Hudson Pacific Properties, Inc. (HPP) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Hudson Pacific Properties Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions].I would now like to turn the conference over to your host, Laura Campbell, Senior Vice President, Investor Relations and Marketing. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to Hudson Pacific Properties Fourth Quarter 2019 Earnings Call. Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investors section of our website, hudsonpacificproperties.com. An audio webcast of this call will be available for replay by phone over the next week and on the Investors section of our website.During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update.With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our President; and Harout Diramerian, our CFO. Victor will give an overview of our performance. Mark will discuss peaking trends in our market, and Harout will touch on financial highlights. Note, they will be joined by other senior management during the Q&A portion of our call. Victor?

Thanks, Laura. Hello, everyone, and welcome to our fourth quarter 2019 call. The fourth quarter rounded out another very strong year for Hudson Pacific. First, let's touch on our 2019 financial and operating highlights. We grew FFO per diluted share, excluding specific items, by 9.1% to $2.03 and achieved same-store and studio cash NOI growth of 6.5% and 10.7%, respectively. We signed more than 2.5 million square feet of office leases with GAAP and cash rent spreads of 37% and 23%, respectively. And this included 435,000 square feet in the fourth quarter at GAAP and cash rent spreads of 41% and 24%, respectively.Fourth quarter activity also reflects an 85,000 square foot lease with Google at Foothill Research Center in Palo Alto, bringing that asset to 100% leased; and a 71,000 square foot lease with Shopify. Our deal with Shopify backfilled 2/3 of the former Deloitte space at Bentall Centre at a 48% mark to market. This will be Shopify's first permanent office space in Vancouver as they intend to move 1,000 new hires into that space, reinforcing our investment thesis regarding downtown Vancouver's draw for innovative companies. We're now in leases to backfill the balance of a 93,000 square feet to Deloitte space with additional tech tenants.Our stabilized portfolio lease percentage ended the year up 100 basis points at 96.4%, and our in-service portfolio was up 210 basis points to 95.1%. Even more impressive, we achieved this meaningful increase in lease percentage with over 1.2 million square feet or 9% of our in-service office portfolio expiring in 2019 as of the end of last year. Year-over-year, our same-store studio lease percentage was up 64 basis points to 92.3% with approximately 7% growth in rents to $41 per square foot. We continue to drive about 50% of our ABR from long-term leases, providing more stable cash flow with continued potential for upside.As for active value-creation pipeline, we delivered 2 projects during 2019 totaling over 400,000 square feet in prime Los Angeles markets. Both were 100% pre-leased, and once stabilized, they will collectively contribute approximately $26 million of cash NOI annually. These include our state-of-the-art EPIC project in Hollywood, which we delivered to Netflix at the start of the fourth quarter. That project was fully pre-leased 14 months prior to completion. EPIC's design from infrastructure to amenities to sustainability attributes sets the standard for what the office of the future can and will be.In the fourth quarter, we also commenced construction on our groundbreaking 584,000 square foot One Westside mall to creative office conversion in West Los Angeles, which, you'll recall, we fully pre-leased to Google just 9 months after purchasing the asset and a full 3 years prior to completion. Including Harlow, which we'll complete in the second quarter of this year and where we have very good leasing activity, we will have 690,000 square feet under construction in Los Angeles, which is an aggregate 85% pre-leased.Our pipeline of future development opportunities in Los Angeles is unparalleled. We could add another 1.3 million square feet of office space, 2/3 of which is uniquely situated on the studio lots in Holly with the balance in prime West Los Angeles. We're moving forward with entitlements for about 420,000 square feet at Sunset Gower, which, if it all goes well, we could be receiving it by the end of this year.In terms of capital recycling for '19, we sold our noncore campus center asset in Milpitas. We also added 1 million square feet of development opportunities on our portfolio, which will enable us to meaningfully grow our footprint, along with cascade the innovation quarter. This will include our joint venture purchase with Blackstone for Bentall Centre in Vancouver, which, in addition to the 1.5 million square foot existing office repositioning, affords us in adjacent approximately 450,000 square foot development opportunity, which is one of the last sites in prime Downtown Vancouver. We also added a 538,000 Washington 1000 site adjacent to a nearly $2 billion convention center expansion in Seattle's Denny Triangle, rounding out our downtown portfolio concentrated in that neighborhood and Pioneer Square.In '19, we also made great strides in formalizing and disclosing our ESG initiatives. We issued our inaugural sustainability report, hired a sustainability and social impact, received multiple accolades for our accomplishments in ESG with recognition, including GRESB's 5-star and Green Star destinations, ENERGY STAR Partner of the Year, Green Lease Leader and NAREIT Leader in the Light Award. We're in the process of refining and fully integrating our corporate responsibility platform, so that it remains authentic to who we are and supports and strengthens every aspect of our business with much more to come on this in 2020.Now I'm going to turn it over to Mark for further details on our leasing and our markets.

