Good afternoon and welcome to the Hudson Pacific Properties Fourth Quarter 2021 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on an 8-K with the SEC and both are now available on our website. An audio webcast of this call will be available for replay on our website. Some of the information we will share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call and in those materials. This morning, Victor will discuss macro trends across our markets and our 2022 priorities, Mark will review 2021 business highlights, along with upcoming opportunities, and Harout will discuss our fourth quarter financial results and provide initial guidance for 2022. Thereafter, we will be happy to take your questions. Victor?

Thank you, Laura. Good morning, everyone and thanks for joining us. Hudson Pacific accomplished a great deal in 2021, staying true to our core strategy. We further expanded our office and studio portfolios within global centers of innovation. We delivered an exceptional value of creating redevelopment opportunities like One Westside. We grew our studio platform by acquiring new production service lines as well as by adding another large scale, purpose built studio to our development pipeline and all of this while successfully capitalizing on our office leasing expirations and maintain a strong and flexible balance sheet. The long-term outlook for the unique type of properties and experience Hudson Pacific provides for its studio and office tenants has never been brighter. For over a decade, we remain diligent in our focus on high barrier-to-entry markets, propelled by growth of tech and media, where the related industry infrastructure, be it capital flows, talents or services is entrenched. We have also put ourselves at the forefront of owning and operating production studios, which operational complexity and unique relationships also create significant barriers to building a platform at scale. Our strategy has proven out and remains well intact as the pandemic has only accelerated pre-leasing demand trends, driving an abundant amount of capital to the tech and media industries. Venture capital investment reached $330 billion in the United States last year. This is the highest year on record and almost double the prior year, with California receiving the lion share of more than 3x any other market. We expect this to continue with venture funds raising nearly $130 billion last year, up 50% year-over-year, and eclipsing the $100 billion mark for the first time ever. Software and other non-biotech investments surged in 2021, which coupled with increased early stage fundings are poised to further…

Thanks, Victor. Our strong performance in 2021 speaks to the resilience of our strategy as well as our team’s incredible ability to execute across all our verticals. Last year, we signed over 1.8 million square feet of office leases with healthy 14% GAAP and 7% cash rent spreads. GAAP and cash rent spreads were further elevated in the fourth quarter at 16% and 11%, respectively, for the 448,000 square feet of deals signed, which contributed to the 150,000 square feet of positive net absorption. Today, even after signing nearly 0.5 million square feet last quarter, our leasing pipeline comprises nearly 2 million square feet of deals in leases, LOIs or proposals, a level of activity 35% higher than our long-term average. Our 2022 expirations are 12% below market. Regarding our largest expirations, we’re in a late-stage leases for 100% of the NFL space in Culver City. We’ve backfilled KPMG space with Amazon and Denny Triangle. We plan to reposition the Burlington Coat space as office in San Francisco, enabling us to capture a very significant markup on the sub-$10 annual rents. We are already in discussions with both, Auris Health and Stanford, to renew along the Peninsula for upcoming fourth quarter expirations. And we now expect that Qualcomm, which expires in the third quarter, will vacate their space, which we will look to reposition as we market it for lease. Excluding known vacates, Qualcomm, Dell and Burlington Coat, we have 45% coverage that is leases, LOIs or proposals on our remaining 2022 expirations as well as another 25% in discussions. Most of those in discussions represent smaller sub-10,000 square foot tenants along the Peninsula and in Silicon Valley with late third or fourth quarter expirations, who would be unlikely to engage more fully until later in the year. That said,…

Thanks Mark. Fourth quarter FFO, excluding specified items, was $0.52 per diluted share compared to $0.44 per diluted share a year ago. Fourth quarter specified items consisted of transaction-related expenses of $1.5 million or $0.01 per diluted share and a onetime prior period supplemental property tax reimbursement of $700,000 or $0.00 per diluted share, compared to specified items totaling $4.8 million or $0.03 per diluted share a year ago. I’ll note that last year, despite the pandemic challenges, we achieved the high end of our 2021 FFO guidance range with full year FFO of $1.99 per diluted share. Fourth quarter AFFO once again grew significantly compared to prior year, increasing by $90.3 million or 37% compared to FFO increases by $16.8 million or 27% during the same period. Again, this positive AFFO trend reflects the significant impact of normalizing lease costs and cash rent commencements on major leases following the burn off of free rent. Fourth quarter NOI at our 42 consolidated same-store office properties increased 4.6% on a GAAP basis and 2.8% on a cash basis, whereas full year NOI increased 0.7% on a GAAP basis and 4.9% on a cash basis. Fourth quarter NOI on our 3 same-store studio properties decreased 9.5% on a GAAP basis and 17.3% on a cash basis. However, adjusting for the onetime prior period property tax reimbursement, NOI would have increased by 17.7% on a GAAP basis and 6.9% on a cash basis. As of year end, our in-service portfolio was 91.8% occupied and 90.8% leased, representing 120 basis points and 160 basis points quarter-over-quarter increase respectively. Following the $1.1 billion refinancing of our Hollywood Media portfolio in late summer, we returned to the capital markets in the fourth quarter to further fortify our balance sheet and increase our liquidity. We raised $413…

Thank you. The first question is from the line of Craig Mailman with KeyBanc Capital Markets. Your line is now open.

