Greetings, and welcome to the Hudson Pacific Properties Incorporated Second Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Laura Campbell, Executive Vice President of Investor Relations and Marketing. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties Second Quarter 2021 Earnings Call. Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are 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'll 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 may cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. Moreover, this quarter, we've once again included certain disclosure prompted by COVID-19 business changes which we won't maintain once business operations normalize. With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our President; and Harout Diramerian, 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. Welcome to our second quarter 2021 call. We had a very strong second quarter in terms of our financial results. We've also had a very busy start to our third quarter, executing on our growth strategy for Sunset Studios. And I'll talk a little bit about that more in a moment. The big picture, the tech and media industries continue to flourish in our markets. Venture investment and fundraising are at record levels. The IPO market is strong, tech employment and hiring have recovered to essentially pre-pandemic levels, and media companies are spending billions to produce a backlog of content. Over the last few months, we've seen real momentum towards the return of office, and we're optimistic that's going to continue. Growing vaccination rates, combined with statewide reopenings in California in mid-June in Washington at the end of June and forthcoming in Vancouver after Labor Day, led companies to begin implementing and formalizing plans. We are still in a wait-and-see mode regarding any major adjustment to space configurations or needs. But even with variance, we're expecting heading into fall, most companies will move forward towards at least a partial reoccupancy of existing space, potentially coupled with vaccine mandates. We're already seeing this from a few of our larger office tenants. Essentially, all of our major studio tenants, Netflix, HBO, CBS, Disney, ABC, and Amazon have resumed and are scheduled to imminently resume active production on our lots with safety protocols in place. Production is now in overdrive given content demand and pandemic-related shutdowns, particularly here in Los Angeles, where we are building a state-of-the-art global studio portfolio to meet that demand. To that end, I'm sure many of you saw, we made two very exciting major announcements over the last week regarding our expansion of our Sunset Studio platform. The first, Sunset Glenoaks, will be the largest purpose-built studio in the Los Angeles area in over 20 years. The project is in Sun Valley, minutes from Burbank where Disney, NBC Universal, and Warner Media are headquartered and where many other production companies like Netflix are located. We're going to build approximately 240,000 square feet, adding another seven stages to our portfolio for a total investment of approximately $170 million to $190 million. We're finalizing plans and budgets that could start construction as early as the fourth quarter of this year and complete the project in the third quarter of 2023. This is a 50-50 joint venture with Blackstone, and we're on point for development, leasing, and property management. The second transaction, which we announced on Monday, marks Sunset Studio's first expansion out of the U.S. into the U.K. Something I've often noted was on our agenda. The U.K. has a long history of global production in a media center. It has a deep pool of talent, crews, and services to support productions, regional infrastructure, and generous and long-standing tax credits. Furthermore, investment in U.K. film and TV has grown dramatically over the last 5 to 7 years, while supply of purpose-built studios remains limited. We're in the entitlement and planning stages to build what will ultimately be one of the three largest purpose-built studios in the U.K. and one of the highest quality production facilities globally for TV and film. The site comprises 91 acres of undeveloped land, about 17 miles north of London in Box Borne Harpeture, minutes from public transit and close to the Heathrow Airport as well as Central London. This facility will provide great access to other major studios, production houses, crew, and talent. We purchased the site for GBP 120 million through a 35-65 joint venture with Blackstone. And although it's early, we anticipate a total investment of around GBP 700 million. We'll be responsible for development, oversight, leasing, and property management and we're setting up a local office and a small team to manage the day-to-day reporting to our team here in Los Angeles. Part of what's so exciting about the Sunset Studio's newest L.A. and U.K. locations is we're reimagining how studio facilities can best support future productions, be it through architectural design, high-tech infrastructure, or sustainable buildings and operations. We're in very positive preliminary marketing conversations with major production companies related to both projects, and we can either master lease or multi-tenant these facilities. It's still early, and we have a lot of interest and flexibility so far. Finally, I want to congratulate the Hudson Pacific team on winning NAIOP's 2021 Development of the Year Award. It's one of the industry's most prestigious awards and NAIOP's highest honor. It's also a reflection of our company's leadership and innovation across every aspect of our business. NAIOP's recognition is especially meaningful given it's based mostly on our exceptional performance throughout 2020, which, of course, was a very atypical and challenging year. So again, very, very proud of the Hudson Pacific team. With that, I'm going to turn it over to Mark.

