Hudson Pacific Properties Inc (HPP) 2014 Q2 法說會逐字稿

Greetings and welcome to the Hudson Pacific Properties, Inc., second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Miss Kay Tidwell, Executive Vice President and General Counsel. Thank you, ma'am. You may begin.

Good afternoon, everyone, and welcome to Hudson Pacific Properties' second-quarter 2014 earnings conference call.

With us today are the Company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas.

Before I hand the call over to them, please note that on this call certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions.

Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, August 5, 2014, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances.

In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company's earnings release, which was released this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Thank you, Kay. And welcome, everyone, to our second-quarter 2014 conference call.

The second quarter was very productive for Hudson, highlighted by the signing of several long-term leases and successful recycling of capital with the disposition of a non-core property.

Subsequent to the end of the quarter, we completed the sale of 112,300 square-foot Tierrasanta property located in San Diego for $19.5 million in an all-cash transaction. Proceeds from the disposition were used towards the acquisition of our Merrill Property, pursuant to the like-kind reverse exchange under the Internal Revenue Code Section 1031.

On the leasing front, Hudson was very active with the completion of new and renewal leases totaling 267,000 square feet during the quarter. Highlights included the new UBER Technologies at 1455 Market Street with the expanded -- with expanded its existing lease and an additional 130,000 square feet.

We also executed another new lease at 1455 Market Street property in San Francisco with Rocket Fuel, Inc., a leading provider of artificial intelligence advertising solutions for digital marketers.

This lease encompasses 24,000 square feet of initial occupancy and includes an expansion for an additional 24,000 square feet for a combined 48,000 square feet of occupancy. With the execution of Rocket Fuel and UBER deals, the office component at 1455 Market Street is effectively fully leased.

Other noteworthy leases in the quarter included a new seven-year, 46,000 square-foot lease in our 901 Market Street property in San Francisco with a fast-growing start up, NerdWallet, Inc., and a seven-year, 25,000 square-foot lease with McGraw-Hill Global Education Holdings at our 83 King Street property in Seattle.

And finally, I'm pleased to announce that our leasing efforts over the quarter also resulted in the execution of a 15-year lease at our 901 Market Street property to the renowned retailer Saks & Company, encompassing a portion of the ground floor and the entire lower level for a total of 41,000 square feet.

The space will be home to the latest Saks Fifth Avenue [Optus Four]. This lease is expected to commence in the second quarter of 2015. With the execution of this lease, our 901 Market property is fully leased.

In terms of leasing trends, fundamentals remain strong in each of our core markets. And looking first at San Francisco, the strong leasing demand throughout the region tightened available supply and continued the upward pressure on rental rates.

Net absorption during the second quarter was a healthy 788,000 square feet, pushing market-wide vacancy to 7%, a 20 basis point decline from the prior quarter. And 150 basis point decline from the second quarter of last year.

Market-wide asking rents increased to $59.28, an increase of 4.7% over the prior quarter, and a year over year increase of 14%. Looking ahead at the second half of the year, we believe technology firms will continue to provide strong demand for office space in the San Francisco marketplace.

Over the next year, four additional new construction projects are expected to deliver 1.3 million square feet to the market. However, this space is already more than 80% pre-leased, and therefore not expected to significantly ease the current supply constraints. If demand holds steady during this time, rental rates should continue to move higher. And could approach the $74 per square foot highs hit in 2000.

Now turning to Los Angeles, the greater Los Angeles office market market exhibits pockets of positive activity. Not surprisingly, West Los Angeles and the Hollywood-Wilshire corridor, our core submarkets in our regions, continue to out-perform the market on a greater basis, accounting for more than 180% of the region's net absorption in the quarter.

Furthermore, across West Los Angeles, second quarter asking rates increased 1.6% from the end of the first quarter and were up 9.8% year over year. And in addition, the West Los Angeles submarket had a vacancy rate of 14% at the end of the second quarter, down from 14.2% at the end of the first quarter of 2000. And significantly outpacing the overall region.

