Hudson Pacific Properties, inc (HPP) Q3 2021 Earnings Call Transcript

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Hudson Pacific Properties, inc (HPP -5.23%)
Q3 2021 Earnings Call
Oct 27, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Hudson Pacific Properties Third Quarter 2021 Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Laura Campbell -- Executive Vice President, Investor Relations & Marketing

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties Third 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'll 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 could cause our results to differ materially from these forward-looking statements which we undertake no duty to update. Moreover, this quarter was once again included in certain disclosure prompted by COVID 19 business changes, which we will maintain as business operations further 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?

Victor Coleman -- Chairman and Chief Executive Officer

Thank you, Laura, and good morning everyone and welcome to our 3rd quarter 2021 call. As we sit today, more than 18 months into the pandemic, the advantages of our focus on top tier tech and media markets on building and reinvesting in a state-of-the-art portfolio and are maintaining a strong balance sheet, have never been more evident. In the 3rd quarter, we had a robust same property NOI growth as our office and studio tenants continue to pay rent and repay deferred rent. We had another solid quarter of leasing activity on positive rent spreads. Our stabilized lease percentage remains over 92% for making good progress on our remaining 2021 and our 2022 expirations. We also successfully executed on multiple city related acquisitions all in spite of the pandemic headwinds. There is definitely growing momentum around our tenants return to the office. Some have already reiterated at least a portion of their employees over the last few months, while others are working toward either a year-end or early 2022 return. The combination of record funding and fundraising by VCs, media can be spending of over $100 billion on content and significant national health and research spending has led to continued growth in hiring within the industries that drive demand for our assets, primarily tech media gaming and life science. Across our markets, office leasing activity was notably elevated or showed healthy indicators such as a shift away from short-term renewals to new and expansion deals. Sublease space contracted almost without exception as a result of tenants, both pulling listings or backfilling space. We also saw a positive absorption around many of our metro areas in submarkets, and in most cases, for the first time since the pandemics onset. We're obviously very focused on maintaining our leasing momentum as the office market recovers, which Mark is going to discuss further in a moment.

We also made several major announcements around the successful growth of our studio platform in the 3rd quarter. We unveiled plans for Sunset Glenoaks, which will be the first purpose-built studio in Los Angeles area in more than 20 years growing our studio footprint in that market to a 1.5 million square feet in two stages. We purchase a major site north of London to build Sunset Waltham Cross which will be a large scale purpose-built facility with 15 to 25 new stages and we expanded our services platform with the purchase of the transportation and logistics companies, Star Waggons and Zio Studio Services, enhancing our existing clients experience, while capturing significant additional production-related revenue. Our combined expertise with Blackstone, across transactions operations and development, is second to none and we're poised to deliver and operate purpose-built next-generation studios that will attract premium productions for years to come and create exceptional value for our shareholders. Finally earlier this month we received our GRESB 2021 real estate assessment results. In addition to earning GRESB Green Star, the highest 5-star ratings for the 3rd year in a row, Hudson Pacific was named an office sector leader for the America's ranking first among the 22 companies in that category in terms of our development program. In addition, we earned an A and ranked first among our US office peers in terms of public disclosure.

I'm incredibly proud of these results as it showcases both the dedication and the ingenuity of our team as well as the commitment to being a leader on ESG issues. With that, may I turn the call over to Mark.

Mark Lammas -- President

Thanks, Victor. Our rent collections remained strong at 99% for our portfolio overall and 100% for office and studio tenants. We've collected 100% of contractually deferred rents due to date and 57% of all contractual deferrals physical occupancy at our properties has stayed consistent over the last several months at around 25 to percent, while as Victor noted activity around a return to the office is accelerating across our markets. Our current office leasing pipeline that is deals and leases, LOI's and proposals stands at 1.8 million square feet, up over 20% quarter-over-quarter and also 20% above our long-term average. We signed 318,000 square feet of new and renewal office leases in the third quarter at 8.3% and 5.1% GAAP and cash rent spreads, with the bulk of that activity, about 65% in the Peninsula and Valley. That brings us to 1.4 million square feet of new and renewal deals year-to-date. Our weighted average trailing 12 months, net effective rents are up about 4% year-over-year, while our weighted average trailing 12 month lease term for new and renewal deals held steady at 5 years. Despite facing about 360,000 square feet of expirations heading in the last quarter our stabilized and in-service office lease percentages remained essentially stable at 92.1% and 91.2% respectively. Recall that the addition of Harlow to the in-service portfolio as of the second quarter, accounts for more than 30 of the 50 basis point drop in lease percentage since first quarter Harlow is 50% leased and we are in leases with the tenant for the balance of the building. We only have 1.9% of our ABR in terms of our 2021 expirations remaining and those leases are over 20% below market. With strong activity on our fourth quarter expirations and existing vacancy, we remain confident our year-end in service leased percentage will remain essentially in line with third quarter levels. We also already have 30% percent coverage on our 2022 expirations. We continue to work on our pipeline of world-class office and studio development projects. In terms of office, we're on track to deliver our 584,000 square foot, One Westside office, adaptive reuse project in West Los Angeles to Google for their tenant improvements in the first quarter of next year. We plan to close on the podium for our 530,000 square foot Washington 1,000 office development in Seattle, later in the fourth quarter. We are in dialog with potential tenants and have 12 months post closing to finalize our construction timeline.

