Greetings, and welcome to the Hudson Pacific Properties, Inc. 1st Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce Laura Campbell, Executive Vice President of Investor Relations and Thank you. You may begin.
Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties' Q1 2021 earnings call. Yesterday, our press release and supplemental were filed on an 8 ks with the SEC. Both are available on the Investors section of our website, hudsonpacificpropertiesdot com.
An audio webcast of this call will also be available for replay by phone over the next week on the Investors section of our website. During this call, we'll discuss non GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We'll 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 those associated with the COVID-nineteen pandemic. Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update.
Moreover, this quarter, we've once again included certain disclosures in response to the SEC's direction on special disclosure of COVID-nineteen prompted business changes. We'll not maintain this level of disclosure as business operations normalize. With that, I'd like to welcome Victor Coleman, our Chairman and CEO Mark Lamas, our President Art Suazo, our EVP of Leasing and Harusia Mariani, our CFO. Victor?
Thank you, Laura. Good morning, everyone. Welcome to our Q1 2021 call. I'm pleased to start my remarks today by noting that lower case studies and increased vaccination availability are leading to positive momentum in the reopening of our U. S.
Markets. And as of late April, between 30% to 40% of eligible California and Washington residents are fully vaccinated with millions more having received their first dose. Vaccinations are moving a bit more slowly in British Columbia, but over a third of the population has had at least one shot and we're hopeful a recent rise in cases there will resolve swiftly. Many of our large tech and media tenants are leading the way in terms of getting their employees back to the office. Google, Amazon, Netflix, Microsoft, Facebook and Uber all plan to bring employees back before or by at least the end of the summer.
These companies led the work from home movement at the outset of the pandemic and their return will serve as the impetus for other companies to call employees back and we certainly anticipate our physical occupancy will increase meaningfully over the next two quarters. Bottom line, our focus on tech and media epicenter positions us extraordinarily well for the next phase and beyond. Our markets remain at the center of gravity for these industries, which have flourished through the pandemic. Venture capital investing surged for the Q1 to nearly $70,000,000,000 shattering previous records. IPO activity remains very strong and recruiters anticipate significant tech hiring.
We're seeing similar trends in media. Netflix alone plans to spend $17,000,000,000 on content in 2021 versus $12,000,000,000 last year and collectively streaming companies Netflix, Amazon, Disney, Apple among others are projected to spend approximately $112,000,000,000 on content. In short, there's plenty of capital for these companies to grow. We've also spent the last decade building and repurposing assets to create premier work environments that are perfectly suited to a post COVID world. We're at the forefront of the movement that prioritize health and wellness, sustainability, technology and in particular experience from award winning innovative developments in Hollywood like Epic to our reimagined creative office campus.
In San Jose like Gateway, our portfolio already delivers precisely what tenants want and need as they contemplate a return to office. We remain focused on growth as we have been throughout the pandemic. We're evaluating multiple, mostly off market opportunities and several on the studio side, but also some of our office portfolios as well. Of course, our existing Sunset platform, our experience in operating and redeveloping production facilities, not to mention our recent hire of a senior executive to head our global studios, uniquely prepares us to create real estate value around demand and content. And we're committed and aligned as even as ever with our partner Blackstone in this endeavor.
Finally, I'm going to mention that on Earth Day, we released our 2020 Corporate Responsibility Report, marking the 2nd such report we've published under our Better Blueprint platform. We've clearly established ourselves as an ESG leader in our industry with bold and impactful initiatives, which in 2020 included becoming 100 percent carbon neutral, pledging $20,000,000 to address homelessness and launching a comprehensive company wide DEI training program. We also received numerous accolades this year such as GRESB's Greenstar and 5 Star Designations, Energy Star Partner of the Year and being named a U. S. Department of Energy Green Lease Leader and a Globe Street Best of Place work.
Our 2021 priorities include reducing our embodied carbon, moving toward net 0 waste and strengthening our DEI commitment on multiple fronts. I'll look forward to sharing more of this important work as it unfolds. And with that, I'm going to turn it over to Mark for more comments.
More than a year into the pandemic, our tenants continue to pay rent. We're also now successfully collecting both previously deferred and delinquent rents and additional requests for relief, mostly from our smaller retail tenants are dissipating. This is all occurring despite California's ongoing eviction moratoriums and renter protections, which are among the strongest in the nation. In the Q1, we collected 98% of our combined contractual rents, comprised of 99% from office tenants, 100% from studio tenants and 54% from storefront retail tenants. April collections are tracking above these levels.
In the Q1, we also successfully collected over 99% of the deferred rents, which became due during the quarter. This trend is so far consistent for April. About 70% of the 80 or so tenants that were 3 or more months delinquent between April and the end of Q1 are either fully repaid or have commenced repayment. This equates to nearly 75% of past due rents from these tenants being repaid. In the Q2 of last year, at the height of the pandemic, we received about 150 rent relief requests from tenants occupying nearly 750,000 square feet.
By comparison, in Q1 of this year, we received only about 30 requests from tenants occupying around 175,000 square feet. Again, these are mostly smaller retail tenants. All in all, we're very pleased with how collections are trending. Turning to our development pipeline. Construction at One Westside continues unabated and we're on track to deliver this fully pre leased 584,000 square foot project to Google in Q1 2022, potentially even sooner.
