Greetings and welcome to the Hudson Pacific Properties, Inc. 3rd Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Laura Campbell, Senior VP of Investor Relations and Marketing. Thank you. You may begin.
Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties' Q3 2020 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, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investors section of our website.
During this call, we will discuss non GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including various ongoing developments regarding the COVID-nineteen pandemic. Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update. Moreover, today, we added certain disclosures specifically in response to the SEC's direction on special disclosure of changes in our business prompted by COVID-nineteen.
We do not expect to maintain this level of disclosure when normal business operations resume. With that, I'd like to welcome Victor Coleman, our Chairman and CEO Mark Lamas, our President Alex Uvelides, our COO and CIO and Harutya Miriam, our CFO. Note they will be joined by other senior management during the Q and A call. Victor?
Thank you, Laura. Hello all. Welcome to our Q3 2020 call. I hope you are all healthy and well. I'm pleased to report that we've had a very safe and very productive Q3.
Our outstanding Hudson Pacific team, which throughout the pandemic has brought tremendous talent and expertise to every aspect of our business continues to successfully navigate this complex environment. As an essential business, we've had 100 percent of our workforce back in the office since Labor Day on a rotating schedule with all the necessary precautions and fantastic to be together again and productive. There is no doubt that we, like others in our markets, have been impacted by the extended shutdowns in California and Washington, which have tempered the recovery we've seen accelerate in other parts of the country. Regardless, our billings are fully operational with industry leading health and safety protocols in place. Our tenants are paying rent, our office and studio assets are well leased, our leasing activity is starting to accelerate and our rent spreads were made at pre COVID levels.
Our development pipeline is on time and on budget and we've got ample capital augmented by premier well aligned JV partners to operate and invest. The bottom line is we're still poised to make visionary type strategic moves that consistently reinforce our position as one of the most creative, dynamic players in our industry. We are however starting to see some positive signs throughout our markets. Last week, San Francisco allowed non essential offices to open, albeit at 25% capacity. Los Angeles Schools can now welcome back 25% of high need students and this includes younger learners, which in turn helps working parents return to the office.
And physical occupancy at our office properties across our markets has reached about 15%, which are slightly higher in the U. S. Sorry, slightly lower in the U. S. And slightly higher in Canada.
We are in constant dialogue with all of our tenants and clients. We know that despite bold statements regarding work from home and seemingly far out return to the office states, particularly by tech companies, most are simply on hold to figure out how, not whether to use their space. Should cities open sooner than anticipated, we would not be surprised to see CEOs accelerate at least a partial return to work. Further, the media has really focused on permanent work from home shift, when the reality is many companies, most recently Microsoft, are simply making moves towards a more flexible schedule. For example, working 1 out of 4 or 2 out of 5 days a week at home.
Our office tenant base
is made up of the world's most creative, innovative companies that build their businesses, their competitive edge around culture, creativity, collaboration and our work environments that are so dynamic that they're exponentially better than being at home. And then there are types of work that you simply can't do at home. Security infrastructure, for example, are major issues for tech companies. If you ever toured our Element LA campus in West Los Angeles, it perfectly exemplifies all these aspects. This is the type of office space we provide throughout our entire portfolio.
As for our studios, despite some delays getting content producers, guilds and unions on the same page about health protocols, production recommenced in late August on 10 of our stages and we're expected to have 34 out of 35 stages active by next month. Clients currently utilizing the stages include a who's who of major media, CBS, Fox, Netflix, Disney, ABC and HBO and to date we've experienced no further shutdowns. Given the pent up content spend in production, particularly the non feature film single camera episodic dramas perfect for streaming for which all of our stages are ideal, we anticipate demand to remain extremely robust. The bottom line is we believe tech and media will lead this recovery. Digital has only accelerated during this pandemic, spring major VC investment in cybersecurity and the cloud, e commerce, healthcare, business services, FinTech and EdTech.
At $38,000,000,000 Q3 2020 was the 3rd highest quarter for U. S. VC Investment in a decade, surpassed only by the Q2 2020 also during the pandemic and the Q4 of 2018. Software companies still dominate allocations. Money has flowed to pharma and biotech, but it's a fraction.
2020 is shaping up to be a good year also for first time venture financing and the money keeps coming. Fundraising has already surpassed 19 levels at $56,000,000,000 and so far making 2020 the 2nd highest year ever. Also in the Q3, pent up demand for Unicorn led to near record U. S. IPO activities in terms of valuations and these trends are expected to continue and are extremely positive for tech and the resiliency of office demand across all of our markets.
At this point, we also had firsthand knowledge of the incredible pent up demand for streaming content. Netflix, Amazon, Apple Plus, Hulu, Disney Plus and HBO Max have had tens of millions of new subscriptions this year. Now 80% of U. S. Consumers subscribe to at least one streaming service.
Nearly a quarter of them have also streamed a 1st run movie with 90% likely to do it again. Nearly half have participated in some sort of streaming activity as well. These statistics are even higher for Gen Z and millennials. Even pre COVID, these 6 streaming companies I mentioned intend to spend approximately $35,000,000,000 on content for 2020. So the demand for backlog for stages and support space is huge in the near term.
In the mid to longer term, it bodes incredibly well for Los Angeles studio and office space at large as the productions in gaming companies continue to grow. Before I turn the call over to Mark, I'd like to highlight our corporate responsibility initiatives. As most of you know, in May, we launched our industry leading ESG platform, Better Blueprint. The pandemic's challenges have only increased the value and importance of making bold moves across 3 focus areas, sustainability, health and equity. And we've done just that.