Thanks, Victor. Our West Coast markets performed exceptionally in 2019, fueled by continued expansion of leading and innovative companies in the tech and media industry. Last year, media company spent $121 billion to produce original content. The top 5 producers, Disney, Comcast, Netflix, ViacomCBS and AT&T, are all active Sunset Studio's clients and comprised over 70% of that spend. Facebook, Amazon, Apple and Google, which are just ramping up on content production, comprised only 13%. Increased production, of course, continues to drive very strong demand for soundstages and production space, yet inventory remains stagnant with stages in Los Angeles, Vancouver, New York and London, all essentially fully occupied.2019 was also another record year for VC investment with nearly $127 billion invested in the U.S. with 40% of those dollars directed towards the West Coast and our markets. There were also a record number of unicorn birth or companies that achieve valuations of $1 billion plus, more than 2/3 or over 70 were in the U.S. The IPO market remains open with a surge of mature companies ready and able to exit. And with another $76 billion in fundraising last year, we expect VC capital flows, along with corporate venture and R&D, to fuel continued growth.Big picture, at year-end, our markets had vacancy rates at record lows, most in the very low to mid-single digits, further contributing to a supply shortage, particularly for large blocks of space. Robust demand resulted in both significant positive net absorption and rent growth year-over-year with submarkets like Downtown Vancouver and North San Jose even posting rent growth in the high teens. Supply remains in check for the foreseeable future with under construction projects 60% to 75% pre-leased and near-term deliveries fully pre-leased. Thus, aside from any macro issues in the U.S. and globally, we would expect market fundamentals to remain favorable into 2020.Specific to the fourth quarter, market conditions were very tight with minimal fluctuations in vacancy, rent and absorption. In Los Angeles, Class A office in West L.A. and Hollywood remained in high demand. Hollywood vacancy was up 10 basis points -- I mean, sorry, 100 basis points to 7.4%, and rents were stable at $61 per square foot with essentially flat absorption. West L.A. vacancy dropped 40 basis points to 10.1%, and rents rose by about 4% to $64 per square foot with 140,000 square feet of positive net absorption.In San Francisco, Class A vacancy tightened 20 basis points to record lows of 2.5% with rents reaching $92 per square foot and about 89,000 square feet of positive net absorption. Along the Peninsula, Class A vacancy remained stable at 7.4%, and rents increased 1.5% to $92 per square foot with 109,000 square feet of positive net absorption.In North San Jose, Class A vacancy dropped 110 basis points to 9.7%, and rents were stable at $50 per square foot with 70,000 square feet of positive net absorption. In Downtown Seattle, Class A vacancy dropped 30 basis points to 6% with rents up nearly 6% to $50 per square foot and positive net absorption of 277,000 square feet. Finally, in Downtown, Vancouver, Class A vacancy was stable at just 2.6% with rents up 3.5% to $64 per square foot and about 10,000 square feet of positive net absorption.We have very little in the way of expirations next year with only about 860,000 square feet rolling or roughly 6% of our portfolio, and we already have coverage that is lease -- deals and leases, LOIs or proposals on approximately 45% of that space. Our two largest expirations are both approximately 40,000 square feet, one with Wells Fargo at Skyway Landing and Redwood Shores and the other with J2 at 6922 Hollywood. We have good activity on both spaces already. Collectively, our 2020 expirations are 17% below market, and our in-place leases are 14% below market, providing us with the ability to continue to meaningfully drive NOI growth throughout our in-service office portfolio.Finally, I'll briefly comment on the potential repeal of Prop 13 tax protection for commercial properties also known as the split-roll measure. While split role may make it under the 2020 ballot, we believe, as do our advisers, that we will -- that it will receive significant opposition and is unlikely to pass. We are, however, proactively monitoring the conversations around its passage. As we have stated consistently, due to a lack of visibility around timing of and process for implementation as well as the natural evolution of our portfolio tenancy, it remains impossible to accurately quantify the measure's potential impact on operating income for individual assets. Should we receive new information or circumstances change, we will be sure to provide an update. However, at a higher level, it is important to note that Hudson Pacific is very well situated relative to most property owners, given that much of our portfolio has been recently reassessed. For example, based on publicly available data, the weighted value of our California assets is 8 years younger from a reassessment perspective than our West Coast office peers. We will, therefore, in fact, be at a competitive advantage should split roll pass, given that all property owners will be incentivized to preserve margins by increasing rents. Landlords like ourselves with less reassessment expense impact will be better able to preserve those margins.As I turn the call over to Harout for a financial highlights, I'd like to say a few words about Harout's recent promotion from Chief Accounting to Chief Financial Officer. As many of you know from firsthand experience, Harout has commendably led all accounting functions since our inception and been instrumental to our growth as we've expanded our access to capital markets. I speak for all of us in congratulating Harout on his well-deserved promotion. Our finance and accounting practices are in great hands.

