Hudson Pacific Properties, Inc. Q2 FY2020 Earnings Call

Greetings, ladies and gentlemen, and welcome to Hudson Pacific Properties Second Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host, Ms. Laura Campbell, Senior Vice President of Investor Relations and Marketing. Please proceed.

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties Second Quarter 2020 Earnings Call. Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investors section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investors section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including various ongoing developments regarding the COVID-19 pandemic. Actual events could cause our results to differ materially from these forward-looking statements which we undertake no duty to update. Moreover, today, we’ve added certain disclosures, specifically in response to the SEC’s direction on special disclosure of changes in our business prompted by COVID-19. We do not expect to maintain this level of disclosure when normal business operations resume. With that, I’d like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our President; Alex Vouvalides, our COO and CIO; and Harout Diramerian, our CFO. Note they will be joined by other senior management during the Q&A portion of our call. Victor?

Thank you, Laura. Good morning, everyone. Welcome to our second quarter 2020 call. I hope everyone is staying safe and healthy during these difficult times. And let me start by saying, once again, how incredibly proud of our Hudson Pacific team, whose deep experience, ingenuity and adaptability are enabling our company to successfully navigate current circumstances. Despite the unpredictability of this pandemic, the shifting government mandates and evolving protocols, we continue to run our business efficiently and effectively. As an essential business, all of our properties remain open and operational. While physical building occupancy remains low, and Mark is going to touch on that, our conversations with tenants indicate they have every intention of returning to the office. It’s simply a matter of when and how. Google is a perfect example of this, although they are now targeting a 2021 return date, the build-out of our unimpeded One Westside asset is absolutely on target. In near-term, most of our tenants are leveraging the lower occupancy that remote work affords, coupled with temporary solutions like moving desks, installing barriers and staggering schedules to safely reintroduce a portion of their workforce. This is exactly what we did starting in June with our own employees, targeting 50% utilization at our corporate and regional offices. There is no doubt it requires people to get accustomed to new seating configurations, paths of travel, regarding PPE use and the likes. But what we fully intend to avoid are the pitfalls of working from home, which I have been talking about for months, and which a Wall Street Journal article articulated very well just last week. Things like impaired efficiency, lack of mentorship, poor communication, and limited creativity are all factors in the company’s long-term success and viability as they have been for ours. If companies haven’t recognized this already, they will soon enough, and hopefully before it’s not too late. I suspect that this article will signal an important shift in the mindset as the realities of a prolonged time away from the office begin to set in. In the second quarter, our rent collections were exceptional; 99% of our office and 100% of our studio tenants paid rent. And again, Mark’s going to discuss this in detail. But the quality of our tenancy shined during these difficult times. In terms of industry exposure, the resilient and innovative nature of tech and the anti-cyclical nature of media will continue to serve us well. Specific to credit quality, 85% of our top 15 tenants are publicly traded or owned by a public parent, while over 60% are either large-cap or investment-grade rated. Regarding geography, nearly 75% of our ABR is derived from less public transit dependent markets like Los Angeles, the Peninsula, and Silicon Valley. And as for asset type, the preponderance of our assets are low to mid-rise products. Our buildings are eight stories on average, facilitating ingress and egress. And further, essentially all of our properties have been substantially repositioned, upgraded or fully redeveloped or newly constructed. From optimized air filtration to ample outdoor workspace, our portfolio is well positioned to meet any new COVID-related requirements. By far, our biggest milestone in the quarter was the announcement of our latest partnership with Blackstone, and the genesis of this transaction well predated COVID-related conversations with multiple interested parties that began as far back as December of 2019, signifying we had tremendous interest in this portfolio, which we have built over more than a decade through strategic acquisitions, operational and capital improvements, world-class development, and phenomenal leasing success. Through the years, we assembled the largest collection of independent stages in the United States. We built the first Class A office building in Hollywood in more than 20 years, and we signed two of the largest office leases ever in Hollywood, creating the LA headquarters for two global media companies. We evolved the design of our urban vertical campus and pushed boundaries in sustainability, delivering Los Angeles’ first office building with a solar facade and a record amount of functional outdoor space. Our sale of 49% to Blackstone, arguably the preeminent institutional real estate investor, provides validation to the stock market, which had not around the value of the portfolio, our views on content creation, and our expertise as an operating partner as well. Clearly, we also chose them as frequent partners and collaborators because they pose less execution risk as we seek to expand our platform and they’re well aligned with our vision going forward. After financing, which Alex will provide some details on as well, we’ll have about $1.3 billion of gross proceeds at our disposal to bolster our liquidity position and further fortify our balance sheet. Especially now that we have reduced our funding requirements for future development, we are nimble and poised to take advantage of market dislocations in the current environment to expand in office as well as studios. We continue to closely monitor various ballot measures in California and the state of Washington that, if passed, would increase taxes for businesses. There is no doubt the local and state municipalities that resulted from the economic shutdown are suffering meaningfully from declines in revenue, which stand to result in spending cuts and priority programs and initiatives. At the same time, there is a renewed engagement at the corporate level, including from real estate firms such as ourselves in all of these processes. While the Top 15 will be on the ballot in California in November, we continue to believe the bill will be effectively depleted; SB 939 and the Seattle head tax were both recently defeated, but there is now a new payroll tax under consideration in Seattle. So, like the pandemic, the dynamics at play continue to evolve, and we will remain engaged and provide leadership as necessary. Before I turn the call over to Mark, I do want to touch on diversity, equity, and inclusion initiatives, which we have been working on for some time and which were rightly brought to the fore in the last quarter. As you know, in March, we launched our Better Blueprint, which has three focus areas: sustainability, health, and equity. Specifically, our commitment to equity is grounded in the notion of opportunity for all and the recognition that we, as a company, need to do our part to eliminate racism and promote diversity and inclusion both internally and, where possible, externally in our communities at large. Our HR and social impact teams are spearheading multiple initiatives to accelerate and strengthen this commitment, including ongoing training sessions, resource groups, and a virtual library for employees. I also joined Los Angeles’ pledge to address racial equity and align with CEO Action for Diversity and Inclusion, which among other commitments, provides a network of other companies with which to share best practices. We also redirected a portion of our annual corporate giving, donating to the Community Coalition here in South Los Angeles and pledging thousands more in microgrants to smaller organizations championing racial equality across our markets. As you can see, we’re investing heavily not only because it’s the right thing to do, but because it’s essential to our continued success and industry leadership. It’s well-established that welcoming different cultures, ideas, and skill sets yield better business outcomes. I expect every Hudson Pacific employee to model these values, and in doing so, we will make our culture and our company even stronger. With that, I am going to turn it over to Mark.

