Hudson Pacific Properties Inc (HPP) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to the Hudson Pacific Properties Fourth Quarter 2021 Conference Call. (Operator Instructions) 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.

Good morning, everyone. 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'll 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.

This morning, Victor will discuss macro trends across our markets and our 2022 priorities. Mark will review 2021 business highlights, along with upcoming opportunities, and Harout will discuss our fourth quarter financial results and provide initial guidance for 2022. Thereafter, we'll be happy to take your questions. Victor?

Thank you, Laura. Good morning, everyone, and thanks for joining us. Hudson Pacific accomplished a great deal in 2021, staying true to our core strategy. We further expanded our office and studio portfolios within global centers of innovation. We delivered on exceptional value of creating redevelopment opportunities like One Westside. We grew our studio platform by acquiring new production service lines as well as by adding another large-scale, purpose-built studio to our development pipeline and all of this while successfully capitalizing on our office leasing expirations and maintain a strong and flexible balance sheet.

The long-term outlook for the unique type of properties and experience Hudson Pacific provides for its studio and office tenants has never been brighter. For over a decade, we've remained diligent in our focus on high barrier-to-entry markets, propelled by growth of tech and media, where the related industry infrastructure, be it capital flows, talents or services is entrenched.

We've also put ourselves at the forefront of owning and operating production studios, which operational complexity and unique relationships also create significant barriers to building a platform at scale. Our strategy has proven out and remains well intact as the pandemic has only accelerated pre-leasing demand trends, driving an abundant amount of capital to the tech and media industries.

Venture capital investment reached $330 billion in the United States last year. This is the highest year on record and almost double the prior year. With California receiving the lion's share of more than 3x any other market, we expect this to continue with venture funds raising nearly $130 billion last year, up 50% year-over-year, and eclipsing the $100 billion mark for the first time ever.

Software and other non-biotech investments surged in 2021, which, coupled with increased early stage fundings, are poised to further drive leasing velocity at our smaller tenant-focused Peninsula and Silicon Valley office assets, where we're already seeing demand accelerate.

Content production spend for the addressable U.S., U.K. and Canadian markets totaled approximately $175 billion in 2021. That's a 14% increase from the prior year with studios like Comcast, Disney, Netflix, Apple and Amazon spending more than $100 billion.

Production spend is anticipated to increase again this year as the battle for streaming service subscribers further intensifies the U.S. and global markets alike. This bodes very well for the demand at both our studios and our strategically located office assets. Several of these companies have sizable requirements, not only for Los Angeles, where the location, quality and studio adjacency of our office portfolio and development pipeline is unmatched, but within our other markets as well.

Improving the public commentary around return to work is beginning to reflect the reality of our tenant discussions and it has accelerated leasing activity across all of our markets. For media and tech tenants and creative office companies, where culture and collaboration is essential, the terms hybrid and flexible are not translating into less workspace.

In fact, FAANG-type tenants, which have long been the bellwether on workplace trends, have been accumulating large blocks of space throughout the pandemic. This activity has accelerated in the most recent months as Meta Platforms, LinkedIn, Pinterest, Upstart, Zillow, Amazon, Twitter, Indeed, Riot Games and Roku have all signed significant leases across our markets.

Big picture, with this favorable backdrop in 2022, Hudson will continue to do what it does best, creating significant shareholder value by transforming underperforming real estate in global tech and media markets, and leasing that space to meet the modern workspace needs of today's and tomorrow's leading companies.

We are specifically focused on 5 key objectives this year. First, to successfully address our 2022 office lease expirations, while capturing double-digit mark-to-market on rents. Second, to execute successfully on our near-term value creation office and studio developments, including Sunset Glenoaks and Washington 1000. Third, to recycle capital from nonstrategic asset sales into high-yielding strategically aligned acquisition opportunities, be it office or studio assets, production service businesses, or repurchase shares. Fourth, to maintain a strong, flexible balance sheet with ample liquidity to run and grow our business. And finally, to continue to undertake innovative and impactful ESG endeavors that further differentiate our company, Hudson Pacific, in the areas of sustainability, health and equity.

With that, now I'm going to turn it over to Mark.

Thanks, Victor. Our strong performance in 2021 speaks to the resilience of our strategy as well as our team's incredible ability to execute across all our verticals. Last year, we signed over 1.8 million square feet of office leases with healthy 14% GAAP and 7% cash rent spreads. GAAP and cash rent spreads were further elevated in the fourth quarter at 16% and 11%, respectively, for the 448,000 square feet of deals signed, which contributed to the 150,000 square feet of positive net absorption.

Today, even after signing nearly 0.5 million square feet last quarter, our leasing pipeline comprises nearly 2 million square feet of deals in leases, LOIs or proposals, a level of activity 35% higher than our long-term average.

Our 2022 expirations are 12% below market. Regarding our largest expirations, we're in a late-stage leases for 100% of the NFL space in Culver City. We've backfilled KPMG space with Amazon and Denny Triangle. We plan to reposition the Burlington Coat space as office in San Francisco, enabling us to capture a very significant markup on the sub-$10 annual rents.

We're already in discussions with both Auris Health and Stanford, to renew along the Peninsula for upcoming fourth quarter expirations. And we now expect that Qualcomm, which expires in the third quarter, will vacate their space, which we will look to reposition as we market it for lease.

Excluding known vacates, Qualcomm, Dell and Burlington Coat, we have 45% coverage that is leases, LOIs or proposals on our remaining 2022 expirations as well as another 25% in discussions. Most of those in discussions represent smaller sub-10,000 square foot tenants along the Peninsula and in Silicon Valley with late third or fourth quarter expirations, who would be unlikely to engage more fully until later in the year.