On the heels of rolling out our new diversity, equity and inclusion programs, adopting 5thwall's viral response module and directing significant charitable giving to populations most impacted by
the current levels, we've achieved 100% carbon
neutral operations, garnering the recognition
of the World Green Building Council as one of
the first major real estate organizations to do so. We did originally anticipate achieving this milestone in 2025, but given the increased energy associated with COVID-nineteen health and safety measures, we moved quickly and creatively to get this done now. Our solutions eliminate all scope 1 and 2 GHG emissions by leveraging our energy efficient portfolio, the use of on-site renewables and a combination of renewable energy certificates and carbon offsets. But we've got a lot more to do. We're pursuing additional on-site renewables and innovative technology solutions to reduce further operational carbon.
We're also working to reduce our Scope 3 GHG emissions from non operational carbon, specifically building materials. So as I said, much more to come and we will continue to lead the industry on this and other related fronts. With that, I
am going to turn it over to Mark.
Thanks, Victor. As you noted, our tenants continue to pay rent. We collected 97% of total 3rd quarter rent comprised of 98% of office rents, 100% of studio rents and 52% of our retail rents. To date in October, we've collected 94% of total rent comprised of 96% of office rent, 98% of studio rent and 51% of retail rent. These percentages exclude rents contractually deferred or abated in accordance with COVID-nineteen lease amendments.
If we included those amounts, our 3rd quarter collections would have been 96% for total rent, 98% for office, 98% for studio and 48% for retail. Our October collections would be 95% of total rent, 96% for office, 99% for studio and 52% for retail. During the Q3, we deferred approximately $3,100,000 or 1.8 percent of total rent, Another approximately $3,100,000 or 1.9 percent remains in discussion for either payment or deferral. We abated only $1,100,000 or approximately 0.7 percent of 3rd quarter rents in connection with COVID-nineteen relief. Our success with collections is a testament to our high quality office tenants and studio clients, which include many of today's most innovative and creative growth companies.
Over 90% of our office ABR is attributable to publicly traded or mature privately held companies and business 10 years or more. Only 3% of our office ABR is attributable to companies in business less than 5 years and each of these 53 companies contribute on average only 0.05 percent of our office ABR, so any risk from younger companies is well diversified. Among our top 50 tenants, which collectively generate about 60% of our office ABR, nearly 75% of that ABR is derived from publicly traded and nearly 55% is from large cap and or credit rated companies. Beyond tenant quality, we believe other attributes make it less likely our tenants will give back space in the near to mid term. There's no doubt that smaller office and retail tenants have struggled the most during the pandemic, but we have always focused on larger credit tenants and longer term leases.
Today, our average lease size is over 15,000 square feet with the remaining term of 5 years. Further, we specialize in creative, flexible workspace, which means our tenants operate at very high densities pre pandemic, typically around 150 to 180 square feet per person. So
even if
a company decides to keep a portion of its workforce from home longer, we expect the physical distancing and lower density requirements in the range of 230 to 250 square feet per person will buoy both demand for and occupancy at our properties. Finally, we own and operate a premier portfolio. Through industry leading development and redevelopment and strategic capital investments, we've always focused on providing the most modern, safest, healthiest workspace in the market. We have a young portfolio. Our average effective building age is 16 years.
We own predominantly low to mid rise product, which is 8 stories on average, reducing the need for elevator access. Nearly 85% of our portfolio has functional outdoor space, including patios, courtyards, elevated and rooftop decks. And essentially all of our properties have state of the art HVAC systems, including MERV 13 air filters or higher. Before turning the call over to Alex, I'll provide a brief update on the various ballot measures this year and potential impacts to our business. States and cities across the country are facing rising deficits resulting from the pandemic and Washington and California are no exception.
As a result, this election season, we're facing several proposed tax increases. Prop 15, if passed, would be the largest property tax increase in California history with major implications for large and small businesses alike and ultimately as this is likely part 1 of 2 California homeowners. We've taken an active leadership role in opposing Prop 15 and there's been a steady decline in both in favor. Polling shows a dead heat at 46% to 46%. However, if passed, the measure won't take effect until the 2022, 2023 tax year and as history has shown, implementation will be incredibly challenging and take years to complete.
As a result, we believe any near to mid term impact to operating expenses will be nominal. Potential long term impacts will depend on future asset revaluation. Given the recent reassessment age of our California portfolio, we enjoy a comparative advantage relative to competing landlords looking to preserve operating margins. San Francisco specifically faces 3 new ballot measures to raise additional revenue at the city and county level. The business tax overhaul to increase gross receipt taxes or Prop F will minimally impact our San Francisco portfolio.
While the proposed increase to the real estate transfer tax or Prop I is significant, it is only relevant upon the disposition of an asset, so it would have limited applicability to our portfolio. Additionally, the impact is relatively insignificant when compared to the underlying value of our San Francisco asset. The business tax based on top executive compensation or Prop L does not directly impact our company's taxes, but would place additional tax burden on certain San Francisco based company. Finally, in Seattle, in July, the City Council passed the payroll tax expense, also known as the head tax, with veto proof majority vote. Even so, there is a concerted effort amongst the business community, including ourselves, to push for local and state solutions to the measure that maintains Seattle's competitiveness as a business destination.
And now, I'll turn the call over to Alex.
Thanks, Mark. We remain fortunate our markets entered the pandemic on very strong footing. Despite negative net absorption almost every submarket the Q3, vacancy remains in the single digits or in some cases just over 10%. Thus far, we're seeing minimal deterioration on rent, both more broadly in the market and within our own portfolio. Sublease space is on the rise in several of our markets, but the numbers tell a complex story, including the fact that some of the larger subleases were pre COVID offering.
Our stabilized and in service office portfolios remain well leased at 94.5% and 93.5%, respectively. We had a notable sequential uptick in leasing activity quarter over quarter signing nearly 185,000 square feet of new and renewal deals despite many tenants on pause and are very limited near term expirations. This included a 42,000 square foot expansion lease with Google at Rincon Center in San Francisco. That deal is a positive sign for how companies are thinking about office space even when pursuing both in person and remote work flexibility. Once again, we achieved robust 41% GAAP and 29% cash rent spread.