While the recovery story in the greater Los Angeles region has recently been characterized by the ebb and flow of the local markets, underlying conditions appear to be improving. The unemployment rate in Los Angeles County continued to tick downward with job growth across all sectors.

The national economy posted 280,000 jobs in June, causing the national unemployment rate to reach 6.1% for the first time since 2008. But unlike previous quarters in which Los Angeles lagged behind the nation, the local economy saw hiring gains in line with the national trend.

With overall employment projected to grow 1.4% over the next two years, forecasts for the Los Angeles market call for increased demand and moderate rental rate growth throughout our core submarkets.

I'd like to briefly update you on our progress over the past quarter on our Icon asset, our latest office development in Hollywood. As you recall, Icon will be an approximately 323,000 square-foot best in class office tower and an additional 90,000 square-foot creative office building with 1,700 stall parking structure ideally located immediately adjacent to our Sunset Bronson Studios property.

We continue to make progress towards the schedule and commencement of a parking structure construction later this quarter. And the groundbreaking of the office tower and production building by the end of this year.

We're very pleased with what we're seeing in terms of the leasing activity in the Hollywood submarket and delighted with our progress as we near commencement of this important development project.

Moving onto Seattle, a recent report by the US Consensus Bureau found Seattle's population is growing at a faster rate than any other major US city, having experienced a 2.8% population growth in 2013.

Driven by the rapidly expanding technology industry, Seattle's unemployment rate dropped to 4.8%, its lowest level since 2008. And its third lowest level -- lowest rate among major metro area cities in the United States.

During the second quarter, total vacancy in Seattle region declined for the fourth quarter in a row, improving 40 basis points to 14.2%, the lowest vacancy rate since the first quarter of 2009. And furthermore, Class A average asking lease rates increased nearly 1.3% from the end of the first quarter to finish the second quarter at a $30 full service gross levels.

This marked the 11th consecutive quarterly increase. Of the major markets, downtown Seattle, where we have the majority of our portfolio in the region, remains the leader for Class A asking rates at $33.44 per square foot, a 1.5% increase from last quarter. And in addition, with a current vacancy rates of only 12.8%, downtown Seattle has accounted for nearly 55% of the region's net absorption during the last four quarters. And significantly out-performed the region as a whole.

With that, I'm going to turn the call over to Mark, our CFO, for details on our second-quarter financial performances.

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended June 30, 2014, totaled $19.8 million, or $0.28 per diluted share, compared to FFO, excluding specified items, of $13.9 million, or $0.24 per share, a year ago.

The specified items for the second quarter of 2014 consisted of costs associated with a one-year consulting arrangement with a former executive of $1.1 million, or $0.02 per diluted share. And an early lease termination payment from Fox Interactive Media relating to our 625 Second Street property of $1.6 million, or $0.02 per diluted share.

Specified items for the second quarter of 2013 consisted of expenses associated with the acquisition of the Pinnacle II building in Burbank, California, of $500,000, or $0.01 per diluted share. FFO, including the specified items, totaled $20.2 million, or $0.29 per diluted share, for the three months ended June 30, 2014, compared to $13.4 million, or $0.23 per share, a year ago.

Net income attributable to our common shareholders was $3.4 million, or $0.05 per diluted share, for the three months ended June 30, 2014, compared to net loss of $6.2 million, or $0.11 per diluted share, for the same period a year ago.

Turning to our combined operating results for the second quarter of 2014, total revenue from continuing operations increased 31.1% to $62.1 million from $47.4 million a year ago.

The increase was primarily the result of an $11.2 million increase in rental to $45.9 million, and a $3.8 million increase in parking and other revenue to $7.1 million, largely resulting from the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on June 31 -- July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014.

Total revenue from continuing operations was partially offset by a $900,000 decrease in other property-related revenue to $2.8 million, primarily resulting from lower production activity at our Sunset Gower media and entertainment property compared with the same quarter a year ago.

