Q3 2024 Hudson Pacific Properties Inc Earnings Call
Good afternoon. My name is Sierra, and I will be your conference operator today. At this time, I would like to welcome everyone to Hudson Pacific Properties' 3rd Quarter 2024 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.
Speaker Change: Thank you. At this time, I'd like to turn the call over to Laura Campbell, Executive Vice President, Investor Relations and Marketing.
Laura Campbell: Good afternoon, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman, Mark Lammas, President, Harout Diramerian, CFO, and Art Suazo, EVP of Leasing.
Laura Campbell: This afternoon we filed our earnings release and supplemental on an 8k with the SEC and both are now available on our website an Audio webcast of this call will be available for replay on our website
Laura Campbell: Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call.
Laura Campbell: Today, Victor will discuss industry and market trends and capital recycling. Mark will provide an update on our office and studio operations and development, and Harout will review our financial results and 2024 outlook. Thereafter, we'll be happy to take your questions. Victor?
Victor Coleman: Thank you, Laura. Good afternoon, everyone, and welcome to our third reporter call.
Victor Coleman: At HUD Specific, we've spent nearly two decades acquiring, transforming, developing, leasing, and operating premier real estate and related services in the most sought-after locations.
Victor Coleman: tethering to dynamic tech and media industries. Over the last several years, our talented team has worked diligently to leverage the strength and resiliency of this unique platform, to rise above the multiple unprecedented once in a generation challenges impacting our core industries and markets.
Victor Coleman: As we sit today, we are gaining additional confidence that the tide is turning. While more time is needed, we believe that as we exit this year and move through 2025, we will stabilize our portfolio and be positioned for a return to growth and ultimately outperformance.
Victor Coleman: The positive office-related indicators that are emerging are numerous. The data clearly shows that office-oriented cultures enhance productivity and performance. And with the U.S. facing the steepest decline in white-collar productivity in 50 years, the push to four- or even five-day workweek has begun.
Victor Coleman: Today, only 1% of the Fortune 100 companies still have fully remote office attendance policies and 80% of the CEO respondents in KPMG's most recent survey anticipate their work will be full-time in office in the coming years.
Victor Coleman: And this movement, which had early traction with financial companies on the East Coast, is now gaining momentum among tech companies along the West Coast. Recent full-time mandate announcements include Seattle's largest employer, Amazon, Dell, and San Francisco's largest employer, Salesforce.
Victor Coleman: Underscoring the momentum in San Francisco, in September muni ridership surpassed 520,000 average weekday boardings and approximately 75% of pre-pandemic levels, with certain routes recovering to well in excess of a hundred percent.
Victor Coleman: And to that, tech layoffs are slowing, venture fundraising is picking up, and after years of cost cutting, venture investors are finally advising portfolio companies to get back out on the offensive.
Victor Coleman: Tech layoffs have consistently declined since the first quarter of 2023, now reaching their lowest level since second quarter of 22, a 45 percent improvement year over year. Furthermore, AI companies, 44 percent of which are in the Bay Area have brought venture investors back to the table.
Victor Coleman: 2024 is on pace to be one of the best years for AI funding on record, with a lion's share going in the Bay Area, which we expect to provide another leasing catalyst in the coming months.
Victor Coleman: A.I. companies tend to be office first, and since January 2022, have at least 2.3 million square feet in the Bay Area. The footprint Cushman Wavefill expects to grow 200% over the next two years.
Victor Coleman: At present, we're monitoring 25 tenants in the market seeking about 800,000 additional square feet.
Victor Coleman: Big picture, a recovery that has already taken hold on the East Coast is now gaining traction on the West Coast. In the third quarter, tenant requirements in the West Coast tech-centric office markets increased 17% year-over-year compared to just 7% for the broader U.S. office market.
Victor Coleman: Downtown San Francisco had positive net absorption for Class A products.
Victor Coleman: for the first time in two years. And year-to-date overall gross leasing is the highest since 2019, with tenant requirements up 20% year over year.
Victor Coleman: The San Francisco Peninsula has also had its first quarter of positive net absorption since 2022, and software and internet companies led leasing volume representing 42% of the top 25 transactions.
Victor Coleman: And in the Valley, office occupancy losses are starting to recede, and tenant requirements are up 33% year-over-year. And in Seattle, we're now seeing mid-sized demand coming back to the market, with overall requirements up about 30% year-over-year.
Victor Coleman: All of this activity mirrors what we're experiencing with our own office portfolio.
Now turning to studios.
The following three months of Los Angeles show counts
has been approximately in the low 80s.
Victor Coleman: Production has started to pick up, nearing 90 shows during October, on trend with stronger demand we are seeing for 2025. While we are moving in the right direction, Los Angeles production has yet to return to any sense of normalcy, which continues to limit demand for our stages and services.
Victor Coleman: Los Angeles is still the worldwide leader in film and television production, but to win back productions in an increasingly competitive, cost-conscious environment, we must have the appropriate financial incentives.
Victor Coleman: Fortunately, office officials in the public realm at all levels have recognized this.
Victor Coleman: And a few weeks ago, Governor Newsom introduced legislation that if passed, would more than double the tax credit program to three quarters of a billion dollars, making it the largest in the United States.
Victor Coleman: This is a very positive development, and if passed, will go into effect in mid-2025, at a key moment when many companies, such as Netflix, envision production to be back to normal.