Hey, guys. Victor, one quick one, I know in the news, there has been some talk about the $150 million tax incentives that Governor Newsom passed. Is Glenoaks – are you guys anticipating getting any of that allocation for Glenoaks and is that sort of in the 7.5% to 8% yield expectation?

So, it’s not in the 7.5% to 8.5% yield expectation and – hi, Craig. The amount is a greater amount, the $150 million is for development allocated for studio development and we will apply for that. Not sure we do fall into the category, I am not sure of the status that we would really fall under Chris Pearson and Chris Barton’s area, but the answer is yes, we’ll apply for it. I am not sure if we’ll get it or not, but it’s not part of the yield.

Okay. And then the assets held-for-sale, how far are you guys along in the process on those few assets you guys put in the bucket there? And I know, you guys have been pretty steady capital recyclers. As we think about maybe what’s in guidance for this year kind of what level of these non-core assets could be in there versus maybe some joint ventures of your better kind of lower cap rate assets?

So, let’s not assume that we are going to do any JVs at this time and we have had conversations on a few of the assets under the auspices of the direction that you are going, but nothing is reflected obviously in guidance as Harout pointed out. But that being said, of the four, no particular order, I think, Del Amo, our final offers are coming in next week, I think it’s Tuesday, 6922, today is the first day of offers. And I think our team is expecting somewhere between 6 to 10 offers or so. So, those two are relatively imminent. Northview, I believe is slated for March 1 for the packages to go out and then they will probably call for offers, first ground offers, my guess is, near the end of March. And we are evaluating a couple of alternatives around Skyway. And I believe the data is exactly the same as March 1, but there is an interesting sort of play around that – around life sciences that has been approached to us. And so we are going to evaluate that with the tenancy and the available vacancy and the transformation of that asset. So they are all – I think if everything goes really well, end of second quarter, everything should be closed and so it will be impacted for the second half of the year, I guess is maybe how the guys would think about it.

Yes. Just to be clear, in our guidance, we assume we hold them for the whole year just because we don’t know the timing. So, the guidance reflects owning those assets throughout 2022.

And I don’t know if you guys have run this, but just assuming maybe something happens in 2Q or late 2Q relative to maybe your expectation, if there is a way to give a blended potential impact that wouldn’t kind of give away what your pricing expectations are? Do you guys have like a sense of what the drag would be if you execute it from this Del Amo speaking, so maybe you are not going to drag?

A suggestion would be the range of gross proceeds there is somewhere between, call it, $3.25 and $3.75 collectively. Recall that Del Amo has no current tenancy and then you can gauge through the percentage leased on the other three kind of what the leasing status is. So, you could throw a relatively low cap rate at the number, a pretty low cap rate, assume you disposed of those assets sometime within the middle of the year, you would get pretty darn close to kind of what the NOI associated with those assets are, right. And then the real question is what do we do with the proceeds, right? Do we redeploy quickly into a new acquisition and so forth, but that should give you a pretty good way of estimating the impact?

No, that’s really helpful. And then just one last one for me, on the Burlington space, kind of what’s the – are you guys envisioning there is the redevelopment play. Does it stay – I know you said it goes office kind of how much do you think you have to spend and what type of tenant – does that include like a lobby refresh and maybe kind of second floor tenancy kind of what’s the play there?

Hey, Craig, it’s Art here. It’s – so the project is 95,000 square feet, currently, all retail. It’s going to be half – virtually half and half, half office half retail for probably a big box user down below. And the rates we are looking at, mind you, I think we have kept saying that our gross rents on that asset were close to $8 annually in that ballpark and we are looking for kind of a low 60s rent on the office portion.

Okay. And is that not to throw the politics into it, but has that location fared well with everything going on in San Francisco from a retail shop listing type issue, like will it be easy to get a retailer in there for the ground floor or is that – do we need a little bit of cleanup and we are able to take a new one?

Yes, absolutely. There is – it’s a great location at Soma. There have been hint of inquiries of how big box retail there and office in that class. So, we feel really good about the activity with kind of the higher end space in Soma.

Great. Thanks.

Thank you, Mr. Mailman. The next question is from the line of John Kim with BMO Capital Markets. Your line is now open.

Thanks. Good morning. I just want to clarify, are you suggesting that guidance can come down based on dispositions or is this a base case just given the timing and the likely low cap rate that you are going to sell out?

So, I guess the answer is it can go down or up, because if we redeploy the amount into accretive assets, it can actually go up. So that’s why we don’t guide either way, because we don’t know the timing and we currently don’t have these proceeds figured out yet. So it can go down if we sell it, sure, but if we buyback stock per se, that might be much more accretive than the underlying FFO that it was providing.

