Greetings, and welcome to the Hudson Pacific Properties, Inc. First Quarter 2021 Earnings Conference Call It is now my pleasure to introduce Laura Campbell, Executive Vice President of Investor Relations and Marketing. Thank you. You may begin.

Thank you, Operator. Good morning, everyone. Welcome to Hudson Pacific Properties First Quarter 2021 Earnings Call. Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are available on the Investors section of our website, HudsonPacificProperties.com. An audio webcast of this call will also be available for replay by phone over the next week on the Investors section of our website. During this call, we’ll discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We’ll also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including those associated with the COVID-19 pandemic. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update.

Thank you, Laura. Good morning, everyone. Welcome to our first quarter 2021 call. I’m pleased to start my remarks today by noting that lower case studies and increased vaccination availability are leading to positive momentum in the reopening of our U.S. markets and as of late April, between 30% to 40% of eligible California and Washington residents are fully vaccinated, with millions more having received their first dose. Vaccinations are moving a bit more slowly in British Columbia, but over one third of the population has had at least one shot, and we’re hopeful a recent rise in cases there will resolve swiftly. Many of our large tech and media tenants are leading the way in terms of getting their employees back to the office. Google, Amazon, Netflix, Microsoft, Facebook and Uber all plan to bring employees back before or by at least the end of the summer. These companies led the work-from-home movement at the outset of the pandemic, and their return will serve as the impetus for other companies to call employees back, and we certainly anticipate our physical occupancy will increase meaningfully over the next two quarters. Bottom line, our focus on tech and media epicenters positions us extraordinarily well for the next phase and beyond. Our markets remain at the center of gravity for these industries, which have flourished through the pandemic. Venture capital investing surged for the first quarter to nearly $70 billion, shattering previous records. IPO activity remains very strong, and recruiters anticipate significant tech hiring. We’re seeing similar trends in media. Netflix alone plans to spend $17 billion on content in 2021 versus $12 billion last year. And collectively, streaming companies Netflix, Amazon, Disney, Apple, among others, are projected to spend approximately $112 billion on content. In short, there’s plenty of capital for these companies to grow. We’ve also spent the last decade building and repurposing assets to create premier work environments that are perfectly suited to a post-COVID world. We’re at the forefront of the movement that prioritizes health and wellness, sustainability, technology and, in particular, experience. From award-winning innovative developments in Hollywood like EPIC to our reimagined creative office campus in San Jose like Gateway, our portfolio already delivers precisely what tenants want and need as they contemplate a return to office. We remain focused on growth, as we have been throughout the pandemic. We’re evaluating multiple mostly off-market opportunities and several on the studio side but also some of our office portfolios as well.

More than a year into the pandemic, our tenants continue to pay rent. We’re also now successfully collecting both previously deferred and delinquent rents. And additional requests for relief, mostly from our smaller retail tenants, are dissipating. This is all occurring despite California’s ongoing eviction moratoriums and renter protections, which are among the strongest in the nation. In the first quarter, we collected 98% of our combined contractual rents, comprised of 99% from office tenants, 100% from studio tenants and 54% from storefront retail tenants. April collections are tracking above these levels. In the first quarter, we also successfully collected over 99% of the deferred rents, which we – became due during the quarter. This trend is so far consistent for April. About 70% of the 80-or-so tenants that were three or more months delinquent between April and the end of Q1 are either fully repaid or have commenced repayment. This equates to nearly 75% of past due rents from these tenants being repaid. In the second quarter of last year, at the height of the pandemic, we received about 150 rent relief requests from tenants occupying nearly 750,000 square feet. By comparison, in Q1 of this year, we received only about 30 requests from tenants occupying around 175,000 square feet. Again, these are mostly smaller retail tenants. All in all, we’re very pleased with how collections are trending.

Thanks, Mark. Touring activity and tenant requirements have continued to increase as companies began to formalize their post-pandemic real estate strategy. In most of our markets, requirements are up 20% to 30% since year-end. Although this is yet to translate into significant deal volume, we expect both signed leases and fewer opportunistic sublease listings to begin to rightsize vacancy and overall availability rates in the coming quarters. We signed 524,000 square feet of deals in the first quarter. That’s essentially double our leasing activity over the past five quarters and on par with our long-term average quarterly leasing activity. Our GAAP and cash rent spreads were 12.2% and 2.4%, respectively. Now to put the 2.4% into context. We had two large renewals in Palo Alto, with Google and Lockheed, that collectively comprise almost 50% of our first quarter activity. Those deals were essentially at market and thus significantly weighed on our cash rent spreads. And remember, Palo Alto rents remain among the highest in our portfolio and in the nation despite COVID. We also had a 35,000 square foot expansion lease executed in the first quarter, the contractual rent for which was slightly below market. Normalized for these as well as short term deals, our cash rent spreads would have been closer to 7%. Again, in line with what we’re seeing throughout our markets, our current leasing pipeline, that is deals in leases, LOIs or proposals, stands at about 1.3 million square feet. That’s up close to 20% since our last call and back in line with our long-term average pipeline. After addressing several of our larger 2021 expirations, we’re down to 6.5% of our ABR remaining to expire this year. Right now, we have roughly 40% coverage on those deals, which are approximately 15% below market.