We have another 3,200,000 square feet of potential future development. Studio related opportunities in Los Angeles comprise over 40%, with the balance being more pure play office across our core markets. The most likely near term project is our Washington 1,000 development in Seattle. We anticipate the podium will be delivered to us sometime in Q4 of this year. We have 12 months thereafter to decide whether to start construction on the tower, which will allow for better line of sight on post pandemic market conditions.
Once construction has started, we can deliver within 18 months. And now I'll turn the call over to Art.
Thanks, Mark. Touring activity and tenant requirements have continued to increase as companies begin to formalize their post pandemic real estate strategy. In most of our markets, requirements are up 20% to 30% since year end. Although this is yet to translate into significant deal volume, we expect both signed leases and fewer opportunistic sublease listings to begin to right size vacancy and overall availability rates in the coming quarters. We signed 524,000 square feet of deals in the Q1.
That's essentially double our leasing activity over the past 5 quarters and on par with our long term average quarterly leasing activity. Our GAAP and cash rent spreads were 12.2% and 2.4% respectively. Now to put the 2.4% into context, we had 2 large renewals in Palo Alto with Google and Lockheed that collectively comprised almost 50% of our Q1 activity. Those deals were essentially at market and thus significantly weighed on our cash rent spreads. And remember, Palo Alto rents remain among the highest in our portfolio and in the nation despite COVID.
We also had 35,000 square foot expansion lease executed in the Q1, the contractual rent for which was slightly below market. Normalized for these as well as short term deals, our cash rent spreads would have been closer to 7%. Again, in line with what we're seeing throughout our markets, our current leasing pipeline that is deals in leases, LOIs or proposals stands at about 1,300,000 square feet. That's up close to 20% since our last call and back in line with our long term average pipeline. After addressing several of our larger 2021 expirations, we're down to 6.5% of our ABR remaining to expire this year.
Right now, we have roughly 40% coverage on those deals, which are approximately 15% below market. I'll also note that despite the challenging conditions across our markets, for the 2021 expirations we've addressed during the Q1, we renewed our backfilled close to 70%. And now, I'll turn the call over to Haru.
Thanks, Art. In the Q1, we generated FFO excluding specified items of $0.48 per diluted share compared to $0.54 per diluted share a year ago. 1st quarter specified items in 2021 consisted of a one time prior period supplemental property tax expense related to ICON, Q and Sunset Bronson of about $1,100,000 or $0.01 per diluted share compared to transaction related expenses of $100,000 or $0.00 per diluted share and a onetime straight line rent reserve of $2,600,000 or $0.02 per diluted share a year ago. 1st quarter NOI at our 43 consolidated same store office properties decreased 3.7% on a GAAP basis and increased 2.6% on a cash basis. Adjusting for the one time supplemental property tax expense on Icon in Q, NOI for our same store properties would have decreased by 2.9% on a GAAP basis and increased 3.6% on a cash basis.
For our 3 same store studio properties, NOI increased 4.1% on a GAAP basis and 6.4% on a cash basis. Adjusting for the onetime supplemental property tax expense at Bronson and Bronson, NOI for our same store studio properties would have increased by 5.2% on a GAAP basis and 7.5% on a cash basis. In the Q1, we repurchased 600,000 shares of common stock at an average price of $23.32 per share. With $1,000,000,000 in liquidity, we still have plenty of capital to pursue growth opportunities and run our existing portfolio. We have no material maturities until 2023, but for the loan secured by Hollywood Media Portfolio, which matures in Q3 2022 and has 3 1 year extension options.
Our average loan term is 5.5 years. In the Q1, our AFFO continued to grow, increasing by 3,000,000 dollars or 6.1 percent compared to Q1 2020. This occurred even while FFO declined by $9,400,000 for the same period. Again, this positive AFFO trend reflects the significant impact of normalized lease costs and cash rent commencements on major leases following the burn off of free rent. We're providing guidance for Q2 2021 FFO of $0.46 to $0.48 per diluted share, excluding specified items.
At the midpoint, this is $0.01 per diluted share lower than our Q1 2021 FFO per diluted share, excluding specified items. This decrease in Q2 compared to Q1 2021 is primarily driven by the following: a 1.5% decrease in office GAAP NOI resulting from prior period rent collections we do not expect to reoccur. A 19% decrease in studio GAAP NOI, primarily due to seasonally adjusted lower production activity. A 7% decrease in G and A, a 1% decrease in interest expense due to additional capitalized interest associated with incremental development spending and finally a 7% decrease in FFO attributable to non controlling interest. In terms of estimating full year 2021 FFO, the $0.47 per share in Q2 2021 guidance midpoint and the underlying components just outlined provide a useful annualized run rate, except for the following full year adjustments.
Office GAAP NOI is expected to be 5 0.5% higher. Student GAAP NOI 9.0 percent higher. Interest expense 1% lower. And finally, FFO attributable to non controlling interest will be 3% higher. And now I'll turn the call over to Victor.