Total operating expenses from continuing operations increased 22.1% to $48.9 million from $40.1 million for the same quarter a year ago. The increase was primarily the result of the office property acquisitions mentioned earlier.

As a result, income from operations increased 80.4% to $13.2 million for the second quarter of 2014, compared to income from operations of $7.3 million for the same quarter a year ago.

Interest expense through the second quarter increased 11.9% to $6.4 million, compared to interest expense of $5.8 million for the same quarter a year ago. At June 30, 2014, the Company had $852.5 million of notes payable, compared to $931.3 million as of December 31, 2013, and $637.1 million at June 30, 2013.

At June 30, 2014, our stabilized office portfolio was 94.6% leased. During the quarter, the Company executed 13 new and renewal leases totaling 266,724 square feet. At June 30, 2014, the trailing 12-month occupancy for the Company's media and entertainment portfolio decreased to 69.9% from 73.1% for the trailing 12-month period ended June 30, 2013.

Turning to the balance sheet, at June 30, 2014, the Company had total assets of $2.2 billion, including cash and cash equivalents of $32.8 million. At June 30, 2014, we had $250 million of total capacity under our unsecured revolving credit facility, of which $80 million had been drawn.

During the quarter, we paid a quarterly dividend on our common stock of $0.125 per share. And we paid a quarterly dividend on our Series B Cumulative Preferred stock equivalent to eight and three-eighths per annum.

The Company is increasing its full-year 2014 FFO guidance from a range of $1.08 to $1.12 per diluted share, excluding specified items, to a revised range of $1.12 to $1.16 per diluted share, excluding specified items.

The guidance reflects the Company's FFO for the second quarter ended June 30, 2104, of $28 per diluted -- $0.28 per diluted share, excluding specified items. This guidance also reflects the disposition of the Company's Tierrasanta property in San Diego on July 16, 2014. And all other acquisitions, dispositions, financing, and leasing activity referenced in this press release or previously announced.

The costs associated with the one-year consulting arrangement with Howard Stern have been excluded from the guidance estimates as non-recurring costs. As is always the case, the Company's guidance does not reflect or attempt to anticipate any impact FFO from speculative acquisitions.

The full-year 2014 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of events referenced in this release. But otherwise exclude any impact on future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters.

Before turning the call back over to Victor, we would like to call your attention to several pages added to our latest supplemental report. First, we've added a page to provide additional information regarding our development pipeline. In particular, you will find information regarding projects under construction including current and projected costs and estimated stabilized cash yield on investment.

Similar information will be provided with respect to our future development pipeline as project constructions commence and the information becomes available.

We've also added disclosure to assist with forecasting the projected increase in net operating income stemming from prior period leasing activity. A page detail for GAAP and cash net operating income for each component of our portfolio as of the recently completed quarter.

Additional pages then provide detail regarding executed but uncommenced leases, and commenced leases with remaining upfront rent abatements, along with details for expiring leases on space being back-filled.

We have also enhanced our quarterly lease expiration disclosure by extending it through the ensuing eight quarters. We believe this additional disclosure should provide the essential information to project the impending impact in net operating income associated with early re-leasing activity.

And now I'll turn the call back over to Victor.

Thanks, Mark. Our second quarter was highly productive, marked by a robust leasing activity, a disposition of a non-strategic asset, and continued progress on our Icon development project.

As always, we appreciate your continued support of Hudson Pacific Properties. And we look forward to updating you on our progress again next quarter. Now, operator, with that I'm going to turn it over to you for questions.

Thank you. (Operator Instructions) One moment, please, while we poll for our first question. Craig Mailman, KeyBanc Capital. Please proceed with your question.

Just wanted to say I appreciate the extra color there on the commencements. I think that's helpful.

Mark, maybe just start on guidance. Can you just go through what some of the -- if there are any major changes in underlying assumptions in guidance.

