Good morning, and welcome to the Hudson Pacific Properties Third Quarter 2022 Conference Call. [Operator Instructions] 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 teams' efforts in effectively navigating this very persistent dynamic macro environment, the confluence of monetary policy, potential recession, tight labor markets and a hybrid work 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 though, 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% over 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. And these companies define what the modern workspace could be, and they invested 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 just ranked recently #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 spend on and off our own Sunset Studio lots.

Quixote is also a strong complement to our purchase of the Zio services as well as Star Waggons last year. With the closing, our Studio segment now comprises of approximately 13% of our NOI with only 1 month of contribution from Quixote. If we were former that back to the start of the year, that number would be 15%.

In terms of development, we're on time and budget to deliver 2 under construction projects totaling 790,000 square feet. One, our 7-stage 241,000 square foot Sunset Glenoaks Studio, which we're building in the 50-50 JV with Blackstone 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 noncore asset sales, generating total proceeds of $145 million with no seller financing required. And 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 maintain a strong flexible balance sheet with excellent capital access.

And 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 adequately navigate the capital markets.

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. That 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 include 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 sulfide 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 leases 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 blocks third quarter 2023, 469,000 square foot expiration at 1455 Market, which we own in a 55-45 JV 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 22 and 23 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 further 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 20 -- our remaining 2022 and '23 expirations, these are predominantly small to mid-sized tenants averaging around 6,000 square feet that typically only engage in earnest on 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 and but 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 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 '23 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 '23 expirations with no tenant exceeding 0.1% of our total office ABR and rents 15% below market. With that, I'll turn the call over to Harout..

Thanks, Mark. Compared to third quarter 2021, our third quarter 2020 revenue increased 14.4% to $260.4 million.

But for known vacate Qualcomm and certain onetime 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 onetime 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 onetime debt extinguishment cost of $3.2 million or $0.02 per diluted share, offset by a onetime 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, $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 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 noncash impairment; $10.7 million transaction-related expenses; and $0.8 million onetime property tax expense identified as excluded items in our year-to-date 2022 FFO. Now we'll be happy to take your questions.

Operator?.

[Operator Instructions] 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 that you have in Hollywood, are those 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. Listen, I think -- thanks for the question. I think you would say they're parallel because you can't do one without the other.

Even on studio lot locations, whether it's the ancillary revenue services, the equipment itself, or the mobile studios, they're filming for the most part, on location and in studios, whether it's 40% on location, 60% studios or vice versa, they're using both for the type of filming that we have in our studios and the relationships that we have overall.

So these trailers and the actual equipment that we use, generators, backup facilities, bathrooms, all of that inclusive of LNG, is probably in line with the studio business in general.

The only difference I would add is the 26 sound stages that we owned now with the Quixote purchase are a lot more day-to-day show-to-show versus long-term commitments..

Okay. And then getting to the leasing, obviously, the Amazon news today that they're freezing hiring, one of your office competitors had some pretty cautious comments about tech and West Coast you guys appreciate the color on the space that you're trying to backfill.

But just overall, how would you compare the leasing market now as far as what expectations for rents, for TIs? And just as tenants are coming up for renewal, are they taking the same amount of space, shrinking? Or are they relocating maybe at San Fran, 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..

Listen, your question is a very vague sort of wide open. I don't mean that critically. Just -- there's a lot there. So let me sort of talk high level and Art can jump in on some factual aspects. Amazon is one of many tenants that have commented on what their game plan is.

Overall, your understanding of the tech tenants is exactly where we see it, which is this is a time of pause, slowness and maybe even reversing paths and giving back space and laying off people. And so we're seeing that.

I think effectively, on our portfolio, specific to what we currently have, we don't see an impact until potentially end of '23 with Met Park North, and we're in conversations in.

And those conversations are going forward, but they're telling us they're not going to let us know between now and, let's say, May or June, give us 6 months' notice as to what they're going to do. And I think they're optimistic in terms of laying out whether they stay or go, we really won't know that.

So I know we've got a couple of calls between now and then people are going to ask the question. We're not going to know because they're telling us we're not going to know. That being said, just in general, we're not seeing any lowering of rents or increasing TIs on the deals that we're making or the conversations we're having on a material basis.

Now that's not to say it won't happen or could not happen, but the deals that we're talking about right now, rental rates are being supported and TIs are being supported from a capital standpoint, for the most part.

I mean, Art, do you want to jump in?.

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. And so I feel like we're well situated, especially in this environment where there is pressure on -- 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 kind of on the leasing market. You guys have been very transparent with respect to recent and upcoming move-outs of Qualcomm, NFL, Nutanix and Black, which has been really helpful, I think, 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 the 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'll tell you, I think, listen, we've laid out what we perceive to be tenants that are going to leave or potentially leave, and you listed them. I mean, in no particular or it's Qualcomm as we know they're gone NFL in about 2 months from now. And then the next wave is Block/Square, and Art's got an update on that.