Victor Coleman: We think new soundstage supply will remain limited, and a comprehensive offering of studios and services will be poised to successfully capture incremental demand, which typically builds ahead of production.
Victor Coleman: We remain confident our studio team is the best in the business, and recently promoted two senior executives in recognition of their growing responsibilities.
Victor Coleman: Stephanie Bourne, who joined Hudson Pacific 2021 from Disney, has been promoted to EVP Studios.
Victor Coleman: with oversight of sales, production services, operations, and strategic initiatives. And Ann Mertens has been promoted to EVP, studio real estate, and Southern California office operations, having led at different times those functions for over a decade.
Victor Coleman: I know both, alongside with our team and the broader studio leadership team, will ensure we continue to benefit from the creative strategies, streamlined operations, and exceptional level of service for which we are known.
Victor Coleman: Finally I want to just talk about capital recycling. With Fed policy easing and office fundamentals improving, transaction volume across our markets is accelerating. We are strategically tapping into this demand as a key component of our effort to deleverage with a focus on completing additional non-core office asset sales where we can maximize value.
Victor Coleman: Of note, our Bay Area assets are garnering strong buyer interest, and as of the third quarter, we're under contract with a buyer that has gone non-refundable on Foothill Research Center in Palo Alto for $23 million. We've opted to sell at an attractive price per square foot, rather than continuing to invest in this asset.
Victor Coleman: Inclusive of Foothill, we presently have three sales under contract, another 300 negotiation, which have the potential to generate gross proceeds totaling 200 to 225 million dollars.
in addition.
Speaker Change: could close early next year. We look forward to providing much more detail and additional updates. With that, I'm going to turn it over to Mark.
Mark Lammas: Thanks Victor. We had another strong quarter of execution from our leasing team, signing 539,000 square feet of office leases with 56% being new deals.
Mark Lammas: This brought our year-to-date total to 1.6 million square feet or 25% ahead of this time last year.
Mark Lammas: Our priority has been to stabilize and grow occupancy. In this quarter, we reported occupancy sequentially 40 basis points higher at 79.1%, along with a consistent lease percentage at 80%.
Mark Lammas: In addition, if we adjust for the 100% lease to an occupied Foothill Research Center, which we designated as held for sale in the third quarter.
Speaker Change: Sequentially, our occupancy increased 60 basis points to 79.3% and our lease percentage increased 20 basis points to 80.2%.
Speaker Change: Our lease economics are improving or stable, with third quarter net effective rents 3% higher than our trailing 12-month average and only 4% off our pre-pandemic trailing 12-month average.
Speaker Change: We have continued to extend lease term, which in the third quarter was approximately six years, slightly above our trailing 12-month average and 42% above our trailing 12-month average a year ago.
Speaker Change: While we reported gap in cash rent spreads, 11.5% and 13.3% off prior levels,
Speaker Change: but for a 29,000 square foot short-term lease in Los Angeles and two mid-sized bay area leases.
Speaker Change: totaling 68,000 square feet, one in Palo Alto, the other in downtown San Francisco. Our gap in cash rent spreads would have been essentially flat.
Speaker Change: In short, as average lease terms continue to lengthen and TI's and free rent remain in check, our net effective rents have held up even by comparison to pre-pandemic periods, in spite of the occasional setback on rent spreads.
Speaker Change: Our lease and activity pipeline, including deals and leases, LOIs, or proposals, remains robust at close to 2 million square feet, about 70% of which are new leases.
Speaker Change: Quarter over quarter, our pipeline in Seattle and Silicon Valley has increased, in part attributable to an 18-20% increase in requirement size in those markets.
Speaker Change: Tours remain active at 1.3 million square feet during the quarter, with a nearly 50% increase in Seattle, which is indicative of the level of interest we are seeing at our recently completed Washington 1000 development.
Speaker Change: To date, we have toured tenants through that project, representing a total of 700,000 square feet of requirements, which range in size from 35 to 150,000 square feet.
Speaker Change: Feedback from Seattle's top brokers during the recent dinner we held at The Asset underscores Watching 1000's superior quality and leasability, only further enhanced by recent market strengthening.
Speaker Change: Across our office portfolio, if we sustain our lease momentum of roughly 500,000 square feet per quarter, which our pipeline in TORUS suggests is reasonable, we expect occupancy to stabilize by the middle of next year, with the potential for meaningful occupancy growth thereafter.
Speaker Change: We have about 670,000 square feet remaining to expire by year end. This includes 140,000 square feet at Met Park North, where the full building tenant recently exercised their right to terminate the lease.
Speaker Change: We are actively exploring options for this asset, which include early discussions with multiple tenants for 30 to 100,000 square foot requirements.
Speaker Change: Our coverage, which includes deals and leases, LOIs, or proposals on remaining 2024 expirations is 37%, which increases to 55% accounting for leases and discussions.
Speaker Change: This is not surprising given that, apart from Met Park North, our average lease expiration is roughly 7,000 square feet and delayed decision-making is typical for these smaller tenants.
Speaker Change: As we look to 2025, excluding the full building lease at Foothill Research Center, which is held for sale, we have less than 1.7 million square feet expiring, or 16% of our ABR.
Speaker Change: Our remaining top five expirations next year collectively total 660,000 square feet, and we have approximately 64% coverage. Beyond that, our average expiring lease in 2025 is roughly 6,000 square feet.