That said, among all our markets, Peninsula and Silicon Valley fundamentals are tightening most swiftly, including a combined 2.6 million square feet of positive net absorption in the fourth quarter. We continue to create value through our pipeline of exceptional redevelopment projects. At the end of last year, we delivered One Westside, a 1980s era shopping mall, we converted into a spectacular urban campus nearly 2 months early and fully leased to Google for tenant improvements.

From start to finish, this project serves as a case study for visionary and sustainable adaptive reuse. We're in leases and expect to sign imminently with a tenant for the balance of Harlow, our stunning 130,000 square foot office development on the Sunset Las Palmas Studios lot.

Upon stabilization, anticipated year-end 2022 for Harlow and mid-2023 for One Westside, these projects will generate approximately $45 million of combined NOI annually.

We've taken advantage of opportunities to acquire a high-quality, strategic and immediately accretive assets like 5th & Bell in Seattle's dynamic Denny Triangle submarket. In less than 3 years, through a series of acquisitions, we've tripled the size of our Denny Triangle portfolio to over 1.9 million square feet and added Amazon to our top tenants.

We now own some of the best assets in that market, which continues to benefit from its South Lake Union adjacency as well as the $2 billion Washington State Convention Center addition and related retail public space and streetscape improvements, all set to deliver in less than a year in January 2023.

We're awaiting the convention center's delivery of the podium for our fully designed and permitted 538,000 square foot Washington 1000 office development, after which construction should take about 18 months. Upon stabilization, we expect this project will generate another approximately $27 million of NOI annually.

We successfully accelerated the growth of our studio platform in 2021 as well. Our goal has always been to build a premier forward-looking studio portfolio, uniquely positioned to meet future demand from leading content creators, be it through location, the right product fit for stages and production office, fully integrated service offering or a combination of all 3.

Our ability to vertically integrate our studio business to not only deliver and operate studio facilities alongside strategically located office assets, but to acquire and run operating companies like Star Waggons and Zio Studio Services, all under 1 global brand, greatly enhances our ability to meet tenant demand and create value.

Combined, Star Waggons and Zio's generated $32 million of EBITDA last year, significantly above our underwriting. And in 2022, we expect EBITDA to grow to approximately $35 million to $37 million.

Construction is now underway at our Burbank adjacent Sunset Glenoaks, which we expect to deliver by third quarter 2023 and generate approximately $15 million of additional annual studio related NOI upon stabilization. We're also making progress on public approvals for our Sunset Waltham Cross development in the U.K., which we could receive by year-end. Collectively, the addition of these 2 studios will expand our global platform to 5 facilities and over 60 stages.

We've continued to opportunistically repurchase our stock under our $250 million share repurchase authorization, taking advantage of pricing dislocations alongside pursuit of embedded and external growth opportunities. In the fourth quarter, we repurchased another 1.3 million shares of our stock at an average price per share of $24.07.

Throughout the entirety of 2021, we repurchased a total of 1.9 million shares at an average price per share of $23.82. As of year-end, we have identified 4 nonstrategic office assets for potential disposition. These include 6922 Hollywood in Hollywood, Del Amo in Torrance, Northview Center in Lynnwood, and Skyway Landing in Redwood Shores.

For all these assets, either the location, tenancy or asset quality is no longer a fit for our strategy and we believe our capital is better allocated to higher-yielding investments, whether it would be funding our development pipeline, making strategic acquisitions or continuing to repurchase our stock.

With that, I'll turn the call over to Harout.

Thanks, Mark. Fourth quarter FFO, excluding specified items, was $0.52 per diluted share compared to $0.44 per diluted share a year ago. Fourth quarter specified items consisted of transaction-related expenses of $1.5 million or $0.01 per diluted share and a onetime prior period supplemental property tax reimbursement of $700,000 or $0.00 per diluted share, compared to specified items totaling $4.8 million or $0.03 per diluted share a year ago.

I'll note that last year, despite the pandemic challenges, we achieved the high end of our 2021 FFO guidance range with full year FFO of $1.99 per diluted share. Fourth quarter AFFO once again grew significantly compared to prior year, increasing by $19.3 million or 37% compared to FFO increases by $16.8 million or 27% during the same period. Again, this positive AFFO trend reflects the significant impact of normalizing lease costs and cash rent commencements on major leases following the burn off of free rent.

Fourth quarter NOI at our 42 consolidated same-store office properties increased 4.6% on a GAAP basis and 2.8% on a cash basis, whereas full year NOI increased 0.7% on a GAAP basis and 4.9% on a cash basis.

Fourth quarter NOI on our 3 same-store studio properties decreased 9.5% on a GAAP basis and 17.3% on a cash basis. However, adjusting for the onetime prior period property tax reimbursement, NOI would have increased by 17.7% on a GAAP basis and 6.9% on a cash basis.

As of year-end, our in-service portfolio was 91.8% occupied and 90.8% leased, representing 120 basis points and 160 basis points quarter-over-quarter increase, respectively.

Following the $1.1 billion refinancing of our Hollywood Media portfolio in late summer, we returned to the capital markets in the fourth quarter to further fortify our balance sheet and increase our liquidity. We raised $413 million through a successful preferred stock offering, which we used to repay a $25.2 million loan secured by 10950 Washington coming due March 2022.

Along with amounts outstanding under our credit facility with additional funds available for other corporate purposes, we also recast our credit facility, increasing availability from $600 million to $1 billion and extending the term until the end of 2025.

At the end of the year, we had $1 billion in liquidity with no material maturities until 2023 and average loan term of 4.8 years. In addition, we have access to $263.9 million of undrawn capacity associated with construction loans for One Westside and Sunset Glenoaks.

Now I'll turn to guidance. As always, our guidance excludes the impact of any new opportunistic acquisitions, dispositions, financings and capital markets activity. In addition, I remind everyone of potential COVID-related impacts to our guidance, including variants and government mandates.

