Earnings Call Transcript - HPP Q2 2022

Operator, Operator

Good morning, and welcome to the Hudson Pacific Properties First 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, Executive Vice President, Investor Relations and Marketing

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, CEO and Chairman

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 of about 5% to 10% during the height of the pandemic. For most of our office tenants, it's clear that 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, three 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 workspaces, 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 six figures, yet the slowdown in demand and activity we witnessed at the beginning of the second quarter tempered in June and July as some 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 that 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 our markets, and this is very positive in terms of development. Most recently, California 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 emphasizing cleaning up cities, supporting police, and ensuring urban centers remain open for 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 and 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 non-strategic 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 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%. To address homelessness, we've invested and donated a total of $4 million towards supportive housing solutions in our communities. We've also strengthened our commitment to diversity, equity, and 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, President

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 for Nutanix with a 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. 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 repositioning 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 two 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's space. Separately, we have had some recent interest in another 200,000-plus square feet, largely from a single tenant. We're also evaluating repositioning 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 Bank of America'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 two projects, upon stabilization, will contribute $42 million of additional NOI annually. We also recently received planning approval for two 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, and 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, CFO

Thanks, Mark. Compared to the second quarter of 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, 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 one-time 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 one-time 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 the 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 is 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 non-cash impairment, and $0.5 million of one-time 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 SOFR curves compared to prior projections and 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 Qualcomm’s 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 we’ll happily take questions.

Operator, Operator

The first question comes from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb, Analyst

I have two questions for you. Victor, I want to take a broader look at the studios. There have been some recent announcements, and while I believe they are all distinct, you can clarify if they are related. For instance, Atlas had news with East End Capital, and I recall another announcement as well. With these studio developments, are the economics in L.A. changing to become more favorable? Or is there simply so much demand that entities can adjust their numbers despite rising costs? How should we interpret the surge in studio announcements from others looking to enter or expand their presence in this market?

Victor Coleman, CEO and Chairman

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 when you call them offline, 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. We are still seeing economics around building at the right price levels. I would caution some of the banter around some people saying they're building studios. I think what was planned earlier last year and even towards 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 we're going to be building, and the activity that we have around them is still consistent with the yield even with cost increases.

Alexander Goldfarb, Analyst

Okay. Mark or Harout, regarding the interest expense, you mentioned last quarter an expectation of $325 million to $350 million in total. Currently, it seems we have $50 million. So, it appears there's still $300 million remaining. Previously, you indicated a 2.25 GAAP cap rate due to several vacancies, but now we are in a higher interest rate environment. Harout, as we consider how to model our interest expense and the debt balances influenced by rates, what do you estimate will be the net impact on interest expense? Some companies are providing specific figures, like an increase of $40 million in interest expense for next year. Can you provide us with similar guidance to help model your expected net floating rate and potential increase in interest expense for next year?

Harout Diramerian, CFO

Thank you for your question, Alex. There's a lot to consider, and we haven't shared any details for 2023 yet. However, I can provide you with a breakdown of our variable debt from 2022 to help you understand the factors at play for modeling purposes. Our variable debt is currently at 34.5%, which amounts to 14% of our total debt. This totals 485,000 for our line, which we believe is a temporary situation. Once we sell some other assets, we expect to reduce that amount significantly. Additionally, 6.1%, or $210 million, is related to construction financing for both One Westside and Sunset Glenoaks, which will also be temporary until these construction loans are repaid. There is another $328 million of debt with various caps. This leaves us with approximately $172 million or $173 million of debt that is truly variable, meaning it doesn't have any caps and is not temporary. Breaking it down this way should help you project our numbers, as we rely solely on future LIBOR and SOFR curves for our forecasts.

Mark Lammas, President

Yes. Alex, let me just respond to your question about the held-for-sales and the 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. 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, Operator

The next question comes from the line of Michael Griffin with Citi.

Michael Griffin, Analyst

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 or expansion of tenants? Any specific sector that's kind of driving it?

Art Suazo, EVP of Leasing

Yes, this is Art. It's really a mixed bag, which is promising. The Greater Valley and Peninsula have shown significant improvement in the broader markets. There was approximately 3.1 million square feet of gross leasing and 2 million square feet of net absorption. This trend has been consistent for the last four to five quarters. It's not only tech driving this growth; we've also seen activity from law firms and various other sectors. It's quite encouraging to note that this activity is coming from a wide range of sectors.

Michael Griffin, Analyst

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?

Art Suazo, EVP of Leasing

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. We'll keep them in some way, shape, or form.

