Good morning, and welcome to the Hudson Pacific Properties First Quarter 2022 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead..

Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on an 8-K with the SEC and both are now available on our website.

An audio webcast of this call will be available for replay on our website. Some of the information we will share on the call today is forward-looking in nature.

Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call and in those materials.

Today, Victor will touch on our strategy and capital allocation priorities, Mark will discuss our first quarter business highlights and upcoming opportunities and Harout will review our first quarter financial results and outlook. Thereafter, we will be happy to take your questions.

Victor?.

Thank you, Laura, and thank you everyone for joining us today. We had a productive first quarter focused on our 2022 priorities that include capitalizing on leasing opportunities, progressing our development pipeline, pursuing capital recycling opportunities, making our strong balance sheet and furthering our ESG leadership.

On today’s call, we will provide updates on each of them. At Hudson Pacific our long-term strategy is to create shareholder value by selectively growing our real estate portfolio as we need to meet of the speculative growth and increasingly convergent tech and media industries.

We’ve had great success at the forefront of this multi-faceted shift delivering tech campuses along studio lots and finding ways to innovate physical design and to streamline leasing and operations to these synergistic types of space. As tech and media business models have expanded, so has our opportunity set.

We will continue to build our portfolio around sure play office in urban West Coast tech hubs, which attracts significant talent and capital like the Bay Area and Seattle. In major global media markets like Los Angeles and the UK we are focused on synergistic CDO and office campuses and pure play studio facilities.

Our fully vertically integrated platform gives us the ability to allocate capital in several ways to generate long-term shareholder value by delivering and operating world-class amenities and sustainable workplaces for tech and media tenants.

Our primary focus remains executing on embedded opportunities and identifying attractive value-add projects targeting stabilized yields of 6% to 8% or more.

Over the last ten quarters alone, two projects like Epic Harlow, One Westside, we’ve demonstrated our ability to identify and invest capital in unique office and studio related opportunities that generate returns in line with or well in excess of those yields.

Going forward, we expect to take advantage of even more embedded development related growth opportunities as well identify and pursue capital attractive acquisitions in a disciplined manner.

We have a significant existing value creation pipeline most of which is studio or studio-related office development and more than half of which we expect to have the ability to commence construction by mid next year. There are two types of compelling opportunities we look to pursue.

One is our core plus opportunities targeting stabilizing yields of 5% to 6% or more to purchase assets that are accretive and strategically aligned with our long-term growth objectives in the right markets with the key tenants. Our acquisition of an Amazon anchored Denny Triangle located at 5th & Bell last year is an example of that.

We’ll also look to grow our studio production services offering to further differentiate our facilities and deepen our relationships with key tenants. From a return perspective, these profitable businesses expand our media derived revenue and operating margins and increase our studio portfolio stabilize yield.

Continuing to return capital to shareholders remains an option as well as part of our balanced approach to shareholder value creation.

And over the last four years, we’ve repurchased $380 million of our common stock which will reach $580 million or approximately 15% of our market cap with the conclusion of our accelerated share repurchase in the third quarter of this year. To-date, during this period, we’ve also paid approximately $543 million of dividends.

Our ESG platform, Better Blueprint is a major differentiator for our company and over the last several years has become essential in the increased alignment with the media and tech tenants that we serve. ESG is now fully integrated into our strategy and capital allocation priorities at both the corporate and property level.

In terms of the - in ESG we are ahead of the game. Our operations are already fully carbon neutral and we have the highest percentage of lead certified buildings amongst our direct peers.

We manage climate risk in accordance with TCFD and the Paris Agreement and we are readily able to comply with the SEC’s recently proposed climate-related disclosures. Our approach to be as prioritize real impact on issues we view as integral to our stakeholders.

We are very focused on DEI and much like our approach to sustainability, we are not satisfied with simply just checking the box.

In addition to diversifying our leadership and Board, our heads of DEI and ESG are building on a variety of existing internal and external facing initiatives and we recently launched an innovative impact investment platform EquiBlue to leverage our expertise to promote DEI holistically in our industry and communities.

We look forward to sharing more on these initiatives in the coming quarters.

And as we look ahead, we’ll continue to work to execute on the multiple levers we have to maximize value for our shareholders, our niche expertise and deep relationships with a secular synergistic converging media and tech businesses, we’ll create many long-term cash flow enhancing opportunities.

We also continue to weigh these growth opportunities against return of capital to shareholders again with the ultimate long-term goal of maximizing shareholder value. Now with that, I am going to turn the call over to Mark. .

Thanks, Victor. We are making good progress on our 2022 priorities. We signed over a half a million square feet of leases in the quarter with a 12% GAAP and 5.8% cash increase in rents from prior levels.

We signed Bank of Montreal’s 100,000 square foot plus, approximately 11 year renewal and expansion lease in Vancouver at Bentall Centre, a testament to the success of our substantial repositioning of that asset over the last three years.

