Hudson Pacific Properties [HPP] Conference call transcript for 2022 q2
2022-07-27 18:17:15
Fiscal: 2022 q2
Operator: Good morning, and welcome to the Hudson Pacific Properties First (sic) Quarter 2022 Conference Call. 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.
Laura Campbell: Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on an 8-K with the SEC, and both are now available on our website. The audio webcast of this call will be available for replay on our website. Some of the information we'll share on this call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will touch on our strategy and the macro environment. Mark will discuss progress on leasing, development and asset sales, and Harout will provide more detail on our second quarter financial results and outlook. Thereafter, we'll be happy to take your questions. Victor?
Victor Coleman : Thank you, Laura, and thank you, everyone, for joining us today. Day in and day out, every level of our organization is committed and focused as we work to make the right decisions that move our business forward in alignment with our core investment thesis. We're continuing to evolve in line with the synergistic converging and secular nature of the tech and media industries, leveraging our unique ability to deliver world-class office and studio facilities that position us to outperform over the long term. The fact that we're making progress against the persistent pandemic backdrop and rapidly evolving economic environment is a testament to our team's efforts and dedication. Office utilization throughout our portfolio continues to rise, and is now in the mid-40s to 50% range, up from its low, about 5% to 10% in the height of the pandemic. For most of our office tenants, it's clear, executives want employees back in the office in some capacity. Not only are they witnessing the deterioration of culture, collaboration and mentorship, but there's also growing evidence of reduced productivity and accuracy among key functional groups. Companies, including Google, Amazon and Netflix, 3 of our largest tenants, operate with a very long-term perspective, and have continued to lease, build out and/or occupy well-located, high-quality, sustainable and collaborative workspace, like we have in our portfolio. We believe that for competitive reasons, our leading tech, media and creative companies, if they have not already will ultimately follow suit. Despite historically low unemployment, it's challenging to predict the precise near-term net impact that hybrid work, capital constraints and potential layoffs could have on office demand. For the second quarter, overall, in several of our markets, we saw tenant requirements in gross leasing grow, sublease space stabilize or decline and positive net absorption in the 6 figures, yet the slow in demand and activity we witnessed at the beginning of the second quarter tempered in June and July as some of the companies paused to digest the impact of increased market volatility and the possibility of a recession. Benefiting from our diversification at our studio assets, we continue to see robust demand for our integrated offering of Class A office, high-quality stages, support space and production services. While our online ancillary production office space is leasing up, albeit slowly, our stages and support spaces are essentially fully occupied. Our studio facilities are ideal for the type of original content of streaming, and other media companies will continue to rely on to win subscribers. Currently, we can accommodate only a fraction of the inbound stage and support space related inquiries, which ultimately bodes well for our online Class A and production office space. Pro-business leadership and policies appear to be gaining momentum across all of our markets, and this is very positive in terms of development. Most recently, California's proposed to establish an annual property tax surcharge on properties valued at over $4 million, the latest effort to repeal Prop 13 failed to garner the requisite signatures to be included on the November ballot. From Seattle to San Francisco to Los Angeles, we're seeing greater support for pro-business candidates with an emphasis on clean up cities supporting police and ensuring urban centers remain open for the business. At the end of the day, regardless of the changing macro or regulatory environments, we're doing what is within our control and what we do best: leveraging our expertise and relationships staying laser-focused on leasing and making strategic enhancements in additions to our portfolio to capture tenant demand, now and in the future. We're in front of every relevant space requirement in our markets. We're effectively determining where repositioning and other capital improvement dollars can have the greatest impact and recycling out nonstrategic assets while executing on select projects within our development pipeline. And we're pursuing only studio and studio-related acquisitions that are synergistic and accretive to our existing platform. Finally, I encourage all of our investors to check out our latest corporate responsibility report, which we published during the quarter. I'm proud of our continued accomplishments and of the value of our Better Blueprint ESG platform, and it's creating value for our stakeholders. Today, we have the highest percentage of LEED-certified properties among our major office REITs. Our operations are carbon neutral, and we have further reduced emissions by 25%. And to address homelessness, we've invested and donated a total of $4 million towards supportive housing solutions in our communities. And we've also strengthened our commitment to diversity equity inclusion, hiring a DEI head and launching an innovative impact fund, EquiBlue, to support these efforts within our industries and our communities. With that, I'm going to turn it over to Mark.
