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Edited Transcript of HPP.N earnings conference call or presentation 30-Oct-20 6:00pm GMT

·60 min read

Q3 2020 Hudson Pacific Properties Inc Earnings Call LOS ANGELES Oct 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Hudson Pacific Properties Inc earnings conference call or presentation Friday, October 30, 2020 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alexander Vouvalides Hudson Pacific Properties, Inc. - COO & CIO * Harout K. Diramerian Hudson Pacific Properties, Inc. - CFO * Laura Campbell Hudson Pacific Properties, Inc. - SVP of IR & Marketing * Mark T. Lammas Hudson Pacific Properties, Inc. - President & Treasurer * Victor J. Coleman Hudson Pacific Properties, Inc. - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Alexander David Goldfarb Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Craig Allen Mailman KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst * David Bryan Rodgers Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Emmanuel Korchman Citigroup Inc., Research Division - Director and Senior Analyst * James Colin Feldman BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst * Michael Jason Bilerman Citigroup Inc., Research Division - MD, Head of the US Real Estate & Lodging Research and Senior Real Estate Analyst * Nicholas Philip Yulico Scotiabank Global Banking and Markets, Research Division - Analyst * Omotayo Tejamude Okusanya Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst * Richard Charles Anderson SMBC Nikko Securities America, Inc., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Hudson Pacific Properties, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) 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. -------------------------------------------------------------------------------- Laura Campbell, Hudson Pacific Properties, Inc. - SVP of IR & Marketing [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties Third Quarter 2020 Earnings Call. Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are available on the Investors section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week, and on the Investors section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainty discussed in our SEC filings, including various ongoing developments regarding the COVID-19 pandemic. Actual events could cause our results to differ materially from these forward-looking statements which we undertake no duty to update. Moreover, today, we added certain disclosures, specifically in response to the SEC's direction on special disclosure of changes in our business prompted by COVID-19. We do not expect to maintain this level of disclosure when normal business operations resume. With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our President; Alex Vouvalides, our COO and CIO; and Harout Diramerian, our CFO. Note they will be joined by other senior management during the Q&A portion of our call. Victor? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Laura. Hello, all, welcome to our third quarter 2020 call. I hope you are all healthy and well. I'm pleased to report that we've had a very safe and very productive third quarter, our outstanding Hudson Pacific team, which throughout the pandemic, has brought tremendous talent and expertise to every aspect of our business continues to successfully navigate this complex environment. As an essential business, we've had 100% of our workforce back in the office since Labor Day on a rotating schedule with all the necessary precautions, and it's been fantastic to be together again and productive. There's 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 buildings are fully operational with industry-leading health and safety protocols in place. Our tenants are paying rent. Our office and studio assets are well leased. Our leasing activity is starting to accelerate, and our rent spreads remain 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 nonessential offices to open albeit to 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 was slightly higher in the U.S. -- sorry, slightly lower in the U.S. and slightly higher in Canada. We're in constant dialogue with all of our tenants and clients. We know that despite both 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'd 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 a move 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 of 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. Sparing major VC investment in cybersecurity and the cloud, e-commerce, health care, business services, fintech and Edtech at $38 billion, third quarter 2020 was the third highest quarter for U.S. VC investment in a decade, surpassed only by the second quarter 2020, also during the pandemic and the fourth quarter 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 first time venture financing, and the money keeps coming. Fundraising is also -- has already surpassed 19 levels at $56 billion, and so far, making 2020 the second highest year ever. Also in the third quarter, 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 have had firsthand knowledge of the incredible pent-up demand for streaming content. Netflix, Amazon, Apple Plus, Hulu, Disney+ 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 1/4 of them have also streamed a first run movie with 90% likely to do it again. Nearly half have participated in some sort of gaming activity as well. These statistics are even higher for Gen Z and millennials. Even pre-COVID these 6 streaming companies I mentioned, intended to spend approximately $35 billion 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 pandemics 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 inclusion programs adopting Fifth Wall's viral response module and directing significant shareable giving to populations most impacted by the current levels, we've achieved 100% COVID neutral operations, garnering the recognition of the World Green Building Council as one of the first major real estate organizations to do so. We originally anticipated achieving this milestone in 2025, but given the increased energy associated with COVID-19 health and safety measures, we moved quickly and creatively to get this done now. Our solutions to eliminate all scope 1 and 2 GHG emissions by leveraging our energy-efficient portfolio, the use of on-site renewables and a combination of renewal 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 nonoperational carbon, specifically building materials. So as I said, much more to come, and we'll continue to lead the industry on this and other related fronts. With that, I'm going to turn it over to Mark. -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Victor. As you noted, our tenants continue to pay rent. We collected 97% of total third quarter rents comprised of 98% of office rents, 100% of