We also expand a global production firm, Company 3 with an approximately 11 year, 60,000 square foot lease at Harlow sets that they now lease the entire 130,000 square foot LEED Gold, Fitwel certified building.

Harlow’s state-of-the-art design and location at the Sunset Las Palmas studio lot were a major draw for Company 3 as they look to unite Hollywood employees in a highly collaborative environment and enhanced proximity to content production clients. Our in-service office portfolio ended the quarter at 91.1% occupied and 92.3% leased.

Our current leasing pipeline including deals and leases, LOIs or proposals comprises 2.2 million square feet of activity, still up about 35% from our long-term average. Our 2022 expirations are approximately 10% below market. Excluding in Qualcomm, we are on leases, LOIs or proposals on 55% of the balance.

We have another 15% or so in discussions largely comprised of smaller tenants along the Peninsula and in Silicon Valley with late year expirations who will engage more fully in the coming quarters. We continue to deliver on our value creation pipeline. Tenant improvements are underway at both One Westside and Harlow.

GAAP rents commenced in November of 2021 for One Westside and in April of 2021, and January of 2022, for the original and expansion leases respectively at Harlow. Upon stabilization, these projects will generate a combined $45 million of additional NOI annually.

Our under construction and near-term planned studio and office development projects total over 2.3 million square feet. Construction at Burbank adjacent Sunset Glenoaks are seven stage 241,000 square foot purpose-built studio remains on budget and on schedule to deliver in third quarter 2023.

The project will generate another $15 million of NOI annually upon stabilization and we are building it to a 7.5% to 8% stabilized yields in comparison to recent studio trades at sub 4% cap rates. We are making good progress on entitlements for our 21 stage 1.1 million square foot Sunset Waltham Cross studio development.

This project is located just north of London where demand for stages continue to notably exceed supply. Sunset Glenoaks and Sunset Waltham Cross together will double the size of our studio portfolio on a square footage basis and to a total of 63 stages.

We expect a near-term closing on the podium for our 546,000 square foot Washington 1000 office development in Seattle and our plan is to commence construction in second quarter 2022 with delivery in early 2024. The Denny Triangle Lake Union submarkets where Washington 1000 is located are thriving and vacancy remains sub 10%.

Washington 1000 sustainable healthy design is state-of-the-art and highly differentiated and we believe that will have considerable appeal for the global tech companies looking to grow in that market. Upon stabilization, Washington 1000 will generate approximately $27 million of NOI annually.

We are also working on entitlements for our 450,000 square foot, Burrard Exchange, hybrid mass timber office building in Vancouver with very positive feedback thus far.

As the tallest such building in North America, this groundbreaking project once again showcases Hudson Pacific’s innovation and leadership in terms of world-class, sustainable design and development. Vancouver market fundamentals already extraordinarily tight pre-pandemic remains strong with sub 6% vacancy.

From a marketing for sale, all four non-strategic assets we identified as held for sale last quarter. These include 6922 Hollywood, Del Amo and Northview Center in Skyway Landing and we view them as non-strategic based on location tenancy and asset quality.

Based on buyer feedback and momentum today, we anticipate dispositions of these assets before the end of the third quarter of this year. We’ll initially use the anticipated $325 million to $350 million of proceeds to pay down our credit facility and ultimately to fund our development pipeline as required.

Expected pricing represents an annualized GAAP cap rate of approximately 2.25% on the collective sales. And now I’ll turn the call over to Harout. .

Thanks Mark. Compared to first quarter 2021, our first quarter 2022 revenue increased 14.7% to $244.5 million. Our first quarter FFO excluding specified items increased 3.3% to $75.2 million and a 3% to $0.50 per diluted share.

Specialized items in the first quarter consist of a trade name impairment of $8.5 million or $0.06 per diluted share and transaction-related expenses of $0.3 million or $0.0 per diluted share.

Note the trade name impairment is unrelated to our operations, it instead reflects the write-offs in accordance with GAAP accounting rules and NAREIT definition of FFO of the value associated with the Zio Studio Services name with three retired upon folding that production service business under Sunset Studio brand.

Our AFFO grew 11.8% to $58.6 million and our same-store property cash NOI was 1.4% to $120.3 million. This quarter, our press release and outlook present a combined same-store property cash NOI for office and studio.

This change reflects the growing synergies and similarities we and other institutional players see between our office and studio assets including increasing similar if not identical tenancy and credit and lengths of lease term.

It is more in sync with our long-term strategy and vision for the company and brings our same-store reporting in line with peers who also own and operate non-office assets be it residential retail or hotel.

At the end of the first quarter, we had over $800 million of total liquidity comprised of $137.6 million of unrestricted cash and cash equivalents and $665 million of undrawn capacity on our unsecured revolving line of credit.

We also have access to $147.4 million of undrawn capacity under our One Westside construction loans and $90.2 million of undrawn capacity under our Sunset Glenoaks construction loan. Our weighted average loan term with extension is 4.9 years. Now I’ll turn to guidance.