Speaker Change: Tornado Studios, in the third quarter, our in-service stages were 76% leased during the prior 12 months, down 220 basis points sequentially, reflecting the previously discussed single-tenant vacating last year.
Speaker Change: Note this lease percentage excludes Sunset Glenotes for which there is not yet trailing 12-month data. Our Coyote State's lease percentage was up 60 basis points sequentially to 33.4% due to increased commercial shoots at our Coyote West Hollywood and Griffith Park locations.
Speaker Change: Compared to a year ago, our third quarter studio revenue was $5.6 million higher, even as we had a sequential $8.5 million decline due to lower average production levels in the third quarter compared to the second quarter, primarily affecting our studio ancillary and transportation segments.
Speaker Change: We currently have signed leases, are in contract, or have client interest on 79% of our film and TV stage square footage, or all but 14 of our 59 film and TV stages, inclusive of Sunset Glen Oaks.
Speaker Change: This activity includes a notable increase in what the industry calls holds, essentially expressions of interest for specific stages for 2025 production dates.
Speaker Change: Similarly, coincident with a modest improvement in production activity late in and subsequent to the third quarter, we have seen stage leads and tours increase, and transportation and location services utilization has improved.
Speaker Change: We are optimistic these are early indicators of sustained stronger demand next year.
Speaker Change: Finally, I will touch on development. We have one active development project, Sunset Pier 94 Studios, which will be the first purpose-built studio in Manhattan.
Speaker Change: Construction is progressing on time and on budget for an anticipated delivery by the end of next year and as of October we have no further equity contributions.
Speaker Change: We are in active discussions with a leading studio, as well as other productions, on multi-year agreements for one or more stages. And with that, I'll turn the call over to Harout.
Thanks, Mark.
Harout Diramerian: Our third quarter 2024 revenue was $200.4 million compared to $231.4 million in third quarter of last year, almost entirely due to the sale of one Westside and the expiration of the block lease at $14.55 market, partially offset by improved studio revenue following the resolution of the related union strike.
Thank you very much.
Harout Diramerian: Our third quarter FFO excluding specified items was $14.3 million or $0.10 per diluted share compared to $26.1 million or $0.18 per diluted share a year ago.
Harout Diramerian: Specified items for the third quarter totaled $0.05 per diluted share, consisting of a $3.9 million one-time straight-line rent reserve related to the transitioning a tenant to cash basis reporting, a $2.2 million non-cash revaluation of a loan swap,
Harout Diramerian: unqualified for hedge accounting, a 1.2 million non-cash deferred tax write-off, and a 0.3 million transaction related expense.
Harout Diramerian: The year-over-year change in FFO, excluding these specified items, was mostly attributable to the factors affecting revenue and lower FFO from non-controlling interests following our purchase of our partner's interest in 1455 market earlier this year.
Harout Diramerian: Our third quarter AFFO was $15.8 million or $0.11 per dilute share compared to $28.1 million or $0.20 per dilute share in the third quarter last year, with a change largely attributable to the previously mentioned items affecting FFO.
Harout Diramerian: Our third-quarter same-store cash NOI was $96.9 million, compared to $113.2 million in the third quarter last year, mostly due to the tenant move-outs, including block at $14.55 market.
Speaker Change: Turn to our balance sheet. As Victor noted earlier, we are proactively pursuing multiple paths to increase liquidity, including asset sales, GV partnerships, and secure financing.
We have no debt maturing until November 2025.
Speaker Change: Our share of net debt relative to our share of undepreciated book value is 37.4 percent. And our percentage of debt, fixed or capped, is 91.5 percent.
Speaker Change: At the end of the third quarter, we had $696 million of liquidity comprised of $91 million of unreceived cash and cash equivalents and $605 million of undrawn capacity on our unsecured revolving credit facility.
Speaker Change: We also have $195 million of construction loan capacity, of which our share is $53 million.
Turning to our Outlook.
Speaker Change: For the fourth quarter, we expect FFO per diluted share to range from $0.09 to $0.13 per diluted share. We anticipate fourth quarter NOI for our QOD business to moderately improve as compared to our third quarter results due to the improved production activity that Victor and Mark highlighted.
Speaker Change: We expect fourth quarter NOI for our in-service office and studio portfolios to remain at levels consistent with the third quarter results adjusted for previously mentioned straight line rent reserves.
Speaker Change: We anticipate having lower office occupancy in the fourth quarter reflecting the full building tenant vacating Met Park North
Speaker Change: in early December. But for this early termination and the designation of Foothill Research Center as held for sale, we believe our office occupancy would have shown another sequential increase.
Speaker Change: Similarly, solely due to the removal of Foothill Research Park from our same store pool, we are updating the range of the same store property cash NOI growth to a negative 13 to 14 percent from a negative 12.5 to 13.5 percent.
Victor Coleman: As always, our outlook excludes the impact of any potential dispositions, acquisitions, financings, and or capital markets activity. And now I'll turn the call back to Victor.
Victor Coleman: Thank you, Heroud. Each quarter we are executing office leasing and we were on track to significantly outperform our activity last year along with the West Coast office fundamentals that are undoubtedly strengthening.
Speaker Change: On the studio side, we have contracts or interest in nearly 80% of our film and TV stages, while Los Angeles production levels are challenging but improving, and the proposed state tax credit legislation and potential City of L.A. incentives
Speaker Change: stand to meaningfully boost demand and based on these factors we believe we're on path to stabilize and start to grow occupancy and cash flow across our entire portfolio next year.
