Q3 2021 Hudson Pacific Properties Inc Earnings Call
[music].
Good morning, and welcome to the Hudson Pacific Properties third quarter 2021 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the stock.
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After today's presentation there'll be an opportunity to ask a question.
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I'd now like to turn the conference over to Laura Campbell Executive Vice President Investor Relations and marketing. Please go ahead.
You operator, good morning, everyone and welcome to Hudson Pacific properties third quarter 2021 earnings call Yes.
Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are available on the investors section of our web site Hudson Pacific properties Dot 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 web site.
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 those associated with the COVID-19 pandemic.
Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update. Moreover, this quarter was once again included certain disclosure prompted by COVID-19 business changes, which we won't maintain our business operations further normalize.
With that I'd like to welcome Victor Coleman, our chairman and CEO, Mark Lammas, our president and he route your maryanne our CFO they will be joined by other senior management during the Q&A portion of the call Victor.
Thank you Laura good morning, everyone and welcome to our third quarter 2021 call as we sit today more than 18 months does depend NAMIC. The advantages of our focus on top tier tech and media markets on building and reinvesting the studio to your portfolio and are maintaining a strong balance sheet have never been more evident.
In the third quarter, we had a robust same property NOI growth as our office and studio tenants continue to pay rent and repay deferred rich we had another solid quarter of leasing activity.
I'm positive rent spreads are stabilized lease percentage remains over 92%, we're making good progress on our remaining 2021 and our 2022 explorations. We also successfully executed on multiple city related acquisitions. All in spite of the pandemic headwinds.
There is definitely growing momentum around our tenants return to the office some of already reiterated at least a portion of their employees over the last few months, while others are working towards either at year end or early 2020 to return the combination of record funding in fund raising by Vcs media can be spending of over $100 billion on <unk>.
<unk> and significant National Health and research spending has led to continued growth in hiring within the industries that drive demand for our assets, primarily tech media gaming and life science across our markets office leasing activity was notably elevated or showed healthy indicators such as a shift away from short term renewals to.
New and expansion deals sublease space contracted almost without exception as a result of tenants both point listings or back filling space. We also saw positive absorption around many of our metro areas and sub markets and in most cases for the first time since the pandemic onset. We're obviously very focused on maintaining our leasing momentum.
As the office market recovers, which mark is going to discuss further in a moment.
We also made several major announcements around the successful growth of our studio platform in the third quarter, we unveiled plans for Sunset Glen Oaks, which would be the first purpose built studio in Los Angeles area and more than 20 years growing our studio footprint in that market to a 1 million square feet in 42 stages, we purchase a major site north of London to build Sunset Walt.
<unk> Cross, which we have large scale purpose built facility with 15% to 25, new stages, and we expanded our services platform with the purchase of the transportation and logistics companies Star wagons, and <unk> studio services, enhancing our existing clients' experience, while capturing significant additional production related revenue.
Our combined expertise with Blackstone across transactions operations and development is second to none and we're poised to deliver and offer a purpose built next generation studio that will attract premier productions for years to come and create exceptional value for our shareholders. Finally earlier. This month, we received our <unk> 2021 real estate assessment.
It's.
In addition to earning <unk> Green Star the highest five star ratings for the third year in a row Hudson Pacific was named an office sector leader for the Americas ranking first among the 22 companies in that category in terms of our development program. In addition, we earned an a and ranked first among our U S office peers in terms of public disk.
Closure.
Credibly proud of these results as it showcases both the dedication and ingenuity of our team as well as the commitment to being a leader on ESG issues with that I'm going to turn the call over to Mark.
Thanks, Victor our rent collections remained strong at 99% for our portfolio overall and 100% for office and studio tenants, we've collected 100% of contractually deferred rents due to date and 57% of all contractual deferrals physic.
Physical occupancy at our properties has stayed consistent over the last several months at around 25% to 30%, while it's Victor noted activity around a return to the office is accelerating across our markets. Our current office leasing pipeline that is deals and leases LOI that proposals stands at $1 8 million.
We're feet up over 20% quarter over quarter, and also 25% above our long term average.
We signed 318000 square feet of new and renewal office leases in the third quarter at eight 3% and five 1% GAAP and cash rent spreads with the bulk of that activity about 65% in the peninsula and valley that brings us to one 4 million square feet of new and renewal deal.
<unk> year to date, our weighted average trailing 12 month net effective rents are up about 4% year over year, while our weighted average trailing 12 month lease term for new and renewal deals held steady at five years.