Mark Lammas : Thank you, Victor. This quarter, as part of our ongoing focus on leasing, we signed over 700,000 square feet of new and renewal office leases, including nearly 500,000 square feet of deals in the Bay Area, alone. This includes two significant renewals. Stanford renewed the entirety of its 43,000 square foot lease at Page Mill Center in Palo Alto through 2027. That lease was set to expire in Q4 of this year. We also renewed 199,000 square feet of Nutanix 2024 expiration and expanded them into another 16,000 square feet at 1740 technology in San Jose, thereby extending about 50% of their current space through 2030. As part of this agreement, Nutanix early terminated 14,000 square feet at Concourse in May of this year, and we've already backfilled that space with another tenant as part of a larger new deal. Nutanix will terminate 67,000 square feet and another 42,000 square feet at Metro Plaza in January and June of 2023, respectively, leaving 117,000 square feet to naturally expire in June of 2024. GAAP and cash rents were up 16%, and nearly 6% from prior levels. Our office portfolio at the end of the quarter was 90.8% occupied and 92.3% leased. Our leasing pipeline, that is deals and leases, LOIs or proposals, is now approximately 2 million square feet. And we've just over 1 million square feet of inquiries and tours on top of that. Excluding known vacate Qualcomm, we're in leases or have LOIs or proposals on about 55% of our remaining 2022 expirations within our in-service office portfolio with another 10% in discussions. Regarding Skyport Plaza in North San Jose, where Qualcomm's lease expires at the end of July. We're working on various repositioned scenarios including enhanced lobbies, common areas and amenity and outdoor space for office use. There are some large office requirements in the market with only a handful of availabilities that can accommodate tenants in the 400,000 square foot range. So we feel that with strategic capital improvements, we will be competitive. We remain in leases with a single tenant to backfill the entire NFL space at 10900 and 10950 Washington in Culver City, and we have interest from 2 other tenants for the entirety of both buildings. Block gave notice that they will vacate the entirety of their space at 1455 Market when their lease expires in Q3 2023. We're continuing our marketing efforts to backfill that space, which includes discussions with existing subtenants who are in about 125,000 square feet or 25% of block space. Separately, we have had some recent interest on another 200,000-plus square feet, largely from a single tenant. We're also evaluating reposition ideas to meet market demand, and we're prepared to backfill this space with single floor and full podium users ranging from 25,000 to 90,000 square feet. That was our original plan to address BofA's rollout when we purchased the asset, and prior to Block's and Uber's rapid expansion. Turning to development. Company 3 and Google are building out their tenant improvements at Harlow and One Westside with gap rents already commenced and stabilization on track for Q4 2022 and Q2 2023, respectively. These projects will contribute a combined $45 million of additional NOI annually. Sunset Glenoaks and Washington 1000 are under construction with anticipated delivery in Q3 2023 and Q1 2024, respectively. These 2 projects upon stabilization will contribute $42 million of additional NOI annually. We also recently received planning approval for 2 projects within our 3.6 million square foot future development pipeline including Berard Exchange, a 450,000 square foot hybrid mass timber office building in Vancouver, and a 1.2 million square foot Sunset Waltham Cross studios outside London, both in partnership with Blackstone. We now have the option to start construction on both projects next year. Finally, to provide an update on our held-for-sale office assets, we've entered into contracts to sell Northview Center in Lynnwood Washington in Delano and Torrance, California. Together these transactions, which we expect to close before the end of Q3 of this year, will yield approximately $50 million of gross proceeds. We continue to market, and have buyer interest in both 6922 Hollywood and Skyway Landing. We are also exploring alternative uses for these assets, 6922 as hotel and residential and Skyway Landing as Life Science. And with that, I'll turn things over to Harout.
Harout Diramerian : Thanks, Mark. Compared to second quarter 2021, our second quarter 2022 revenue increased 16.6% to $251.4 million. Our same-store property cash NOI grew by 7.3% to $125.2 million, primarily driven by the commencement of cash rents on various leases, including Califia Farms, Twitch Interactive and WeWork at Maxwell and Rivian at Clocktower Square. Our second quarter FFO excluding specified items, was $74.6 million or $0.51 per diluted share compared to $74.4 million or $0.49 per diluted share. Specified items in the second quarter consisted of transaction-related expenses of $1.1 million or $0.01 per diluted share, and a onetime property tax expense of $0.5 million or $0.00 per diluted share compared to transaction-related expenses of $1.1 million or $0.01 per diluted share and a onetime property tax expense of $0.3 million or $0.00 per diluted share a year ago. Year-to-date, AFFO continues to improve by $4.7 million or 4.2% or $0.05 per diluted share, or 6.6%. At the end of the second quarter, we had $781.5 million of total liquidity comprised of $206.5 million of unrestricted cash and cash equivalents and $515 million of undrawn capacity on our unsecured revolving credit facility. Note, our total liquidity as of the quarter's end, includes proceeds from settlement of the U.S. government securities used to repay the $126.4 million of in-substance to fee debt subsequent to the quarter. We also have access to $143.9 million of undrawn capacity under our One Westside construction loan, and $85.5 million of undrawn capacity under our Sunset Glenoaks construction level. Approximately 69% of our debt is unsecured and 66% is fixed rate. Our weighted average loan term with extension at 4.7 years. Now on total guidance. As always, our guidance excludes the impact of any opportunistic and not previously announced acquisitions, dispositions, financings and capital market activity. We are updating full year 2022 FFO guidance to a range of $2 to $2.06 per diluted share, excluding specified items. Specified items consist of $1.4 million of transaction related expenses, $8.5 million of trade name noncash impairment and $0.5 million of onetime property tax expense identified as excluded items in our year-to-date 2022 FFO. Our revised guidance reflects the impact of higher interest expense associated with steeper LIBOR and sulfur curves compared to prior projections, also reflects the anticipated disposition of Northview Center and Del Amo by the end of the third quarter for gross proceeds of approximately $48.8 million, which we expect to use to repay outstanding amounts under our credit facility. Note that we increased our full year same-store property NOI projection by 50 basis points to a revised range of 2.5% to 3.5%, which includes the full impact of Qualcommâs expiration at Skyport Plaza without renewal or backfill. The increase stems from improved leasing expectations as well as lower operating expenses compared to prior projections. Adjusted for Qualcomm, full year same-store property cash NOI growth projections would be 4.25% to 5.25%. Now weâll happily take questions. Operator?