And then the next one after that is Amazon. After that, we have nothing of substance until '25, and that's Uber. So really -- and I think we've laid out where we see the vacancies and where we see the possibility of us signing deals, and we've got activity on a lot of that right now.

But I think the reality is the large tenants in our portfolio are pretty stable after the ones that we've mentioned..

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?.

I mean, listen, we've been pretty vocal, myself, maybe more than others or maybe not as not as more as much as a few but more than others about where the political environment is in our marketplaces in specific to Seattle, San Francisco and Los Angeles. Next week is a big week for Los Angeles.

We're hoping that there may be a little bit of a sea change like there was in San Francisco. Specific to San Francisco, I think it's -- it's got a long way to go, but we have seen a change. I think the voices are loud enough, ours being one of them.

I would encourage you to come to our event on Monday, where we're going to have the mayor there and the former mayor as well, and we're going to talk specifically about this on a low fireside chat, which is the Monday before NAREIT. I do think, Blaine, that there is progression.

There is absolute reality that business needs to survive with decisions that are hard and fast and efficient. I'm not going to stand in a shoebox and give you my political beliefs, but I do think, as I said, those messages are out there. I would caution those who've not been to San Francisco.

I was there 3 weeks ago last Monday, I was pleasantly surprised on the activity in the streets and the flow of traffic, both people in and out of areas, specifically in the Financial District down by our building, the Ferry Building. But I do think that the ridership is completely up as a result of that.

Now as you move south, towards South San Francisco, up Mission and the likes of that, you will see other avenues of maybe sketchiness has still not been cleaned up. But there's a motive and there's a game plan, and I'm hopeful that, that will continue to be progressive and entice tenants and residents to come back to the city in full force..

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 nontech sectors? ..

Law firms, making up a significant component of the activity that we're seeing even as we've seen a bit more of a slowdown in tech tenant demand.

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. So I will say, really for the first time in Seattle, this is going back 2 quarters, professional service has taken -- 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 any additional color. I'm certainly curious about the Trailer Park building, the 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. So anything you can provide there would be helpful. ..

Sure. Pricing was a bit softer than our initial expectations kind of heading into, let's say, around -- in the first quarter of this year. I think we're still pleased with the execution.

Northview held up pretty close to initial expectations, the Hollywood building, the Trailer Park building you refer to, that came in a bit lower than initial expectations, but still so let me give you a couple of kind of data points you can use, either for modeling purposes or to kind of get a handle on what the economics look like.

On a GAAP basis, we did sell 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 NOI and a GAAP cap rate basis, the 3 assets we sold and the Del Amo asset had actually negative. NOI on it came in at a 4-4 cap. And on a cash basis, it came in at a 3-4 cap.

You just take the two assets, which I think people are kind of interested in, they both came in -- again, this is on back half of the year NOI, GAAP and cash. They came in 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 sell, we -- 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. And as I just indicated, they came in at like 3 4.

So they're really not much different from what our initial help was, but just a little -- 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's very few transactions that are getting 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. But 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 the sure deal.

The stuff that 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 -- sorry, decision-making has slowed. I'm wondering if you have an update as to when you think occupancy is going to bottom in your portfolio? ..

Yes, sure. I mean, listen, I think -- I mean, Art can sort of walk you through our main big deals. Our occupancy balance is going to be effective when we execute a couple of the big deals in Seattle and San Francisco that we're working on right now. And then I think backfill NFL.

I don't want to give any perceptive analysis other than what Mark's prepared remarks were on our Qualcomm building. And that building, we just don't have the type of activity that we would have hoped for, currently after they moved out in August.

But the other buildings that we're talking about, we have lots of activity, and we're hopeful that we can execute a few deals.

Art, do you want to get into some specifics with that?.

Yes, absolutely. So 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. And there is about 125,000 square feet of subtenancy within that number, and we're going to keep these 2 subtenants, by the way.

We're going to keep both of them in some footprint collectively bringing us to 65% coverage effectively a year out. And so we're being as aggressively we need to do to get activity and to get deals closed 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.

And 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. And so on a trailing 12-month basis, you're going to -- you should expect to see that steadily improve..

Sticking with the studio business, it looks like 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 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 -- a part office, part kind of industrial that historically has had occupancy for media companies, most recently Warner.

But more importantly, it sits on a very, very large parcel, 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.

And so 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. But 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 had talked about being opportunistic with acquisitions, and I think that was probably your entry into Quixote. But curious on what you're seeing in the acquisition market today. And then maybe a dovetail to that is obviously, you took studios cut it in half and now have tripled it.