Not really in assumptions. Really just in activity that transpired over the quarter. So some of the revised guidance is a result of the actual quarter. We had somewhat better than expected studio performance. A little bit of interest savings. And some pick-up on timing on move-ins.

But the majority of the [revised] bump is really new leasing activity. We mentioned NerdWallet. We also did a lease at 6922. Those both impro -- helped for the remainder of the year. We're also feeling fairly optimistic relative to our earlier projections on the studio.

So those are contributing. And then to a lesser extent we're hopeful we could pick up some incremental interest expense savings. So the combination of some better than expected performance this quarter and leasing and studio pick-up for the balance of the year is underlying that guidance model.

Okay. And did the close of Tierrasanta. Did that close earlier than you guys had anticipated?

No. In fact, he exercised an extension option. But it closed within the contractual timeframe. It was a mid-July close.

Okay. Then, Victor, I know you had mentioned a little bit about Icon. Could you just go into a little bit more on the demand you guys are seeing in Hollywood?

Yes. Craig, right now our leasing team inside and our outside brokers are touring large tenants. I think there's right now about three large tenants of anywhere from 100,000 to 350,000 feet in the marketplace that are looking at Hollywood as well as in a couple other locations.

Clearly there's not a lot of Class A space locations they can go to. It's going to depend on timing and their needs. And our timing on completion. But we're touring large tenants. And then the marketing aspect of our model and the physical space where we're touring is just completed. And our collateral materials are just completed. So we're getting a tremendous response on that as well.

Okay. I guess just bigger picture, looking through everything. The portfolio is pretty much largely stabilized. You have Icon, which you guys need to lease. But just what's next for you guys? What are you looking at on the acquisition side?

Are there any new markets or submarkets that you're looking at? And kind of thoughts here on financing. I think we had talked previously about maybe looking at some joint ventures for 1455 (inaudible) in L.A. Is that kind of still on the table here?

Well, right now, we have -- and I don't mention it in my prepared remarks. But typically we've got a consistent pipeline of acquisitions. And potential acquisitions that is pretty much stable throughout our portfolio. Focused in all three markets.

We're not looking at anything else right now other than the California and Pacific Northwest markets. And I think the amount of activity that we're looking at and we're moving forward on negotiations on various different forms and functions is pretty consistent.

I also think that, to answer your second part of your question, we're still very much in conversations and looking and evaluating alternatives on a J.V. basis on both our Element asset and our 1455 asset. And the right time with the right capital structure, we'll see where that comes out.

Great. Thank you.

Jamie Feldman, Bank of America. Please proceed with your question.

Great, thank you. Yes, thanks, also, for the increased disclosure. It's very helpful. So I guess the studio business, sounds like you guys had a quarter a little bit better than you had expected.

Can you talk a little more about what you guys are seeing there and what we should expect going forward?

I think right now we're looking at a pretty consistent flow of some mid-term tenants for the office component that has been as active as we'd ever seen. There are tenants which just is sort of commentary in general on Hollywood and the activity of Hollywood in general. And so we're seeing a very strong flow of tenancy. And increased rental rates there.

In terms of the third quarter, fourth quarter sort of evaluation on the actual studio space directly. We feel pretty comfortable with almost Q3's full occupancy of all the sound stages. And a lot of that should sort of leak into the fourth quarter as well.

I think we've got a very good backfill as well on commercials, which we've seen now in the last couple of quarters, which is obviously higher revenue stream and much more of a consistent flow than we've seen in the past.

So all signals are pretty positive on both lots. And all the sounds stages right now are [counted] full.

Okay. And then I guess back to Icon and just Hollywood in general. Can you just help quantify the amount of square footage, actually looking at the market? I know we've had --

It's -- you know, Jamie, it's hard to do because, you know, I'll give you an example. Yahoo, which everybody knows is in the marketplace. They're looking at Hollywood, they're looking at downtown L.A., and they're looking in Burbank.