Okay. That makes sense. On your ‘22 expirations you discussed having 45% in coverage, another 25% in discussions, excluding the known vacates. How much of that is renewal leases versus new leases where there might be some vacancy downtime?

You mean backfill; do you mean backfill on...

Yes.

Yes. So I would say it’s probably a third of it is backfill that we are already working really across the entire portfolio.

If I could just ask one more, so the Dell, I think you mentioned that’s a known vacate, so that was the lease that was extended on a part-time basis or short-term basis from October to earlier this year. So I just want to clarify that Dell will be leaving that space?

That’s correct. Well, they are leaving three floors and then we have – we are in discussions on actually one of those floors currently. The backfill and the market is – the market is about 52%.

Great. Thank you.

Thank you, Mr. Kim. The next question is from the line of Manny Korchman with Citi. Your line is now open.

Hey, everyone. Maybe just a combination of sort of what Harout has talked about and Victor’s comments in the beginning, but it sounds like you are going to get a bunch of the excess capital in from these dispositions and I am not sure how big your acquisition pipeline is, but you also did the Prop C, which brought a bunch of excess capital in, so kind of what is the plan? Is it that you have a big acquisition pipeline? Is it that you just wanted to be sort of cash heavy at the moment or what drove you knowing that you could be signing these assets in this upcoming year to do the Prop C, which brought so much capital in?

So, couple of things, Manny. I mean, listen, we have a very extensive development pipeline that we are aggressively pursuing and some we have announced and some we haven’t. That’s one. We do have allocated dollars that we have not specified yet for other accretive uses of capital. And as always, we have a very strong balance sheet to maintain flexibility. I wouldn’t read into one or the other, I would read into the fact that we have always looked to capitalize on opportunities to access capital. These four assets are not core assets to the portfolio. Timing is right. Hopefully, pricing will be right and we will execute on those deals. Just as Harout said, the question before or two ago, I am not sure. If we don’t get the right pricing on these assets, we are not going to sell them. So, it’s not a stage of complete. And you never know what happens as markets change in timing and that’s exactly why we haven’t altered any of our numbers for 2022.

And then Victor, in the press release last night, you pointed out growth in the studio portfolio as one of the focuses for the year. That’s not that different than what you have said in the past, but is it – is there a reason that it’s sort of front and center?

Well, I think there is a lot of opportunities that we are looking at right now in that. And I mean I think relatively speaking, there is – we are probably evaluating more opportunities with our JV in that product type. I am just sort of thinking off the top of my head, then what we are seeing in the office in our markets in the office sector, so yes.

Thanks, Victor.

Thanks, Manny.

The next question is from the line of Jamie Feldman with Bank of America. Your line is open.

Great. Thank you. I was hoping you can talk more – follow-up more on the comments you made at the beginning of the call about capital flows, VC investment and how it’s translating into better leasing, especially for your smaller tenant portfolio. Can you talk about specifically the submarkets that maybe in the fourth quarter or even as you look at the leasing pipeline seem to be getting – actually improving? And then as you think about the portfolio following these four asset sales, how do you think the trajectory and maybe even the expiration risk can start to look differently?

Yes. So, I will take it sort of a top level and then I can let Mark and Art jump in a little bit, Jamie. But if you think about the amount of capital that’s just raised in California alone, as I said in my prepared remarks, I mean that’s going to equate to the logical thought process of being distributed to companies that want to be in close proximity to their capital providers or their partners or their investors. And that’s always been the trend. And that’s why people focus substantially on VC capital, deployment of capital into first, second, third, fourth stage investments, right? I mean, just to take a look at it, if you really narrow it down in the Valley, I mean, we’ve got just alone, we did, I think, 145 deals in Silicon Valley in 2021 relative to half that, I think it was like – less than half at 100 – sorry, 74 deals, I think it was, in 2020. So the majority of those deals are this small tenant, smaller relative to the large tenants that are out there that we’re signing in the top 10 large tenants in the Valley were Apple, Meta, NetApp, C3, LinkedIn. I mean, those were all in the 700 to 0.25 million square feet, and I’m referring to the 10,000 to 30,000 square footers. And so that’s going to equate to, I think, what we’re seeing and the activity on that alone. Not to mention, by the way, that the Valley did, I think, about 14 million square feet of deals in ‘20 and ‘21. So a lot more than people thought. So there is a direct correlation to capital raise, deployment and growth, and we’re seeing that on the ground on a granular basis, and Art can comment on that.

Yes, we definitely see it on the ground, especially across the Valley where we moved that portfolio about 130 basis points quarter-over-quarter, and that’s all deal volume in the kind of sub10,000 square foot range. And again, we – our market share is still – our market share is about 10% of all the deals that we’ve done over the last 2 years, that’s ‘20 and ‘21 in the Valley. But our footprint there is probably about 4%. So we’re definitely doing more than our share of deals.