Thanks, Art. In the first quarter, we generated FFO, excluding specified items, of $0.48 per diluted share compared to $0.54 per diluted share a year ago. First quarter specified items in 2021 consists of a onetime prior period supplemental property tax expense related to ICON, CUE and Sunset Bronson of about $1.1 million or $0.01 per diluted share compared to transaction-related expenses of $0.1 million or $0.00 per diluted share and a onetime straight-line rent reserve of $2.6 million or $0.02 per diluted share a year ago. First quarter NOI at our 43 consolidated same-store office properties decreased 3.7% on a GAAP basis and increased 2.6% on a cash basis. Adjusting for the onetime supplemental property tax expense on ICON and CUE, NOI for our same-store properties would have decreased by 2.9% on a GAAP basis and increased 3.6% on a cash basis. For our three same-store studio properties, NOI increased 4.1% on a GAAP basis and 6.4% on a cash basis. Adjusting for the onetime supplemental property tax expense at Sunset Bronson, NOI for our same-store studio properties would have increased by 5.2% on a GAAP basis and 7.5% on a cash basis. In the first quarter, we repurchased 600,000 shares of common stock at an average price of $23.32 per share. With $1 billion in liquidity, we still have plenty of capital to pursue growth opportunities and run our existing portfolio. We have no material maturities until 2023 but for the loan secured by our Hollywood media portfolio, which matures in Q3 2022 and has three one year extension options. Our average loan term is 5.5 years. In the first quarter, our AFFO continued to grow, increasing by $3 million or 6.1% compared to Q1 2020. This occurred even while FFO declined by $9.4 million for the same period. Again, this positive AFFO trend reflects the significant impact of normalized lease costs and cash rent commencements on major leases following the burn-off of free rent. We’re providing guidance for Q2 2021 FFO of $0.46 to $0.48 per diluted share, excluding specified items. At the midpoint, this is $0.01 per diluted share lower than our Q1 2021 FFO per diluted share, excluding specified items. This decrease in Q2 compared to Q1 2021 is primarily driven by the following: a 1.5% decrease in office GAAP NOI resulting from prior period rent collections we do not expect to reoccur; a 19% decrease in studio GAAP NOI primarily due to seasonally adjusted lower production activity; a 7% decrease in G&A a 1% decrease in interest expense due to additional capitalized interest associated with incremental development spending; and finally, a 7% decrease in FFO attributable to noncontrolling interests.

Thanks, Harout. As we head into the third quarter, we’re very optimistic that the positive trends we’re seeing in terms of the vaccine, the reopening of our markets and tenants’ desire to return to office will continue. At Hudson Pacific, we’re poised to outperform in a recovery due to our exposure to the dynamic tech and media industries; our high-quality, growth-oriented tenants; and our well-located premier and modern portfolio, inclusive of our unique ability to operate and redevelop studio assets. We’re well capitalized and focused on growth both through our existing development pipeline and the pursuit of new office and studio opportunities, and I look forward to sharing more on all these fronts in the coming quarters. As always, I want to express my appreciation to the entire Hudson Pacific team for their excellent work and dedication. And thank you, everyone, for listening in today, and we appreciate your continued support. Stay healthy and safe, and we look forward to updating you next quarter. Operator, please open the line for questions.

Thank you. Our first question is coming from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hi, guys. Consistent with everyone else, it seems like your leasing pipeline is on the upswing here. Could you just talk about what trends you’re seeing from a space planning or density standpoint, if there’s really any changes going on relative to pre-COVID?

Hi, Craig. It’s Victor. I’ll start and I’ll let Art jump in, okay. I hope you’re well. Listen, I think from a baseline standpoint, what we’re finding is exactly what you’re hearing from everybody else. Density is increasing, we’re seeing less people in more space. I do think that the jury is still out on – candidly, on hot-desking. It doesn’t seem to be very popular right now. It looks like more open space or office space that has room for conference facilities and the like, so that seems to be in demand. And as a result, tenants are looking to get input from their own employees as to what makes them comfortable. It’s just going to evolve. Obviously, it’s not going to be a permanent situation that is going to be one size fits all. Lots of companies are looking at different alternatives.

Sure. I’d like to add to that. Hi, Craig. The operable word, I think, is evolving, and it’s a very fluid situation. I think nobody – I don’t think anywhere we’ve seen somebody pull a permit and say, gosh, we’re going to really rethink our space, that’s not happening. But what we are seeing is the solutions in the interim are the furniture systems, right, providing a more flexible solution to whatever their needs are so that as this does evolve, they can really densify the space if need be. And so again, we haven’t seen people pulling permits and doing hard construction on that basis. That – I think I just wanted to add that.

No, that’s really helpful. And Victor, your comment that you’re seeing less TI than you thought you would. What do you think is driving that?