Despite facing about 360000 square feet of expirations heading into last quarter, our stabilized and in service office lease percentages remained essentially stable at 92, 1% and 91, 2% respectively.
Recall that the addition of Harlow to the in service portfolio as of the second quarter accounts for more than 30 of the 50 basis point drop in lease percentage since first quarter.
Harlow is 54% leased and we are in leases with a tenant for the balance of the building.
We only have one 9% of our ABR in terms of our 2021 explorations remaining and those leases are over 20% below market.
With strong activity on our fourth quarter explorations and existing vacancy we remain confident our year end in service lease percentage will remain essentially in line with third quarter levels.
We also already have 30% coverage on our 2022 expirations.
We continue to work on our pipeline of World Class Office and studio development projects.
In terms of office, we're on track to deliver our 584000 square foot one Westside.
Office adaptive reuse projects in West Los Angeles to Google for their tenant improvements in the first quarter of next year we.
We plan to close on the podium for our 538000 square foot, Washington, 1000 office development in Seattle later in the fourth quarter, we're in dialogue with potential tenants and have 12 months post closing to finalize our construction timeline.
We also recently announced plans for Berard exchange, a 450000 square foot hybrid mass timber building on the dental Center campus in Vancouver, We have submitted a development permit application and construction could start in early 2023.
On the studio side, we plan to begin construction for our 241000 square foot Sunset Glen Oak studio development in Sun Valley before year end with delivery anticipated in the third quarter of 2023.
We're also working through design and public approvals for Sunset Welcome Cross Studios. The 91 acre site. We recently purchased northern blended and expect to have more details on scope as well as timing as we head into next year and now I will turn the call over to her road.
Thanks, Mark in the third quarter, we generated <unk>, excluding specified items of <unk> 50.
Per diluted share compared to 43 per diluted share a year ago third quarter specified items consisted of transaction related expenses of $6 3 million or <unk> <unk> per diluted share onetime debt extinguishment costs of $3 2 million or <unk> <unk> per diluted share.
And one time prior period supplemental property tax reimbursement related to Sunset Las Palmas.
$1 $3 million or <unk> <unk> per diluted share compared to transaction related expenses of $2 million or zero cents per diluted share.
And onetime debt extinguishment costs of $2 $7 million or <unk> <unk> per diluted share a year ago.
Third quarter NOI at our 45 consolidated same store office properties increased five 1% on a GAAP basis and increased 10, 8% on a cash basis.
For our three same store studio properties NOI increased 49, 8% on a GAAP basis, and 45, 5% on a cash basis.
Adjusting for the one time prior period property tax reimbursement to NOI would have increased by 27, 9% on a GAAP basis, and 22, 8% on a cash basis.
Turning to the balance sheet at the end of the third quarter, we had approximately <unk>.
<unk> 6 billion in liquidity with no material maturities until 2023 and average loan term of four six years.
In August we refinanced the mortgage loan secured by our Hollywood media portfolio.
Accessing additional principal while lowering the interest rate and extended the term we replace the prior $900 million loan bearing LIBOR plus two 5% per annum.
With a $1 $1 billion loan bearing LIBOR, plus one 7% per annum.
The new loan has a two year term with three one year extension options and is non recourse except as to customary carve outs, we also purchased $209 $8 million.
The new loan, which bears interest at a weighted average rate of LIBOR plus 155% per annum.
Our pro rata net debt. After this refinancing remained unchanged at $351 million.
In terms of our three studio related acquisitions completed during the quarter. The Sunset Awesome Cross site in the U K and star wagons, and Dio studio services operating businesses, we funded each with a combination of cash on hand and draws from our revolving credit facility.
On account of these three transactions and other corporate activity at the end of the third quarter, we drawn $300 million under our revolving credit facility, leaving 300 million of Undrawn capacity.
Third quarter, <unk> grew significantly compared to the prior year, increasing by $10 $1 million or over 21% by comparison <unk> increased by 9% or $6 million. During the same period again. This positive <unk> trend reflects the significant impact of normalizing lease costs.
And cash rent commencements on major leases following the burn off of free reps now.
Now I'll turn to guidance as always our guidance excludes the impact of unannounced or speculative acquisitions dispositions financings and capital market activity. In addition, I'll remind everyone of potential COVID-19 related impacts to our guidance, including variance in evolving governmental mandates.
Clearly uncertainty surrounding the pandemic makes projecting the remainder of the year difficult and we assume our guidance will be treated with a high degree of caution.