So can you give us a sense of kind of where that might be going here with this opportunistic acquisition comment at all?.

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 100% correlated to that. I'll start on the off side.

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 increase in cap rate marketplace.

I do think you're going to see, I know of some institutional quality assets that are going to come to market, whether they trade or not on the off-site in our markets, are going to be very interesting to see where that pricing comes into play.

On the studio side, there is currently today, one asset that's come to marketplace that we'll be curious to see where that price is. But so far, what we're seeing from the first ground bids and understanding, is it's fairly aggressive and a very minimal increase in cap rate on that asset.

-- there's another potential asset that possibly comes to marketplace. But after that, I don't see a lot of depth on the studio side. I do did see maybe an acquisition or two in the services side, not for us, but they're going to be coming out.

So that would support where I think our valuation is on our Quixote and Star Waggons and [indiscernible] purchases in the last year plus, so that sort of gives you a snapshot of what's out there. But it is obviously apparent 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 rate and then maybe any downtime as you're negotiating those leases as we get closer here to the expiration? ..

Yes. We've been in leases for some time. It's a complicated transaction. And the deal behind it really came up not too long ago. But we don't think of it as a viable backup. Can't get into rate. We're in negotiations on that. We're not getting it into rate and deal specifics with you at this point.

But we do feel like -- I think we've talked about it's going to be kind of early '24 first quarter, second quarter occupancy..

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 being included in the Blackstone partnership?.

Dan, this is Mark. Before, the short answer to that is no. As you know, we own the production services business, and this -- this acquisition is part, sort of supports that production service business. So we own it on our own.

While we have you on the phone, Dan, we wanted to take the opportunity to add some information, if you will, on the back of your note the other day regarding dividend coverage, which I realize is not in response to your question, but we're going to do it anyway. So we ran some math around it.

And let us give you just our math around your math if only to kind of give investors a little bit more to go by. You are -- for those who haven't read the note, you had our dividend distribution at 98% for 2022. That year is essentially we have 3 quarters actual, only 1 quarter projected.

Off of our -- essentially actual NOI, we expect to be more like 65% distributed relative to year '98. Now you're careful in your note to point out that you normalize -- the mean difference is probably the normalization of recurring CapEx, TIs, LTE recurring. We took your convention relative to 2022 and even under your convention.

So putting aside what we actually expect to spend even under your convention to mention we get to 78, not 98. And again, that's against '22 actual.

The other thing we did, too, just to kind of check at all is we ran 2 year forward, 3-year forward, 4-year forward and 5-year forward projections against our NOI, but using your convention of spend relative to NOI.

And the peak amount in terms of the percentage distributed during that period it never exceeds 85%, and that's in this 2- to 3-year period while we're dealing with some of these bigger vacancies. But over the 5-year period, it's 78%. So similar to where 2022 landed, we never get any remotely close to 98%.

And again, that's using your convention on recurring CapEx. So anyway, we thought it's important to round out the explanation. I would also just add for what it's worth, I know you're using a convention, I think that, that sector-wide convention on the NOI recurring.

If we go back all the way to 2016, I think we went back -- we're -- we've actually been spending closer to 24% on recurring CapEx relative to NOI. So under your convention, we're at, say, 400 or 500 basis points higher than what our historical spend has been..

Okay. I appreciate those comments. We'll have to go back and look at my functions and happy to take it offline to and 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 -- I believe you have two assets on the market in Downtown L.A., pretty decent quality assets long term. I'm just curious how marketing is going for those assets. We heard Del Amo financing was being included in the marketing of those deals.

And I was 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.

They have been bids on both assets from people and then individual assets. Depending 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. But there's an ability for them to get the asset back.

So we'll keep you posted as things go forward. Yes. And by the way, just I forgot, we also -- 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, and it has been sort of being prepared for that. Our intent, as we said, was not to do that. The market had cooled on that, and as a result, it's come back.

We've got three potential buyers for that asset as well. So we'll keep you posted on that one, too, Daniel, going forward. So there's 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 was to move in, would there be -- 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 on -- 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. I mean, 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 just improve that capacity. So in the very near term, we've got the 110 coming due in January, can easily address that on the line. 50 a little later in the year, again on the line.

And then we'll -- we can accommodate the final 160, that's 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. So 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. ..

But suffice to say, I mean, we've got a lot of liquidity right now on the balance sheet to get us through -- nothing major after what Mark had mentioned comes due until '25..

The next question comes from the line of [Camille Bonham] with Bank of America..

Following up on earlier questions. I noticed that the average lease term on your renewals were pretty short. And 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 able -- 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. Yes, it is true. We had a sequential tick down in length of lease term on a blended basis. If you look, our new deals take up probably about 7 months -- on the average of 7 months. It was really the renewals. There were 3 renewals in there that really dragged it down, dragged the average down to about 30 months.