Speaker Change: And with that, the momentum of asset sales, our positive discussions with JV partners and lenders, we expect to have the balance sheet and liquidity to achieve our business objectives.
Now with that, we'll be happy to take questions. Operator?
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.
Speaker Change: Our first question of the day comes from Blaine Heck with Wells Fargo. Your line is now open.
Speaker Change: Great, thanks. Good afternoon. Just starting on the sales, Victor, can you just talk about the drivers behind what looks like an accelerated effort on the asset sales side and the rationale behind, you know, looking at the additional six office asset securitization, any expectations for cap rates you can provide there, and then, you know, lastly, just maybe how we should expect all of those moves to kind of affect your covenants.
Speaker Change: The assets, how you should look at those assets as being non-core, we always evaluate assets in the portfolio that may or may not fit into our long-term strategy with capital allocation and with excess work around leasing or capital improvements
Speaker Change: or the future growth of those assets. So that's how we identified them. They're not core to the portfolio and they're not what we would call as our best and highest quality assets. I do think, you know, you touch on the JV and in the CMES structure, we've allocated some time and energy around six assets.
Speaker Change: that we've got a very, very great response from JV Partners.
Speaker Change: and from our CMBS debt allocation for that portfolio. We're exhausting our talents around that. We should have, I think, more definitive information by first quarter, early first quarter of the year, but so far it's on track. Don't wanna get into cap rates at all at this time.
Speaker Change: Suffice to say, our ownership interest in that is going to be equal to what's been in our past JVs.
which is roughly around 50%.
Speaker Change: So that's the intent for that aspect. Lastly, in terms of covenants, there is not going to be any impact in covenants. We are working through that right now and we feel confident that this form of liquidity is another avenue for us to go on the offensive down the road.
Speaker Change: Okay, great. We'll look forward to more updates there. I guess just second question, thanks for your commentary on the studio side. I guess I'm still wondering how much of it affects some of this movement out of LA and into other markets that change the kind of stabilized run rate of studio production that can come from LA, and whether you think that all of that is reversible with Governor Newsom's tax credit proposal.
Speaker Change: Well listen, I think overall, the blank of the studio business and the entertainment business overall has been affected nationwide. It's not just California, it's California, it's Georgia and New York.
Speaker Change: in general, are all impacted based on the shift in the strike. In terms of the movement back to L.A., L.A. still is the entertainment capital of the world. We are seeing an uptick, quarter over quarter, in our prepared remarks.
Speaker Change: from a show count and I think the movement by Governor Newsom and the impetus right now of Mayor Karen Bass.
Speaker Change: onslaught it the direction right now is from the holds that we have and the conversion from holds
facilities and our operating businesses.
Speaker Change: all look on track for 25, and it could be in the first quarter all the way through the fourth quarter, to really see a massive impact. And so we're confident that we're in the right direction here, Blayne, and we're also confident that production is going to be enhanced by the impetus of what Gavin Newsom and...
Speaker Change: Mayor Bass has put in place. So I think all of that's going to be impactful and put California to where it was and I just want to reiterate it's it's not different here than it is anywhere else.
Speaker Change: other than for domestic US. I mean, yes, overseas, I think you've seen a much greater pick up as of late in production, and that hopefully would fall soon here as well.
That's helpful. Thanks. Thanks, Victor.
Thanks Blayne.
Speaker Change: Our next question comes from Alexander Goldfarb with Piper Sandler. Your line is now open.
Oh, uh...
Good afternoon out there.
Speaker Change: and NOI. How are you looking at that debt as far as, you know, is all of that scheduled to be dollar-for-dollar refinanced or do you think that some of this will be subject to negotiations?
Speaker Change: I'm not sure what you mean by subject to negotiations. I mean, listen, we are intending on refinancing. We're in conversations right now on a secure debt that's coming due. And at 25, we've got a very good response on that. And and I don't think we are all concerned about the value of those assets and the equity that we have in place on those assets that are coming due. You know, I'm not going to comment.
Speaker Change: Alex on where we see rate but you know we're looking at either floating or fixed and a a term that could be five or seven and the market is very conducive to that right now so we feel that that they're going to get executed and we have all the confidence that we'll get it executed well before expiration at the end of 25.
Okay, and then the second question is
Speaker Change: As we look into next year, I realize we're still far out from giving 25 guidance, but...
Speaker Change: You know, the trajectory that you guys are talking about sounds like the studio, it sounds like the businesses overall have bottomed, the recovery is a little, is...
Speaker Change: You know, a little slow, hopefully, the Hollywood stuff with the tax credit passes, and that incentivizes there. It sounds like the leasing is making some progress, but still some vacancy that needs to be addressed in the uncovered exposures.
Speaker Change: Is the 11 cents in the fourth quarter, is that a number that we should think about for a quarterly run rate for next year, or are there things that you would point to that would make that quarterly run rate materially higher?
Speaker Change: Yeah, I would not look at the 11th as a quarterly run rate for next year. I think you would have to look at it higher. And as I said in the prepared remarks,
Speaker Change: And as Harout said in his prepared remarks, we will address our full year guidance at our next quarter's call.
Speaker Change: You know, I do think that the impact of where the entertainment business was to where it is, to where it's going, we'll see a material change, and we're confident in that change being put in place.