Only about 20% of our activity this quarter involved shorter term extension, that is with a term of 12 months or less. Even excluding those deals, which typically entail a rent premium, our mark to market was still up pre COVID levels, 38% on a GAAP basis and 25% on a cash basis. We're seeing renewed tenant activity in our leasing pipeline increased 40% quarter over quarter to 960,000 square feet. That's fully in line with Q3 2019 and now less than 10% of those deals are on hold. Our remaining expirations for 2020 equate to about 2% of our ABR and we have coverage on about 45% of those deals.
Our 2021 expirations for which we have about 40% coverage equate to about 11% of our ABR. Our mark to market on in place leases remains about 14%, so we still have some cushion even with continued pressure on rent. We hit several major milestones within our development pipeline over the last 4 months. Arlo received a certificate of occupancy. We topped off structural steel at One Westside, which remains on budget and on track to deliver in the Q1 of 2022, and we received unanimous approval to build another nearly 480,000 square feet at Sunset Gower.
We alongside our partner Black Stone can now commence pre leasing efforts. We fully intend to replicate our success at Sunset Bronson and we'll revitalize this historic lot when the time is right. Now more than 50% of our 2,700,000 square foot pipeline of future development projects, which contains some of the best sites in the country's best office market, is fully entitled and will be ready to build as we emerge from the current crisis. In terms of new acquisitions, over the last quarter, we've been primarily focused on growing our studio platform with Blackstone in Los Angeles, New York, London, Toronto and Vancouver. We're looking at both development and redevelopment opportunities.
For straight up office, deal flow remains slow. There are virtually no value add or opportunistic deals with near term lease up risk. The bid ask is too far apart and there isn't any dispute yet in the market. We're instead evaluating best in class properties where the rent roll is made up of long term credit tenancy. Deal pricing is sometimes at or above pre COVID levels, but with our strong liquidity position, we're actively looking to redeploy capital, scale and generate attractive risk adjusted returns.
And now I'll turn the call over to Haru.
Thanks, Alex. In the Q3, we generated FFO excluding specified items of $0.43 per diluted share compared to $0.51 per diluted share a year ago. 3rd quarter specified items in 2020 consist of transaction related expenses of $200,000 or $0.00 per diluted share and one time debt extinguishment costs of $2,700,000 or $0.02 per diluted share compared to transaction related expenses of $300,000 or $0.00 per diluted share. The sale of a 49% stake in our Hollywood Media portfolio, lower parking revenue stemming from COVID-nineteen impacted occupancy, reserves against uncollected rents and lower service and other revenue at our studios largely offset gains associated with lease commencement at EPIC, FORTH INTraction, Foothill Research Center and 1455 Market drive the year over year decrease. 3rd quarter 2020 FFO, excluded specified items, includes approximately $0.02 per diluted share of revenues against uncollected cash rent and approximately $0.02 per diluted share of charges to revenue related to reserves against straight line rent receivable.
This resulted in a total negative impact to 3rd quarter 2020 FFO of approximately $0.04 per diluted share, some or all of which may be ultimately collected. Q3 2020 FFO also reflects approximately $0.03 per diluted share decrease in parking revenues, some or all of which will resume with tenant reintegration. So I'm a tell you this with closing our JV with Blackstone, the Partnership closed a 900,000,000 dollars mortgage loan secured by the property by the portfolio with an initial 2 year term and annual interest rate of LIBOR plus 2.15%. We received $1,200,000,000 of gross proceeds and used approximately 849,500,000,000 to fully repay our unsecured revolver, our Metpark North loan and term loans BND. We also purchased $107,800,000 of the loans securing the Hollywood Media portfolio, which bears interest at a weighted average annual rate of LIBOR plus 3.31%.
In addition, we repurchased 1,200,000 shares of common stock at an average price of 22.57 per share. To date, we repurchased a combined 2,600,000 shares of common stock at an average price of $23.89 per share under our $250,000,000 share repurchase plan. We now have $1,300,000,000 in liquidity consisting of $165,300,000 of cash and cash equivalents, dollars 600,000,000 of capacity on our unsecured revolver and $339,500,000 of capacity on our One Westside construction. We have no maturities until 2022 and a weighted average term of maturity of 6.1 years. Thus, we have ample capital to manage our properties, complete our development projects and ultimately pursue new Before turning to guidance, I'd like to highlight a very positive emerging trend relating to our AFFO.
Despite a $12,700,000 decline in FFO quarter over quarter resulting from the temporary impact of our Hollywood Media portfolio JV, We actually generated a modest increase in AFFO for that same period. This reflects a combination of normalizing leasing costs along with the transaction transition from non cash revenue to cash rent commencement following the burn off of free rents under significant leases as indicated by the $9,100,000 drop compared to last quarter. Much more striking is the increase in year to date AFFO, which is over 45% higher than AFFO in the prior year. To emphasize, this trend occurred in spite of temporary impact of our latest JV due to significant lower leasing costs and transition to cash rent commencement. It is an important milestone, which we've often noted in connection with prior period leasing activity.
On May 5, we withdrew our previous 2020 earnings guidance due to the uncertainty around business disruptions related to the COVID-nineteen pandemic. Given these uncertainties persist, we have not reinstated guidance for the balance of the year. We are, however, once again providing following details in lieu of formal guidance. We base this information on what we know today to help you assess our potential earnings results for Q4 2020. Due to the continued impact of COVID-nineteen, we expect our Q4 2020 operation to be similar to that of the Q3 2020.
