Good morning, and welcome to the Hudson Pacific Properties Third Quarter 2022 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President of Investor Relations and Marketing. Please go ahead.

Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on the 8-K with the SEC, and both are now available on our website. An audio webcast of this call will be available for replay on our website. Some of the information we'll share on the call is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss macro conditions and our third quarter highlights. Mark will provide detail on our office leasing, and Harout will touch on our financial results and outlook. Thereafter, we'll be happy to take your questions. Victor?

Thanks, Laura, and thank you, everyone, for joining us today. At Hudson Pacific, we're leveraging our expertise and relationships and continuing to hustle every day to get leases signed. I'm proud of our team's efforts in effectively navigating this very persistent dynamic macro environment, the confluence of monetary policy, potential recession, tight labor markets, and a hybrid work environment continue to impact supply and demand fundamentals in all of our markets. One offset is that, on a positive level, we are finally seeing more companies bring employees back to the office 2 to 4 days a week, and office users are acquiring, touring, and trading paper. Simply put, it's just taking longer to get leases over the finish line as tenants attempt to make mid- to long-term real estate decisions in the face of considerable uncertainty. Our strategy has positioned our portfolio optimally for this challenging cycle, and strong evidence is that our year-to-date leasing activity of 1.6 million square feet is in line with our historical year-to-date levels and up over 18% from last year. For more than a decade, Hudson Pacific has partnered with tech and media companies to create campuses and workspaces that engage and inspire employees. These companies define what the modern workspace could be, and they invest well above and beyond our TIs to ensure that their employees want to spend time at the office. We, in turn, invested in the infrastructure upgrades, on-site amenities, the latest technology, and substantial ESG initiatives. As a testament to the latter, we recently ranked #1 of 96 office companies in GRESB 2022 real estate assessment. We have a unique vertically integrated platform and a modern sustainable portfolio essential to meet tenant demand in the current marketplace. Now let me touch on some of this quarter's highlights. We signed over 380,000 square feet, representing 65 new and renewal leases that once again saw our GAAP and cash rents increase. This activity was largely driven by small to midsize tenants averaging 6,000 square feet across a range of industries, including tech, health care, and government. The Bay Area comprised approximately 70% of the new and renewal leasing activity, including several large deals, such as renewals of ARS Health for 27,000 square feet, Amcor Technology for 23,000 square feet, and a state of California lease for 43,000 square feet. We're staying opportunistic in terms of our acquisitions as we continue to monitor market conditions. In the third quarter, we acquired Quixote, a leading stage and production services provider, which was a key component to our strategy to build a premier full-service global studio platform. With its combination of stage lease rights, production gear, and vehicles, Quixote further enhances our ability to capitalize on robust production spending on and off our own Sunset Studio lots. Quixote is also a strong complement to our purchase of the Zio services and Star Waggons last year. With the closing, our Studio segment now comprises of approximately 13% of our NOI, with only one month of contribution from Quixote. If we were to frame that back to the start of the year, that number would be 15%. In terms of development, we're on time and on budget to deliver two under-construction projects totaling 790,000 square feet. One is our 7-stage 241,000 square foot Sunset Glenoaks Studio, which we're building in a 50-50 joint venture with Blackstone and will deliver in the third quarter of next year. As the first purpose-built studio in Los Angeles in over 20 years, Glenoaks will benefit from the same favorable supply-demand fundamentals as our Hollywood assets where stages are full, and we can only accommodate less than 5% of our current increase. We already have interest from a major media company for a multistage, multiyear deal, even as we anticipate Glenoaks will follow a more traditional studio model of leasing at least some stages on a show-by-show basis. On the other construction project, Washington 1000 in Seattle, it doesn't deliver until 2024. We continue to ready our 3.6 million square foot future development pipeline, approximately 65% of which are studio or studio-related office properties. So when the timing is right, we can initiate construction. During and subsequent to the quarter, we executed 3 of our 4 non-core asset sales, generating total proceeds of $145 million with no seller financing required. We're in conversations with 2 separate buyers on the fourth asset. We continue to review our portfolio for potential dispositions; that is, assets that no longer align with our strategy based on location and growth potential. We are committed to maintaining a strong flexible balance sheet with excellent capital access. Following our successful $350 million green bond offering in the third quarter, as well as the sale of 6922 Hollywood last month, we now have over $950 million of liquidity with 93% of our debt fixed or hedged. Time and again, we have demonstrated our ability to navigate the capital markets adequately. Between the green bond and the preferred stock offerings earlier this year, we've raised over $650 million over the past 12 months at rates 150 and 500 basis points inside the current rates, respectively. In summary, as we face current macroeconomic headwinds, we have a team, a platform, and a portfolio to succeed, and we're energized to continue to lease our assets and drive future cash flow. Now I will turn over to Mark.