That said, we're providing initial full year 2022 FFO guidance in the range of $2.01 to $2.09 per diluted share, the midpoint of which represents a 6% increase over that of our initial FFO guidance last year. There are no specified items in connection with this guidance. We expect same-store office cash NOI growth of 2% to 3%, which includes the full impact of Qualcomm's expiration without renewal or backfill of their entire space at Skyport Plaza.

Adjusting for this expiration, we would have guided to 3.5% to 4.5% growth. We expect same-store studio cash NOI growth of 15% to 16%. Note that our 2022 full year guidance reflects for the first time, the full year benefit of certain transactions and milestones, our acquisitions of Star Waggons and Zio Studio Services, both of which occurred in the third quarter and our purchase of 5th & Bell and the delivery of One Westside to Google for tenant improvements, both of which occurred in the fourth quarter.

Now we'll be happy to take questions. Operator?

(Operator Instructions) The first question is from the line of Craig Mailman with KeyBanc Capital Markets.

Victor, one quick one. I know in the news, there's been some talk about the $150 million tax incentive that Governor Newsom passed. Is Glenoaks -- are you guys anticipating getting any of that allocation for Glenoaks? And is that sort of in the 7.5% to 8% yield expectation?

So it's not in the 7.5% to 8.5% [FFO] yield expectation. And -- hi, Craig. The amount is a greater amount, the $150 million is for development, allocated for studio development, and we will apply for that. Not sure -- we do fall into the category. I'm not sure of the status. That would really fall under Chris Pearson and Chris Barton's area. But the answer is yes, we'll apply for it. I'm not sure if we'll get it or not, but it's not part of the yield.

Okay. And then the assets held for sale, how far are you guys along in the process on those few assets' you guys put in the bucket there? And I know you guys have been pretty steady capital recyclers. As we think about maybe what's in guidance for this year, kind of what level of these noncore assets could be in there versus maybe some joint ventures of your better kind of lower cap rate assets?

So let's not assume that we're going to do any JVs at this time. I mean, we've had conversations on a few of the assets under the auspices of the direction that you're going. But nothing is reflected, obviously, in guidance as Harout pointed out.

But that being said, of the 4, in no particular order, I think, Del Amo, our final offers are coming in next week. I think it's Tuesday, 6922, today is the first day of offers. And I think our team is expecting somewhere between 6 to 10 offers or so. So those 2 are relatively imminent. Northview, I believe, is slated for March 1 for the packages to go out and then they'll probably call for offers, first ground offers, my guess is, near the end of March.

And we're evaluating a couple of alternatives around Skyway. And I believe the data is exactly the same as March 1, but there's a -- an interesting sort of play around that -- around life sciences that has been approached to us. And so we're going to evaluate that with the tenancy and the available vacancy and the transformation of that asset.

So they're all -- and I think if everything goes really well, end of second quarter, everything should be closed and so it will be impacted for the second half of the year, I guess, is maybe how the guys would think about it.

Yes, just to be clear, but in our guidance, we assume we hold them for the whole year just because we don't know the timing. So the guidance reflects owning those assets throughout 2022.

And I don't know if you guys have run this, but just assuming maybe something happens in 2Q or late 2Q relative to maybe your expectations, there's a way to give a blended potential impact that wouldn't kind of give away what your pricing expectations are? Do you guys have like a sense of what the drag would be if you execute on some of these. Somebody said Del Amo is vacant. So maybe it's impact to drag.

Well, maybe a suggestion would be the range of gross proceeds there's somewhere between, call it, $3.25 and $3.75 collectively. Recall that Del Amo has no current tenancy and then you can gauge through the percentage leased on the other 3 kind of what the leasing status is. So you could throw a relatively low cap rate at the number, a pretty low cap rate. Assume you disposed of those assets sometime within the middle of the year, you'd get pretty darn close to kind of what the NOI associated with those assets are, right? And then the real question is what do we do with the proceeds, right? Do we redeploy quickly into a new acquisition and so forth? But that should give you a pretty good way of estimating the impact.

No, that's really helpful. And then just one last one for me. On the Burlington space, kind of what's the -- are you guys envisioning there as the redevelopment play? Does it stay -- I know you said it goes office. Kind of how much do you think you have to spend? And what type of tenant -- does that include like a lobby refresh and maybe kind of second floor tenancy? Kind of what's the play there?

Craig, it's Art here. It's -- so the project is 95,000 square feet. Currently, all retail, it's going to be half -- virtually half and half. Half office, half retail for probably a big box user down below. And the rates we're looking at -- mind you, I think we've kept saying that our gross rents on that asset were close to $8 annually, in that ballpark, and we're looking for kind of a low-60s rent on the office portion.

Okay. And is that -- not to throw the politics into it, but has that location fared well with everything going on in San Francisco from a retail shop listing type issue? Like will it be easy to get a retailer in there for the ground floor? Or is that -- do we need a little bit of cleanup [and then maybe able to take a new...]?

Yes, absolutely. There's -- it's a great location at SoMa. There has been hint of inquiries a big box retail there and office in that class. So we feel really good about the activity with kind of the higher-end space in SoMa.

The next question is from the line of John Kim with BMO Capital Markets.

I just want to clarify, are you suggesting that guidance can come down based on dispositions? Or is this a base case just given the timing and the likely low cap rate that you're going to sell at?

I guess the answer is if you can go down or up, because if we redeploy the amounts into accretive assets, it can actually go up. So that's why we don't guide either way, because we don't have the timing, and we currently don't have these proceeds figured out yet. So it can go down if we sell it, sure. But if we buy back stock per se, that might be much more accretive than the underlying FFO that it was providing.