We also recently announced plans for Burrard exchange, a 450,000 square foot, hybrid mass timber building on the Bentall Centre campus in Vancouver. We've submitted a development permit application and construction could start in early 2023. On the studio side, we plan to begin construction for our 241,000 square foot, Sunset Glenoaks Studios Development in Sun Valley before year-end, with delivery anticipated in the third quarter of 2023. We're also working through design and public approvals for sunset welcome cross studios, the 91-acre site, we recently purchased north of London and expect to have more details on scope as well as timing as we head into next year. And now I'll turn the call over to Harout.

Harout Diramerian -- Chief Financial Officer

Thanks, Mark. In the third quarter, we generated FFO excluding specified items $0.50 per diluted share compared to $0.43 per diluted share a year ago. Third quarter specified items consisting of transaction-related expenses of $6.3 million or $0.04 per diluted share. One-time debt extinguishment costs of $3.2 million or $0.02 per diluted share and one-time prior period supplemental property tax reimbursement related to Sunset Las Palmas of $1.3 million or $0.01 per diluted share, compared to transaction related expenses of $0.2 million or $0.00 per diluted share and one-time debt extinguishment costs of $2.7 million or $0.02 per diluted share a year ago. Third quarter NOI at our 45 consolidated same-store office properties increased 5.1% on a GAAP basis and increased 10.8% on a cash basis. For our three same-store studio properties, NOI increased 49.8% on a GAAP basis and 45.5% on a cash basis. Adjusting for the one-time prior period property tax reimbursement, the NOI would have increased by 27.9% on a GAAP basis and 22.8% on a cash basis. Turning to the balance sheet. At the end of the third quarter, we had approximately $0.6 billion in liquidity with no material maturities until 2023 and average loan term of 4.6 years. In August we refinanced the mortgage loan secured by our Hollywood media portfolio, accessing additional principal, while lowering the interest rate and extending the term, we replaced the prior $900 million loan bearing LIBOR plus 2.15% per annum, with a $1.1 billion loan bearing LIBOR plus 1.17% per annum. The new loan has a 2-year term with 3 one-year extension options and is non-recourse except as to customary carve outs. We also purchased $209.8 million of the new loan which bears interest at a weighted average rate of LIBOR plus 1.55% per annum. Our Pro Rata net debt after this refinancing remained unchanged at $351 million. In terms of our three studio related acquisitions completed during the quarter the Sunset Waltham Cross site in the U.K and Star Waggons and Zio Studio Services operating businesses. we funded each with a combination of cash on hand and draws from our revolving credit facility. On account of these three transactions and other corporate activity at the end of the third quarter, we have drawn $300 million under our revolving credit facility, leaving 300 million of undrawn capacity. Third quarter AFFO grew significantly compared to the prior year, increasing by $10.1 million or over 21%. By comparison, FFO increased by 9% or $6 million during the same period. Again, this positive AFFO trend reflects the significant impact of normalizing lease costs and cash rent commencements on major leases, following the burn off of free rent.

Now I'll turn to guidance. As always, our guidance excludes the impact of unannounced or speculative acquisitions, dispositions financings and capital market activity. In addition, I'll remind everyone of potential COVID related impacts to our guidance including variance and evolving governmental mandates. Clearly, uncertainty surrounding the pandemic makes projecting the remainder of the year difficult and we assume our guidance will be treated with a high degree of caution. As noted many companies are still determining return to work requirements and the impact on space needs, because of this, for example, our guidance does not assume a material increase in parking and other related variable income. Overall, we assume full occupancy and related revenues will not return to pre-COVID condition levels in 2021. That said, we are narrowing full year and providing fourth quarter 2021 guidance in the range of $1.95 to $1.99 per diluted share, excluding specified items. And $0.48 to $0.50 per diluted share excluding specified items respectively. Specified items for the full year, including those referenced in our second quarter SEC filings and the third-quarter earnings release, includes $7.4 million of transaction-related expenses and $3.2 million of costs associated with the early extinguishment of debt. There are no specified items in connection with the fourth quarter guidance. I'll point out that we incurred $1.4 million of prior period supplemental property tax expenses, as noted in the first and second quarter SEC filings. Nearly all of which was offset by the prior period supplemental property tax reimbursement of $1.3 million received during the third quarter. So we're not identifying as specified item related to prior period taxes for the purposes of 2021 full-year guidance. And now I'll turn the call back to Victor.