Thank you, Victor. Our second quarter rent collections remained strong at 99% for our overall portfolio and 100% for office and studio properties. We've collected 100% of our deferred rents due today. Physical occupancy at our office buildings currently ranges from 5% to 55%, depending on the asset. At the lower end, our properties are largely occupied by tenants communicating an end of summer or early fall return. As physical occupancy has improved, so has our parking revenue, which grew 12% in the second quarter compared to the quarter prior. Office leasing activity continues to accelerate across our portfolio and markets, especially in terms of inquiries and tours. This activity translated into strengthening fundamentals more so in some markets like Silicon Valley, which in the second quarter had stable rents, declining vacancy, and significant positive net absorption. In line with these trends, our deal pipeline that consists of deals in leases, LOIs, or proposals stands slightly above our long-term average at 1.4 million square feet. That's up 75% compared to the second quarter last year and 35% year-to-date, despite our having completed over 1 million square feet of deals so far in 2021. To that end, we signed 510,000 square feet of deals in the quarter, once again, in line with our long-term average with 19% GAAP and 12% cash rent spreads. Our weighted average trailing 12-month net effective rents are up close to 10% year-over-year. There are two primary drivers of this increase: First, our effective rents are up slightly, about 8%; and second, our annual tenant improvements per square foot are down 30% and mostly due to executing more renewal leases. Separately, our trailing 12-month lease term and renewal deals also increased from 4.5 to about 5 years year-over-year, and term has also extended from pandemic lows. Our deal activity this quarter was split relatively equally between the Bay Area, with the preponderance along the Peninsula and in the Valley, and the Pacific Northwest, specifically Seattle and Vancouver with a handful of deals in Los Angeles. We maintained our stabilized lease percentage at 92.7%. Our in-service lease percentage dipped 30 basis points due to the inclusion this quarter of Harlow, which we delivered a company 3 in April. But for Harlow, which is 54% leased, our in-service lease percentage would have risen 40 basis points to 91.8%. We have 4.4% of our annual base rent expiring over the rest of the year with about 55% coverage on that space. Our remaining 2021 expirations are about 12% below market. For expirations, we addressed in the first half of the year, we renewed or backfilled close to 70%. Touching on our office developments, we're on track to deliver One Westside to Google in the first quarter of next year potentially sooner. We're also set to close on the podium for Washington 1000 late in the fourth quarter at which point, we'll have a year to further evaluate tenant interest and broader market conditions and to finalize our timeline to start construction. And now I'll turn the call over to Harout.

Thank you, Mark. In the second quarter, we generated FFO, excluding specified items, of $0.49 per diluted share compared to $0.50 per diluted share a year ago. Second quarter specified items consisted of $1.1 million or $0.01 per diluted share of transaction-related expenses and $0.3 million or $0 per diluted share of one-time prior period supplemental tax expense related to Sunset Gower compared to $0.2 million or $0 per diluted share of transaction-related expenses a year ago. FFO beat our own expectations at the midpoint of our guidance by $0.02 per diluted share. This was primarily due to the reversal of reserves against uncollected cash rents and straight-line rent receivables and savings on operating expenses, some of which we expect to incur in the second half of the year. Second quarter NOI at our 44 consolidated same-store office properties decreased 2.1% on a GAAP basis but increased 4.9% on a cash basis. For our three same-store studio properties, NOI increased 17% on a GAAP basis and 29.3% on a cash basis. Adjusting for the one-time supplemental property tax expense at Sunset Gower, NOI for our same-store studio properties would have increased by 22.8% on a GAAP basis and 35.8% on a cash basis. At the end of the second quarter, we had $0.9 billion in liquidity with no material maturities until 2023, except for the loan secured by our Hollywood Media portfolio. This loan matures in Q3 2022 and has three 1-year extensions; our average loan term is 5.2 years. In late July, in preparation for funding our U.K. Blackstone joint venture, we drew down $50 million on our revolver, resulting in $550 million of undrawn capacity; we funded our remaining pro rata acquisition costs with cash on hand. Our AFFO continued to grow in the second quarter, increasing by $11.4 million or nearly 24% compared to Q2 2020. This occurred even while FFO declined by $3.6 million for the same period. Again, this positive AFFO trend reflects the significant impact of normalizing leasing costs and cash rent commencements on major leases following the burn off of free rent. 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 the potential COVID-related impacts to our guidance, including variants like Delta and evolving government mandates. Clearly, the 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 return 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 physical occupancy and related revenues will not return to pre-COVID levels in 2021. That said, we're providing both full year and third quarter 2021 guidance in the range of $1.90 to $1.96 per diluted share excluding specified items and $0.47 to $0.49 per diluted share excluding specified items, respectively. Specific items for the full year 2021 are the $1.1 million of transaction-related expenses and the $1.4 million of prior period supplemental property tax expense referenced in our second quarter SEC filings. There are no specified items in conjunction with our third quarter guidance. And now I'll turn back to Victor.

Thank you, Harout. As always, I want to express my appreciation to the entire Hudson Pacific team for the exceptional work this and every quarter, and thanks to everyone for listening in today. We appreciate your continued support. Stay healthy and safe, and we look forward to updating you next quarter. Operator, with that, let's open the line for questions.

Our first questions come from the line of Craig Mailman with KeyBanc Capital Markets.

Victor, I have a two-part question regarding the studios. Firstly, I'm interested in understanding why the structure is different in terms of your ownership stake compared to the original agreement with Blackstone. Secondly, could you explain the equity commitment that HPP would need to make in relation to the leverage the partnership might apply to these assets?

