Hudson Pacific Properties, Inc. (HPP) Q4 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Hudson Pacific Properties Fourth Quarter 2022 Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Good morning, everyone. Thanks for joining us. With me today on the call are Victor Coleman, our CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on 8-K with the SEC, and both are now available on our website. An audio webcast of this call will be available for replay on our website. Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss our 2022 accomplishments and 2023 priorities, along with macro trends across our markets. Mark will review our office leasing and development highlights and Harout will review our fourth quarter financial results and 2023 outlook. Thereafter, we'll be happy to take your questions. Victor?

Thank you, Laura. Good morning, everyone, and thanks for joining us. Let me start by highlighting Hudson Pacific's 2022 accomplishments, which align with the 5 key objectives centered around leasing, capital recycling, development, balance sheet management and ESG that I outlined on our call at this time last year. Let me start with leasing. We leased over 2.1 million square feet in 2022, just shy of our long-term average and up more than 300,000 square feet from 2021. We achieved positive GAAP and cash rent growth of 14% and 4%, respectively. We executed on all 4 of our planned nonstrategic asset sales, closing 3 last year for a combined $144 million of gross proceeds with our fourth Skyway Landing now closed for an additional $102 million of gross proceeds for total dispositions of $246 million. As part of our efforts to grow our portfolio, the world-class amenitized collaborative sustainable office and studio space, we purchased Quixote a leading stage and production services provider to an off-market transaction, and we made good progress on our 2 under-construction studio and office projects totaling 780,000 square feet, while securing entitlements for 2 future projects totaling 1.6 million square feet. We now have $1 billion of total liquidity and with a focus last year on using proceeds from asset sales and our successful $350 million green bond offering to pay down and refinance debt. We also reduced our interest rate exposure through caps and swaps to maintain our total fixed and cap debt at 85-plus percent. We continue to return capital to our shareholders throughout the year, repurchasing approximately $240 million of our common stock and maintaining our dividend with a stable full year AFFO payout ratio of just over 60%. We also continue to achieve sustainability and ESG excellence, ranking number one, in the office companies in the Americas by GRESB and winning NAREIT's Leader in the Light Award during 2022. And most recently, we were recognized by Newsweek as one of America's most responsible companies and included in the 2023 Bloomberg Gender Equality Index further aligning our platform with stakeholders prioritizing sustainable and equitable workforces. I'm also very proud of the Hudson Pacific team and our ability to execute and work towards creating long-term value for our shareholders in this complex and highly dynamic environment. Our strategy places Hudson Pacific at the confluence of several macroeconomic trends that we believe are transitory. Therein lies the opportunity as we leverage our unique industry expertise and full-service platform to position our company and world-class portfolio optimally for the next cycle. We continue to see utilization across our portfolio and prove with multiple assets trending towards 50% to 75% peak occupancy. Utilization remains very tenant and thus asset specific, but we believe growing employer mandates and employee willingness to return, especially in light of the recent layoffs will result in even higher utilization and reemphasize on being in the office to improve workforce productivity in the coming year. Looking at the 5 largest layoffs among North American tech companies over the last 6 months, only about 15% of those layoffs based on loan notices, impacted our U.S. markets accounting for about 1% of the company's total workforce. While hiring among tech and media companies was notably declined in the recent months. We recall these industries had massive hiring gains throughout the pandemic with little or no augmentation of their office footprint. In our target U.S. markets, employment levels in tech and media related sectors are still at or well above pre-pandemic levels, reflecting the inherent long-term secular strength in the case of Seattle and the Bay Area as much as 15% above. Software and IT job postings are still 20% to 25% above in the pandemic levels according to Indeed. And we know as big tech rightsizes, talent will spin out and build the next high-growth companies, the next Google or the next Amazon. VDC capital firms raised about $160 billion in 2022 and have record amounts of capital to invest in Series A and B rounds, and they're still very active. This will give rise to innovative small and medium-sized companies that will ultimately expand within our portfolio and beyond just as they've done in past cycles. As of the fourth quarter, top studios, including Apple TV, Netflix, Disney, Amazon and others, we're still projecting to spend a total of $140 billion on content this year, up 11% from last year to a new high. Original content spend, which typically accounts for 20% to 50% of the total spend and is perhaps a better indicator of production was expected to increase by a more moderate 2%. However, we did see production activity moderate in the fourth quarter, particularly here in Los Angeles, which we attribute to several factors, including studios growing austerity measures, the Amazon MGM and Discovery WarnerMedia acquisitions and caution ahead of the late spring Studio union contract negotiations as well as annual seasonality. We'll continue to monitor these trends but remain confident in the long-term fundamentals around content creation and the ability of our platform through a combination of long-term leases and increasingly diverse geographic footprint and product offering to meet the current and new client priorities and preferences. At Hudson Pacific, we're building upon a strong track record of execution, be it our ability to uncover opportunities, deliver premier office and studio space, execute leases and grow rents. And in so doing, we've set the bar when it came to creative, collaborative, high-quality, high-touch, sustainable work environments and related services to inspire the world's most innovative and creative companies and their employees. As these industries evolve and grow once again, we will be at the forefront of this next shift. We will leverage our platform seasoned cycle team that's fully tested our full service programs, vertically integrated platform and our unique strategy and value of our relationships to continue to expeditiously optimize our portfolio in ways that we could create significant value for shareholders. Looking ahead to '23, our priorities are as follows: to continue to successfully address our 2023 office lease expirations with the goal of preserving rent and occupancy, to execute on our near-term value creation office and studio development opportunities, specifically Sunset Glenoaks and Washington 1000 to further strengthen our balance sheet, by delevering through asset sales and reducing interest rate risk through hedges, and finally, to continue our ESG and sustainability leadership which has become a hallmark of our businesses and how do we create long-term value for our shareholders. Now I'm going to turn the call over to Mark.