Thanks, Victor. As Victor highlighted, our rent collections remain exceptional. During the second quarter, we collected 97.3% of total rents, comprised of 99% of office rents, 100% of studio rents, and 48.7% of our retail rents. To date, in July, we have collected 94.8% of total rent, comprised of 96.9% of office rents, 100% of studio rents, and 31.4% of retail rents. These percentages exclude rents contractually deferred or abated in accordance with COVID-19 lease amendments. If we were to include those amounts, as we have done in previous public disclosures, our second quarter collections would have been 94% for total rent, 96% for office, 93.8% for studio, and 44% for retail. Our July collections would have been 93.4% of total rent, 96% for office, 89.5% for studio, and 31% retail. During the second quarter, we granted deferrals equivalent to $4.2 million or 2.7% of total rents. Another approximately $4 million or 2.5% remains in discussion for either payment or deferral. We abated only $1.1 million or 0.7% of second quarter rents in connection with COVID-19 relief and another $200,000 or 0.1% due to a settlement in connection with a non-COVID-related litigation matter. Again, our strong collections are a reflection of our high-quality tenant base and even more so, the strength of our large tenants. Our 50 largest tenants account for over 60% of our quarterly rents. Three co-working tenants within our largest 50 tenants comprise one-third of all uncollected rents. We deferred rents for only one non-co-working tenant within our 50 largest. The remaining nearly two-thirds of uncollected rent was traceable to small tenants, including our storefront retail, the average size of which is approximately 6,800 square feet. It is precisely these tenants that were afforded relief under the very state and local rent collection moratoriums. Understandably, many of our storefront retail tenants, which comprise only 2.8% of our total ABR, are struggling. We recognize the value they provide to our office tenants and the surrounding community. Whenever possible, we’re working closely to support them and find a solution to keep them in the space which increasingly involves some sort of percentage rent arrangement. There are, however, a handful of tenants where we’ll agree to take back that space and repurpose it for backfill with another retail use or potentially even an office use. Regarding our studios, stage demand is strong, with only three of our 35 stages available for lease, all of which are subject to active discussions with multiple major studios for commencements in the coming months. As for production activity, delays among content producers, the guilds and unions representing actors and crews in adopting COVID-19 protocols, mainly on frequency and methods of testing, have pushed production commencements. We now expect production to phase in over the next month, with essentially all stages in use by September. As we have discussed previously, trends bode well for an increase in stage demand and production activity in Q4 and into 2021. Returning shows are asking for additional space to de-densify cast and crew at any given time. Location shoots are being replaced with stage sets to increase protection for actors. Shows will go straight to series and forgo pilot testing, and multi-season shows will skip hiatus periods and shoot without interruption. Bottom line, production must resume as safely and as soon as possible. Content creators are now under significant pressure to refresh their pipelines at the risk of losing subscriber interest. As previously noted in May, we launched our tenant reintegration program, which we’ve developed in accordance with local government guidelines and in close coordination with our larger tenants and internal and external subject matter experts. Our priority has been to create the safest and healthiest work environment possible. We are focused on proactive multi-channel communication, enhanced safety-focused cleaning and operating procedures, and efficient building access. We are also asking tenants to do their part, and thus far, the program has been very well received. Questions generally centered around air filtration and ventilation and options for enhanced cleaning of office suites, which we are well equipped to address. Indeed, tenants are slowly repopulating our buildings. Right now, physical occupancy stands around 5% to 10% in the United States and 15% to 20% in Canada. This is up 5% to 10% across the board over the last few weeks. Even so, many large tech tenants, including most recently, our top tenant, Google, have announced extended but still temporary plans to work from home, most until year-end. Some companies are staying flexible and modifying plans based on local conditions. For example, Amazon Seattle employees will work from home until year-end, but the Vancouver counterparts will return to the office this fall. Clearly, the situation remains fluid, and we’re ready to pivot accordingly to support our tenants through these challenging times. And now I will turn the call over to Alex.