Yes. I'll let Mark talk about the latter, Craig. First of all, I hope you're doing well. Thank you for the question. So listen, on our Sunset Glenoaks asset, we have the same terms and conditions as our Twilight project. That's pretty much standard for the deals that we are doing here in the U.S., based on the capital source of Blackstone. The U.K. deals that we've announced and that we're also working on have a different structure based on the capital structure of Blackstone in the different entities that they're contributing to this, and that's why we're doing it that way. So there's no magic around it. I think uniformly, we'll see some variation of that at various different times depending on these deals that we've been sourcing that most of them are off-market transactions. So they may have an additional capital partner or a joint venture partner that would have to alter the structure. But suffice it to say, I think most of the Twilight structure that was the initial deal and the platform we're working on will be what we see here in the U.S. Mark, do you want to talk about the capital structure?

Yes. So Craig, the Glenoaks deal is pretty close in terms of ratable ownership; it's a 50-50 deal. We had taken the land down a while ago, and you can see how much we, on a consolidated basis, put in the land. But the expectation is we're going to finance out the rest of it, call it about $150 million depending on the start date through Q3 of 2023. On a gross basis, we're 50% of that, but we think we'll end up doing about 60% asset-level financing. So the total remaining spend for us over the next two years is only like $30 million. So that gives you kind of the capital structure for that one. On the London deal, the Park Plaza deal, I think Victor mentioned, the land has already been taken down for GBP 125 million. Our piece of that is like GBP 45 million. The remaining spend gross to us is about GBP 200 million that goes out, call it between now and 2025. Similar to the Glenoaks deal, we're thinking that's going to be 60% to 65% financed on the construction side. So the total remaining spend net of financing for us, phasing in over five years or so is about GBP 80 million.

Okay, right. Yes. So not a huge sum. So about $110 million kind of on your share over the next four to five years. Okay?

Correct.

Could you share your thoughts on the redevelopment of the third Sunset studio you purchased? I don't recall any ground-up projects from you, but perhaps I am mistaken. What returns are you targeting, and is there a significant difference between the U.K. and L.A.?

No, the U.K. deal has very attractive returns. I'm not going to discuss the actual numbers until we're ready to release them, but we wouldn't proceed with that deal if it wasn't significantly better than what we're experiencing here. We haven't done any pre-leasing yet and only have indications of interest. Regarding our Sunset Las Palmas deal, we haven't built a sound stage there, but we have built Harlow, and our returns have proven to be better than we initially projected. We are also considering new stage development in California apart from our recent Glenoaks announcement on existing assets we own. Those returns are also looking to be in the 7% to 8% range, which is very attractive.

Then just one last one, if I could. The decision behind the $46 million of ATM. It doesn't seem like you guys needed the cash, and the stock price, you've been vocal that it's undervalued relative to what you guys think it's worth and what we think it's worth, just a decision there?

Yes. I think it's helpful to provide some context. In 2020 and 2021, when the stock was at a considerably lower level, we bought back more than 4.1 million shares at just a touch over $23 a share, and that used about $100 million of liquidity at the time. This recent issuance under the ATM, it's a fraction of that in terms of the size; it's only 1.5 million shares and is just shy of $30 a share. So a $7 premium per share on the 1.5 million shares of reissuance. We're using the ATM in the way we've always used it to fund customary corporate cash requirements. We mentioned we had some spending on these recently announced studio transactions. So we just view it as one of our prudent measures of cash management to maintain our liquidity and balance sheet for future requirements. We thought it was a timely issuance, given where the stock was recently.

In addition, I mean, doing small transactions like this, we're okay at the lower level, but we're not going to issue a big amount or large equity issuance at these numbers, especially at today's number.

Our next questions come from the line of Manny Korchman with Citigroup.

Victor, last quarter, you spent some time talking about value-add opportunities that you're seeing. And I think both on the office and studio side, are those progressing and just haven't closed yet, and so we should just wait for those to happen? Or has something changed there? And maybe those opportunities have fallen out?

No. We are actively pursuing several of those opportunities on the office and the studio side. The majority of those are off-market. So they're a little bit more complicated. There are a couple of marketed studio properties that we are working on right now, and both are value-add. I'm not in a position to say whether we get them or somebody else gets them, but it's just a continual process. I do think, Manny, it is taking longer to close transactions. But like this U.K. deal, I mean, we've been working on that deal for 6, 7 months or something like that. So it's just taken a long time to come to fruition. And that was an example of an off-market development deal, but it's something that we've been pursuing for a long time.

And then just turning back to the capital sources conversation, that same light. Are dispositions something that we should think more about, especially if you land some of those deals? Or would you go and maybe tap the equity markets, even though Harout said he won't.

Well, I didn't hear Harout say that. No. Listen, I think we talked about the decisions in the portfolio currently today. We've been approached on some assets. There's not a large number of them. I think it will be basically on an EV basis, but there's nothing earmarked right now on a disposition for the remainder of this year.

Our next questions come from the line of Nick Yulico with Scotiabank.

