants in the market. Well, a lot of those tenants who were on the sidelines, and I think those tenants, you’re starting to see the front end of those tenants come back and start to kick the tires again and reengage. And in San Francisco, they’ll believe or not. Yes, there’s been about a 20% uptick in inactivity in San Francisco. We don’t have, as, you know, we don’t have any exposure. We’re 98% leased. We’ve got maybe 50,000 square feet expiring this year, so we’re in really good shape, but it’s refreshing to see that some of those tenants have come back in the sidelines in San Francisco, the sublease space, as you know, we see the deceleration right in the sublease space that’s being put on the market. And obviously we feel confident about the direction it’s going.

So, would you say CBD San Francisco seeing a similar pickup to these other sub markets or not necessarily.

Inactivity?

Yes.

Yes, yes, no. So, like I said, we’ve specifically seen their tenants in the market, it dropped to 2.8 million square feet office, 6 million feet. We’re back over 3.5 million feet. So yes, we’re starting to see some of those tenants reengage.

Okay. All right. Thank you.

Thanks, Jamie.

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks. Good morning up there. So in terms of future development projects, you guys have been able to build to some pretty solid yields over the last 10 years and added to your land bank. So, I guess, can you talk about that shadow pipeline? I’m guessing you’d be more willing to build something with a studio component rather than traditional office at this point, but, what do you think could be the next developments or when could that happen and what level of pre-release, if any would you need to just start something in this environment?

Yes, Blaine, listen, I think you know, given our pipeline right now, I think it would be the built-ins of our market. So, in Vancouver at Bentall Center, we’re evaluating a 0.5 million feet the demand in that marketplace seems to still be as consistent as it was pre-COVID. And so we’re looking through design right now and deciding is the opportune time and pre-leasing, we’ve got some activity with some larger tenants that are currently in the marketplace and expanding the marketplace. We have Washington 1000 that is a planned fully entitled built for 2023 for us to start. We could start earlier if we wanted to maybe as early as end of 2022, I do think that that’s going to be based upon pre-leasing component. We have not seen the two or three tenants that came to us initially have been on the sidelines during this timeframe, but I think our team is fairly confident that that for us to break ground there, we will have a level of pre-leasing as to the percentage amounts, not really sure. Then you come down to Los Angeles and we are in the final stages that our Sunset Gower development, which would be two projects – two development opportunities, but a 0.5 million square feet. We’re in – we are, a year away from being fully ready to break ground there. And that would also depend on some pre-lease components and that’s going to be a combination of office and studios and the activity there has been fairly stable with our existing tenants and new tenants in the marketplace that want to expand.

Okay. Thanks Victor. That’s helpful. And just to circle back on your Washington 1000 asset, if my recollection is correct, I think that project is somewhat tied to what goes on with the convention center expansion there, which seems to be delayed and kind of over budget. Can you just comment on what effect if any that has on your plans there?

Yes. Blaine, listen, it’s slightly delayed and the budgetary aspects are not our issue. But when it’s delivered we’ll be compelled to do at least initially complete the podium through the retail component there, which is part and parcel of our commitment. After that, we will have a timeline that can extend a little longer than anticipated timeline to build the tower. And so we’re not concerned about the state of Washington completeness and candidly, it actually works in our benefit if the timeline works that we have some pre-leasing component done, we can hold off on us breaking ground until they’re completed.

Great. That’s helpful. Last for me, in terms of studio acquisitions, obviously interest in the property type has increased recently in there have been, a couple of studios that have been on the market or treated recently, I’m sure you guys looked at those assets. Was it just pricing that held you back or was there any other reason, and I guess, what are the main features that you guys are looking for in studio assets and acquisition opportunities?

I mean, other than the Raleigh studio that just was a portion of that showed there really has not been anything else in the market. There are several deals on coming to market at market and several deals that we are negotiating exclusively off market. So, I think it would be fair to say that our plate is going to be relatively full in that area, in the near future and announcements should be anticipated shortly. And so, what we’ve been very disciplined into our markets. We’re interested in the core markets that we’ve always talked about. And our venture with Blackstone is completely active right now. And I would venture to say that you’ll see a number of deals come our way, both of existing deals in ground up.