Thanks, Mark. In the second quarter, stay-at-home guidelines along the West Coast continued to mute office leasing demand. The good news is that our markets began the pandemic on very strong footing, with vacancy at historic lows, rents at historic highs, limited and/or pre-lease supply, and absorption muted only by constrained availability. Despite negative absorption and increased sublease supply across our markets in the second quarter, outside of the San Francisco CBD, rents were stable and vacancy ticked up only around 50 to 250 basis points. Tech, media, life science, healthcare, and government tenants drove demand. We remain vigilant regarding the impact of continued shutdowns and a potentially more protracted impact on the San Francisco CBD, given its density and greater reliance on public transit. In general, our portfolio is outperforming current trends, and we feel about as well positioned as any to weather the next six to 12 months. Our stabilized and in-service portfolios ended the quarter at 95.1% and 94% leased, respectively. Our second quarter leasing activity reflects both slow demand due to COVID and our portfolio’s limited remaining 2020 expiration, just 3.6% of our office ABR. We signed 107,000 square feet of leases in the quarter. About half were related to short-term 12-month or less extensions at or around in-place rents, including some COVID-19 lease amendments. Deal terms for the remaining 50,000-or-so square feet of activity were in line with prior quarters, including an average mark-to-market of 17.7% on a GAAP basis and 21.4% on a cash basis. Although we have seen an uptick in activity and tours with the initial lifting of stay-at-home orders, tenants are still for the most part on the sidelines. We have about 800,000 square feet of deals in our leasing pipeline that are deals in leases, LOIs or proposals. This is slightly less than reported in previous quarters and again in large part because of our limited expiration. Less than 10 deals representing approximately 75,000 square feet died due to COVID, and only a portion of requirements in our pipeline, about 20%, are officially on hold. The rest are just moving very slowly. Tenants, regardless of size, are working to understand and balance near-term work from home and density requirements with longer-term space and growth needs. Note that of the 3.6% of our office ABR subject to expirations this year, just 0.6% is attributable to the San Francisco CBD. Our 2021 expirations represent 10.6% of our office ABR, and San Francisco CBD expirations represent only 0.4%. Most of our exposure next year, about 8% of our office ABR, is in the Peninsula and Valley. Given stronger fundamentals and the low-rise recently modernized nature of our portfolio in those markets, we’re optimistic tenant demand for a majority of our forthcoming availabilities will be resilient. Work continues unabated at our two construction projects. Carlo is substantially completed with only corn shell closeout work remaining. We expect full completion in Q3, and discussions are moving slowly with a handful of potential users to lease all or portion of the space. One Westside is fully funded and pre-leased, and on track for delivery in Q1 2022. One final note regarding our Blackstone Studio JV; we expect the transaction to close imminently. We also expect to close a $900 million mortgage loan secured by the portfolio. The non-recourse loan will be interest-only with an initial annual interest rate of LIBOR plus 2.15% and a 2-year term with three 1-year extension options. Harout will provide further details as to the use of proceeds from both the sale of our 49% interest and our share of asset-level financing. And with that, I will turn the call over to Harout.