And so you can't say, hey, they're only looking at Hollywood. They're looking at where they can fit. They are one of, as I said, a handful of tenants that are out there today that are looking between 100,000 and 300,000 plus feet that once they all start finding their homes, there's going to be the old adage, musical chairs. Somebody's going to be standing and nobody's going to have a seat. That's sort of of what we hope.

In terms of our asset and the uniqueness of our asset in the marketplace of Hollywood, we fit a mold that a lot of guys don't have, which we talked about in the past. Which is we've got an access to a campus facility that has media and entertainment. It's got production offices. It's got a lot more expansion.

We're going to have more parking than anybody else in the marketplace. And we got freeway accessibility with amenities that are being built up all around us. So we feel good about our project. It's hard to quantify who's looking only at Icon versus other Hollywood assets versus the general marketplace.

The good news is, there's few assets in the market and there's a lot of tenants looking to sort of find home. And I'm only referring to the larger ones. We haven't even started talking about the single and multiple store guys. The 20,000 and 40,000-footers.

Okay. And then finally, can you guys talk about what you're seeing in terms of the Wilshire corridor, Olympic corridor. From earnings season so far it sounds like things are doing pretty well on the far west side and then doing pretty well in Hollywood. And I'm having a hard time figuring out exactly what you guys are seeing on the ground in between.

Well, listen, there's not a ton of space on the corridor for large tenants. And so I think you are seeing the migration because Santa Monica's virtually full. And Brentwood doesn't have any big space. And guys like us at Element are deluxe asset.

We're full up. And so there's not a lot of large space available. And tenants are looking for a home. I think you're seeing activity that may not be as quick as people want. But we're definitely seeing rental rate movements.

In the marketplaces that we're looking at right now, I think you've seen a tremendous number of comps on Wilshire Boulevard and in Santa Monica and Penn Station and Colorado.

Full service gross numbers that as low as four bucks all the way up to -- we've seen deals done at over $6 a foot full service gross. And so I think the rental rates in some of these transactions that we've most recently seen are pretty impressive rental rates.

And it's indicative of where the strength of the market is. All the way through July. So I do think there are not a lot of large tenants because there's not a lot of large space. So it's maybe not making as much of an impact on the news, but we've got -- I can give you five examples in the last three months of deals that have been done at really good, 20,000 to 100,000 square feet at rental rates near, as I said, $4, $5, and $6 a foot.

Okay. That's helpful. Thanks, guys.

You got it.

Vance Edelson, Morgan Stanley. Please proceed with your question.

Congrats on a strong quarter. You mentioned the pipeline for acquisitions in all three markets. And given the pricing out there and the liquidity in the market, that sounds like no easy trick.

So first, could you comment on cap rates and how expensive potential targets have become? What your own return requirements are. And then if you want to maybe touch on your secret sauce that's allowing you to still source potential deals.

So thank you for the compliment. So right now we're looking at two different buckets. We're looking at a stabilized bucket and then we're looking at value-add. And obviously we're not seeing either of those buckets currently in our pipeline.

In San Francisco we had a couple of deals we worked on and then sort of got priced a little bit out of the market. But in Seattle right now I think on the value-add stuff, a stabilized basis is we're talking in the 6.5% to 7.5% range.

We're pretty comfortable with that. We're seeing a few deals. Right now we're working on a few things in Seattle. These are all relationship deals. I think every deal we're working on is off-market with the exception of one marketed deal right now, which is a slightly profile deal.

Down here in Los Angeles, we've got a couple of portfolios that are off-market. We've got individual assets that are off-market. And one deal is a marketing deal. Same thing on a stabilized basis, it's more the 5% range stabilized. And then the value-add is probably more of the 6.5% to 7% range versus the 7.5% range.

But it's relationship-driven. It's proven track record. I think a lot of our peers right now have been focused on development. I think we've balanced ourselves on development and the value-add and some stabilized. And we'll continue to do so.

I'm confident that the deals that we're looking at are solid, accretive deals to the portfolio. They match very well with our current assets. And I don't think they're going to shock a lot of people if we get them done. They're not going to blow anybody away and say: Why are you doing that?