That said, for the Q4 compared to the Q3, office NOI is expected to increase approximately 1.5% and media NOI is expected to increase approximately 5.5%. 3rd quarter operating results include the impact of the new Hollywood media portfolio JV for 2 months, whereas the Q4 will fully reflect this transaction. After adjusting for one time debt extinguishment fees in the 3rd quarter, we expect interest expense to be approximately 0.4% higher, reflecting the full quarter impact of interest relating to the New Hollywood Media portfolio loan. We also anticipate an increase to FFO attributable to non controlling interest of approximately 20% compared to the Q3. And now, I'll turn the call back
to Victor. Thanks, Harut, Mark, Alex and Laura. I am going to close by saying this, we do not take lightly any of the hurdles that California is placing or proposing to place on its businesses and all of its residents. In many ways, and I've said this before, this unfortunately is nothing new. And while
we are
optimistic Californians, we will thrive in spite of these obstacles as we have for years. We plan to do everything in our power to help California continue to lead, to be a great place to do business, a great place to raise a family and simply a great place to live. And again, I want to express my appreciation to the entire Hudson Pacific team for all their hard work and dedication. And thanks for everybody here listening today. We appreciate your continued support.
Stay healthy and safe and we look forward to updating you next quarter. And operator, with that, let's open the line up for any questions that are applicable.
Thank you. We will now be conducting a question and answer session. Our first question has come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question. Hey,
good morning out there. Just been a long earnings week. So two questions. First, if you could just give a little bit more color, the stock buyback, good thing. Obviously, the stock is incredibly depressed.
But your stock is trading at an applied 8% and you guys bought a piece of the media loan that was a 3.3%. So, if you could just walk through that because it would have seemed like that capital would have been better used to buy back your stock at a higher yield. So just want to hear more about how you guys view the transaction?
Yes. Alex, hey, it's Victor. Thanks for the question. So, Alex, you've personally asked this several times and the answer has been the same. First of all, it was a LIBOR plus 3.3.
And yes, it is a far cry from an implied 8%, even though today stocks were probably trading at a forward looking implied 10.5%. So, the answer to your question is, we will always buy back our stock at these levels. We couldn't buy back our stock during that transaction because we were closed out initially as we are right now. But as of Wednesday, we will start buying back our stock at these levels and continue
to do so. But as I've said countless times before,
we're not going to look to miss out on opportunities. We have fortunately in a very, very nice situation with capital that's accessible for us to invest in multiple factors, stock being one and assets being another. Specific to this, we just know that the credit being that it's Blackstone and ourselves and the opportunity on that there was a mezz, we would take it ourselves and have this as an opportunity to park this for a period of time since we had a need for capital to be invested and we had nothing else at the time to be invested. That's what we chose to do. And it was a small amount.
Yes. I would just add, the $900,000,000 loan on the $1,650,000,000 is 55% leverage. The purchase of the 107,800,000 dollars not only did it allow us to delever to effectively 40%, which is much closer to our target leverage, but we delevered purchased at LIBOR +3.31, which is significantly higher than our own cost of debt. So, if
we want to re lever, we can re lever much cheaper than that debt. So, there's it makes
a host of sense for I mean, there's a lot of reasons why
it makes a lot of
sense. Okay.
And then, the second question, Victor, and you will love it because I am playing the typical sell side analyst, which is, on one side, I hate something. On the other side, I like something. So there was a recent Silver Cup trade here in New York that I think created sort of low fives and it would seem like these transactions, the studios are a rare breed. They come up every now and then. It's like buying sort of a Ferrari GTO from the '60s.
They're not a lot of them. When they come up, they command to take money. Low fives seem still pretty cheap for an asset that it's hard to replicate very few of them around. Obviously, right now, your cost of capital isn't great. The Blackstone JV makes it better.
But what are your views on where cap rates for studios are going and why they shouldn't continue to go lower, in which case the low fives for Silver Cup may end up looking cheap. Just some color on your thoughts on these trades?
Yes, sure. You want to get that call?
No, it's from Washington, D. C. As a whole, I think.
I am just kidding. So no, listen, I think cap rates are definitely going to be compressed in that field. There are a lot of eyeballs on it. The competition, I think, has obviously increased. That asset is a great asset.
It's an asset that we did play in the field of trying to purchase. We didn't at the time and the sole reason we didn't become more aggressive is because we were in the middle of our process with our JV with Blackstone and so timing just didn't work. Those assets are still going to be sought after. Hudson and Blackstone in our venture are going to continue to expand that platform. We have talked about it.
We have several deals that we are looking at right now and we are going to continue to be aggressive on that. And I think you are absolutely right. I think those kind of cap rates are good cap rates and the market is even going to get tighter on that stuff, because
there is very few of them out there.
Okay. Thank you, Victor.
You got it. Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Yes. Good morning out there and good afternoon everyone. I guess I heard in Alex's comments that maybe you guys are really focused on core transaction today. And I guess I just wanted to verify the thought process around that. And additionally, where you're comfortable buying assets?
Obviously, a lot of changes in the market today quite a bit. Also on the legislative front, I mean, are you comfortable buying core assets in San Francisco proper today? What's your thought process around that, Victor?
It's a good question. Listen, core assets for long term cash flow stability is something that we will look at, depending on tenant quality, geographical location, economies of scale, our cost of capital, our JV partners. If we were to look at it with a JV partner, their cost of capital, all those factors, Dave, are going to come into play. Listen, are you asking me directly, are we going to buy an asset today in San Francisco? I would say the answer is probably not.
That's not a marketplace that we are comfortable at this level. As Alex said in his remarks, right now, we're not seeing the spread for buying value add assets in any of our markets to speak of, they are still priced at levels that I think we believe are too high, given that the lease up activity in our market is a lot slower than it was last 12 months ago, clearly. So, but there's always going to be unique opportunities and synergies that we have to take into account and be like we have in various different times in our lives as Hudson for the last, what, 14 years have looked at various times in the cycle and capitalized on it. And dare we say that we've made some mistakes, but not a lot. And so we're going to continue to the same premise moving forward.