Okay. That makes sense. On your '22 expirations you discussed having 45% in coverage, another 25% in discussions, excluding the known vacates. How much of that is renewal leases versus new leases where there might be some vacancy downtime?

You mean backfill? Do you mean backfill on...

Yes.

So I would say it's probably 1/3 of it is backfill that we're already working on really across the entire portfolio.

If I could just ask one more. So the Dell, I think you mentioned that's a known vacate. So that was the lease that was extended on a part-time basis or short-term basis from October to earlier this year. So I just want to clarify that Dell will be leaving that space?

That's correct. Well, they're leaving 3 floors. And then we have -- we're in discussions on actually 1 of those floors currently. The backfill and the mark is -- so the market is about 52%.

The next question is from the line of Manny Korchman with Citi.

Maybe just a combination of sort of what Harout has talked about and Victor's comments in the beginning, but it sounds like you're going to get a bunch of excess capital in from these dispositions and I'm not sure how big your acquisition pipeline is, but you also did the [Prop C], which brought a bunch of excess capital in. So kind of what is the plan. Is it that you have a big acquisition pipeline? Is it that you just wanted to be sort of cash heavy at the moment? Or what drove you, knowing that you could be signing these assets in this upcoming year to do the Prop C , which brought so much capital in?

So a couple of things, Manny. I mean, listen, we have a very extensive development pipeline that we are aggressively pursuing and some we've announced and some we haven't. That's one. We do have allocated dollars that we've not specified yet for other accretive uses of capital. And as always, we have a very strong balance sheet to maintain flexibility. I wouldn't read into one or the other. I would read into the fact that we've always looked to capitalize on opportunities to access capital.

These 4 assets are not core assets to the portfolio. Timing is right. Hopefully, pricing will be right, and we'll execute on those deals. Just as Harout said, the question before or 2 ago, I'm not sure. If we don't get the right pricing on these assets, we're not going to sell them. So it's not a fait accompli. And you never know what happens as markets change in timing, and that's exactly why we haven't altered any of our numbers for 2022.

And then Victor, in the press release last night, you pointed outgrowth in the studio portfolio as one of the focuses for the year. That's not that different than what you've said in the past, but is it -- is there a reason that it was sort of front and center?

Well, I think there's a lot of opportunities that we're looking at right now in that. And I mean -- I think relatively speaking, there's -- we're probably evaluating more opportunities with our JV in that product type. I'm just sort of thinking off the top of my head, than what we're seeing in the office, in our markets in the office sectors. So yes.

The next question is from the line of Jamie Feldman with Bank of America.

I was hoping you can talk more and follow-up more on the comments you made at the beginning of the call about capital flows, VC investment, and how it's translating into better leasing, especially for your smaller tenant portfolio.

Can you talk about specifically the submarkets that maybe in the fourth quarter or even as you look at the leasing pipeline? Seem to be getting -- actually improving. And then as you think about the portfolio following these 4 asset sales, how do you think the trajectory and maybe even the expiration risk can start to look differently?

Yes. So I'll take it sort of a top level and then I can let Mark and Art jump in a little bit, Jamie. But if you think about the amount of capital that's just raised in California alone, as I said in my prepared remarks, I mean that's going to equate to the logical thought process of being distributed to companies that want to be in close proximity to their capital providers or their partners or their investors. And that's always been the trend. And that's why people focus substantially on VC capital, deployment of capital into first, second, third, fourth stage investments, right?

I mean, just to take a look at it, if you really narrow it down in the Valley, I mean, we've got -- just alone, we did, I think, 145 deals in Silicon Valley in 2021 relative to half that, I think it was like -- less than half at 100 -- sorry, 74 deals, I think it was, in 2020. So the majority of those deals are this small tenant, smaller relative to the large tenants that are out there that we're signing. I mean, the top large tenants in the Valley were Apple, Meta, NetApp, C3, LinkedIn. I mean, those were all in the 700 to 0.25 million square feet, and I'm referring to the 10,000 to 30,000 square footers.

And so that's going to equate to, I think, what we're seeing and the activity on that alone. Not to mention, by the way, that the Valley did, I think, about 14 million square feet of deals in '20 and '21. So a lot more than people thought. So there's a direct correlation to capital raise, deployment and growth, and we're seeing that on the ground on a granular basis, and Art can comment on that.

Yes, we definitely see it on the ground, especially across the Valley where we've moved that portfolio about 130 basis points quarter-over-quarter, and that's all deal volume in the kind of sub-10,000 square foot range. And again, we -- our market share is still -- our market share is about 10% of all the deals that we've done over the last 2 years, that's '20 and '21 in the Valley. But our footprint there is probably about 4%. So we're definitely doing more than our share of deals.

And then just to sort of top up your trailing part of your question, Jamie. Skyway is the only asset in the Valley. We have purposely tried to vacate that asset for a higher and better use, either, as I said, for life sciences. Whether we do it or somebody else does in the sale process, I mean, that's the higher and better use and the rents are going to justify that. Del Amo is 100% vacant, it's a small asset. We've talked about it all along. It's 100% vacant. 6922 has had some leasing aspects there, and we're hopeful that we're going to get the right pricing levels. And Northview is -- I'm going off of -- I think it's a mid-80s or something like that, something to that effect. So yes, I think with these 4 assets, if we execute on it, it will take some of the exposure away from some of the future vacancy in the portfolio.

Okay. And then I guess those comments make a lot of sense based on VC funding we've seen. But you've also seen the stock market sell off and real concerns about growth stocks or growth companies. Have you seen a shift at all in -- or a slowdown at all in leasing volume? Or are deals falling out of bed or anything based on some of the broader picture?