Thanks, Victor. Our leasing team continues to hustle. And in the fourth quarter, we signed 517,000 square feet of new and renewal leases. This resulted in over 96,000 square feet of positive net absorption and drove our in-service office lease percentage up 40 basis points to 89.7%. This included a 100,000 square foot, 10-year lease with a large publicly traded software company at Metro Center in Foster City, which was not only the largest deal in our portfolio for the quarter, but also the largest along the entire San Francisco Peninsula and a win for the team. Our activity also included the full building 47,000 square foot backfill of Lockheed Martin with a 17-year lease with Stanford at 3176 Porter in Palo Alto, and a 40,000 square-foot 10-year renewal with SFMTA at 1455 Market in San Francisco. Both deals addressed 2 of our larger 2023 expirations. Our GAAP rents on fourth quarter deals were up 16%, while our cash rents were down 0.5%, driven primarily by Stanford's renewal at 3176 Porter. Adjusted for the Stanford lease, cash rents were close to 3% higher. Note that NFL, which vacated 10900 and 10950 Washington on January 1 of this year, is still included in our fourth quarter lease percentage. Although we continue to negotiate with a single tenant for the entirety of that asset, we're actively exploring redevelopment of the property as residential to take advantage of its prime Culver City location and pending Up Sony. This is a decision we expect to be able to make in the coming months as we review our options. Even as we continue to sign significant leases, we have 1.9 million square feet of opportunities in our leasing pipeline at multiple stages. We also currently have activity on both of our only 2 large block expirations in 2023. Specifically, we have 60% coverage on block space at 1455 Market in San Francisco, which expires in the third quarter of this year. We're negotiating with an existing 25,000-foot subtenant and a new tenant with a 250,000-foot requirement. If we can close on these, we'll have largely addressed our only material expiration in downtown San Francisco this year. We're also in discussions with Amazon to renew their fourth quarter 140,000 square foot expiration at Met Park North in Seattle and expect to have more visibility after their plans by the third quarter. We currently have 42% coverage on our 2023 expirations with an average tenant size of roughly 9,000 square feet. Approximately 50% of these are located in the Peninsula and Valley submarkets where we're seeing resilient, small to midsized tenant demand for our assets. According to CBRE, in the fourth quarter along the Peninsula, over 70% of leases signed were under 5,000 square feet. And in the Valley, over 60% of deals were under 10,000 square feet. We're staying disciplined in our approach to new development as we monitor market conditions. Our under construction development pipeline consists of 2 attractive and unique projects. Our Burbank adjacent 7-state Sunset Glen Oak studio, which will be the first purpose-built studio in Los Angeles in over 20 years is on track to deliver this year. We're in discussions with several tenants regarding multistage, multiyear commitments, including some single tenant users for the entire lot, but we're also prepared to leverage a more traditional show-by-show lease model for some stages. Construction also continues at our Washington 1000 office tower, which will deliver next year and is well positioned as the best of the best product in Seattle's Denny Triangle submarket. Over the last decade, we've established a proven track record of excellence in development with our platform and projects winning numerous awards from the likes of GRESB, NAIOP and ULI. Apart from our 2 under construction projects, we continue to progress entitlements and designs for the balance of our 3.6 million square foot pipeline of potential development opportunities, which contains unique projects like Burrard Exchange, which will be one of North America's tallest mass timber office towers and Sunset Waltham Cross, which will be one of the largest studio facilities in the U.K. We're taking this time to ready our pipeline to ensure we can commence construction and create value, but only when the timing is right. With that, I'll turn the call over to Harout.