Great. Thanks Victor.

Thank you. Take care.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey good morning, good morning Victor and everyone out there. Just, a few questions here. I guess the first question is just sort of going back to Jamie’s question. We care a lot about, what’s going on in San Francisco versus the Peninsula. And it sounds like the Peninsula is sort of like the Sunbelt of sort of California where everyone’s sort of either moving out of San Francisco to go live in the Peninsula or business, whatever totally different dynamics between the business situation there versus the political and the business situation in San Francisco vis-à-vis lockdowns, et cetera. Do you see any of your tenants? So, Victor, I hear you that you guys are committed to California, the West Coast, but are you seeing more tenants sort of rethink their San Francisco plans and instead focus on Peninsula. And then are you seeing that translate to any actual discussions as far as leasing or development potential or right now, people are just making decisions based on their distinct holdings or existing square footage. And so far, it’s not really translating into anything that’s longer term visible.

Yes. Alex, this is Art. We’re not seeing that, that exodus out of San Francisco at all. I mean, in fact, what our leasing teams are connected up and down from the city down to San Jose. All of these are they’re being, all these deals that are coming back are really deals that were on positive and are seeing a kind of renewed interest, but we’re not, they’re made independently of any of those things that you mentioned.

I think Alex, you’re spot on the Peninsula. I think you’ll be surprised to hear when we announced some of the renewals that we’re working on. As the terms and conditions there at the activity in the Peninsula has picked up dramatically in the last 90 days. And our team up there is entertaining a number of a number of deals that were pretty much stagnant all through spring and summer. And so as our Art says, they’re coming back. In terms of the city, listen, I think you’re spot on and the political environment, there is not a good situation. Does that mean you throw it out? The answer is no. The city will recover. It just depends on when and we’re just poised very, very fortuitously that we don’t have a lot of expirations in the city and those that are coming up, we actually have a reverse increased by our tenants that are asking to renew for longer term, some of the largest tenants now in years 2023 and beyond. So, we’ve had some activity around that at the same time. So, I’m not saying that the picture is absolutely spectacular by any means, but there is activity and people are planning for the future. The future is going to come on us pretty quickly. And I think these tenants understand that when they’re back, they’re going to be back on some form that’s greater than it is clearly today. And maybe not as great as it was a year ago today, but they’re pretty excited about the opportunity to get people back in the office and that’s the central thing.

Okay. And then I heard to put you on the spot, because I can ask Mark this anymore, because he gave you the CFO rings. It sounds like for the first quarter, it sounds like it’s a pretty good number called $0.46 at the midpoint, which sort of analyzes a $1.85. So things are getting better. I think you said lower interest expense, but is there any reason that sort of a $1.85 is not a good 2021 number that we should think about? Or are there some things, I mean, I’m sure there’s some things that are variables, but it seems like, they’re all positives, right? There’s uncollected rent, parking, there’s studios, retail coming back on, I mean these are all sort of positives. So is there any reason that we shouldn’t think about sort of a $1.85 is as sort of being this sort of implied low end of a guidance range for the year?

Alex, yes, I think that implies basically the right thing. I think, we did provide in our prepared remarks. There are some items that we feel would be even better through the remainder of the year, which was G&A and interest. So theoretically, if those do also come in by the $1.85 is low. So, I think if you want to start off with $1.85 as the low end of the range, I think that that works well.

Okay. So, I mean, all these other things sounds like they could come on sometime over the course of the year that would sort of bring that up. Meaning that from what you see right now, there are no negatives that would bring this. That would be a detriment that are unforeseen, that would be a detriment to this number.

Right. I mean the only negative is anything COVID related. Right? I think if there’s things like that, we can’t control that. But so far, we like the trend. I mean, just to be clear, it’s not going to be straight throughout the year. There’ll be ebbs and flows. Right? The media business being an item. Q2 is usually our slowest quarter. So just, you’ve got to factor that in. But ultimately what you said is accurate.