I think you also made a comment, maybe it was Alex that made it on the 40% or maybe Mark, 40% coverage on the 21 lease expirations, 14% mark to market on that. Is it much harder to have those conversations today if you don't have a first half maturity? So you have good visibility on the tenants that want to remain in place or those that might be peeling out next year? And I'm thinking probably some of the smaller tenants versus larger tenants. And do you have anything that you can share on that?
Sure. This is Art. As we said, we have a pretty good handle on so far on the 21 expirations. If you recall, 2 of those tenants make up 25% of the $1,500,000 and we're in discussions with them and moving those along. So, yes, I mean, we do the rest of them are it drops down to about 40,000 feet at that point and then we're in active negotiations with a couple of those tenants too.
So, yeah, we feel pretty good about where we sit and the mark to market is going to be very strong.
Last maybe on co working, you guys have addressed WeWork and some of the leases there in earlier quarters. I know Regis has filed some bankruptcies and there's been some articles in the press that you guys in San Francisco and others. I guess the question is, do you feel like you're making any progress with some of those transactions? And ultimately, do you feel like you're appropriately reserved at this point for some of those flexible negotiations that you're having?
Yes. This is Mark. Yes. We are definitely appropriately reserved. Everyone of our co working locations, with the exception of Shack 15, which is a relatively small location and Maxwell, the WeWork, 1 of 5 WeWork locations, we did it, we switched to a percentage rent deal.
They're all current. We are working on
a little bit of an adjustment on Regis for some of the footage up in Seattle that will they'll pay in effect 100% of the rents on the 450 and give us some of the footage back at 95 Jackson. We think that's a real opportunity because it's well built out and it kind of allows us to recapture space so that's contiguous. And so, the overall picture is very healthy actually on the co working side with just a couple of adjustments that I just outlined. And we are fully reserved against all of that.
I appreciate all the color from everyone. Thanks.
Thank you. Our next question has come from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. I want to get an update on your thoughts on just the relative demand across the Bay Area submarkets. Are you seeing any trend in Silicon Valley versus Peninsula versus CBD just as your leasing pipeline starts to pick up a little bit more?
Sure. I think it's interesting. So the pipeline has picked up quarter over quarter kind of back to early year pipeline levels. Chiefly, it's believe it or not, there's some expansions in there. There's tenants who have taken their finger off the pause button to reengage.
And some of these are early 'twenty ones now coming back and engaging with a plan. So that's the reason for the increase in the pipeline. Relative to the markets, I would say Peninsula and Silicon Valley are stronger than the city. The city, I think, the active requirements has dropped from levels of about 6,000,000 square feet to about 2,800,000 square feet. So that is to say that there is still activity out there, but all of that activity that's on the sidelines, I feel encouraged going forward as people get clarity, tenants get clarity on how they're going to utilize space and when they're going to utilize space that some of that is going to stick.
And again, that's very encouraging to me as we're seeing we'll start to see more and more demand.
Okay. And then in terms of a shift, like maybe more of a focus on suburban satellites or hub and spoke, any of these things you've heard about in the last couple of months? Do you see Yes. Doing that?
Listen, it's not that we're not seeing that. We just don't have the space in either areas that people are seeing some massive shift on with the other. We just did our Google deal in the city. It wasn't like they were seeing is going to go in the city or they are going to go in the valley. They have different requirements for each marketplace.
We don't have a lot of space in the city that we're going to be comparing to people saying, no, we're going to go here or there. I think it is as it has been in every different types of cycle when people said, oh, the valley is getting crushed and the city is doing great. There is demand for whatever those markets are that we are
seeing.
We are not seeing a massive exodus of the city, you say we are going to the valley, and not like we did before. And so at the end of the day, it's been constant. Clearly, as Art said, we have a lot more activity in the Valley right now and people are more interested in trying to make deals in a much more expedited manner.
Jamie, it's Alex. Just to add on what Victor said, I think the West Coast is slightly different than maybe what you see in New York where there is a high reliance on public transportation, this idea of the maybe spread out geographically. We were already doing that. If you think about our markets, whether it's Seattle and then Bellevue in the East side, if you think about the tech companies that were both in the city and had their footprint down all the way to San Jose and then LA in particular as you know is a relatively sprawling city. So, I think that trend had already existed in our market pre pandemic.
So, we're not seeing any further shift to say, hey, we're going to pull out of one specific area and continue to spread. I think a lot of the companies that were driving growth in the markets were already pretty well spread out throughout the West Coast of the markets that we are in.
Okay. That's all helpful. And then, I thought the VC numbers you shared were pretty impressive. Any thoughts on how that translates into demand and what submarkets that might help?
Well, listen, we can't quantify that demand, but obviously the capital is there. It's going to get used, as I said in my prepared remarks, from anything from stabilized companies who want to go public to our new range of unicorns. So space is going to get absorbed based on the growth prospects of those companies. But then again, there's a lot of talk around some of the VC companies investing in tech or all the other ancillary businesses around tech, which is the highest demand clearly, but they may not only invest in companies that are going to stay here in California. They're looking at all markets, obviously, given what's going on.
And I think after we sort of settle out in the next few weeks post election and see where things are going to shake out at the beginning of the year, we will get much clearer of a picture of companies growing and surviving in California.
Okay. Thanks. And can you talk about the leasing prospects at Harlow? I know you got your Certificate of Occupancy building.
I think for a project like that, it's a fantastic project.
Right now, as tours are still limited, people still not in the existing footprint, we view that as a project that's by growth for a tenant. And I think until we get tenants back into the space that they lease, as you're seeing a lot of the deals getting done tend to be renewals right now versus new deals and expansion. So, we love the project. We think it's a fantastic project. We now have our CFO, so everything is ready to go.