As always, our guidance excludes the impact of any new opportunistic acquisitions, dispositions, financings and capital markets activity. We are narrowing the full year 2022 FFO guidance to a range of $2.02 to $2.08 per diluted share, excluding specified items and maintaining our midpoint at $2.05 per diluted share.

Specified items consist of the non-cash trade name impairment of $8.5 million and transaction-related expenses of $0.3 million, both of which were identified as excluded items in our first quarter FFO.

We expect same-store property cash NOI growth in the range of 2% to 3%, which includes the full impact of Qualcomm’s expiration without renewal or backfills of their entire space at Sky Plaza. Adjusted for Qualcomm, expected same-store property cash NOI growth would be 3.5% to 4.5%.

Our guidance assumes the successful distribution of our four held for sale properties before the end of the third quarter this year for gross proceeds in the range of $325 million to $350 million. Now, we’ll be happy to take your questions.

Operator?.

The first question comes from Jamie Feldman with Bank of America. Your line is open. .

Great. Thanks for taking the call.

I guess, just to start, just thinking about some of the sequential portfolio metrics in the quarter, so, like the change in leasing or the change in same-store NOI presentation, can you talk about - has your outlook changed at all? Or why you are blending those now? And how much office has changed and how much studio has changed to get to that 2 to 3?.

Hey, Jamie. This is Harout. Thanks for the question. So, we didn’t changed now because it’s the first quarter and we decided to simplify our financials. It happened that there is a sequential down quarter-over-quarter but not material, I think 50 basis points in total and attributable to both office and media. Remember this is just a cash same-store NOI.

So, that’s the impact quarter-over-quarter. .

Can you talk about what drove that? And maybe tying into that 90% leased to decline I know a lot of it was WMC, maybe just give a little bit more color about – on anything that’s changed in the core outlook? Whether we can see it through guidance or not or maybe things changed?.

Sure, I’ll address the why. I think I addressed it in our prepared remarks, but ultimately we want to simplify our financials. We want to be in line with our peers. We think the businesses are synergistic that exactly in tenants longer term leases all those pieces I mentioned before and that’s the why.

In terms of how it’s impacting our guidance and projections, even though cash same-store NOI down a little bit, it’s not impacting the total FFO NOI dramatically, primarily because it’s just a – well, let me back track, first the reason for the decrease from – still we have some leases that we were – we have some tenants that we were in leasing with that ended up not closing and we deferred the lease up of that.

But ultimately, that’s the driver of it. It’s just some delayed leasing even though and Art can touch upon this on the leasing program. .

Okay. That’s helpful. So maybe just – can you talk more about the leasing market? It sounds like maybe Art – with ….

Yes, hi, Jamie, well. .

Hi. .

Listen, I am still very much encouraged that our markets have continued to show positive momentum. That is starting with demand, that drives everything and gross leasing. Our active deals in negotiation grew in the same period of time that we are talking about grew 280,000 square feet quarter-over-quarter. So, the demand is there.

It’s I think all markets showed a little bit of a slowdown in leasing velocity that as deals signed in the early part of the year – early part of the quarter. And then, as we started working through omicron, we really saw a big pop ourselves included in active leases signed. I think the majority of our leases signed in the month of March.

So, no, I don’t – there is no slowdown in terms of demand and active deals in the market. We’ve actually seen three quarters of very positive demand and if you look back year-over-year, starting to close. .

And would you say that pick up in the pipeline, is it small tenant, is it large tenants, what markets, what types of sectors?.

Yeah, I mean, I think across all markets cheaply over 10,000 square feet although we are seeing an uptick in interest in tenants under 10,000 feet in particular Silicon Valley. But I would attribute to if you think about the demand growth, the two markets where we’ve seen the most demand growth are Silicon Valley and the Peninsula.

I mean, we picked up 40 basis points on $5.7 million square feet just in the quarter and we’ve got another – of that kind of 280,000 square feet, 200,000 was attributable to the valley and the Peninsula. So we feel really good there.

And then the other was LA where we are already kind of close to 99% leased with that 35,000 square feet to lease in this building. But the demand across LA including Hollywood has picked up. .

Okay.

And then, just to clarify the change in percent leased sequentially, how much of that was Dell versus other buildings or other tenants?.

Yes, well, Dell was 95 basis points and we – the sequential decline – this is Mark speaking, was 50 basis points. So, but for the known vacated Dell, we actually had positive net absorption roughly, call it, 40-ish basis points. .

Or it should actually would have been up without Dell..

Yes, it would have been up around 50 basis points, that’s right. .

Okay. Alright. That’s good. Alright and then I guess, just curious to Washington 1000, I know you - I mean, can you just talk more about that investment and what you feel comfort on starting that project.

What does the leasing pipeline look like in that market?.

Well, I mean, in terms of comfort, it sounds like, Victor, you are going to jump in on?.