Thanks, Farooq. As we head into the Q3, we're very optimistic that the positive trends we're seeing in terms of the vaccine, the reopening of our markets and tenants' desire to return to office will continue. At Hudson Pacific, we're poised to outperform in a recovery due to our exposure to the dynamic tech and media industries, our high quality growth oriented tenants and our well located premier and modern portfolio inclusive of our unique ability to operate and redevelop studio assets. We're well capitalized and focused on growth, both through our existing development pipeline and the pursuit of new office and studio opportunities, and I look forward to sharing more on all these fronts in the coming quarters. As always, I want to express my appreciation to the entire Hudson Pacific team for their excellent work and dedication.
And thank you everyone for listening in today, and we appreciate your continued support. Stay healthy and safe, and we look forward to updating you next quarter. Operator, please open the line for questions.
Thank you. We will now be conducting a question and answer Please proceed with your questions.
Hey, guys. Consistent with everyone else, it seems like your leasing pipeline is on the upswing here. Could you just talk about what trends you're seeing from a space planning or density standpoint, if there's really any changes going on relative to pre COVID?
Hey, Craig, it's Victor. I'll start and I'll have Art jump in, okay? I hope you're well. Listen, I think from a space science standpoint, what we're finding is exactly what you're hearing from everybody else. Density is increasing.
We're seeing less people and more space. I do think that the jury is still out on candidly on hot desking, doesn't seem to be very popular right now. It looks like more open space or office space that has room for conference facilities and the likes of that seems to be in demand. And as a result, tenants are looking to get input from their own employees as to what makes them comfortable. It's just going to evolve.
Obviously, it's not going to be a permanent situation that is going to be one size fits all. Lots of companies are looking at different alternatives. But right now, it seems that the majority of the space that we currently have either coming back to market based on rolling tenants or the space that we're bringing out to market has been very popular and a lot less capital dollars have been to put into it than we thought. Art? Sure.
I'd like to add to that. Hi, Craig. The Opdiv award, I think, is evolving and it's a very fluid situation. I think nobody I don't think anywhere we've seen somebody pull a permit and say, gosh, we're going to really rethink our space. That's not happening.
But what we are seeing is the solutions in the interim are the furniture systems, right, providing a more flexible solution to whatever their needs are so that as this does evolve, they can really densify the space if need be. And so again, we haven't seen people pulling permits and doing hard, hard construction on that basis. That's I think I just wanted to add that.
No, that's really helpful. And Victor, your comment that you're seeing less TI than you thought you would, what do you think is driving that?
Well, I'll tell you, I toured just this week. I actually went to one of our newer properties yet because Netflix just started to move in. And just as Art said, the systems they put in place because they've been building that space out ready to be occupied since summer of last year and now they're ready to go and they're moving people in. What is a 6 person area, desk space area for 6 people, they've converted to 3. And so they've left the desks in, but they've spread people out.
So on a systems basis, I think those dollars are already put in place and they haven't moved furniture around. In terms of redoing TIs or capital dollars on space, they just haven't changed it. And this is a brand new building. And I think we're seeing that throughout the entire portfolio. People are not spending the money in TIs.
They're using the optimal space they have because it's a lot more open air space. That's what creative office space was, right? You always heard me say, what was the definition of creative office space? It was more people and less space. Now this evolution is going to be less people and more space.
So it's the inverse of that. Yes. I'd like
to add to that, Craig. On our 2nd generation space, we've been talking about our VSP program for a long time, and it's basically put us in a position where we're situated to capture the demand with really move in ready space, kind of fresher move in ready space that's highly amenitized. And so when tenants are coming to that space, they're spending fewer TI dollars because we've built it with flexibility in mind. And so that's really helped us and it's going to continue to help us as tenants reengage in the market and you start to see more and more demand is going to be space ready to go and we feel comfortable in that situation.
All right. That makes sense. And just two quick follow ups. You guys Dell EMC is obviously giving back some space. You had other space giving back at 505 as well.
What's the prospects to get that re tenanted? Kind of what do you think downtime looks like at that asset?
Yes. So the first
one you're talking about is Qualtrics, was on the top floor. We're already in negotiations on that space. On the 3 floors, just to be clear, Dale EMC had 4 floors. They're giving back 3. We're left with about 45,000 square feet.
The 3 floors in question, we have about 125,000 square feet of active prospects in that. And that's chiefly because the increase in active deals in the pipeline that are in the market in Seattle has probably picked up about 25% to 30% just quarter over quarter. And so we're very optimistic in that great space.
And the mark on that all
of that space released about the same time. So the mark on that for fall section is north of 50%.
North of 50,
Yes. 50 or 1? Yes, yes. 50, I'm sorry.
And then just last one, Company 3 took the space in Harlow, but they also have space in Santa Monica, not necessarily close to each other. Are they 2 different uses or could they look to get back to Santa Monica space on that?
No, it's totally different use. They're not giving back Santa Monica.
All right, great. Thank you.
Thanks, Craig.
Thank you. Our next questions come from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey, Harut, thanks for the comments on the 2Q guidance and how to think about the full year. Given those comments, why not just come out with full year FFO guidance, sort of sort of
Let me jump in because we've talked about this multiple times. We can't come out with full guidance and I don't want to continue to repeat ourselves when we don't have tent fully in the assets. So we don't we have a massive number that's variable around parking and after hours HVAC and aspects around that that we just it's such a huge number that you guys keep asking the same question. We keep giving the same answer. When the buildings are populated, it becomes a lot easier to come up with a number.
