Hudson Pacific Properties, Inc. (HPP) Q2 2014 Earnings Report, Transcript and Summary

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, Ms. 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 noncore 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 Place property pursuant to a 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 -- it was expanding its existing lease at 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 leasing 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 of 1455 Market Street is effectively fully leased. Other noteworthy leases in the quarter included a new 7-year, 46,000 square-foot lease at our 901 Market Street property in San Francisco with the fast-growing startup NerdWallet, Inc., and a 7-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 Off 5th store. This lease is expected to commence in the second quarter of '15. With the execution of this lease, our 901 Market property is fully leased. In terms of leasing trends, fundamentals remained 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 a 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, 4 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. As 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 exhibits pockets of positive activity. Not surprisingly, West Los Angeles and the Hollywood Wilshire Corridor, our core submarkets in our regions, continue to outperform 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 2000 and significantly outpacing the overall region. While the recovery story in the Greater Los Angeles region has recently 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 288,000 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 few 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 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 scheduling commencement of the parking construction -- 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 Hollywood submarket and delighted with our progress as we near commencement of this important development project. Moving on to Seattle, a recent report by the U.S. Consensus Bureau (sic) [U.S. Census Bureau] found Seattle's population is growing at a faster rate than any other major U.S. 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 metro -- 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 second -- the second quarter at $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, remained the leader for Class-A asking rates at $33.44 per square foot, a 1.5% increase from last quarter. And in addition, with the current vacancy rates of only 12.8%, Downtown Seattle has accounted for nearly 55% of the region's net absorption during the last 4 quarters and significantly outperformed 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 3 months ended June 30, 2014, totaled $19.8 million or $0.28 per diluted share compared to FFO, excluding specified items, or $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 1-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. The 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 3 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 3 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 revenue 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 to 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 during 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 8 3/8% 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, 2014 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 1-year consulting arrangement with Howard Stern have been excluded from the guidance estimate as nonrecurring costs. As always -- as is always the case, the company's guidance does not reflect or attempt to anticipate any impact to 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 in current -- 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 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 details the 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 renovatements [ph], along with details for expiring leases on space being backfilled. We have also enhanced our quarterly lease expiration disclosure by expanding -- extending it through the ensuing 8 quarters. We believe this additional disclosure should provide the essential information to project the impending impact to net operating income associated with earlier 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, the disposition of a nonstrategic 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.

[Operator Instructions] Our first question comes from Craig Mailman with KeyBanc Capital.

Mark, maybe just start on guidance. Can you just go through what some of the -- if there are any changes or 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 pickup on timing on move-ins. But the majority of the revidence [ph] bump is really new leasing activity. We mentioned NerdWallet. They also did a lease at 6922. Those both have 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 pickup for the balance of the year is underlying that guidance.

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

No. In fact, you have to exercise the extension option, but it closed within the contractual timeframe. It was a July -- mid-July close.

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

Yes. I mean, yes, Craig, right now, our leasing team inside and our outside brokers are touring large tenants. So I think there is, right now, about 3 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? Any kind of thoughts here on financing? I think we talked previously about maybe looking at some joint ventures for a 1455 or an Element LA, 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 3 markets. We're not looking at anything else right now other than the California and the 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 at and evaluating alternatives on a JV basis on both our Element asset and our 1455 asset. And with the right time with the right capital structure, we'll see where that comes out.

Our next question comes from Jamie Feldman with Bank of America.

So I guess the studio business, it 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 midterm tenants for the office component that has been as active as we've ever seen. There are tenants which just is sort of commentary in general on Hollywood and the activity in 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 soundstages. 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 soundstages right now are accounted for.

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

It's -- Jamie, it's hard to do because -- 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, right, somebody's going to be standing, and nobody's going to have a seat. That's sort of what we hope. In terms of our assets and the uniqueness of our asset in the marketplace at 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 story guys, the 20,000 and 40,000 footers.