studio rent 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 rents and 51% of retail rent. These percentages exclude rents contractually deferred or abated in accordance with COVID-19 lease amendments. If we included those amounts, our third quarter collections would have been 96% for total rent, 98% for office, 98% per studio and 48% for retail. Our October collections would be 95% of total rent, 96% for office, 99% for studio and 52% for retail. During the third quarter, we deferred approximately $3.1 million or 1.8% of total rent, another approximately $3.1 million or 1.9% remains in discussion for either payment or deferral. We abated only $1.1 million or approximately 0.7% of third quarter rents in connection with COVID-19 relief. Our success with collections is a testament to our high-quality office tenants and studio clients, which include many of today's most innovative and creative growth companies. Over 90% of our office ABR is attributable to publicly traded or mature privately held companies in business 10 years or more. Only 3% of our office ABR is attributable to companies and business less than 5 years, and each of these 53 companies contribute, on average, only 0.05% of our office ABR, so any risk from younger companies is well diversified. Among our top 50 tenants, which collectively generate about 60% of our office ABR, nearly 75% of that ABR is derived from publicly traded and nearly 55% is from large-cap and/or credit rated companies. Beyond tenant quality, we believe other attributes make it less likely our tenants 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've 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 MIRV 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 '22, '23 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 midterm 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 maintain Seattle's competitiveness as a business destination. And now I'll turn the call over to Alex. -------------------------------------------------------------------------------- Alexander Vouvalides, Hudson Pacific Properties, Inc. - COO & CIO [5] -------------------------------------------------------------------------------- Thanks, Mark. We remain fortunate our markets entered the pandemic on very strong footing. Despite negative net absorption almost every submarket in the third quarter, 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 our 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 base even when pursuing both in person and remote work flexibility. Once again, we achieved robust 41% GAAP and 29% cash rent spreads. 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 at pre-COVID levels, 38% on a GAAP basis and 25% on a cash basis. We're seeing renewed tenant activity in our leasing pipeline increased 40% quarter-over-quarter to 960,000 square feet. That's fully in line with third quarter 2019, and now less than 10% of those deals 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. Harlow received a Certificate of Occupancy, we topped off structural steel at One Westside, which remains on budget and on track to deliver in the first quarter of 2022, and we received unanimous approval to build another nearly 480,000 square feet at Sunset Gower. We, alongside our partner, Blackstone, can now commence pre-leasing efforts. We fully intend to replicate our success at Sunset Bronson and will revitalize this historic lot when the time is right. Now more than 50% of our 2.7 million 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. They are virtually value-add or opportunistic deals with near-term lease at risk. The bid-ask is too far apart, and there isn't any just 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 and scale and generate attractive risk-adjusted returns. And now I'll turn the call over to Harout. -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [6] -------------------------------------------------------------------------------- Thanks, Alex. In the third quarter, we generated FFO, excluding specified items, of $0.43 per diluted share compared to $0.51 per diluted share a year ago. Third quarter specified items in 2020 consist of transaction-related expenses of $0.2 million or $0.00 per diluted share and onetime debt extinguishment costs of $2.7 million or $0.02 per diluted share, compared to transaction-related expenses of $0.3 million or $0.00 per diluted share. The sale of a 49% stake in our Hollywood Media Portfolio, lower parking revenue stemming from COVID-19 impacted occupancy reserved against uncollected rents and lower service and other revenue at our studios largely offset gains associated with lease commencement at EPIC, Fourth & Traction, Foothill Research Center and 1455 Market drive the year-over-year decrease. Third quarter 2020 FFO excluded specified items includes approximately $0.2 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 third quarter 2020 FFO of approximately $0.04 per diluted share, some or all of which may be ultimately collected. Third quarter 2020 FFO also reflects approximately $0.03 per diluted share decrease in parking revenue, some or all of which will resume with tenant reintegration. Simultaneous with closing our JV with Blackstone, the partnership closing $900 million 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 $1.2 billion of gross proceeds and used approximately $849.5 million to fully repay our unsecured revolver, our Met Park North loan and term loans B&D. We also repurchased -- we also purchased $107.8 million 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 1.2 million shares of common stock at an average price of $22.57 per share. To date, we repurchased a combined 2.6 million shares of common stock at an average price of $23.89 per share under our $250 million share repurchase plan. We now have $1.3 billion in liquidity, consisting of $165.3 million of cash and cash equivalents, $600 million of capacity on our unsecured revolver and $339.5 million 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 opportunities. Before turning to guidance, I'd like to highlight a very positive emerging trend relating to our AFFO. Despite a $12.7 million 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 noncash revenue to cash rent commencements following the burn-off of free rent under significant leases, as indicated by the $9.1 million 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 commencements. 