Victor Coleman -- Chairman and Chief Executive Officer

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Craig Mailman of KeyBanc Capital Markets. Your line is open. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, everyone. Just wondering if we can get a little bit more color on the expanded leasing pipeline here, maybe give us a sense if it's strengthening in any particular market and also from a rent perspective, is that 4% net effective rent growth still staying intact, given what you guys have in the pipeline.

Victor Coleman -- Chairman and Chief Executive Officer

Yes. Hey, Craig, let me have Harout answer that. Go ahead.

Harout Diramerian -- Chief Financial Officer

Yes, absolutely. Hi, Craig. Yes. So the expanded -- you called it the expanded pipeline has been expanding really, since the beginning of the year. If you think about where we were, we're at close to about a 1,000,008 square feet in the active pipeline. Those are unique deals, just to be clear, those are not duplicative deals in any one of those assets. So it has grown about 800,000 square feet since the beginning of the year. It's also grown about 350,000 square feet here in the third quarter through the delta variant. And so we're seeing an uptick everywhere. More specifically, if you think about where we are hyper-focused on leasing and this Silicon Valley is about 500,000 square feet of that pipeline. So close to a third and then there's probably about 17% in Seattle, relative to the growth that we've seen Trailing 12. It's interesting, on the proposals that we're seeing right now, Craig, going out the door, they're kind of early stages, we seeing an uptick, we're probably seeing a very similar uptick in space rent and we're also seeing really net free rent being given on deals. They're going -- these are deals are going out the door that are closed kind of end of the quarter and into the first quarter.

Victor Coleman -- Chairman and Chief Executive Officer

And Craig, on your second question on net effective we looking back we went back on Trailing 12-month net effectives for several years now and we've been able to hold that net effective rent, if not improve it every quarter since the onset of the pandemic. And I think that trend looks like it will continue.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful, and just curious, I know you guys have talked in the past about Qualcomm and the NFL. Just an update there and whether any of that is also in the 1.8 million square feet?

Harout Diramerian -- Chief Financial Officer

Yes. So I'll start with, I'll start with NFL. NFL, as you know expires at the end of, at the end of next year. They exercise their termination. We are actually negotiating -- we're in LOI with two users, each for the entirety of the space. So only 160,000 to 170,000 square feet is in that active pipeline currently.

Victor Coleman -- Chairman and Chief Executive Officer

By the way, I would add that it's our over a 20% mark on that backfilled.

Harout Diramerian -- Chief Financial Officer

Right. And then back to Qualcomm. Qualcomm, we're still in discussions about a reduced footprint, we're marketing the space. We're very close, actually trading paper on the entire project, those marks are probably closer to 3% on Qualcomm.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful and then just one last one, you guys continue to make good moves here on the studio side of things. I'm just curious, number 1, is Blackstone at all interested in joint venturing the new acquisitions. And number 2, just given the lack of comps for that business and the value you guys are creating, I mean what's the end game there, would you guys consider spinning it out into its own company to kind of realize the full value or how long would you guys want to keep it the REIT and maybe not get the credit for it.

Victor Coleman -- Chairman and Chief Executive Officer

So, Craig listen, on the first part the answer is 100% yes. Blackstone -- and we had commented on that in the past, they are in the process of coming in those deals and others that we're working on the JV side, so we're fully aligned as partners going forward in all aspects of that business in the overall industry. In terms of the aspect of valuation was we just bought that to deal, it's very accretive as you know. We're going to run it. I think it's more of a greater question down the road of what we do is the entire platform versus just the two businesses and the other ancillary income streams that we're looking at right now.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Well, that's what I was getting at, because you guys are kind of building a vertically integrated business there, and that's what you're getting at the whole platform, not just deal and Star Waggons.

Victor Coleman -- Chairman and Chief Executive Officer

Yeah. And as I said, it's still just too early for us to turn to determine what our next steps are.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great, thanks guys.

Victor Coleman -- Chairman and Chief Executive Officer

Thanks, Craig.

Operator

The next question comes from Alexander Goldfarb of Piper Sandler. Your line is open. Please go ahead.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, good morning out there. So maybe just following along on Craig's question on the studios. Yes. When you now look at -- you have the trailer business, which I understand are more glamorous than just trailers. But you have that business, you obviously have tremendous amount of demand for content. How much, yeah, when we blend these two together and say that there is a tremendous amount of demand for content production, how much more juice is there both out of your existing studios. And then, out of the trailer you just acquired. So in total, as we think about the combination is this like there's an extra 10% in aggregate NOI that you could get out of the combined platform, 20%. Is there just some sort of metric the way that we can think about it?