And then just to sort of top up your trailing part of your question, Jamie. Skyway is the only asset in the Valley, we have purposely tried to vacate that asset for higher and better use either, as I said, for life sciences, whether we do it or somebody else does in the sale process, I mean, that’s the higher and better use and the rents are going to justify that. Del Amo is 100% vacant. It’s a small asset. We’ve talked about it all along. It’s 100% vacant. 6922 has had some leasing aspects there, and we’re hopeful that we’re going to get the right pricing levels. In Northview is I’m going off – I think it’s a mid-80s or something like that, something to that effect. So yes, I think with these four assets, if we execute on it, it will take some of the exposure away from some of the future vacancy in the portfolio.

Okay, thank you. And then I guess those comments make a lot of sense based on VC funding we’ve seen, but you’ve also seen the stock market fell off and real concerns about growth stocks or growth companies. Have you seen a shift at all in – or a slowdown at all in leasing volume? Or are deals falling out of bed or anything based on some of the broader concern?

I just walked you through – I gave you a snapshot of the top 10 deals just in the Valley alone. It’s like 3 million – over 3 million square feet of all the top FAANG related tenants or ancillary-related tech and media tenants that are signing space. From that side, you’ve talked to our peers in the markets, and you know what’s going on in the marketplace. I mean, they are the most active. They lease the most space. I think they lead by the markets that they are in for high-quality real estate, and we’ve seen zero set back or pushback on that. I think also if you look at our portfolio, we don’t have a ton of those tenants that are expiring, but those that are, are looking to renew. We’ve already exposed the market to the Dell, the NFL and the Qualcomm. But other than that, the next year down, we are negotiating with existing tenants to renew. And as Mark said in his prepared remarks, we are in leases on two of those spaces anyways.

Yes, Jamie, close to the three quarters back and when we started reporting that we’ve seen increase and strengthening in fundamentals and it really – it starts with tenant demand in the Valley, tenant demand has been increasing steadily, and the gross leasing is up quarter-over-quarter sequentially. We are – if you look at our deals, Jamie, our square footage from ‘20 to ‘21 increased 165%. So I mean that speaks to the velocity and obviously, we’re getting our share of deals.

Okay. So I guess it sounds like you’re not – you haven’t seen any change in appetite based on what’s going on in the stock market or growth concerns?

No. I mean, if anything, what we’re trying to – what we’re seeing is an acceleration in deal activity.

Okay, alright. Great. Thank you.

Thanks, Jamie.

The next question is from the line of Blaine Heck with Wells Fargo. Your line is open.

Okay, thanks. Good morning, out there. Victor, you talked in your prepared remarks about using proceeds from sales to fund high-yielding office and studio investments. I guess we’ve seen that strategy in play on the studio side with the acquisition of Zio and Star Waggons on the service side. So is it more of that type of investment we should expect on the studio side? And then with respect to office, most of the trades we’ve seen thus far have been really high-quality, low-yielding properties. So are you seeing more opportunity on that value-add side that might eventually have higher yields? Or was that high-yield comment directed more towards development in office?

Listen, the high yield – let me take you’re – the first part of your question. On the type of assets that we’re looking at, they are truly high yielding are going to be more development related or operational related, which is consistent with what we are projecting on the studio side, but also on the office development side. I think it’s no hidden secret that our projected returns for Washington 1000 are going to be one of the highest-yielding development deals, if not the highest in most recent history in all of Seattle and the surrounding areas. So that sort of falls into that category. We – going to your office comment, I do think that the core deals are trading at relatively aggressive cap rates, and if they are really not aligned to the kind of stuff that we’ve typically done in the past. We are starting to see some value-add deals, that I think makes some sense. And so we’re not projecting we’re going to do one or 10 of them, but we are obviously evaluating them as they come in and hopeful that we will see more.

Okay, great. Helpful commentary there. Maybe for Mark or Harout, with respect to the timing of Google revenue recognition, can you just walk us through the major milestones there? I think based on the notes in the supplemental I guess my understanding is you’ve turned the property over to Google to build out their tenant improvements. And then hopefully, in the third quarter, the GAAP rents will commence and then essentially 9 months later cash flow commence. Is that correct? And how are you feeling about Google getting the TIs completed by the third quarter this year?

So a couple of points there. So we did deliver the space in 2021 in December. So we did start GAAP revenue recognition at that time. And from a GAAP and FFO perspective, that’s going to continue regardless of the timing of their build. And so that answer. In terms of their build and their cash rent payment, that’s on them. They have that amount of time. If they were to build sooner or later than that, their cash rent still starts. It doesn’t – it’s not affected by their ability to complete the work. And you’re right, after 9 months, we do have cash rent starting. And then at a 3-month – sorry go ahead, Mark.

Sorry, you have 1 month of free rent that starts in the third quarter of ‘20 – month of I mean, sorry, 1 month of cash rents that starts third quarter of this year. And then they have 8 months of abated rent and then all of the cash rents begin again after that 8 months of abatement.