Thanks, Mark. Our fourth quarter 2022 revenue increased 12.2% to $269.9 million compared to fourth quarter 2021, primarily driven by income generated from our Quixote acquisition in August 2022 and the commencement of Google's lease at One Westside in December 2021, partially offset by Qualcomm's vacancy at Skyport Plaza in July 2022. Our fourth quarter same-store property cash NOI increased 2.7% to $126.9 million compared to fourth quarter 2021, primarily driven by increases in revenue at 1998, 11601 Wilshire, 45 market and Sunset Gower Studios, partially offset by Qualcomm's vacancy at Skyport Plaza in July 2022. Adjusted for Qualcomm, our same-store cash NOI would have increased to 6.7%. Fourth quarter FFO, excluding specified items, was $0.49 per diluted share compared to $0.52 per diluted share a year ago. Fourth quarter specified items consisted of transaction-related expenses of $3.6 million or $0.03 per diluted share compared to transactional expenses of $1.5 million or $0.01 per diluted share and a property tax reimbursements of $0.7 million or $0.00 per diluted share a year ago. Fourth quarter AFFO was $62.1 million or $0.43 per diluted share compared to $72.5 million or $0.47 per diluted share a year ago. Our payout ratios for the fourth quarter and year-to-date were 58% and 61.4%, respectively, underscoring that our dividend remains well covered. We continue to execute on financing and asset sales to fortify our balance sheet. At the end of the fourth quarter, we had $870.8 million in total liquidity comprised of $255.8 million in unrested cash and cash equivalents and $615 million of undrawn capacity under our unsecured revolving credit facility. We also had another $98 million and $59.3 million of undrawn capacity under construction loans secured by One Westside, 10850 Pico and Sunset Glenoaks, respectively. Upon repaying our $110 million Series A notes in January 2023 and using $102 million of sales proceeds from Skyway Landing to pay down unsecured revolving credit facility this February, we now have $1 billion in total liquidity. In January, we also entered into interest rate swaps on our $172.9 million pro rata share of our 1918 loan and $351.2 million net pro rata share of our Hollywood Media portfolio loan. Accounting for these debt repayments and interest rate swaps, the composition of our debt as of December 31, 2022, on a pro forma basis, results in fixed debt of approximately 82.8% and fixed end capped debt of approximately 86%. We currently have $210 million of debt maturing towards the end of 2023, which can be repaid from our line availability. This includes our $50 million Series E notes maturing in mid-September and $160 million note of Quixote secured debt maturing on December 31. Now I'll turn to our outlook for 2023. As always, our guidance excludes the impact of any acquisitions dispositions, financings and capital markets activity. We're providing an initial full year 2023 FFO guidance range of $1.77 to $1.87 per diluted share. There are no specified items in connection with this guidance. We expect same-store property cash NOI to grow -- growth of 2.5% to 3.5%, which reflects the additions to the same-store property pool of One Westside, 5th and Bell and Harlow and the removal of 10900/10950 Washington and Culver City, which we, for guidance purposes, designated as redevelopment to residential. Our 2023 full year guidance reflects for the first time, the full year benefit of our Quixote acquisition, which occurred in the third quarter of 2022. However, guidance does not reflect the potential disruption in studio production activity beyond the slowdown mentioned earlier, in the event, ongoing studio union contract negotiations lead to a strike and halt on production, which could occur as of May 1 and/or June 30 of this year. Now we're happy to take your questions. Operator?

[Operator Instructions] Our first question is from Michael Griffin with Citi.

Maybe we can just start off on the guidance for '23. Victor, in your prepared remarks, you talked about preserving rent and occupancy for the year ahead. So I mean, should we read this as you expect the occupancy sort of to be flat? And then as it relates to the same-store, I mean it seems like it's more a function of just moving assets in and out of the same-store pool as opposed to more organic growth. I guess, do you have a sense of what that number would be if the NFL building was included in the pool this year?

Well, let me start, and I'll get the guys to sort of jump in, Michael, on your second part of your question first. So we're not moving assets in and out. I think it's important to note on the NFL asset, we have limited activity from single building users. And when we recognize the fact that the interest was not as high as we anticipated in a marketplace that we know is in high demand for residential and the opportunity for the upzoning in Culver City, it's now being evaluated by our team, which is the highest and best use. The return on that asset would be obviously much higher in the residential capacity. But we're going to evaluate it. We'll keep you posted on what we think the returns are going to be in the construction costs and the likes of that. And whether we do it or not ourselves is TBD. That being said, the asset, if we had kept it in on a same-store basis, that asset was well below market anyway in terms of the NFL numbers. And I do think that we're probably looking at it -- we were always probably looking at a '24 occupancy, physical occupancy of that asset as the year went by in '22, and we saw where the activity was. Harout, do you want to comment on that?

Sure. What we don't want to do is really do what you're trying to do right now, which is selectively add or remove certain assets that comply with our same-store policy, right? So in -- regardless of these assets, they were supposed to come in as our policy states, which is Harlow, One Westside and 5th and Bell and that's all being removed is because of a change in use. You noticed that Skyport is in the same-store because there is no change in use in the asset. And I don't think selecting one asset versus another to see what the impact of same-store is beneficial to anyone. However, if we ignore both Skyport and One Westside and leave 10950/10900 out our same for cash NOI would go up by 5%. So I do think that cherry picking certain assets doesn't move any of us. This is our same-store pool. And this is what we've guided on.

Right. I understand that. But I guess my – sorry --

We are -- I was just going to segue over to your question on occupancy. We started last year with 2 million feet of expirations beginning in '22 and signed 2.1 million square feet and that kept our lease percentage close to 90%. This year, we start with less expiration than we did last year. We're about 1.6 million square feet, but there are some pretty sizable expirations as part of that NFL and block being 2 decent-sized expirations. And so our view is that -- and we have 2 million feet of activity in the pipeline now or close to that. So we expect the full year leasing activity to be healthy on -- but our view is trying to pinpoint some ending year lease percentage, a bit of flow therein, because it's so tied to our success of either backfilling one or, let's say, the block space, for example, can fairly materially move the needle as of any moment in time. But I think we're set up to have a really successful year in any event.

Right. And again, I don't want to hark on the moving assets [indiscernible]. It just seems to me that if there is potential office demand for NFL? I mean, I know you have your own same-store policies, but if that were to get leased, one would think that, that should still be in the pool. But I understand you have your own metrics for quantifying which is in or not in the same-store pool. And then one more, if I could, just quickly. Victor, you mentioned in your prepared remarks just a comment on transitory effects in the environment right now. I guess can you expand on that? I mean, is the long-term assumption that we go back to what the office was like at a pre-COVID level? I just found that they used the word transitory is sort of interesting, just given we're sort of in this what I would interpret as more permanent sort of hybrid -- remote hybrid work environment. If you could expand on that a bit, that would be great.