As noted many companies are still determining returned to work requirements and the impact on space needs because of this for example, our guidance does not assume a material increase in parking and other related variable income overall, we assume full occupancy and related revenues will not return to pre Covid <unk>.
<unk> levels in 2021.
That said, we are narrowing full year and providing fourth quarter 2021 guidance in the range of.
$1 95 to $1 99 per diluted share excluding specified items and 48 to 50 per diluted share excluding specified items, respectively specified items for the full year, including those referenced in our second quarter SEC filings and the third quarter earnings release.
Includes $7 $4 million of transaction related expenses and $3 $2 million of costs associated with the early extinguishment of debt. There are no specified items in connection with our fourth quarter guidance.
I'll point out that we incurred $1 4 million of prior period supplemental property tax expenses as noted in the first and second quarter as SEC filings nearly all of which was offset by the prior period's supplemental property tax reimbursement of $1 3 million received during the third quarter. So we're not identifying.
As specified item related to prior period taxes for purposes of 2021 full year guidance and now I will turn the call back to Victor.
Thank you Arun as always I want to express my appreciation once again to the entire Hudson Pacific team for their exceptional work. This in every quarter and thanks to everyone for listening today. We appreciate your continued support stay healthy and safe and look forward to updating you next quarter and operator with that let's open the line for any questions.
Yeah.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your touch timeframe, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press stop N K.
Our first question comes from Craig Melman Keybanc capital markets. Your line is open. Please go ahead.
Hey, everyone.
Just wondering if we could get a little bit more color on the expanded leasing pipeline here, maybe give us a sense if it's <unk>.
Strengthening in any particular market and also from a rent perspective as it is that 4% net effective rent growth still kind of staying intact. Given what you guys have in the pipeline.
Yes.
Hi, Craig let me have art answer that so again I'll, absolutely hi, Craig Yeah. So the expanded <unk>.
Call. It the expanded pipeline had been expanding really since the beginning of the year. If you think about where we were.
At close to about 1 million eight square feet in the active pipeline. Those are unique deals I just to be clear those are not duplicative deals in any in any one of those assets. So it has grown about 800000 feet since the beginning of the year. It's also grown about 350000 square feet.
Here in the third quarter through really through the Delta variant and so we're seeing an uptick everywhere more specifically if you think about.
We're we're hyper focused on leasing peninsula and Silicon Valley.
<unk> is about 500000 square feet of that pipeline, so close to a third and then theres probably about 17% in.
In Seattle.
Relative to the growth that we've seen trailing 12.
Kristin.
On the proposals that we're seeing right now Craig going out the door that are kind of early stages. We're seeing an uptake we're probably seeing is very similar uptick in face rent and we're also seeing.
Really.
Less free rent being given on deals that are going these are deals are going out the door that are closed at the end of the quarter and into the first quarter.
And Craig on your second question on net effective.
We.
Looking back.
We went back on trailing 12 month net effective for several years now and we've been able to hold that net effective rent if not improve it.
Every quarter since the onset of the pandemic.
And I think.
That trend looks like it will continue.
No that's helpful.
Just curious I know you guys have talked in past about Qualcomm and NFL.
An update there and whether any of that is also in the $1 8 million square feet.
Yes, so I'll start with I'll start with NFL NFL as you know expires at the end of at the end of next year. They exercise the termination we are actually negotiating an LOI with two users each for the entirety of the space.
Only 100, <unk>, so called 170000 square feet isn't that active pipeline.
Currently.
By the way I would add that it's over a 20% mark on that backdrop.
Right and then back to Qualcomm Qualcomm, we are still in discussions about a reduced footprint, we're marketing the space, we're very close actually trading paper.
On the on the entire project those box those marks are probably closer to 3% on Qualcomm.
Okay.
Helpful. And then just one last one.
You guys continue to make good moves here on the studio side of things I'm. Just curious number one is blackstone at all interested in joint venturing.
The new acquisitions and number two just given the lack of comps for that business and the value guys are creating I mean, what's the endgame. There would you guys consider spinning it out into its own company to kind of realize the full value in or how long would you guys want to keep it.
In the the REIT.
And maybe not get the credit for it.
So.
Craig listen on the first part of the answer is 100%, yes Blackstone.
And we had commented on that in the past.
They are in the process of.
Coming in on those deals and others that we're working on the JV side. So we're fully aligned as partners going forward in all aspects of that business and in the overall industry in terms of the aspect.
<unk> of valuation listen we just we just bought that to heal.
It's very accretive.
As you know.