Thanks, Victor. Our in-service portfolio ended the quarter at 89.3% leased, driven by known vacate Qualcomm leading 377,000 square feet at Skyport Plaza in North San Jose in July. But for Qualcomm, our in-service portfolio would have ended the quarter at 91.8% leased, down 44 basis points, which speaks to the overall strength of our tenants and assets even in the current macroeconomic climate. In terms of our leasing activity during and subsequent to the third quarter, we are executing and progressing deals with small to midsize tenants and with less velocity than we would like. Even so, we are continuing to reload our leasing pipeline, which includes activity on all 4 of the recent or pending large tenant expirations through 2023. We currently have around 2 million square feet in various stages, providing us with 57% coverage on our remaining 2022 expirations and 49% coverage on our upcoming 2023 expirations, which are collectively 6% below market. Let me touch on leasing priorities in each of our markets. In Los Angeles, our in-service portfolio is 98.9% leased. Our main focus remains backfilling known vacate NFL's 168,000 square foot lease at 10900-10950 Washington and Culver City following their move to the stadium complex in Englewood and the lease expiration in December of this year. A highly sought-after location for an array of office users, Culver City still has sub-6% vacancy, and we have 2 tenants interested in backfilling the entirety of NFL space, one in lease negotiations and the other in early negotiations. Apart from NFL, we have 44% coverage on 76,000 square feet expiring in Los Angeles through the end of 2023 with no tenant exceeding 0.2% of our total office ABR. Collectively, our remaining 2022 and 2023 expirations in Los Angeles are 18% below market. Moving on to the Bay Area, our San Francisco in-service portfolio is 93.8% leased. Our primary focus is backfilling known vacate Block's third quarter 2023, 469,000 square foot expiration at 1455 Market, which we own in a 55-45 joint venture with CPPIB. We're already in negotiations with existing Block subtenants to remain in a portion of their square footage as well as a new tenant to backfill an additional 250,000 square feet, which collectively translates to 65% coverage on that space. Apart from Block, we have 75% coverage on 67,000 square feet expiring in San Francisco through 2023 with no tenant exceeding 0.2% of our total office ABR. Our remaining 2022 and 2023 San Francisco expirations, including Block, are 6% below market. Our combined Peninsula and Silicon Valley in-service portfolio, excluding Skyport Plaza, where known vacate Qualcomm moved out of 377,000 square feet in the third quarter, is 88.2% leased. Guideport is a quality asset, but we are executing an approximately $12.5 million capital plan to enhance interior and exterior finishes and amenities for both buildings. We are in early discussions with a potential tenant for about 50% of Qualcomm's former space. Regarding our remaining 2022 and 2023 expirations, these are predominantly small to mid-sized tenants averaging around 6,000 square feet that typically only engage seriously in renewals about 3 months in advance. Even so, we have about 40% coverage on 297,000 square feet of remaining 2022 expirations, which are 8% below market, and 25% coverage on 807,000 square feet of 2023 expirations, which are essentially at market rents. In Seattle, our in-service portfolio is 85.4% leased. We own 4 assets in the Denny Triangle submarket, which are 100% leased with no significant expirations through 2023, except for a 140,000 square foot lease at Met Park North, expiring in November of next year, which we are in very early discussions to potentially renew. Our Pioneer Square in-service lease percentage is 51.6%, largely due to Dell EMC's decision to vacate 505 1st earlier this year. We are currently in negotiations with a tenant on a 240,000 square foot requirement for that asset. Apart from Amazon, we have 100% coverage on 65,000 square feet expiring in Seattle through 2023, with no tenant exceeding 0.2% of our total office ABR. Rents on our remaining 2022 and 2023 expirations in Seattle, including Amazon, are about 20% below market. Lastly, in Vancouver, where vacancy remains low at around 7%, our in-service portfolio is 94.4% leased. We have 47% coverage on our 197,000 square feet of remaining 2022 and 2023 expirations, with no tenant exceeding 0.1% of our total office ABR and rents 15% below market.