Yes. I mean listen, I could sort of tell you what we're seeing on the ground region or region all the way through. But the reality is we are definitely in the latter stages of post-COVID and some sense of normality where the majority of our tenants are 3 days plus a week and some are fully up to 5. Some of our tech tenants are fully 5 days a week. Some of our fire-related tenants are 3 days a week. So on the average, we're seeing that. And we're seeing that shrink -- that number shrink from basically an overall 75% pre-COVID occupancy level -- a physical occupancy level to probably -- I don't know where that number is going to fall in place. But we're sort feeling it's going to be in that 60% to 70% anyways. And if you look at our portfolio today, I mean, we're at -- in Vancouver, we're at 75%. We're -- in Seattle, we're roughly at 75%, in the Peninsula, we're between 45% and 60% in our portfolio. San Francisco, we're looking around 25%. But if you take a look at the Ferry Building, we're at 75%. And so and in L.A., we've got assets that are 100%, and we've got our multi-tenant assets that are 50%. So the average is between 50% and 100%. So I do think that we're seeing a big shift. And that's going to continue to evolve as companies look to establish their presence both physically and then socially within their own environments and culture.

Our next question is from Dave Rodgers with Baird.

Yes. I guess first on the leasing, you talked about 42% coverage on the expirations for this year, and I think you said 60% of block. Does that include leases that you've already just signed? Or is this still leases that you're negotiating. I just wanted to try to get a sense in those 2 particular instances, how much of that activity is already done?

Dave, it's Art. Do you mean of the 42%?

How much of it?

Yes.

Yes. Most of it is in negotiation that we signed, I think, 3 deals, and most of that is in LOI stages right now.

Okay. Victor, a second on the union negotiation. Can you give us a sense, I guess, across the studio business of how much of that business would that impact for you? Is that Star Waggons, Quixote like the whole services side as well as kind of the services you're providing or sourcing within the studios themselves. And I guess how much direct impact do you get on expenses, maybe, let's say, versus just the occupancy hit shutting the studios down?

Yes, I'll start and I'm going to kick it over to Jeff Stotland because he's here also to sort of focus specifically on this. But yes, first and foremost, Dave, I mean, the unions negotiation between the 3 between SAG and DDA and Riders Union right now, it's an obvious hot button. Last time it was sort of -- contentious was right around 8. When we first owned our studios, we saw a 100-day strike -- it's a little bit of a land grab right now to see who's going to go first. Our preference, like everybody else is on the ownership, production side would be DGA because they seem to have great leadership and a direction. And so if they can get out of head and make a deal which is what we're all hopeful it may set precedent, but we don't know what's going to happen there. Specifically, we're looking time line May, June as some sort of emphatic time line when the actual strikes would occur. We obviously are not impacted by our sound stages that are on leases we are much more impacted on our operating businesses, which will produce content up until the strike occurs, and Jeff can get into a little bit more detail on that.

Yes. So if the strike happens, obviously, it impacts occupancy and utilization and it's a high fixed cost business, right? So once those impacts happen, obviously, it ripples through and it rolls down to our profitability. We have 2 different sides of the business, as you know, on the Sunset brand. Most of our business, 80%, 85% of it is under long-term lease. So really, the vast -- there's much less of an economic impact on the Sunset side. On the Quixote side, which is our collection of the stages that are under lease as well as the service codes, that business is maybe 90% show by show, not sort of a short-term lease. So not under that long-term lease model. All in, the whole portfolio -- the entire portfolio is roughly 50-50. But the 2 different businesses are pretty different. I guess the last thing I would say is we look at this as, obviously, it's not great, but it's obviously fully out of our control, and it's a short-term impact. So ultimately, we do believe if and when a strike happens we expect to recapture a lot of that demand, whether it's Q3, Q4 or '24, we expect to recapture most of it. So that's kind of how we think about it.

Just to recap that, about 50% of that could be at risk if all 3 are striking and the studio is shut down.

Yes. For the temporary period, yes.

Yes. Well, it's 50% of revenue. The impact to NOI would not necessarily be the exact same thing because of the cost nature of each business. But yes, 50%, about half of the revenue is under a short term and about half is under long term.

Okay. That's helpful. Last one for me. Just on disposition, appetite and desire to get assets into the market currently and get those closed, to continue to create liquidity for the business.

Listen, we have a few more that we are looking at. Market conditions will obviously dictate timing and pricing on that. Nothing is imminent. We did take our Arts District assets off the market last year and have not looked to revisit to bring them back at this time. But we successfully executed on our most recent disposition, which was last -- which was done this quarter, but we executed last year, and we closed it this quarter. So I think you could sort of anticipate that we'll let you know when we bring assets to the marketplace because we're not going to do them on our own. We'll bring third parties and it will be public, just like it was at the Arts District.

Our next question is from Alexander Goldfarb with Piper Sandler.

Great. Just continuing on the studio business, you guys have increased the mobile studio business. So just want to know more about that. We've gotten used to the way the regular or the traditional downstage business works through the year. But now that you have more mobile studios, I want to understand the seasonality of that? And then also, just the depreciation, more of that is not an add back. So Harout, just as we think about the guidance and what's in there, any sort of adjustments that we should be mindful to make sure that we properly account for the depreciation now that we have sort of a full year of the big studio -- mobile studio platform.