Well, I’ll tell you, I toured – just last week, I actually went to one of our newer properties, yes, because Netflix is just starting to move in. And their – just as Art said, the systems they put in place – because they’ve been building that space out, ready to be occupied since summer of last year. And now they’re ready to go and they’re moving people in. It’s – what would – what is a six-person area, desk space area for six people, they’ve converted to three. And so they’ve left the desks in, but they’ve spread people out. So on a systems basis, I think those dollars are already put in place, and they haven’t moved furniture around. In terms of redoing TIs or capital dollars on space, they just haven’t changed it, and that’s a – this is a brand-new building. And I think we’re seeing that throughout the entire portfolio. People are not spending their money in TIs. They’re using the optimal space they have because it’s a lot more open-air space. That’s what creative office space was, right? You always heard me say what was the definition of creative office space. It was more people in less space. Now this evolution is going to be less people in more space. So it’s the inverse of that.

Yes. I’d like to add to that, Craig. On our second-generation space, we’ve been talking about our VSP program for a long time, and it basically put us in a position where we’re situated to capture the demand with really move-in-ready space, kind of fresher move-in-ready space. It’s highly amenitized. And so when tenants are coming to that space, they’re spending fewer TI dollars because we’ve built it with flexibility in mind. And so that’s really helped us, and it’s going to continue to help us. As tenants reengage in the market and you start to see more and more demand, there’s going to be space ready to go, and we feel comfortable in that situation.

All right. That makes sense. And just two quick follow-ups. You guys – Dell EMC is obviously giving back some space. You had other space given back at 505 as well. What’s the prospects to get that retenanted? Kind of what do you think downtime looks like at that asset?

Yes. So the first one you’re talking about is Qualtrics, who’s was on the top floor. We’re already in negotiations on that space, on the three floors, just to be clear. Dell EMC had four floors. They’re giving back three. We’re left with about 45,000 square feet. The three floors in question, we have about 125,000 square feet of active prospects in that. And that’s chiefly because the increase in active deals in the pipeline that are in the market in Seattle has probably picked up about 25% to 30% just quarter-over-quarter. And so we’re very optimistic. That’s a great space. And the mark on that – all of that space were leased about the same time. So the mark on that floor for is north of 50%.

North of 50%, five-zero? Art, five-zero or one-five?

Yes, yes. five-zero, I’m sorry.

50%. And then just last one. Company three took a space in Harlow, but they also have space in Santa Monica, not necessarily close to each other. Are they two different uses? Or could they look to get back the Santa Monica space when that – when it expires?

No, It’s totally different use. They’re not giving back Santa Monica.

All right. Great. Thank you.

Thanks, Craig.

Thank you. Our next questions come from the line of Manny Korchman with Citi. Please proceed with your questions.

Hi, Harout, thanks for the comments on the 2Q guidance and how to think about the full year. Given those comments, why not just come out with a full year FFO guidance sort of to the extent that?

Manny, let me jump in because we’ve talked about this multiple times. We can’t come out with full guidance – and I don’t want to continue to repeat ourselves – when we don’t have tenants fully in the assets. So we don’t – we have a massive number that’s variable around parking and after-hours HPAC and aspects around that, that we just can’t – it’s such a huge number that you guys keep asking the same question, we keep giving the same answer. When the buildings are populated, it becomes a lot easier to come up with a number. There’s no gaming here. It’s a process of just why give you a number that we’re just going to come back on in a month or two from now when people come in, in June, July, August or September? That’s the reality of it. There’s no gaming here.

Victor, I hear you. At the same time, you’ve now given – or hopefully, we’re closer to you having some idea of when those tenants are coming back. And so with that as a baseline, I thought that you would have given or could have given a number that was closer to where you’re going to end up, if nothing else changes from where we go from here, and then you could provide the same guide rails around that the same way you said, Hey, look, this is our 1Q and our 2Q. If you think about that for the rest of the year, this is where we get. We’re getting closer to, I hope, having some kind of more secure footing on when people get back in. And so I think that’s what’s driving the question, not the fact that in Q4.

Well, I’ll let Harout jump in here on the factor on that. But let’s be candid. We have – some of our larger tenants are saying they’re coming in June. Some are coming in September. Some say they’re not coming until the end of the year. So it’s not yet – and by the way, and I just mentioned, I was just over at Netflix, and they say they’re not coming in until...

September.

September. But yet, people are in the space right now. So it’s really evolving day-to-day. This is not like an absolute finite time line that people are saying, September 1, we’re all coming in. We’re hopeful people will be in by then, but it’s been moving around.

Yes. I mean they keep on – just to add to Victor’s point, companies keep on either refining or adjusting the dates that they’ve previously said they’d come back, so it’s hard to determine. But ultimately, we’ve – if you listen to the – or go back and look at the prepared remarks, we’ve given you the guardrails for the end of the year. The math is all there. We just haven’t out and out said what guidance will be at the end of the year.

Yes.

Yes. And so it’s like 90% there. And why not the rest, 10%? Because of the uncertainty.

Yes. And Manny, I mean, I think you have a very sound baseline to work from with the guardrails that Harout outlined in his prepared remarks, and you’ll get to a number or should be able to get to a number pretty readily. The only difference will be the very uncertainties that Victor mentioned, namely that, that variable income, right? And, I mean – so think of that as sort of upside. If we – if the buildings populate quicker and parking resumes and visitors come back in, then you’ll see more of that variable income come through quicker. And you could just build it off of that baseline that Harout has given you the formula for.