Operator: The first question comes from the line of Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb: Two questions for you. Victor, let me just ask a bigger picture, on the studios. There have been some announcement recently. And I think these are all separate, but you'll correct me and let me know if these are actually all the same, but there was like Atlas that had something East End Capital. And I think there was one other. There have been a number of studio announcements -- are the economics for studios in L.A. changing and becoming more advantageous? Or is there just so much demand that people can make the numbers work regardless of cost escalations? Or how should we think about some of this increased announcements on the studio front from other people looking to either enter or expand their holdings?
Victor Coleman: Well, listen, Alex, I think it's specific to markets. If you're looking specifically at L.A., the demand for studios is still relatively high. At our Sunset Glenoaks, we've got multiple tenants who are interested in the whole thing, or a series of stages and the economics around our transaction are still very favorable. We went out and did a third-party study, which I'm sure our guys can share with you want to call them off-line, to show supply-demand ratios in our main markets, and some of the other main markets throughout the country and other parts of the world. And we are still seeing economics around building at the right price levels. I would caution sort of the banter around some people saying they're building studios. I think what was planned earlier last year, and even to the extent at the end of last year, a lot of those deals are not going to materialize. I don't think there's a lot of debt on construction financing available for new development and unfettered groups who don't have a lot of experience. And so I still think we're in a very good position on the assets that we have already said that we're going to be building, and the activity that we have around them, it's still consistent with the yield even with cost increases.
Alexander Goldfarb: Okay. And then, Mark or Harout, on the interest expense, I think originally -- on last quarter's call, you spoke about $325 million to $350 million of total dispose. You have $50 million now. So it sounds like there's still $300 million. You last time gave a 2.25 GAAP cap rate just because of a bunch of vacancy, but now we have a higher interest rate environment. So net, Harout, as we think -- and I'm not asking for '23 guidance, but as we think about modeling our interest expense line and what debt balances we should be thinking about that are affected by rates. What do you think on your numbers, sort of the net impact of interest expense? Like some of the companies are giving absolute numbers like, hey, expect interest expense next year to be $40 million higher or something like that. Is there something that you can give us so that we can sort of be modeling in the ballpark for where your net floating rate will be? And how much interest expense do you think is going to increase next year?
Harout Diramerian: Alex, thank you for the question. There's a lot to digest that we haven't provided anything in 2023. But maybe as a guidepost, I can give you a breakdown of our 2022 -- or our variable debt this year. So you can get a sense of what the drivers are and then use that to model. If you look at our variable debt, even though it's at 34.5%. It's really comprised of the 14% of the total debt. It's 485,000 to our line, which we find to be temporary. And once we sell these other assets, we'll buy that down pretty significantly. Another 6.1%, or $210 million, relates to construction financing, both at One Westside and Sunset Glenoaks, which again is relatively temporary until those construction loans get taken out. And then you have another $328 million worth of debt that has some sort of cap on it, whether -- various caps. And then that really leaves you with $172 million or $173 million of debt that's truly variable, meaning there's no caps. It's not temporary. So if you kind of break it down that way, you can look to use those numbers to project. Because ultimately, all we use are future LIBOR and sulfur curves. So we don't have any other crystal ball to utilize other than those.
Mark Lammas: Yes. Alex, let me just to respond to your question about the held for sales and impact on debt. If you cut through it, even if you assume kind of higher underlying SOFR or LIBOR rates, which on the curve peak out in December and then start tapering back down. Even if you assume kind of the higher end of that curve, the NOI generated by those assets, right, which until sold will continue to contribute, roughly offsets. And it differs between 622 at Skyway Landing. But collectively, they basically offset the savings associated with the debt repayment. So net, it's more or less a neutral outcome, whether you sell it and pay down the debt or keep the assets and carry the debt.