We're going to run it I think it's more of a greater question down the road of what we do with the entire platform versus just.
The two businesses and the other ancillary income streams that we're looking at right now.
Well, that's what I was getting at because you guys are kind of building a vertically integrated kind.
Kind of business, there and Thats, what youre getting at the whole platform not just D onstar wagon.
And as I said, it's still just too early for us to sort of determine what our next steps are.
Alright, great. Thanks, guys.
Thanks, Craig.
The next question comes from Alexander Goldfarb of Sandler. Your line is open. Please go ahead.
Hey.
Good morning out there.
Maybe just following along Craig questioning on the on the on the studios.
Uh huh.
Yeah. When you when you now look at you know you have the trailer business.
Which you know I understand the more glamorous linzess trailers, but you have that business.
We have tremendous amount of.
Demand for content.
How much yes, when you blend the two together and say that there's a tremendous amount of demand for content production.
How much more juice is there both out of your existing studios and then out of the trailer you just acquired so in total as we think about the combination.
Is this like there's an extra 10% in aggregate NOI that you could get out of the combined platform. One 8% is there just some sort of metric the way that we can think about it.
Yes, I mean, Craig I think it's useful to think about what type of accidents.
Okay Sally.
So there are different different shopping greg's, replacing me, which is fine.
Great to hear publicly.
Sorry, Alex.
Yeah, I mean, I think if you look at the historical.
Our growth and recognize of course 2020 is unusual.
We've always generated.
Essentially every year in more than a decade double digit year over year NOI growth and.
And if you even if you consider kind of where we're likely to end up this year.
We will be back to our.
<unk> in line with 2019, which was.
Our best.
Year on record.
And.
So we're back to where sort of back to the.
Two the highest NOI levels that the portfolio has achieved.
And I think it's fair to expect that by 2022 that NOI growth will improve at least another probably 10% year over year.
And Theres a couple of drivers around that which is probably a little too much to get into now.
<unk> have the potential to perform.
In line if not better.
With that type of growth on a year over year basis and in fact, even if you look at where 2021 is.
Coming out.
The it's looking like they're going to be five plus percent better on EBITDA for the year, then even we forecasted when we last guided so.
I think it's fair for you to expect over the long term and are at least for the foreseeable future. While the content creation is as intense as it is that year over year NOI growth of 10 or more percent per annum.
Fair to expect.
Okay. So mark if I understand correctly, so right now you're back to 2019 levels is what youre, saying, you expect the aggregate studio portfolio, including the wagons and.
And trailers to grow at.
At that 10% pace and then you think theres an additional on top of the entire aggregate an additional 10% extra I.
I just want to make sure that we're understanding it correctly.
You're saying the combined platform, including these operating business is or are likely to.
Generate 10 plus percent year over year NOI growth for the foreseeable future.
Okay, and then Victor question as you talk to Ceos industry had.
Office managers, we continue to read a lot about our return to office days getting delayed or some companies even thing indefinitely.
Is the reason that you see these companies delaying is it truly because of COVID-19 fears or is it more fears with such a tight labor market that their employees are going to leave and decamped to other companies and that's why they're hesitant or is it they're saying one thing publically, but internally, they're putting the screws on.
Listen it's a great question, Alex and I think we're getting real time information from not just people who are our tenants, but other other.
<unk> companies and Ceos, I think Theres a couple of factors here that we're realizing that are that are obviously coming to fruition first of all as the days go by it's not even weeks or months people are changing their tune on this and we're seeing more activity.
Physical activity in all of our assets and not just ours, but just in the markets that we're in people are starting to come back sooner than we thought because it was sort of intimated that would be end of the year first quarter, but companies are making decisions I think it has nothing to do with Covid fears and it has all to do with <unk>.
Flexibility and labor and fearful of people moving to other countries that are offering that right now the window is closing in our perspective as to the fears and I think the back to normality is going to happen a lot quicker than any of us even imagine.
Given what we've even seen since really since October one.
And companies are starting to make those moves so it is a labor issue.
Our opinion is not.
Fear issue from a medical issue.
Okay. Thanks Victor.
Thanks, Alex Slash Craig.
Yes.
Our next question comes from Jamie Feldman of Bank of America. Your line is open. Please go ahead.
Thank you.
Was hoping you can talk more about just what youre seeing in the Silicon Valley sub market.
If you look at the portfolio occupancy quarter over quarter, it looks like Redwood shores, North San Jose Santa Clara.
And that had the most declines in your kind of L. A Seattle markets look a lot better can you just talk more about whether it's the small tenant market the larger tenant market.