Michael Griffin, Analyst

Got it. Could you put a number around that subtenant exposure, kind of quantify it?

Art Suazo, EVP of Leasing

Total sublease in our portfolio is probably about 400,000 square feet, maybe a little more.

Operator, Operator

The next question comes from the line of Jamie Feldman with Bank of America.

Jamie Feldman, Analyst

Victor, I want to revisit your initial comment about the overall demand for technology. It seems that demand is still present. Can you elaborate on this? I know there are many negative headlines in the press, but what do you think the key tenants and major tech companies are considering regarding their long-term space plans at this time?

Victor Coleman, CEO and Chairman

Yes, Jamie, I don't have a crystal ball, but I believe you've noticed the marketplace where negativity gets the most attention. However, many stable tenants, despite some pauses or holdbacks, are looking beyond the next 24 to 36 months. For instance, we have seen companies like Google in our portfolio reach out to extend leases for up to 10 years. While some tenants may want to wait and see, or are considering downsizing, there are strong tenants that are committed to certain assets in our portfolio. They have expressed interest in renewing early or restructuring their leases for longer terms, typically 7 to 9 years or even longer. Art, would you like to add anything?

Art Suazo, EVP of Leasing

Yes. Throughout the pandemic, we have seen tenants taking on more space with us. Currently, the large tenants driving the market, such as Apple, are negotiating significant deals in Silicon Valley for nearly 400,000 square feet. Microsoft is securing 450,000 square feet in Vancouver, among others. We continue to witness this trend across various markets.

Jamie Feldman, Analyst

So can you quantify 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?

Art Suazo, EVP of Leasing

I know that Seattle is currently experiencing some caution regarding demand and leasing activity. There are four tech tenants occupying nearly 100,000 square feet who have paused their activities. They haven't exited the market, but they are still present. This situation is our main concern for Seattle at the moment. However, I cannot provide a detailed breakdown of the tenants who have recently paused their activity.

Jamie Feldman, Analyst

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?

Art Suazo, EVP of Leasing

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, Analyst

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 power?

Art Suazo, EVP of Leasing

It's a mixed situation. Each market has its own dynamics. In the Valley, rental rates have been stable, and there is currently no pressure on concessions as the pace of deals increases. In the Peninsula, Vancouver's market has remained steady, with rates gradually rising even during the pandemic. We're in a strong position there. We're closely monitoring Seattle, which is competitive for us, but we still have a solid pipeline of deals in negotiation, totaling over 200,000 square feet. Rental rates in Seattle have not declined, but we remain competitive. The most significant challenges are in San Francisco, where the market is highly competitive, and we need to address the 40 million square feet of leases expiring in the city over the next two years. Those are the two areas we are watching closely. In Los Angeles, particularly West Los Angeles, tech and media tenants are driving the market, and we have not observed any decline in rental rates.

Mark Lammas, President

Jamie, Art and I did a bit of a deep dive on net effective leases, 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 start to get a real sense of net effective. If you look at those markets, net effectives are up year-over-year compared to last year's activity in those very same markets, 14%. Interestingly, they're not just up relative to 2021, they're higher than 2019 and 2020 across all three of those markets. So just to answer your original question about rents and TIs and so forth, based on the activity to date, where there's a good-sized sample of real activity signed, rents are looking great.

Art Suazo, EVP of Leasing

As I mentioned earlier, tenants are willing to pay more for premium space. In the current markets, we aren't facing much competition for these spaces, and this is allowing us to benefit from their willingness to invest in these assets.

Jamie Feldman, Analyst

So the 14%, is that in your portfolio or that's across the entire market?

Mark Lammas, President

No. That's activity in our portfolio.

Jamie Feldman, Analyst

Okay. And just to clarify, it seems the expected cost to build at Sunset Glenoaks has increased by about $5 million at the midpoint. Can you explain where that increase comes from?

Mark Lammas, President

Well, I don't think that's a comparison to last quarter. Or is it?

Jamie Feldman, Analyst

I think it is.

Mark Lammas, President

I don't know. I'll have to look into that. We can take that offline.

Operator, Operator

The next question comes from the line of Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

Great. Just a couple of quick ones. One is just on just a little bit more color on the Nutanix 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, President

Yes. First of all, the team got ahead of this situation, and we're really proud of their efforts. They recognized Nutanix's long-term needs after experiencing significant growth. They were managing their operations across three different assets and wanted to rationalize their footprint. They hadn't utilized a considerable portion of the space they had acquired and hadn't invested in improvements. Uninfluenced by the work-from-home trend, they focused on their long-term requirements, managing to extend around 50% of their space through 2030. Additionally, nearly 30% of their current footprint does not expire until the middle of 2024, and they are still considering their options for that. Therefore, 75% of the space is either extended through 2023 or has the potential for further extension. Would you like to add anything to that?