Mark Lammas -- President

Yeah, I mean, Craig, I think it's useful. The thing about what...

Alexander Goldfarb -- Piper Sandler -- Analyst

Actually it's Alex.

Mark Lammas -- President

Alex, Sorry. Yes.

Alexander Goldfarb -- Piper Sandler -- Analyst

No, it's a different shop unless Craig's replacing me, which is fine and great to hear probably.

Mark Lammas -- President

The -- sorry Alex, I think if you look at the historical NOI growth in recognize of course 2020 is unusual. We've always generated in essentially every year in more than a decade, double-digit year-over-year NOI growth and even if you consider kind of where we are likely to end of this year, we will be back to our materially in line with 2019, which was our best year on record on. And so we're back to -- we're sort of back to the highest NOI levels that the portfolio has achieved. And I think it's fair to expect that by 2022, that NOI growth will improve at least another probably 10% year-over-year. And there's a couple of drivers around that, which is probably a little too much to get a new now. Zio and Star Waggons have the potential to perform in line, if not better with that type of growth on a year-over-year basis, and in fact, even if you look at where 2021 is coming out on -- it's looking like they're going to be 5 plus percent better on EBITDA for the year, than even we forecasted when we last guided. So I think it's fair for you to expect over the long term and are at least for the, for seeable future while the content creation is as intense as it is, that year-over-year NOI growth, 10 or more percent per annum is fair to expect.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay, So Mark. If I just understand correctly. So right now you're back to 2019 levels is what you're saying, you expect the aggregate studio portfolio including the wagon and trailers to grow at that 10% pace, and then you think there is an additional on top of the entire aggregate an additional 10% extra. I just want to make sure that we're understanding it correctly.

Mark Lammas -- President

No, I'm just saying the combined platform, including these operating businesses, are likely to generate 10 plus percent, year-over-year NOI growth for the foreseeable future.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay and then Victor. Question, as you talk to CEOs, Industry heads, office managers. We continue to read a lot about return to office date getting delayed or some companies even saying indefinitely. Is the reason that you say these companies delaying, is it purely because of COVID fears or is it more fears the such a tight labor market that their employees are going to leave and take camp to other companies. And that's why they're hesitant or is it the same one thing publicly but internally, they're putting the screws on.

Victor Coleman -- Chairman and Chief Executive Officer

Listen, it's a great question, Alex and I think we're getting real-time information from not just people who are our tenants, but other decision-makers in companies and CEOs. I think there's a couple of factors here that we're realizing that are obviously coming to fruition. First of all, as the days go by. It's not even weeks and months. People are changing their tune on this and we're seeing more activity physical activity in all of our assets and not just ours, but just in the markets that we're in, people are starting to come back sooner than we thought, because it was sort of intimated that would be end of the year, first quarter, but companies are making decisions. I think it has nothing to do with COVID fears and it has all to do with flexibility in labor and fearful of people moving to other companies that are offering that right now. The window is closing in our perspective as to this year's. And I think the back-to-normality is going to happen a lot quicker than any of us even imagine. Given what we've seen since really since October 1 and companies are starting to make those moves. So it is a labor issue in our opinion, it's not a fear issue or medical issue.

Alexander Goldfarb -- Piper Sandler -- Analyst

Okay. Thanks, Victor.

Victor Coleman -- Chairman and Chief Executive Officer

Thanks, Alex/ Craig.

Operator

Our next question comes from Jamie Feldman of Bank of America. Your line is open. Please go ahead.

James Feldman -- Bank of America -- Analyst

Thank you. I was hoping you can talk more about just what you're seeing in the Silicon Valley submarkets, if you look at the portfolio, occupancy, quarter-over-quarter, it looks like Redwood Shores, North San Jose, Santa Clara had the most declines and you're kind of LA, Seattle market looks a lot better. Can you just talk more about whether it's the small tenant market, the larger tenant market? We're hearing a lot about all the capital that's been raised out there and that should translate into based demand. Just maybe more color on what's really happening on the ground across the different sub-markets.