Thanks, Alex. So we provided that in the guidance section in the chart, we've kind of illustrate what our range is for 2023 in terms of the non add-back of depreciation or not real depreciation to be more precise. So that's in our guidance and the Q4 number is probably the closest to our run rate you'll see just because it has a full quarter of Quixote and obviously, the formerly Star Waggons and Zio products. So that's all in that number and the guidance is probably is our best indication of that.

Yes. In terms -- Alex, in terms of your first part of your question, I mean, listen, if you recall, when we first got into this industry and this business, we were really running show-by-show variability, and we converted over to long-term leasing. So it's exactly what it was. I mean as each show goes in and the success of the show, it will be based upon the success of the pickup. The biggest difference though today than when it was some time ago when we first bought these studios and whatever it was at 8 or 9 is that now the shows that go in on a variable basis, which are for the small screen, the series episodic versus features. They're almost inevitably always picked up for 2 years. And unlike before, it would be much more seasonality and filming would be starting sometime in early -- late spring, early summer and carry through till March, April, and there would be a hiatus. Now filming 24/7, 12 months a year. But we do see seasonality around the mobile studio business, specifically in December, usually, we see it again around August. There's been weaknesses in quarters at various different times. And we pointed that out. The stickiness is what's going to happen between the increase on location shoots and the amount of days there versus in our sound stations. And what we've tried to message around this is we're capturing both. We're capturing production on location now at a level of about almost 70% that's filmed specifically in Los Angeles. And then we're capturing location shoots in studios that are not just all of ours, but now our competitors and our friends studios because we control a substantial amount of that business.

Okay. Actually, that's helpful. The second question is just sort of L.A. has done a great job over the past several decades of diversifying its economy. I mean it still obviously content, but it's got a much deeper tenant base, if you will. Do you feel that Northern California and Seattle are too concentrated? And if yes, is there anything that the local communities -- business communities are trying to do to diversify? Or in your view, the upside when tech really works more than compensates for the tech downturns as far as owning and investing in real estate.

Well, listen, I would completely concur with your statement in Los Angeles. I mean I think people do think of LA as the city of entertainment, but really, it is the most diversified of all the markets we're in. And whether it's entertainment, whether it's tech, whether it's small business, whether it's fire related businesses, I mean the diversity of our tenants is much more apparent in Los Angeles. How that has trickled through our portfolio in the Peninsula, in San Francisco, in Seattle, it is evolving by just what you're seeing statistically in our portfolio and the leasing that our team did. So if you look thematically at 2022, currently, the makeup of our portfolio is about 40% tech. You know that. Most people know that. But if you look back on '22, we did about 300-plus leases. Of that, I think it was somewhere around -- from a number of leases, less than 20% were tech and from a square footage about 30% were tech. And if you look at the quarter, we did about 76 leases. And if you look at -- and this is portfolio-wide. And if you look about 17% of those leases were tech and about 30% square footage. So it's consistent that you're seeing the spread. Now what are communities [indiscernible] listen, at the end of the day, I can't sort of comment on the political environment and community community. But I can tell you, there is still a welcoming thought process for small business growth, specifically in California, specifically in the valley that is spearheaded and you saw my -- you heard my prepared remarks. I mean, the next Amazon or the next Google is coming out of the divisions of those companies with the way VC capital has always attracted those types of tenants that start small and hopefully grow big and become successful. And they're not all tech clearly, and they're not all entertainment. And so the diversity will be there. It just takes a little bit of time. But the genesis of capital is driven on the success of the companies, which in the history of Seattle, San Francisco and the Peninsula, these companies have been tech-related because that's where the success has come from.

Our next question comes from Ronald Camden with Morgan Stanley.

Just going back to sort of the same-store NOI question. Maybe just thinking about it a different way, is there a way we could sort of break it out that growth? And what's occupancy, what's bumps, what's free rent burning off? Just trying to get a sense of what's driving that 3% at the midpoint.

I don't know if we ever got that granular on our same-store disclosure I think I illustrated earlier where if you back out the big movers, which is Qualcomm, Google and I guess, NFL, we were still having a 5% increase of our same store, and I think that's just a product of either good leasing and/or ramp-ups and free rent burning off. Otherwise, I don't think we can get into the very granular detail, especially in our Northern California segment, which is an average occupancy of what, 5,000 square feet -- yes. So it's really hard to really break that down. But that's kind of the big picture of it.

Helpful. Does that then just yes, I think that's helpful. Just moving on to sort of the leasing, I think you talked about sort of the $1.9 million pipeline that's in focus right now. Can you talk about sort of what the tenants are saying? I mean you hit on the Amazon thing, which has been in the news and so for just how are you guys sort of thinking about that? How are those conversations going?

Well, let me sort of start by -- given the accolades of the leasing team. I mean 2 main square feet in '22 was literally end-to-end combat. And so when I just mentioned, Ronnie, that we did over 300 leases. I mean that was a lot of hard work. I think that's indicative of where we sit right now. We are still in a headwind position where tenants have choices. And so they're looking at the availability of space, the likelihood of the landlord to be able to write a check for TIs and the ability to execute at their time line, not our time line. And never before we've seen such a delay of tenants that are interested in the leasing space, but haven't committed because they don't have to until the absolute last minute. And if they're a leading space to come to our space or others, their current landlords are laying extend and hold over when times in the past, they said the holdover ratios are 150 or 200 over rent, and you have to pay that. Now they're waiving that. It's an absolute flat and you can take more time and make your decision. So with that as a backdrop, on our 1.9 million square feet in the pipeline, as Mark indicated in his prepared remarks, 400,000 feet -- sorry, 300,000 feet of that is 2 tenants at block. And so that takes us -- and there are 2 tenants, one's 250 and one is a little over 25%. Those 2 tenants, we are working hard on those 2 tenants. But if you take the next million fit, I can let Art sort of address that.

