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

Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties Second Quarter 2021 Earnings Call. Yesterday, our press release and supplemental were filed on an 8-K with the SEC. Both are available on the Investors section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investors section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We'll also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including those associated with the COVID-19 pandemic. Actual events cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. Moreover, this quarter, we've once again included certain disclosure prompted by COVID-19 business changes which we won't maintain once business operations normalize. With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our President; and Harout Diramerian, our CFO. They will be joined by other senior management during the Q&A portion of the call. Victor?

Thank you, Laura. Good morning, everyone. Welcome to our second quarter 2021 call. We had a very strong second quarter in terms of our financial results. We've also had a very busy start to our third quarter, executing on our growth strategy for Sunset Studios. And I'll talk a little bit about that more in a moment. The big picture, the tech and media industries continue to flourish in our markets. Venture investment and fundraising are at record levels. The IPO market is strong, tech employment and hiring have recovered to essentially pre-pandemic levels, and media companies are spending billions to produce a backlog of content. Over the last few months, we've seen a real momentum towards the return of office, and we're optimistic that's going to continue. Growing vaccination rates, combined with statewide reopenings in California in mid-June in Washington at the end of June and forthcoming in Vancouver after Labor Day, led companies to begin implementing and formalizing plans. We are still in a wait-and-see mode regarding any major adjustment space configurations or needs. But even with variance, we're expecting heading into fall, most companies will move forward towards at least a partial reoccupancy of existing space, potentially coupled with vaccine mandates. We're already seeing this from a few of our larger office tenants. Essentially, all of our major studio tenants, Netflix, HBO, CBS, Disney, ABC, Amazon, have resumed and are scheduled to imminently resume active production or on our lots with safety protocols in place. Production is now an overdrive given content demand and pandemic-related shutdowns, particularly here in Los Angeles, where we are building a state-of-the-art global studio portfolio to meet that demand. To that end, I'm sure many of you saw, we made 2 very exciting major announcements over the last week around our expansion…

Thank you, Victor. Our second quarter rent collections remained strong at 99% for our overall portfolio and 100% for office and studio properties. We've collected 100% of our deferred rents due today. Physical occupancy at our office buildings currently ranges from 5% to 55%, depending on the asset. At the lower end, our properties largely occupied by tenants communicating an end of summer or early fall return. As physical occupancy has improved, so has our parking revenue, which grew 12% in the second quarter compared to the quarter prior. Office leasing activity continues to accelerate across our portfolio and markets, especially in terms of the inquiries and tours. This activity translated into strengthening fundamentals more so in some markets like Silicon Valley, which in the second quarter had stable rents, declining vacancy and significant positive net absorption. In line with these trends, our deal pipeline that is deals in leases, LOIs or proposals stand slightly above our long-term average at 1.4 million square feet. That's up 75% compared to the second quarter last year and 35% year-to-date, despite our having completed over 1 million square feet of deals so far in 2021. To that end, we signed 510,000 square feet of deals in the quarter, once again, in line with our long-term average with 19% GAAP and 12% cash rent spreads. Our weighted average trailing 12-month net effective rents are up close to 10% year-over-year. There are 2 primary drivers of this increase: First, our effective rents are up slightly, about 8%; and second, our annual TIs per square foot are down 30% and mostly due to executing more renewal leases. Separately, our trailing 12-month lease term and renewal deals also increased from 4.5 to about 5 years year-over-year and term has also extended from pandemic lows. Our deal activity…