So in terms of the guidance for the rest of the year and maybe even just kind of a preview heading into next year. How should we think about your office leased rate? It did slightly improve this quarter; you had some positive net absorption. How should we think about future quarter leasing volume heading forward and whether your leased rate at this point, you think has kind of stabilized and hit a bottom?

Well, I'll sort of just talk about it from a general level. I mean, your last comment is the accurate comment. I mean, we've seen some flattening. We only have 4% remaining for this year. We've already identified the known vacates. I think we're pretty comfortable with that. The trends, obviously, Nick, have gone up, both from a rate term and an activity standpoint. I mean, Art, can jump in and sort of just talk a little bit about that. But we're not leaning towards the fact that we're seeing anybody on the horizon of size that was going to vacate that we know of at this time. But do you want to jump in?

Yes, that's true. Nick, it always comes down to net new leasing on what we have in the pipeline, which has been continuing to increase over the year and certainly over the last 60 days to backfill or lease up some of those holes from the known vacates. I think there's still a lot of wood to chop on the expirations this year. I can't peg a number for you on lease percentage, but we're starting to see with the new leases in the pipeline on the backfill side, we're starting to see some good progress.

Okay. That's very helpful. I guess just a follow-up question on that is as you think about return to office, getting delayed a little bit in some markets now also with some new mass policies in place. I guess, how does that change the dynamic of the leasing market out there where you had some of those provisions getting removed? Now there's some more concern with Delta. I mean just any thoughts on how that's playing out on a real-time basis in terms of the delay leasing volume, leasing tours, et cetera?

Well, I don't think it impacted us in terms of volume and tours. I think we've all sort of anticipated a September 1 day and that push 30, 60, 90 days, it's not going to impact the decision-making trees that we're seeing right now, at least to date. I mean, real time right now, it just hasn't. We've got very strong activity in the third quarter and some pretty good line of sight in the fourth quarter as well. We have, as I said, some known vacates and some larger space that we've got activity on as well. I do think the moment-to-moment news and information that keeps coming out is not going to distract the larger users, which is predominantly our portfolio mix from them making decisions that are 7, 10 years down the road and effectively moving in 3 to 9 months. So if it moves them off 30, 60, 90 days, we shouldn't be impacted that dramatically.

Our next questions come from the line of Alexander Goldfarb with Piper Sandler.

So two questions, Victor. The first question is, as you guys think about the U.K. and certainly the great movie market, what sort of additional risk do you include? Because I'm guessing it's probably not as efficient to run a U.K. as it is obviously in L.A. So what are the additional returns that you're looking for both to compensate for the lack of efficiency because it's overseas? And two, just the foreign exchange risk and foreign economy risk?

Well, listen, I think, first of all, we're super excited about a project like this. If you read the release and the press around that, this is going to be a world-class facility. I do think that there will be, obviously, as it's a ground-up project, a lot of startup costs that are going to be fairly front-ended. That being said, we're making a commitment in personnel, office, and the likes of that, which will then align with economies on our sales and back-office team that's going to be based out of Los Angeles. Whether it's in the U.K., Vancouver, New York, or here in L.A., I think you'll see some impressive economies from the operational side of it. In terms of the capital side, I do think we have to be cognizant of the spread between the pound and the U.S. dollar, the same awareness applies in Vancouver between the Canadian dollar and the U.S. dollar. It's early, and there's not a lot of capital spend as we get into deeper capital and the structure around debt and equity. I assume that Harout and Mark will come to me, and we'll discuss hedging and the like on material dollars. But at this time, it's just too early to evaluate that. I would say that we are going to make a conscious effort to build our platform over in the U.K., and this shouldn't be the only deal that we would be doing there. So we're going to continue to look for more.

The second question is regarding the domestic studios. The occupancy rate for the quarter was 88%, which is slightly lower than the first quarter. Given the increase in productions, it seems surprising since the lots have been busy with filming. I would have expected the occupancy to be higher. It's difficult to believe there would be any downtime because everyone has been watching various reruns. It’s hard to think that studio space isn’t being utilized around the clock. How should we interpret the actual decrease in occupancy instead of it being closer to the 90% range?

Yes. Alex, it's that 160 basis point sequential dip is about 20,000 feet, just shy of 20,000 feet. As you point out, it has nothing to do with stage usage. They're all committed. The office utilization associated with stage usage is high, but there's about 235,000 feet spread across the three studios that are really their office use unrelated to stage use. As we sit today, that's about, call it, 63% utilized. It's really just a direct byproduct of people not working in offices due to COVID. We've seen a bit of a giveback of some of that square footage over the last 4, 5 quarters of COVID. As people get back in the office, we expect that occupancy to tick back up to its historical norm of 90-plus percent. But we need the casting agents and other entertainment-related tenants that want to be on location to start coming back to the office.

When you mention that, you're referring to small office suites located next to the studios where individuals go to write scripts or engage in various activities. These are just small office spaces.