All right. And then Victor, turning to your comments on acquisitions, it sounds like you’re pretty well along the way there. Maybe just close in and say how long you’ve been working on those. And anything that might have changed throughout the course of the pandemic in those deals?

I think, listen, we are very confident there’s going to be a series of acquisitions that we’re going to be executing on. Some were further along than others. It’s taken longer, I just think, for a whole host of reasons but none less than the fact that just people are not in full time. And it has not changed our energy level nor desire to complete these acquisitions. So yes, we are poised very well for acquisitions. And I think in the interim few months coming, you’re going to hear from us on them.

Thanks, everyone.

Thanks, Manny.

Thank you. Our next questions come from the line of Frank Lee with BMO Capital Markets. Please proceed with your questions.

Hi. Good morning, everyone. Just a follow-up on your comments on the Seattle market. You mentioned Dell downsizing and Qualtrics. But it looks like Nuance also moved out. Do you have a sense of where these smaller tech tenants are going? Or are they deciding they don’t need a space anymore? Just curious if this is more company specific or a more broader thing that’s impacting the Pioneer Square submarket?

Yes. So all – those tenants are all larger tenants, Frank. So Nuance had been subleased to Qualtrics, it’s essentially Qualtrics taking their space and moving – actually, Qualtrics moved into about 200,000 square feet at two anew. So they outgrew the space. And Dell, we knew about, obviously, and they’re – that was just a downsize with them. But the other – there’s really no other small tech tenants that we’re dealing with right now in that Pioneer Square market.

Okay. Thanks for clarifying and then a question on the studio business. We’ve seen a number of – increasing amount of headlines on new potential developments, retail conversion opportunities and even new entrants into the market. Just curious if we’re at a point where new supply could be an issue. Or do you think the $112 billion of content spend you talked about can meet this demand?

Well, we’re not even close to a new supply being an issue. I mean listen, a lot of people are talking about studios. And whether they execute on them or they don’t, it’s to be determined. But there’s a high demand for sound stage space in multiple locations in the country and not the least of which are in our own backyard. So we’re not concerned about the supply at this stage.

Okay, great. Thank you.

Thank you. Our next questions come from the line of Jamie Feldman with Bank of America. Please proceed with your questions.

Great. Thanks. Hi, everyone. I guess, Art, just to talk more about the leasing pipeline, the 1.3 million square feet. Can you talk about like what markets that in – what markets those are in? And any kind of – anything that you can point out in terms of how the different submarkets are acting?

Sure. I’ll start with the first one, which is the pipeline, 1.3 million. It’s really distributed across what you might think where we have vacancy in roll almost right up and down our portfolio. The markets themselves, I would say that we’re starting to see – or we’ve seen kind of in the quarter a significant uptick in Seattle. The top three are really Seattle, San Francisco and Silicon Valley. The others have, call it, 10% to 15% kind of increase in their active deals in the pipeline. But those three in particular, I’m very encouraged by the uptick in activity. And it’s mostly generated by tech. I will say that the valley, we’re starting to see more of an uptick from previous levels in professional service firms, but tech is still driving it.

Okay. Thank you. So if you look at your kind of quarter-over-quarter percent leased, you had the biggest decline in Seattle and the Bay Area. Can you talk – like does that match up pretty well with those – that incremental vacancy or that incremental percentage decline? And how should we think – oh, sorry, go ahead.

Yes. That – well, I was going to answer the first question. First, the – that absolutely lines up with it. Some of these known vacates or early terminations, we’ve been out in front of from a marketing perspective. And so we have active prospects for a lot of that space currently.

Okay. That’s helpful. And then – so how do you think about the – either the percent leased or occupancy trajectory? I guess what’s in the 2Q guidance? And then how do you guys think about what – the rest of the year given the – I assume at this point you have a pretty good sense of move-ins versus move-outs?

Hi, Jamie. It’s Mark. We spent a fair amount of time last night making sure we could kind of give you some context around that Q4 to Q1 sequential decline, and it popped up in a fair number of the early notes. What’s – what that sequential decline implies from a square footage amount is about 260,000 square feet of rollout over the quarter. We had about 540,000 square feet of expirations in the quarter. What you might notice on the lease activity page is 144,000 of early termination. Now that’s unusually high. In all of last year, we had 118,000 feet of early termination. In the last quarter, Q4, we only had 12,000 square feet. So the first quarter saw an unusually high amount of early termination. These were not unexpected early terminations. They were tenants that we had been struggling with for – throughout the pandemic. In most cases, we weren’t even getting rent from them, the biggest of which was Notel at 625 2nd. And we finally – we weren’t getting rent, and we finally just got the space back from them. And we’re doing what we can to recover against that. We also lost 27,000 feet with Regus, and then we had had, and I’m not going to name names, but a law firm for 20,000 feet, which we were sort of embroiled in a drawn-out disagreement with. So it – for the first quarter, those – feeding those through in what will prove to be an unusually high amount of early terminations, which we do not expect to see throughout the remainder of the year, if you adjust for that and sort of normalize early terminations, what you’d really expect to see is about maybe 90 basis points of rollout, which is about, I’ll call it, 130,000 feet as opposed to the 260,000 that we witnessed. Now that would be 130,000 feet in a quarter that saw 540,000 feet of expirations. So an unusually high quarter of expirations matched with an unusually high amount of early terminations. Now I’m going to stop short of trying to pinpoint for you what that implies in terms of where the 91.7%, let’s say, on in-service depending on what metric you want to point to. But I’m going to stop short of trying to pinpoint where that ends up on the year. But I can say this. I think it’s fair to expect that we’re not going to continue to see anything like 180 basis points of sequential downtick in lease percentages throughout the balance of the year.