Thank you, Mark. In the second quarter, we generated FFO, excluding specified items, of $0.49 per diluted share compared to $0.50 per diluted share a year ago. Second quarter specified items consisted of $1.1 million or $0.01 per diluted share of transaction-related expenses and $0.3 million or $0 per diluted share of onetime prior period supplemental tax expense related to Sunset Gower compared to $0.2 million or $0 per diluted share of transaction-related expenses a year ago. FFO beat our own expectations at the midpoint of our guidance by $0.02 per diluted share. This was primarily due to the reversal of reserves against uncollected cash rents and straight-line rent receivables and savings on operating expenses, some of which we expect to incur in the second half of the year. Second quarter NOI at our 44 consolidated same-store office properties decreased 2.1% on a GAAP basis, but increased 4.9% on a cash basis. For our 3 same-store studio properties, NOI increased 17% on a GAAP basis and 29.3% on a cash basis. Adjusting for the onetime supplemental property tax expense at Sunset Gower, NOI for our same-store studio properties would have increased by 22.8% on a GAAP basis and 35.8% on a cash basis. At the end of the second quarter, we had $0.9 billion in liquidity with no material maturities until 2023, but for the loan secured by our Hollywood Media portfolio. This loan matures on Q3 2022 and has 3 1-year extensions, our average loan term is 5.2 years. In late July, in preparation of funding our U.K. Blackstone JV, we drew down $50 million on our revolver, resulting in $550 million of undrawn capacity, we funded our remaining pro rata acquisition costs with cash on hand. Our AFFO continued to grow in the second quarter, increasing by $11.4…

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

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

Victor, maybe a 2-parter on the studios. Just curious, the structure of these is a little bit different in terms of your ownership stake versus the original deal with Blackstone. Is there a reason for that? And then separately, could you just talk about the equity commitment that HPP would need to make versus kind of the leverage you may -- the partnership may put on these assets?

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

Yes. So Craig, the Glenoaks deal is pretty close in terms of ratable ownership, it's a 50-50 deal. We had taken the land down a while ago, and you can see how much we, on a consolidated basis, put in the land. But the expectation is we're going to finance out the rest of it, call it, about $150 million depending on the start date through Q3 of 2023. And on a gross basis, we're 50% of that, but we think we'll do -- end up doing about 60% asset-level financing. So the total remaining spend for us over the next 2 years is only like $30 million. So that gives you kind of the capital structure for that one. On the London deal, the Park Plaza deal, I think Victor mentioned, the land has already been taken down GBP 125 million. Our piece of that is like GBP 45 million. The remaining spend gross to us is about GBP 200 million that goes out, call it between now and 2025. Similar to the Glenoaks deal, we're thinking that's going to be 60% to 65% financed on the construction side. So the total remaining spend net of financing for us, phasing in over 5 years or so is about GBP 80 million.

Okay, right. Yes. So not a huge sum. So about $110 million kind of on your share over the next 4 to 5 years. Okay?

Correct.

And then could you just give us a sense -- I know you guys have done a little bit of redev on the third Sunset kind of studio you bought, but I don't recall you guys doing ground up on studios, maybe I'm mistaken, but just kind of what kind of returns are you targeting? Is there a big difference between the U.K. and L.A.?

No, these deals -- well, the U.K. deal, the returns are very attractive. And I mean, I'm not going to get into the actual numbers until we're prepared to sort of release them. But we wouldn't be doing that deal unless it's significantly better than what we're seeing here. But we haven't done any preleasing yet. We've only had indications of interest. You're referring to our Sunset Las Palmas deal. We have not built a sound stage there, but clearly, we built Harlow our returns, they were very, very good. and have proven out better than we initially underwrote it at. We are looking at some new development of stages here in California other than our most recent Glenoak's announcement on existing assets that we own. And those returns are also penciling out in the 7% to 8% range. And so they're also very attractive.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So 2 questions, Victor. The first question is, as you guys think about the U.K. and certainly great movie market, but what sort of additional risk do you include? Because I'm guessing it's probably not as efficient to run U.K. as it is obviously an additional studio in Sun Valley on the north side. So what are the additional returns that you're looking for both to compensate for the lack of efficiency because it's overseas? And two, just the foreign -- the FX risk and foreign economy risk.