I just walked you through -- I gave you a snapshot of the top 10 deals just in the Valley alone. It's like 3 million -- over 3 million square feet of all the top FAANG-related tenants or ancillary-related tech and media tenants that are signing space. From that side, you've talked to our peers in the markets, and you know what's going on in the marketplace. I mean, they're the most active. They've lease the most space. I think they lead by the markets that they're in for high-quality real estate, and we've seen 0 set back or pushback on that.

I think also if you look at our portfolio, we don't have a ton of those tenants that are expiring, but those that are, are looking to renew. We've already exposed the market to the Dell, the NFL and the Qualcomm. But other than that, the next year down, we are negotiating with existing tenants to renew. And as Mark said in his prepared remarks, we are in leases on 2 of those spaces anyways.

Yes, Jamie, close to the 3 quarters back and when we started reporting that we've seen increase and strengthening in fundamentals and it really -- it starts with tenant demand in the Valley. Tenant demand has been increasing steadily, and the gross leasing is up quarter-over-quarter sequentially. We are -- if you look at our deals, Jamie, our square footage from '20 to '21 increased 165%. So I mean that speaks to the velocity and obviously, we're getting our share of deals.

Okay. So I guess it sounds like you're not -- you haven't seen any change in appetite based on what's going on in the stock market or growth concerns in your leasing pipeline?

No. I mean, if anything, what we're trying to -- what we're seeing is an acceleration in deal activity.

The next question is from the line of Blaine Heck with Wells Fargo.

Victor, you talked in your prepared remarks about using proceeds from sales to fund high-yielding office and studio investments. I guess we've seen that strategy in play on the studio side with the acquisition of Zio and Star Waggons on the service side. So is it more of that type of investment we should expect on the studio side?

And then with respect to office, most of the trades we've seen thus far have been really high-quality, low-yielding properties. So are you seeing more opportunity on that value-add side that might eventually have higher yields? Or was that -- the high-yield comments directed more towards development in office?

Listen, the high yield -- let me take you're -- the first part of your question. On the type of assets that we're looking at that are truly high yielding are going to be more development related or operationally related, which is consistent with what we are projecting on the studio side, but also on the office development side. I think it's no hidden secret that our projected returns for Washington 1000 are going to be one of the highest-yielding development deals, if not the highest in most recent history in all of Seattle and the surrounding areas. So that sort of falls into that category.

We -- going to your office comment. I do think that the core deals are trading at relatively aggressive cap rates, and they're really not aligned to the kind of stuff that we've typically done in the past. We are starting to see some value-add deals that I think makes some sense. And so we're not projecting, we're going to do 1 or 10 of them, but we are obviously evaluating them as they come in and hopeful that we'll see more.

Okay. Great. Helpful commentary there. Maybe for Mark or Harout, with respect to the timing of Google revenue recognition, can you just walk us through the major milestones there? I think based on the notes in the supplemental, I guess my understanding is you've turned the property over to Google to build out their tenant improvements. And then hopefully, in the third quarter, the GAAP rents will commence and then essentially 9 months later cash will commence. Is that correct? And how are you feeling about Google getting the TIs completed by the third quarter this year?

So a couple of points there. So we did deliver the space in 2021 in December. So we did start GAAP revenue recognition at that time. And from a GAAP and FFO perspective, that's going to continue regardless of the timing of their build. And so that's that answered. In terms of their build and their cash rent payment, that's on them. They have that amount of time. If they were to build sooner or later than that, their cash rent still starts. It doesn't -- it's not affected by their ability to complete the work. And you're right, after 9 months, we do have cash rent starting. And then at a 3-month -- sorry go ahead, Mark.

Sorry, you have 1 month of free rent that starts in the third quarter of '20 -- a month of -- I mean, sorry, 1 month of cash rents that starts third quarter of this year. And then they have 8 months of abated rent and then all of the cash rents begin again after that 8 months of abatement.

It's a little confusing, because there's a big gap there in terms of cash rent. But for GAAP purposes, immediately upon delivery is when you recognize the rest.

That you can see, by the way, in Footnote 14 on Page 20 of the supplemental, in case you want to reference it, you can see that description.

The next question is from the line of Caitlin Burrows with Goldman Sachs.

Maybe just starting with a broader one on return to office. So I think some of the data shows that this is improving once again. I was wondering, if you could just go through what are tenants telling you in terms of their latest plans? And maybe more importantly, how do you think that's evolved over the past, say, 6 months? And what could be different now?

Well, I think -- listen, we're all in the same position as to where we see it. It's a day-to-day, literally a day-to-day moving target with the mask mandates being lifted virtually everywhere but the city of Los Angeles, their dates in place. And I think that's been the catalyst and kids going back to school and the vaccination increasing for children has led us to be fairly -- fairly much in communication with all of our tenants on the larger scale that they have a game plan, and it is imminent. And some as early as March 1.

And so it seems as if this is a real starter versus the last Delta or Omicron that has maybe delayed. I also do think, Caitlin, you're finding that companies are not coming out with statements, they're just bringing people back, because they don't want to say -- this start-stop, they're not going to do that again. And so -- but we specifically have our largest tenants in the portfolio are all actively engaging to come back imminently.

Got it. And then maybe just a question on the studios. You had positive same-store cash NOI growth in the fourth quarter, and your guidance assumes an acceleration in '22, but it does look like same-store occupancy is down. So I was just wondering if you could go through how same-store NOI and revenues are accelerating even if occupancy is declining?

Yes. That occupancy decline, it doesn't, by the way, take much on 1.2 million square feet to sort of move the needle. But that occupancy decline has been kind of driven off the same basic on sort of dynamic, if you will, throughout the pandemic, namely, it's nonstage-using office tenants. So some of our space is occupied by tenants that want proximity to the stages like casting agents, for example.