Thank you very much, Mark, for the kind words and support. In the fourth quarter, we generated FFO, excluding specified items, of $0.55 per diluted share compared to $0.49 per diluted share a year ago or a 12.2% quarter-over-quarter increase. Specified items in the fourth quarter consisted of transaction-related expenses of $200,000 or $0 per diluted share and onetime debt extinguishment costs of $600,000 or $0 per diluted share, compared to specified items consisting of transaction-related expenses of $300,000 or $0 per diluted share and lease termination revenue of $3 million or $0.02 per diluted share a year ago.In the fourth quarter, NOI at our 35 same-store office properties increased 6.8% on a GAAP basis and 10% on a cash basis. For 12 months 2019, our same-store office NOI increased 9% on a GAAP basis and 6.5% on a cash basis. Our fourth quarter same-store studio NOI decreased by 3.1% on a GAAP basis and 1% on a cash basis, primarily due to a onetime property tax, escape assessment at our Sunset Bronson related -- our Sunset Bronson property related to historical periods. Full year 2019 same-store studio NOI increased 9.2% on a GAAP basis and 10.7% on a cash basis.Through capital recycling and refinancing, we further strengthened our balance sheet in 2019, ending the year with over $800 million of total liquidity. Note that this amount excludes project-specific financing such as our recently completed One Westside construction loan. We successfully issued $900 million of public bonds across 3 separate offerings and recast the $235 million studio loan into a revolving facility, which is now secured by Sunset Bronson, ICON and CUE, at lower rates with more favorable terms. Subsequently, in the fourth quarter, we were upgraded by Moody's from BAA3 to BAA2 with a stable outlook, reflecting both the continued strength of our balance sheet and the high quality of our management, portfolio and markets.Leverage remains low at 33% of market cap. Only 50% of our debt is secured, and only 6% is floating rate. Other than our $65 million loan secured by Met Park North, which we intend to pay off when available for prepayment in the second quarter of this year, we have no material maturities until 2022.Turning to guidance. We are providing full year 2020 FFO guidance in the range of $2.14 to $2.22 per diluted share, excluding specified items. You'll note that our FFO guidance midpoint represents a 7.4% year-over-year FFO growth for 2020. Our guidance includes same-store cash NOI growth assumptions of 4.5% to 5.5% for office and 5% to 6% for studios. In addition, we expect to derive cash NOI growth from our 10 nonsame-store office properties in excess of 50%. And as a reminder, our guidance always excludes the impact of unannounced or speculative acquisitions, dispositions, financings and capital markets activity.And now I'll turn the call back to Victor.