Operator: The next question comes from the line of Michael Griffin with Citi.
Michael Griffin: Maybe stepping back to talk again about the leasing in the San Francisco area. Obviously, it was driven by the Nutanix and Stanford renewals, but kind of for that other half of the leasing, what really drove this demand? Was it new leases, expansion of tenants? Any specific sector that's kind of driving it?
ArtSuazo: Yes. This is Art. It's really a mixed bag, which is promising, right? I mean the Valley and Peninsula -- Greater Valley and the Peninsula has shown quite a bit of lift in the greater markets. There was roughly 3.1 million square feet of gross leasing, 2 million square feet of net absorption. And we've seen that driven 4 to 5 quarters in a row, right? And relative to our portfolio, it is -- it's not just tech, but it's been law firms. It's been a fire sector and so forth. So it's very pleasing to see that it's coming really from all sectors.
Michael Griffin: And then I just wanted to get a sense on the subtenant exposure in the portfolio. I think Mark kind of touched on this in the prepared remarks, but could you see some of these go direct as future prospects for space in the future?
ArtSuazo: Yes. Absolutely. I think Mark alluded to 1455 in particular, which we're working with those tenants to keep them in some capacity. But across the portfolio, we're in front of every single one of our subtenants. And we'll keep them in some way, shape or form.
Michael Griffin: Got it. Could you put a number around that subtenant exposure, kind of quantify it?
ArtSuazo: Total sublease in our portfolio?
Michael Griffin: Yes. Yes.
ArtSuazo: Probably about -- we're talking about probably a 400,000 square feet a little bit more.
Operator: The next question comes from the line of Jamie Feldman with Bank of America.
Jamie Feldman : Victor, I want to go back to the comment you made at the outset of the call about just -- it sounds like just tech in general and overall demand, it still seems like it's there. Can you just talk more broadly about -- I know we're seeing the headlines. And of course, the press is focusing on the negative. But what do you think the paying tenants and the largest tech tenants are thinking about their long-term space plans today?
Victor Coleman: Yes. Jamie, listen, I don't have a crystal ball as I'll use here. But I think you've seen in the marketplace, and I appreciate the rhetoric around negativity seems to have the highest highlight, so -- which we've seen. But the preponderance of the stable tenants, even though there may be a pause or a hold back, have a vision beyond 24, 36 months, right? They're not -- so I think the encouraging aspect of the -- I'll use Google as an example because we're seeing it in our own portfolio. They've come back to us on some space and said we want to extend leases and the likes of that for 10 years out. That's their vision. And I think that's the encouraging aspect, even though other tenants are saying, we're going to wait and see and we're not going to renew or we're going to downsize. And so the overall rhetoric around some of the strong tenants staying related or not, we're staying put in certain assets, and we know which ones in our portfolio, they're staying put at there are certain assets in our portfolio, we have exposure, but we know that they reached out and said, we want to renew early or we want to restructure our lease so we have longer term. I think the silver lining, if there is one on that is the term that they're looking at is not a 3, 4-year term. It's more a 7, 8, 9 year term, or longer. Art wants to comment on that.
ArtSuazo: Yes. And not only term, but you've seen -- through even the depth of the pandemic, Jamie, you've seen the fan tenants taking additional space even with us. But even as we speak now, the tenants that are driving -- the large tenants that are driving the market, Apple still doing large deals in Silicon Valley. They just had almost 400,000 square feet. Microsoft doing 450,000 square feet in Vancouver and the likes of those. We're still seeing those across the markets.
Jamie Feldman : So can you quantify like the size of that leasing pipeline? The stuff that's probably on hold for now, but on a longer-term view probably gets leased at some point?
ArtSuazo: I do know that one of the markets that has had some caution right now with regards to demand and leasing activity is Seattle. I know there's 4 tenants close to about 100,000 square feet that are tech tenants that have really -- they've hit the pause button. They've not left the market, but they're still in the market. And that's -- for Seattle right now, I think that's kind of our chief concern. But I couldn't give you a market-by-market breakdown of tenants who have hit the pause button recently.
Jamie Feldman : Okay. So maybe using them as an example. What do you think they're waiting for? Is it the economy? Is it understanding how they're actually going to use space? Is there something else?
ArtSuazo: Yes. I think it's a little of everything really. But really, they're still working through what does return to work look like, right? And with kind of recent economic news, I think, they're looking at it and being more judicious about what they're going to take in the new market.
Jamie Feldman : Okay. And then just thinking about economics, I mean, are you able to push rents? And what are the TI discussions like assuming a slower leasing market, you lose some pricing powering?