And we've seen throughout the pandemic, as tenants haven't been coming to office, some of that tenancy has trailed off. Having said that, the real driver of revenue at the studios is the stage utilization, their utilization of the services and then all the support that goes with that. And so you can easily continue to kind of post the type of returns, same-store growth and the like, based off of really, really strong stage usage and everything that goes with that, even if we see a little bit of weakness on these nonstage-using office tenants, which is why you -- the 2 kind of can coexist, if you will.

When things normalize, and they are normalizing, and tenants start to return to the office more regularly, that part of the studios that lends itself to these nonstage-using office tenants, that will start to normalize too, and they'll come back in. So there's definitely more upside with the restoration of that tenancy here in the near term.

The next question is from Rich Anderson with SMBC.

Congrats on the Super Bowl, for any Rams fans out there. Speaking of the NFL. What is the mark on that expected to be, assuming you get what this late stage through to the finish line? and I understand this doesn't expire until the end of this year? Given the TI build-out and everything, we're really talking about this becoming a kind of a 2024 event from the standpoint of cash flow. Is that correct?

No. So this is Art. First of all, it's 170,000 square feet, we are very close, final lease negotiations to the mark, as we've mentioned before, is about 26% for the business for the...

That's ceased though, right?

On the expiring rate, yes, base rent. Yes. That's right.

24 -- no, I believe there is an 8-month build period from execution.

Okay. So late 2023 then?

That's right.

As for Qualcomm, my question there is, what's the risk or that this thing goes the way Cisco did a few years ago. There were points in time when you were expected to have some good news from the vacate there and ultimately, it didn't quite work out. I mean, do you feel like the market is just in a different spot now and that you won't have a similar outcome with Qualcomm?

Well, let me start with high level. I mean you're talking apples and oranges, right? I mean completely different market, Rich. This is a marketplace that earlier on in some of the questions that I was asked -- walk through the 14 million square feet that what was leased in the Valley is all sort of akin to the type of real estate that this is. It has nothing to do with Campus Center and the quality of real estate that was. That was a 1 asset in a marketplace that had -- in the best of times, had 0 growth opportunities and activity.

And this is an asset that is highly sought after. And so we're talking apples and oranges, as I said. I do think the activity has been -- we never -- we didn't find out that they were really going to leave. And the only reason we found out is they never told us, so that they came and went. And they didn't tell us and that was at the end of December. So we're under the assumption 100% and now we're positioning it to be marketed. And I think Art will tell you that he's very confident.

Yes. So we have -- Victor, you hit the nail on the head with the apples to oranges. I mean it's a great asset. I mean, it's 2 building assets, it's new construction, newer construction, it's in a great market in North San Jose. And Victor mentioned before, there were 10 deals over 100,000 square feet in 2021. Now there's -- right now in the market, there's about 12 over 100,000 square feet that we're at least in dialogue with. And so we feel absolutely positive about -- really the prospect of getting a lease signed. Probably building-by-building, if I had to guess, Rich, if that was your next question, rather than the 2-building user.

Okay. Fair enough. Appreciate that. Harout, you mentioned the 37% AFFO growth in 2021. I'm wondering, when you think of 2022, how much of that 37% was sort of unsustainable and really what we should be thinking about in terms of AFFO growth, if you could provide any color on that for this year?

So I'm not sure if it's unstable or not. It is directly attributable to; a, cash rents coming up in all of our assets, right, burn off of free rents, if you will. And I think stabilization of TIs and LCs. I think Google, when that starts paying cash, as Mark walked the previous caller through, that's going to really contribute to AFFO in the future. Now will it be a little bumpy if there's a relatively large lease signed? Sure. And for TI, but I think obviously, the benefit of that is it will be more cash rents. But I think looking out, it looks pretty -- I don't think the growth of 37% is sustainable every year, but I do think the level of AFFO that you're seeing now should be relatively sustainable.

Yes. Okay. And then one last quick question for you, Victor. I was reading about the opening of the Great Point Studios in Yonkers, New York. I'm sure you guys noticed that. That's 1 million square feet and it seems to be moving along, Lionsgate as the base tenant. But where -- to what degree do you see sort of early-stage opportunities like that where perhaps we're not quite into the entitlement stages yet, but you could see a vision of growth in similar form to that. And is that the kind of thing that you're seeing that gets you kind of jazzed up about seeing more opportunities in the JV than you do even in your conventional office business?

Well, yes, listen, I went and saw that facility. And they're about -- they just actually are ready to open some of that space and some of the office space, March 1. Listen, that's the kind of stuff that you're absolutely right. I mean, we're looking at opportunities exactly like that or ground-up purpose-built facilities in Vancouver and London, in New York, and here in Los Angeles. And so -- and there are other markets that we're evaluating at the same time. And so there are some very interesting opportunities that I think the JV is going to be pursuing fairly aggressively.

And so -- but you probably need to be a year early year in the case of the Great Point example, right, before you could get involved in that?

Yes. I mean, there are obviously entitlement issues on some of these and some of the ones we're working on. We're working through those in existing deals that we've not announced yet.

The next question is from the line of Vikram Malhotra with Mizuho.

So maybe just -- I just wanted to clarify with the early delivery of One Westside, just the impact to 4Q and then the impact to 2022 versus maybe what you had anticipated earlier. I know there's obviously the concurrent interest expense you're going to start recognizing as well. So if you can just walk us through kind of the math on how much of -- how much did it contribute to 4Q? And then maybe to 1Q?

Sure thing. So in the fourth quarter, our share of FFO gave us roughly $300,000 of additional FFO in Q4. So it wasn't that meaningful to the [stabilized] interest [with 1 month of] activity. In terms of 2022, there really isn't an impact, right? It's just starting a month earlier from a GAAP perspective. Maybe cash comes in a month earlier, but for the balance of 2022, there is no impact for that early delivery.