Hearing a lot about all the capital that's been raised out there and that should translate into base demand just maybe more color on whats really happening on the ground across the different submarkets.
Yes, I mean really let's start with I mean, you said, it's silicon Valley, and the peninsula and Silicon Valley and by the way that's great news coming out of all of the markets right not just the ones you mentioned, but silicon Valley gross leasing was up $1 2 million square feet right. It was the second best quarter. During the pandemic net absorption was down very slightly but that was after 900000 square feet was absorbed.
In the previous quarter, and then tenant demand continues to be strong right. There were $3 2 million square feet, which is close to about 85% of pre pandemic levels.
That's in Silicon Valley.
The peninsula very similarly overall.
Overall gross leasing was up 35% quarter over quarter at about $1 2 million square feet again, which is just shy of pre pandemic levels and the net absorption was positive for the second time during the pandemic and 190000 square feet and sublease space dropped by about 300000 square feet. So these things are actually.
These things are actually happening on the ground as you say is it a small tenant market, yes, really it's driven by our portfolio of small tenants, but we're starting to see an uptick in early early pipeline of under 10000 square foot tenants really coming back out really drafting off of the the larger tenants mid sized tenants that are out there for.
Example.
We just did the largest deal we did with <unk> was at 27000 square foot law firm and then really right behind it.
The 5% to six to 7000 square foot deals into our VSP program are starting to appear so we feel good not just in the valley not just on the peninsula, but in all the other markets, where we're starting to see this.
Buoyancy.
So when you I guess when you think about the large leasing that's been done and when we hear about the pipeline it sounds like a lot of very large tenants.
Hi can you breakout what the leasing pipeline looks like.
Some stuff that's more relevant to your portfolio versus the market overall.
You mean, the deals done in the market those numbers.
Besides the two deals in the market I would say really probably about 20% or deals 20% have been deals under under call. It 10000 square feet and we're starting to see in the early part of the pipeline, we're starting to see those numbers increase dramatically.
Yes.
Okay.
There are certain submarkets here that you think will benefit more than others.
From the small tenant activity I think I think you nailed it I think it's silicon Valley and the Peninsula I think.
Other markets like like Los Angeles, we've already we've already started to see an increase in smaller tenant activity. Although we don't have a lot of small space.
We don't have a lot of small space in San Francisco.
And in Vancouver.
Really it's always been a mixed bag that that's been our most consistent market from.
From a small tenants and large tenant perspective, and so I have no concerns about about Vancouver at all.
Okay, and then where would you put the mark to market.
I guess, it's kind of late in 'twenty, one I guess through 'twenty two on your exploration.
Yeah, Dan its mark.
Eight.
I wanted to just make sure to give you a sense of what the composition of <unk> 22 explorations are so you can get an appreciation of that but right now the mark on all 22 exploration is.
A bit above 7%.
<unk>.
As with all focusing on any particular period.
66% of the explorations in 'twenty, two or in the peninsula and Silicon Valley, where.
Not the least of which is includes Palo alto. So there's not a heck of a lot of mark positive Mark in those markets combined.
Hum.
And the markets are the markets, where we do have huge mark to market just don't happen to make up that much of the exploration. So for example, Seattle, where we have over a 30% mark happens to only be a little bit more than 2% of the explorations oral in.
San Francisco for example, we have over 70% Mark, but it's only 7% of the exploration so 22.
By the way, we have phenomenal coverage already in 'twenty, two we're already over 30% covered in terms of <unk>.
Exploration I think.
<unk> is by the time, we get to 2023, what you see is because of the composition of that 23 expirations, we're back to over a 20% mark to market on 2023 expirations and so as you see activity roll through in 'twenty, two which will be a combination of of renew backfill in 'twenty two but also some.
Renew backfill on 23, what you're really going to see is more of a blend between the two marks it probably in the mid teens.
14, 15% Mark to market on what it'll be a combination of backfill in 'twenty, two and 'twenty three space.
Okay, and then last for me.
Youre starting to new.
New studio development, we keep seeing headlines of new projects out there and just more capital flowing into the space can you just talk about what gives you comfort on the supply side and the studio business right now.
Well I think listen I think location is going to be.
Could it be one.
<unk> content demand and the amount of capital going into content markets Jamie.
Jamie you know what's out there it's in every single headline I mean.
By any estimation, it's over $100 billion four.
For the upcoming year, and it's going to be that that on multiple basis is for many years to come.