Thanks, Mark. Compared to the third quarter of 2021, our third-quarter 2022 revenue increased 14.4% to $260.4 million. But for known vacate Qualcomm and certain one-time prior period property tax reassessments, our same-store property cash NOI would have increased 2.2% year-over-year rather than declining 2% year-over-year to $122.7 million compared to $125.2 million a year ago. Our third-quarter FFO, excluding specified items, was $74.1 million or $0.52 per diluted share compared to $77.3 million or $0.50 per diluted share last year. Specified items in the third quarter consisted of transaction-related expenses of $9.3 million or $0.07 per diluted share and a one-time property tax expense of $0.4 million or $0.00 per diluted share compared to transaction-related expenses of $6.3 million or $0.04 per diluted share and a one-time debt extinguishment cost of $3.2 million or $0.02 per diluted share, offset by a one-time prior period property tax reimbursement of $1.3 million or $0.01 per diluted share a year ago. Year-to-date, our AFFO is $183.3 million or $1.25 per diluted share, which is $0.05 per diluted share or 4.2% higher compared to last year. Our AFFO payout ratios for the third quarter and year-to-date were 65% and 60%, respectively, making our dividend extremely stable, if not conservative, as it does not yet reflect cash flow coming online from One Westside and Harlow. We continue to execute on financing and asset sales to fortify our balance sheet. At the end of the third quarter, we had $866.7 million of total liquidity, comprised of $161.7 million of unrestricted cash and cash equivalents, and $705 million of undrawn capacity on our unsecured revolving credit facility. This reflects the use of $40 million of proceeds from the sale of Northview and Del Amo to repay amounts outstanding on our credit facility. Upon payment of an additional $85 million with proceeds from the sale of 6922 Hollywood in October, we currently have $790 million of undrawn capacity on our revolving credit facility and $951.7 million of total liquidity. Including our access to undrawn capacity of $141.5 million under our One Westside construction loan and $69.8 million under our Sunset Glenoaks construction loan, we currently have $1.2 billion of total capacity. As of the end of the quarter, our company share of unsecured and secured debt, net of cash and cash equivalents, was $3.7 billion, 91% of which was fixed or hedged with a weighted average term of maturity of 4.4 years, including extensions. Again, this factors in repayments of our revolving credit facility from Northview and Del Amo sales as well as net proceeds from a $350 million green bond offering, adjusted for a post-quarter paydown of our credit facility related to our sale of 6922, 93.2% of our debt is fixed or hedged. Now I'll turn to guidance. As always, our guidance excludes the impact of any opportunistic and not previously announced acquisitions, dispositions, financings, and capital markets activity. We are narrowing our full-year 2022 FFO guidance to a range of $2.01 to $2.05 per diluted share, excluding specified items. Specified items consist of $8.5 million trade name non-cash impairment; $10.7 million transaction-related expenses; and $0.8 million one-time property tax expense identified as excluded items in our year-to-date 2022 FFO. Now we'll be happy to take your questions.

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

First, just before we get into the fun on leasing and some of the tech stuff, especially the Amazon news, I just want to go back to the mobile studios. As you guys assess those businesses historically, how durable have you found the earnings? And how much of the parallel do you see that? Are the studios in Hollywood more durable, or are the mobile studios just as durable? I'm just trying to get a sense for the quality of those earnings from the mobile studios versus the on-site facilities in Hollywood.

Alex, it's Victor. Thank you for the question. I think they are interconnected because you can't have one without the other. On studio lots, whether it's additional revenue services, the equipment, or mobile studios, filming occurs both on location and in studios. This could be around 40% on location and 60% in studios, or the opposite, as both are utilized for our filming types and overall relationships. The trailers and equipment we use, such as generators, backup facilities, and bathrooms, which includes LNG, align with the studio business in general. The only difference I would mention is that the 26 sound stages we now own from the Quixote purchase are used much more frequently from show to show instead of for long-term projects.

Okay. And then getting to the leasing, obviously, with the Amazon news today that they're freezing hiring, one of your office competitors had some pretty cautious comments about tech and West Coast. Could you appreciate the color on the space that you're trying to backfill? But just overall, how would you compare the leasing market now regarding expectations for rents and TIs? And just as tenants are coming up for renewal, are they taking the same amount of space, shrinking? Or are they relocating maybe in San Francisco, tenants moving to the Peninsula or maybe moving to other markets? Just trying to get a real sense because, obviously, the headlines out of the tech companies have not been encouraging.