Well, listen, I think, first of all, we're super excited about an opportunity like this. And if you sort of read the release and the press around that, I mean this is going to be a world-class facility. And so I do think that there is going to be, obviously, since it's a ground-up project, Alex, a start-up costs are going to be fairly front-ended. That being said, I mean, we're making a commitment personnel, office and the likes of that, which will then go in line with economies on our sales and back-office team that's going to be based out of Los Angeles. So whether it's in the U.K., whether it's in Vancouver, whether it's in New York or here in Los Angeles, I think you'll see some very impressive economies from the opco side of it. In terms of the capital side, I do think we have to be cognizant of the spread between the pound and the U.S. dollar, and it's no different than what we're aware of in Vancouver between the Canadian dollar and the U.S. dollar. At this time, it's early and there's not a lot of capital spend as we get into deeper capital and the structure around debt and equity, I'm assuming that Haruna Mark will come to me and we'll discuss hedging and the likes of that on material dollars. But at this time, it's just too early to evaluate that. I would say that we are going to make a conscious effort of building our platform over in the U.K., and this shouldn't be the only deal that we would be doing there. So we're going to continue to do more.

Okay. Then the second question is on the domestic studios, the occupancy rate in the quarter was 88%, which is actually down a smidge from the first quarter. Just given all of the ramp-up in productions, I mean we're out there recently toward, I mean, the lots were full, like filming, filming, filming, I would have thought this occupancy would have been higher. So is it just some time -- I mean it's hard to believe that there's any downtime there. I mean everyone has been watched and watched every sort of rerun that you can out there. So it's hard to believe that studio space isn't being used 24/7. So how do we look at the actual dip in occupancy versus it being something more in the 90s?

Yes. Alex, it's that 160 basis point sequential dip is about 20,000 feet, just shy of 20,000 feet. As you point out, it has nothing to do with stage usage. They're all committed. And the office utilization associated with stage usage is high, but there's about 235,000 feet spread across the 3 studios that are really -- their office use unrelated to stage use. And as we sit today, that's about, call it, 63% utilized. And it's really just a direct byproduct of people -- COVID, people not working in offices. So we've seen a bit of a giveback of some of that square footage over the last 4, 5 quarters of COVID. As people get back in the office, we expect that occupancy to tick back up to its historical norm of 90-plus percent occupancy. But we need the casting agents and other entertainment-related tenants that want to be on location to start coming back to the office.

And when you say that you're not -- this isn't like the Netflix tech office. These are those small little office suites that are next to the studios where the people go to like sit and write script or do whatever they book with their age or whatever, these are other small little offices that?

Considering it's nonmedia -- they're typically media companies that are nonstage users that want to be in a media-like proximity to other media companies that are stage users.

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

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

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

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

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

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

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

Well, listen, Blaine, it's a great question. You've covered us a long time, so you've seen from the inception where people were trying to understand what the studio business was and how much negativity we got around to now it being sort of one of the darlings of alternative real estate. It's an area that we can capitalize growth on, and I think we're committed to growing our portfolio on our game plan through our Sunset brand with Blackstone. The commitment is uniform. And I believe that you'll see us substantially increase our NOI over time in that product type. It's not going to detract us from maintain and growing in the office business and our portfolio around office, and we've got development opportunities that are coming out of the ground in the office portfolio that I think are very attractive and we'll sort of go hand in hand. If you're asking sort of for me to ballpark, what is it, is it 2:1 or a 3:1, I don't know. But I can tell you, we are right now monitoring and underwriting and working earnestly on more studio deals than we are in office deals. And you know -- listen, I don't have to say it, but the capital structure is just a better structure right now for that. There's a high demand on debt. and very, very -- I mean, we never saw pricing around the debt on studio businesses, the studio industry and business around the opco side that we are seeing now. I mean, the numbers are spectacular. And so it's encouraging to see that the market is coming and becoming educated around that. And obviously, we've got a great partner.

Great. Very helpful commentary. And then just a little bit more specifically on the occupancy and lease rate side, maybe for Mark or Art. I know you guys have yet to formally get back the Dell EMC space in October, but given that it's going to be 1 of your largest blocks of space, I wanted to ask whether you guys have any early interest there and whether you think there's demand for that large box from a single user, or will you be splitting up that space?