Considering it's non-media, they are typically media companies that do not use a stage but want to be in close proximity to other media companies that do use a stage.

Our next questions come from the line of John Kim with BMO Capital Markets.

I was wondering if you could provide more commentary on the demand environment for new studio space in the U.K. and how you plan to position your studio versus the existing competition, whether it's by price point and also the type of tenants you may be targeting?

Yes, John, it's a great question. Listen, the demand right now over in the U.K. is voracious. All of our relationships have reached out and surveyed the demand levels and desire levels, and every one of the new content players are looking for space. Utilization there is extremely high right now. There has not been a new facility built there like there hasn't been a new facility built here in a very long time. We are very confident that purpose-built, best-in-class is going to succeed on a dramatic basis. The Pinewood Shepperton is the most recent, but it's an add-on to the existing facility, which is literally probably the world's best facility. That speaks to what we're trying to follow suit. The reaction around this has been very, very positive in terms of our relationships and those who are looking to get a foothold for a long-term lease. So we're confident that we'll be capturing a nice percentage of that demand.

And as far as the other opportunities and the other potential entry markets, Toronto, Vancouver, New York, I think you alluded to some core plus opportunities in studios. But is that how you expect to enter those markets, or would they be more development-focused?

I think it's a combination of both, John. We're looking at development opportunities in multiple markets, and we're looking at core opportunities in multiple markets at the same time.

Our next questions come from the line of Blaine Heck with Wells Fargo.

A lot of my questions have been asked. But I guess just taking a bit of a step back, Victor. Clearly, I think the focus for you guys on the growth side of things has been growing through the studio business. And I think we've talked about this before, but can you give us any update on how big a part of the portfolio you think the studio business could ultimately get to kind of your share of NOI?

That's a great question, Blaine. You've been following us for a long time, so you’ve witnessed our journey from when people were trying to understand the studio business and the challenges we faced, to now it being a standout segment of alternative real estate. We see significant growth potential here, and we’re dedicated to expanding our portfolio through our Sunset brand in collaboration with Blackstone. Our commitment remains strong. I anticipate a substantial increase in our net operating income over time in this area. This focus will not hinder our efforts to maintain and grow in the office sector. We have upcoming development opportunities in our office portfolio that I find very appealing and will complement our studio initiatives. If you're looking for an estimate of the studio-to-office focus ratio, I'm not sure whether it's 2:1 or 3:1. However, I can say that we are currently evaluating and pursuing significantly more studio deals than office deals. The current capital structure is more favorable for studios right now. There is high demand for debt, and we are witnessing unprecedented pricing in the studio sector that we haven’t seen before. The figures are remarkable and it's heartening to see the market becoming more informed about this sector. Additionally, we have an excellent partner on board.

Great. Very helpful commentary. And then just a little bit more specifically on the occupancy and lease rate side, maybe for Mark or Art. I know you guys have yet to formally get back the Dell EMC space in October, but given that it's going to be one of your largest blocks of space, I wanted to ask whether you guys have any early interest there and whether you think there's demand for that large box from a single user, or will you be splitting up that space?

Sure. This is Art. That's a great question. The floor area is about 45,000 square feet each, and there is a demand for the larger floor plates. Recently, we've noticed that millennials have shown interest, particularly over the last 60 days, with Seattle leading in this increased demand and tenant activity, growing to nearly 3.5 million square feet. We're seeing significant interest in Pioneer Square, which I believe will see a market uptick of over 20%. Currently, we have about 250,000 square feet of activity in the Pioneer market alone, encompassing properties like 505, 83 King, and 95 Jackson. The activity in the past 60 days has been substantial. When I mention over 200,000 square feet, I'm referring to actual negotiations. We feel optimistic about this space, as it is quite impressive.

Our next questions come from the line of Jamie Feldman with Bank of America.

Great. I guess just sticking with occupancy, I think Mark, you said 55% coverage on the remaining expirations for the year. Has there been any change in either tenants you think that are staying or tenants you think that are moving out to get to that number? And maybe if you could just talk about the largest blocks. I know you talked about Dell EMC, but maybe a little more color on potential to backfill or anything that's changed?

Art covered the backfill question on Dell EMC. There's really only one decent-sized expiration on top of that; we've got 24,000 feet rate with McGraw Hill. Other than that, we're really talking about very small expirations for the balance of the year and we're currently 55% covered on that remaining footage. It's really just about getting those deals over the line.

Yes, the 55% mark is covered. For the full year, we reached over 1.4 million square feet, and we indicated that we were nearing 70% coverage, approximately 69%. This is the final piece. The remaining units average about 5,000 to 6,000 square feet. Many decisions are still pending. In the last 60 days, we have shifted some likely vacancies into retention, and we will keep working on this. We have nearly 100 tenants to manage, and our team is diligently working to finalize these deals.

Okay. That's helpful. And then as you think about net effective rents, I mean, would you say they've moved at all in the market yet? And also, what are your latest thoughts on your mark-to-market?