Thanks, Alex. In the second quarter, we generated FFO, excluding specified items, of $0.50 per diluted share compared to $0.48 per diluted share a year ago. Second quarter specified items in 2020 consisted of transaction-related expenses of $200,000 or $0 per diluted share, with no specified items in 2019. The commencement of significant leases at Epic, Fourth and Traction, and Foothill Research partially offset by the project and portions of Page Mill Center being taken offline for repositioning were primary drivers of this year-over-year increase. The second quarter 2020 FFO, excluding specified items, includes approximately $0.02 per diluted share of reserves against uncollected cash rents and approximately $0.01 per diluted share of charges to revenue related to the write-off of accrued straight-line rent receivables, some of which may be ultimately collected. Finally, second quarter 2020 FFO reflects approximately one separate diluted share decrease in parking revenue, some of which will resume with tenant reintegration. In the second quarter, NOI at our 39 same-store office properties decreased 5.2% on a GAAP basis and 3.7% on a cash basis. A one-time property tax recovery at Rincon Center and 275 Brandon reduced operating expenses in the second quarter of 2019 by approximately $3.2 million. Adjusted for this one-time amount, net operating income and cash, net operating income would have decreased 2.3% and 0.4% respectively. The cash net operating income decrease also reflects that it does not include approximately $1.7 million of COVID-related contractually deferred rents and recoveries. Adjusted for the one-time property tax recovery and the COVID-related deferred rents and recoveries, cash net operating income would have increased 1.5%. Our same-store studio NOI decreased by 21.3% on a GAAP basis and 26.7% on a cash basis, largely due to a decrease in service and other revenue stemming from shelter-in-place measures disrupting production activities and stage utilization. Note that revenue reclassifications in accordance with ASC 842 increased rental revenue with a corresponding decrease in service and other revenue in the second quarter of 2019. Adjusting for these reclassifications, second quarter 2020 rental revenue would have been modestly higher, with a correspondingly higher decrease in service and other revenue compared to the second quarter of 2019. We have $1.1 billion in liquidity, comprised of $45.1 million of cash and cash equivalents, $400 million of capacity on our unsecured revolver, $230 million of capacity on our revolver secured by Sunset Bronson, ICON, and CUE, and $380.8 million capacity on our One Westside construction loan. Again, we have no maturities until 2022, except for our $65 million loan secured by MedPar North, which we intend to repay with our revolver. Upon closing our JV with Blackstone, which Alex mentioned, we anticipate imminently, our total balance sheet and cash liquidity will increase significantly to about $1.6 billion. Following full repayment of our unsecured revolver and term loans B&D. Further, the transaction is expected to improve many of our credit metrics, including reductions in company share of net debt to market capitalization and adjusted annualized EBITDA to consolidated net debt. Needless to say, we have ample liquidity to manage our properties, complete our developed projects, and ultimately pursue new opportunities as we withdrew our previous 2020 earnings guidance on May 5 due to the uncertainty around business disruptions related to the COVID-19 pandemic. Given that these uncertainties persist, we have not reinstated earnings guidance for the balance of the year. We are, however, once again, providing the following details in lieu of formal guidance. We base this information on what we know today to help you assess our potential earnings results for the second half of 2020. We expect our rent relief program to have a minimal impact from a GAAP perspective. In terms of cash, we deferred approximately $4.2 million of second quarter cash rents across all segments, with another $4 million remaining in discussion for payment or deferral. Additional deferral may be appropriate over the coming months. The duration of deferred rents will depend on various shelter-in-place measures and tenant reintegration plans across our portfolio. As Mark previously mentioned, we made approximately $1.3 million of second quarter cash rents, most of which we expect to continue throughout the year. Parking income decreased approximately $2.25 million in the second quarter compared to last year. As with the deferred cash rents, we expect the duration of the impact of this income to coincide with tenant integration timeframes. With respect to our studios, notwithstanding the delay in occupancy on a handful of stages at Sunset Las Palmas, previously mentioned by Mark, we anticipate approximately $400,000 more rental revenue in the second half of this year compared to the first half, most of which will occur in the fourth quarter. Similarly, due to temporary shutdown and production activity at our studios, we anticipate an approximate $1 million to $2 million decrease in second half studio NOI stemming from service and other revenues less expenses compared to the first half, most of which will occur in the fourth quarter. While our leasing pipeline remains healthy, we currently estimate that the slowdown in leasing activity could result in a 3% to 4% decline in consolidated second half NOI compared to second quarter run-rate, exclusive of parking and other impacts already mentioned. Again, depending on the duration of shelter-in-place measures and tenant reintegration plans, please be aware that all estimates are provided based on the assumption that the Blackstone studio joint venture will be treated as consolidated for accounting purposes. As a result, Blackstone’s share of operating results and associated financing related to the asset held in the new joint venture will be reflected as an increase to FFO attributable to non-controlling interest. And now, I will turn the call back to Victor.