Thanks, Harout. Thanks, Mark, and thanks, Laura. Hudson Pacific is well positioned for a very successful 2020. Conditions along the West Coast and particularly in our markets remain incredibly tight. We've already made great progress on our more than limited 2020 office lease expirations, which are significantly below market. Our active value-creation pipeline of office development and redevelopment projects is substantially pre-leased. And as Harout discussed, our balance sheet has never been stronger. We have ample liquidity to run and grow our businesses.As always, I'd like to thank the entire Hudson Pacific Properties team for their passion, dedication and exceptional work each and every quarter. And to everyone listening, we appreciate your support of Hudson Pacific Properties. And operator, with that, let's open the line for questions.

[Operator Instructions]. Our first question comes from Jamie Feldman with Bank of America Merrill Lynch.

I guess can you start by just talking about where you think rent growth will look like in your markets this year across the major markets?

Of course. So let's just sort of look back at what we sort of looked at last year versus what we predicted versus what happened, and then we'll sort of tell you what we think about for 2020. So our predictions last year were 6% to 8% in Los Angeles, and they came out at about 7.5%. So we were right in the middle of that, which was good. We're thinking that L.A. would be about 4% to 5% for '20. In San Francisco, we predicted 10%. Actually, it was about 11% through third quarter to third quarter, but it dipped down. And so the year ended up about 7%. So we were off there. We're looking somewhere around 3% for San Francisco next year is what our guys are telling us. The Peninsula, we thought was sort of 5-plus percent. It ended up being like 6% to 8%. We kind of think that 4% to 6% is that range again next year. In Seattle, we thought it was going to be 6% to 8%. It was 7%. And we sort of think it's going to be about 5% to 6%. And Vancouver, we thought was 7%. We were way off there. It was 17%. And we think it's going to be closer to 10% to 12%. So that sort of gives you parameters as to where we think the year will end up at the end of '20, Jamie.

Okay. And with San Francisco tightening so much in property unlimited and it sounds like property could limit even more. Do you think that -- why do you think people are saying such a pullback in rent growth there?

I think they're being conservative. I do think there has been a little bit of an increase in sublease space, which is good. There still is not a lot of space in the marketplace of any size. But you've seen some sublease space come to market, which is going to, I think, help the tightening that's currently in place today. And I think our guys -- I'm not pulling these numbers out of the year. We've got our team and where they think they're seeing deals. We have very little role. So we're not going to see the impact as much. But at the end of the day, I just think our guys are being a little conservative as to what's been going on, but that seems to be the answer.

Okay. And then as you look ahead on the investment pipeline, I mean, what are your thoughts on potential acquisitions this year, especially in the studio business and your appetite to move beyond any of your current markets?

So as we said in our prepared remarks, we've got -- we're very well positioned on our balance sheet. We've got a lot of capacity. We are looking at various deals, both studio deals and core office deals and value-add office deals in all of our markets. I think our appetite is consistent to what it's been in the past. And I'm excited about some of the prospect deals that we're looking at right now that should probably be vetted a little stronger. We got a couple of off-market deals, and we got a couple of marketed deals, but my guess is by midyear, we'll have some appetite that hopefully we'll be executing on some new deals.

And in your core markets, does that mean you're not really looking beyond your core markets or your current markets?

On the office side, we're definitely not looking beyond our core markets.

Okay. It sounds like studios potentially.

Yes. Well, we've always talked about that.

Our next question comes from Manny Korchman with Citi.

On One Westside, it looks like your yield on that project came down a little bit, but the costs remain the same, and obviously, you signed at least Google. So what would drive the yield downward without an increase in costs?

Yes. I'll sort of take the top line, and then Mark can get into the big details. So listen, when we gave the initial yields, our construction was not firm at the end of the day. We had bidded it out, and there's a tremendous amount of contingency in that number. So I think at the end of the day, some of the costs have gone up slightly. But the more important aspect of the cost -- more [indiscernible] major details, we have negotiated to build a parking structure with our new REA conversation with the neighbor. And so we're contributing to that, which was not -- was an unforeseen cost that we're going to be putting into play there. But it's not going to affect the economics of the deal. The NOI is the NOI.