No, go ahead, sorry. .

Yeah, in terms of comfort, I mean, I think we’ve mentioned this in the past. I mean, a combination of I think forces give us confidence around it, one, we are in a extremely attractive level in terms of all in cost at roughly $650 a foot.

I mean, anything that quality in that market is trading well north of a $1000 a foot, I mean, there is $1100, even $1200 per square foot comps and we are going to be all in with land included at $650 a foot. There is also really strong indications of good tenant demand.

There is at least tenants – three tenants north of 100,000 feet that we are already in discussions on. There is a growing pool of other large requirements, 75,000 foot requirements that are also in the market as we speak. The South Lake Union submarket has sub 10% on vacancy and even below that for premier quality.

So, I think all the forces are aligned to make that project just look to be a screaming success. .

And Jamie, it’s Mark if I can add to that, put a finer point on the demand, I mean, we’ve seen four quarters of elevated demand in Seattle. We’ve seen deals over 100,000 square feet it will probably three years, now there is closer to eight. And on top of that, the demand is probably about 85% or maybe 90% of pre-pandemic level.

That’s the demand in the market right. So, in the submarkets that we operate in there was positive absorption quarter-over-quarter. The drag on an absorption was simply all in the CBD. And so, South Lake Union, Denny Triangle, and even – Square were all positive feedbacks. That’s a sentiment on where demand has come. .

Okay. Alright. Thanks for the color. .

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

Thanks. Good morning. Can you, Harout, explain again why you combine office and studio guidance? Does that mean that studio is less predictable than office potentially? And maybe bigger picture, with Netflix’s issues and I guess, the company being more cost conscious, it seems like we’ve reached key content spend.

Does that change your development trends at all for studio?.

John, it’s Victor. I am going to answer the question for Harout. It’s simple as what he said. The combined is what every other company has done in our peer set and non-peer set and we are doing the same thing. There is no hidden secret to it.

If you look at companies that office in life science it report the same office in multi-family, they report the same office in residential, they report the same mixed use in office, they report the same. So there is no hidden secret here.

So, let’s just move on from that point, okay? In terms of your question on Netflix, clearly, if you want to go back and look at the transcript of Ted Sarandos, is claims – Ted Sarandos is Co-CEO of Netflix that his spend on content is going to be equal or more than they’ve done in the past.

And so, the streaming companies’ perception on this is a downturn is actually not relevant to first of all the demand that we have in our studio space, one and two, the amount of capital that’s been put into the marketplace.

I think the quality is what they are focused on, on the content versus quantity and they are prepared to spend equal or more money on that.

So, but I would suggest as opposed to looking at Hudson and what we are saying, I just suggest go into the transcript based upon what Netflix says directly about their company as probably you’ll hear from Amazon and Apple and everybody else. .

And then could you mention about half of your developments will be started in the next, I guess, next year. Can you give any figures as far as dollar amounts of CapEx for the ….

I didn’t mentioned half of our developments, because what I mentioned in my prepared remarks is that, two of our developments which is what Mark just walked through, which is Washington 1000, which we will commence because of entitlement processes and what I mentioned was – is that we should have Burrard Exchange, which is our Vancouver development for approximately $0.5 million and our Sunset Waltham Cross is our million square foot, billion dollar development.

We’ll have entitlements by – hopefully by summer, if not by the end of the third quarter.

The commencement of those two projects have yet to be determined, but that is now all developments and when we have another 0.5 million feet, at Sunset Gower we have 0.5 million feet, in the Peninsula we have 0.5 million feet, at Sunset Las Palmas and we have other development opportunities that we have not disclosed yet, but are coming out of the ground.

In terms of the capital amount for those projects, I mean, it’s all outlined in our supplemental. So you can take a look there. .

And how will it be funded? Is it through additional asset sales or…?.

As we mentioned in our prepared remarks, the funding of the development will be through asset sales that was outlined in March prepared remarks after and the amount of cap, the availability of capital we have on our balance sheet currently today, all the developments that we are talking about are going to be funded with capital that is – are re-accessible and available.

.

Yes, I would just add to that. We have a construction loan for Glenoaks all of that, so all the construction cost for Glenoaks are already accounted for the construction loan. .

Nice. Thank you. .

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

Hey everyone.

So, Art, maybe one for you, on the Company 3 expansion, were those lease terms are same for the expansion space as original lease at Harlow?.

Yes, the lease terms were the same as well as the terms. .

Okay. And then, Harout, going back to same-store, and now Victor doing – I am not asking about guidance. The….

I would say, this would be the first call I am like, three of them that you are not asking for, so, thank you. .

Zio and Star Waggons, when do those come into the same-store pool?.

So, because they are not office or CDO properties. We don’t consider them same-store. So they’ll always be sitting outside of same-store, just because they are not actual real estate. .

Okay. So no stores, so they won’t come in. And then, just same-store in the quarter for studios was weaker than I had anticipated.