But I think we're being patient because of the current situation.
Okay. And then last for me, interesting point on the AFFO pop in the Q3 over 2019. How are you guys thinking about the dividend and having to raise it at some point?
Yes. I mean, listen, we've talked about that before. Mark can get into details, but clearly, this is a signal of what's to come, which we've been talking about. And with our collections the way they're at right now, which has been consistent since March at 95%, the obviously impact on this is going to be dividend is going to increase. And we've always said it's going to probably increase sometime in 2021 and maybe early, maybe middle, but I mean, Mark is pretty confident given that the FFO impact is something and thanks for picking that up.
Mark, do you want to comment?
Well, no, I'm glad that you appreciated the commentary. I mean, we've been foreshadowing this for quite a long time. And as we look ahead, we think this Q3 result will carry forward pretty dependably. And as Victor says, we'll be monitoring the dividend. We have good coverage now at the $0.25 a quarter and we'll be monitoring it for the next opportunity where we'll make sense to make a bond.
Okay. Thank you.
Thanks, Jamie. Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question. Hey, good afternoon, everyone.
Victor, I mean, you started off the call on a really positive note and fundamentals aren't necessarily reflecting that. But so what are you guys looking for on the ground to either get more positive or negative that would make the that we as investors or analysts in your stock should also be following?
Well, let's talk about just basic facts, Manny, right? I mean, so this thing started now, we're going since March. We're now November 1st this weekend. We've been consistently collecting at 95%. We've probably come off our occupancy levels by 1%.
So during what people are now citing is the worst time in our lives after all the cycles that we have all seen that we are seeing our fundamentals are stable. They haven't moved. They are not like we have seen volatility in rent collections or volatility in occupancy. The key is going to be the things that are clearly out of all of our controls. And at the end of the day, it's getting kids back to school in Washington and in California like they are in Vancouver and seeing the occupancy in the buildings go up.
So, we see our stability of our buildings go from 15% occupancy back to some normalized numbers. Is work from home going to dominate? I think you already know that position and everybody is saying the same thing. And whether it's the tech companies or the fire related companies, CEOs in America have said, hey, we are going back to work just when people are comfortable.
So this is a it's a timing
game, but it shouldn't what I guess what our sort of take is at Hudson, our quality of portfolio has not changed. We have a phenomenal quality of assets. And we've got stable playing, very, very high quality tenants. So why are our values trading at 11 caps when private markets are buying stuff at 4s and 5s or threes, fours and 5s, right. I mean, so there is such a massive disconnect.
And I do think that people inherently are using the tone of saying, office has changed forever, never going to change forever. Things always revert back. It may look a little different and maybe it's a 4 day work week, but doesn't mean we're not seeing any impact on the ground by any of our major tenants that said, we want to give back space or we're looking to reconfigure our space, so we have less space for the same amount of people or all the sort of synapse that people are feeling and hearing in the market today. So I think that part of the positive attributes is just how we see it from our position at the end of the day. Now also, we don't have an issue, sorry, we don't want to sort of paint a brush around the issue of the political environment.
I'm not talking about the federal environment. I'm talking about California environment. We have some major issues in this state that we're going to have to tackle, but it's not going to be a process by which you're going to see a mass exodus out of California. California is California despite itself. And if you listen to our calls for the last 10 years, we've talked about it the same way.
People are here for a reason and they're going to stay here for the reason. And so we're optimistic that this
is going to pass and
it will be adjusted. That's I think that's where the tone is from our standpoint, Manny, from the ground that we look at from.
Thanks for that, Victor. And, Haru, thanks for the pieces of guidance going forward here. I was a little bit surprised that studio income wouldn't recover faster now that things are shooting. Is that just a magnitude issue and people aren't paying those ancillary fees the the scale of the shooting isn't there? Is there something else that I'm not
thinking about?
Let me jump into Mark's going to talk about some
of the facts around it. First of all, the shooting just started. It prepped in late August, which that means that the stages were being built, people were getting back, protocols were being put in place, and it was slower than we anticipated. Let's candid. And I mentioned that in my prepared remarks.
I mean, the unions and the PPE agreeing to getting people back to work has been a lot slower, but now they're up and running. So we're 95% active in our portfolio right now in terms of the studios. And so you're going to see a massive uptake in the ancillary revenue that they weren't paying before. Mark, can you get into it?
Yes. I mean, it did on a from Q2 to Q3, the ancillary did tick up a decent amount. It didn't get quite to Q1 levels. But if our own projections hold, Q4 ancillary should be almost to Q1 levels. So that'll be a pretty significant uptick from Q3 to Q4, which is a reflection of exactly what Victor is mentioning, namely the ramp up that was starting to occur through Q3 and then it will really take all the Q4.
And then as we we'll see in 2021 that that ramping up continues beyond Q4 and we get to pretty significant levels normalized levels in Q1, Q2, Q3, Q4. I would say, it would the ancillary revenues looking forward would be even stronger than say 2019 levels, but we've got a little bit of uncertainty around control rooms because these live audience shows, we're not it's not clear yet whether or not we're going to get as much control room revenue. And that does affect a handful of stages. That said, all the other stages are expected to be as busy as they've ever been looking ahead and we'll start seeing the real impact of that in Q4. And then, Manny, I'm sure you can see it, but base rent, rental revenue has held steady throughout the pandemic and we really saw no deterioration on rental
revenue. Hey, Victor, it's Michael Bilerman here with Manny. Just coming back to your commentary that things always revert back. You look at the retail, the mall business, and that certainly hasn't reverted back. And I can remember so many conference calls of the mall landlords saying that e commerce and technology wasn't an issue.
You think about Westside Pavilion, that deal wouldn't have happened for you if the mall industry didn't change. So what gives you the confidence that we are not that office won't become the next mall business?