Thanks, Harout, Alex, and Mark. I know our remarks have been extremely lengthy today, but I want to take a final moment to once again recognize our incredible Hudson Pacific team. Their health and well-being remain of paramount importance. We are taking every possible precaution to create a safe and comfortable environment as our employees return to work. I am proud that in the face of adversity and in some cases, personal strife, they have risen to each and every challenge they face. Their willingness to go above and beyond and to bring their A game to tasks both big and small, to pivot quickly in dynamic and evolving situations and work together even when physically apart, is all a testament to what an amazing company we have all built. It’s an honor to be part of this group, and I applaud, and want to thank each and every one of them. To everyone listening, I appreciate your continued support. Please stay healthy and safe. We look forward to updating you next quarter. With that, operator, let’s open the line up for any questions.

Ladies and gentlemen, our first question comes from Nick Yulico with Scotiabank. Please proceed with your question.

Thanks. Hi, everyone. I just want to ask about the second half of this year NOI impact. I think you said about a 3% to 4% decline versus the second quarter or first half of the year. Can you just tell us what the assumptions are behind that? I mean, are you just not assuming much in the way of any sort of new leasing or new commencements that will be able to backfill vacancy or expirations?

Not exactly. It’s more of a deferral or delay in leasing as tenants haven’t been able to make up their minds in terms of space planning. So that’s the reason for the push. So it’s just delayed, not reduced.

Okay. And in terms of the deferrals, I just want to be clear, it sounds like you guys are including that as a negative impact when you’re talking about cash NOI or same-store cash NOI?

That’s correct. So when we defer income, that means we did not receive the cash NOI. So our cash NOI results reflect a lower number as a result of the deferrals.

Okay, that’s great. Just my last question is, maybe you could talk a little bit more about the different type of demand in your markets. And I just want to hear a little bit more as well about San Francisco versus the Valley; it sounds like you guys are a little bit more worried about leasing in San Francisco because of it being a city reliant on mass transportation versus the Valley, which is more of a drivable market. I guess I am just wondering, is this something that is just popping into your head as a realistic theory? Or are you actually hearing this type of dialogue coming from prospective tenants looking at San Francisco versus Valley? Thanks.

Sure. Nick, I will start, and then I will have Harout jump in. This is not something that’s coming or ahead, but at the end of the day, right now, the leases that we are looking at that are large leases are actually in the city. We are negotiating a couple of deals right now that are fairly large deals that look like we will get them across the finish line in the next month or so. And so we are seeing activity there. I think the informal thought is that we are just seeing a little bit more of our pipeline that’s in the Valley right now because that’s where the available space is. We don’t have a lot of space available in the city.

That’s exactly right. We don’t have the vacancy in the city; the deals that Victor referenced are in leases right now that have been going on for some time, and there’s been no discussion about any trepidation about your concerns. And we are certainly not hearing it, even with the smaller tenants for the vacancy in San Francisco.

Okay. Thanks, everyone.

Thanks, Nick.

Thank you. Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. Maybe sticking on the rental environment to some extent, pre-COVID, the mark-to-market seemed north of 20% in the portfolio. Just kind of curious, if you look at the remaining 2020 expirations, which are pretty minimal in 2021? How you guys are viewing that mark-to-market maybe with whatever assumptions you guys have on market rents going forward?