Speaker Change: Hopefully, as I said, some of the transactions that are on hold that are going to be secured to stages being leased and the demand going back up. So yes, I wouldn't read into the 11 cents as being our run rate going forward.
Thank you, Victor.
Thanks Alex, as always.
Speaker Change: Our next question today comes from Michael Griffin with Citi. Your line is now open.
Speaker Change: Great, thanks. Just wanted to go back to the studios for a second and it seems like things are maybe getting better into the fourth quarter. So I know you didn't specify around kind of a Quixote piece of the fourth quarter guide, but is it fair to assume we should see an increase in NOI there relative to the third quarter? And then maybe stepping back, you talked about the tax credit being beneficial, obviously for the industry, but is there a worry that may be similar to the worry about the Teamster strike this year? Production could be delayed until the tax credit gets enacted. Do you think there's the political capital to go forward with a tax credit like this?
Speaker Change: So let me address the latter part first, Michael. At the end of the day, listen, I think we're all very confident, the industry's confident that this...
Speaker Change: Legislation is going to pass. The Governor would not have come out as strongly as he did with the amount of $750 billion, which is going to be the highest in place.
Speaker Change: tax credit for the entertainment business, and as a result, I think the
Speaker Change: Modifications could be minimal. We'll see what happens in the you know in the in the coming months.
Speaker Change: But it's all sort of earmarked for it to be voted on and in place by mid-year 25. That's the anticipation.
Speaker Change: You know, the city-wide mandates that are being put in place, there's already a committee in place that is promoting back to Los Angeles.
production in Los Angeles.
Speaker Change: There are multiple factors that I think are supporting it. And just to answer your question in specifics, it doesn't mean they're going to wait till everything's in place. I think directionally, that's what we were waiting for, is leadership and direction both on the state level and on the city level. And then overall, just in the production companies, to see that this is a direction, because it will take hold for two, three, four years. This is not a one-and-done process.
Speaker Change: And I think that's how we're looking at when people are looking for production, they're going to look at multiple savings over multiple venues over multiple productions over a short to medium time frame. So I wouldn't envision this to say it's going to be impacted day one when it's voted on.
Speaker Change: A lot of it will have some tailwinds and get us to a point where you're going to see upsourcing and production going forward immediately in the first, second quarter of 2025.
[inaudible]
Speaker Change: Appreciate that, Victor. And then just maybe circling back again on the transaction activity, and I realized there were a number of things that you can't yet disclose, but maybe on the Foothill Research Center, I think you said a purchase price of about 23 million. By my math, that's about $120 a square foot. I know that was part of a portfolio I think you acquired around 2014 or 2015. So can you give us a sense of how that valuation compares to maybe when you bought the portfolio of the property back then? And then maybe just some broad commentary around how transaction volumes and value has changed over the past, call it pre-COVID until now.
Speaker Change: Stanford that would have impacted the viability of that asset to be re-tenanted going forward. So really we looked at highest and best use of dollars and that's what we decided to to sell that asset and when you understand who we sold it to I think you'll sort of figure out the strategy and the structure around that. That being said I would not equate that to market conditions. It is a unique transaction in the market and it's a unique transaction to both the buyer and the seller's relationship.
In terms of overall acquisition and transaction activity,
Speaker Change: or we will announce have been or will be owner-users, so they're unique to the assets in specifics.
Speaker Change: As I did mention, you know, in my prepared remarks, we've not seen a tremendous amount of transactions in the marketplace that would be what I would say Hudson-esque acquisitions. If we had access to an unlimited amount of capital and wanted to go in the...
Speaker Change: offensive today, there's not an asset in the marketplace on the West Coast that us as a company would have said we would have liked to have owned and we missed out. So I think that gives you sort of an indication as to where we think the market is. But we know there will be assets coming to the market. We've identified where they are and what they are. It's going to be a timing issue. And with the obviously the increase in financing activity and the Fed easing, I think they're going to come to market in 25 and you'll see what kind of opportunities are out there, which will truly test and improve out where real cap rates are.
Great. That's it for me. Thanks, Victor.
Thank you.
Speaker Change: Your next question today comes from Caitlin Burrows with Goldman Sachs. Your line is now open.
Speaker Change: Hi everyone. I think in the prepared remarks you guys talked about how if you kept up this pace of leasing about 500,000 square feet per quarter that could support occupancy stabilization in mid 2025. So I guess I was just wondering if you could talk a little bit about the kind of leasing cadence that you're seeing, how confident you are that that can stay at that pace and maybe like any other details on the size and type of kind of leasing requirements that you're seeing.
Speaker Change: Yeah, Caitlin, I'll start off, you know, listen, I think we're really very pleased with
Speaker Change: all three quarters of leasing, but the most recent quarter, it's just indicative of, as the prepared remarks were made, you know, in 2023, we did 1.7 million square feet, and we're right now in excess of 1.6 million square feet, and we're only three quarters in. The pipeline is consistent, as Mark said in his prepared remarks. We're confident we're gonna execute on that, and that's why we've come across to say that, you know, in 25, we should see some stabilization and continued increase in occupancy to a stabilized level. I do think Art would like to probably comment on just, you know, what markets we're seeing positive absorption in for the first time in some time.
Yeah, you know, just to...
Speaker Change: Put a finer point of what Victor said, this 2 million square feet is spread, you know, across the Bay Area's 1.1 million square feet of that activity. There's 500,000 square feet in Seattle, and the remaining 400,000 square feet is split evenly between Vancouver and LA, which obviously we're encouraged about.