Sure. This is Art. That's a great question. Remember, the floor is -- the floor is about 45,000 square feet a piece. So it breaks out the large floor plates are in demand. It's interesting. We've certainly seen, it's millennial and if taking the interest from the beginning of the year, mostly over the last 60 days, Seattle kind of leads the way with that uptick in interest and tenants in the market, somewhere they were over 3 million -- almost 3.5 million square feet now. We are seeing specifically in Pioneer Square and with that opportunity, which I think the market will be in north of 20%. We've got about 200 -- call it, 250,000 square feet of activity just really in that Pioneer market alone, and that's the 505, 83 King, 95 Jackson and so forth. So the activity we've seen over the last 60 days has really come on. And when I say over 200,000 feet, I don't mean just tours, I mean, in negotiations with. So we feel pretty good about that space and it's pretty impressive space actually. So we feel about that.

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

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

Art covered the backfill question on Dell EMC. There's really only one decent-sized expiration on top of that, we've got 24,000 feet rate with McGraw Hill. Other than that, we're really talking about very small expirations for the balance of the year and we're currently 55% covered on that remaining footage, right? So it's really just about getting those deals over the line. And then as Art pointed out towards the beginning of the call, net new absorption on the difference there. So anyway, Art?

Yes. So that 55 mark is covered. If you think about kind of the full year, we were over 1.4 million square feet. We -- on the prepared remarks, we also indicated that we're pretty close to 70%, probably 69% coverage on full year. So this is really, again, the remaining piece. The balance of which are maybe average of 5,000 to 6,000 square feet. And so there's still a lot of decisions to be made. We have really converted over the last 60 days, converted some likely to vacate into retention, and we're going to continue to work through it again. There's a lot of -- we probably get close to 100 tenants to deal with, and the team is hard at work trying to get those over the goal line.

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

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

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

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

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

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

Yes. Well, I mean, it's. We worked on an analysis on the correlation between VC fundraising and how that ultimately translates into tenant demand. And going back about a decade, and it's clearly correlated. So there's a lag effect. But if history holds, the VC fundraising should continue to drive tenant demand throughout the Bay Area. I'm not sure how closely people are tracking. But if you look at just funds raised through the end of the second quarter in the Bay Area, there's been 130 funds that have closed and they've raised more than $30 billion. And to put that into context, prior to 2018, the Bay Area had never raised more than $30 billion in an entire year. And so 2019 and '20 were pretty exceptional years. But if you just think about where we're trending in fundraising today and where that's likely to end up in '21, we're talking about maybe not record-breaking fundraising but pretty close to it. And our view -- and then that will ultimately translate into deals closed. And in fact, we're on a record pace right now in the Bay Area at 1,500 completed so far, which is a record-breaking pace. So in terms of VC fundraising and deals closed, we think all the ingredients are there to continue to drive tenant demand.

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

Both.

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

I just had a quick 1 maybe on the weighted average lease term. It seems like it is shorter than it's been in the past. So wondering if there was any other kind of detail or reasoning you could give for this and your outlook for it lengthening going forward?

Yes. It depends on kind of what period of time you look at it. It's definitely been trending longer -- terms have been trending longer since sort of the onset of the pandemic. So it's up on a weighted average basis, looking back trailing 12 months compared to the prior trailing 12 months, it's up about 7%. So it's trending in the right direction. Although if you go back further than that, the durations have shortened up a bit. I mean, Art, I mean, you could?

Yes. Yes. If you just -- you're just looking quarter-over-quarter, you're right, it is because there were 2 -- actually, there were 2 deals on -- 2 new deals that one was 145 months, the other was -- close to 120 months that really skewed the number up. But we have been -- over the years, we've been trending up, as Mark said. And then on the renewal side, again, there were 2 deals that made up a little over 2/3 of the square footage that were 60 months plus, and that's kind of how you -- the numbers look, if you just looking quarter-over-quarter.

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

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

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

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

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

Yes. Well, I would say -- Dave, I would say the demand across the entire portfolio has been driven by kind of midsized to large tenants, just everywhere. With the exception of Vancouver, which is it's been a mixed bag, right, small and large tenants. But we are seeing those larger midsize deals driving the market, but over the last -- like I said, over the last quarter, we've seen an uptick in small tenant activity in the Peninsula and Silicon Valley, which right now kind of translates into kind of early pipeline deals, right? And so it started with inquiries and tours and then kind of early pipeline. And so we'll start to see some of those come to fruition kind of later in the quarter and into the fourth quarter. But it really -- again, you said it, it started with the mid and large deals driving the market.