Right. That's a perfect segue, Manny. If you -- knowing that the asset is fully pre-leased, so that we have a pretty strong line of sight on the NOI, that really is the component that didn't change. It's just that as we looked at where the midpoint was falling on that range of costs that we continue to show, the midpoint was starting to feel a little light, not by a lot. So let me just run the math. If you lower the midpoint on the yield by the 25 basis points knowing that the NOI is the same, it implies that the midpoint, if you will, or the cost is no longer at the $525 million level, it's implied at more like the $540 million level, so call it $15 million-or-so higher. And -- but it's still -- the $540 million still falls within the range. So we didn't change the range. It's just that we wanted to give ourselves some room at the midpoint on the yield. That's the essence of it. Now as Victor was alluding to, we could easily still come out within the old range on the yield, right, because if we don't spend every dollar of contingency and so forth, we'll easily fall back within the old range. We just wanted to give ourselves a little bit of room in light of the fact that the costs were to take higher.

Got it. When you bought Bentall, I thought that part of the plan there was to do a big repositioning of the retail space, but I'm not sure you've talked about it since. Could you give us an update on what's happening there, maybe timing and costs?

Yes. We don't have costs, but it's an absolute plan. We engaged architects design right now for a complete review. You're absolutely accurate of the retail. It's going to be smashing. How it's come out right now, the initial design is going to be more than impressive. I think it's going to be a very unique repositioning because what we're attempting to do is take all the ground for retail and bring it up to the main level and then connect all the buildings, both outside and inside. And so all new space will be all leasable space on that basis, higher yield on that space because it's going to be Street-level versus below grade and the plan will be for us to maintain the below grade for access to the transit system and maybe some bike storage and some open-building storage. So we have to run the numbers on the economics as to how the rent will increase, but it's going to be an impressive development and a repositioning. And it's going to come in line with us building approximately 0.5 million feet because we're designing at the same time and how that's going to connect all with the retail. So it's all part of the plan, but we don't have a cost yet. And when we do, I promise you, Manny, you'll be the first to know.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Just a few quick questions. Harout, just going back to the tax on Sunset Bronson, if you can go through a little bit of the tax reset on that, it sounded like it's not just a Prop 13. It sounded like it's something older. So maybe you could just go through that? And do you think that there are other buildings in your portfolio that could be subject to a similar reassessment?

Sure. The adjustment for the studios relates back to the IPO and the back and forth we've had with the assessor's office to get a number. So we don't think that number -- well, we are disputing that number. But until we have a resolution, it comes in. As far as if there are other properties, more likely than not, if there are other adjustments, they'll be going the other way, meaning there will be reassessments going down as opposed to up. Because of the accounting, we're supposed to take the higher of the 2. In this case, we didn't have insight in the past for this amount, and now we do. So -- but this again highlights the problem with Prop 13 in general, which is this is an assessment going back almost 10 years. Yet it's only now being resolved on the city's end -- or the assessor's end, and I'm not sure how they'll do it with everything as opposed to just a change of ownership.

Okay. And then on that same line, to what you said earlier in the call, I think Mark said it on the portfolio age, all the taxes are sort of passed through, right, either it's on a triple-net basis or on a gross over the base year basis. So wouldn't any tax increase, whether it's at Sunset Gower or any of the other properties, most of that would flow to the tenants, right, as opposed to HPP?