Anything specific driving that? And then how does that recover through the year?.

Yes, Manny, I wouldn’t really think of the – as weakness per se in the first quarter of this year. I mean, you can see expenses are essentially identical. The revenue is a bit lower, but that’s really more a reflection of a very, very strong first quarter of last year, a very high level of production activity.

And as you know, it doesn’t take much to move the neo on the studios. I mean, your denominator is pretty small there. So, relative small differences and say top-line revenue can make a fairly big difference on a percentage basis when you look at it on a same-store. .

Yes, hey, Victor, just a question on sort of capital allocation of $200 million accelerated buyback which I would assume should be done shortly net out there probably somewhere in the $25, $26 range when all said and done north of a 7 cap which is pretty hard to replicate.

It sounds like you really have some exciting development opportunities and some stuff that you want to accelerate, so perhaps additional capital there.

How do you sort of balance the development some of these value-add core plus, core acquisitions with potentially re-upping your share buyback given under an accelerated basis?.

Well, I think, listen, I’ve mentioned this four, it’s not a simple science, that is one versus the other.

If there are opportunities as I mentioned in my prepared remarks on stabilized assets that we are looking to buy whether it’s value-add or core plus, the numbers are going to be in the 6 to 8 range on the value-add and the 5 to 6 range on the core plus and the development as you pointed out taking a look at the supplemental on March to March, I mean, the ones we are talking about right now are specifically Washington 1000 and then next will be Waltham Cross and Burrard Exchange.

I mean, these are seven and eight and that falls in line with the yield structure of buying back stock. We just did $200 million, you are right, we are 90% of the way done virtually with that. I mean, the remainder is coming due in the next couple of months.

And so, we are always looking at the alternatives around that and as I mentioned – sorry, as Mark mentioned, we got about approximately 350, maybe a little bit more of dispositions that are going to close in the next 90 days or less. .

Right, with cash to be able to go do something. I kind of comeback just on as we think about the studio and office split and I don’t wanted to get half done, because I think it’s maybe people have read it perhaps the wrong way.

You are – when you report, you are going to continue as you did in the first quarter, split out all the numbers, report same-store, you are just from a guidance perspective will say, look, we are going to forecast our total same-store NOI goal, which has a multitude of different business lines that have a lot of similarities and credit to them.

But we are going to give you a total number.

But when you report, we are going to break it all out for you and we are going to call out in the future I suspect, please confirm this, that we are going to call out if there is going to be some volatility given the studio businesses are little bit more volatile than your office business which in itself could have some issues, either a delay on timing on leasing or other variables.

Can you talk through some of that?.

So, listen, I think, consistency is key, right? And being consistent which we have done in the past, and in transparent, which we have in our supplemental, we’ll have all the information that you will need to determine we are not here to say on good quarters versus bad quarters. This is our reporting. This will be consistent going forward.

If you really look at the materiality which Mark mentioned, when you are talking the same-store on the studios was 12% versus 15%, okay? So it’s still a big number, and but if you look at the dollar amount as Mark said, it was inconsequential specifically in the fact that we only own half of it versus two years ago we owned a 100% of it.

So, the information will all be there and we’ll be able to decipher on for anybody who wants to do the work, but to be consistent with what we think is easier for reporting as I mentioned and to be consistent with what our peers are doing, going forward, you’ll see one number, but all the backup information will be available. .

Right. Thank you so much. .

And by the way, at the same token as I mentioned, it has nothing to do with timing of specific reporting. It’s just that we did it for this quarter and it’s going to be going forward it would have been the same thing if the studio was 25% and the office was 3%, we still would have done it. So, there is no difference.

It’s just that we are doing it for this quarter going forward. .

As a learning lesson and then I know, you’ve been in the public markets a long time and then you’ve been extraordinarily successful.

I think the change in hindsight, our hindsight is 2020, probably deserved a little bit more explanation in the press release and if it wasn’t in the press release given the notes that came out overnight and the way the stock was reacting probably something that could have been more eloquently addressed in the public comments including the numbers and impact and just putting it away, because, unfortunately I think it negatively affected your stock.

And so, hopefully, that’s a good lesson learned for the future. .

Thank you. .

Thank you Mr. Korchman. The next question is from the line of Alexander Goldfarb with Piper Sandler. Your line is open. .

Hey, good morning out there. I’ll try to ask some lighter questions. So, going on the studios and the office, Mark, appreciate your comments on the occupancy decline and that we should worry.

So my question is, as you guys look to the office leasing demand, what’s the break out between demand for traditional office versus non-stage users who would want office on the studios? And I guess, what I am getting at is, are the economics to you guys better, because people, for whatever reason, even though they are non-states, they want to pay out more and maybe the TIs are the same or is it truly different leasing trends such that we could see strong general leasing for office that may not necessarily correlate with the demand that would see at the same time for non-stage users of studio office?.