Speaker Change: We're extremely confident that we will achieve more than 500,000 square feet, especially because of the 1.6 million square feet Victor just mentioned puts us at 530,000 square feet on average right now year to date. So we're already ahead of that. And with our team's ability to execute.
Speaker Change: We can definitely improve these numbers. On the net absorption, we're seeing positive absorption in the peninsula for the first time in a long time. We're seeing, in San Francisco, we're seeing Class A space.
Speaker Change: with positive absorption for the first time in several years. More importantly in Greater San Francisco where
Speaker Change: Negative absorption has averaged a little bit over a million square feet a quarter through the pandemic. Negative absorption was down to 106,000 square feet. So over the last several quarters, we're really starting to see this thing turn, and we're very excited about what we see.
Got it. Okay. And then.
Speaker Change: I was trying to take notes as you guys were speaking in the prepared remarks. Some of them were kind of fast, but I wrote something to myself about, like, on the studio business, a positive development for mid-2025, and you made a comment about Netflix and things being, I don't know, closer to normal or a normalized rate for them, I think. I was wondering if you could just talk about that Netflix comment a little bit more and the visibility into that, like, I don't know, did they tell you or just that comment. Thanks.
Speaker Change: Well, I think what we're finding is the streaming companies are seeing an uptick in quality, which we've talked about for a long time. And now it's an uptick in quantity. And so they greenlit more shows than the prior quarters. And we just think that nothing happens overnight, Caitlin. But once they greenlit them, or greenlight them, I guess is the correct term, then the production wheels start to move in motion. And that's how we convert holds.
Speaker Change: to Occupancy, and so we're seeing that, and our direct correlation with Netflix is not too dissimilar than we have with other of our studio partners that occupy our space. We're just seeing that activity pick up.
Got it, thank you.
Thanks.
Speaker Change: Your next question comes from John Kim with BMO. Your line is now open.
Thank you.
Speaker Change: Your J&A guidance went down about a million dollars in your guidance, but it's still expected to increase year-over-year. And when you look at it on a year-to-day basis versus your NOI, it's at 23% versus 17% last year.
Speaker Change: I realize that you expect a recovery in NOI and earnings going forward, but is there anything you can do on the overhead front to reduce the cost and normalize it closer to earnings?
Speaker Change: Sure, a good question, Don. So first, you know, we're constantly looking for ways to reduce our GNA, as evidenced by our revised guidance. Secondly,
Speaker Change: The increase in the G&A is primarily related to incentive-based shares that we added in 2024 that we didn't have in 2023. They're not cash G&A. It's, you know, really going to be reflective of how the shares are performing.
Speaker Change: And in terms of, John, you know, GNA savings and the likes of that, you know, we are constantly looking at evaluating all of our GNA, but yes, it's correlated to our NOI. And, you know, as we see our NOI increase and we're completing these leases and the future leases that we have, I think that's going to right-size itself fairly quickly.
Okay.
Speaker Change: And looking at your lease expiration schedule in the fourth quarter, and comparing that to the same metric last quarter, the square footage that's expiring went up almost 150,000 square feet, yet the ABR went down a little bit.
Speaker Change: I mean, listen, I can get the guys to get in detail, but we announced that at our Met Park North, Amazon exercised their termination, and that was almost 100% of that number.
Speaker Change: Okay, so that got moved up, the expiration got moved up to the fourth quarter.
Correct.
Okay.
Okay, thank you.
Speaker Change: Your next question comes from Katie Elders with Jeffries. Your line is now open.
Speaker Change: Hi, yes, this is actually Peter on the line. Just wanted to go back to some of the comments on coverage on your expirations. So maybe one for Mark or Art. I think you said for remaining
Speaker Change: five largest expirations in 2025, you have 64% coverage. Can you just remind us how you sort of define coverage and help us think through sort of historically what the success rate in translating when you have coverage on a lease to actually getting a renewal done?
Art Suazo: Yeah, this is Art. So the the coverage is deals in proposals, otherwise we make a distinction in leases, right? And to give you a percentage on
Art Suazo: success rate, I think our team's been at a clip of about 70%, 75% on deals that we have in negotiation that we take to lease.
Speaker Change: Okay, so is the way to think about it then kind of 75% success rate on that 64% is like a sort of a good way to...
Thank you.
Yeah.
Speaker Change: Okay, got it. And then one other, I just want to make sure I heard Harout correctly in your comments, was the change in the same store guide simply just the removal of Foothill Research Center, or was there anything else to call out in the guide there?
Yeah, that's the biggest driver.
Without that we would have been the same.
Okay.
Speaker Change: Your next question comes from Rich Anderson with Bloodbush. Your line is now open.
Thanks, good afternoon.
So just looking back when you bought the...
Speaker Change: The Peninsula Silicon Valley Portfolio in 2015, that was 15 million square feet, 53 assets. Just looking at your disclosure on page 17.
Speaker Change: excluding San Francisco, you've got 17 assets in those markets, five and a half million square feet. I don't know if that's apples to apples in terms of what has happened over the past 10 years, but what is your appetite and your interest in sort of the non-San Francisco Bay Area assets that remain in the portfolio? Is that where you'd see maybe a significant portion of future sales going forward? Thanks.