Okay. Good to hear. And then shifting gears, can you give us a feel for the overall leasing pipeline in aggregate? Will second quarter strength likely continue? And I guess another way to look at it is, did second quarter leasing activity remain strong through July, from what you've seen?

Well, yes.

Yes. It's a little tricky to respond to, Vance, because we have so little in the way of expiration. And not that much office availability. But there's certainly no reason to -- if you look at the wider market, putting aside what availability we have or lack there.

I'm looking towards our head of leasing, Art Suazo. All indications are there -- or all of our core markets remain strong. You want to comment?

Yes. Yes. The activity, I think we have something like a couple hundred thousand square feet available. We have activity close to the 300,000 square foot range. And that's spread out. We have multiple -- especially on the larger piece (inaudible) space, we have multiple negotiations going on for those blocks of space.

Beyond that, it's really space that we're repositioning. It's going to take some time to lease. But other than that, (inaudible) activity.

And I just think it's -- I just jotted one more note. But I think the fact that we did the deal in 901, which we just announced today. And on space it's very challenging at a very good rate. And an excellent term in credit. We announced that we had some activity up in Seattle.

We did the McGraw-Hill deal, which we just recently announced as well, which is not a tech company. Shows the sort of support of other ancillary tenants in the marketplace. I think we've got that same kind of flow with our remaining space.

And we've got some people who are looking to expand into current occupied space because their businesses are doing well. And so we're seeing that consistently throughout the portfolio, as well.

Okay, that's great color. And lastly, now that Tierrasanta is taken care of and I know that was considered fairly non-core. But any disposition pipeline to speak of, even it's just land? Or are you fairly happy with everything you have right now?

We always look at the portfolio to see what fits and what doesn't. And I think there may be an asset or two in the portfolio. But that's about it that we would maybe consider over the near- to mid-term of disposing. But otherwise, no, we're pretty comfortable with what we have. And how it sort of fits in the mix.

Okay, great. I'll leave it there. Thanks, guys.

Thanks, Vance.

(Operator Instructions) Brendan Maiorana, Wells Fargo. Please proceed with your question.

So, Victor, on -- not I guess straight dispositions. But if you J.V. assets like you were talking about earlier in the call and 1455 I think is a candidate that's possible.

What should we think about from a timing perspective? And what would be some of the -- what are some of the things that you're considering as whether or not to pursue that as a strategy?

Well, I guess from a timing standpoint, if we were to pursue it, it would be sort of a year-end transaction. And the viability of doing it is sure -- based on, I guess, three factors.

First and foremost, we've got some re-leasing activity. Virtually the asset's 100% occupied but we know we have some additional tenancy that wants to move into some of the lower rent space. So we would want to capture that first before we put a valuation on the table.

Secondarily -- the second issue would be the structure and what we would desire on a structure on a J.V. We'd want to maintain control of that asset and all the bells and whistles that go along with that. So obviously the market conditions around our structure would have to be adhered to in order for us to want to consider doing a deal.

And then lastly, and obviously the most important, is who the partner is. And the relationship not just Hudson and 1455, if that was the asset we were to talk about. But to Hudson and 1455 and any other ancillary businesses that we would want to do with that partner.

So it's not an urgent response for us to say, hey, we're just going to get it done. But I do think it's something that we're considering. We're having conversations. And I think by year-end we'll have some sort of a resolution whether we will or won't do it.

Is there -- there's been some nice trades in that mid-market area in San Francisco. Is there any reason to think that some of the price per pounds that we've seen come across, you guys wouldn't be able to capture similar value for 1455?

None whatsoever.

Okay. All right, that's helpful. What -- so the backfill, you guys don't have much space. But I guess Fox moved out of 625 Second. So you've got a little bit of space there. What are the prospects for leasing up the remainder of that building?