It’s a little confusing, because there is a big gap in terms of cash rent, but for GAAP purposes, immediately upon delivery is when you recognize the rest.

Great. That’s clear. Thank you.

That you can see, by the way, in Footnote 14 on Page 20 of the supplemental, in case you want to reference that you can see that description.

Appreciate it, Mark.

The next question is from the line of Caitlin Burrows with Goldman Sachs. Your line is open.

Hi, good morning. Maybe just starting with a broader one on return to office, so I think some of the data shows that this is improving once again. I was wondering, if you could just go through what are tenants telling you in terms of their latest plans? And maybe more importantly, how do you think that’s evolved over the past, say, 6 months and what could be different now?

Well, I think, listen, we’re all in the same position as to where we see it. It’s a day-to-day – literally a day-to-day moving target with the mask mandates being lifted virtually everywhere in the city of Los Angeles, their dates in place. And I think that’s been the catalyst and kids going back to school and the vaccination increasing for children has led us to be fairly – fairly much in communication with all of our tenants on the larger scale that they have a game plan, and it is imminent. And some as early as March 1. And so it seems as if this is a real starter versus the last Delta or Omicron that has maybe delayed. I also do think, Caitlin, you’re finding that companies are not coming out with statements, they are just bringing people back, because they don’t want to say they start stop. They are not going to do that again. And so – but we specifically have our largest tenants in the portfolio are all actively engaging to come back imminently.

Got it. And then maybe just a question on the studios, you had positive same-store cash NOI growth in the fourth quarter, and your guidance assumes an acceleration in ‘22, but it does look like same-store occupancy is down. So I was just wondering, if you could go through how same-store NOI and revenues are accelerating even if occupancy is declining?

Yes. That occupancy decline, it doesn’t, by the way, take much on 1.2 million square feet to sort of move the needle. But that occupancy decline has been kind of driven off the same basic on sort of dynamic, if you will, throughout the pandemic namely, it’s non-stage-using office tenants. So, some of our space is occupied by tenants that want proximity to the stages like casting agents, for example. And we’ve seen throughout the pandemic, as tenants haven’t been coming to office, some of that tenancy has trailed off, having said that, the real driver of revenue at the studios is the stage utilization, their utilization of the services and then all the support that goes with that. And so you can easily continue to kind of post the type of returns, same-store growth and the like, based off of really, really strong stage usage and everything that goes with that, even if we see a little bit of weakness on these non-stage-using office tenants, which is why you two kind of can coexist, if you will. When things normalize, and they are normalizing and tenants start to return to the office more regularly, that part of the studios that lends itself to these non-stage-using office tenants, that will start to normalize too, and they’ll come back in. So, there is definitely more upside with the restoration of that tenancy here in the near-term.

Got it. Thanks.

Thank you Burrows. The next question is from Rich Anderson with SMBC. Your line is now open.

Thanks. Good morning and congrats on the, Super Bowl for any Ram Sands out there.

Thank you.

Speaking of the NFL, what is the mark on that expected to be, assuming you get what this late stage through to the finish line, and I understand this doesn’t expire until the end of this year? Given the TI build-out and everything, we’re really talking about this becoming a kind of a 2024 event from the standpoint of cash flow. Is that correct?

No. So this is Art. First of all, it’s 170,000 square feet, we are very close, final lease negotiations with the mark, as we’ve mentioned before, is about 26% for the business.

That’s seasonal, right?

On the expiring rate, yes, biggest rent. Yes. That’s right.

Yes.

And then, 24 – no, I believe there is an 8-month build period from execution.

Okay. So late 2023 then?

That’s right.

As for Qualcomm, my question there is, what’s the risk or that this thing goes the way Cisco did a few years ago. There were points in time when you were expected to have some good news from the vacate there and ultimately, it didn’t quite work out. I mean, do you feel like the market is just in a different spot now and that you won’t have a similar outcome with Qualcomm?

Well, let me start with high level. I mean you’re talking apples and oranges, right? I mean completely different market, Rich. This is a marketplace that earlier on in some of the questions that I was asked, walk through the 14 million square feet that what was leased in the Valley is all sort of akin to the type of real estate that this is. It has nothing to do with Campus Center and the quality of real estate that was. That was a one asset in a marketplace that had – in the best of times, had zero growth opportunities and activity. And this is an asset that is highly sought after. And so we’re talking apples and oranges as I said. I do think the activity has been – we never – we didn’t find out that they were really going to leave. And the only reason we found out is they never told us, so that they came and went, and they didn’t tell us and that was at the end of December. So we’re under the assumption of 100% and now we’re positioning it to be marketed. And I think Art will tell you that he’s very confident.

Yes. So we have – Victor, you hit the nail on the head with the apples to oranges. I mean it’s a great asset. I mean, it’s two building assets, its new construction, newer construction, it’s in a great market in North San Jose. And Victor mentioned before, there were 10 deals over 100,000 square feet in 2021. Now there is – right now in the market, there is about 12 over 100,000 square feet that we’re at least in dialogue with. And so we feel absolutely positive about really the prospect of getting lease signed. Probably building-by-building, if I had to guess, Rich, if that was your next question, rather than the two-building user.