Your question is quite broad, and I don't say that negatively. There's a lot to unpack. Let me provide a high-level overview, and then Art can add some specific details. Amazon is just one of several tenants who have shared their strategies. Overall, your perception of the tech tenants aligns with ours. We are noticing a phase of stagnation, and potentially a trend of downsizing and layoffs. In terms of our current portfolio, we don't anticipate any significant impact until possibly late 2023 regarding Met Park North, and we are in discussions about that. Those discussions are ongoing, but the feedback we have received indicates that we won’t have clarity until around May or June, so we have a six-month window before we know their decision. They seem optimistic as to whether they will stay or leave, but until then, we won’t have a definitive answer. I am aware that we will have a few calls before then, and questions will arise. Unfortunately, we won’t have answers because it's been communicated to us that we simply don't know. That said, we are not experiencing any reduction in rental rates or increased tenant improvement costs in the discussions we’re currently having. While that doesn’t rule out the possibility, the deals we are considering right now are maintaining stable rental rates and tenant improvements from a capital perspective. Art, would you like to add anything?

Yes. It's really a function on the TI. It's really a function of construction cost, not as a function of a deal from a leverage perspective, right? And so it really comes down to what condition is the space in most of the markets. What condition is space, and we figure out how much we need to spend. Again, construction costs. We're in a great place because of our DSD program, and we have prebuilt space that's pretty much ready to go with minor improvements. I feel like we're well-situated, especially in this environment where there is a little bit of pressure on TIs and free rent.

The next question comes from the line of Blaine Heck with Wells Fargo.

Just a follow-up on the leasing market. You guys have been very transparent regarding recent and upcoming move-outs of Qualcomm, NFL, Nutanix, and Block, which I think has been really helpful in setting expectations. Victor, at this point, I know you just talked about Amazon, but kind of past that, do you feel like the large move-out role is likely to be lower in the future? Or are there any additional large tenants that you're not quite sure about, past those you've kind of spoken to and singled out?

Blaine, I think we've clearly laid out the tenants we expect might leave. You mentioned Qualcomm, which we know is already gone, and then the NFL will be leaving in about 2 months. Following that, we have Block/Square, and Art has an update on that. The next significant tenant is Amazon. Beyond that, we don't anticipate any substantial departures until 2025 when Uber might leave. Overall, we've identified where we see vacancies and potential new deals, and there's some activity regarding that now. However, the fact remains that the larger tenants in our portfolio are generally stable aside from the ones we've discussed.

Great. That's helpful. And then Victor, second with you, we're all going to be out in San Francisco for NAREIT in a couple of weeks. You've talked about crime and other social issues impacting the CBD in the past. Should we expect to see much improvement while we're there? And I just wanted to get kind of your thoughts on whether you think some of the social and safety issues are still affecting your markets and the decision to return to the office?

We've been quite vocal about the political situation in our key markets, particularly Seattle, San Francisco, and Los Angeles. Next week is important for Los Angeles, and we hope to see a significant change similar to what we've experienced in San Francisco. While San Francisco still has a long way to go, there is definitely a shift happening, and our voices are part of that dialogue. I invite you to join our event on Monday with both the current and former mayors, where we will have a fireside chat addressing these issues just before NAREIT. I do believe there's progress being made, but the reality is that businesses must adapt and make tough, efficient decisions. I'm not going to delve into my personal political views, but I think the discussions are happening. For anyone who hasn't been to San Francisco recently, I visited three weeks ago and noticed a surprising amount of activity in the streets, particularly in the Financial District near our building. Ridership has significantly increased as a result. However, as you head further south towards areas like South San Francisco, there are still some lingering problems that need to be addressed. There is a plan in place, and I'm optimistic that it will continue to develop and encourage both tenants and residents to return to the city fully.

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

Mark, I think you mentioned in your prepared remarks demand that you're seeing from smaller tenants taking space. The average seems to be about 6,000 for the quarter. Is this a trend that you expect to continue in the future? And maybe kind of more broadly, do you see a pivot away from tech tenants from this demand and maybe see your portfolio growing exposure to other non-tech sectors?

Yes. I'll begin with the response, and Art will provide additional insight. The comment was regarding the Peninsula and Silicon Valley, where our portfolio primarily serves a smaller tenant base, specifically small to midsized tenants. We conducted a more thorough analysis of the pipeline in that market. The average size of tenants is slightly higher than the 6,000 square feet we've observed recently, coming in closer to 8,000 square feet, which is an interesting trend to monitor. We've noticed a significant increase in professional services, particularly law firms, which have become a major part of the activity we are witnessing, even as there has been a slight decline in demand from tech tenants. Art?

Yes, that's exactly right. And as Mark said, in the Valley, it's still completely driven by tech with the uptick of professional services. For the first time in Seattle, this goes back 2 quarters, professional services have kind of taken the lead in terms of the number of deals done relative to sector.