There is a lot going on in that question, Alex. So, forgive me if I didn’t – I am not hitting exactly in response. But let me try to illustrate, there is a few 100,000 feet of what you would – what we classify as office.

But it’s – what on site – alongside of the stage is themselves and its main use is for those associated with the stage use that is to say the production part of the stage use to have a space top to office in writers, post-production people, people that need space to operate from associated with the use of a stage, okay? Historically, that square footage has never been 100% occupied by stage users.

We’ve traditionally had some amount of square footage available for other potential tenants that want to be located next to after studio lot, caffeine agents, psychiatrists, I mean, there has been all sorts of interesting different types of tenants like that, okay.

They never meet up the majority of the tenancy in the office component associated with the sound stages, okay.

What we saw during the pandemic was, because those tenants tended to be under shorter term leases, they, like everyone else in the world were starting to work from home, there was also for a stretch there until production resumed again less activity happening on the lots, we saw some lots of deterioration in tenancy of those tenants, okay? That’s what you’ve seen reflected in the sequential decline in the overall studio occupancy.

By the way, that number is a trailing twelve month number, so, if you had weaker prior quarters, it shows up in the current quarter, but the current quarter number is not just that quarter, it’s a number trailing behind it all the prior twelve month period. We would now see – we think we’ve turned the corner.

We are seeing a pickup in demand of the non-stage using office tenants. There is no – by the way, just to clarify another things is, there is no TIs or commissions associated with that tenancy. We – people approach us directly.

We have our own sort of internally driven marketing campaign where we reach out through our contacts to potential non-stage using office tenants that might want to locate there and we are seeing a pickup in that activity.

So, the expectation is, as quarters roll forward here and that activity begins to roll through our trailing 12 months number, we hope to see an improvement in that occupancy.

Does that answer?.

That’s helpful. That’s good. Second question is, Harout, you guys have about little over $800 million floating rate debt after you pay-off with the proceeds later this year would be, call it $500 million on the floating rate. Is that – I know this is always a good mix that you want between floating and fixed.

Is $500 million or that percentage of total debt, is that where you’d be comfortable at or you would think about further reducing that? Just curious. .

So, let me, and Mark, by the way you jump in, but let me address that, all of our floating rate debt with the exception of our line of credit, it was in good bankers. So, the ability for us to pay them down is not as simple it’s just our decision. So that part of the challenge. The process of it is in our home media portfolio. .

I’d like to say, if you look at the floating rate debt running – our company share running through the supplemental that 24.6%, it grew just correct that the majority of it is such as with JVs, but to put a finer point on it, 35% of the floating rate debt relates to two JV assets that we obviously are going to have to work with our JV partner on whatever the longer term goals would be with respect to that floating rate debt, but in total, that amount of debt, that will be 8.6% of our total indebtedness.

So, it’s a small component. And yes, there is another part in our JV that is roughly 25% of our floating rate debt, but – in our JVs, but that is construction debt. And all of the interest on it is capitalized.

So it doesn’t affect our earnings and the goal there would be to replace that debt upon completion of those construction projects, which is what you would typically do. The all of the remaining floating rate debt is the line.

It’s 40% of the floating rate debt and 100% of that outstanding line balance is going to be addressed through the asset related sales – the pending sales.

So, Alex, the overall goal of the company has always been to manage its floating rate exposure and you see it time and time again where the majority of our floating rate exposure is often on the line and then we pay the line back to zero, which is exactly what we expect to do here in the very near term.

Sometimes some construction related debt, all the interest is capitalized and then there is a little JV debt. .

Okay. Thank you. Appreciated. Thank you. .

Thank you, Mr. Goldfarb. The next question is from Nick Yulico with Scotiabank. Your line is open. .

Thanks. Just wanted to ask about the San Jose airport submarket.

Maybe you could talk a little bit more about types of demand you have seen for the Qualcomm asset, also as well you have Cloud 10, which I am sure that fits into some discussion, as well as your some users down there about looking at space in the market?.

Sure, Nick. This is Art. Thanks for the question. The market – as I mentioned before, the demand across the valley, demand has been up for several quarters now. Our gross leasing kind of closing in on pre-pandemic levels.

In our particular portfolio, we are looking at about a 120,000 square feet of deals right now in new deals with this elevated demand that we’ve had, new deals that are in negotiations – some form of negotiation at this point.

So we feel, really, really good about that and most of that just – put a finer point, most of that is capitalizing our people rather than we put place, because tenants want to get in quicker. They don’t want to protract and build up here then so forth. And so, that’s where our cheap demand is in Silicon Valley.

Moving over to Qualcomm, Qualcomm’s space as you know, they are out to be in the July.

We are still aggressively marketing the project to all the users over 100,000 square feet throughout the valley and beyond the work that we are doing, the freshing up of the property will probably likely take us into end of Q1, which again just to refresh your memory, include landscape, hardscape and refreshing of the common areas in the building and amenitizing it quite substantially.