Victor Coleman -- Chairman and Chief Executive Officer

Yeah, I mean really, let's start with, I mean you said it, Silicon Valley and the Peninsula. Silicon Valley, and by the way, great news coming out of all of the markets, right? Not just the ones you mentioned but Silicon Valley gross leasing was up 1.2 million square feet. It was the second best quarter during the pandemic. Net absorption was down very slightly, but that was after 900,000 square feet was absorbed in the previous quarter and then tenant demand continues to be strong, right? There are 3.2 million square feet, which is close to about 80% of pre-pandemic levels and that's in Silicon Valley. On the Peninsula, very similarly, overall gross leasing was up 35% quarter-over-quarter at about 1.2 million square feet. Again, which is just shy pre-pandemic levels and the net absorption was positive for the second time during the pandemic, at 190,000 square feet and sublease space dropped by about 300,000ft. So, these things are actually happening on the ground as you say, is it a small tenant market. Yeah, really it's driven by, in our portfolio. Small tenants, but we're starting to see an uptick in early pipeline of under 10,000 square feet tenants really coming back out, really drafting off of the larger tenants mid tenure. For example, we just did -- the largest deal we did was, was a 27,000 square feet loft room and then really right behind it. The 5000 to 6000 or 7000 square foot deals into our VSP program are starting to appear. So we feel good, not just in the Valley. Now, just on the Peninsula but in all the other markets where we're starting to see this buoyancy.

James Feldman -- Bank of America -- Analyst

So I guess when you think about the large leasing that's been done. And when we hear about the pipeline, it sounds like a lot of very large tenants. How, can you break out what the leasing pipeline looks like. Just stuff that's kind of more relevant to your portfolio versus the market overall.

Harout Diramerian -- Chief Financial Officer

You mean the deals done in the market. Those numbers that I recited to you, the deals in the market. I would say really probably about 20% of deals are under, call it 10,000 square feet and we're starting to see in the early part of the pipeline. We're starting to see those numbers increase dramatically.

James Feldman -- Bank of America -- Analyst

Okay. And are there are certain submarkets tiers that you think will benefit more than others.

Victor Coleman -- Chairman and Chief Executive Officer

From the small tenant activity, I think you nailed it, I think it's Silicon Valley and the Peninsula. I think other markets like Los Angeles, we've already started to see an increase in smaller tenant activity, although we don't have a lot of small space. We don't have a lot of small space in San Francisco and in Vancouver, really, it's always been a mixed bag. That's been our most consistent market from a small tenant and large tenant perspective. And so I have no concerns about Vancouver at all.

James Feldman -- Bank of America -- Analyst

Okay. And then, where would you put the mark to market on, I guess it's kind of late in 2021, I guess through 2022 on your expiration.

Mark Lammas -- President

Jamie, it's Mark. I want to just make sure to give you a sense of what the composition '22 expirations are so you can get an appreciation of it. But right now the mark on all '22 exploration is a bit above 7%. As with all focusing on any particular period, 66% of the expirations in '22 or in the Peninsula and Silicon Valley where not the least of which is, it includes Palo Alto, so there is not a heck of a lot of positive mark in those markets combined and the markets what we knew have huge mark-to-market, just don't happen to make up that much of the expiration. So for example, in Seattle, where we have over a 30% mark, happens to only be a little bit more than 2% of the expirations or in San Francisco, for example, we have over 70% mark, but it's only 7% of the expiration so '22, by the way, we have phenomenal coverage already in '22, we're already over 30% covered in terms of expirations. I think it's telling that by the time you get to 2023, what you see is because of the composition of the '23 expirations. We're back to over at 20% mark-to-market on 2023 expirations. And so, as you see activity rolls through in '22 which will be a combination of renewed backfill on '22 but also some renewed backfill on '23. What you're really going to see is more of a blend between the two Mark at probably in the mid-teens, 14%, 15%, mark-to-market and what will be a combination of backfilling '22 and '23 space.

James Feldman -- Bank of America -- Analyst

Okay. And then last from me, you're starting to new studio development, we keep seeing headlines of new projects out there and just more capital flowing into the space. Can you just talk about what gives you comfort on the supply side in the studio business right now?

Victor Coleman -- Chairman and Chief Executive Officer

Well, I think, listen, I think location is going to be one and then content demand and the amount of capital going to content markets. I mean, Jamie. You know it's out there. It's in every single headline, I mean, it's by any estimation, it's over $100 billion for the upcoming year and it's going to be that on multiple bases for many years to come. There will be, in our opinion, some supply issues as time goes by. Based on, some contraction or consolidation of the business. But there hasn't been new studios built-in a year's. As in our prepared remarks, here in Los Angeles, our studio will be the first completed and it's going to be the first into 20 years. And so there is some room and there is room in the markets that we believe are the ones that are going to be the stickiest that we've talked about for several, several years on this. It's getting more headlines because obviously it's become a space that people are now interested in.

Mark Lammas -- President

You said there will be supply issues like how far are you thinking or what market?

Victor Coleman -- Chairman and Chief Executive Officer

I can't even guess that. But clearly, if everybody is going to continue to look to build there is going to be some supply issues. Not many though.

James Feldman -- Bank of America -- Analyst

So what you're saying it's not anytime soon.

Victor Coleman -- Chairman and Chief Executive Officer

No.