Well, for the remainder of the year, our mark-to-market is right around 13%. 12%, it's 3%. On our net effective, we are up really kind of trailing 12 as Mark had indicated in the remarks, chiefly because our rent has been holding our base rent, which has remained very steady, coupled with the fact that we're spending less on tenant improvements, mostly because of the renewals. Our renewals are going to probably carry the day; about 2/3 of our deals will be renewals going forward, and so we'll see a reduced level spend on tenant improvements. But we feel good about it because a lot of these markets in lesser quality space, you start to see a very competitive situation where trophy to new assets are kind of 5% off on a net effective basis, then you start to grow into non-view super commodity space, which is like 15%, maybe 20% below net effective. So we're doing exceptionally well in that regard.

Yes. Jamie, I do think it's been a little surprising to all of us how little focus there's been on some of these trends. No matter how you skin it, net effective rents are higher. It's not just on a trailing 12-month comparison basis; it's even better if you look at the 5 quarters most affected by COVID compared to, say, from all the way back to 2018, the trend is even better than that. That translates through both at the effective rent level and translates through on the tenant improvement level. I think there's a tendency to focus on just the quarter and lose track of how these numbers have trended over almost any measurement period, how favorably they have trended. I think the other thing, too, that we've tried to comment on but I don't think has gotten as much focus as we would have thought is how that's translated through on the AFFO trend. Our AFFO per share is up, I don't know, 30-plus percent. It's surprising to all of us just how that seems to have gotten overlooked.

That's a good point. I was going to ask you about cash flow in general? I mean, now that you're starting to put some capital to work in the studios, where do you think the cash flow trajectory and the distribution coverage trajectory looks like?

Based upon what we've seen, I think it's pretty consistent with our comments in previous quarters. We think this AFFO trend is going to continue. At a certain point, we are going to revisit the dividend distribution amounts, fairly soon, meaning within the next 12 to 24 months, that's kind of the direction it's headed.

Okay. And then finally, just tied to the leasing markets. We've seen a lot of capital raised in the Bay Area, I guess, across all your West Coast markets. I mean, how are you seeing that translate into demand? What do you think is going to happen here? I guess maybe if you could talk about the individual submarkets.

Yes. Well, we worked on an analysis of the correlation between VC fundraising and how that ultimately translates into tenant demand. Going back about a decade, it's clearly correlated. So there's a lag effect, but if history holds, the VC fundraising should continue to drive tenant demand throughout the Bay Area. Firstly, I am not sure how closely people are tracking. But if you look at just funds raised through the end of the second quarter in the Bay Area, there have been 130 funds that have closed and they've raised more than $30 billion. To put that into context, prior to 2018, the Bay Area had never raised more than $30 billion in an entire year. 2019 and 2020 were pretty exceptional years. If you think about where we're trending in fundraising today and where that's likely to end up in '21, we're potentially talking about maybe not record-breaking fundraising but pretty close to it. In our view, that will ultimately translate into deals closed. We're on a record pace right now in the Bay Area at 1,500 completed so far, which is a record-breaking pace. So in terms of VC fundraising and deals closed, we think all the ingredients are there to continue to drive tenant demand.

And do you think that benefit the CBD San Francisco or Silicon Valley or may?

Both.

Our next questions come from the line of Caitlin Burrows with Goldman Sachs.

I just had a quick one, maybe on the weighted average lease term. It seems like it is shorter than it's been in the past. So wondering if there was any other kind of detail or reasoning you could give for this and your outlook for it lengthening going forward?

It depends on the timeframe you consider. Terms have definitely been getting longer since the pandemic began. On a weighted average basis, looking back at the last 12 months compared to the previous 12 months, it has increased by about 7%. This indicates that it is moving in the right direction. However, if you look back further, the durations have actually decreased a bit. Art, do you have anything to add?

Yes. If you look at the quarter-over-quarter numbers, the increase is largely due to two deals, one lasting 145 months and the other nearly 120 months, which significantly affected the figures. However, as Mark mentioned, we have been experiencing an upward trend. On the renewal front, two deals accounted for more than two-thirds of the square footage, both of which were over 60 months, influencing the quarter-over-quarter appearance of the numbers.

Yes, I would just say, generally speaking, I think this has been the case for everyone in the sector. You can see it in exploration tables, annual exploration tables; there is a somewhat higher than normal amount of renewals that are getting done that are shorter in term, 12 months or less. That reflects a degree of uncertainty for some amount of the renewal tenants on what their long-term space needs are. We expect as people get back to work, that kind of elevated short-term renewal amount will start to trend down.

Got it. Okay. And then congrats again on the announced plans with Blackstone. I was wondering if you could mention your current expectations in terms of timing for that project, and what the first milestone to watch out for between now and then would be; maybe it's something on permitting or approvals or pre-leasing or something else that might be relevant?

Yes, we've been in close contact for the last several months with the local approval process. I think that would be the first hurdle that you're going to see, and it's somewhere between right around 12 months from now; I think you'll see some major aspects around that. We're really excited, and we're moving in the right direction.