Well, no, not from a historic and capture of view, right? I mean it's possible you could go back in their leases where you can do a cat reconciliation over the historic period. Maybe some of this tax increase as it relates to Bronson, we can do that on some of it. But -- and so yes is the answer to some extent. But I think in the case in these unusual instances where you're getting hit for in escape assessment dating back a decade, it gets understandably harder to expect that you're going to be able to successfully go back to all that tenancy and recovery at all, and we'll see. But for now, we're reflecting the higher operating expense, and we'll see perhaps -- what we can do on recovery.By the way, I think, Alex, just -- it's worth quantifying this a little bit because I think it's getting a little more focused than necessary. It is true that on a fourth quarter year-over-year basis, we showed a negative 1% decline in same-store growth. But the dollar amount that we're talking about property taxes flowing through is $960,000 on a onetime-only basis. And if that number hadn't hit in that particular quarter, the year-over-year cash difference would have been -- instead of negative 1%, it would have been almost 9% positive same store. And so it takes -- the point about the studios that I think everyone has to keep in mind when they think of these percentage changes is the denominator is so little that it doesn't take hardly anything on an absolute dollar basis to really move the needle significantly.

And then one more item. In terms of the reassessments in general, at the studios, for the most part, there is no recovery. The studios are different than the office. We do have some recovery on the studio as it relates to Bronson. For the most part, there is no recovery. And for the office properties, you're right, there is a recovery component in that, that we would get if there was a reassessment. But again, if it's a reassessment on a go-forward basis, yes, that will be passed to tenants, and we will pay only our share of any vacancy. But if it's on a historical basis, the biggest challenge is if a tenant is no longer in the building, trying to go back and collect it from a tenant that's not there is pretty close than possible.

Right. Okay. And then the second question, on the capital, you said that midyear -- to Jamie's question, midyear, you may be looking to acquire some things. Is there any match-funding? So should we think about dispositions offset? Or how do we think about capital plans, whether it's funds for development spend or funds to purchase for acquisitions? Any of this coming from dispositions? Or all this would be sort of free cash flow, line of credit, new financing, et cetera?

I mean I was just to say, listen, we don't -- we said this before, there's no asset of any material substance that we're looking to dispose of. So everything is -- that we're looking to do going forward will be on free cash flow and our opportunities with what we currently have in the balance sheet.

And we have plenty of liquidity, as we stated earlier, to cover that.

[Operator Instructions]. Our next question is from Rich Anderson with SMBC.

So with relatively low expirations this year, do you expect to perhaps proactively look to early renew? Or do you think you'll have some tenants come to you and try to cut a deal earlier if they're not expiring until next year or the year after?

Rich, it's Art. Yes, I mean, that's always the case. We're always proactively looking beyond the current year. We're even looking into '22 on some of those expirations for the exact same reasons you just mentioned. Right now, so we've got about 850,000 square feet expiring this year. We've got about 45% coverage on those. And if you look into '21, we've already got about 20 -- kind of 20% coverage on those expirations, cheaply the larger ones.

And is that coverage like that's about where it should be about this early in the year? Or are you kind of way ahead of schedule?

Yes, I think we're ahead of schedule, for sure.

Okay. I asked this question last quarter and maybe just rephrase it and see if there's an update. But on the CapEx line, TI and maintenance CapEx, where do you see the numbers falling in 2020 versus 2019? Do you see a trend down in your CapEx spend? Or is it about equivalent to last year?

Thanks, Rich. So the way -- in terms of true capital, that's not the issue here. The biggest driver of that spend is TI dollars, and that's directly related to either the leasing activity that we generate or the timing of the tenant reimbursements, which is very challenging to predict. That being said, it's hard to really focus on 1 particular quarter in that sense. And so the way we see it is, on an average basis, we do see that coming down over the next roughly 2 years, depending on the timing of the tenant activity and the tenant reimbursement. It may be lumpy over that time, but we definitely see it coming down as indicated by our lack of expirations coming up. And a lot of the activity that is driving the capital is also going to generate revenues that aren't reflected right now because it's all front-loaded. So if you combine the capital spend in the future with the revenue generated from those leases and the burn-off of the free rent of those leases, the impact to AFFO, which is really the more important point, is going to be very, very impressive, and it's going to be large. It's just a timing issue, one that TI is going to be spent.

Okay. Last question for me. Look back at your fourth quarter 2018 outlook for '19. And you guided same-store NOI office growth at 3%. You did 9.1%. So like night and day kind of results versus expectations going in. So I'm curious how you feel about your outlook for 2020. Do you sense, not that you're sugar -- or sandbagging, but do you sense that similar sort of dynamics are at play today, whereas you've set your guidance but that's not so much a target as much as you've got a bare minimum for this year? Is that a good way to think about it?