But if you look at where length of trim has been trending from Q2 2020, that's really where it bottomed out for us. We've steadily been increasing our length of term on deals from -- again, from somewhere around 32 months to 52 months. And so we feel pretty comfortable about it.

Directionally, I just think it would just -- the 3 deals really on the renewal side to drag down the quarterly average..

Yes.

If I could just maybe just add some analytics around Art's point because it's dead on, if you look not just at the recently completed quarter, which can be overly influenced by a couple of deals, if you look at 9 months, the full 9 months of this year, it's actually up on -- just on the renewals, about 4% on -- at 49.1 compared to 47.1 for the 9 months of the same period last year.

So we're actually seeing an improvement. I would even add to that if you want more to contextualize that. If you look at overall lease terms, while this particular quarter on a sequential basis was down, if you look, say, at a trailing 12-month basis, for the most recently completed quarter and you compare that to, say, trailing 12-months pre-COVID.

So the last quarter of 2020 going back 12 months, they're essentially in line. We're like 0.5% lower than we were 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. So we've been -- I think, the last -- certainly the last 8 quarters or so that we've been trending around 60 -- somewhere around 60%, 65% on retention. I think we're going to be pretty close to that..

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? And 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, I think, in the current quarter. But Glenoaks was when we did the construction loan and the 3.5% on Howard [indiscernible] Center happened as of the financing of that instrument..

And then as it relates to that swap, that's a swap we actually 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. Where -- 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.

And we're always monitoring hedging opportunities and depending on how that looks later in 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 are you going to manage the balance sheet in regards to a leverage level and whether you do have more, let's say, asset sales contemplated or something else that would maybe address your leverage over the next year?.

Sure. I mean, just to address the net debt to EBITDA. It is a little elevated this quarter, primarily because there's only 1 month of Quixote adding value. If you normalize that, it comes down a little. But the -- you're correct, the future burn off of tenants that are expiring isn't reflected in the current one.

And neither like you said, is One Westside. But the One Westside is significantly more impactful than the burn-off of almost all the tenants that are rolling. So from that perspective, we feel pretty good about how that's going to continue. And obviously, 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. But 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.

And that -- I mean, 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? And then also, in terms of that project realizing attractive location and very attractive design and -- but at the same time, we are moving into a more uncertain environment from a leasing standpoint.

And so just 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 actually consider pausing it from a construction standpoint to preserve capital or wait for maybe a less uncertain leasing environment?.

I'll just address the capital side, and then Victor or Art will address the question around leasing. In terms of capital, -- we've only got -- we're fully locked in on costs, Nick. We've got -- we're underway. It's probably close to being topped out by this point. All costs are under a guaranteed contract, so we have no cost risk.

There's only about $170 million of spend left to go to complete that. So it's not going to be burdensome, particularly in terms of capital availability. There's obviously -- once we have a tenant in tow, there's the spend associated with [indiscernible] and commission, which we would be more than happy to spend obviously.

So it really is not, Nick, a material burden on our capital availability..

Yes. So I mean Nick you said it, it's a great location. It's also a fantastic asset. There's a handful of large deals out in the market. We're talking to all of them. We're in negotiations with 1 in particular right now from 200,000 to 250,000 square feet. So yes, we still feel is on the large tenant demand.

And that trophy assets, the newer states is garnering all the attention. So we still feel good about it. We have a little bit of time, but we're not hoping to kind of get the next tenant behind this one as well..

Yes. And then lastly, Nick, listen, there's -- as you know, there's flight quality here. We believe in this asset. There's no turning back now though, let's be very candid. It's not like we're going to stop construction and then be in a situation where this building is not going to be completed.

So as Mark said, the capital spend is already in place, and we have a lot of activity, specifically around a couple of 100,000 square footers. And that means we got to go to ground war and do full 4 deals, that's what we'll do to get the rest of it 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 that you guys provided in the [indiscernible] and just annualize that, it looks like that deal was kind of done at like the [9.5]. But I think in the past, when I do was first announced, it kind of was -- we thought it was like a 12 13 cap-type transaction.

Could you just help us understand that a little bit 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. I mean, you nailed it. You got 1 month of results there. You can't gauge the valuation of this business off of 1 month of result. But -- we'll see where full 2022 ultimately shakes out.

And when we were guiding, we were really focused more on '23 because that would be a full year of ownership where it's under our structure, it takes into account other opportunities we have with having combined this business with our pretty existing business.

And 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. And you'll just 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 second question, just again, given all the conversation around slowdown in tech demand, I mean, how do we start to think about kind of potential new development starts going forward in regards to that landing a big lease? Is that -- how do we kind of think about when you may start something new, if at all? ..

I mean the market shift has led us to obviously 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, and 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..