There will be in our opinion some supply issues as time goes by based on based on some contraction or consolidation.
Of the business, but there hasnt been new studio is built in years.
Our prepared remarks here in Los Angeles, our studio will be the first completed and it's going to be the first in 20 years.
So there is some room.
And there is room in the markets that we believe are the ones that are going to do the stickiness that we've talked about for several several years on this is.
It's getting more headlines because obviously, it's become a spaces people in our industry.
Yes.
You said, there will be supply issues.
How far out are you thinking or what market.
I can't even guess.
Yes, yes.
Clearly if everybody is going to continue to look to build theres going to be some supply issues.
I mean, youre, saying is that anytime soon.
Okay. Thank you.
Yeah.
Thanks, Jamie.
The next question comes from Manny Korchman of Citi. Your line is open. Please go ahead.
Hey, everyone.
Victor if we if we continue to focus on the leasing pipeline you have.
I guess over over what timeframe.
Or I guess, what what.
Start time of leases comprised that so does that stuff that is likely if it all lands to be done in the next six months is that tenants that are looking for early 'twenty three and they're just starting to look and so it's in your pipeline.
What sort of the timing of that.
Well generally Manny I mean, the ones that we're talking about are deals that are in.
That are being paper now.
So I think maybe what youre getting at here is is and maybe I may be wrong.
And then <unk> will jump in what Youre sort of getting at here is are tenants looking to lock up space at these rates for the next 12 months out or 24 months out and the reality is I mean, we're real time.
On trading.
Trading paper for tenants to move in as soon as the space is complete. So this is there's not a lot of lead time around that so it's really more around six months now when you look at it.
Obviously, a qualcomm larger space or an NFL.
There were increases on one tenant right now it's going to be a little different right because the lease negotiations are going to get completed and then we're going to have to rebuild all the space. So its going to depend on the amount of Ti work and the repositioning of the assets for the most part all of our smaller guys.
The other space radio or modification the bigger guys that you would obviously imagine it can be six plus months out.
Yes.
And what we're seeing right now the interest level, though I just want to stress.
<unk> numbers are the interest level has picked up dramatically in all forms not just the large tenants.
Which is just sort of.
Timeline, we're going to be two years out of the pandemic from when it started.
The first quarter and then as a result people are starting to realize their needs and I think the bigger question at the end of the day I mean, you've had this conversation with our team.
Before his quality of real estate and the quality will shine on the higher end real estate.
Versus what we feel is second tier real estate, which will struggle a little bit longer like it would in any cycle.
Yeah, if I could add some color to that you just talked about Victor was spot on but if you talk about the the level of the pipeline right. Now I mean, if you think about pre pandemic are averaged 25 months or 25 month average of the pipeline was somewhere in the neighborhood of about $1 4 million five and will now we're carrying a close to a $1 eight so it gives you some perspective.
On the volume in the pipeline and yet these are deals with.
Minimal downtime right, we're talking about time to build out the space. These guys arent land banking, they're not trying to take space way into the future and trying to bank on rates. Now these are tenants, who need space because of demand right now and I think it's because of chiefly because of confidence back in the market from smaller tender.
So we're again drafting off the larger tenants who have had this confidence that are looking past.
The return to work date to strike deals.
And then are the numbers you quoted earlier for Qualcomm, which I think you said it was a positive 3% roll up in NFL, which is positive 20% are those on base rates and if so how much.
<unk> work or concessions will it take to get there or are those net rates.
No. Those are those are face rates that we're talking about on NFL really.
It's a ti package is not going to be time downtime to reposition space. So that's going to be immediate on Qualcomm theres. Some level of work, we will still need to do.
They clean up the space, but not very much.
Thanks, everyone.
The Missouri.
The next question is from John Kim of BMO capital markets. Your line is open. Please go ahead.
Thanks, Good morning.
Mark you talked about net effective rents being up 4% over the last 12 months.
Isolating this quarter it was down about 20% sequentially and a lot of it.
Probably due to GI is maybe it's a mix, but I am wondering if you see that net effective rent of 4% kind of trending down.
Given the most recent evidence.
Evidenced.
I don't think so I mean, you know the third quarter is.
It's fairly common for it to be a lower gross lease amount.
Amount just because of summer and so forth.
So we did $3 18 square footage compared to over half a million in the prior two quarters.
And I think importantly, new leases were a higher percentage of the overall leases.
In the third quarter at over 40% compared to prior quarters Q1 was only 26% made up of new leases.