It’s Harout. Yes. So I think they are going to be very similar. I mean, a lot of the mark-to-market you saw on vacancy, some of those deals just happened that they were very close to market. But the deals that we have in our pipeline that we are continuing to get through, that is to say, in LOI leases, there have been no erosion on rents, and they are exactly the rents that we have targeted for those spaces.

Okay. And Harout, with the deals you guys have in the pipeline, I mean are tenants pushing back or trying to re-trade potentially on rents or pushing for increased concessions? What’s the conversation to a tenant has been like?

Yes. So the deals that we have in the pipeline that will continue to move forward, that is to say, we have got about 125,000 feet in leases on top of the deals we signed this quarter. There’s been no erosion in rent. These are deals that need to get done. I suspect they have been trying to push it through the decision; they are not economic decisions, they are space utilization decisions. We haven’t seen that so far, and certainly not an uptick in tenant improvements on those same deals.

Okay. And then just moving to the investment landscape, you guys have ample capital here post the Blackstone deal. Just kind of curious if you could give a little bit of color on how much of this could be potential studio expansions versus office? And then maybe just the most recent update on the West side? And then lastly—sorry for a three-part question, but just how you think about deploying capital, even though you raised it at pretty attractive yields here, but deploying it when the stock is trading where it is today and kind of how you view that trade-off?

Yes. So I will jump in here first, Craig. First of all, the Blackstone transaction, we have talked about the deployment of capital. Yes, we have ample liquidity. We really will look at it on multiple areas. Clearly, the first area that we have talked about, and we are seeing some very good traction on is deploying that capital to enhance that business with Blackstone and grow that platform. With the announcement of the deal, and some of the relationships we have had in the past, we are seeing a nice flow of products that should help us accomplish that goal. We mentioned before on capital deployment, our position has been if we can get—and we are evaluating some better yielding positions of pieces of paper on the debt side. That’s something that we would find attractive to deploy capital on either a loan to own or some sort of a hybrid debt piece. Alex and his team have started to see more of those deals come to market as we feel in the third and fourth quarter that would be the case. Not dissimilar to what I have said in the past at various levels where the stock is trading and our best performance at whatever the cap rate is trading at today, we will also entertain buying back stock as we always have, and it’s not mutually exclusive to that aspect. So we are in a very enviable position to be able to use that capital, and we think we will be able to deploy it efficiently. When we do, you guys will be the first to know.

Got it. And just kind of update on One Westside.

Yes. Sorry, it was a 5-part question, not a four-part question. One Westside, we are completing the throes of it. There’s been no change in terms of the construction pipeline or interest level of Google. For the most part, the design that we had put in place with Google has held up to a post-COVID world, with lots of outdoor space, as you know, when we showed it, lots of accessibility for walkways and safety and security. That is now starting to shape up for us to look at that asset. In terms of the timeline, I literally think we are a week or two behind. So it’s literally nothing. We have been building all the way through this process.

Yes. Just further what Victor said, we have been successful in keeping the project on track during this current environment. It’s looking great. It’s progressing, and we are super excited to keep the project going and to deliver to Google. As Victor mentioned, the bones of the project, pre-COVID, really position it strong for what we think the world is going to look like coming out of this. Low-rise building, lots of indoor/outdoor space, natural daylight—it's going to be a fantastic project that we are super proud of.

And that’s helpful. But I guess what I was getting at is just talks with Macerich about buying their remaining interest. Any update on that kind of process?

Listen, we have talked about this before. So this deal has got a lockout period. So we would have to agree on this transaction. It’s at our option at the end of the day. The intent is basically to own 100% of this asset. That’s always been clear, and given where they sit today, and their capital needs, they know where we sit. We have had open conversations and dialogues. I think there will be an appropriate time where we will sit and make a transaction, but it’s not imminent.

Great. Thanks, guys.

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

Hey, good morning. Mark or Harout, just if we could go back, I think, to Nick’s question on the impact in the back half, just so we are clear, maybe I need to be clear. If we start with the second quarter as a base and then add back the write-offs, so add back the $4 million, then the changes that we would make to the quarterly run rate for the back half, it sounds like are just the potential for an additional $4 million of write-off and then the uptick in the fourth quarter at the studios; I think you mentioned basically $1 million to $2 million of revenue from the studios, another $400,000 uptick from the studios. And I am not sure if that’s only in the fourth quarter or if that then flows into next year? But so I just want to make sure I have those pieces correct as we think about how the back half of this year should be?