So, we feel pretty good about those prospects and by the time we go into work we hope to be kind of deepen the negotiations. .

In terms of Cloud 10, I mean, we’ve got some reverse increase. As you know the demand for large tenants in the valley and specifically in San Jose, all the way through Palo Alto is really large tenants.

And so, Cloud 10 is being that it’s a new development that seems to be the attractive level here at most of these tenants and we are seeing our fair share of increase on that right now. And one of the competitive advantages we have with the Qualcomm space itself is for users who see significant growth in the near future. We’ve got Cloud 10.

We’ve also got another $2.1 million square to leverage across the airport for that particular type of user. .

Okay. Thanks. And then, the other question is on the guidance for interest expense. It went up about $9 million, I guess, you do have the line balance right now as curve shifted.

I guess, I just want to be clear if there was anything else that was driving that besides those issues and then also I want to be clear that that guidance for interest expense does assume that, as you mentioned the asset sales are paying down the line later this year?.

This is Harout. Yes, so we are using the asset sales to pay down the line and as a reminder that’s the gross interest expense and any portion relates to our JV partners is also reflected – is often reflected in their earnings side of it. So, that interest line – it’s a consolidated number. .

And it does reflect the updated curve – LIBOR curve. .

Okay. Got it. Alright. That’s helpful. Thanks. I appreciate. .

Thank you, Mr. Yulico. The next question is from the line of Ronald Kamdem with Morgan Stanley. Your line is open. .

Thanks for taking the questions. Just a couple quick ones from me. Just on the big picture, following on the question that was just asked. We’ve been just trying to bridge the guidance given at the beginning of the year the 205 before and then the updated guidance of 205. Just trying to figure out what went up and what went down.

Just a quick look, it looks like obviously interest expense was the big one on the upside. Can you just maybe walk us through really quickly what were the offsets to get back to sort of the same level? Hoping that question made sense..

Sure. Yeah, that’s a great question. So the biggest offset is our share repurchase. So, when we announced guidance back in February, we didn’t had that in our guidance and therefore we are effectively reaping the benefits of that by offsetting the interest expense. That’s the biggest piece. There is other small pieces, but that’s the biggest one. .

Okay. Got it. I figured. Alright, so just bigger picture question just taking a step back, maybe if you can update us on what you are hearing from sort of the return office on the utilization. Is that’s something that what levels could we expect by the end of the year? What are you hearing from tenants? Thanks. .

Yes, listen, I mean, I think you are hearing – we are hearing and you are seeing what we are seeing. The large sense in our portfolio are virtually back and now we are seeing a fairly aggressive move on the small tenants to come back somewhere around three or four days a week.

The utilization has picked up dramatically in the last 30 days or really since March 1 I guess, and we anticipate that’s should roll through bearing any other strain that may have people go back. But we are seeing it, I don’t think we are seeing the same kind of the transient parking numbers yet come to provision.

But we are definitely seeing the actual parking and office occupancy much higher. And if I could add to that, the confidence that Victor talked about kind of beginning March 1 throughout the market has really created this demand that I have been talking about.

I said that, the beginning of the year started off a little slow because of omicron, but it really start to pick up later, it really tracks with this uptick in demand everywhere it’s tracked with exactly what Victor said kind of that March 1 date. .

Right.

And if I could sneak one more in, can you just remind us how do you guys think about recurring CapEx of the business and how should we expect that to trend over the next, I don’t know, 2, 3, 4, 5 years?.

Well, I would say, go ahead, go ahead, Mark will add. In terms of how we think about it, I mean the main components of recurring CapEx or TIs or commissions until they tend to track the level of refin activity.

I do think you see in our numbers that as we have kind of projected sometime ago a leveling off in recurring CapEx including in the most recent quarter. I encourage you to kind of go back and look at where, how this quarter compares to kind of previous quarters.

But in the end, what it’s really done is, shown the steady improvement in AFFO which on a trailing 12 month basis is up 25% year-over-year and I would add that that is on top of a more than 40% increase from the prior year. So, we’ve seen this leveling off on recurring CapEx, it’s showing up materially in AFFO.

I don’t know what else to add about how else we see it. .

Another way we look at it is, because the TIs are very lumpy, looking at one identical quarter can – leading we have maybe a very large tenant that gets reimbursed all the TIs in one quarter, that doesn’t means that will be repeated.

So we do tend to look out at it on a for, three year or two year basis just to see where it goes and when you look at that, we see that’s our recurring capital is more normalized now than it has been in the past.

There will be some bumps here and there primarily because if there is a large tenant who takes a lot of TI that it’s going to happen in one quarter and therefore comes down in the following. .

Great. Thanks so much. .

Thank you, Mr. Kamdem. The next question is from Rich Anderson with SMBC. Your line open. .

Thanks. Good morning, still out there. If I can make a quick comment and then a question on Netflix, they are experiencing competitive challenges, they are a company within an industry, is it not an industry conversation it’s a company.