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-19 pandemic. Given these uncertainties -- given these uncertainties persist, we have not reinstated guidance for the balance of the year. We are, however, once again, providing following details and do a formal guidance. We base this information on what we know today to help you assess our potential earning results for fourth quarter 2020. Due to the continued impact of COVID-19, we expect our fourth quarter 2020 operations to be similar to that of the third quarter 2020. That said, for the fourth quarter compared to the third quarter, office NOI is expected to increase approximately 1.5%, and Media NOI is expected to increase approximately 5.5%. Third quarter operating results include the impact of the new Hollywood Media Portfolio JV for 2 months, whereas the fourth quarter will fully reflect this transaction. After adjusting for onetime debt extinguishment fees in the third quarter, we expect interest expense to be approximately 4% higher, reflecting the full quarter impact of interest relating to the New Harlow Media portfolio loan. We also anticipate an increase to FFO attributable to noncontrolling interest of approximately 20% compared to the third quarter. And now I'll turn the call back to Victor. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [7] -------------------------------------------------------------------------------- Thanks, Harout, Mark, Alex and Laura. I'm going to close by saying this. We do not take lightly any of the hurdles that California is placing or proposing to place on its businesses and all of its residents. And in many ways, and I said this before, this, unfortunately, is nothing new. And while we're optimistic Californians, we will thrive in spite of these obstacles as we have for years. We plan to do everything in our power to help California continue to lead, to be a great place to do business and 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. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question has come from the line of Alexander Goldfarb with Piper Sandler. -------------------------------------------------------------------------------- Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Just 2 questions. First, if you could just give a little bit more color. The stock buybacks, good thing. Obviously, the stock is incredibly depressed. But your stock is trading at an implied 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 wouldn't seem like that capital would have been better used to buy back your stock at a higher yield. So I just want to hear more about how you guys view the transaction. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Yes. Alex, 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, the 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, catalyst comes before, we're not going to look to miss out on opportunities. We have, fortunately, in a very, very nice situation with capital that's accessible for us to invest in multiple factors, stock being one and asset being another. Specific to this, we just know that the credit being that it's Blackstone and ourselves, and the opportunity 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. -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [4] -------------------------------------------------------------------------------- Yes. Yes, I would just add, the $900 million loan on the $1.650 billion is 55% leverage, the purchase of the $107.8 million not only did it allow us to delever to effectively 40%, which is much closer to our target leverage, but we delevered purchased at LIBOR plus 3.31%, which is significantly higher 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 makes a host of sense or -- I mean, there's a lot of reasons why it makes a lot of sense. -------------------------------------------------------------------------------- Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [5] -------------------------------------------------------------------------------- Okay. And then the second question, Victor, and you'll love it because I'm playing the typical sell side analyst, which is on one side, I hate something on the other side, I like something. So there was a recent silver cup trade here in New York that I think created sort of low 5 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 big money. Low 5s seems 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. 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 5s for silver cup band up looking cheap. Just some color on that -- on your thoughts on these trades? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [6] -------------------------------------------------------------------------------- Yes, sure. You want to get that call? -------------------------------------------------------------------------------- Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [7] -------------------------------------------------------------------------------- No, it's from Washington D.C... -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [8] -------------------------------------------------------------------------------- I'm just kidding. So no, listen, I think cap rates are definitely going to be compressed in that field. There are a lot of eyeballs on it. The competition, I think, has obviously increased. That asset is a great asset. It's an asset that we did play in the field of trying to purchase. We didn't at the time, and the sole reason we didn't become more aggressive is because we were in the middle of our process with our JV with Blackstone. And so timing just didn't work. Those assets are still going to be sought after. Hudson and Blackstone in our venture are going to continue to expand that platform. We've talked about it. We have several deals that we're looking at right now, and we're going to continue to be aggressive on that. And I think you're absolutely right. I think those kind of cap rates are good cap rates and the market is even going to get tighter on that stuff, because there's very few of them out there. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from the line of Dave Rogers with Baird. -------------------------------------------------------------------------------- David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10] -------------------------------------------------------------------------------- I guess I heard in Alex's comments that maybe you guys are really focused on core transactions 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. So I mean, are you comfortable buying core assets in San Francisco proper today? What's your thought process around that, Victor? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [11] -------------------------------------------------------------------------------- It's a good question. Listen, core assets for long-term cash flow stability is something that we will look at paying on tenant quality, geographic location, economies of scale, our cost of capital, our JV partners, if we were to look at with a JV partner, their cost of capital, all those factors, they 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're still priced at levels that I think we believe are too high, given that the leased up activity in our markets 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 we like we have in various different times in our lives as Hudson for the last, what 14 years, have looked at various times in the cycle and capitalized on it. We obviously say that we've made some mistakes, but not a lot. And so we're going to continue with the same premise moving forward. -------------------------------------------------------------------------------- David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12] -------------------------------------------------------------------------------- I think you also made a comment maybe with 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 do you have good visibility on the tenants that want to remain in place or those that might be peeling out next year? And I'm thinking apparently some of the smaller tenants versus larger tenants? And do you have anything that you can share on that? -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [13] -------------------------------------------------------------------------------- Sure. This is Harout. 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 $1.5 million, and we're in discussions with them and moving those along. So yes, I mean, we do -- the rest of them are -- it drops down to about 40,000 feet at that point, and then we're in active negotiations with a couple of those tenants, too. So yes, we feel pretty good about where we sit. And the mark-to-market is going to be very strong. -------------------------------------------------------------------------------- David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14] -------------------------------------------------------------------------------- Last, maybe on co-working. You guys have addressed WeWork and some of the leases there in earlier quarters. I know Regus has filed for bankruptcy, 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? -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [15] -------------------------------------------------------------------------------- Yes, this is Mark. Yes, we are definitely appropriately reserved. Every one of our co-working locations with the exception of SHACK15, which is a relatively small location and Maxwell, the WeWork, 1 of 5 WeWork locations where we did -- we switched to a percentage rent deal, they're all current. We are working on a little bit of an adjustment on Regus for some of the footage up in Seattle. That 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 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. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question is come from the line of Jamie Feldman with Bank of America Merrill Lynch. -------------------------------------------------------------------------------- James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst [17] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [18] -------------------------------------------------------------------------------- Sure. I think it's interesting. So the pipeline has picked up quarter-over-quarter kind of back to early year pipeline levels. Chiefly, is there some -- 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 21s now coming back and engaging with a plan. So that's the reason for the increase in the pipeline. Relative to the markets, I would say, Peninsula and Silicon Valley are stronger than the city. The city, I think the active requirements has dropped from levels of about 6 million square feet to about 2.8 million square feet. So that is to say that there is still activity out there but all of that activity that's on the sidelines. I feel encouraged going forward as people get clarity, tend to 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. -------------------------------------------------------------------------------- James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst [19] -------------------------------------------------------------------------------- Okay. And then in terms of a shift, like maybe more of a focus on suburban satellites or hub and spoke, any other thing you guys have heard about in the last couple of months, do you see (inaudible) doing that. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [20] -------------------------------------------------------------------------------- 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 one way or 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, they're going to go in the valley, they have different requirements for each marketplace. We don't have a lot of space in the city that we're going to be comparing to people saying, oh, we're going to go here or there. I think there 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's demand for whatever those markets are that we're seeing. We're not seeing a massive exodus to the city to say we are going to the valley. And now like we did before. And so at the end of the day, it's been constant clearly, as I would say, 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. -------------------------------------------------------------------------------- Alexander Vouvalides, Hudson Pacific Properties, Inc. - COO & CIO [21] -------------------------------------------------------------------------------- Jamie, it's Alex. Just to add on what Victor said. I think the West Coast is slightly different than maybe what you'd see in New York, where there's 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 on 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 L.A., in particular, as you know, is a relatively sprawling city. So I think that trend had already existed in our market pre pandemic. And so we're not seeing any further shift to say, hey, we're going to pull out of one specific area and continue to spread. I think a lot of the companies that were driving growth in the markets were already pretty well spread out throughout the West Coast of the markets that we're in. -------------------------------------------------------------------------------- James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst [22] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [23] -------------------------------------------------------------------------------- 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 Unicorn. 