There's no gaming here. It's a process of just why give you a number that we're just going to come back on in a month or 2 from now when people come in, in June, July, August or September. That's the reality of it. There's no gaming here.
Victor, I hear you. At the
same time, you've now given or hopefully we're closer to you having some idea of when those tenants are coming back. And so with that as a baseline, I thought that you would have given or could have given a number that was closer to where you're going to end up if nothing else changes from where we go from here. And then you could provide the same guide rails around that the same way you said, hey, look, this is our 1Q and our 2Q. If you think about that for the rest of the year, this is where we get. We're getting closer to, I hope, having some kind of
more secured footing
on when people get back in. And so I think that's what's causing the new question, not the fact that
we're giving you full. I think it's too many on the factor on that, but let's be candid. We have some of our larger tenants are saying they're coming in June, some are coming in September, some say they're
not coming until the end
of the year. So it's not yet and by the way, and I just mentioned, I was just over at Netflix and they say they're not coming in until September, but yet people are in the space right now. So it's really evolving day to day. This is not like a absolute finite timeline that people are saying September 1, we're all coming in. We're hopeful people will be in by then, but it's been moving around.
Yes. I mean
they keep on just to add to Victor's point, companies keep on either refining or adjusting the dates that they previously said they'd come back. So it's hard to determine. But ultimately, if you listen to the or go back and look at the prepared remarks, we've given you the guardrails for the end of the year. The math is all there. We just haven't out and out said what guidance will be at the end of the
year. Yes.
And so it's like 90% there. And why not the rest 10% because of the uncertainty?
Yes. And Manny, I mean,
I think you have a very sound baseline to work from with the guardrails that Karuta outlines in his prepared remarks. And you'll get to a number or should be able to get to a number pretty readily. The only difference will be the very uncertainties that Victor mentioned, namely that variable income, right? And I mean so think of that as sort of upside. If we if the buildings populate quicker and parking resumes and visitors come back in, then you'll see more of that variable income come through quicker.
And you can just build it
off of that baseline that Harit has given you the formula for.
Okay. And then just turning to your comments on acquisitions, it sounds like you're pretty well along the way there. Maybe just close in as to how long you've been working on those and anything might have changed throughout the course of the pandemic in those deals?
Yes. I think, listen, we are very confident there's going to be a series of acquisitions that we're going to be executing on. Some were further along than others. It's taken longer, I just think for a whole host of reasons, but none less than the fact that people are not in full time. And it has not changed our energy level nor desire to complete these acquisitions.
So yes, we are poised very well for acquisitions. And I think in the interim few months coming, you're going to hear from us on them.
Thanks, everyone.
Thanks, Manny.
Thank you. Our next questions come from the line of Frank Lee with BMO Capital Markets. Please proceed with your questions.
Hi. Good morning, everyone. Just a follow-up on your comments on the Seattle market. You mentioned Dell downsizing and Qualtrics, but it looks like Nuance also moved out. Do you have a sense of where these smaller tech tenants are going?
Or are they deciding they don't need a space anymore? Just curious, is this more company specific or a more broader thing that's impacting the Pioneer Square submarket?
Yes. So those tenants are all larger tenants, Frank. So Nuance had been subleased to Qualtrics. It's essentially Qualtrics taking their space and moving actually Qualtrics moved into about 200,000 square feet at 2 and U. So they outgrew the space.
And Dow we knew about obviously and that was just a downsize with them. But the other there's really no other small tech tenants that we're dealing with right now in that Pioneer Square market.
Okay. Thanks for clarifying.
And then a question
on the studio business. We've seen a number of increasing amount of headlines on the new potential developments, retail conversion opportunities and even new entrants into the market.
Just curious if we're at a
point where new supply could be an issue or do you think the $112,000,000,000 content spend you talked about could meet this demand?
We're not even close to
a new supply being an issue. I mean, listen, a
lot of people are talking about studios and whether they executed on them or they don't, it's to be determined, but there's a high demand for soundstage space in multiple locations in the country and not the least of which are in our own backyard. So we're not concerned about the supply at this stage.
Okay, great. Thank you.
Thank you. Our next questions come from the line of Jamie Feldman with Bank of America.
I guess, Art, just to talk more about the leasing pipeline, the 1,300,000 square feet. Can you talk about like what markets that in what markets those are in and any kind of anything that you can point out in terms of
how the different submarkets are acting?
Sure. I'll start with the first one, which is the pipeline $1,300,000 It's really distributed across where you might think where we have vacancy and roll, almost right up and down our portfolio. The markets themselves, I would say that we're starting to see we've seen kind of in the quarter a significant uptick in Seattle, the top three really Seattle, San Francisco and Silicon Valley. The others have call it, 10% to 15% kind of increase in their active deals in the pipeline. But those 3 in particular, very encouraged by the uptick in activity.
And it's mostly generated by tech. I will say that the Valley, we're starting to see more of an uptick from previous levels in professional service firms, but tech is still driving it.
Okay. Thank you. So if you look at your kind of quarter over quarter percent leased, you had
the biggest decline in Seattle and the Bay Area.
Can you talk like does that match up pretty well with those that incremental vacancy or that incremental percent lease decline? How should we think sorry, go ahead.