And if you look at the composition of that 120000 feet of new leases. There's one lease in there for 27000 feet. Its a 12 year deal on space that hadn't been touched in 20 years at.
One of the twin dolphin spaces. So it needed a fair amount of G is plus added 12 years that had a hefty.
Leasing Commission.
And so it came in at like $2 16, a foot on a 12 year deal.
Which skewed the overall net effective by quite a bit right. Because you have not only do you have higher new deals as a percentage of overall deals and you have a 27000 foot deal that makes up 23% of all your new deals and so if you adjust for that what you see is your <unk>.
<unk> dropped to $54 a foot.
Which is low actually lower than prior quarter, and well lower than the trailing nine months. So.
Yeah.
As we've often said in the past if you get too caught up on.
Say, a smaller sample size in this case 318000 feet and don't recognize that you have.
Other footage amounts that are much larger and more impactful in prior periods, you can get kind of a distorted understanding of what's going on so.
I do think the positive net effective trend.
Trend.
Yeah.
Is appears to be sustainable.
And I think it's important though just to underscore the point, it's really important not to get too caught up in any one particular quarter's activity for reasons I just.
You know outlined.
Okay that makes sense.
And can I ask what drove the same store NOI growth of 10, 8% on a cash basis this quarter.
It looks like maybe half of that was with free rent but.
Looking at the occupancy year over year.
Down pretty significantly so I was wondering what has been driving offsetting that occupancy loss.
Your.
Your observation is Dr. Right. Most of it is has to do with free rent burn off primarily at our epic building that asset came online.
It is now producing cash NOI there are some.
Prior year concessions.
The ferry.
Helping this quarter, meaning in the third quarter last year, we had concessions that didn't reoccur. This year and then finally on RIN Con Google's lease commence I think in earlier this year from a deal we signed in the previous year. So that's contributing cash NOI and a little bit of the sublease rental.
Revenue from.
From the sublease at.
Salesforce has.
Those are the main drivers.
So parking was not a contributor.
Very little.
No.
Unfortunately, okay. So there's more upside there.
Great. Thank you.
Thanks, John.
The next question comes from Blaine Heck of Wells Fargo. Your line is open. Please go ahead.
Great. Thanks, Victor just to follow up on the studio side and specifically on acquisitions, obviously as you said interest in the property type has increased pretty dramatically.
Content creation has become a theme can you just talk about the size of the opportunity set to acquire studio properties versus traditional office and whether that's going to have any limiting effect on your ability to grow that side of the business or are you just more focused on development and redevelopment and the lack of acquisition opportunities or maybe competition.
<unk> tore them shouldn't really have a major impact on your plans.
Well competition is going to have impact on everybody's plants, right I mean, but.
Blaine.
The underlying aspect around the competitive set.
It's been that we're not making a market now the market is being made for us so when youre looking at our valuation of what our portfolio is valued at what what's the street's valued at and what the real market value is a massive disparity so thats only helping us in terms of that aspect in terms of what we see in the market the competitive land.
<unk> has also enabled us to see.
Some deals being marketed in some deals not being marketed and I think our ability to grow in that area is very is very consistent.
I do think that you'll see us do a number of deals not just from the development side, but on on existing well located.
<unk> marketplaces that we've identified.
And if we're going to continue to be a player in that there is enough product out there for us and others and so I do think that.
That's going to continue for some time.
Yes.
Okay. That's helpful. And then shifting gears can you give us any more color on your.
Washington, 1000 project Mark I think you said you have 12 months to determine the construction timeline after closing.
Previously you guys talked about the possibility of starting that project towards the end of 'twenty. Two early 2023 is that still kind of the most likely timeline or does it really just depend on prospective tenant interest in that asset.
Yeah, I mean, that's certainly we have the freedom to to commence late in 'twenty two.
We're monitoring the market we have really.
Compelling tenant interest early tenant interest in it.
We're at we're so fortunate to have bought when we did our all in costs are.
Somewhere maybe 400 below what anything has traded for a comparable quality in the market.
And.
And even with kind of if.
If we run a really conservative rent assumption on it.
We're pointing to close to <unk> cash on cash return so.
I think probably more importantly is.
<unk>.
Gauging the market median tenant demand.
And getting underway on that so that we can deliver and take advantage of.
Satisfying that tenant requirement.
Yeah.
As soon as.
We see it on the horizon.
So I could see US start before then it really just depends on what we're seeing in terms of like major tenants and their need for delivering space, Yeah, and I just wanted to jump in on that Theres going to be a couple of announcements that are deals that are about to be signed in Seattle, that's going to take some massive amount of space off the marketplace. That's been sitting there.