James Feldman -- Bank of America -- Analyst

Okay, thank you.

Victor Coleman -- Chairman and Chief Executive Officer

Thanks, Jamie.

Operator

The next question comes from Emmanuel Korchman of Citi. Your line is open. Please go ahead.

Emmanuel Korchman -- Citi -- Analyst

Hey, everyone. Thanks. If we continue to focus on the leasing pipeline you have, I guess over what timeframe or I guess what start time of leases comprise that. So is that stuff that is likely if it all lands to be done in the next 6 months? Is there tenants that are looking for early '23 and they're just starting to look at. So it's in your pipeline. Just what sort of the timing of that.

Victor Coleman -- Chairman and Chief Executive Officer

Well, generally meaning, I mean the ones we're talking about are deals that are being papered now and so I think maybe what you're getting at here is and maybe I'm wrong and then Harout will jump in. What you're sort of getting at here is our tenants, looking to lock up space at these rates for the next 12 months out or 24 months out. And the reality is, I mean we're real-time on trading paper to move in as soon as the space is complete. So this is, there's not a lot of lead time around that. So it's really more around 6 months. Now when you look at it obviously a Qualcomm larger space or an NFL, where we're going to lease this on one tenant right now, it's going to be a little different, right? because the lease negotiations are going to get completed. And then we're going to have to rebuild all the space. So it's going to depend on the amount of TI work and the repositioning of the assets. For the most part, all of our smaller guys it's other space ready or modification. The bigger guys you would RBC measures can be 6 plus months up and that's been what we're seeing right now, the interest level though. I just want to stress what Harout's numbers are, the interest level has picked up dramatically in all forms, not just the large tenant, which is just sort of a timeline and we're going to be 2 years out of the pandemic from when it started, first quarter and then, as a result, people are starting to realize their needs, and I think the bigger question at the end of the day, may you've had this conversation with our team before, is quality of real estate and the quality will shine on the higher-end real estate versus what we feel is second-tier real estate, which will struggle a little bit longer like it would in any cycle.

Harout Diramerian -- Chief Financial Officer

Yeah, if I could add some color to that. What you just talked about, Victor was spot on. But if you talk about the level of the pipeline right now. I mean if you think about pre-pandemic, our 25 month average of the pipeline was somewhere in the neighborhood of about a 1,000,004, 1,000,005 and well now we're carrying close to 1,000,008. So it gives you some perspective on the volume in the pipeline. And yeah, these are deals with minimal downtime. Right? We're talking about time to build out the space. These guys aren't landbank and not trying to take space way into the future and trying to bank on rates now. These are tenants who need space because of demand right now and I think it's chiefly because of confidence back in the market from smaller tenants who were again drafting off the larger tenants who have had this confidence and are looking past the return to work date to strike deals.

Emmanuel Korchman -- Citi -- Analyst

And then the number you quoted earlier for Qualcomm, which I think you said was a positive 3% roll-up and NFL which is 20% percent, are those on space rates, and if so how much work or concessions will take to get there or are those net rates?

Mark Lammas -- President

No, those are space rates that we're talking about on NFL really if the TI package is not going to be downtime to reposition space. So that's going to be immediate on Qualcomm. There is some level of work, we will still need to do to clean up the space, but not very much.

Emmanuel Korchman -- Citi -- Analyst

Thanks, everyone.

Operator

The next question is from John Kim of BMO Capital Markets. Your line is open. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

Thanks, good morning. Mark, you talked about net effective rents being up 4% over the last 12 months. But just isolating this quarter, it was down about 20% sequentially and a lot of it is probably due to GIs, maybe it's a mix. But I'm wondering if you see that net effective rent of 4% kind of trending down, given the most recent evidence?

Mark Lammas -- President

Yes, I don't think so. I mean the 3rd quarter is fairly common for it to be a lower gross lease amount just because a summer and so forth and so we did 3-18 of square footage compared to over $500,000 in the prior two quarters. And I think importantly, new leases were a higher percentage of the overall leases in the third quarter at over 40% compared to prior quarters, Q1 was only 26% made up of new leases and if you look at the composition of that 120,000 feet of new leases. There is one lease in there for 27000 feet as a 12-year deal on space that hadn't been touched in 20 years at one of the Twin Dolphin spaces so it needed a fair amount of GIs, plus at 12 years that how to have the leasing commission and so it came in at like 2-16 a foot on a 12-year deal, which skewed the overall net effectives by quite a bit, right, because you have not only of higher new deals as a percentage of overall deals and you have a 27,000 foot deal that makes up 20% of all your new deals. And so, if you adjust for that, what you see is your TILC has actually dropped to $54 a foot, which is actually lower than the prior quarter and well, lower than the Trailing 9 month. So, you know what, you know as we've often said in the past, if you get too caught up on say a smaller sample size, in this case, 300,000 feet, and don't recognize that you have other footage amounts that are much larger and more impactful in prior periods. You can get kind of a distorted understanding of what's going on. So I do think the positive net effective trend you know, appears to be sustainable and I think it's important, though, just to underscore the point. It's really important not to get too caught up in any one particular quarter's activity for reasons I just outlined.