Hey, listen, I can't prognosticate what will or won't happen. I can only say what we are seeing specifically with our tenants and the conversations we are having internally with our own employees. Whatever this change is going to be impacted at the end of the day will be a young person's change. And so the young people here are going to make the movement to make the decision to interact, socialize, be onboarded, learn how to move up the corporate ladders and strategies in companies. Clearly, there are going to be aspects of office businesses that don't need to be in offices.
But when you are talking about creating value and working together and getting educated and building a platform, everything that technology, media and entertainment has built for the last, whatever, 12 years since the inception of the growth of the Amazon, the Googles, the Facebooks, the Apples of the world, has predicated on that. So why would we all of a sudden say, or even assume to say that, socialization is not going to be important, therefore people can work from home. It's not retail. Retail is a choice. People in this country are unfortunately not going to have a choice whether they're going to have to work or not.
People have to go to work to end up putting food on the table and providing livelihoods for their families and growing the economy. And so that's going to be around office. And I think personally, there are a lot of CEOs in this country who politically today cannot make those statements because the time is not right. We are not out of the woods on COVID and people are still concerned about their health and welfare of themselves and their employees as they should be. But when that shifts, that shift is going to happen and people will end up going back to some level of normality and whatever that level of normality is, whether it's 3 days a week or 4 days a week, people, young people want to go to work and they want to socialize and interact.
That's how we look at it and that's what we are hearing from our tenants. They are all saying the same thing.
Yes. When we have been back for the last 3 to 4 weeks and it has been a pleasure to be back together as a team and as colleagues after 6.5, 7 months of being apart. So I agree with you on that part for sure. Thank you. Thanks.
Thank you. Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys. Just curious here, it sounds like kind of the mark to markets are holding. I'm just curious, aside from base rents, what your projection for net effect is given just kind
of where concessions and CapEx are trending?
Yes. Greg, it's Art. I would say the deals that we've closed out, granted our deal velocity is down, but concessions are holding. We're not giving any more free rents. There's not more tenant improvements on any package and our rents, our take rents are at or a little bit above underwriting.
And so this is kind of good over the last 7, 8 months. And our ask rates are flat. A lot of these deals have been in the pipeline for some time. They've had every opportunity to erode. They haven't.
And so I'm only speaking to deals that actually have been done in our portfolio. And so we feel encouraged by that.
Okay. That's helpful. Then you guys have some of the sublease space available in San Francisco with Uber.
I'm just kind of curious that's a
shorter term west on it, as you talk to them or hear about demand for that. How is that kind of going relative and how could that impact
the rents, the competitive rents here for San Francisco and in your portfolio, if at all? Well, Craig, so first of all, it's 25.
So it's not short term. I mean, we still have 4 more years, a little more than 4 more years on that space. It's great space, and it's open floor plans and there's lots of excess space for employees and growth. Remember that space has been on the market pre COVID. I mean that was the space that they looked at.
There's a lot of decisions that Uber is going to be making about moving to their new space or if they even move to the new space and where we sit with that. I don't think our space is going to dictate values in the marketplace because it's way below market in terms of where even if you want to go obviously below COVID, pre COVID times, it's way below, but even currently just compared to the deal we just did with Google, it's massive as well, right, Ark? Yes.
Okay. And then just last one for me.
You guys have talked a little about buying assets here. I know the time may not be right, but assuming perhaps your stock price isn't back to a level that makes it interesting to use as a currency and also doesn't compare well to market cap rates and debt is still extremely cheap
and the fact you guys have a decent amount of
cash flow coming on in
the next couple of years. I mean, would you look to just use more leverage in the near term and
then hopefully delever over time as that future cash flow comes on? Is that a consideration in order to just kind
of juice yields in the near term? That's never been our model. There are instances where inviting a little bit more leverage say in a JV context makes sense, but we're not going to sort of stray from our discipline in terms of balance sheet management just to try to temporarily choose deals.
Okay. Thank you. Thank you. Our next question has come from the line of Nick Yulico of Scotiabank. Please proceed with your question.
Thank you. I just had
a question on Page 15 of
the supplemental, you gave that stat on the ending lease percentage in the same store office pool and it was down 280 basis points year over year. Can you just talk a little bit about what's driving that? How much of that is a function of not doing as much lease up of existing vacancy versus maybe are you experiencing a lower than normal retention rate on renewals?
Well, I wish there was just one easy answer, but I literally wrote, I don't know, 6 different contributors that account for that, starting with Berry. One thing thematically is that we've seen retail, a decent amount of retail move outs. We saw it at Ferry. We saw it at 6922. We saw GSA move out at Rincon Center and some retail move outs there.
So, there's no one sort of standout reason for it. It's some combination of just relatively small tenants, but nevertheless a combination of them and then retail move out that is really the driver of that period over period lease percentage decline.
Okay. Thanks. I guess I am wondering, based on the visibility you have right now in terms of new leasing that could happen that's in the works, expirations that are coming up where you have some visibility on renewing a tenant. I mean, is that a number that's going to stay under pressure just because mathematically you're facing a lot of expirations and new leasing is subdued because of COVID or other reasons?
Yes, Nick, it's hard. You're right. So it's
deal actual lease velocity is down everywhere. So predicated on the lease velocity, we've been always doing a good job of backfilling and leasing our vacancy. And so it's still some of these deals are still in the pipeline and we're encouraged by that. It's a matter of timing and getting them through, getting tenants to feel more comfortable about decision making on how they're can use their space and when they're going to use their space. So do we if we had nothing in the pipeline, I'd say, yes, shucks, I don't know when, but it's really getting these things these deals through, which we're doing a
good job of kind of marshaling all
of our efforts to get them through. So we feel encouraged about the backfill and the lease up kind of going into 2021. Okay.