Yes. I mean, I think maybe the easiest most direct way to piece together those component parts is really to look at three-month actuals for the second quarter, start with your office rental. We have already dealt with the service and other revenues through the commentary around parking and other revenue. So ignore the service and other revenue line item. Just start with office rental, back off office operating expenses, right, because they are both on a GAAP basis. The commentary is the adjustment is that $3.5 million to $4 million or a midpoint of $3.5 million on decline in the second half relative to that amount, right? Because that’s your second quarter run rate, right? The rental left the expense. Then you back off that number, say, $3.5 million in the back half.

And that $1.5 million is a quarterly rate, right, Mark, not in totality for the back half?

In totality, yes.

Okay.

Okay, and then we have given you the studio piece separately and we have given you the parking piece separately. Another way to think about the parking piece is just take your service and other revenue and run it through. In other words, just to keep it level at second quarter levels.

For at least Q3 and then assuming that all these at-home measures get lifted after Q3, then it will be back up to what we normally have presented.

Yes. So a conservative view would be to keep it flat, that there was no pickup on parking revenue relative to the second quarter. A somewhat less conservative view would be maybe to start showing some increase in that revenue on the theory that parking as tenants reintegrate and transient parking resumes may contribute better to parking.

I think one more comment on the studios in terms of what to look for outside of 2020. We expect as the studio filming has been delayed as a result of the shelter-in-place measures again, we expect Q4 to be stronger, and that will roll into 2021 because they will need more time to fill.

Okay. But Harout, the $400,000 and the $1 million to $2 million, that’s in aggregate. So basically, studios in the fourth quarter are looking to be up $1.5 million to $2.5 million, is that correct?

Yes. That’s a good way to look at it. The third quarter may be a tick higher than the second quarter because we are going to see some production activity phasing in starting in August, and then maybe more fully. We should basically be in full production in September. You are going to see some of that pick up within the third quarter, but the majority of it will hit in the fourth.

Okay. And then the second question is, maybe I missed comments on Maxwell, but can you just update us on Maxwell WeWork and what’s going on there?

Yes. Sure. We had discussed this on our last quarterly call. WeWork is paying rent in all of their locations with the exception of Maxwell. We are negotiating a deal. We signed that deal with them, and it’s going to be more of a percentage rent transaction. It also will enable us the deal has enabled us to take over the asset with some notification period; we’re now evaluating some of the other tenant uses and interest level down there. The numbers that the guys have quoted have been based on a percentage rent. It’s the only deal that we have with any of our co-working entities. That looks like it will be a wait and see based on the interest level. We clearly have interest level from some of the existing enterprise tenants and new tenants in that marketplace that want to expand into it.

Okay. Thank you, Victor.

Thanks.

Thank you. Ladies and gentlemen, our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

I just have one left, and maybe I will start with Harout and Victor. And Harout, you could jump in on some of it. But with the VSP program, I just kind of wondered about your experience now with collections as you move into August, the demand negotiations with any of those tenants? I guess, are you inclined to do more of this given the comments that you just made around WeWork and just co-working in general? Just kind of your thoughts on that part of the business and how it’s performed?

Sure. It’s Harout. The VSP is chiefly, it’s a lot of the smaller spaces that are kind of ready to go. We’ve always built them out less densified; that’s the word. Let’s densify and allow tenants to create the environment that they need. And so we are on track with the deals that we have right now in the VSP program. During this period, we have been able to deploy our resources to build out more in this fashion. I think that, that’s going to be part of kind of the increase in leasing velocity going forward as having the inventory in the proper markets ready to go. So yes, it’s going to be a big part of our successes going forward as it has been with some space modification.

What’s your total exposure to that VSP that you might consider to be in the VSP program? And what’s the availability do you have to sit here today? Or what do you how much you build out?

So I think deployed, ready to go right now, we have got about 100 probably about 120,000 square feet. Again, these are smaller tenants for smaller tenants. We’ve got in the works; we’ve got probably another 75,000 square feet in some process of development.

Okay, great. Thank you.

Our next question comes from the line of Tayo Okusanya with Mizuho. Please proceed with your question.