ArtSuazo: Yes. I mean it's a mixed bag. Different -- every market is different. In the Valley, rates have remained pretty stable. There's no pressure on concessions right now as deal velocity starts to pick up. That's the Valley in the Peninsula. Vancouver has been very steady, steadily increasing through kind of the depth of pandemic. So we're really in good shape there. I think the ones that we have really keeping a close eye on is Seattle, where we're a type of competitive, but we still have a pretty robust pipeline of deals that we're in negotiation, call it, north of 200,000 square feet. Those rates haven't eroded, but we're still very competitive. And the biggest that we all know and talk about is San Francisco. We're in a market there where not only be hypercompetitive, but we're going to have to go in and dig in. We have the best team on the ground and start to dig into the 40 million square feet of expirations across the city that are going to take hold over the next 2 years. So those are the 2 that we're keeping a really close eye on. And then as we move down to L.A., West Los Angeles, the tech and media tenants have been driving the market in a big way, and we haven't seen any deterioration in rents.
Mark Lammas: Jamie, Art and I did a bit of a deep dive on net effectives, and this might be interesting here. Of the 1.5 million feet that we've signed so far, 1 million of it is in the Peninsula, San Jose and Vancouver. And there's enough footage there to really get -- start to get a real sense of net effective. And if you look at those markets, were -- net effectives are up year-over-year compared to last year's activity in those very same markets, 14%. And interestingly, they're not just up relative to 2021, they're higher than 2019 and 2020 across all 3 of those markets. So just to get to your original question about rents and TIs and so forth. Based on the activity to date, where there's real a good sized sample of real activity signed, it's -- rents are looking great.
ArtSuazo: Right. And Jamie, if I can state the obvious that mentioned before, as the tenants are paying up for premium space, and there's a lot of -- in the markets that we're not having to slug it out. there's a lot of premium space out there, and so we're the beneficiaries of them paying up to be in the asset.
Jamie Feldman : Okay. So the 14%, is that in your portfolio or that's across the entire market?
Mark Lammas: No. That's in our -- that's activity in our portfolio.
Jamie Feldman : Okay. And then just housekeeping. It looks like the expected cost to build at Sunset Glenoaks is up about $5 million at the midpoint. Is there any -- where does that come from?
Mark Lammas: Well, that's not -- I don't think that's compared to last quarter? Or is it?
Jamie Feldman : I think it is.
Mark Lammas: Are you comparing it to Q1?
Jamie Feldman : Yes. I think the high end is up $10 million.
Mark Lammas: We -- I don't know. I'll have to be wrong. I don't know. We'll take that offline.
Operator: The next question comes from the line of Ronald Kamdem with Morgan Stanley.
Ronald Kamdem : Great. Just a couple of quick ones. One is just on just a little bit more color on the NIC deal that you guys sort of mentioned earlier on. Just maybe what they're looking for? And how do their space needs change? And what's the plan for sort of the release and any sort of CapEx needs there?
Mark Lammas: Yes. I mean, first of all -- and Art will jump in here to answer. But the team, first of all, got way out in front on this, and we're really proud of -- they identified the long-term -- Nutanix' long-term need, they had experienced explosive, explosive growth. They were spread around 3 different assets. They were looking to kind of rationalize their footprint and consolidate. They never really used a fair amount of the footage that they had taken down. They never spent TI dollars on it, or anything. And so totally uninfluenced by work from home. They were just looking at what they think their long-term requirement is, and that's what got the team kind of focused and able to extend them on 50 -- about 50% of their footage through 2030. I would add, by the way, that another almost 30% of their footprint doesn't expire until the middle of '24, and that's still in play. They just don't know yet what they want to do on that. So 75% of the footage is either extended '23 or have the potential for further extension. I don't know if you want to add to that?
ArtSuazo: Yes. No, that's exactly right. And by the way, the mark was 6.5%, which is a solid mark going forward on their premises. And then the backfill portion, there's roughly about 15,000 square feet that was immediately backfilled this quarter was at about a 13 -- it's over 13% mark. So all in, it was just a great deal.
Ronald Kamdem : Great. Helpful. And then my next question is just on the -- if you could maybe help us think about -- there's a lot of ins and outs, obviously, with occupancy outside of, I think, the Qualcomm, which you called out. But when I look at the lease expiration schedule over the next 8 quarters, maybe from a high level, how are you guys thinking about the occupancy build maybe as you sort of finish out this year and into next, given all the leasing that you've done so far?