Well, I was going to answer that first question first. That absolutely lines up with it. Some of these known vacates or early terminations we've been out in front of from a marketing perspective. And so we have active prospects for a lot of that space currently.
Okay, that's helpful. And then so how do you think about the either the percent leased or occupancy trajectory? I guess what's in the 2Q guidance? And then how do you guys think about what the rest of the year given the I assume at this point you have
a pretty good sense of move ins versus move outs?
Yes. Hey, Jamie, it's Mark. We spent a fair amount of time last night making sure we could kind of give you some context around that Q4 to Q1 sequential decline, and it popped up in a fair number of the early notes. What's what that sequential decline implies from this square footage amount is about 260,000 square feet of rollout over the quarter. We had about 540,000 square feet of expiration in the quarter.
What you might notice on the lease activity page is 140 4,000 of early termination. Now that's unusually high. In all of last year, we had 118,000 feet of early termination. In last quarter, Q4, we only had 12,000 square feet. So the Q1 saw an unusually high amount of early termination.
These were not unexpected early terminations. They were tenants that we had been struggling with for throughout the pandemic. In most cases, we weren't even getting rent from them, the biggest of which was Knotel at 6 25 Second. And we finally we weren't getting rent. We finally just got the space back from them, and we're doing what we can to recover against that.
We also lost 27,000 feet with Regis and then we had had and I'm not going to name names, but a law firm for 20,000 feet, which we were sort of embroiled in a drawn out disagreement with. So it for the Q1, those feeding those through in what will prove to be an unusually high amount of early terminations, which we do not expect to see throughout the remainder of the year. If you adjust for that and sort of normalize early terminations, what you'd really expect to see is about maybe 90 basis points of rollout, which is about, call it, 130,000 fee as opposed to the 260,000 feet that we witnessed. Now that would be 130,000 feet in a quarter that saw 540,000 feet of expirations. So an unusually high quarter of expirations matched with an unusually high amount of early terminations.
Now I'm going to stop sort of trying to pinpoint for you what that implies in terms of where the 917, let's say, on in service depending on what metric you want to point to. But I'm going to stop sort of trying to pinpoint where that ends up on the year. But I can say this, I think it's fair to expect that we're not going to continue to see anything like 180 basis points of sequential downtick in lease percentages throughout the balance of the year.
Mark, can I add to that?
Jaeme, it's important to know
that really despite what Mark just said, our sequential drop was in line with our peers. But I think it's more noticeably, if you look back year over year, that is to say, throughout the pandemic and you look at our lease percentage over this past year, it certainly is far more favorable, think, than our peers year on a year over year basis.
For sure.
Okay. That's helpful. So is there an occupancy number included in the 2Q guidance?
Well, we didn't guide to an occupancy number, no.
Okay. Great. Thank you. And then just a couple more. I guess the first question people have been asking about is, Victor, any interest in a tracking stock for the studio business?
It's been a hot topic lately.
Yes. I think, listen, we've talked about that in our growth patterns around that business. It's something that we'll I think we'll revisit as we continue to grow that portfolio and platform with Blackstone.
Okay. But nothing imminent? No. Okay. And then last a little nitpicky, but your NFL lease, can you is there an
update on the plans there or their expiration?
So their expiration is at 2023. We've engaged in a brokerage company for some time. We've got some very good activity on that space by a couple of single tenant users and it's great space. And we also have an additional plan that we are looking at that would cause it to be completely redeveloped. So, we've got opportunities on it, but we definitely have some time.
Go ahead, Art.
Yes. And to add to that, yes, so it's their expiration is end of 'twenty three. They have an early term at the end of 'twenty two that they have to exercise in, I believe, September, something like that. They have to be up and running. They have to run both facilities at the same time and the ability to do that remains to be seen, right?
So at this point, I can't tell you with certainty that they're going to be out, but word on the street is they're going to be up and running. So let's wait and see on that.
Okay. All right. Thanks, everyone.
Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yes, good morning out there. Maybe Art, start with you on the Palo Alto renewals that you talked about. You had made a point that those were obviously at market. How much did that market change versus your expectation? I guess, were those always going to be above market?
Or has the market moved, I guess, substantially against you in the last year or so? Just some color on
that would be helpful.
No, absolutely, kind of right on track. I mean, those were the highest some of the highest rents in the country, certainly the highest in our portfolio. And our expectation was really right on.
Okay. So I guess to take from that commentary that the market rent kind of net effective haven't really moved that much against you relative to maybe where you were at the beginning of 2020, I mean just making sure I'm understanding your comments correctly?
That's right. That's absolutely right.
Okay.
On the 40% coverage, obviously dealt with the big one that we were all looking at. Anything else that's of size in there that maybe just doesn't qualify for the top tenant list that's kind of on your watch list as you look for the rest of the year?
Yes. I mean, I guess the next biggest in line is absolute software in Vancouver, probably about 46,000 square feet. We're in negotiation we're in leases actually with them got a pretty healthy market, about a 40% mark. And then it drops off after that. And so again, it's we're in discussions with there's some downside discussions.
Tenants are still trying to figure out how they're going to utilize the space. And a lot of the expirations are kind of weighted towards the end of the year and they're all small tenants. And so we continue to kind of hand to hand combat to make sure we can keep them in some capacity.