Mark, can I add to that? James, it’s important to note that really, despite what Mark just said, our sequential drop was in line with our peers’. But I think it’s – more noticeably, if you look back year-over-year, that is to say throughout the pandemic, and you look at our lease percentage over this past year, it certainly is far more favorable, I think, than our peers’ on a year-over-year basis.

For sure.

Okay. Thank you. That’s helpful. So is there an occupancy number included in the 2Q guidance?

Well, we didn’t guide to an occupancy number, no.

Okay. Great. Thank you. And then just a couple more. I guess the first question people have been asking about is, Victor, any interest in a tracking stock for the studio business? It’s been a hot topic lately.

Yes. I think, listen, we’ve talked about that in our growth patterns around that business. It’s something that we’ll – I think we’ll revisit as we continue to grow that portfolio and platform with Blackstone.

Okay. But nothing imminent?

No.

Okay. And then last, a little nitpicky, but your NFL lease, can you – is there an update on the plans there? Or is it their expiration?

So their expiration is at 2023. We’ve had – we’ve engaged in a brokerage company for some time. We’ve got some very good activity on that space by a couple of single-tenant users, and it’s a great space. And we also have an additional plan that we are looking at that would cause it to be completely redeveloped. So we’ve got opportunities on it, but we’ve got – we definitely have some time. Go ahead, Art.

Yes. And to add to that, yes, so it’s – their expiration is end of 2023. They have an early term at the end of 2022 that they have to exercise in, I believe, September, something like that. They have to be up and running. They have to run both facilities at the same time. And the ability to do that remains to be seen, right? So at this point, I can’t tell you with certainty that they’re going to be out. But word on The Street is they’re going to be up and running. So let’s wait and see on that.

Okay. Thanks, everyone.

Thank you. Our next questions come from the line of Dave Rodgers with Baird. Please proceed with your questions.

Hi, yes. Good morning out there. Maybe, Art, start with you on the Palo Alto renewals that you talked about. You guys made a point that those were obviously at market. How much of that market changed versus your expectation? I guess were those always going to be above market? Or has the market moved, I guess, substantially against you in the last year or so? Just some color on that would be helpful.

No, absolutely, kind of right on track. I mean those were the highest – some of the highest rents in the country, certainly the highest in our portfolio. And our expectation was really right on.

Okay. So I guess to take from that commentary that the market rents’ kind of net effect is – haven’t really moved that much against you relative to maybe where you were at the beginning of 2020? I mean just making sure I’m understanding your comments correctly.

That’s right. That’s absolutely right.

Okay. On the 40% coverage, obviously Dell was the big one that we were all looking at. Anything else that’s of size in there that maybe just doesn’t qualify for the top tenant list that’s kind of on your watch list as you look for the rest of the year?

Yes. I mean I guess the next biggest in line is Absolute Software in Vancouver, call it, about 46,000 square feet. We’re in negotiation – we’re in leases actually with them in a pretty healthy mark. It’s about a 40% mark. And then it drops off after that. And so again, it’s – we’re in discussions with – there are some downsize discussions. Tenants are still trying to figure out how they’re going to utilize their space. And a lot of the expirations are kind of weighted toward the end of the year, and they’re all small tenants. And so we’ll continue to do kind of hand-to-hand combat to make sure we can keep them in some capacity.

Yes. And David, it’s Victor. On Dell EMC, we knew this was coming. We just didn’t know how much. It was a variance between what they took and taking less or more. But they gave us a heads-up way early on that they were downsizing because it’s – it wasn’t a Pioneer Square Seattle play, it was a Dell EMC play across the board for the country.

Got you. Thank you for that. And Victor, on the studios, can you kind of tell us where we’re at in the studio recovery? I know we had talked previously about maybe going to 24-hour shifts and getting business back. You’ve given us some color with the GAAP same-store NOI expectations but maybe just some added color around that.

Yes. Dave. Listen, we are – so I don’t want to get into specific details, but we are seeing full production right now with the exception of, obviously, occupancy of office at its highest level right now. And we’re starting to see somewhat of a market that gauges based on seasonality because this is the quarter that has typically been the slowest. And so far, we’re not seeing that. We’ve also just engaged with two great tenants and signed new leases in sound stages with them in our portfolio that is – one extended for five years and one extended for two. And so we’re seeing the activity as high as it’s been. And from a production standpoint, it is on location – sorry, it is on sound stage location versus on location more. But now we’re seeing the on-location shoots going, so they are running greater than five days a week, which is what we thought would happen. So all the benchmarks are the same, as we anticipated to be going, and we’re just hopeful that it’s going to continue through this quarter and early next in the seasonality aspect. And we have no reason to believe that it shouldn’t. That’s henceforth why our numbers were different this quarter than we anticipated on the studio side.