Got you. That's helpful. Maybe turning to recent transaction activity. I'm curious if you can provide additional color. I’m certainly curious about the Trailer Park building, 6922 Hollywood. How did pricing compare at execution versus when the deal was originally marketed? And then kind of any other insights or color? I know there are some bigger assets sort of on the trading block in that market. Anything you can provide there would be helpful.

Sure. Pricing was a bit softer than our initial expectations heading into around the first quarter of this year. I think we're still pleased with the execution. Northview held up pretty close to initial expectations, and the Hollywood building, the Trailer Park building you refer to, that came in a bit lower than initial expectations. Let me give you a couple of data points you can use, either for modeling purposes or to get a handle on what the economics look like. On a GAAP basis, we sold three buildings, so let me give you that, so you can kind of get it straight in your model. If you take back half of this year's NOI and a GAAP cap rate basis, the three assets we sold and the Del Amo asset had actually negative NOI on it, coming at a 4-4 cap. On a cash basis, it came in at a 3-4 cap. These two assets, which I think people are kind of interested in, both came in on the back half of the year NOI, GAAP and cash, essentially on top of each other at a 5 cap gap and at a 4 cap cash. Early indications when we were talking about those three assets being up for sale showed that on a cash cap rate basis, our thinking was we were in like a 2-8 kind of cash cap rate for the three assets. As I just indicated, they came in at like 3-4. So they're really not much different from what our initial held was, just a touch softer in terms of final value.

Yes, Michael, and I'll just jump in. I think you probably know in the markets that we're in, there are very few transactions executed at where the initial underwriting was, let's just say, 90 or 120 days ago. A lot of these transactions clearly are asking for seller financing. That's a little bit of the weakness on 6922 Trailer Park for us, is that we had some solid interest, 4 or 5 real buyers there. A few of them wanted seller financing, and we weren't prepared to do it at the terms that they wanted, and so we went with the all-cash buyer with a sure deal. What we see in the marketplace right now, obviously, the multi-tenant stuff is very challenged in terms of getting the execution where people perceive values to be.

The next question comes from the line of John Kim with BMO Capital Markets.

You talked a lot about backfilling and addressing some of your upcoming expirations, but also recognizing the economic environment has changed and we're seeing leasing decision-making has slowed. I'm wondering if you have an update on when you think occupancy is going to bottom in your portfolio?

Yes, certainly. I believe Art can provide an overview of our significant deals. Our occupancy levels will improve as we finalize a couple of major agreements in Seattle and San Francisco that are currently in progress. Regarding the Qualcomm building, I don’t want to offer much analysis beyond what Mark has stated; we haven't seen the expected activity since they moved out in August. However, for the other properties we're discussing, there's considerable activity, and we are optimistic about closing a few deals. Art, would you like to share some details on that?

Yes, absolutely. The next two, obviously, NFL, which we are in leases on and have a backup deal behind that, we feel pretty confident about that. And then the one that's staring everybody in the face is the Block set of 470,000 square feet that comes up in September of next year. We already have 65% coverage on that. What does that mean? Well, 250,000 square feet of net new deals that we're negotiating, a deal that we're negotiating on currently. There is about 125,000 square feet of subtenancy within that number, and we will keep these 2 subtenants in some footprint, collectively bringing us to 65% coverage effectively a year out. We're being as aggressive as we need to be to get activity and to close deals in that market.

And what about on the studio side? I noticed that occupancy did pick up 40 basis points sequentially. Is that momentum going to continue over the next couple of quarters?

Yes, it should. I mean, we've been sort of giving some background around that. That's the result of improved occupancy in the component of the studios that are office users that use space unrelated to stage use. So people in the entertainment business, but not the actual stage users. I think we've indicated that since we measure occupancy on the studios on a trailing 12-month basis, we saw during COVID a bit of a pullback on that type of occupancy, and we've seen that improve over the last 2 or 3 quarters. On a trailing 12-month basis, you should expect to see that steadily improve.

Sticking with the studio business, I noticed that you made a small acquisition in New Mexico. I was wondering if you could discuss the pricing rationale and if it was really due to the Quixote acquisition.

Well, it is related to the production services business. If you read the footnote, we try to get some color around what the nature of this property is. It's 35,000 feet of part office, part kind of industrial that historically has had occupancy for media companies, most recently Warner. More importantly, it sits on a very large parcel, a 29-acre parcel, and we currently parked over 90 transportation vehicles, Star Waggons vehicles, that both serve the Albuquerque studio owned by Netflix, which is about 2.5 miles away, and all of the other studio business in and surrounding Albuquerque, which is a busy media market. We had an opportunity to secure this site to give us the long-term ability to park our trailers, perhaps down the road, maybe even lease that 35,000 feet to a user. Most importantly, it's there to service that very busy production services market.