Okay. And then just final question, Victor, the announcement about a week or two ago, the departure of Alex and Josh, obviously we all got to know Alex quite well, great guy. But it does seem to be a trend that we’re seeing, not just you, but some other REITs where people are going to the private side, just seeing to disconnect and opportunity comp and all that. Do you foresee this being a bigger issue? Is this going to lead to G&A pressure for you or is this sort of your more view is this is the natural ebb and flow and their departure allows opportunity for people to grow and therefore you don’t see like a G&A issue or any sort of those sorts of things.

Well, first of all, Josh is a really good guy too. I don’t think Alex is the nicest guy of the two that left. I think Josh is a pretty good guy. Maybe I’m in the minority, but I’m going to support him.

It’s a full bar card in his office and you never put Josh on the sacrificial lamb for in front of us, public analysts.

Listen, they’re both great assets and they’ve been with us for a long time. And I would say first and foremost, we wish the greatest success in their new venture that they’re launching hopefully eminently in any help that we can do as a company and friends, we’re going to support them. The issue around Hudson specifically, and then generally I’ll comment it this way. This is the first time we’ve ever had any senior people leave the company. That’s been by their choice, not our choice. I will say it that way. And we’ve got a massive bench and great depth. And the team here is energized and excited to take over and grow. I think you point out an interesting dynamic in that the public markets versus the private market are constrained. And when you have talented energetic individuals, this comes up and if you shouldn’t be expected to that this is a one-time thing. I think from our standpoint, it’s the company he doesn’t anticipate any more exodus, but you never know what happens in time and, that’s why you’re not run by one person. You’re run by a team of professionals and the team is ready to move forward on this. As economic aspects change, I think you’re going to see gravitation to, or from the public to private markets.

Okay. Thanks, Victor.

Our next question comes from the line of Frank Lee with BMO Capital Markets. Please proceed with your question.

Hi, morning, everyone. I have a follow-up on this studio business. You mentioned the various opportunities you’re looking at. Can you talk about how competitive and how the buyer pool has changed in markets like Burbank, Culver City and in the valley, and then longer term, do you foresee any potential disruptions this could have in your Hollywood market as supply increases?

Well, I think the latter first, I mean, listen, our stabilized assets, in Hollywood are best-in-class and they were – there are historical purpose-built assets, so there’s not going to be any variability around that. The demand is absolutely off the charts from the competitive landscape that’s out there right now, because of the growth and the product that’s in the marketplace and as a result I think that the competition for soundstages is as high . I do think that the – in terms of the competition, it’s so ironic that of everybody who covers us for years, they didn’t talk about this business. They’re in competitive and we were the only ones doing it. And now that there’s eight competitor out there, and it really is just eight competitor, it’s all of a sudden a concern these – there’s, in our office side, which is 80% plus of the portfolio, we’ve got countless competitors. And nobody seems to talk about that aspect. So, I welcome the competition. I think the opportunities that we have are extremely impressive, as I said, I’m not worried about it. I think it does validate our thesis that we’ve been publicly dealing with for 10 years, which has said from day one there’s massive values in these assets and the pricing around them is not solely based on what we think the values are. Other people are out there now pricing them. So, I think it just proves that, the markets have undervalued the value of this real estate and we have now, I would say yes, a competitor, but a benchmark and others that have come into the marketplace that are validating our values, which is currently trading way below what NAV is by the private market valuation.

Okay, great. And then there’s been some discussions that San Francisco is looking to take more of a proactive approach in reducing property taxes given, declining property values from the pandemic. Just want to get your thoughts, if you think other California markets you’re in and if this plays out there could be any potential property tax savings within your portfolio.

Well, we did announce that we had a great property tax savings just recently on this quarter. And I think, there could be additional properties tax savings throughout the entire portfolio in California. I do see that there is a little bit of a – see change with prop 15 getting defeated and there is a pushback and there’s political realization that it can’t continue the way it has been. That’s gotten us to this point right now. So, those are all positive aspects of where the – where I think people realize that businesses in place do have some sort of control and aspects as to where values are put in place, and then you can’t continually tax the same entities going forward. So, the coalitions for are starting to, are starting to build to the coalitions against, and I think that’s encouraging. We still have a lot of room to go. And I think more companies and more CEOs are becoming more vocal. And as a result, I think you’ll see a change, but it’s going to take some time.