Yes. I mean, Victor, you're spot on. I mean, the 1.9 is a very healthy level, as Mark had indicated earlier, that we carry in -- be mindful of the fact that we had just finished leasing 500,000 square feet plus. And so our ability to reload the pipeline in this environment has been a feed for our team on the ground. And so we do anticipate the demand to be a healthy level going forward because of the successes we've had. But that remainder of the square footage that Victor was talking about, I mean, we're chiefly talking about tenants that are roughly about 6,000 or 7,000 square feet. And these tenants have dominated most of the markets, I will say, with the exception of Silicon Valley where it's still tech driven. All the other markets have seen an uptick -- a significant uptick over the last couple of quarters in fire and -- fire sector and professional service firms. And as a matter of fact, it really -- which was shocking 2 quarters ago, that set those 2 sectors surpassed tech in the Seattle market. So those are the types of tenants we're looking at right now. And as you might imagine, this demand generally favors our portfolio. Why? Because we have our VSP program, which is the market-ready suites that have been super successful. I think as we build them out, we've over time, least submit an 80% clip. And so that's why we feel really bullish about the small tenant to be back in the market.

Our next question is from [Camila Bonnell] with Bank of America.

So there's been a number of big tech firms coming out recently stating that they're planning to cut back on their office footprints, Google being the latest I know that your leases with Google are longer term, but I wanted to understand if you see any risks of subleasing or lease termination from them as they're your largest tenant in the portfolio.

Yes. Well, listen, we're in constant contact with Google, and we have obviously several leases with them. I think we have not seen any indication of subleasing in any of our assets with them to date. I think in one of our assets, we have an early term at the end of '24, which is Hillview, and I think that's about 200,000 feet or so. And they've had some chat about keeping half and maybe terminating half, but that's moved because it's the 3 different departments. That's moved around. I think that's the only conversation that I can recall that our team has had to date. And as I said, that's at the end of 20 --

2025.

Beginning to '25, thank you. So yes, that's -- [Camila] that's all that we know to date.

Okay. And from any other or any other tenants within the portfolio, any increased risk for subleasing there, too?

No. I mean listen, the only other one in the portfolio that everybody already knows about is Uber because they're at 1455 and they expire in '25. And into '25. They've been trying to sublease their space and one of the transactions that we're working on will include part of that, but that's it.

Got it. And can you spend a bit of time talking about the Skyway Landing sale you recently closed on the types of buyers that you were seeing? And any color around how pricing came out versus your expectations?

Yes. So I’ll just take that a little bit if you recall, we detenanted the building to approximately, I think, 30% occupancy over the last year plus in – on the ability for us to maybe convert this for life sciences for either ourselves to do or for a particular buyer. So the life science interest buyers were who was looking at this asset. I think we sold the asset for about effectively vacant for about 400-plus a foot. And so we’re pretty pleased with the number. And – and I think as a result, the execution was one that’s – in today’s marketplace, we did not entertain where we ask to carryback financing. So I think it was clean. Mark, do you want to add to it?

Yes. I mean just in case you want it for your numbers, that’s less than a 1% GAAP and cash cap rate on Q4 annualized. So it makes effectively no difference to our operating results going forward. And as Victor points out, we did north of $400 a foot on the sale. So good execution on that.

Our next question is from Nick Yulico with Scotiabank.

Going back to the same-store NOI guidance for this year, I wanted to see if you could break down the impact between office and studio for the components?

Yes. Nick, we're guiding without that. We don't think -- I mean, first of all, our peers are not separating out when they have multi or whatever in their numbers, right?

On life sciences.

On life Sciences. I mean, suffice to say, office is the vast majority of that same-store NOI. And to get to the 3% at the midpoint, office would have to be darn close to that number to begin with. It ought to give you a pretty good idea of the composition of the 2 numbers.

Okay. Got it. And then, I guess, just following up on that, in terms of I know you talked earlier about it's hard to forecast where the lease rate might be for the portfolio at the end of the year. But maybe you could give us a sense for an actual like a same-store office occupancy type of number that's embedded, the change in same-store office occupancy embedded in your same-store cash NOI growth.

Look, Nick, I respect the tenacity. But look, we didn't -- if we were going to guide to it, we would have guided to it.

Okay. All right. Just one last question is going back to 1455 market and the tenant, the prospective tenant you're talking about there. I guess at this point, are there -- is it solely reliant on that one tenant? And I think in a pithy might have said it's a government tenant. And so I'm just trying to figure out sort of the likelihood of risk of actually that deal getting done.

Listen, I can't tell you if it can get done or not. We're the only place that they're looking at, I'll say that. And so it either makes or it doesn't with us. So I think I'm not going to put a number on what it is. We're hopeful that something comes out of it. And if it doesn't, then we'll figure something else out. But to answer your question directly, that's the only one tenant of size currently today that we're entertaining.

Okay. And is it a government tenant?

I can't say.

Our next question comes from John Kim with BMO.