And what was the price?

Well, there's no point in giving a cap rate because it wasn't occupied when we bought it, and we didn't buy it for that purpose, but it was approximately $8 million.

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

Victor, in your opening comments, you talked about being opportunistic with acquisitions, and I think that was probably your entry into Quixote. But I'm curious about what you're seeing in the acquisition market today. A dovetail to that is obviously, you cut studios in half and now have tripled it. Can you give us a sense of where that might be going here with this opportunistic acquisition comment?

Yes. I mean, listen, you nailed it; it was correlated around the Quixote acquisition because we really hadn't talked about it since we closed the transaction. But it's 100% correlated to that. I'll start on the offside. As I said, we're seeing some deals in the marketplace nowhere near the flow just given where the debt markets are and the appetite of people to sell into an increasing cap rate marketplace. I do think you're going to see some institutional quality assets that are going to come to market, whether they trade or not in our markets are going to be interesting to see where that pricing comes into play. On the studio side, there is currently today one asset that's come to market, and we will be curious to see where that price is. So far, what we're seeing from the first ground bids and understanding is that it's fairly aggressive and a very minimal increase in cap rate on that asset. There's another potential asset that possibly comes to market. But after that, I don't see a lot of depth on the studio side. I do see maybe an acquisition or two in the services side, not for us, but they're going to come out. That would support where I think our valuation is on our Quixote and Star Waggons purchases in the last year plus, so that sort of gives you a snapshot of what's out there. But it is obvious that the flow of deals is nowhere near what we've seen in the past.

I appreciate the color, Victor. On the one asset, the studio asset in the market and maybe one coming to market, are those assets you're bidding on? Or are those just going to be good comps you think for your company?

One of the assets we are going to be bidding on, which is the one coming to the marketplace. We did not bid on the one that is in the market now.

Appreciate that. And then maybe just a follow-up, shifting over to NFL. You've been talking about those two tenants for a while. It sounds like maybe one is close to inking the deal. Can you talk about the rate and then maybe any downtime as you're negotiating those leases as we get closer to the expiration?

We've been in leases for a while, and it's a complex transaction. The deal came up recently, and we don't consider it a solid backup. I can't disclose the rate as we are currently negotiating, so I won't provide specific details at this time. However, we anticipate that occupancy will start in early 2024, likely in the first or second quarter.

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

Great. Maybe going back to the New Mexico deal, assuming that deal is also included in the Blackstone partnership?

Dan, this is Mark. The short answer to your question is no. As you know, we own the production services business, and this acquisition is intended to support that business. So we own it independently. While I have you on the line, I want to take this opportunity to clarify some details regarding your recent note on dividend coverage. I know this doesn’t directly respond to your question, but we wanted to provide additional information. We did some calculations in relation to your analysis to give investors further insight. In your note, you indicated our dividend distribution for 2022 was at 98%. Given that year, we have three quarters of actual data and one quarter projected. Based on our actual NOI, we expect our distribution to be about 65% in comparison to your 98%. You rightly pointed out in your note that there’s a normalization concerning recurring CapEx, TIs, and LTE recurring. Using your framework for 2022, our calculation suggests the distribution would actually be 78%, not 98%, based on 2022 actuals. We also conducted forward projections against our NOI using your spending framework. During that period, the highest percentage distributed never exceeds 85%, occurring over a 2- to 3-year stretch while we address larger vacancies. Over the 5-year span, we estimate it to be 78%, similar to the 2022 outcome, and we never approach the 98% mark. This is based on your assumptions regarding recurring CapEx. In reality, our spending on recurring CapEx relative to NOI has been closer to 24%.

Okay. I appreciate those comments. We'll have to go back and look at my functions and happy to take it offline to chat more about the differences in methodology. But I appreciate the comments nonetheless. Maybe just a second question regarding the transaction market. Victor, you mentioned the lack of comps and the difficulty in obtaining financing. I believe you have two assets on the market in Downtown L.A., pretty decent quality assets long term. How is marketing going for those assets? We heard Del Amo financing was included in the marketing of those deals. Curious if that's attracting any more bidders than anything else you guys have been working out there?