Okay. Fair enough. Appreciate that. Harout, you mentioned the 37% AFFO growth in 2021. I’m wondering, when you think of 2022, how much of that 37% was sort of unsustainable and really what we should be thinking about in terms of AFFO growth, if you could provide any color on that for this year?

So I’m not sure if it’s unstable or not. It is directly attributable to; a, cash rents coming up in all of our assets, right, burn off of free rents, if you will. And I think stabilization of TIs and LCs. I think Google, when that starts paying cash, as Mark walked the previous caller through, that’s going to really contribute to AFFO in the future. Now will it be a little bumpy if there is a relatively large lease signed? Sure. And for TI, but I think obviously, the benefit of that is will be more cash rents. But I think looking out, it looks pretty – I don’t think the growth of 37% is sustainable every year, but I do think the level of AFFO that you’re seeing now should be relatively sustainable.

Yes. Okay. And then one last quick question for you, Victor. I was reading about the opening of the Great Point Studios in Yonkers, New York. I’m sure you guys noticed that. That’s 1 million square feet and it seems to be moving along Lionsgate as the base tenant. But where – to what degree do you see sort of early-stage opportunities like that where perhaps we’re not quite into the entitlement stages yet, but you could see a vision of growth in similar form to that. And is that the kind of thing that you’re seeing that gets you kind of jazzed up about seeing more opportunities in the JV than you do even in your conventional office business?

Well, yes, listen, I wouldn’t – saw that facility. And they are about – they just actually are ready to open some of that space and some of the office space, March 1. Listen, that’s the kind of stuff that you’re absolutely right. I mean, we’re looking at opportunities exactly like that or ground up purpose-built facilities in Vancouver, in London, in New York, and here in Los Angeles. And so – and there are other markets that we are evaluating at the same time. And so there are some very interesting opportunities that I think the JV is going to be pursuing fairly aggressively.

And so – but you probably need to be a year early year in the case of the Great Point example, right, before you can get installed in that?

Yes. I mean there are obviously entitlement issues on some of these and some of the ones we are working on. We are working through those in existing deals that we have not announced yet.

Yes. Okay. Thanks very much.

Thanks.

The next question is from the line of Vikram Malhotra with Mizuho. Your line is open.

Thanks for taking the questions. So, maybe just – I just wanted to clarify with the early delivery of One Westside, just the impact to 4Q and then the impact to 2022 versus maybe what you had anticipated earlier? I know there is obviously the concurrent interest expense you are going to start recognizing as well. So, if you can just walk us through kind of the math on how much of – how much did it contribute to 4Q and then maybe to 1Q?

Sure thing. So, in the fourth quarter, our share of FFO gave us roughly $300,000 of additional FFO in Q4. So, it wasn’t that meaningful for the activity. In terms of 2022, there really isn’t an impact, right. It’s just starting a month earlier from a GAAP perspective. Maybe cash comes in a month earlier, but for the balance of 2022, there is no impact for that early delivery.

It was always expected.

Yes, it was always expected, as always in our numbers, and that’s what we had provided in terms of information in the past.

Okay. And then just the spreads on the office side still seem pretty robust. I know you talked about some of the vacancy, one of the vacancies with still at a 50% mark. But just stepping back, given where market conditions are today, what is portfolio-wide mark to market today for the office segment?

It’s just shy of 10%, the spot mark to market.

Okay. And then just last question, I guess with all the capital now that you may have additional capital with the asset sales. I am thinking of two specific kind of areas and I wanted to get your thoughts, maybe Victor on this. One is your peer has moved to maybe where some of their tenants are moving to Austin, the Sunbelt on the office side. So, that’s one area, I would love to get your thoughts. And second, with this whole quality divide that’s percolating across markets, what’s the need or the desire to do a lot more redevelopment of assets, including maybe amenitization?

Well, Vikram, thank you. So listen, we have been asked the question about other markets in the office space. And there are other markets that we might consider. But right now, we are sort of laser-focused on our core markets being Vancouver through on the West Coast all the way down to Los Angeles. We are not considering Austin. I think it’s a great marketplace, but it’s not a marketplace for Hudson at this time. And we think there is going to be some ample opportunities in our markets and maybe some others as well, that we will evaluate and see how synergistic it is. In terms of your second question, I mean, absolutely, we have spent the last 2 years during COVID, looking at a number of our assets and spending a tremendous amount of capital on those assets, both on the outside and the inside. In the inner workings of the assets, on the systems and then on the beautification of the assets and the quality of space to adapt it to be concurrent with our quality portfolio and our assets. And the ones that were not are like the four assets we talked about that we are going to get rid of and dispose of. So, there is a flight to class, and I think that’s sort of proven out to our portfolio and why we are seeing the assets that have leased in our portfolio are the ones that we put a lot of time and money into or they are newer quality assets.