Yes. And David, it's Victor. On Deliancy, we knew this was coming. We just didn't know how much. It was the various between what they took and taking less or more.
But they gave us a heads up way early on that they were downsizing because it wasn't a Pioneer Square Seattle play, it was a del EMC play across the
board for the country.
Got you. Yes, thank
you for that. And Victor
on the studios, can you kind
of tell us where we're at in the studio recovery? I know we've talked previously about maybe going to 24 hour shifts and getting business back. You've given us some color with the GAAP same store NOI expectations, but maybe just some added color around that.
Yes. Dave, listen, we are so I don't want to get into specific details, but we are seeing full production right now with the exception of obviously occupancy of office at its highest level right now. And we're starting to see somewhat of and Heru market have gauged this based on seasonality because this is the quarter that has typically been the slowest and so far we're not seeing that. We've also just engaged with 2 great tenants and signed new leases in soundstages with them in our portfolio that is one extended for 5 years and one extended for 2. And so we're seeing the activity as high as it's been.
And from a production standpoint, it is on location sorry, it is on sound stage location versus on location more, but now we're seeing the on location shoots going. So they are running greater than 5 days a week, which is what we thought would happen. So all the benchmarks are the same as we anticipated to be going. And we're just hopeful that it's going to continue through this quarter and early next in the seasonality aspect. And we have no reason to believe that it shouldn't.
That's henceforth why our numbers were different this quarter than we anticipated on the studio side.
Great. That's helpful. Last maybe just for Harut. On the reversal of revenues, can
you give us a sense what
the cash and straight line impact were to this quarter from those reversals, how meaningful they were? Sure.
It was actually almost all cash. So it was tenants that have started to repay their rents in accordance with either repayment agreements that we already have and it was about 2,600,000
dollars All right. Thank you all.
Thank you. Our next questions come from the line of Nick Yulico with Scotiabank. Please proceed with your question. Thanks. Hi, everyone.
So I just wanted to go back to the comment that I think Art you made about the
leases that are expiring this year being, I think you said 15% below market. I wasn't sure if you meant that you're actually going to get a positive 15% releasing spread or what for leases the rest of this year or if you were talking about something else?
No, that's exactly right, Nick. You got it exactly right.
Okay. All right. And my second question then is also going back to the pipeline. I think you cited 1,300,000 square feet pipeline. And I just wanted to understand how we should think about, I guess, historically what type of conversion rate you get on that?
Because I know we're all trying to figure out where occupancy is heading or at least the leased rate in year. And so just trying to think about that $1,300,000 versus the expirations. And does this mean that you're just you're going to get a higher lease rate at some point this year? Or is it just some sort of conversion rate on that 1,300,000 pipeline?
Yes. So that 1,300,000 square feet is skewed towards the renewal pipe the renewal for the remainder of the year about 65%. The answer is, is that yes, I mean over historical levels, we've had about $1,300,000 in the pipeline. So the good news is it's starting the pipeline is starting to get healthier. And, of course, we always want more in the pipeline, but our conversion rate is always has been historically pretty good because we don't we define our pipeline as deals in deep in the negotiations.
And so versus others who may include inquiries and tours and things like that. So I feel pretty good about our conversion rate.
Okay. So just to be clear, sorry, the pipeline does you said it's mostly related to renewal activity. And so it would include when you're talking about the 40% coverage on expiration, that's inclusive of that 1,300,000
dollars number. That's
right. Okay. All right. Thank you. Take care, Eric.
Thanks, everyone.
Bye, Nick. Our next questions come from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions.
Thanks so much. Good afternoon. I just wanted to maybe Art build on that or clarify the 40% coverage comment. Basically, are you saying you have about 6% of the portfolio rolling and you're very confident about 40% and you're still negotiating with the rest. Is that how we should take it?
Yes, that's exactly right.
So I guess I'm typically like at least so I would imagine that 40% and I'm sorry I'm getting granular, I'm not trying to get like an occupancy number, but I'd imagine like leases that are like this quarter or next quarter, you probably have already made decisions, right? It's more about the leases in the Q4 that you're still debating or discussing?
No. 3rd quarter yes, as I said, Q3 and Q4 is heavily weighted. A lot of those tenants well, the average tenant size is probably 5000 to 6000 square feet. And we're still in dialogue with them as they're trying to really figure out what their needs are. So yes, that's a lot needs to work itself out, but we're in active discussions with all of them right now.
Got it. Okay. That makes sense. If I look at the renewal, the spreads obviously were decent on the office side and the studio side. You just mentioned you have 15% potential mark to market on the remainder of the role.
But if I just look at the incentives, especially the TIs and the free rents, to me at least it seemed like they ticked up versus kind of a, call it, trailing 4 quarter or 6 quarter, whatever number you want to take. I'm just wondering was there anything in the specific about the leases that were new leases and especially talking about the new lease TI, anything specific about that that would have caused it to jump up a little bit?
Yes. Victor, it's Mark. Absolutely. I think it's important, by the way, to recognize that we're talking about 138,000 square feet of leases. So it's not a large sample size to draw broad conclusions out of like our incentive costs going up and so forth.