Speaker Change: Yeah, Rich, I'm not sure about your math on that. But because I think you said 15, it was almost like like 8.2 million square feet was the size of the portfolio, not 15. But regardless, your question is about the peninsula and the quality of those assets in the peninsula and whether or not they're earmarked for
Speaker Change: for potential disposition over a period of time. I would say that given the activity that we currently have on the six assets, one of which you know, the number of the assets in that marketplace is half.
Speaker Change: So the majority of the assets are in other markets as well. That being said, there's some very high quality assets in that portfolio that we are still very excited to be owners of. And there's a couple in the Redwood Shores area we've commented on in the past that's a marketplace that I think we would exercise some prudent guidance.
if we could exit those assets in that marketplace.
Speaker Change: And we've had some reversing series on that that are not a part of the
Speaker Change: Yeah sorry I was going to say we've had reverse increase that are not part of the six assets. Go ahead Rich. Okay fair enough yeah I was looking at the combined company at the time of that deal so apologies for that 8.2
Speaker Change: And then the second question is, you know, Victor, you had said at some point along the way that the studio business has resulted in, and correct me if I'm wrong, $100 million of lost EBITDA because of all the things that have happened.
How has that number changed in terms of...
Speaker Change: the potential recapture going forward. Has that gone up or is it stabilized in that range? I'm just curious, you know, what we're looking at as a possible recapture, as studio business starts to stabilize and improve going forward. Thanks.
Speaker Change: Got it. I mean, Mark, you want to jump in? Yeah. Yeah, I, you know, Rich, hard to...
Perfectly recreate what you have in mind on the hundred
Speaker Change: Historically, we've pointed to the fact that the same store studios have contributed on a consolidated basis.
Speaker Change: around, let's call it $34 million in 2022. On that, our view around Coyote is that it's...
have the potential.
on, you know, historically...
Here on out.
Speaker Change: judging by the number of holds we have, the tours we've got, the indications of interest we have across the services business, and as those show counts improve, so will the EBITDA for the Coyote business, and we think, you know, and we demonstrated in the fourth quarter annualized 22 results.
Speaker Change: You know, that was $44 million at a clip. If we can get to that $120-ish show count level, we should be right back around that level. And that, in combination with that same store, you're looking at about $75 million of run rate, even across the studio platform.
Okay, great. Great call. Thanks, Mark.
and the
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Thanks, Rich.
Speaker Change: Your next question comes from Tom Catherwood with BCIG. Your line is now open.
and the
Speaker Change: Thank you so much and good afternoon everybody. Maybe starting with Art, two-part question on Seattle for you. First, how is sublease availability impacting demand for Washington 1000, if at all? And then second, over in Pioneer Square, you've made progress at 411 first this year. What are your expectations for 505 first and 95 Jackson over the near term?
Art Suazo: Sure, I'll start with sublease. You know, the reduction of sublease supply is one of the positive fundamental shifts consistent across all our portfolio, not just not just in Seattle. And this quarter alone, we see the most significant improvement in San Francisco and Seattle, where the market is absorbed 400,000 square feet.
Art Suazo: and 350,000 square feet respectively, much of which is high-quality space, allowing us to compete more effectively.
The second question...
Speaker Change: Yeah, 411. So yeah, that was our VSP program at work. We've talked about it constantly. The market demand is in smaller spaces, 5,000.
certainly under 10,000 square feet.
We leased 411 to 94%.
Speaker Change: and it was just a great success story there. And 505, those are larger floor plates, they're about 45,000 square foot plates.
Speaker Change: As we've talked about, we're starting to see demand grow significantly. And in Seattle, we're starting to see the 20 to...
Speaker Change: kind of 20,000 to 50,000 square foot tenants, which is right in our wheelhouse, increases out there, you know, touring constantly. We feel that, you know, there's one to three, one to three floor tenant out there that we're going to make some real headway on very, very shortly.
Speaker Change: Excellent, appreciate that Art. And then last one for me, maybe for Mark, it looks like you opened a new hub for a Quixote in Atlanta. Have you been moving assets and staff to that market from the West Coast and is the new hub in response to visible demand in that market or is it kind of more spec in nature?
Speaker Change: the time of purchase at Coyote. So there's nothing new. It is obviously a recognition of
Speaker Change: the status of Atlanta in terms of the overall domestic landscape on content creation. We've got roughly, I don't know, 10-ish plus percent of our overall fleet
Speaker Change: stationed there. And, you know, over the years, as Atlanta has seen its share of content creation, that fleet has been very well utilized.
Speaker Change: When things pick back up domestically, we expect to see it improve in Atlanta and we'll see that utilization likewise go up.
Speaker Change: We can we also have the freedom. The good news of one of the best attributes of the Coyote business is that fleet is by definition transportable. So we have the requisite facilities in Atlanta, so we could enhance our fleet there. If we see growing demand for it, we could do it readily and
Speaker Change: At this point, we're just waiting to see things improve across the board domestically.
The
Speaker Change: I think you might be referring to a new, we have a relatively new presence in Albuquerque. That fleet has done incredibly, incredibly well because Albuquerque has been one of the bright spots domestically.
Speaker Change: Our next question today comes from Dylan Brzezinski with Green Street. Your line is now open.
Dylan Brzezinski: Good afternoon, guys. Thanks for taking the question. I think over the last several quarters, you guys talked about being able to achieve or ending the year in terms of office occupancy flat versus end of last year's figures, but it doesn't seem like that's
the case any longer, so just trying, just curious.