No. I mean I appreciate the point, and we were thrilled with anyone that we were able to increase our midpoint on same-store and that we were even able to exceed it. But when we go in, Rich, we go in with as much of a sort of a reasonable and transparent number as we've got. And so I think our midpoint coincides with where we're modeling out our number, including our FFO and everything. It all hangs together.I would mention a couple of things, though, because I think it's really important to kind of keep track of what last year's relates to and what this year's relates to. So last year was 31 assets that generated that was working off of a denominator, a 2018 NOI number of $280 million. And we grew that -- by the time of the year was over by the final 6.5%. This year, the same-store is no longer 31 assets. It's 39 assets, and the starting NOI is 100 -- more than $100 million higher on the denominator. It's $384 million. And by the way, we ended the year on those -- on that same-store portfolio almost 96% leased, so -- and with very little role. So we're still generating a heck of a lot of NOI growth. It's just we're generating it against a much bigger denominator and without that much exploration this year to work with or without much net absorption to work with. So it's still a powerful engine of NOI growth. It's just as we get bigger and bigger and the underlying starting point gets increasingly higher, you could imagine it's that much harder to generate very, very high same-store percentage growth.

Our next question comes from Omotayo Okusanya with Mizuho.

Yes. I just wanted to follow up firstly on Rich's point. I think the part of the HPP story about, again, lower recurring CapEx, better AFFO per share growth going forward, better FAD dividend coverage going forward. And I guess, just with the 2020 guidance, it's a little bit hard to kind of quantify what that could potentially be. And again, I understand your comments about -- it's all going to be lumpy, and it's kind of a two year look-forward. But is there any kind of additional guidance or additional direction you can kind of give us just about 2020 and in particular, around that issue?

Yes. I mean just to sort of piggyback off of what Harout was saying, it's important -- and I know there's a desire to really want to hone in on 2020, and that's what we've just guided to. But as it relates to AFFO and recurring CapEx spend, including TI, there's a real danger in trying to hone in within, say, a 12-month window. We think it's far more productive to look at, say, 8 or even 12 months out. And if you look at 8 months and you kind of normalized, if you will, sorry...

Quarter.

Oh, sorry, eight quarters out. So say, two years out, we are at a level, we think, on an average quarterly basis over that period that's in line if not maybe a tick lower than where we ended on a quarterly run rate basis for 2019. Meanwhile, FFO is growing very quickly. I mean even this year, we've posted 7.4% year-over-year FFO growth, and we have all the engines to continue to see a lot of FFO growth beyond 2020 into '21 and '22. And as a result of that, by the time you sort of look at an average quarterly run rate of all recurring CapEx for '20 and 21 in comparison to 2019, we think that the AFFO potential growth relative to 2019 is in the mid-30% range. Or said another way, if you average out the amount of recurring CapEx over the next eight quarters, we should see something like 13 -- 12% to 13% average AFFO growth per annum for that window. If you stretch that out another 4 quarters, it gets really exceptional. Because not only then are we seeing a slight decline in the overall recurring CapEx into 2022 average out over those 12 quarters, we're seeing an average decline, we're -- now FFO has really, really moved, and you're seeing something like mid-60% AFFO growth averaged out for the 12 ensuing quarters compared to 2019, or said another way, more than 20% per annum AFFO growth over the next 12 quarters.

And the driver of that is a combination of the drop in the AFFO -- or sorry, drop in the capital spend but also the burn-off of a lot of upfront free rent and the mark to market that we've been posting for a while finally being reflected in the cash NOI.

Got you. Okay. That's actually very helpful context. I appreciate that. And then the -- my second question, the studios business, again, just trying to understand a little bit more about changing dynamics in that business. Are you kind of -- do you have higher percentages of leases that are now longer-term leases? And then also around a lot of things happening with Netflix kind of doing more in the movie side. They're getting all these Oscar nominations and things like that. Is that fundamentally changing demand for that business, utilization of space in that business? And how are you kind of taking advantage of that, if that's the case?