It's just not a big enough amount of leases quite yet. But within that, over half is the lease we signed with Company 3 at Harlow, which is 1st generation TI space on a 12 year deal. And so naturally, it's going to have somewhat higher tenant improvements. Those came in at $85 and leasing commissions will be on the high side too. So those were $27 a foot and that's again, that's over half of the 138,000 feet.
If you simply remove that deal, your new lease incentive costs dropped to $72 a foot from the $92 a foot, which is actually below the per square foot total running through full year 2020. There's also a few other anomalies. There's a little bit more than 13,000 square feet that we did on VSP space. And when VSP space is a total gut and reduced space and tends to come out a bit on the high side on TIs, on the weighted average TI and the VA that 13,000 square feet of DSP is 119 a foot. So when you further adjust for that, all of the remaining new space actually drops to 58 bucks a square foot compared to the $92 reported in it, which is like $20 lower than the full year $20 per square foot average.
So it really is just a byproduct of what the composition of that 138,000 square feet is and not worth thinking of as a trend or some sort of indication that incentives are on the rise.
Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, I think it's still good morning out there. So, first, just want to go back to Manny's question on guidance. And Victor, I'm not asking for a guidance range. But as we think about the components that go in there that are the variables, there's the cash payments that either from tenants who are on a cash basis who are paying or the catch up of rents that are owed. So one, just curious where we stand on quantifying that?
And then 2, you mentioned variable items like parking or after hours utilities or things like that. I imagine that grip is in there, although it sounds like the studios are pretty well full production. I'm guessing that we're seeing all the extras on that. But just curious, what are the variables like as we think about quantifying? So how much from the cash rent side?
And then how much are we still missing on parking after hours utilities, etcetera?
Well, let me tackle the second one for the parking after hours utilities. I think we've been Quintin just is saying it's about 0.2p a quarter of that, that's still negatively impacted. So there's upside there that we haven't seen yet. So assuming tenants come back sooner, that number will be in our number sooner. If they continue to delay, that number will continue
to be delayed. So that one
is too short. The cash rents, those are more temporary. We had a large amount that have to happen this quarter, which was a big surprise. But we don't anticipate having these big chunks on a go forward basis. There are just a couple of very specific tenants with specific negotiation happening that helped us collect that.
So and then finally, to your point, yes, the studio revenue can still be pretty variable. There was upside this quarter. I think we've built in from that momentum in the numbers that we provided, but that could go either way again depending on the activity and anything else that can change as a result of COVID.
Alex, if I could just add to the comment about the cash rent collections. As Haru points out, we had some unusually high repayments that will be really one time repayments because they were kept up. If you look at the amounts that we collected of previously deferred rents over the quarter, the total collected is in the neighborhood of 200, call it 250,000 dollars So of the $2,600,000 a lot of it isn't made up of previously contractually deferred catch ups. We collected 99% of what we were due in terms of deferred rents, but it's not you shouldn't look at that as the absence of what that big catch up was. It was important, but it wasn't anywhere close to majority of it.
Okay. So just in sum, it sounds like the $0.02 of the parking and after hours, it sounds like that's the biggest piece, right? Yes. That's the
whole listing, yes, yes.
Okay. So in other words, as we're thinking about our model and earnings, the cash impact from rent collections is minimal. Obviously, the studios is going to be what it is, but really the missing link, if you will, is that $0.02 a quarter.
Right. And we through all the disclosures and comments that Mark's made in the past in terms of our collections, that would be expected, right? We've been collecting 97%, 98%, 99% of our rents. So therefore, the deferred amount isn't going to be that much just based upon that math.
Right. And the retail stuff that's that like whatever 50% that is I guess de minimis in the scheme of things.
Yes. At this point retail is only 2.2% of ABR, right? So I mean, if we're collecting 50 plus percent of it, which we are, it's about 1%. Okay, cool. Second question is,
One Westside, obviously, you guys are getting close to opening it or delivering it a year from now in the Q1 of 2022. Victor, I'm sure you don't like negotiating publics on the phone. But still just curious, is that something that we should think about a buyout occurring before the project is delivered? Or that is something that if it does happen would be something after Q1 2022 after it gets delivered?
Well, let me say it this way, Alex. There is no trigger on a buyout until it's stabilized. And so unless we or Macerich go to each other and offer it up and the other party agrees. So I would say it's safe to say that the conversations are fluid and there is more than just the 2 of us interested in that piece. But I can tell you, we're not selling our piece.
I wouldn't think that you would. But interesting, it sounds like it could be a JV or something like that, but helpful. Victor, listen, thank you very much.
Thanks, Alex. Be safe.
Thank you. Our next questions come from the line of Venkat Kameneng with Mizuho. Please proceed with your questions. Hi, good morning. On the Studio segment, in terms of marketing and trying to pre lease the new developments at Sunset Gower and LA, How are tenants differentiating between those developments?
Is timing of delivery the main factor? Or are there some nuances to those stages that are catering to different production leads?
Well, I think
the differentiation is based on demand. And the demand right now is somewhat being fluid because candidly, as we've mentioned before, the production side has been up and running in full swing, but the office occupancy side has not. And so until some of these tenants figure out how much space they really need and the density aspects that we talked about, it's going to be based upon their interest. 1, their need 2, and most importantly, delivery. And I think that seems to be the hidden aspect that nobody seems to talk about, which is fully entitled projects are a lot better off than those who are just publicly saying, hey, we're going to come out and build a studio or we're going to build office space and a studio without entitlements.