Because it was always expected.

Yes, it was always expected, it was always in our numbers, and that's what we had provided in terms of information in the past.

Okay. And then just the spreads on the office side still seem pretty robust. I know you talked about some of the vacancy -- 1 of the vacancies was still at a 50% mark. But just stepping back, given where market conditions are today, what is portfolio-wide mark-to-market today for the office segment?

It's just shy of 10%, the spot mark-to-market.

Okay. Okay. And then just last question, I guess, with all the capital now that you may have additional capital with the asset sales. I'm thinking of 2 specific kind of areas, and I wanted to get your thoughts, maybe Victor on this.

One is your peer has moved to maybe where some of their tenants are moving to Austin, the Sunbelt on the office side. So that's 1 area, I would love to get your thoughts. And second, with this whole quality divide that's percolating across markets, what's the need or the desire to do a lot more redevelopment of assets, including maybe amenitization?

Well, Vikram, thank you. So listen, we've been asked the question about other markets in the office space. And there are other markets that we might consider. But right now, we're sort of laser-focused on our core markets being Vancouver through on the West Coast all the way down to Los Angeles. We're not considering Austin. I think it's a great marketplace, but it's not a marketplace for Hudson at this time. And we think there's going to be some ample opportunities in our markets and maybe some others as well, that we'll evaluate and see how synergistic it is.

In terms of your second question, I mean, absolutely, we've spent the last 2 years during COVID, looking at a number of our assets and spending a tremendous amount of capital on those assets, both on the outside and the inside. In the inner workings of the assets on the systems and then on the beautification of the assets and the quality of space to adapt it to be concurrent with our quality portfolio and our assets.

And the ones that were not are like the 4 assets we talked about, that we're going to get rid of and dispose of. So there is a flight to class, and I think that's sort of proven out to our portfolio and why we're seeing the assets that have leased in our portfolio are the ones that we put a lot of time and money into or they're newer quality assets.

So just to clarify, you're saying you've spent 2 years sort of doing that. And now if there are any incremental assets that don't fit the bill, you're -- the primary strategy is disposition?

No. Not to clarify that. Just so you know the primary strategy is to finish the work on some of the assets that we've been working on. I think there's several assets that are a lot of renovations and modifications of core space that are still in the works. I mean we've got -- I don't even know the number of projects, but it's a substantial number of projects that are working -- that our redevelopment team is working on. Just the assets right now that we're disposing of are those 4. There's no other assets that we've identified at this time to put on that list.

The next question is from the line of Ronald Kamdem with Morgan Stanley.

Just a quick one. Just can you talk about what the utilization of the portfolio is? And as that sort of starts to get back to normal, is there any sort of variable expenses that we should be mindful of as more people start utilizing the properties?

Well, yes. I mean, utilization, as Victor pointed out earlier when the question came up is definitely improving and accelerating, somewhat quietly because their employers are actually having people come in, even though they're not making bold announcements about it.

I do think this method that a lot of landlords, I think were using during the pandemic of gauging physical occupancy through elevator swipes or parking and the likes. We're beginning to recognize is really not going to be probably too useful a methodology as we're witnessing really the normalization of more of a hybrid flexible work model.

So what we expect to see is buildings will be in high utilization insofar as the suites will have -- all the suites will have some amount of physical occupancy. It will just be less dense occupancy, right? So we think we're all going to need to recalibrate the way we think about what it means to be, say, fully occupied. And we're just sort of seeing the early stages of that now.

As per incremental variable cost, yes, there will be not much. I mean all of our buildings throughout the pandemic remained fully operational. They're -- and including heightened janitorial services and so forth. And we're not -- there's not going to be much more to incur on those variable services. And as you know, I mean, even if utilities, for example, were slightly higher, let's say, after hours HVAC and so forth, it's all escalatable and recoverable. So you won't really see much of that.

I think the real -- what we're all sort of waiting on is for parking to really materialize. There's very little incremental variable expense associated with that. A little bit for the parking operators, but more importantly, we're really not recognizing anywhere close to what normalized parking revenue should look like. And so that's where I think you should be sort of expecting the real impact to be felt.

The next question is from Dave Rodgers with Baird.

A couple of follow-ups for you. You guys quoted, I think, in the press release last night, 41% leverage with the preferred. So when you think about $350 million of asset sales at the midpoint, $100 million maybe of cash flow after the dividend, gives you quite a bit of liquidity. But I guess from the perspective of 3 things: one, known capital spends, known commitments this year, how much is that? And then, how do you kind of phrase in your heads the kind of the leverage of the company as well as kind of the buyback program, as you had mentioned earlier?

Real quick. On the leverage issue, it's not -- wasn't the preferred. It's only the preferred unit A. It's not with the preferred C, the 41%, just to be clear there. In terms of...

Well, it's -- I mean, the leverage question is always -- can be a little unwieldy, because it depends on what your underlying point of measurement is. Is it like equity capitalization? And of course, that will be totally -- that's entirely unknown. We don't know where our share price is going to trend at the point in time that we've deployed that capital.

So -- but if you looked at it in terms of, say, something more predictable, underlying gross asset value, undepreciated book, let's say, that's quite a bit lower than 41% as we sit today, it's closer to the mid-30s. And every dollar expected to be deployed on that pipeline development and so forth, will cause an incremental dollar of gross asset value.

So it will still remain a very manageable level looked at in terms of net debt to undepreciated book, probably maybe you might go up 100, at most 200 basis points on that leverage level, but still in that manageable mid-30 range. So that -- I mean, I think that responds to the question on kind of leverage trends, right? Did we miss something else there, David?

No, that's fair. And I guess that also assumes that a buyback program would be somewhat constrained by that as well?