Mark Lammas: Yes. That's a great question. Yes. If the activity that's in the pipeline that we touched on in our prepared remarks, if you look at that activity and you kind of play it forward to year-end, we lose Qualcomm end of July, as you know. That's -- we're going to experience a bit of a dip in both lease percentage and occupancy on account of that. And so -- but there's ongoing activity, a lot of activity throughout the third quarter and into the fourth quarter. And it looks to us like if that activity holds. And by the way, there's potential even more favorable outcomes here if new requirements come around, which they always do. But if you just look at what's currently in the process, if that activity holds, there's a very reasonable chance that we will end the year materially in line on a lease percentage basis. Now the reason I focus on lease percentage, one, I think it's the more relevant between lease and occupancy. But two, we're going to be working on getting leases executed all the way to year-end. And that may mean that there's a bit of a delay on that commencement, so we might experience a bit of an occupancy drag into year-end even as we've restored the lease percentage at or around the level it's currently at. So that's how it's looking. And I would say a fair amount there that we got to execute on the pipeline in Seattle. That's sort of -- and there's 500,000 square feet of activity mostly in Pioneer Square, and we're moving forward on that. But if that comes through, we could end the year kind of right around where we are right now.
Ronald Kamdem : Great. And then my last one is maybe just a bigger picture one. I think you guys are one of the few office REITs was just the pure West Coast exposure. As you think about -- I think all this commentary about tech pausing, clearly, your long-term focus. But what are -- I mean what are some of the things? Where are the signpost? What are you guys thinking about in terms of making -- sticking with these markets? Or whether there's opportunities to add another one or diversify? Just -- or maybe it's too soon now. But what are some of the things you should -- you will be thinking about and considering in terms of potentially adding diversification away from the West Coast?
Victor Coleman: Right. Listen, I'll jump in on that. Listen, I think we've looked at multiple markets compared to where we're at. We still think the West Coast markets, even throughout some volatile times also in high times and low times is the areas and markets that we feel most comfortable with. If the world is accurate, and we're going to see some dip in all these marketplaces and valuation shifts, it will only avail ourselves to the ability to actually go into those markets with the right gap, stack and structure and enhance our portfolio with high-quality assets that are synergistic in the next 2 or 3 years to come. And so that would be the direction versus going somewhere else and doing external growth in other markets. So our intent is to maintain our position and possibly grow it depending on where the economy is on the West Coast.
Operator: The next question comes from the line of Vikram Malhotra of Mizuho.
Vikram Malhotra: Maybe just building upon the occupancy -- the prior occupancy question. Some of your peers have started maybe giving some sign post guidepost about in the sense of not obviously a specific number, but thinking about the direction of same-store NOI growth, the puts and takes on other line items. So I'm wondering if you can just give us a sense of what are the major kind of variables we should be thinking about as we sort of model and look forward to '23. Anything that may be known, like the interest expense kind of if you assume where rates are today versus maybe where the real swing factors are for '23?
Mark Lammas: Vikram, there's a lot in that question. I guess some guideposts are -- we've already got we've got a relatively sort of lower exploration year as we sit today, and it will be even lower as we get to year-end than, say, we did in 2019, 2020, '21. So a little less exploration as expected into '23. We -- the mark on '23 expirations, as I said today, it's almost 20%. So it's even better in '23 than it was if I recollect, as we were heading into '22. So really healthy mark, a little less expiration to contend with than we've had in the past couple of years. As for interest expense, if you look at the curve, you'll see by the middle of next year or so, let's take SOFR, for example. I think you're back right around 3%, and there's -- and it continues to decline from there. I think there's a real chance we won't have quite as much floating rate debt on the books anyway. But to the extent that we have some, there's probably in '23, so we'll start to see some sort of relief, if you will, on interest expense. So I'm not so sure I can remember all your questions, Vikram. That gives you some --
Vikram Malhotra: Yes. No, that's helpful just more of the big picture buckets going into '23, whether it's the core the same-store pool, the ins and outs, you talked about the expirations. Obviously, they are the known move-outs in the bumps. And then you talked about the rate environment, I guess, like ancillary income or any other line items that.
Harout Diramerian: Yes, for sure. Just as a reminder, there's also a few of our assets that are currently -- the tenants are building out their space, and their cash NOI will really start contributing in '23, the biggest of which is Google at well One Westside. So in terms of cash NOI, no annualized would be around $50 million on a consolidated basis.
Victor Coleman: Yes. For Google. Yes. And Glenoaks will deliver to -- so that could be a contributor. And then you know the big 2023 expiration is Square Block at 1455, and we've already given you sort of line of sight on that.
ArtSuazo: Right. And the next biggest we're in negotiations with, which is Amazon for 139,000 square feet.