John Kim -- BMO Capital Markets -- Analyst

Okay. That makes sense. And can I ask what drove the same-store NOI growth of 10% on a cash basis this quarter, it looks like maybe half of that was with free rents, but looking at the occupancy, year-over-year, it's down pretty significantly. So I was wondering what has been driving and offsetting that to us.

Victor Coleman -- Chairman and Chief Executive Officer

Your observation is right. Most of it has to do with free rent burn off primarily at our EPIC building. As that asset came online, it's now producing cash NOI. There are some prior year concessions like the ferry, that's helping this quarter, meaning in the 3rd quarter last year we had concessions that didn't reoccur this year. And then finally on Rincon, Google's lease commenced, I think in earlier this year from a deal we signed in the previous year. So that's contributing cash NOI and a little bit of the sublease rental revenue from the sublease at Salesforce had. Those are the main drivers.

John Kim -- BMO Capital Markets -- Analyst

So parking was not a contributor.

Mark Lammas -- President

Very little, unfortunately.

John Kim -- BMO Capital Markets -- Analyst

Okay.

Mark Lammas -- President

So there is more upside there.

John Kim -- BMO Capital Markets -- Analyst

All right, thank you.

Mark Lammas -- President

Thanks, John.

John Kim -- BMO Capital Markets -- Analyst

The next question comes from Blaine Heck of Wells Fargo. Your line is open. Please go ahead.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great, thanks. Victor, just to follow up on the studio side and specifically on acquisition. Obviously as you said interest in the property type has increased pretty dramatically as content creation has become a theme, can you just talk about the size of the opportunity set to acquire studio properties versus traditional office and whether that's going to have any limiting effect on your ability to grow that side of the business or are you just more focused on development and redevelopment and the lack of acquisition opportunities or maybe competition for them shouldn't really have a major impact on your plans.

Victor Coleman -- Chairman and Chief Executive Officer

While competition is going to have an impact on everybody's plans. Right? I mean, but Blaine I think the underlying aspect around the competitive set, it's been that we're not making a market now, the market's being made for us. So when you're looking at our valuation of what our portfolio is valued at. What the Street valuing at and what the real market value is at, is a massive disparity. So that's only helping us in terms of that aspect. In terms of what we see in the market, the competitive landscape is also enabled us to see some deals being marketed in some deals not being marketed. And I think our ability to grow in that area is very consistent. And I do think that you'll see us do a number of deals, not just from the development side, but on existing well located seemed marketplaces that we've identified and we're going to continue to be a player in that. And there is enough product out there for us and others. And so I do think that that's going to continue for some time.

Blaine Heck -- Wells Fargo Securities -- Analyst

Okay, that's helpful. Then, shifting gears, can you give us any more color on your Washington 1000 project. Mark, I think you said you have 12 months to determine the construction timeline after closing. I think previously you guys talked about the possibility of starting that project toward the end of 2022, early 2023, is that still kind of the most likely timeline, or does it really just depend on prospective tenant interest in that asset.

Mark Lammas -- President

Yeah, I mean certainly we have the freedom to commence late in '22. We're monitoring the market we have really compelling tenant interest, early tenant interest in it. Where we're at, we're so fortunate to have bought when we did. Our all-in costs are somewhere maybe 400 below what anything has traded for of comparable quality in the market and even with, if we run a really conservative rent assumption on it, we're pointing to close to, and cash-on-cash return. So I think probably, more importantly, is gauging the market meeting tenant demand and getting underway on that, so that we can deliver and take advantage of satisfying that tenant requirement, you know, as soon as we see it on the horizon. So I could see us start before then. It really just depends on what we're seeing in terms of what major tenants and their need for delivering space

Victor Coleman -- Chairman and Chief Executive Officer

Yeah. And I just wanted to jump in on that there is going to be a couple of announcements that are deals that are about to be signed in Seattle, that's going to take some massive amount of space off the marketplace, it's been sitting there. And these are large credit tenants that are absorbing a lot of the space that we were concerned about. So we'll be the first project when we're ready. That's ready to go because we're entitled and virtually able to build, as Mark said is early as mid '22 probably.

Mark Lammas -- President

Yeah, and these deals that Victor's referring to are not just direct deals but there also large sublease deals that are out there and our delivery window couldn't lineup better, especially with the positive momentum in the market right now.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great. Thanks everyone.