Okay. And then finally, can you guys talk about what you're seeing in terms of like the Wilshire Corridor or Olympic Corridor? From earning 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 and because Santa Monica is virtually full, and Brentwood doesn't have any big space, and guys like us at Element or our 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. They may not be as quick as people want, but we're definitely seeing rental rate movements. I mean, in the marketplaces that we're looking at right now, I think you're -- you've seen a tremendous number of comps on Wilshire Boulevard and in Santa Monica and Penn Station in Colorado, its full-service gross numbers, as low as $4 all the way up to -- we've seen deals done at $6 -- over $6 a foot of full-service gross. And so I think the rental rates in some of the 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 5 examples in the last 3 months of deals that have been done at really good 20,000 to 100,000 square feet, at rental rates here, as I said, $4, $5, $6 a foot.

Our next question comes from Vance Edelson with Morgan Stanley.

You mentioned the pipeline for acquisitions in all 3 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 compliments. So right now, we're looking at 2 different buckets, right: we're looking at a stabilized bucket; and then we're looking at a 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 they sort of got priced a little bit out of the market. But in Seattle, right now, I think as a 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, and 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 marketed deal. Same thing on a stabilized basis, it's more of 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 since 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 some done. They're not going to blow anybody away in saying like, "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, Vance, because we have so little in the way of exploration and not that much office availability. But there is certainly no reason, if you look at the wider market, putting it aside, what availability we'll have or lack of. I mean, I'm looking towards our Head of Leasing, Art Suazo. I mean, I -- all indications are there -- or all of our core markets remain strong. Do you want to...

Yes, the activity here, I think we have something like a couple hundred thousand square feet available. We have activities close to 300,000 square-foot range. That's spread out. And we have multiple -- especially on the larger piece of space, we have multiple negotiations going on for those lots of space. And beyond that, it's really -- it's -- speaking of repositioning, it's going to take some time to lease, but other than that, we've got really good activity.

I think -- I just think, just to add one more note because -- I mean, I think the fact that we did the deal at 901, which we just announced today, and on a space that'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 noncore, but any disposition pipeline to speak of even if 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 2 in the portfolio, but that's about it, that we would maybe consider over the near to midterm of disposing. But otherwise, no, we're pretty comfortable with what we have and how it sort of fits in the mix.

[Operator Instructions] Our next question comes from Brendan Maiorana with Wells Fargo.

So Victor, on not, I guess, straight dispositions, but of your JV assets, like you're 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 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 -- should -- based on, I guess, 3 factors. First and foremost, we've got some releasing activity. Virtually, the asset is 100% occupied, but we know we have some additional tenancy that wants to move in to 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 JV. We 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 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 the 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 midmarket area in San Francisco. Is there any reason to think that some of the price per pound that we've seen come across, that you guys would be able to capture similar value for 1455?

None whatsoever.

Okay. All right, that's helpful. What -- so the backfill, you 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 got 2 tenants right now: one is existing San Francisco tenant that's a fairly popular one, that's consistently looking for more space; and the other one that's a very well-financed, capitalized media company that's a household name. Both are looking at the same space.

Okay. And would that be a sort of a pickup 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 -- does that TI typically spend when the lease commences? And then it completes when the cash rent commences?

Yes, I mean, certainly by completion, there's a little lag on your TI spend, right, 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 3 months to as much as say 6 months before commencement that TI spend should be well underway. And then maybe as much of a -- 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, and there's some space where you've got tenants that are replacing existing tenancy with the pickup 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 pickup, the fall to the bottom line from NOI on modified gross leases? Is that -- is it just -- is probably all of 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...

Let's compare it to vacant space today. So I was just sort of looking at one, 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? 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 that Rincon are rolling out on a full-service basis, right. And most of the deals that 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 $4, give or take, $4 to $5 on for the net new and J, right? So let's say, your full-service rollout is, I don't know, $30, right? So take AT&T, I think that rolled out at like $28, full service. And it rolled up to like $35, modified. So you call it -- so if you gross that out, it's like $40 compared to $28 on a full-service basis. Or if you want it back out, you picked up on the base rent, you picked up, whatever, $6 or $7, plus you picked up at $4 on the direct you eject [ph].

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 are thinking about? And I mean, 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 the Colorado spaces, they have some vacancy, and they're doing some renovations at Water Garden. So that sort of would accommodate an additional square footage pickup 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 somebody's tenants are leaving somewhere to go to newer space or bigger space, and that space will come on the marketplace. But for the most part, I think it's going to be accessibility of 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 of interest both on the multifamily 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, finding 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'd-- if you think about expanding your submarkets in L.A.?

We like both those markets.

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.