I wanted to ask about your fourth quarter cash same-store growth, which in office was positive at 1.9%, but you also had occupancy drop 510 basis points year-over-year is a big, I think, headwind to overcome. Were there any onetime items in there, whether it's termination fee or free rent burn-off that really helps to this quarter's results?

There were -- if there are any termination fees, there are probably de minimis. So I don't think there's anything in there. And it's a combination of partial quarter increases in occupancy and rent bumps. So there wasn't anything as I recall, onetime in those numbers that would drive it. It's just rental income. And maybe a collection of some rent stats basically rent burn off.

Okay. And just to clarify, you don't include termination fees in your guidance. Correct?

If we do, we call it out -- in our guidance, no, we don't include termination fees?

We really haven't had much material termination fees unlike many of our peers, just not -- haven't played much of a role in our numbers.

And the last time we had a big one, we were very clear on calling it out everywhere. So people understood the impact of them either in same-store or total even FFO.

Can you talk about -- this might be a little bit premature, but can you talk about the conversion opportunity at the NFL Culver space whether it's multifamily or condo conversion that you're contemplating? And whether or not you're looking at other assets in your portfolio for either resi or life science conversions?

Yes. Maybe a clarification around the conversion. What we're exploring at 10950 in Culver City is really a full redevelopment. It's not we're not additional taking 170,000 feet in sort of converting that to residential. Rather the upzoning that's currently underway in Culver City is to densify sites along transportation corridors. And we think our site could support as many as, say, up to 470 units. There are comps within, say, a mile radius of us that are good residential comps that are under development today that point to valuations for our site at that density level, it's somewhere maybe double our current GAAP basis, which is why we think it's a compelling opportunity to pursue. As for other conversions, it's obviously happening in various markets, residential conversions, more on B or even C quality type real estate. We don't really have that within the portfolio. We are looking at sort of what it entails to convert on assets that may be physically are well situated for conversion or maybe happen to be in markets that have nearby residential so that we're at least informed about what the opportunity for conversion looks like, but I don't -- I mean, I think we -- Victor has said on past calls, I don't think we think there's much of our existing portfolio that's a real candidate for conversion given the quality of the assets.

Okay. Just one more for me on your dividend and your decision to maintain it. I think it's refreshing you're not going the herd necessarily, but how committed are you to maintaining the dividend for the year just given you're trading a 9% yield and you might have some use of proceeds on retaining that capital?

And listen, we're completely committed to maintaining the dividend. I mean, you can see where our AFFO ratio is right now. It's one of the lowest we've had, I think, in quite some time. And I think it's whether we're following the herd of our we're creating our own, the reality of the situation is the amount of differential here for access to capital, given our liquidity position right now is not materially -- there won't be a material change if we lowered our dividend. And we just think that given this is hopefully an indication of the strength of the company, one and two, the position by which we're going to take going forward, which has been consistent throughout I mean at one point, last year, we were having conversations about increasing our dividend because of our AFFO where it's going to. And Harout, do you want to comment?

Yes. I just wanted to add and not to take away anything that Victor said, we always evaluate our dividend policy and coverage and factor in current economic conditions, leasing activity, interest rates, everything that we also put into our guidance. So -- and again, thinking through all that, we've decided to maintain our dividend in the short term at least whether or not we increase or decrease later on is something we evaluate on an ongoing basis.

Our next question comes from Young Ku with Wells Fargo.

Just wanted to go back to the commentary on Google. I think you mentioned Hillview as a potential early termination. But other than that, are there any other chunk here at least that we should be aware of that's coming up by end of 2024 that could potentially move on?

No, there's nothing to the end of '24. The next lease is probably Foothill in 2025 sometime maybe. But it's in our supplemental lease expirations.

For Google, yes, it's all laid out in our top 15 tenant listing and has all the breakdown of all the leases there.

And all of our expirations are outlined for the next 8 quarters in the supplemental.

Okay. That's helpful. And then, yes, just since you mentioned Google again. what kind of utilization are you seeing at the different spaces like the leases?

I think we'll -- I know at Hillview, they're almost 100% because it's 2 different groups. I think at Foothill, we have 2 buildings, one -- I'm pretty sure one is fully occupied. One of the buildings, I believe there was vacancy there that they never built out, but not a tremendous. I thought it was -- I'm going off memory like 20,000 feet or less, a little bit more.

Yes. Yes, some of that effect. So yes.

Got it. Okay. That's helpful. And Harout, I think you might have mentioned this when you were talking about guidance. So you're not baking in any potential strike on the studio side that's in your guidance right now, right?

That's correct.

Okay. And what kind of FFO impact would there be if, let's say, the strike took place and then there was minimal kind of production for back half of the year?

I'm going to just let Jeff Stotland answer at least relating to this question.

Yes, so I would say rather than attempt to quantify this now if the strike materializes because again, we don't -- we're not like 100% certain that it's actually going to materialize. But if it does, -- and it wouldn't really officially start until May 2 because the contract expires May 1. And I think we have our next earnings call like May 3. So Probably at that point, we'll have a better sense of the timing and the impact, maybe we can give you a better sense then. But right now, it's premature.

Our next question comes from Dylan Burzinski with Green Street.

Just curious on a capital -- from a capital allocation perspective, any desire to start some of the developments that you guys have laid out in your prepared remarks?