Yes, Daniel, there are two assets in the portfolio that we're marketing. We've got multiple offers on them. They all include, with the exception of one, some form of seller financing. Obviously, I'm not going to get into the terms and conditions of that. But it's up to 50%, and that's the limit. There have been bids on both assets from people and then individual assets. Depending on where pricing comes into play, we'll make a decision on what we're going to do. One of the more interesting buyers is a user for one whole building, which is fully leased for 7 more years. There's an ability for them to get the asset back. We'll keep you posted as things go forward. As Mark mentioned in his prepared remarks, we sold 3 of 4 assets. The fourth asset, our Skyway asset, where we talked a couple of quarters ago about the life science industry and the attractiveness of that asset, has come back. We've got three potential buyers for that asset as well. We will keep you posted on that one too, Daniel, going forward. There are three to talk about in the future.

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

You have Sumit on for Ronald. Just wanted to follow up on the prepared remarks. I think you said you had a tenant that's interested in 50% of the Qualcomm space. Just remind us if that tenant were to move in, what are you expecting in terms of downtime and so forth?

Listen, thanks. As I said, look, we have a tenant. It's a user of maybe the potential ownership. I think it's just way too early for us to underwrite and give you some projections on that. I'll go back to what I said earlier. Of the assets that we have large vacancy and the disclosure and transparency that we're giving you, I would not put a tremendous amount of credit in those two buildings versus the other stuff that we're talking about.

Got it. And then just a follow-up, you have some debt coming due next year and the year after that. What are your plans to take care of that?

Well, probably use the line. We've got almost $800 million available on the line; if any of the asset sales we've been focused on happened, that would likely improve that capacity. In the very near term, we've got the 110 coming due in January, which we can easily address on the line. The 50 due a little later in the year, again on the line. We can accommodate the final 160, which is all the way at the end of next year, also on the line, if necessary. But a lot can happen between now and then.

We always review the capital markets. We use the line as our temporary holding period, but we always look at the bond market, the private placement market, the term market to help us address all of our financing needs.

We currently have significant liquidity on the balance sheet to take us through without any major obligations until 2025.

The next question comes from Camille Bonham with Bank of America.

Following up on earlier questions. I noticed that the average lease term on your renewals was pretty short. We've been hearing that occupiers are looking for flexibility in their leases, given many are still trying to understand the impact of hybrid working on their office footprint. Are you seeing any change in the lease structures you are signing, whether there are additional clauses being put in place for expansion or contraction, or even early breaks?

Yes, Camille, this is Art. It is true that we saw a slight decrease in the average lease term on a blended basis. Our new deals have an average length of about 7 months. However, there were three renewals that significantly lowered the average to approximately 30 months. Looking at the trend since Q2 2020, that’s where we reached our lowest point. We have been gradually increasing the length of our lease terms from around 32 months to 52 months. Overall, we feel confident about this trend, and we attribute the decline in the quarterly average primarily to those three renewal deals.

If I could just add some analytics around Art's point because it's accurate, if you look not just at the recently completed quarter, which can be overly influenced by a couple of deals, but at the full nine months of this year, it shows an increase in renewals of about 4% at 49.1 compared to 47.1 for the same period last year. We're seeing an improvement. Additionally, if you want more context, while this particular quarter was down sequentially, if you examine a trailing 12-month basis for the most recently completed quarter and compare it to the last quarter of 2020 going back 12 months, they are essentially in line, being only about 0.5% lower than pre-COVID.

Okay. I appreciate all the details so far around the leasing pipeline. Can you remind us what the retention rate was for this quarter? And what do you view as the new normal on a go-forward basis for the company?

Yes. Over the last eight quarters, we've maintained a retention rate of around 60% to 65%. I believe we will remain close to that level.

And just switching to the financing side. Can you talk to what the embedded costs were for the caps and swaps you obtained this quarter? I believe you have $125 million of swaps burning off soon. What's your thinking about hedging this floating rate exposure through 2023?

Yes. So we did knock all of the caps and swaps that we enumerated in the supplemental had preexisted. So we didn't incur anything as it relates to hedging instruments in the quarter.

I think with the exception maybe of Bentall which happened in the current quarter. But Glenoaks was when we did the construction loan at 3.5% on Howard Center happened as of the financing of that instrument.

As it relates to that swap, that's a swap we had a while ago. We paid off term debt and then we were able to keep that in place to continue to offset floating rate exposure. When it burns off, we're going to look at what floating rate debt we have, it's a little bit more than 400 at that point. We're always monitoring hedging opportunities, and depending on how that looks later this year, we might put further hedges in place.