Our next question has come from the line of Dave Rodgers with Baird.

Art, maybe to start with you, a derivative on some of the earlier questions. You guys have talked about large floor plate leasing; pretty strong demand from tech tenants on the larger side. But you've got a pretty decent-sized portfolio of smaller tenant assets, obviously, throughout the Peninsula down in Silicon Valley. So can you talk specifically about what you're seeing? Is that where you're seeing the shorter-term rollover? Are you seeing a build of demand from those tenants?

Yes. I would say that the demand across our entire portfolio has primarily come from midsized to large tenants, everywhere except for Vancouver, which has had a mix of small and large tenants. We're experiencing an increase in larger midsize deals driving the market. Over the last quarter, there has been a rise in small tenant activity in the Peninsula and Silicon Valley, which is currently leading to early pipeline deals. This began with inquiries and tours, and some of these deals are expected to materialize later this quarter and into the fourth quarter. Ultimately, it started with mid and large deals propelling the market.

Yes. I appreciate that color. And then maybe Victor or Mark, just maybe the explicit question is, are you changing any guideposts around leverage as you talk about development and levering up some of the joint ventures? And then maybe, Victor, the implicit question is, when you were buying studios a handful of years ago, you were using a lower office implied cap rate to do it. Now you've got 95% of your weight toward office, which is at a higher implied cap rate buying a lower cap rate asset. I guess how long does that work? How long before you think about maybe financing that a different way or making that a stand-alone business?

On the leverage side, I believe we have adopted a very cautious approach. When reviewing our previous development deals, we have primarily used leverage for development and then removed that leverage based on our success rate. I expect this trend to continue, and you can anticipate the same approach moving forward on the studio side. You raised an important question that we have indeed discussed. We will evaluate the platform and the alternative investments we are making around it. As I mentioned earlier, we have a strong partnership with Blackstone, which provides us with a robust capital structure. They have various funding sources, and within our Twilight structure, we possess a longer-term funding capacity. We also have flexibility concerning timing. We are mindful of considering the future and, based on size and valuation, determining the best approach and timing for this platform. This will always be part of our ongoing discussions as we strive to expand.

Our next questions come from the line of Daniel Ismail with Green Street.

You mentioned potentially starting Washington 1000 later this year or at least reviewing it. I'm just curious, based on the trends you're seeing on the ground across the portfolio, if office development is looking like a more attractive use of funds today than it was, say, last quarter?

Well, I mean, Daniel, I would look at it a little differently than in office development and trends. I would look at the demand for this asset and the activity. We're not making announcements today, but the demand and activity specifically for Washington 1000, we'll make a determination at the appropriate time whether we're going to break ground.

Are you currently seeking new development sites for office space, or should we anticipate that studio space will remain the primary focus moving forward?

I mean, we've looked at development sites that we bid on in high demand in some of our markets, particularly in the Vancouver and Seattle adjacent markets. I don't think just going off the top of my head, I don't think we've done anything in Southern California in terms of attractive office. No new opportunities in Northern California either recently. Yes, I would say the opportunities are things that we'll continue to evaluate in the Pacific Northwest on the office side and clearly portfolio-wide in the other markets on the studio side.

Great. And just last one for me on the U.K. studio acquisition or development side. Is there anything structurally different between how studios run in the U.K. versus the U.S., in terms of lease term or the splits of fixed revenue and variable revenue or anything that we should be aware of?

No, no. I mean, it runs the same. I do think that we are changing the model of short- to long-term leases, and that will be part and parcel of what we're going to try to attract here, that has permeated into that marketplace. Most recently, with Disney, HBO, and Netflix signing longer-term leases over in the U.K. So we're happy to see that trend permeate from the U.S. to over there. We're hopeful that will be the same.

Our next questions come from the line of Vikram Malhotra with Morgan Stanley.

Victor, congrats on getting the U.K. studio investment, certainly a good and a big step. I'm just wondering, is there room or a potential plan to recreate sort of the office studio combo that you have in L.A. in the U.K. or more specifically, even just office in the U.K.?

Yes, there definitely is a demand for not only traditional studio space but also for office studio campus facilities. This is what makes our initial deal in Box Borne attractive. We are exploring another opportunity that aligns with this, featuring a successful office component alongside a combined studio component. So, yes, we are very focused on purpose-built campus-style projects, and I believe the demand for these is quite high.

In the initial permitting, you might be receiving potential zoning for both studio and office.

Correct.

Okay. And then just in terms of the alternative investments that you mentioned, potentially exploring. I am wondering just about alternative markets maybe in the U.S. One of your peers, obviously, just acquired a big portfolio in Austin. Any chance you'd look at any of the Sunbelt markets over the near term?

That's not typical for us. We spent time looking at markets. Some of those markets have been attractive, but I think we're still trying to build out our West Coast portfolio. We're still trying to grow in Vancouver and in the office portfolio. I think the attractiveness of the combined studio office in the markets we’re looking at will be akin to the media tech world. That's pretty much the game plan for now.