Art Suazo, EVP of Leasing

Yes, that's correct. The mark was 6.5%, which is a strong indicator for their premises moving forward. The backfill section has around 15,000 square feet that was filled this quarter at a rate of over 13%. Overall, it was a very favorable arrangement.

Ronald Kamdem, Analyst

Great. Helpful. My next question is about the occupancy situation, particularly outside of the Qualcomm area you mentioned. When I review the lease expiration schedule for the next eight quarters, how are you approaching occupancy growth as we finish this year and move into next year, considering all the leasing activity you've completed so far?

Mark Lammas, President

That's a great question. Looking at the pipeline activity we've discussed, we expect a dip in both lease percentage and occupancy by the end of July when we lose Qualcomm. However, there is significant ongoing activity throughout the third and into the fourth quarter. If that activity persists, we could end the year with lease percentages in line with our current levels, especially if new requirements arise. I focus on lease percentage because it's more relevant than occupancy. We'll be working on executing leases until year-end, which may cause some delays in occupancy. Currently, we have a substantial amount to execute in Seattle, primarily 500,000 square feet in Pioneer Square, which we’re progressing on. If everything comes together, we might finish the year at around our current lease percentage.

Ronald Kamdem, Analyst

Great. My last question is more of a broader one. I believe your company is one of the few office REITs focused exclusively on the West Coast. Considering the current discussions about the tech industry slowing down and your long-term strategy, what are your thoughts on remaining committed to these markets? Are there any indicators or signs you are monitoring? Are you considering opportunities to diversify or expand into other markets, or is it too early to explore that? What factors will you be evaluating in regard to potentially moving away from a solely West Coast focus?

Victor Coleman, CEO and Chairman

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 and low times, are 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 two or three years to come. 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, Operator

The next question comes from the line of Vikram Malhotra of Mizuho.

Vikram Malhotra, Analyst

Building on the earlier questions about occupancy, some of your peers have started to provide guidance regarding same-store NOI growth trends, considering the various factors at play. Could you share what key variables we should focus on as we project for 2023? Also, it would be helpful to know about known aspects, such as interest expenses, assuming current rates, along with any significant factors that could impact 2023.

Mark Lammas, President

Vikram, that question covers a lot of ground. To provide some guidance, we are currently experiencing a lower exploration year than in previous years, and this is expected to decrease even further by the end of the year compared to 2019, 2020, and 2021. Therefore, we anticipate slightly less exploration activity in 2023. The mark for expirations in 2023 is nearly 20%, which is an improvement compared to what we saw as we approached 2022. So, we have a healthy mark and fewer expirations to deal with than in the last couple of years. Regarding interest expenses, if we look at the interest rate curve, particularly SOFR, we expect rates to be around 3% by the middle of next year, with a gradual decline thereafter. There’s a good possibility that we won’t have as much floating rate debt as before. However, any that remains might provide some relief on interest expenses in 2023. I apologize if I missed some of your questions, but I hope this gives you a clearer picture.

Vikram Malhotra, Analyst

Yes. No, that's helpful just more of the big picture buckets going into '23, whether it's the core 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, CFO

Yes, definitely. Just as a reminder, several of our assets are currently undergoing tenant improvements, and their cash NOI will start making a significant contribution in 2023, with Google at One Westside being the largest. In terms of cash NOI, on a consolidated basis, it would be approximately $50 million annualized.

Victor Coleman, CEO and Chairman

Yes. For Google. Yes. And Glenoaks will deliver too, so that could be a contributor. And the big 2023 expiration is Square Block at 1455, and we've already given you a sort of line of sight on that.

Art Suazo, EVP of Leasing

Right. And the next biggest we're in negotiations with, which is Amazon for 139,000 square feet.

Operator, Operator

The next question comes from the line of Daniel Ismail with Green Street.

Daniel Ismail, Analyst

Maybe just staying on the timber front and ESG. Victor, you mentioned ESG in the opening remarks and a possible tenant interest in Berard Exchange. I'm just curious, more broadly, are you seeing those ESG factors translating into higher rents or better tenant attraction or retention quite yet?

Victor Coleman, CEO and Chairman

That's a great question. The awareness of ESG factors has finally become evident. Regarding institutional quality tenants, those aspects of our assets that have been upgraded from an ESG perspective attract a certain level of tenants who are interested in those upgraded properties. However, I don't think we can directly link this to an increase in rents. The level of interest outweighs the potential for increased rents because there is significantly higher interest and awareness in this area. I believe that is the most crucial point.