Vikram Malhotra: Okay. That makes sense. And then just maybe one, Victor, a bigger picture question. obviously, you've gotten very early on the studio business created a lot of value through the combination with office. Still some -- and obviously, there's a lot of demand for those certain select for those high-quality assets. I'm just wondering like in the current portfolio, some would argue, office is undervalued. Some would argue, the studios are dramatically undervalued. Is there a thought of some -- you've done the JV with Blackstone. Is there a thought of something more strategic, either just monetizing studios in its entirety? Or frankly, even just where things are -- what other alternatives would you look to create value at this point, whether -- even if it's considering a broader sale of the company?
Victor Coleman: I mean that's obviously a loaded question, Vikram, but I will say in terms of the in terms of the studio business, both in the office and the soundstage side. I mean the value upside, that's not recognized beyond just your obvious comments of the commercial real estate and the sound stage undervalued based on where the perception is and the true value is, is the operating businesses. I mean we consistently outperform the op businesses and have acquired companies, and we'll continue to do so in the future on the operating side. And the true multiple value and IRR value well exceeds what we're achieving just in stabilized office and stabilized studios. I mean we're effectively double or more in terms of the returns. And so those aren't gaining the values either. So the combination of all of that is nice to see that it's at least sitting there from our standpoint and pure cash standpoint. In terms of the greater picture, I'm not in a position to make a comment on that on a public call with everybody.
Operator: The next question comes from the line of Tayo Okusanya with Credit Suisse.
Tayo Okusanya: Sorry if you addressed this because I got on the call a little late. But for Broad Exchange in Vancouver and Sunset Walsum cross studios, what would encourage you guys to start development in 2023? And what would be the thought around kind of funding those development sites?
Victor Coleman: That's a great question. So I mean, listen, the encouragement level is what we're seeing right now on the ground. I mean in terms of Brad Exchange, we have a tenant that has indicated some interest in the entire property. We've got another tenant that has indicated an interest, I think, in about 200,000 square feet. So tenant interest in that marketplace, given where the vacancy factor is, which I think is 4% or something to that effect approximately. That market is a little different than what we would look at in throughout other markets we're in. And I do think it's fundamentally a very unique asset in that it's a timber built, and the desire around that is very high. And so we'll continue to look at the fundamentals in that marketplace, which are extremely strong. And I said, as I think maybe an outlier. In terms of Sunset Walton Cross, and then I'll go back to the funding in a second. In terms of Sunset Walton Cross, that's going to be a world-class soundstage facility in a marketplace that is still wealthy in need of excess studio and office space. We also have had interest from single tenants for multiple sound stages in office space on that. And we just got approvals on that asset last Monday -- a week ago, Monday. And so that asset will be indicative of our premarketing that we're working on now. We are going through all of that, both here in Los Angeles and in London in terms of entertaining tenants and educating them on the amenity-based project that we're going to be looking to build. In terms of the capitalization, I mean, remember how the cap stack is. We're a 75-25 with Blackstone at Burrard Exchange, and we're at 65-35 -- isn't that right?
Harout Diramerian: 80-20
Victor Coleman: Sorry. 80-20.
Mark Lammas: Yes. It's 35-65.
Victor Coleman: 35-65 -- 65-35 with Blackstone at Walton Cross. And so the capital structure from our standpoint for those -- both those developments will be much more limited from Hudson's exposure, and it will be a mutual discussion with Blackstone as to the right time to start the build.
Mark Lammas: Yes. And Blackstone has indicated that they'll want construction financing in connection with both. So when you think about just capital needs from our side, the spend is very light for us.
Operator: The next question comes from the line of Daniel Ismail with Green Street.
Daniel Ismail: Maybe just staying on the timber front and ESG. Victor, you mentioned ESG in the opening remarks and a possible tenant interest in broad exchange. I'm just curious, more broadly, are you seeing those ESG factors translating into higher rents or better tenants, attraction or retention quite yet?
Victor Coleman: Listen, that's -- it's a great question. I think the awareness on the ESG side has finally come to fruition. On the institutional quality tenants who are -- whether it's -- any aspect of our assets that are upgraded on the ESG side have had an attractive level of certain tenants that will only go on those assets or those type of assets that have already been upgraded to that extent. So has it correlated specifically to increase rents? I don't think you can directly do that correlation. But I think the interest level outweighs the increased rents on that because we have a much higher interest and awareness level. I think that would be the most important aspect.
ArtSuazo: That's right. Even from a leasing perspective -- this is Art, by the way. Leasing perspective, we've seen over the last several years, it was a nice to have, became a check the box to, gee, with these institutional tenants you're not going to get on the short list. And that means everything.
Daniel Ismail: Got it. That makes sense. And then just one more small housekeeping question for me. On the Sunset Walton development, Victor, I think you mentioned approvals coming in earlier this week. I just noticed on the supplemental an increase in the estimated square footage of the project. Was that related to the increase -- was that related to the approvals? Or was that a change in design? Or when are the increase in size?