Okay. Thank you.

Thanks.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thanks for taking the questions. Maybe just going back to sort of the core markets San Francisco versus sort of the broader Bay area, I know you’ve talked about overall demand sort of picking up the pipeline looking good, sublease space is high. So, I’m just sort of wondering if you were to – if you were to sit here across sort of the key markets and particularly the city given where sublease rates are today. What’s – is there a bifurcation and what you’re seeing in terms of the need for landlords to reduce rents on what maybe tenants are looking for, and how wide could that be? Like where – what areas are you seeing sort of pricing hold or rental hold versus what types of properties are you seeing rent needed to go down pretty dramatically to see incremental demand?

Yes, Vikram, listen, it’s a great question. And I do think that you have to look at quality of the real estate first, and then candidly, if you’re a landlord in that marketplace, like we are, our goal is to maintain occupancy, so it depends how much pain you want to take. Right? And so if you’ve got a loan on the asset, and you’ve got expenses that you need to hear too, and you haven’t got a deep pockets to protect yourself in the asset quality in terms of what’s happening, you’re going to be a little bit more desperate to lower your rent versus not. I think all landlords in today’s marketplace are going to be dictated towards the demand of a tenant and so none of us wants to lose tenants. How far down you’re going go. I don’t think there’s a benchmark that says that. I think this the irony and we’ve made this comment before, and it’s important for me to highlight is that the tenants that are coming due today whether it’s 2021, 2022, whatever it is, typically have been tenants that signed in, 2015, 2016, maybe even seven years back to 2014. And so it’s 2014 or 2015 or 2016. The mark to market is still well above where even your reduced rent is. So, we’re all still making more money than our current in place rents were, as these tenants come into play. These aren’t mark to market deals that that were 2019 in late 2019 and obviously first quarter of 2020, that where the peak of the marketplace is. So, when we look at some of our space and you’ve been following this for a long time and supporting us for a long time. You’ve seen that, we had marked a mark to market in San Francisco it’s 50% or 100%. And so those mark to markets are now 20% or 25%. It’s still much greater than what the tenants were willing at. So, we still have some what I would say is a floor or cushion or whatever you want to classify it to be. So, we’re not saying we’re given space away, so yes, it’s a mark to market to where the peak was pre-COVID, but not necessarily to where the rent started and were even accreted to in place rents over the last five or seven years.

(47:30):

Well, what you said is accurate. We do have those headwinds, however, to remind you, we also have below market leases. So, we’re going to renew a percentage of our tenants and they’re below market. So, that’s going to bring up our cash NOI, and I think we’re pretty confident on our prospects. But I think we continue to see growth in cash NOI that may not be as high as a plus 6% we got this quarter after removing the one-time items, but we still think we have a lot of upside as freeware continues to burn off. And the bumps start coming in.

Okay. And just maybe just to clarify, like, I know you’re not, we don’t have specific numbers around it, but just kind of high level to put kind of guardrails around the occupancy, kind of in your own budgeting, high end versus low end. How should we think about kind of where occupancy could shake out towards the year end?

Well, I think I mentioned Vikram. This is Mark. I mentioned that in completing year-end budgets and looking at where we ended up on a least percentage basis at year end and how it compares to where it will trend towards the end of the current year, we were materially in line with those two numbers. So whether it’s a – obviously a combination of our renewals and its success on renewals plus expectations on absorption of existing vacancy, but through the combination of that, or in our in service portfolio appears to trend so that we maintain our current lease percentage.

Got it.

Also just a reminder in terms of renewals, the largest renewals that we have are happening at the end of the year. So the impact on cash same-store NOI at least for 2021, isn’t going to be that large for those tenants. So those are going to be more 2022 and beyond in terms of occupancy.

That makes sense. Okay, great. Thanks so much.

Thanks Vikram.

Our next question comes from the line Omotayo Okusanya with Mizuho. Please proceed with your question.

Yes, good afternoon. Most of my questions have been answered, but a quick one on studio. As same-store studio leased rate it kind of went down this quarter also went down in 3Q, I think, in 4Q the general impression was maybe it would be a positive trend as production for that coming back. So I am just kind of curious a little bit about the 4Q stat and the outlook going forward.