Art Suazo, EVP of Leasing

That's right. From a leasing perspective, we've seen over the last several years that it has shifted from being a nice-to-have to a requirement. With these institutional tenants, if you don't meet this criteria, you're unlikely to make their shortlist, and that is significant.

Daniel Ismail, Analyst

Got it. That makes sense. I have one more small housekeeping question. Regarding the Sunset Waltham development, Victor, I believe you mentioned that approvals came in earlier this week. I noticed on the supplemental that there is an increase in the estimated square footage of the project. Was this increase related to the approvals or is it a change in design? When did the size increase occur?

Victor Coleman, CEO and Chairman

Yes, the increase in size is due to our acquisition of an adjacent property that allows us to add more support and outdoor space. This addition increased the overall square footage, and we made that purchase earlier in the spring. That's the reason for the increase reflected in the supplemental.

Operator, Operator

The next question is a follow-up question from Michael Griffin with Citi.

Michael Bilerman, Analyst

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 acquired the EOP portfolio and they came on the board and obviously in the 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 effectively a lockup on those shares. I'm just trying to understand if there is anything precluding that.

Victor Coleman, CEO and Chairman

No. I mean, listen, their information from the standpoint of shareholders, like everybody else, is publicly traded information. And in terms of their information on the partnership, it's also publicly held information, but there are no restrictions on the stock.

Michael Bilerman, Analyst

And I recognize I could ask this of John, but they bought almost a 4 million share position at a VWAP back at 24; the stock is 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, CEO and Chairman

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, CFO

Is that what you're referring to? Are you referring to open market buying or the '21?

Michael Bilerman, Analyst

I mean, yes, that was the open market purchase, wasn't it? The 3.8 million shares they've just held since.

Mark Lammas, President

No. They held a substantial position, with about half of the $3.5 billion purchase being recorded as equity in 2015. Then they were locked out for a while, which delayed their ability to liquidate that position. I believe it took them three or four years, but they held nothing at that time. They have since made open market purchases, but that’s the situation.

Victor Coleman, CEO and Chairman

We're not part of those open market purchases.

Michael Bilerman, Analyst

Exactly. I wanted to better understand the open market purchases from earlier last year. The stock had fallen but then recovered a bit. I was curious if there was anything stopping them from selling that stock, considering all the relationships and the information about your prospects. Additionally, if there wasn’t anything preventing them from selling, shouldn't they be buying given the basis and value? That's what I was trying to clarify.

Victor Coleman, CEO and Chairman

Yes. As I said, there are no restrictions. I think you could ask them if they want to continue to buy. We would love to have their answer.

Michael Bilerman, Analyst

I'm sure you will. Is there anything you are considering regarding reinvesting in the stock? I know you did the accelerated share repurchase in 2020, which you can't change now. At that time, you sold shares, received proceeds, and completed the transaction. How are you thinking about taking that further? Do you believe that was a beneficial process, or are you exploring other methods to enhance shareholder value with the hope that the stock price will then increase?

Victor Coleman, CEO and Chairman

Listen, I think it was an excellent execution at the time, and it was something that we said we were going to do. Since then, 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. I think the intent is for us to continue our game plan on that basis.

Michael Bilerman, Analyst

Do you have incremental asset sales to put to market to generate more proceeds to effectuate those purchases?

Victor Coleman, CEO and Chairman

Yes. I mean, we've commented on the two small ones that are selling, and we've got two more that they're in active negotiations. Then we'll revisit market conditions and other assets that potentially may fall into that category.

Operator, Operator

The next question comes from the line of David Rodgers with Baird.

David Rodgers, Analyst

I have one follow-up question. Victor, you mentioned the strength in the studio and support business. I noticed that Netflix took a charge on real estate related to Burbank, and I have some questions about the potential impact of that. Are you seeing any communication with them regarding giving back space, terminating leases, or subleasing?

Victor Coleman, CEO and Chairman

No. Listen, that was out in Burbank. I believe that was maybe their animation group or something like that, right? It was office space.

Art Suazo, EVP of Leasing

It was space that was not even occupied or built out. So

Victor Coleman, CEO and Chairman

Yes. We've had zero communication on that level that they're interested in giving back any space in any of our portfolio. Quite frankly, I've heard nothing in Hollywood, in general, from them at all and other assets too.

Operator, 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, CEO and Chairman

Thank you, operator, and thank you to everyone for participating in 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, Operator

The conference call has concluded. You may disconnect.