Operator

The next question is from Ronald Kamden of Morgan Stanley, your line is open. Please go ahead.

Ronald Kamdem -- Morgan Stanley -- Analyst

Just a couple of quick ones. Just going back on the pipeline anymore color in terms of the geographic breakdown of the pipeline, is it sort of properly next to the portfolio? Is one region sort of jumping out the pipeline?

Victor Coleman -- Chairman and Chief Executive Officer

Yeah, I mean I think I mentioned it before. But as you might imagine Peninsula, Silicon Valley takes about a 3rd of that active pipeline with activity and then really it starts to disperse evenly Kind of 20%, 15% as we talk about West LA as we talk about San Francisco again. San Francisco, not very much in the way vacancy right now and then Vancouver with some small tenant activity, But it's exactly how you would look at our portfolio in terms of vacancy and upcoming expirations and we lineup nicely.

Ronald Kamdem -- Morgan Stanley -- Analyst

Great. And then the second question was just, obviously, there is a lot of development activity happening and you're thinking about funding sources and sort of the private market. Does this incrementally make you maybe look at the disposition market more favorably as a funding source? How are you guys thinking about that over the next couple of years for this?

Victor Coleman -- Chairman and Chief Executive Officer

Yeah, Ron we are acutely aware of the bid-ask process right now with assets and we've got, specifically three assets that we've got BOB's out right now and interesting by our brokers and 3rd party buyers that we're going to evaluate a timeline. I anticipate probably even though something to be done by late this year, early first quarter in terms of our decision and then some execution on some PSAs, so, yeah, we are very much on top of that. And you said, there's two or three assets for sure that we're looking at very seriously to bringing them out to market.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. That's all my questions. Thank you.

Victor Coleman -- Chairman and Chief Executive Officer

Thank you, Ron.

Operator

The next question is from Nick Yulico of Scotiabank. Your line is open. Please go ahead.

Nicholas Yulico -- Scotiabank -- Analyst

Thanks. I guess just going back to the leasing volume in the quarter. I was wondering maybe for order, Mark, in terms of whether the spike in Delta affected closing of deals. Whether there is no specific square footage you can cite that got spilled over a year into the fourth quarter and is now going to get signed any perspective, you can give on that.

Victor Coleman -- Chairman and Chief Executive Officer

Yeah, I'll jump in. Mark, you can follow up if you want. We didn't see that. Deals have their own time timeline and their own flow, the deals we did not build and again there is 620,000 square feet in leases or late-stage LOI that we're planning to close imminently. And I just think it was just the timing. Timing of those deals closing that you'll see some of them in the fourth quarter and some of them well in the first quarter. But, no, it wasn't, it was surprisingly not due to Delta and as a matter of fact, the front end of our pipeline, the front end of our activity actually accelerated during the Delta barrier.

Nicholas Yulico -- Scotiabank -- Analyst

Okay, thanks. I guess just the second question is on occupancy. And I know Mark, I think you said it should be roughly flat fourth quarter versus third quarter. I mean, any rough feel you guys can give us for how to think about occupancy over the next year and reason I'm asking is, because it looks like your expirations next year, actually higher than your expirations this year. And you did lose down what something like 200 basis points of occupancy year-over-year. So just trying to think how we should get comfort in that occupancy doesn't continue to fall, based on the lease expiration schedule.

Mark Lammas -- President

Yes, look it starts with the coverage on expirations as we mentioned on the call we're over 30% covered on expirations. And I think it will grow from there. It also is important I think to recognize that will get 60-70% retention before the year is over. But it's also a burden to realize you know of the 1,000,007 of vacancy we have, we're over 40% covered on deals at least in negotiation or better on that existing vacancy. So but we can make meaningful inroads on that and get to that plus 60% retention. We have our view that we've stabilized in terms of our service leased percentage should carry out through the balance of next year.

Nicholas Yulico -- Scotiabank -- Analyst

Okay, great. Thanks, Mark. Appreciate it.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Victor Coleman, Chairman, and CEO for any closing remarks.

Victor Coleman -- Chairman and Chief Executive Officer

Thank you for the participating and all the hard work from the Hudson team, we'll talk to you all next quarter. Have a good day.

Operator

The conference has concluded. You may now disconnect.

Duration: 53 minutes

Call participants:

Laura Campbell -- Executive Vice President, Investor Relations & Marketing

Victor Coleman -- Chairman and Chief Executive Officer

Mark Lammas -- President

Harout Diramerian -- Chief Financial Officer

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Alexander Goldfarb -- Piper Sandler -- Analyst

James Feldman -- Bank of America -- Analyst

Emmanuel Korchman -- Citi -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Nicholas Yulico -- Scotiabank -- Analyst

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