So, just to clarify, you are saying you have spent 2 years sort of doing that. And now if there are any incremental assets that don’t fit the bill, you are – the primary strategy is disposition?

No. Not to clarify that. Just so you know the primary strategy is to finish the work on some of the assets that we have been working on. I think there is several assets that are a lot of renovations and modifications of core space that are still in the works. I mean we have got – I don’t even know the number of projects, but it’s a substantial number of projects that are working – that our redevelopment team is working on. Just the assets right now that we are disposing of are those four. There is no other assets that we have identified at this time to put on that list.

Okay. Thanks for the color.

You got it.

The next question is from the line of Ronald Kamdem with Morgan Stanley. Your line is now open.

Just a quick one. Just can you talk about what the utilization of the portfolio is? And as that sort of starts to get back to normal, is there any sort of variable expenses that we should be mindful of as more people start utilizing the properties?

Well, yes. I mean utilization, as Victor pointed out earlier when the question came up is definitely improving and accelerating somewhat quietly, because their employers are actually having people come in, even though they are not making bold announcements about it. I do think this method that a lot of landlords, I think were using during the pandemic of gauging physical occupancy through elevator, swipes or parking and the likes. We are beginning to recognize is really not going to be probably too useful methodology as we are witnessing really the normalization of more of a hybrid flexible work model. So, what we expect to see is buildings will be in high utilization and so far as the suites will have – all the suites will have some amount of physical occupancy. It will just be less dense occupancy, right. So, we think we are all going to need to recalibrate the way we think about what it means to be, say, fully occupied. And we are just sort of seeing the early stages of that now. As per incremental variable cost, yes, there will be not much. I mean all of our buildings throughout the pandemic remain fully operational. They are – including heightened janitorial services and so forth. And we are not – there is not going to be much more to incur on those variable services. And as you know, I mean even if utilities, for example, were slightly higher, let’s say, after hours HVAC and so forth, all escalatable and recoverable. So, you won’t really see much of that. I think the real – what we are all sort of waiting on is for parking to really materialize. There is very little incremental variable expense associated with that. A little bit for the parking operators, but more importantly, we are really not recognizing anywhere close to what normalized parking revenue should look like. And so that’s where I think you should be sort of expecting the real impact to be felt.

Got it. Thank you. All my other questions have been answered. Thanks so much.

Thank you, Mr. Kamdem. The next question is from Dave Rodgers with Baird. Your line is open.

Yes. Hi everyone. Thanks for taking the time. A couple of follow-ups for you. You guys quoted, I think in the press release last night, 41% leverage with the preferred. So, when you think about $350 million of asset sales at the midpoint, $100 million maybe of cash flow after the dividend, gives you quite a bit of liquidity. But I guess from the perspective of three things, one, known capital spends, known commitments this year, how much is that? And then, how do you kind of phrase in your heads, the kind of the leverage of the company as well as kind of the buyback program, as you had mentioned earlier?

Real quick, on the leverage issue, it’s not on the preferred. It’s only the preferred unit A. It’s not with the preferred C, the 41%, just to be clear there. In terms of…

Well, it’s – I mean, the leverage question is always can be a little unwieldy, because it depends on what your underlying point of measurement is, is it like equity capitalization. And of course, that will be totally – that’s entirely unknown. We don’t know where our share price is going to trend at the point in time that we have deployed that capital. So – but if you look at it in terms of, say, something more predictable underlying gross asset value, un-depreciated book, let’s say, that’s quite a bit lower than 41% as we sit today, it’s closer to the mid-30s. And every dollar expected to be deployed on that pipeline development and so forth, will cause an incremental dollar of gross asset value. So, it will still remain a very manageable level looked at in terms of net debt to un-depreciated book, probably maybe you might go up 100 basis points, at most 200 basis points on that leverage level, but still in that manageable mid-30 range. So, that – I mean I think that responds to the question on kind of leverage trends, right. Did we miss something else there, David?

No, that’s fair. And I guess – that also assumes that a buyback program would be somewhat constrained by that as well?

Yes. I mean well, it’s some – I guess, there is limits on everything. And I don’t think any – even very impactful buyback program is – we are constrained. I mean we have got ample room on the balance sheet to do a meaningful buyback, if that’s where we choose to focus our capital.

And then maybe just last on the liquidity side, known capital commitments for the year relative to kind of what you are anticipating bringing in?

It’s – I mean, in terms of, again, putting aside any speculative acquisitions, so it’s not that much. We have got a $90 million construction loan for Glenoaks, that it covers all of the spend for the year on Glenoaks. We have got – you can see in the development pages of the supplemental, we only have really the TI allowance and a little bit of retainage left on One Westside, all of which is covered under that construction loan. So, we are really just talking – the only real meaningful spend, which could hit and won’t be much, will be Washington 1000, when we get underway there. And I don’t know exactly how much of it hits just in calendar year ‘22. But I am going to say it’s probably maybe, I don’t know, $70 million, $80 million at most. So – oh, yes. Well, when we got to complete the purchase, there is $65 million at the point of acquisition. And then there is whatever incremental spend we have early on in the year, let’s say, maybe I don’t know, maybe it’s more like $40 million, $50 million by the end of the year. So, maybe it’s $100 million with the takedown of the land on Washington 1000. That’s the only – like something that requires current liquidity that’s not covered by existing constructed debt. The only other spend is just our ordinary TIs and commissions and recurring CapEx, which you can get a good idea of kind of what the run rate of that looks like. It’s been roughly averaging over the past 4 years, like $25 million a quarter.