We still live in probably the most entitlement constraint marketplace in the country, and these things do not happen quickly. So regardless of where the conversations are with us relative to the tenant demand, we are still positioned extremely well because we're fully entitled in both projects.
Great. Thank you. And one for Haru. Looks like kind of straight line rent abovebelow market rents kind of ticked up sequentially about $8,000,000 after declining for the past 4 quarters. Was that primarily driven by the acquisition of 19, 18, 8, or is there something else contributing to that?
And how should
we be thinking about that?
No, thank you for that. There's a few items contributing to that. One is the acquisition of 18/8/8/8/8/8/8/8/8/8/8/8, just because of the blow market nature of that asset. The second is, a lot of our leases have just coincidentally a lot of free rent in the Q1 and so straight line rent typically ticks up as a result of that. And so that's the reason for the increase.
Great. Thank you.
Thank you. Our next question has come from the line of Daniel Heitzig, Green Street. Please proceed with your question. Great. Victor, you mentioned changing density requirements a few times throughout the call.
I'm just curious and I know this is a difficult question to answer, but what do you think current density is in your portfolio now? And what do you think we may be trending to?
Well, right now, it's nothing, right, overall. But yes, you mean going back to when we were fully occupied pre pandemic? Daniel, I think it was probably somewhere in the it could be as low as 150 to 175 feet per. And I think we're talking about on average and I could be low 250. So it's a 40% increase and it may be more.
But yes, that's sort
of the number that people were talking about to us specifically. As I said, I've been touring some of
our space and people are
getting ready to occupy, and it is like that. It's half of what it was. I do think that's the major upside where people are not looking at office the way they should be about where the future is. Everybody is talking about a massive increase in employment, specifically a move around. And we know our tenants, the largest ones, Amazon, Netflix, Google are all looking to employ thousands of people in our markets alone.
In order to put those people in the space they currently have, they're going to need more space, right? And so that's where the upside is going to be.
And then on the leasing activity, are you there any trends of tenants trading up, say post COVID from Class B to higher quality buildings?
Yes. Daniel, I mentioned this in last quarter. We are seeing and Art intimated a little bit on the professional tenants, which typically we've not seen a lot of professional tenants coming through the portfolio. We've got a couple of full floor users, specifically law firms that are looking to, that we're in leases with now in the Valley and they are moving up and they're moving from Bs to As and we're seeing that because of the opportunity in certain marketplaces and certain asset classes that aren't as high rents as they were. I'm not so sure that's merit enough for a trend, but clearly it will attract people who maybe otherwise never had the opportunity to attract.
And just last one for me. You mentioned being in the process of closing on a few acquisitions. I'm just curious on the studio side, what are you currently underwriting for unlevered returns for studios? I believe you mentioned, on the development side having mid-7s to high-8s type returns. What does that look like on the new acquisition front?
Unlevered or levered? You said unlevered? Yes, I mean, I think we're looking at stabilized
7.
And generally, presumably, this comes with some development upside too, I would guess.
Yes, and economies.
Got it. Thanks, Ricky.
Thank you.
Thank you. Our next questions come from the line of Rich Anderson with SMBC. Please proceed with your questions.
Thanks for hanging with me and now good afternoon. So just to make sure, Hubert, I got this right when you laid out the guidance for the Q2. Should we start with just sort of backing out the $2,600,000 in the second quarter and then grow from there? Is that the right way to think about it?
If you've earned $2,600,000 of the one time, no, we just try to keep it as simple as possible. If you start off with our reported numbers and make the adjustments that I provided, it will get you to what we think Q2 may look like.
Okay. Okay. But that was a one time kind of event, right? Maybe I'm just maybe we could take that offline. I don't want to get too much granular detail on that.
That is true. It's a one time. But again, that's when we gave the numbers, we factored that in.
Okay, okay. All right. Okay, understood. All right. And then a question for Victor.
On the strategy to grow studios, I just got off a call earlier today where there was supposed to be a deal, but COVID kind of is completely different asset class, but COVID kind of disrupted the negotiation and buyer and seller could no longer come together. And I'm wondering if that kind of has been happening in the studio space, had you probably been able to close some stuff to this point, had it not been for the pandemic and perhaps seller just couldn't come to a number with you because of these unknown factors.
Is that is it fair to say that it's been
kind of disruptive early on in terms of your ability to grow the studio from here studio business from here?
I wouldn't say so. No, Rich, I think, listen, things are just taking a little longer. I don't think it's been based upon disruption around the pandemic. I think it has been based upon people actually being integrated fully up and running and ready to go. And that did take some time and that was a 6 to 12 month process.
But the activity is pretty much normalized now and the markets are pretty fluid in terms of the bid ask and what sellers and buyers are interested in doing. So whatever potential slow process I think is behind us.
Okay, sounds good. Thanks.
Thanks, Rich.
Thank you. There are no further questions at this time. I would like to turn the call back over to Victor Coleman for any closing remarks.
I appreciate everybody's participation and questions. And once again, I want to thank the enormous effort of the entire Hudson Pacific team and its dedication to making this company what it is today. So everybody be safe and we will talk to you next quarter. Thanks so much, operator.
Thank you. Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.