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

So on the leverage side, listen, I think we've been very conservative on the leverage side. And looking at the development, I would look at the past development deals we've done. For the most part, we've been using leverage to develop and then taking that leverage out and based on the success ratio. And so I do think that, that's going to continue. And so you could sort of expect that same pattern going forward on the studio side. You bring up a good question and it's obviously 1 that we've -- we've talked about. We'll wait and see what the platform and some of the alternative investments that we're making around this platform. And we -- as I mentioned before, we've got a long runway with Blackstone and the capital structure around Blackstone that we -- that is contributing to this as our partner. Obviously, you know they have multiple buckets, we have in Twilight structure a bucket that's a lot longer in terms of the lifespan. And so we have flexibility around timing. But it is not lost on us to look at down the road paying on size and valuation, what we do with this platform and if we roll it out, what's the best timing and execution. So that will always be part of our conversation as we continue to grow this.

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

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

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

Maybe just going back to the -- across your footprint, are you guys hunting for new development sites on the office side, or should we expect Studio space to continue to be the source installment going forward?

I mean, we've looked at development sites that are -- that we bid on and the high demand in some of our markets, particularly in the Vancouver and Seattle and adjacent Seattle markets. I don't think just going off the top of my head. I don't think we've done anything in Southern California in terms of attractive for office. And I know there's been nothing in Northern California that we've looked at from a development standpoint recently. So yes, I would say the opportunities are the things that we'll continue to evaluate in the Pacific Northwest on the office side and then clearly portfolio-wide in the other markets on the Studio side.

Great. And just last 1 for me on the U.K. studio acquisition or development side. Is there anything structurally different between how Studios have run versus -- in the U.K. versus the U.S., say, in terms of lease term or the splits of fixed revenue and variable revenue or anything that we should be aware of?

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

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

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

Yes. I mean there definitely is. There's a demand for not just pure Studio, but office studio campus facility and we are -- that's the attractiveness of our initial deal in Box born. We are looking at another opportunity that is aligned with that, that has a successful office component, adjacent to combined studio component there as well. So yes, that campus sort of style project that is purpose-built is something that we're very much focused on, and I think the demand is very high for that.

And so in the initial permitting you are, you might be getting -- I don't know if the zoning works differently, but you'll be getting potential zoning for both Studio and Office?

Correct.

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

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

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

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

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

Yes. I mean, we might continue to stretch it out as we have been over the last 4 quarters. I mean it can vary. It really -- if you look at it purely on a 1-quarter basis, you could get 1 big lease that distorts it. So it's a little dangerous. I think it's better to look at trends. And as we pointed out, we've been getting to longer term than in the last say, 4 quarters compared to where we kind of started the pandemic at. And I wouldn't -- I don't think we'd get to pre-pandemic levels in terms of term over the next 2 quarters, but I think we'll continue to stretch that out.

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

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

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

And are you -- do you own the brand outright or you share an ownership of the brand?

No, we share it.

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

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

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

Yes. Listen, I don't want to get into what equity sources they're doing and using because that's their business, not ours. I mean we're comfortable with the capital structure. We're comfortable with the relationship we currently have. Suffice to say, it's not all consistent. To date, everything under Twilight is 1. The other projects we're working on are going to be a combination of either Twilight or something else, but it's not my place to tell which capital dollars that's they're reporting.

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

No. I know where you're going out with that. The answer is no. I mean it's a very consistent structure throughout with buy/sell provisions and exercisable on both sides. And so those terms and conditions have not changed from deal to deal. And so there is not going to be any positive or negative ability for 1 transaction to be executed versus another. Obviously, we'll consider the totality of the portfolio asset by asset, just like we would if we owned it 100%. And going forward, that's always going to be the case. So just because the percentages are different doesn't mean that the rights are different.

Okay. And then is there -- what sort of exclusivity between each partner on studio deals that each finds, I don't know if you found this land or they found that land, but just how does it work? Are you effectively exclusive partners on the studio side on all studio investments?

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

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

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

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