Dylan Brzezinski: Trying to figure out sort of what has changed in the last several months to where.
Dylan Brzezinski: You guys no longer feel like you guys can reach the, you know, flat occupancy year over year.
I realize some of that's probably Amazon related.
Speaker Change: Maybe if you can just talk about sort of, you know, why that that's kind of new news and then being incorporated and got Erin occupancy now. And then two, like has anything changed on the leasing front? It seems like if anything at all, like leasing momentum has picked up throughout the year. So, so just more, more, more thoughts on that would be helpful.
Speaker Change: Yeah, I mean, I mean, you you singled out one of the two factors we would be we're confident we would have been
Speaker Change: flat, if not slightly improved by year-end, but for two changes. One, Amazon expires in the early termination, which increased our expirations by year-end by 140,000 feet. And then the help for sell for foothill roughly at the 20 basis point impact on occupancy percentage. And back to those two new developments, we expected to finish the year at or above current occupancy.
Ph.D. level.
Speaker Change: And then I guess just one more for me, I mean, touching on the return to office momentum that you guys are seeing across the tech landscape, especially with some of the larger tech companies like Amazon. I mean,
Speaker Change: You know, what we saw in New York was, as RTO picked up, you saw a pretty swift correlation to an improvement in leasing activity and minimal downsizing upon vacate.
Speaker Change: I guess one of the things we're trying to figure out is how does that parallel with what you guys expect to happen on the West Coast? It seems like...
Speaker Change: The pickup in RTO is not necessarily causing a direct improvement in leasing demand, whether it be due to cyclical factors or something else. So just as you guys sit here today and look at the momentum you're seeing in RTO, I mean...
Speaker Change: Can you sort of talk about any offsetting impact associated with that? I mean, it seems like Amazon is still, and some of the other larger tech companies are still giving back space. So can you kind of just talk about some of the puts and takes and how you guys see that playing out over the next 12 months?
So, Dylan, macro-wise, you know, Art mentioned it
Speaker Change: for a similar wave on the west coast that we've seen on the east coast.
Speaker Change: and these tech companies are just getting back, right? I mean, Amazon is not back five days until January 9th, I think is the date.
Speaker Change: and so is Dell and so is Salesforce. And then the follow suit on that will be, who's back, how much do we need, and then where do we go from there? I do think one of the differences on the tech side versus the finance side, East Coast being the finance and West Coast being the tech, is a lot of these tech companies are realizing that they have a desperate need to increase their space.
Speaker Change: but they want to control their space. And what I mean by that is they're all coming out and saying, hey, we want the entire building, or we want the entire availability of security, or ingress and egress, and the likes of that. So it's making it a little more challenging to pick and choose which assets they want to be at. I think once those assets that are available today that are single-tenant assets.
Speaker Change: come off the marketplace, then you're going to see a much bigger wave. So on a macro basis, I think that's what we feel, and we're confident we're going to see that impact by second, third quarter of 2025. Victor said it exactly right, Dylan. And on top of that, let me just say, as we're doing deals, even with tenants in the process of return to office and trying to decide what their footprint looks like,
Speaker Change: More than ever we're having conversations about future growth even as they're leasing space, right? So they want they want to talk about how they can secure future growth You know in the lease
Speaker Change: because this potentially may not be good enough. That's the inference, right?
Thank you for joining us. We'll see you next time.
Speaker Change: Great, that's incredibly helpful detail, Victor and Art. Thank you so much.
Thanks, everyone.
Speaker Change: Your next question comes from Ronald Camden with Morgan Family. Your line is now open.
Speaker Change: Hey, just two quick ones. Just looking at the NOI margin in the quarter, maybe was that seasonality or what sort of drove it down? And I think you mentioned occupancy not really bottoming until sort of the middle of next year. As that occupancy declines at the beginning of next year, should we expect more margin pressure?
Speaker Change: I'm sorry are you referring to market pressure on the studio properties, on the office properties? On the office properties.
Got it. I think the impact there is just...
Speaker Change: Basically, leasing activity in the middle of the quarter. So we, like we said, we wrote off that one tenant and that drove down some of the some of the.
Thank you.
What are margins? Hypothesis, yeah.
Speaker Change: Okay, great. And then just my second question, it was just to follow up on Amazon. Obviously,
Speaker Change: You know, you still have two leases with them. Just what our conversations are like, any sort of update on their plans with those leases. Clearly a lot of turmoil on those, but.
wondering how they're utilizing that space. Thanks.
Speaker Change: Ron, we're in active conversations. Obviously, we don't get into the details, but suffice to say, you know, Amazon is talking to us on existing assets and some future growth throughout our Pacific Northwest portfolio. So we're confident in their ability to continually grow with...
Speaker Change: within our markets and candidly in the Hudson portfolio. The Met Park North asset was not something that we were surprised that they were going to turn around and give back. We just thought it would be probably beginning of the year versus the end. But remember, we did renew them for a very short time frame for a reason, and they were looking to expand their portfolio outside of that.
Great, that's it for me. Thank you.
Thanks.
Thank you.
Speaker Change: There are no further questions at this time, so I'd like to turn the call back to Victor Coleman, CEO and Chairman, for closing remarks.
Speaker Change: Thanks so much for participating today and appreciate the support of HUD-specific. Have a good rest of your evening.
This concludes today's conference call. Goodbye. You may now disconnect.