Hi. Yes, good afternoon. The short-term leases that were signed, could you just talk a little bit about what the terms of the leases are? Just trying to get a better sense of the flexibility around those things, either become long-term leases later on? Maybe opportunities for you if you find a better tenant and you can kind of move a tenant in there? I’m just kind of curious what kind of flexibility and puts and takes around the short-term.

Well, I wouldn’t—the ones we called out so that we could give you a clear understanding of what the true underlying mark-to-market is a 54,000 square feet of short-term extensions. I wouldn’t look at those as if they were in connection with sort of just a desire to extend them for 12 months or less. That was in connection with rent relief programs that we were granting to a tenant that had a shorter term remaining on the lease. So a tenant comes to us, wants two months of deferral. We are willing to give them two months of deferral, but we want, say, turn beyond the period that they would that the bullet payment would arise or give them a little bit more time so that they have time to amortize the deferred rents. So this wasn’t like arm’s length arrangement where a tenant came to us for a short-term extension. This was hand-in-hand with an underlying rent granting of some form of rent relief.

Got you. Okay. And then Harout, some commentary was made there that the process of trying to lease it up is moving along, but the word slowly was used. I’m just kind of curious the use of the word slowly as you kind of shifted to this multi-tenant strategy? Again, how confident are you feeling that you get leased up there by opening or a little bit after opening?

Clearly, given the fact that tours are not at face-to-face; they are virtual, it has slowed the process of the amount of people that actually can see the space. It has enabled us to finish it, which we will be finishing it shortly. It’s almost complete. I guess by the end of September, it should be ready to be seen. Hopefully, when the lifting happens and people start coming back, we will see a lot more tours. But that’s the definition of slowing. We’re just not getting the physical tours right now for a full office building like that.

Got it. Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Thanks. Good afternoon. Sorry if I going. We had a whole star one trouble for some reason. So just two questions. First for Harout, when you talk went through the sort of the guidepost for the rest of this year, you talked about the JV, and it’s going to be consolidated. So is it sort of a simple, take 49% of the FFO previously somehow? And has that minority interest fee DUCs, is that how we should think about it?

Partially, that would be true for the assets un-levered, but then you have to factor in the leverage of the $900 million and allocate 49% of that debt to effectively offset that reduction of FFO.

Okay. Okay. I will try to miss around out that. And then a quarter question perhaps for Victoria, just kidding, Victor, the densification of the studio; somebody mentioned along the way as sort of content starts to ramp back up. I am wondering if the denser nature of the studio and need more space to spread within the studios for health reasons and all that, if that can be extrapolated to how the office business generally would behave in the aftermath of all this? Do you see this, gosh, actually being resulting in an increase in office demand because of social distancing within the four walls of those assets?

Well, I think, listen, we have talked about that, and Rich, I think that’s exactly what we as other landlords are finding right now. We’re finding that they are not asking for less space. They are actually keeping the existing space with less people. That’s exactly the case that’s happening in the studio business. What we are finding is that they are allocating more space for the same amount of people that they are going to be working there. We feel that in the deals that we are negotiating right now that we are in leases. I mentioned earlier in the call, there’s a couple of them in San Francisco right now that are larger tenants, square footage-wise. The amount of square footage has stayed the same, and they’re going to put fewer people in that space. I think that’s going to be a trend going forward. Who knows what happens if people start hiring again in 2021 or beyond and what they’re going to do about that, but I think it’s going to be a combination of existing space or more space, and then flexible hours to gain people not coming in at the same time or sharing space in a different form of function than we’ve seen in the past. So this is a wait-and-see.

And I think just taking one step further, maybe maintenance CapEx starts to trend down because you’re not jamming so many people in there, it’s not as much of a house party. I mean I’m kind of riffing on this, but it seems like there’s perhaps another side of this argument?

Well, I definitely think that will fall into play. But I do think be cautious on the maintenance side, when it comes to how many orders come in and out of office buildings; you are going to have a lot more cleaning done on a regular during the day than you just had you would have of the night. So that could offset it.

Yes. Okay, great. Alright, thanks. That’s all I have.

Thanks, Rich.

Thank you. Ladies and gentlemen, at this time, there are no other questions. I would like to turn Victor Coleman for closing comments.

Yes. I apologize that we have gone over by our allotted time, but I think there was a lot of information. I appreciate the support for Hudson and we look forward to speaking on our next quarterly call, and we hope everybody is safe. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines and thank you for your participation.