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Text: Both are available on the Investors section of our website, hudsonpacificproperties.com.
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.
They will be joined by other senior management during the Q&A portion of the 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 toward 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 toward 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 two very exciting major announcements over the last week around our expansion of our Sunset Studio platform.
The first, Sunset Glenoaks, will be the largest purpose-built studio in the Los Angeles area in over 20 years.
The project is in Sun Valley, minutes from Burbank where Disney, NBC Universal and Warner Media are headquartered and many other production companies like Netflix are located.
We're going to build approximately 240,000 square feet, adding another seven stages to our portfolio for a total investment of approximately $170 million to $190 million.
We're finalizing plans and budgets that could start construction as early as fourth quarter of this year and complete the project in the third quarter of 2023.
This is a 50-50 joint venture with Blackstone and we're on point for development, leasing and property management.
The second transaction, which we announced on Monday, mark Sunset Studio's first expansion out of the U.S. into the U.K. Something I've often noted was on our agenda.
The U.K. has a long history of global production in a media center.
It is a deep pool of talent, crews and services to support productions, regional infrastructure and generous and long-standing tax credits.
Further, investment in the U.K. film and TV investment has grown dramatically over the last five to seven years, while supply and purpose-built studios remains limited.
We're in the entitlement and planning stages to build what will ultimately be one of the three largest purpose-built studios in the U.K. and one of the highest quality production facilities globally for TV and film.
The site comprises 91 acres on undeveloped land, about 17 miles north of London and Box Borne Harpeture, minutes from public transit and close to the Heathrow Airport as well as Central London.
This facility will provide great access to other major studios, production houses, crew and talent.
We purchased the site for GBP120 million through a 35-65 JV with Blackstone.
And although it's early, we anticipate a total investment of around GBP700 million.
We'll be responsible for development, over site, leasing and property management and we're setting up a local office and a small team to manage the day-to-day reporting to our team here in Los Angeles.
Part of what's so exciting about the Sunset Studio's newest L.A. and U.K. locations is we're reimagining how studio facilities can best support future productions, be it through architectural design, high-tech infrastructure or sustainable buildings and operations.
We're at the very positive preliminary marketing conversations with major production companies related to both projects, and we can either master lease or multi-tenant these facilities.
It's still early, and we have a lot of interest and flexibility so far.
Finally, I want to congratulate the Hudson Pacific team on winning the NAIOP's 2021 Development of the Year Award.
It's one of the industry's most prestigious awards and NAIOP's highest honor It's also a reflection of our company's leadership and innovation across every aspect of our business.
NAIOP's recognition is especially meaningful given it's based mostly on our exceptional performance throughout 2020 which, of course, was a very atypical and challenging year.
So again, very, very proud of the Hudson Pacific team.
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 one million square feet of deals so far in 2021.
To that end, we signed 510,000 square feet of deals in the quarter, once again, in line with our long-term average with 19% GAAP and 12% cash rent spreads.
Our weighted average trailing 12-month net effective rents are up close to 10% year-over-year.
There are two primary drivers of this increase: First, our effective rents are up slightly, about 8%; and second, our annual 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 five years year-over-year and term has also extended from pandemic lows.
Our deal activity this quarter was split relatively equally between the Bay Area with the preponderance along the Peninsula and in the Valley, and the Pacific Northwest, that is Seattle and Vancouver with a handful of deals in Los Angeles.
We maintained our stabilized lease percentage at 92.7%.
Our in-service lease percentage dipped 30 basis points due to the inclusion this quarter of Harlow, which we delivered a company three in April.
But for Harlow, which is 54% leased.
Our in-service lease percentage would have risen 40 basis points to 91.8%.
We have 4.4% of our ABR expiring over the rest of the year with about 55% coverage on that space.
Our remaining 2021 expirations are about 12% below market.
For expirations, we addressed in the first half of the year, we renewed or backfilled close to 70%.
Touching on our office developments, we're on track to deliver One Westside to Google in the first quarter of next year potentially sooner.
We're also set to close on the podium for Washington 1000 late in the fourth quarter at which point, we'll have a year to further evaluate tenant interest and broader market conditions and to finalize our time line to start construction.
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 three 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 three 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 million or nearly 24% compared to Q2 2020.
This occurred even while FFO declined by $3.6 million for the same period.
Again, this positive AFFO trend reflects the significant impact of normalizing leasing costs and cash rent commencements on major leases following the burn off of free rent.
Now I'll turn to guidance.
As always, our guidance excludes the impact of unannounced or speculative acquisitions, dispositions, financings and capital market activity.
In addition, I'll remind everyone of the potential COVID-related impacts to our guidance, including variants like Delta and evolving government mandates.
Clearly, the uncertainty surrounding the pandemic makes projecting the remainder of the year difficult, and we assume our guidance will be treated with a high degree of caution.
As noted, many companies are still determining return to work requirements and the impact on space needs.
Because of this, for example, our guidance does not assume a material increase in parking and other related variable income.
Overall, we assume full physical occupancy and related revenues will not return to pre-COVID levels in 2021.
That said, we're providing both full year and third quarter 2021 guidance in the range of $1.90 to $1.96 per diluted share excluding specified items and $0.47 to $0.49 per diluted share excluding specified items, respectively.
Specific items for the full year 2021 are the $1.1 million of transaction-related expenses and the $1.4 million of prior period supplemental property tax expense referenced in our second quarter SEC filings.
There are no specified items in conjunction with our third quarter guidance.
We appreciate your continued support.
Stay healthy and safe, and we look forward to updating you next quarter.

user
q2 ffo per share $0.49 excluding items.
sees fy ffo per share $1.90 - $1.96.

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