The next question comes from the line of Nick Yulico with Scotiabank.

First question is just on thinking about the overall balance sheet leverage. Debt-to-EBITDA has gone up a bit. You also have an issue over the next year where some of the move outs aren't factored into EBITDA. I know you get some EBITDA also from One Westside. But how should we think about how you are going to manage the balance sheet in regard to leverage level and whether you do have more asset sales contemplated or something else that would maybe address your leverage over the next year?

Sure. To address the net debt to EBITDA, it is a little elevated this quarter, primarily because there's only one month of Quixote adding value. If you normalize that, it comes down a little. But you're correct; the future burn off of tenants that are expiring isn't reflected in the current one. Neither is One Westside. One Westside is significantly more impactful than the burn-off of almost all the tenants that are rolling. From that perspective, we feel pretty good about how that's going to continue. We're going to be focused on leasing, and sorry, in addition to Harlow, let's not forget, that has not provided any cash net debt to EBITDA cash from starting in the current quarter in Q4.

Yes. Just to add a little bit more specifics around this. We've given indications in the past over what pro forma adjustments look like for Harlow, for One Westside; we could do likewise for Quixote. What you would see quickly, Nick, is that it drops below 7 on a pro forma basis. Last time we ran it, it was like a 6-6 debt-to-EBITDA. You can expect that to materialize as the cash rents from those kick in towards the end of this year and into next.

All right. That's helpful. The second question is on Washington 1000. I don't believe you have a construction loan in place. Just wanted to hear your latest thoughts. Are you trying to pursue something there? In terms of that project realizing attractive location and design, but at the same time, we are moving into a more uncertain environment from a leasing standpoint. Trying to understand why you're still confident in going forward with that project right now and if there's any chance that you would consider pausing it from a construction standpoint to preserve capital or wait for maybe a less uncertain leasing environment?

I'll address the capital aspect first, and then Victor or Art can discuss the leasing question. Regarding capital, we are fully committed to our costs. Construction is progressing well and is nearing completion. All costs are under a guaranteed contract, eliminating any cost risks. We have approximately $170 million remaining to finish the project, which will not significantly impact our capital availability. Once we secure a tenant, we will incur expenses related to leasing and commissions, which we are willing to invest. Overall, this does not impose a material burden on our capital resources.

Yes. Nick, you said it; it's a great location. It's also a fantastic asset. There are a handful of large deals out in the market. We're talking to all of them. We're in negotiations with one in particular right now from 200,000 to 250,000 square feet. We still feel positive about it. We have a little bit of time, but we're not hoping to get the next tenant behind this one as well.

Yes. Lastly, Nick, there is flight quality here. We believe in this asset and there is no turning back now. It's not as if we are going to stop construction and leave this building incomplete. As Mark mentioned, the capital expenditure is already allocated, and we have significant activity, particularly with a couple of large 100,000 square foot deals. If necessary, we are prepared to pursue full-scale deals to ensure the remaining space is leased.

The next question comes from the line of Tayo Okusanya with Credit Suisse.

First of all, just around the Quixote deal. Again, if you take the September NOI provided in the supplemental and just annualize that, it looks like that deal was done at around 9.5. In the past, when it was first announced, we thought it was like a 12 to 13 cap-type transaction. Could you help us understand that a little better? I don't know if there's some seasonality in the business, which is why just analyzing the September numbers may not be the right way to look at it?

Yes. You nailed it. You have one month of results there. You can't gauge the valuation of this business off of one month of result. We'll see where full 2022 ultimately shakes out. When we guided, we were really focused more on '23 because that would be a full year of ownership where it's under our structure, taking into account other opportunities we have with our existing business. We are still confident that this business off of 2023 relative to the $360 million we paid for it is like an 8 to 8.5 multiple on EBITDA. You'll have to continue to monitor the disclosure around that as we have more months to put in front of you to see how closely we are to achieving that multiple.

That's it. And then just a second question, given all the conversation around the slowdown in tech demand, how do we start to think about potential new development starts going forward in regards to that landing a big lease? How do we think about when you may start something new, if at all?

The market shift has led us to be in a position where we would do one of the multiple deals that we currently have in various forms and functions, for it to break ground would have to be a pre-leasing component. The amount of pre-leasing and the tenant quality is obviously up in the air. But it's changed from wherever we looked in the past.

That concludes our question-and-answer session. I would like to turn the conference back over to Victor Coleman, Chairman and CEO.

Thank you so much for the participation and appreciate all the questions. We look forward to seeing most of you at NAREIT in about two weeks.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.