Sure.
These are credit credit large credit tenants that are absorbing a lot of the space that we were concerned about so we will be the first project. When we are ready that's ready to go because we're entitled and virtually able to build as Mark said as early as mid 'twenty two probably yes in these deals.
Victor is referring to not just direct deals, but theyre also large sublease deals that are out there and our delivery window couldnt be couldnt lineup couldn't lineup better, especially with the positive momentum in the market right now.
Yes.
Great. Thanks, everyone.
Yeah.
The next question is from Ronald Camden of Morgan Stanley. Your line is open. Please go ahead.
Just a couple quick ones just going back on the pipeline anymore color in terms of the geographic breakdown in the pipeline is it sort of properly index for the portfolio as one region.
Jumping out.
Pipeline.
Yeah, I mean, I think I mentioned, it before but as you might imagine peninsula and Silicon Valley.
Makes up about a third takes up about a third of that active pipeline.
With activity and then you really start to disperse evenly.
20%, 15% as we as we talk about west La as we talk about.
San Francisco again, San Francisco, not not very much in the waves vacancy right now.
And then.
Vancouver with some small some small tenant activity.
Got it.
It's exactly how you would look at our portfolio in terms of vacancy and upcoming expirations.
And we lined up nicely.
Great and then.
The second question was just.
Obviously, theres a lot of activity happening in how youre thinking about funding sources and sort of the private market.
Incrementally.
Make you maybe look at the disposition market more favorably as a funding source are you guys thinking about that over the next couple of years.
Got it.
Yes, Ron we are.
We're acutely aware of.
<unk>.
The bid ask process right now with assets and we've got Ah.
Specifically.
Three assets that we've got <unk> out right now and interest in by.
Our brokers and third party third party buyers that that we're going to evaluate a timeline I anticipate.
You know something to be done by late this year early first quarter in terms of our decision and then some execution on some <unk>. So yes. We are we're very much on top of that and as I said, there's two or three assets for sure that we're looking at very seriously to bring in the mass market.
Yes.
All my questions. Thank you.
Thank you Ron.
The next question is from Nick.
Let's go to your Bank. Your line is open. Please go ahead.
Thanks, I guess, just going back to the leasing volume in the quarter I was wondering maybe for order.
Mark you know in terms of whether.
Whether you know the spike in Delta effect at closing of deals whether there's specific square footage you can cite that.
Got spilled over here into the fourth quarter and is now then it gets signed.
Any perspective, you can give on that.
Yeah, I'll, let al jump in market you can you can follow up with you.
No we didn't see that.
Deals have their own timeline and their own flow the deals that did not close and again theirs.
620000 square feet in leases or late stage LOI.
We're planning to close imminently and I just think it was just the timing timing of those deals closing that youll see some of them in the fourth quarter and some of them well into the first quarter, but no. It wasn't it was surprisingly not due to delta and as a matter of fact.
The front end of our pipeline the front end of our activity actually accelerated.
During during the Delta variant.
Okay. Thanks.
Yes, just the second question is on occupancy I know I know Marc you said.
I think he said it should be roughly flat fourth quarter versus third quarter. I mean, any rough feel you guys can give us for how to think about occupancy over the next year and.
I'm asking because it looks like your expirations next year are actually higher than your exploration. This year and you did lose your down what something like 200 basis points of occupancy year over year. So just trying to think.
How we should get comfort in that.
That occupancy doesn't continue to fall based on the lease expiration schedule.
Yes.
Let's look it starts with the coverage on explorations.
As we mentioned on the call we're over 30% covered.
On explorations in.
Hum.
And.
Girl from there.
It also is important I think to recognize.
<unk>.
We'll get you know.
60%, 70% retention.
Before.
The year is over but.
It's also important to realize you know the $1 seven a vacancy we have.
Sure.
<unk>.
Over 40% covered on.
<unk> at least in negotiation or better.
On that existing vacancy so.
But we can make.
Meaningful inroads on that and get to that.
60 plus percent retention.
We have the I think this argue that we've stabilized in terms of our <unk>.
And in service lease percentage.
I should carry out through the balance of next year.
Okay, great. Thanks, Mark I appreciate it.
Yeah.
Yes.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Victor Coleman, Chairman and CEO for any closing remarks.
Thank you for the participation and all the hard work from the Hudson team will talk to you all next quarter have a good day.
Yes.
The conference has concluded you may now disconnect.
Okay.
Okay.
Yeah.