Great. That’s helpful. Last maybe just for Harout on the reversal of revenues. Can you give us a sense what the cash and straight-line impact were to this quarter from those reversals? How meaningful they were?

Sure. It was actually almost all cash. So it was tenants that have started to repay their rents in accordance with repayment agreements that we already have, and it was about $2.6 million.

All right. Thank you all.

Thank you. Our next questions come from the line of Nick Yulico with Scotia Bank. Please proceed with your questions.

Thanks. Hi, everyone. So I just wanted to go back to the comment that I think, Art, you made about the leases that are expiring this year, being, I think you said, 15% below market. Now I wasn’t sure if you meant that you’re actually going to get a positive 15% releasing spread. Or what – for leasing the rest of this year or if you were talking about something else.

No, that’s exactly right, Nick. You got it exactly right.

Okay. All right. And my second question then is also just going back to the pipeline. I think you said there was 1.3 million square feet of pipeline. And I just wanted to understand how we should think about, I guess, historically what type of conversion rate you get on that? Because I know we’re all trying to figure out where occupancy is heading or at least the leased rate in the portfolio. And you do have – just using the full – not your share number. You have about one million square feet of expirations this year. And so just trying to think about that 1.3 million versus the expirations. And does this mean that you’re just – you’re going to get a higher leased rate at some point this year? Or is it – or is there some sort of conversion rate on that 1.3 million pipeline?

Yes. So that 1.3 million square feet is skewed toward the renewal – the renewals for the remainder of the year, about 65%. The answer is, is that, yes, I mean, over historical levels, we’ve had about 1.3 million in the pipeline. So the good news is it’s starting – the pipeline is starting to get healthier. And of course, we always want more in the pipeline. But our conversion rate is always – has been historically pretty good because we don’t – we define our pipeline as deals in deep in the negotiations, and so – versus others who may include inquiries and tours and things like that. So I feel pretty good about our conversion rate.

Okay. So just to be clear, sorry, the pipeline does – you said it’s mostly related to renewal activity. And so it would include – when you’re talking about the 40% coverage on expiration, that’s inclusive of that 1.3 million number?

That’s right.

Okay. All right. Thank you. Take care everyone.

Bye Nick.

Thank you. Our next questions come from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions.

Thank you so much. Good afternoon. I just want to, maybe Art, build on that or clarify the 40% coverage comment. Basically, are you saying you have about six percent of the portfolio rolling, and you’re very confident about 40% and you’re still negotiating with the rest? Is that how we should take it?

Yes, that’s exactly right.

So I guess I’m – typically, like at least – so I would imagine that 40% and I’m sorry I’m getting granular. I’m not trying to get like an occupancy number. But I’d imagine like leases that are – like this quarter or next quarter, you probably have already made decisions, right? It’s more about the leases in the fourth quarter that you’re still debating or discussing?

No, third quarter – yes, third – well, as I said, third quarter and fourth quarter is heavily weighted – a lot of those tenants – well, the average tenant size is probably 5,000 to 6,000 square feet, and we’re still in dialogue with them as they’re trying to really figure out what their needs are. So yes, that’s – there’s a lot – a lot needs to work itself out, but we’re in active discussions with all of them right now.

Got it. Okay. That makes sense. If I look at the renewal – the spreads obviously were decent on the office side and the studio side. You just mentioned you have 15% potential mark-to-market on the remainder of the roll. But if I just look at the incentives, especially the TIs and the free rents, to me, at least, it seemed like they ticked up versus kind of a, call it, trailing four quarter or six quarter, whatever number you want to take. I’m just wondering, was there anything in the – specific about the leases that were new leases? And especially talking about the new lease TI, anything specific about that, that would have caused it to jump up a little bit?

Yes. Vikram, it’s Mark. Absolutely. I think it’s important, by the way, to recognize that we’re talking about 138,000 square feet of leases. So it’s not a large sample size to draw broad conclusions out of like our incentive costs going up and so forth. It’s just not a big enough amount of leases quite yet. But within that, over half is the lease we signed with Company three at Harlow, which is first-generation TI space on a 12-year deal. And so naturally, it’s going to have somewhat higher tenant improvements. Those came in at $85, and leasing commissions will be on the high side, too. So those were $27 a foot. And that’s – again, that’s over half of the 138,000 feet. If you simply remove that deal, your new lease incentive costs drop to $72 a foot from the $92 a foot, which is actually below the per-square foot total running through full year 2020. There’s also a few other anomalies. There’s a little bit more than 13,000 square feet that we did on VSP space. And when VSP space is at total gut and reduced space and tends to come out a bit on the high side on TIs – on – the weighted average TI on that 13,000 square feet of VSP is $119 a foot. So when you further adjust for that, all of the remaining new space actually drops to $58 a square foot compared to the $92 reported, which is like $20 lower than the full year 2020 per-square foot average. So it really is just a byproduct of the – what the composition of that 138,000 square feet is and not worth thinking of as a trend or some sort of indication that incentives are on the rise.