And then it's helpful. And then I guess I just want
to be clear on when
you talk about 40% of next year's expirations having coverage, does that mean you actually have a lease in place right now or you're just confident that you're going to get it done? And then I guess I'm wondering as well is that number also applied to the next several quarters? I mean you have about 2% of your portfolio expiring every quarter over the next 3, 4 quarters. Is it 40% for the next couple of quarters? Or is the number higher for the next couple of quarters?
Yes. So I kind of look at the year and that 40% represents
the deals we have in
negotiation And some of them are a small percentage of those are completed already, but it's really the totality of renewed and in well into negotiation. So we feel like we have a pretty good handle on it. And a lot of those tenants are I mean, I think the average tenant size once you drop down is about 6000, 7000 square feet. And so a lot of these tenants, especially now with no clarity on how they can utilize their space and when. That window was very, very, very small.
Before they would be discussing a renewal 9 to 12 months out, even small guys. Now that's shrunk to anywhere from kind of 3 to 6 months.
Okay. Thanks everyone. Thank you. Our next question comes from the line of Omokayo Okifania of Mizuho. Please proceed with your question.
Hi, yes. Good afternoon, everyone. So the comment
that was made about the accelerating the FFO growth in 3rd quarter And then, Vistra, I think you said that's a sign of things to come.
Could you just help us think
a little bit through 2021 and maybe any big kind of pre rent burn off or things like that that we should be aware of as we are kind of starting to figure out 2021, what AFFO per
share growth would look like?
Yes. I mean, it's sort of
getting ahead of 2021 guidance to get too granular about what exactly it looks like. Although I would say in preparing the commentary, Haru and I did sit with the model
to sort
of reassure ourselves that this trend, both sequential, let's say from say Q2 to Q3 and looking ahead in Q4 and beyond, is sustainable
for the
reasons we outlined in the prepared remarks that is to say the shift from free rent to cash paying rent, this sort of normalization on recurring CapEx being the key drivers of that. So, it does appear that this is we have reached the turning point that we've been long foreshadowing. Offhand, and Garud, I don't know if anything comes to mind. Offhand, I cannot think of as significant leases we've experienced in 2020 shifting from free rent to cash paying rent. There's always some amount of it, but I think we witnessed a lot of it in the latter half of twenty twenty
with the likes of Epic and
our Arts District assets and so forth. I don't know that 2021 has that dynamic, but I do think it will benefit from a full year of cash fee rent on all of those tenants as opposed to partial period.
That's right, Mark. What's happening is, yes, the free rent portion is coming together for us. Obviously, if there's a large deal that we signed, there is going to be a leasing cost associated with that. But as we look out, based on our current portfolio, the free rent burn off will continue. And I think there will be ups and downs depending on the quarter, but ultimately, this is
a trend that it's heading to.
Great. Okay. That's helpful. Thank you. Thank you.
Thank you. Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.
Thanks. And just on the work from home, I agree with you. I mean, if the young person sitting in the interview chair says, I want to work from home 4 days a week and the other equally qualified says, I'm in every day, who's going to get that job? So, I think you're spot on with that, Victor. I mean, someone my age probably can have some of that flexibility, but younger generations are probably going to be led by the market and the market is going to be back to work in my opinion.
I just wanted to kind of say that. All of my questions have been asked and answered except for one and that's on the buyback. You said you're going to be back to the market on Wednesday. Maybe you're saying that tongue in cheek, maybe that was legit?
No, no, no.
It's not tongue in cheek. We would have been back to the market this week. But obviously, we are locked out until through end of business Tuesday.
So we will be back in
the market Wednesday. My question is, so I have
a little hesitation on buybacks. I don't know how often they really work, mainly because you can't really see the accretion, particularly these days within the midst of a pandemic and no guidance. But I don't know how well they truly work. I understand them obviously buying at 11% cap, but it does disrupt the balance sheet or has the potential to do so. So we may differ on the value of buybacks, but I'm curious if you guys can give us a sense of what the limit like what your limitations are on that beyond what's available to do in the current buyback program, like where could it where would you have to stop that in your opinion?
Rich, it's a great question. You think the same way we do, which is it's a moment in time and we are taking advantage of the market conditions based on where our stock is being currently valued or we know that the real value is or what we perceive the value to be. And so it's always going to be a balance and whether it's an entry in the market on a buyback basis or we look to do a tender, those are going to take obviously precedent based on access to capital and use the capital and proceeds for other things. That being said, we have a $250,000,000 approval process right now. We would go back to the Board, which we could go back easily at any time and increase that.
I believe we've already purchased about, I don't know, 1 110,000,000 at various different levels. So we still got a little bit more room to go. So that would be the process right now is to fill out the $250,000,000 and then look at exactly what you're talking about, metrics and use of proceeds and where our leverage levels are and how the balance sheet is impacted and where the stock price is. And I think
that will definitely be on the forefront
of what we're doing given everything else we are doing with the company right now and other opportunities that we are looking at. And so, there is no finite number to say, hey, we need to buy X. I think it's going to be access to where the markets will be pricing it at and where we think the opportunities are. But right now, as we sit on October 30th and where our stock price is today, we will be buying back at least the remainder of the $140,000,000 or so, whatever Mark says we have, going forward.
Okay, good. Stock is going up just as you said that. So there you go.
Still buying back.
All right. Thanks very much.
Thanks. Have a good weekend. Thank you, everybody. I know we have run over time, so I apologize if we've not let anybody ask questions. But unfortunately, it's been a long quarter and a lot of time and we try to be in tune as to only 12 o'clock West Coast time.
So I want to thank everybody for participating. And again, I want to thank the entire Hudson team who continues to excel during these challenging times. I'm proud of all of you and we look forward to chatting with you all on our next quarterly call. Thanks, operator. We'll disconnect now.
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.