Well, when we talk about the studios, we so often focus on stage utilization because that’s really the driver of success at the studios, but it’s – so it’s easy to lose track a little bit that there is about a third of the footage is office – ancillary office footage that supports those studios, but it’s not – the office isn’t entirely occupied by stage using tenants as to say some of the office utilization is riders and other production-related users, but some of it are people that simply just want to be on a studio lot casting people and people like that. And due to the disruption from COVID, some of those users, who don’t – again are not there because of the stage use and who were under say shorter-term leases or whose lease has expired, we saw a bit of a pull back if you will on what would be a normal renewal rate for those users. And as production has begun to resume again, our view is we’re going to see a lot of those non-stage office users return to the lot just to be affiliated again with all the other studio users.

That’s helpful. And then just another follow-up on the studio stuff again in regards to just the Sunset studios and potential development there, did I hear you correctly that it’s at least a year away before you break ground on any potential additional studio development, Sunset Gower?

Let me – on Sunset Gower, yes, I think that would be an accurate statement. We probably would not break ground until first quarter of 2022.

First quarter of 2022, great. Thank you.

Thank you.

Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Yes, good morning. Victor, you talked about acquisitions on the studio side, but could you revisit your thoughts around acquisitions and investments outside of development on the traditional office side? Are you feeling any better there? Are you seeing more opportunities like you thought with Eighth? Is that something you’re interested in today? And maybe juxtapose that against the buyback, which I know it’s not one or the other, but maybe update us on your thoughts there and kind of the allocation of capital…

Yes, Dave. No, thank you. Listen, the buyback position is still the same at these levels. When opportunities to build themselves, we will consistently buyback. I think we’ve proven that track record out all through the last really 12 months plus. And so, that’s going to continue. We have not seen a massive inflow of trend of deals on the commercial side as of now. I do think that the team has been evaluating a few value add deals. And so, our appetite would be consistent with that given the opportunities that some of those value-add deals are significantly cheaper than they were a year ago. And so, if we were interested in them at that time, why would we not be interested at this time if they’re accretive to the portfolio. Eighth was a great acquisition opportunity and we have a great partner in CPP that we’ve done several deals with. And their appetite, as I mentioned on the prepared remarks, as our other two JV partners appetite is still very strong, both for commercial assets.

Okay. Just maybe one follow-up on the value-add. Obviously, you saw deals last year. They’re still in the market. Are you seeing more – having more off-market conversations about more of those deals happening? I mean, are we turning that corner yet? Or is that still a little bit ways in front of us?

I think you’re seeing more value-add deals now than when we maybe talked about it at our last call or for sure at our summer call where really nobody was prepared to put a value-add deal because there was zero bids out there and the price differentiation was so extreme. There may be a little bit of – what I would consider desperateness from some sellers that want to get out. And they are mostly – your spot on those conversations are off market. They’re not marketed deals. And so, we’re seeing more. And there is a few attractive opportunities that we’re underwriting. So I’m anticipating that that could be a good opportunity for a company like Hudson.

Great. Thanks. And then maybe just follow up Art, if I could. Art, you’ve went through, I believe the economics for the fourth quarter and you talked about healthy economics overall. It looks like there was a bigger kind of a TI package this quarter that hit and maybe weighed on some portion of those numbers. But correct me if I’m wrong and maybe explain the outlier?

Sure, yes. So if I could repeat, the – on a blended basis, we’re actually are our TI and lease information were down $21. If you’re focused on the new deals, yes, that was a readying deal, which we were building in the space from really raw space up to a warm shell with tenant target preponderance of our space is not in that condition. It’s usually kind of ready move in space. So that was the outlier.

That’s helpful. Thanks all.

Our next question comes from the line of Emmanuel Korchman with Citi. Please proceed with your question.

Hi, it’s Michael Bilerman here with Manny. Victor, just two questions. The first on Alex and Josh, did they not have non-compete? Or are they just not competing in their new venture with you? And when you say you’re going to provide them all the support, are you capitalizing their venture in any way or providing them any capital?