Well, I think we did -- yes, we indicated that there's no -- we're not anticipating a near-term start on what are really kind of -- on the office side, we've got Burrard. We're monitoring it. We'll make sure it's ready to go if the market conditions support it or if we had some significant pre-leasing. The studio side is a bit different. We're pretty far along. We're fully entitled on Waltham Cross, which you'll recall is studio development site that we own in partnership with Blackstone, we own 35% of that. That one could start. Again, we're monitoring it. Market conditions remain very good. We are out looking for construction financing, which we'll have to -- we don't quite know yet how that pricing is going to shake out. But that it is feasible that, that could start this year. But other than that, we don't have any other near-term starts.

Okay. That's helpful. And then just curious, what's the overall mark-to-market on the portfolio today?

Yes. So the spot mark-to-market across the entire portfolio consolidated is about 2%. The 2023 mark on expirations is about 4%, both positive.

Our next question comes from Vikram Malhotra with Mizuho.

Just wanted to follow up on 2 specific tenants. Just see if there's any update on thoughts. One is just Salesforce given the news of them restructuring or terminating leases. Just wondering if there's any specific update you have on your sales force leaves. And then WeWork as well. They've already, I think, given back 40 buildings last year or 40 spaces -- any update on just how the WeWorks spaces are performing?

So I mean, sales force, we still have a considerable amount of time on that lease. I mean, with the earliest expiration of 83,000 feet, not occurring until middle of 2025, then we have like sort of 2-year staggered expirations thereafter. It's fully subleased to Twilio. So I mean, there's really nothing immediate to update you on a sales force.

Let me just add to that. Not only is like Twilio, it's somewhat an above market rate. So the idea of sales force returning that and giving up their upside profit would be strange.

Yes. I'll clarify. Not necessarily above market, but above the underlying directly. So we're sharing in the profit of that. So Salesforce highly motivated to do whatever it can to maintain that lease. On the WeWork front, we have 4 locations with them. They've approached us and we're talking to them. For the time being, there -- they look to be pretty profitable on at least 3 of those locations, and they seem pretty incentivized to do whatever they can to maintain those locations. The fourth is that 1455 market, that one's been -- even though they've had higher attendance there, apparently, they're not generating quite enough membership. So we're in -- that one, we probably end up being in more of a negotiation with them at some point.

Okay. That's helpful. So maybe I guess what you're saying, part of WeWork or 1 of the 3 could potentially be terminated or given back. But as of now, 3 of them are performing really well. Is that fair?

Yes. I mean, at least really well, I suppose, is up to WeWork to decide. But from the financials, we review, they all look to be profitable.

Okay. And then just on back to the occupancy, I respect that you can't give a specific number, but I'm just looking for like guardrails or ultimately just ranges. Assuming you do very new -- very little new leasing. And you -- we all know the known move outs as well as the expirations that are there in the book today. I'm just wondering like as a spot occupancy, if you can clarify where was spot occupancy on Jan 1? And if you were to do no new leasing or no new backfilling, can you just give us sort of the a range or sort of where you think the low point could be just trajectory-wise? It just would be helpful because -- it's tough to just say --

I'm going to stop you now, okay, because we're not going to go here, okay? You're the fourth guy in this call has asked the question, the answer still is the same, okay? It's the same question if you say, give me the high end. What's the best case scenario? We leased out 1.9 million square feet. We're not going to do that either. Let's go on, okay?

Okay, fine. I mean, I guess, ultimately, for real estate, there's occupancy and rent. So it's just hard for us to sit here and say, where is it going to be? But I guess we'll be helpful if I be in midyear or you can give us for that.

Go ahead.

Maybe just last one on FAD. I guess the -- your comment was around this year, at least, you're committed to the dividend. If I just look at sort of CapEx, assuming similar CapEx levels that you saw last year, is it safe to say like based on your FFO range, a FAD of -- if my math is correct, FAD of around 130 to 140. Is that the equivalent to what you've guided to on FFO?

We -- I mean, we can run the numbers. I mean, I guess if you're backing into it that way, I'm sure those numbers work. But first of all, I think when you say FAD, you mean AFFO, right, in my mind it's different calculations.

But yes, I mean, look, you're sort of extrapolating which is fair, right? You're looking at FFO kind of year-over-year change on that and what that might imply in terms of AFFO. There's a lot of other adjustments, as you know, that make the correlation between FFO and AFFO a little trickier to pin down. I would say maybe to give you a sense as we look at the model between Google and Company 3 cash rents commencing this year on -- those significantly mitigate the impact of vacancy like Qualcomm, NFL block and should help us maintain an AFFO level pretty close to 2022, and that -- we have to normalize TI and LC spend in order to kind of get to that level, which is totally reasonable. I want to point out, by the way, because I think it gets lost a little bit as people think about just maybe the trend on FFO and AFFO, can be you can lose track of what's going on directionally in terms of TIs, LCs and net effective rents because those have a much more profound impact over the long term. And if you -- and especially if you look at the -- what's going on directionally in terms of average lease term, our leases signed in '22 were 17% longer than they were in the prior year. So we're elongating our leases. They were 5.5 years in '22. And I think what happened in the most recent quarter is also really important. Our TI costs were 36% below what they were in Q4 of '21 and 57% below on a per square foot basis than they were in '19. So I think these drivers of AFFO -- and I think that gives you some sort of some comfort in terms of how our coverage could trend.

Operator, we're over our time limit. So I want to thank everybody for participating in the call, and I apologize that we're slightly over what our commitment was. Appreciate everybody taking interest in us, and we look forward to talking to everybody next quarter. Bye-bye.

The conference has concluded. You may now disconnect.