Well, listen, I mean, we're taking advantage of it because the growth in the capital dollars that is going into the content world is growing at an exponential amount. And so that business is just at the inception, even though I think the markets are trying to understand how much capital is there. You're talking about the growth in that business. We're all, not Netflix but every single 1 of them, it's the $100 billion range right now, a new content that's coming across the board. So we, as the largest independent owners of studios, are going to capitalize on that, both, as we've said in the past, with the existing tenants we currently have on the long- and mid-term leases, plus we've enabled ourselves flexibility for short-term leases to capitalize on mark-to-market movement. We're very bullish on that business. We're very bullish on the plan that we've put in place 10 years ago. And I think it's proven way beyond anybody's expectations in the markets as to how good it has been and at how good it's going to be going forward.

Our next question is From Dave Rodgers with Baird.

I got a couple of questions, and I'll just throw them all at you right away. I guess first is spreads were really good in the fourth quarter, but overall lease economics looked like they were a little bit lower on the TI spend. Can you update us on that? And then the second question, Harlow, any update on the data, the leasing timing? And will that begin to expense in the second quarter of '21 if it's not stabilized? Last question, I guess, would be just on the 230,000 square feet of leases that expired in the last day of the year, is that in your physical occupancy unless the stalls go vacant?

Okay. So let's take the easy 1 first. And I can let Art jump in, but we'll talk about Harlow first. But before we talk about the spend and then we'll talk about the lease-up. And we'll go lease-up first with both. On the Harlow side, we've got very strong leasing activity. We are looking at end of second quarter to hopefully have some meaningful comments as to who we're talking to. As I've mentioned in the past, there's very little new construction in Los Angeles. We've held off for a single building user. We've put off single-floor users. And we're going to hold that party line until we think otherwise. Not worried at all about the current yield returns and rates. Candidly, I think we're probably low on rates because we've seen from our initial underwriting that it looks better, but we're holding the line on that right now.And yes, the answer is yes. If we can get somebody in the space by a lease signed by, let's say, third quarter, it's a 3 to 4 month, maybe 4 to 5 month build-out. I think the expense would sort of kick in end of first quarter, beginning of second quarter of '21.

Yes, Victor is right. I mean so the activity has been consistent. We've got -- we're in discussions right now and in negotiations about 4 users, 2 of which are for the entire building, the rest are for kind of half the building. So it remains stable, and we'll just continue negotiating right of control if it delivers at the end of the second quarter.

Do you want to comment?

Yes, I've lost track a little bit of the question.

Well, can I just add one more thing about the Harlow? I think you asked, is it going to start expensing? The answer is, if it is leased, yes, the accounting will allow you to keep capitalizing up to one year after the completion of development unless it's operating. So I'm not sure if that answered your question, but that's how it works.

I think on the leasing cost question, and we're going to drill down, but -- but I believe, if I'm focused, Dave, on the right number here, you're looking at the 3-month maybe annual blended TI and commission cost and which is largely driven off, as you can tell, the new lease component of it. And I think that's a direct by-product of the biggest lease we signed in the quarter, which is Google, right, which would have had not only exceptionally high rents but high TIs that would -- so there's a -- as you might expect, when you're in 1 of the best markets in the country, getting among -- yes, it's Google. Yes, getting the best rents in the -- among the best rents in the country, there's a sort of correlation that we're giving them -- we're willing to give a bit better of a, say, an allowance, right, because they're highly amenitized in their space. So you're going to get a slightly higher per square foot amount. But again, it goes hand-in-hand with the fact that we got $114 a foot or whatever on rent. So I think that's what you're seeing there.

The last point, you had mentioned, year-end. The preponderance of the year-end vacancy was Del Amo, and that is vacant space. And so that carries through. There's 115,000 feet as a single user.

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Victor Coleman for closing comments.

Thank you so much for participating in our fourth quarter '19 call. We look forward to seeing you all and speaking to you all at the end of this quarter.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.