Can I just take – this is Mark. Can I just take the initial question and Victor the latter? On non-compete, California does not – it’s pretty employee friendly state as the law goes. And you can’t – there is no such thing as enforceable non-competes. Now, typical arrangements, and this would be the case, not just with respect to Alex or Josh or candidly any executive is we have standard non-solicitations. We have standard confidentiality clauses, and not that it would ever be necessary in this case because it’s as Victor has outlined, but all of our agreements also have things like non-disparagement causes. Again, these standard causes. That’s about what you can do in California, and that’s what our typical agreements have.

Yes. And then in terms of the latter part of the question, listen they’re not looking at our markets currently today. They’re looking in the Sunbelt and other marketplaces. And the answer to the capitalization is if they came to us with opportunities, of course, since we trust them and liked them, we would obviously entertain not to say that we’re going to do any insurances that we would do it, but we would obviously help them out in any way.

And then second question, just in terms of capital deployment and Victor, I know there’s a lot of different buckets, you can deploy capital. And obviously, you’ve done the share buybacks, given the significant discount to NAV, you’re obviously doing development and activating as much of the pipeline for the future as possible. There’s redevelopment, you talked in the last question about these value add opportunities that you’re looking at. How does the buying of stabilized assets even with a joint venture partner? How does that sort of marry up with really the value side of all those other activities? I guess, why put money in? Is it a market share? Is it supporting your joint venture partner? Just help us to understand that part of your capital deployment when all those other activities that you have in front of you team better sort of return opportunities.

So, listen, I know where you’re getting out on that. And in specific to that, I think each opportunity will stand alone. We’re going to make the right decisions. And you’re right. I mean, we were heavily weighted on value add and development. That’s not going to dissipate in terms of our game plan and what we’re currently working on as we speak. In terms of Eighth that was a conscious decision on threefold, one and no particular order. It was a relationship with the tenant being Amazon and our exceptional relationship with them and it’s enhancing that going forward given what we have with them in that market and other markets. It’s a class A asset with them for 10 plus years and the new CEOs offices just happened to be in our project. And it was a great opportunity for us to capitalize on. Two, you mentioned it. It is a JV structure with an existing partner that we are 55:45, which is the standard deal that we do with them. And three the economics around that transaction were effectively great. I mean we did an L plus I think 170 loan for 50% of the transaction where effectively gets us our going in yield somewhere in the mid 7s or so going up and the capital deployment is minimal for us to – for us over the next 10 years. So it wasn’t this is a stabilized deal, why you’re buying a bond? It was a combination of, I think, all three of those.

Okay, thanks for the color, Victor.

You got it.

Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Thanks and thanks for hanging a little longer. I just had a quick question related to what you said Victor earlier. You’re negotiating a bunch of potential opportunities in the studio space. And you mentioned both development and acquisition opportunities. I’m wondering about kind of repurposed real estate or re-entitled real estate. Is that something that studio – the studio business can kind of come to the rescue of some see-through assets that are out there, whether it’s the anchor space of a department store in an old mall or even an industrial asset that’s probably obsolete by now? Are these opportunities that you could see studios kind of expand that way? Or am I just barking up the wrong tree?

Listen, I think, Rich, you are commented on something that people have been looking at. I do – and as have we and we have not looked at it and said this is absolutely a non-starter. The cost return analysis for non purpose-built studios is still very challenging. And then the quality is challenging. Now, I do want to caution, and this is no way of me hedging that saying, hey, does that mean Hudson’s doing this or not. The level of technology in the entertainment and media business that is evolving may avail themselves for this given that smaller size stages for certain types of technological filming and the likes of that could be applicable for conversion space like that. But in terms of a “savior” to existing space that is not purpose-built and at the end of the day, is void given the change of the economic structure. I don’t see that as a mainstream for that business.

Okay. That’s all I have. Thanks very much.

Thanks, Rich.

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.

Thank you so much. And I appreciate the interest in Hudson again this quarter and the entire Hudson team, I appreciate all the support by everybody in the call. Have a great rest of your day and everybody be safe. Thanks so much, operator. Bye-bye.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.