No one see Netflix stock down 68%, but isn’t the silver lining or perhaps the silver lining for you as you expand your diversification in that world and that ultimately would be a good thing in my mind and my – like I think of Amazon is scaling back in industrial, that’s actually a good thing for the industrial REITs because it allows them to expand and diversify their exposure in ecommerce.

That same rule would apply here I would think that you would expand your diversification in streaming and in content providers.

Is that a fair way to think about it?.

Well, Rich, listen, nobody said Hudson is only content tenant, because the occupiers are stages and office space as Netflix. I mean….

Mostly my point, exactly. .

Yeah, Amazon, Apple, Disney and Warner Brothers and HBO, I mean, yes you are absolutely right and they are not the only content brand and even though they are saying that they are not going to slow their content, the others are saying they are increasing our content. So you are absolutely right.

I mean, competition is good, and I don’t think anybody is implying that as Netflix goes, Hudson goes. So, thank you for that. .

Yes. And that’s – that is the point I was trying to make. A second question is, everyone on this call recognizes that Hudson trades at a pretty steep discount. The market staying 45% I don’t know your internal NAV number is, but we can all agree that it’s a discount.

Victor, you sold Arden back in, I guess, whether it’s 2005 and I am not going to litigate a sale of the company or anything like that. But you now have two distinct businesses that have synergies of course between them the studios and the office.

But is there now an opportunity to find a way to unlock that value price discovery for some segment of your business and really sort of demonstrates the market in action in a transformational way that could really bite into that NAV discount that’s I am sure been a storm in your side for a while now.

I am curious if you are strategizing around that at all. .

So, let me make a couple comments on that. First of all, clearly without seeing, but I will say, the discount to NAV, whatever number you put on it is large and it is not something that we are happy about and we’ve never said that we are happy about it and we are not going to go see about it.

Second of all, I think we have demonstrated the value of assets both on the studio side and on the office side that they are not value today what they would be if they were sold on a one-off basis.

I think thirdly, which is even more importantly been us is the value of the assets that the third-party markets have come out and you are seeing comps on single tenant office or multi-tenant office or studios that are trading in combined numbers at 3, 4, 5, caps and you are seeing independent evaluations from the likes of other people who are on this call like Green Street and looking at valuations of the portfolio at a 4 to 5 cap or 4.5 to 5.5 whatever the number is.

So, I don’t think what you are saying is order to validate. I think the validation is there, Rich. I think, it’s the desire of what we do next and the answer is, as a fiduciary, we will always and are currently always looking at alternatives that do not just maintain its status quo position.

But in order to validate, what we see or what the market wants to see in terms of the asset quality and pricing, and value of those assets, I think it’s done within the company. But it’s done a lot more outside the company now and the comps are there. .

Okay. Fair enough. Thanks. .

Thanks, Rich. .

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

Great. Thank you. Looking like as we are getting close to the top of the hour, but just wanted to ask a big picture question regarding rising rates.

Maybe Vic or Mark, I am curious if you are noticing any tangible impacts as you guys are out there either marketing those four assets for sale or looking to acquire new assets, that’s there have been any tangible move in pricing because of the rise in rates?.

So, Daniel, I think it’s a great question. So, on the disposition side, albeit we had two buildings that are multi-tenant. One building which the market knows is an asset that is relatively worth to us in the company and it’s been vacant for a long time and doesn’t fit. And then the third is an asset that is going to be a complete repositioning.

I can say, we are almost in contract, we are under letter of intent for all of them in contract with a couple of them and there has been no push back on financing. Now, that being said, I am going off of sort of memory here I believe, two out of four or maybe three out of four have no financing contingencies at all. They are all cash buyers.

I am sorry. None of in that financing contingencies, but they are all cash buyers, three are cash buyers and some are self-financing. That being said, it’s not impacted us.

On the flip side, there have been assets that we have looked at that are value-add assets with stabilized yields as our prepared remarks stated that I think has been – have been taken off the market because they can’t execute at this time.

But I think that is very far and few between from what we are seeing in the marketplace and transactions that are going to be announced or they have already been announced.

And so, I’d say, the easy answer is, the impact yet today is still very minimal in terms of transactions both on the acquisition and disposition side with the movement in interest rates. .

Got it. That’s helpful.

And no – so other impacts also in the business like tenant construction loans or anything like that in terms of what you’ve seen on some of the other ripple effect that rising rates could have?.

No, at this time, no. I mean, everything we are looking at has been very much intact even though the rates have moved. And I believe the reasoning is that the market already perceived that these rates were moving and so it is already baked into people doing business. .

Got it. Thanks for the color. .

Thank you, Mr. Ismail. This concludes our question and answer session. I would like to turn the conference back over to Victor Coleman, Chairman and CEO for any closing remarks. .

Thank you so much for participating and we’ll talk to everybody next quarter. Thanks operator for the work. .

The conference has concluded. You may now disconnect..