Victor Coleman: Yes. No, the increase in size is we bought an adjacent property that we can add some support that space and some outdoor space. And so that in itself increased the square footage, and was -- I think we purchased that in spring sometime. And so that's why it was increased in the supplemental.
Operator: The next question is a follow-up question from Michael Griffin with Citi.
Michael Bilerman: It's Michael Bilerman here with Griffin. Victor, I just wanted more of a clarification question. You obviously have an extraordinarily close relationship with Blackstone going all the way back to when you the EOP portfolio and they came on the board and obviously at studios and everything. Is there anything in your relationship that precludes them from selling the shares they bought back at the beginning of '21? Or for that matter, adding to that position. Given all of your relationships and ventures, whether it's up in Canada or the U.K. or the studio business. I didn't know if there was effective a lockup on those shares. I'm just trying to understand if there are anything is precluding that.
Victor Coleman: No. I mean, listen, their information from the standpoint of shareholders, like everybody else is its publicly traded information. And in terms of their information on the partnership, it's also publicly held information, but there is no restrictions on the stock.
Michael Bilerman: And so -- and I recognize I could ask this of John, but they bought almost a 4 million share position at a VWAP back at 24, stocks at 14%, you would think that there would be more interest at these levels, given everything that you've been able to produce and all of your commentary on the call.
Victor Coleman: I wonder if what you're referring to is the position that they carried back in connection with the contribution of the portfolio in 2015.
Harout Diramerian: Is that what you're referring to? Are you referring to open market buying or the '21.
Michael Bilerman: I mean Yes, that was the open market purchase, wasn't the 3.8 million shares they've just held since.
Mark Lammas: No. They held a substantial position, roughly half of the $3.5 billion purchase was carryback in equity in 2015. And then it took them -- they were locked out for a while and then it took a little while for them to liquidate that position, I want to say, 3 or 4, but they held nothing at that point and they've since done open market purchases, but --
Victor Coleman: We're not part of those open market purchases SP1 Yes.
Michael Bilerman: Exactly. And that's what Right. And I'm just trying to -- I wanted to better understand because, obviously, the open market purchases were back earlier last year, right, as the stock had fallen off -- had recovered a little bit. And I just didn't know if there was anything precluding them from selling that stock given all the relationships, and I would see information about your prospects. And if there wasn't the opposite question that I asked was, well, shouldn't they be buying given all of the basis and value. So that's where I was just trying to understand it better.
Victor Coleman: Yes. As I said, there are no restrictions. And I think you could ask them if they want to continue to buy. We will love to have their answer.
Michael Bilerman: I'm sure you will. Is there -- the other only other topic, is there anything -- and I recognize your comments about the overall marketplace. Anything that you're thinking about from dipping back into the stock? Obviously, you did the accelerated share repurchase insights 2020, you can't go back in time. At that time, you liquidated you had proceeds and you executed the trade. I guess how are you thinking about furthering that, do you feel like that was a good exercise to go through or sort of look at other ways to drive shareholder value and hope the stock price followed suit.
Victor Coleman: Listen, I think it was an explant execution at the time, and it was something that we said we were going to do. And subsequent to that, we have been averaging down, so to speak, in the structure on a saving basis up until a point where we were locked out. That will open up again sometime in early August. And I think the intent is for us to continue the game plan on that basis.
Michael Bilerman: Do you have incremental asset sales to put to market to generate more proceeds to effectuate those purchases?
Victor Coleman: Yes. I mean we've commented on the 2 small ones that are selling, and we've got 2 more that they're in active negotiations. And then we'll revisit market conditions and other assets that potentially may fall into that category.
Operator: The next question comes from the line of David Rodgers with Baird.
David Rodgers: Okay. Just one follow-up for me. I think it was -- Victor, you made the comments about strength in the Studio and support business. Did see that Netflix had taken a charge on real estate, and I think that was related to Burbank, but I do think there were some questions around any of that impact. You guys, do you see any communication with them related to wanting to give back space terminate space or sublease it?
Victor Coleman: No. Listen, that was out in Burbank. I believe that was maybe their animation group or something like that, right? It was an office space.
ArtSuazo: It was spaced it wasn't even -- they hadn't even occupied let build out. So --
Victor Coleman: Yes. We've had zero communication on that level that they're interested in giving back any space in any of our portfolio. And quite frankly, I've heard nothing in Hollywood, in general, from them at all, and other assets too.
Operator: That concludes the question-and-answer session. I would like to turn the conference back over to Victor Coleman, Chairman and CEO, for any closing remarks.
Victor Coleman: Thank you, operator, and participating, everybody on the call today. I want to reiterate what Mark's comment was about the Hudson team and the great efforts that they make quarter in, quarter out, and we look forward to speaking with everybody next quarter. Thanks so much.
Operator: The conference call has concluded. You may disconnect.