We've got two tenants right now. One existing San Francisco tenant that's a fairly popular one that's consistently looking for more space. And another one that's a very well-financed capitalized media company that's a household name. Both looking at the same place.

Okay. And would that be sort of a pick-up in rents relative to where Fox was?

Oh, yes. Definitely.

Okay. This is probably for Mark. So if we look at the lease disclosure, which is really helpful, how should we think about the TI spend that's on those leases that are yet to commence? Is that -- should -- does that TI typically spend when the lease commences? And then completes when the cash rent commences?

Yes. Certainly by completion you're -- there's a little lav in your TI spend because it takes a little while for them to spend and then submit for the allowance. But it's anywhere from, say, as little as three to as much as, say, six months before commencement that TI spend should be well underway. And then maybe as much as of -- as a 60 day, 90 day-ish lag before the final spend is sort of fully made after commencement.

Okay. Okay, that's helpful. And how should we think about -- so there's a fair amount of space that is vacant today. There's some space where you've got tenants that are replacing existing tenancy with a pick-up in rent.

But for the space that is vacant today, and most of that is on modified gross leases, how should we think about the pick-up fall to the bottom line from NOI on modified gross leases? Is that -- is it just -- is probably all that fall to the bottom line? Or is it 90% of that number?

Well, it depends on what type of -- if I'm following your question, Brendan, it obviously depends on if we roll the tenancy over to the same recovery structure. Right? So on (multiple speakers) --

Let's compare it to vacant space today. So I was just sort of looking at one at Rincon you've got a modified gross lease of $46. And it's the tenant moved out in December of last year.

So it's vacant today. So do you pick up 46 bucks? Is it sort of 90% of $46? How should we think about that?

Right. So it's probably -- maybe I'm struggling to understand your question. But, right. So most of the leases at Rincon are rolling out on a full service basis. Right?

And most of the deals are getting done today are getting done on a modified basis. And so what you're going to end up with is you're going to pick up the improvement on base rents plus call it another four bucks, give or take. Four to five bucks on -- for that net U&J. Right?

So let's say your full-service roll out is, I don't know, 30 bucks. Right? So take AT&T. I think that rolled out at, like, 28 bucks full service. And it rolled up to, like, 35 modified. So you call it -- so if you gross that up, it's, like, 40 bucks compared to 28 bucks on a full service basis. Or if you want to back out the -- you picked up -- on the base rent you picked up, whatever, six or seven bucks. Plus you pick up the $4 on the direct U&J.

Yes, okay. Got it. Last one, Victor. So just in Los Angeles, in Hollywood, if you're talking to media, tech, entertainment tenants, I'd imagine it's Hollywood. I think you mentioned Burbank. Probably Arts District and Playa.

Are those kind of the main submarkets that they're thinking about? Is it really all just timing related or are there one thing or another that may draw a tenant to one particular submarket over another?

Oh, I think those are probably the main submarkets. Plus I would include Santa Monica, since Water Garden and Colorado Place has got -- is going to have some vacancy. And they're doing some renovations at Water Garden.

So that sort of would accommodate an additional square footage pick-up there. It really is timing and it's really going to be the desire to try to find the space in those marketplaces when the need of their space rolls.

There is going to be some move around. So it is going to be a little bit of a game where some of these tenants are leaving somewhere to go to a newer space or a bigger space. And that space will come on the marketplace.

But for the most part, I think it's going to be accessibility to the space first and foremost versus any other specific need. All those areas you mentioned clearly have or will have in the near future amenities that are going to make it of interest both from the multi-family side for tenants' employees. As well as all the retail amenities.

So that's not going to be the issue. It's really going to be on desire. Find the space and the time by which it's available.

And how would you guys feel about trying to get a presence either in the Arts District or Playa, as you would maybe think about expanding your submarkets in L.A.?

We like both those markets.

Okay. All right, thanks, guys.

Thanks.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Coleman for closing comments.

Thank you very much for participating and supporting Hudson. And we look forward to chatting with you either later this quarter or next.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a great day.