Okay. And then maybe just last, quickly, a clarification on the occupancy for Harout or Mark. With the Dell EMC move-out, can you just give us a sense of what's the goal, year-end occupancy? Is there a range you can provide us that you're looking to hit in terms of leased or occupant or just occupancy?

We don't include an occupancy target as part of our guidance information. I mean, you can see what we've provided in the press release. But I would say, just sort of leveraging off of the earlier comments from Art and Victor in terms of coverage on remaining expirations and so forth. Generally speaking, it does look to us that our lease percentage is pretty stable right now. It could be a tick higher, maybe a tick lower by year-end. Overall, it feels stable at this point.

Okay, great. And then just to clarify, you mentioned the coverage you already have in terms of expirations. So I'm just wondering, given the Delta variant resurgence, is it fair to assume that sort of the recent lease term periods, whether it's the 60-, 70-month period renewal or maybe new leases, is that sort of a good way to think about near-term third quarter part of leasing in terms of lease term?

Yes. I mean, we might continue to stretch it out as we have been over the last four quarters. It can vary. If you look at it purely on a one-quarter basis, you could get one big lease that distorts it. So it's a little dangerous. I think it's better to look at trends. As we've pointed out, we've been getting to longer term than in the last say, four quarters compared to where we kind of started the pandemic at. I wouldn't expect we'd get to pre-pandemic levels in terms of term over the next two quarters, but I think we'll continue to stretch that out.

Our next questions come from the line of Manny Korchman with Citigroup.

Victor, I just wanted to follow up on a couple of things on the Studio side; I recognize we spent 75% of the call talking about 5% to 10% of your business, but it is the fast-growing one where you're allocating capital. So I appreciate your staying on to answer them. Can you just walk through the role and responsibilities of HPP and Blackstone? And does that differ by region, i.e., are they taking a different role in the U.K. given their presence there and long-term history versus the stuff in L.A.? Just talk about how each partner and what they're responsible for and how it differs?

Yes. It's a very fair, valid question given the differentiation on ownership. Our business consistently throughout in our venture with them to date in our ventures with them, both in the U.K. and with Twilight and our Sunset brand, is the operator, developer, manager, and marketing leasing day-to-day operations of our ventures together. That being said, there are other projects that we may take a lesser role and evaluate whether or not it's going to be the case. But as long as it's under the Sunset Studio brand, that's what our operations is. We're getting well compensated for that role, and we will continue to do so.

Do you own the brand completely or do you share ownership of it?

No, we share it.

Okay. And then like in Europe, are they in all the tax structuring and all that stuff? I'm just trying to understand is Europe different than L.A.?

No. We are doing exactly what we're doing here there for this specific project.

And then just in terms of equity, everything you have is obviously on balance sheet. But are they holding their equity in different parts of the firm, for example. Are they using the Europe fund to do the Europe deal? Are they using the BREIT to do the stabilized stuff they originally bought? Are they doing the opportunity fund to do the next development that you have going on? I'm just trying to understand how consistent the ownership of their equity is to all of these individual projects versus the larger platform.

Yes, listen, I don't want to get into what equity sources they're using because that's their business, not ours. I'm comfortable with the capital structure. I am comfortable with the relationship we currently have. Suffice to say, it's not all consistent. To date, everything under Twilight is one. The other projects we're working on will be a combination of either Twilight or something else, but it's not my place to say which capital dollars they're reporting.

And we're further out from a modernization of this business. But I guess with the different ownership structures on their side, could that complicate a sale or a buy-in by you or bringing another partner or spinning it off or taking it public? Does that inhibit you in any way or cost your shareholders any more money to sort of aggregate?

No. I know where you're going out with that. The answer is no. I mean it's a very consistent structure throughout with buy/sell provisions and exercisable on both sides. Those terms and conditions have not changed from deal to deal. There is not going to be any positive or negative ability for one transaction to be executed versus another. Obviously, we'll consider the totality of the portfolio asset by asset, just like we would if we owned it 100%. Going forward, that's always going to be the case. Just because the percentages are different doesn't mean that the rights are different.

Okay. What kind of exclusivity exists between each partner in the studio deals? I'm not sure if you discovered the land or if they did, but how does the process work? Are you essentially exclusive partners in all studio investments?

Well, no. I think it's easier to sort of effectively look at it. It's relatively complicated, but because there are different tranches. Under the Sunset brand, they could not use the Sunset brand without us, but we could if they chose not to do a transaction with us. We control the brand, even though we own it collectively. That gives you an idea of that aspect, and that's what we're going to be running off of the brand. That said, if we brought them a deal, and I'm going off of memory here, but I think if we brought them a deal and they said no, I know we can still do it ourselves. They can't go do a studio deal without our approval.

There are no further questions at this time. I would like to turn the call back over to Victor Coleman for any closing comments.

Sorry that we went over long today, but I appreciate everybody's consideration and input, and we look forward to having our next call next quarter.

Thank you. That does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a great day.