Thank you. Our next questions come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.

Hi. I think it’s still good morning out there. So first, just I want to go back to Manny’s question on guidance. And Victor, I’m not asking for a guidance range. But as we think about the components that go in there that are the variables, there’s the cash payments that – either from tenants who are on a cash basis who are paying or the catch-up of rents that are owed. So one, just curious where we stand on quantifying that. And then two, you mentioned variable items like parking or after-hours utilities or things like that. I imagine that grip is in there, although it sounds like the studios are pretty well full production. So I’m guessing that we’re seeing all the extras on that. But just curious, what are the variables like as we think about quantifying? So how much from the cash rent side and then how much are we still missing on parking, after-hours utilities, et cetera?

Well, let me tackle the second one. For the parking/after-hours utility. I think we’ve been pretty used to saying is about $0.02 a quarter that’s still negatively impacted. So there’s upside there that we haven’t seen yet, right? So assuming tenants come back sooner, that number will be in our numbers sooner. If they continue to delay, that number will continue to be delayed. So that one is straightforward. The cash rents, those are more temporary. We had a large amount that had to happen this quarter, which was a big surprise. But we don’t anticipate having these big chunks on a go-forward basis. There are just a couple of very specific tenants with specific negotiation happening that helped us collect that. So – and then finally, to your point, yes, the studio revenue can still be pretty variable. There was upside this quarter. I think we’ve built in from that momentum in the numbers that we provided. But that could go either way, again depending on the activity and anything else that can change as a result of COVID.

Alex, if I can just add to the comment about the cash rent collections. As Harout points out, we had some unusually high repayments that will be really onetime repayments because they were catch-ups. If you look at the amounts that we collected of previously deferred rents over the quarter, the total collected is in the neighborhood of $200,000 call it, $250,000. So of the $2.6 million we – a lot of it isn’t made up of previously contractually deferred catch-ups. We collected 99% of what we would do in terms of deferred rents. But it’s not – you shouldn’t look at that as the absence of what that big cash catch-up was. It was important, but it wasn’t the – anywhere close to the majority of it.

Okay. So just in sum, it sounds like the $0.02 of the parking and after hours, it sounds like that’s the biggest piece, right? So that is going...

Yes. Absolutely. That’s – yes.

Okay. So in other words, as we’re thinking about our model on earnings, the cash impact from rent collections is minimal. Obviously, the studios is going to be what it is. But really the missing link, if you will, is that $0.02 a quarter?

Right. And we’ve – through all the disclosures and comments that Mark has made in the past in terms of our collections, that would be expected, right? We’ve been collecting 97%, 98%, 99% of our rents. So therefore, the deferred amount isn’t going to be that much just based on that math.

Right. And the retail stuff that, like, whatever, 50%, that is, I guess, de minimis in the scheme of things?

Yes. At this point, retail is only 2.2% of ABR...

Yes.

Right? So, I mean, if we’re collecting 50-plus percent of it, which we are, it’s about one percent.

Okay, cool. Second question is One Westside. Obviously, you guys are getting close to opening it or delivering it a year from now, in the first quarter of 2022. Victor, I’m sure you don’t like negotiating publicly on the phone. But still, just curious, is that something that we should think about a buyout occurring before the project is delivered? Or that is something that, if it does happen, would be something after first quarter 2022 after it gets delivered?

Well, let me say it this way, Alex. We – there’s no trigger on a buyout until it’s stabilized. And so unless we or Macerich go to each other and offer it up and the other party agrees. So I would say it’s safe to say that the conversations are fluid. And there is more than just the two of us interested in that piece. But I can tell you we’re not selling our piece, so.

I would – I wouldn’t think that you would then. But interesting. Sounds like it could be a JV or something like that, but helpful. Victor, listen, thank you very much.

Thanks, Alex .

Thank you. Our next questions come from the line of Venkat Kommineni with Mizuho. Please proceed with your questions.

Hi. Good morning. On the studio segment, in terms of marketing and trying to prelease the new developments at Sunset Gower and L.A., how are tenants differentiating between those developments? Is timing of delivery the main factor? Or are there some nuances to those stages that are catering to different production? I mean...

Well, I think – and I think the differentiation is based on demand. And the demand right now is somewhat being fluid because candidly, as we’ve mentioned before, the production side has been up and running in full swing, but the office occupancy side has not. And so until some of these tenants figure out how much space they really need – and the density aspects that we talked about, it’s going to be based upon their interest, one; their need, two; and, most importantly, delivery. And I think that seems to be the, the hidden aspect that nobody seems to talk about, which is fully entitled projects are a lot better off than those who are just publicly saying, hey, we’re going to come out and build a studio or we’re going to build office space and a studio without entitlements. We still live in probably the most entitlement-constrained marketplace in the country, and these things do not happen quickly. So regardless of where the conversations are with us relative to the tenant demand, we are still positioned extremely well because we’re fully entitled in both projects.