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 say 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'll get much clearer of a picture company is growing and surviving in California. -------------------------------------------------------------------------------- James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst [24] -------------------------------------------------------------------------------- Okay. And can you talk about the leasing prospects at Harlow? I know you got your Certificate of Occupancy for the building. -------------------------------------------------------------------------------- Alexander Vouvalides, Hudson Pacific Properties, Inc. - COO & CIO [25] -------------------------------------------------------------------------------- I think for a project like that, it's a fantastic project. Right now, as tours are still limited, people are 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 COO. So everything is ready to go, but I think we're being patient because of the current situation. -------------------------------------------------------------------------------- James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office & Industrial REIT Analyst [26] -------------------------------------------------------------------------------- Okay. And then last for me, interesting point on the AFFO pop in the third quarter and over '19. How are you guys thinking about the dividend and having to raise it at some point? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [27] -------------------------------------------------------------------------------- Yes. I mean, listen, we've talked about that before and Mark can get in the 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%. Obviously impact on this dividend is going to increase. And we've always said it's going to probably increase sometime in '21 and maybe early, maybe middle, but I mean, Mark is pretty confident given that the AFFO impact is something and thanks for picking that up. Mark, do you want to comment? -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [28] -------------------------------------------------------------------------------- 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 are going to rethink this third quarter result will carry forward pretty dependently 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, look for the next opportunity where it'll make sense to make a bomb. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question is comes from the line of Manny Korchman with Citi. -------------------------------------------------------------------------------- Emmanuel Korchman, Citigroup Inc., Research Division - Director and Senior Analyst [30] -------------------------------------------------------------------------------- Victor, I mean, you started off the call on a really positive note and the 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 -- that we as investors or analysts in your stock should also be following. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [31] -------------------------------------------------------------------------------- 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 1, 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've all seen, we're seeing our fundamentals are stable. They haven't moved. They're not like we've seen volatility in rent collections or volatility in occupancy. The key is going to be the things that are clearly out of all of our controls. And at the end of the day, it's getting kids back-to-school in Washington and in California, like they are in Vancouver and seeing the occupancy in the buildings go up. So we see our 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 farm related companies, CEOs in America have said, "Hey, we're going back to work just when people are comfortable." So this is -- 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 3s, 4s 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 it doesn't mean we're not seeing any impact on the ground by any of our major tenants have said, we want to get 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 synaps 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 on the issue of the political environment. And I'm not talking about the federal environment, I'm talking about the 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, any -- from the ground that we look at from. -------------------------------------------------------------------------------- Emmanuel Korchman, Citigroup Inc., Research Division - Director and Senior Analyst [32] -------------------------------------------------------------------------------- Thanks for that, Victor and Harout, 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 because the sort of just the scale of the shooting isn't there? Is there something else that I'm not looking at. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [33] -------------------------------------------------------------------------------- Let me jump in and Mark is 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 be candid. And I mentioned that in my prepared remarks, I mean, the unions and the PPE agreeing to getting people back to work has been a lot slower. But now they're up and running. 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 were there before. Mark, can you get into it. -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [34] -------------------------------------------------------------------------------- Yes. I mean, it is on a -- from Q2 to Q3, the ancillary did pick up a decent amount. It didn't get quite to Q1 level that if our own projections hold, Q4 ancillary should be almost to Q1 levels. So that will be a pretty significant uptick from Q3 to Q4, which is a reflection of exactly what Victor is mentioning, namely, the ramp-up that was starting to occur through Q3, and that will really take all to Q4. And then as we -- we'll see in '21 that, that ramping up continues beyond Q4, and we get to pretty significant levels at 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 certainty around control rooms because the live audience shows, we're not -- it's not clear yet with not we're going to get as much control on 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 kind of 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 that one. -------------------------------------------------------------------------------- Michael Jason Bilerman, Citigroup Inc., Research Division - MD, Head of the US Real Estate & Lodging Research and Senior Real Estate Analyst [35] -------------------------------------------------------------------------------- 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 what has been going. Would that [same thing] would happen for you if the mall industry didn't change. So what gives you the confidence that we are not -- that office won't become the next mall business? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [36] -------------------------------------------------------------------------------- Listen, I can't prognosticate what will or won't happen. I can only tell you what we're seeing, specifically with our tenants and the conversations we're having internally with our own employees. This -- whatever these changes get 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 a decision to interact, socialize, be onboarded, learn how to move up the corporate ladders and strategies and companies. Clearly, there are going to be aspects of office businesses that don't need to be in offices. But when you're talking about creating value and working together and getting educated 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 Amazons, the Googles, the Facebooks, the Apples of the world, has been predicated on that. So why would we all of a sudden say, or even assume to say that socialization is not going to be important. Therefore, people can work from home. It's not retail. Retail is a choice. People in this country are unfortunately not going to have a choice whether they're not going to have to work or not. People have to go to work, to end up putting food on the table and providing the livelihood 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 it's not -- the time is not right. We are not out of the woods on COVID and people are still concerned about their health and welfare of themselves and their employees as they should be. But when that shifts, that shift is going to happen and people will end up going back to some level of normality and whatever that level of normality is, 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, and that's how we look at it, and that's what we're hearing from our tenants, and they're all saying the same thing. -------------------------------------------------------------------------------- Michael Jason Bilerman, Citigroup Inc., Research Division - MD, Head of the US Real Estate & Lodging Research and Senior Real Estate Analyst [37] -------------------------------------------------------------------------------- Yes. Well, we've been back for the last 3 to 4 weeks, and it has been a pleasure to be back together as a team and his colleagues after 6.5, 7 months of being apart. So I agree with you on that part, for sure. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question is comes from the line of Craig Mailman with KeyBanc Capital Markets. -------------------------------------------------------------------------------- Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [39] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [40] -------------------------------------------------------------------------------- Yes. Greg, this is Harout. 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 rent. There's not more tenant improvements on any package on our rents, our take rents are at or a little bit above underwriting. And so this has kind of gone over the last 7, 8 months. And our face -- our ask rates are flat. These -- 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. -------------------------------------------------------------------------------- Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [41] -------------------------------------------------------------------------------- Okay. That's helpful. And then you guys have some of the sublease space available in San Francisco with Uber. Just kind of curious if that's a shorter-term left on it. As you talk to them or hear about the demand for that, how is that kind of going relative? And how could that impact the rents, the competitive rents here for San Francisco within your portfolio, if at all? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [42] -------------------------------------------------------------------------------- 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 -- 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 into their new space or if they even move to the new space and work 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 compared to the deal, we just had with Google, it's massively below, right, Harout? -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [43] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [44] -------------------------------------------------------------------------------- Okay. And then just last one for me. You guys talked a little bit about buying assets here. And 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 you guys 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 do deals in the near term? -------------------------------------------------------------------------------- Alexander Vouvalides, Hudson Pacific Properties, Inc. - COO & CIO [45] -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question is come from the line of Nick Yulico of Scotiabank. -------------------------------------------------------------------------------- Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [47] -------------------------------------------------------------------------------- Just a question on Page 15 of the supplemental, you give that stat on the ending lease percentage in the same-store office pool. 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? -------------------------------------------------------------------------------- Alexander Vouvalides, Hudson Pacific Properties, Inc. - COO & CIO [48] -------------------------------------------------------------------------------- Well, I mean, Nick, I wish it was just one easy answer, but I literally wrote, I don't know, 6 different contributors that account for that, starting with very -- 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 stand out 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. -------------------------------------------------------------------------------- Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [49] -------------------------------------------------------------------------------- Okay. I guess I'm wondering, based on the visibility you have right now in terms of new leasing that could happen that's in the works, expirations that are coming up, where you have some visibility on renewing a tenant. I mean is that a number that's going to stay under pressure just because mathematically, you're facing a lot of expirations and new leasing is subdued because of COVID or other reasons? -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [50] -------------------------------------------------------------------------------- Yes, Nick, it's Harout. 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 -- so it's still -- some of these deals are still in the pipeline. We're encouraged by that. It's a matter of timing and getting them through getting tenants to feel more comfortable about decision-making on how they're going to 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, it 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 it. So we feel encouraged about the backfill and the lease-up kind of going into '21. -------------------------------------------------------------------------------- Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [51] -------------------------------------------------------------------------------- Okay. And then -- that's helpful. And then I guess, I just want to be clear on, when you talk about 40% of next year's expiration having coverage. Does that mean you actually have a lease in place right now? Are you just confident that you're going to get it done? And then I guess, I'm wondering as well, is that number also apply 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? -------------------------------------------------------------------------------- Harout K. Diramerian, Hudson Pacific Properties, Inc. - CFO [52] -------------------------------------------------------------------------------- Yes, 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 we think 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 7,000 square feet. And so a lot of these tenants, especially now with no clarity on how they can utilize their space and when. That window is very, very small before they would be discussing a renewal 9 to 12 months out, even small guys, now that's shrunk to anywhere from 3 to kind of 3 to 6 months. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Our next question is come from the line of Omotayo Okusanya of Mizuho. -------------------------------------------------------------------------------- Omotayo Tejamude Okusanya, Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst [54] -------------------------------------------------------------------------------- So the comment that was moved about the accelerated AFFO growth in third quarter. And then this, 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 like free rent burn off or things like that, that we should be aware of the kind of starting to figure out 2021, what AFFO per share growth could look like? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [55] -------------------------------------------------------------------------------- Yes. I mean it's sort of getting ahead of 2021 guidance to get too granular about what exactly is looks like. Although I would say, in preparing the commentary, Harout and I did sit with the model to sort of reassure ourselves that this trend, both sequential, I'd say, from, say, Q2 to Q3 and looking ahead into Q4 and beyond, is sustainable for the reasons we outlined in the prepared remarks, that is to say, the shift from free rent to cash-paying rent this sort of normalization on recurring CapEx being the key drivers of that. So it does appear that this is -- we have reached the turning point that we've been long for shadowing. Off hand -- Harout, I don't know if anything comes to mind, off hand, 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 don't -- but I think we witnessed a lot of it in first half of 2020 with the likes of EPIC and our Arts District asset 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 seeing rent on all of those tenants as opposed to partial. -------------------------------------------------------------------------------- Mark T. Lammas, Hudson Pacific Properties, Inc. - President & Treasurer [56] -------------------------------------------------------------------------------- This is 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'll be ups and downs depending on the quarter, but ultimately, this is a trend that it's heading to. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Our next question is come from the line of Rich Anderson with SMBC. -------------------------------------------------------------------------------- Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [58] -------------------------------------------------------------------------------- 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 legitimate... -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [59] -------------------------------------------------------------------------------- No, no, not tongue in cheek, we would have been back in 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. -------------------------------------------------------------------------------- Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [60] -------------------------------------------------------------------------------- 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 a 11 cap. But it does disrupt the balance sheet or has the potential to do so. So we may differ on the value of buybacks. But I'm curious if you guys can give us a sense of what the limit -- like what your limitations are on that beyond what's available to do in the current buyback program? Like where could it -- where would you have to stop that in your opinion? -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [61] -------------------------------------------------------------------------------- Richard, it's a great question. And you think the same way we do, which is it's a moment in time, and we're taking advantage of the market conditions based on where our stock is being currently valued where we know the real value is or what we perceive the value to be. And so it's always going to be a balance and whether it's entering the market on a buyback basis or we look to do a tender. Those are going to take, obviously, precedent based on access to capital and use of capital and proceeds for other things. That being said, we have a $250 million approval process right now. If we would go back to the Board, we could go back easily at any time and increase that. I believe we've already purchased about, I don't know, $100 million -- $110 million at various different levels. So we still got a little bit more room to go. So that would be the process right now is to fill out the $250 million and then look at exactly what you're talking about metrics and use of proceeds and where our leverage levels are and how the balance sheet is impacted and what the stock price is. And I think that will definitely be on the forefront of what we're doing, given everything else we're doing with the company right now and other opportunities that we're looking at. And so there is no finite number to say, hey, we need to buy X. I think it's going to be 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 30, and where our stock price is today, we will be buying back at least the remainder of the 140 or so whatever Mark says we have going forward. -------------------------------------------------------------------------------- Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [62] -------------------------------------------------------------------------------- Okay. Good. Stock is going up just as you said that, so there you go. -------------------------------------------------------------------------------- Victor J. Coleman, Hudson Pacific Properties, Inc. - Chairman & CEO [63] -------------------------------------------------------------------------------- Still buying back. Thank you, everybody. I know we've run over time. So I apologize if we've not let anybody ask questions, but unfortunately, it's been a long quarter and a lot of time and we try to be in tune as to only 12:00 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. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.