Yes. I mean, well, it's some -- I guess, there's limits on everything. And I don't think any -- even very impactful buyback program is -- were constrained. I mean, we've got ample room on the balance sheet to do a meaningful buyback, if that's where we choose to focus our capital.

And then maybe just last on the liquidity side, known capital commitments for the year relative to kind of what you're anticipating bringing in?

It's not -- I mean, in terms of, again, putting aside any speculative acquisitions, so it's not that much. We've got a $90 million construction loan for Glenoaks, that is -- it covers all of the spend for the year on Glenoaks. We've got -- you can see in the development pages of the supplemental, we only have really the TI allowance and a little bit of retainage left on One Westside, all of which is covered under that construction loan.

So we're really just talking -- the only real meaningful spend, which could hit and won't be much, will be Washington 1000 when we get underway there. And I don't know exactly how much of it hits just in calendar year '22. But I'm going to say it's probably -- maybe, I don't know, $70 million, $80 million at most.

With the remaining purchase.

So -- oh, yes. Well, we've got to complete the purchase. There's $65 million at the point of acquisition. And then there's whatever incremental spend we have early on in the year, let's say, maybe I don't -- maybe it's more like $40 million, $50 million by the end of the year. So maybe it's $100 million with the takedown of the land on Washington 1000.

That's the only -- like something that requires current liquidity that's not covered by existing constructed debt. The only other spend is just our ordinary TIs and commissions and recurring CapEx, which you can get a good idea of kind of what the run rate of that looks like. It's been roughly averaging over the past 4 years, like $25 million a quarter.

We're rather late, so I'm going to take a couple more questions. That's it. So we're just sort of running over. I'm cognizant of people's time.

The next question is from Daniel Ismail with Green Street.

Just one for me. We've been discussing for a few quarters now the strength in Silicon Valley and on the Peninsula. But I'm curious if you think that translates to the San Francisco CBD this year?

Yes. Listen, that's a great question. I think from our standpoint, aside from Burlington's early termination, our portfolio there is like 94% leased. So we don't have a lot of exposure. So we're personally in good shape. I think -- you've heard me say this before, I'm still relatively bullish on San Francisco and the future of San Francisco, I think, will swing faster than people believe it's going to swing. And I think as a company perspective, we feel the same way.

The tenant demand is clearly on the rise there. If you and I had this conversation a year ago, these numbers were dramatically different. I mean we've seen 7 million feet of gross leasing in the city in the last 12 months and the sublease space has gone from, I think, it was as high as like a...

9.8 million square feet. We're down about 1.3 million, just from April, really...

Yes. I mean, so the trend is really much better than, I guess, what people are really seeing. But it's got some work to go. I do think the political atmosphere is changing. I think it's changing in all of our markets. And I think that's helping people understand where the marketplace is on that basis. But I believe that San Francisco still has some issues that they're going to have to accomplish in the next 24 months. And that's sort of the future that we're looking at that's the line of sight.

But it still remains a tale of 2 markets, right? The spaces that are highly amenitized, more desirable spaces, rents have started to tick back up, less upward pressure on TIs and free rent. So those are all positive signs that we're paying very close attention to.

Operator, we'll take 1 more question, please.

Certainly. The last question is from Nick Yulico with Scotiabank.

Sorry if I missed this, but is it possible to get the occupancy growth that's assumed in guidance? And I know Qualcomm by itself is about 250 basis points of vacancy. So any perspective you can give us there?

Well, yes, we haven't provided that. And we -- there's been a lively debate. That might be something we add because it's been asked quite a bit. I can say, Nick, we did review the numbers on the heels of the completing the quarter. And it looks to us that occupancy by end of '22 is essentially identical to where we ended on the in-service portfolio at the end of '21.

Okay. And that's -- sorry, that's inclusive of the Qualcomm vacate?

Yes, that's for all of the in-service portfolio, which Qualcomm is part of.

Okay. And just a follow-up on Qualcomm. Is -- do you have any insight there about what affected that leasing decision? It sounds like it was kind of abrupt, but at one point, you said maybe they would keep a building. I'm not sure if flexible work impacted that decision for Qualcomm?

And then just separately in terms of that whole submarket there, it's where you have now have some more vacancy. Also wondering how that impacts Cloud 10, the future development as well? Maybe just talk briefly about sort of demand in that market?

Sure, Nick, let me start. So if you recall, I mean, we were having these conversations a little over 4 years ago. And Qualcomm was debating whether or not they were leaving or staying. And so it has nothing to do with a COVID decision or flex or deciding to do it. I mean they -- we went back and forth with them. They came to us at the last minute and said they're staying. So this is just how they operate. I don't think it has anything to do for us to sort of assume that this is a market decision based on the last 2 years.

That being said, I'll let Art jump in and sort of talk about the middle part of your question, but I'll just say Cloud 10 is being discussed with 2 tenants right now, who are very interested in it. And it's -- because it's a brand-new project. It's a super cool campus, designed by Gensler, and I think there's going to be some continual interest demand in that. And the timing around that is going to be different in terms of delivery, obviously, for something like this.

Yes. Like we said, there were about 10 deals done that were responsible for about 3.1 million feet across the Valley. And we're now tracking about 12 more that are greater than 100,000 square feet. And we've said, it's going to be likely a single building user, 2 single building users. And we're currently in the process of repositioning the asset, modernizing the amenities, landscaping, hardscaping and just making the tenant experience superior. And so we feel very, very good about the leasing in the market and we'll be able to capture that.

Thanks so much. And listen -- I'm sorry, we went over by 10 minutes. I appreciated all the support. And most importantly, I appreciate the dedication and hard work of all the employees at Hudson and the great quarter and the accomplishment of 2021. We'll see you guys all soon.

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