Okay. Go ahead.

We are rather late, so I am going to take a couple of more questions. That’s it. So, we are just sort of running over. I am cognizant of people’s time.

Thank you, Mr. Rodgers. The next question is from Daniel Ismail with Green Street. Your line is open.

Great. Thank you. Just one for me. We have been discussing for a few quarters on the strength in Silicon Valley and on the Peninsula. But I am curious if you think that translates to San Francisco CBD this year?

Yes. Listen, that’s a great question. I think from our standpoint, aside from Burlington’s early termination, our portfolio there is like 94% leased. So, we don’t have a lot of exposure. So, we are personally in good shape. I think – you have heard me say this before, I am still relatively bullish on San Francisco and the future of San Francisco, I think will swing faster than people believe it’s going to swing. And I think as a company perspective, we feel the same way. The tenant demand is clearly on the rise there. If you and I had this conversation a year ago, these numbers were dramatically different. I mean we have seen 7 million feet of gross leasing in the city in the last 12 months and the sublease space has gone from, I think it was as high as like a…

9.8 million square feet. We are down about 1.3 million, just from April, really…

Yes. I mean so the trend is really much better than, I guess what people are really seeing. But it’s got some work to go. I do think the political atmosphere is changing. I think it’s changing in all of our markets. And I think that’s helping people understand where the marketplace is on that basis. But I believe that San Francisco still has some issues that they are going to have to accomplish in the next 24 months. And that’s sort of the future that we are looking at that’s the line of sight.

But it still remains a tale of two markets, right. The spaces that are highly amenitized, more desirable spaces, rents have started to tick back up, less upward pressure on TIs and free rent. So, those are all positive signs that we are paying very close attention to.

Got it. Thanks.

Operator, we will take one more question, please.

Certainly. The last question is from Nick Yulico with Scotiabank. Your line is open.

Thanks guys. Sorry if I missed this, but is it possible to get the occupancy growth that’s assumed in guidance? And I know Qualcomm by itself is about 250 basis points of vacancy. So, any perspective you can give us there?

Well, yes, we haven’t provided that. And we – there has been a lively debate. That might be something we add because it’s been asked quite a bit. I can say, Nick, we did review the numbers on the heels of the completing the quarter. And it looks to us that occupancy by end of ‘22 is essentially identical to where we ended on the in-service portfolio at the end of ‘21.

Okay. And that’s – sorry, that’s inclusive of the Qualcomm vacate?

Yes, that’s for all of the in-service portfolio, which Qualcomm is part of.

Okay. Thanks. And just a follow-up on Qualcomm. Is – do you have any insight there about what affected that leasing decisions? It sounds like it was kind of abrupt, but at one point, you said maybe they would keep a building. I am not sure if flexible work impacted that decision for Qualcomm? And then just separately in terms of that whole submarket there, it’s where you have now have some more vacancy. Also wondering how that impacts Cloud 10, the future development as well, maybe just talk briefly about sort of demand in that market?

Sure, Nick, let me start. So, if you recall, I mean we were having these conversations a little over 4 years ago. And Qualcomm was debating whether or not they were leaving or staying. And so it has nothing to do with a COVID decision or flex or deciding to do it. I mean they went back and forth with them. They came to us at the last minute, they were staying. So, this is just how they operate. I don’t think it has anything to do for us to sort of assume that this is a market decision based on the last 2 years. That being said, I will let Art jump in and sort of talk about the middle part of your question, but I will just say Cloud 10 is being discussed with two tenants right now, who are very interested in it. And it’s – because it’s a brand-new project. It’s a super cool campus, designed by Gensler, and I think there is going to be some continual interest demand in that. And the timing around that is going to be different in terms of delivery, obviously, for something like this.

Yes. Like we said, there were about 10 deals done that were responsible for about 3.1 million feet across the Valley. And we are now tracking about 12 more that are greater than 100,000 square feet. And we said it’s going to be likely a single building user, two single building users. And we are currently in the process of repositioning the asset, modernizing the amenities, landscaping, hardscaping and just making the tenant experience superior. And so we feel very, very good about the activity in the market and deal to capture that.

Okay. Thanks everyone.

Thanks so much. And listen, I am sorry, we went over by 10 minutes. I appreciated all the support. And most importantly, I appreciate the dedication and hard work of all the employees at Hudson and a great quarter and the accomplishment of 2021. We will see you guys all soon.

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