Great. Thank you. And one for Harout. Looks like kind of straight-line rent above below-market rents kind of ticked up sequentially about $8 million after declining for the past four quarters. Was that primarily driven by the acquisition of 1918 8th? Or was there something else contributing that? And how should we think about that?

There’s a few items – no, thank you for that. There’s a few items contributing to that. One is the acquisition of 1918 8th just because of the below-market nature of that asset. The second is a lot of our leases have – let me just put it that way, a lot of free rent in the first quarter, and so straight-line rent typically ticks up as a result of that. And so that’s the reason of the – for the increase.

Great. Thank you.

Thank you. Our next questions come from the line of Daniel Ismail at Green Street. Please proceed with your questions.

Great. Victor, you mentioned changing density requirements a few times throughout the call. I’m just curious – and I know this is a difficult question to answer, but what do you think current density is in your portfolio now? And what do you think we may be trending to?

Well, I just – right now, it’s nothing, right, overall. But yes, you mean going back to when we were fully occupied pre-pandemic, Daniel, I think it was probably somewhere in the – it could be as low as 150 to 175 feet per. And I think we’re talking about, on average, and I could be low, 250. So it’s a 40% increase. And it may be more. But yes, that’s sort of the number that people were talking about to us specifically. And as I said, I’ve been touring some of our space that people are getting ready to occupy, and it is like that. It’s half of what it was. I do think that’s the major upside where people are not looking at office the way they should be but where the future is. We – everybody is talking about a massive increase in employment, specifically a move-around. And we know our tenants, the largest ones, Amazon, Netflix, Google, are all looking to employ thousands of people in our markets alone. In order to put those people in the space they currently have, they’re going to need more space, right? And so that’s where the upside is going to be.

And then on the leasing activity, are you noticing any trends of tenants trading up, say, post-COVID from Class B to higher-quality buildings?

Yes. Daniel, I mentioned this in the last quarter. We are seeing it, and Art intimated a little bit on the professional tenant side, which typically we’ve not seen a lot of professional tenants coming through the portfolio. We’ve got a couple of full-floor users, specifically law firms that are looking to – we’re in leases with now in the Valley, and they are moving up. I mean, they’re moving from Bs to As. And we’re seeing that because of the opportunity in certain marketplaces and certain asset classes that aren’t as high rents as they were. I’m not so sure that’s merit enough for a trend. But clearly, it will attract people who maybe otherwise it never had the opportunity to attract.

And just last one for me. You mentioned being in the process of closing on a few acquisitions. I’m just curious on the studio side, what are you currently underwriting for unlevered returns for studios? I believe you mentioned, say, on the development side having mid-sevens to high-eights-type returns. What does that look like on the new acquisition front?

Unlevered or levered? You said...

Unlevered.

You said unlevered? Yes, I mean, I think we’re looking at stabilized 7%.

And generally – presumably, this comes with development upside, too, I would guess?

Yes. And economies.

Got it. Thanks, Victor.

Thank you.

Thank you. Our next questions come from the line of Rich Anderson with SMBC. Please proceed with your questions.

Thanks for hanging with me. And good afternoon. So just to make sure, Harout, I got this right when you laid out the guidance for the second quarter, should we start with just sort of backing out the $2.6 million in the second quarter and then grow from there? Is that the right way to think about it?

If you heard $2.6 million of the onetime, no, we just try to keep it as simple as possible. If you start off with our reported numbers and make the adjustments that I provided, it’ll get you to what we think Q2 may look like.

Okay. Okay, but that was a onetime kind of event, right? Maybe I’m just – maybe we can take that offline. I want to get into too much granular detail on that.

Oh, that is true, it’s a onetime. But again, that’s – when we gave the numbers, we factored that in.

Okay. Okay, got – Oh, okay, understood. All right. And then a question for Victor on the strategy to grow studios. I just got off a call earlier today where there was supposed to be a deal, but COVID kind of – it’s a completely different asset class, but COVID kind of disrupted the negotiation and buyer and seller could no longer come together. And I’m wondering if that kind of has been happening in the studio space. Had you probably been able to close some stuff to this point had it not been for the pandemic and perhaps seller just couldn’t come to a number with you because of these unknown factors? Is that – is it fair to say that it’s been kind of disruptive early on in terms of your ability to grow the studio from here, studio business from here?

I wouldn’t say so, no, Rich. I think, listen, things are just taking a little longer. I don’t think it’s been based upon disruption around the pandemic. I think it has been based upon people actually being integrated fully up and running and ready to go. And that did take some time, and that was a six to 12-month process. But the activity is pretty much normalized now, and the markets are pretty fluid in terms of the bid-ask and what sellers and buyers are interested in doing. So I – whatever potential slow process, I think it’s behind us.

Okay, sounds good. Thanks. A - Victor Coleman Thanks, Rich

Thank you. There are no further questions at this time. I would like to turn the call back over to Victor Coleman for any closing remarks.

I appreciate everybody’s participation and questions. And once again, I want to thank the enormous effort of the entire Hudson Pacific team and its dedication to making this company what it is today. So everybody be safe, and we will talk to you next quarter. Thanks so much, operator.

Thank you. Thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.