Q4 2024 Hudson Pacific Properties Inc Earnings Call
Cameron: Good afternoon. My name is Cameron and I will be your conference operator today.
Speaker Change: At this time, I would like to welcome everyone to the Hudson Pacific Properties 4th Quarter 2024 Earnings Conference Call.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer 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.
Thank you.
Speaker Change: At this time, I'd like to turn the call over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.
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 also 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.
Speaker Change: Thereafter, we'll be happy to take your questions. Victor. Thank you, Laura. Good afternoon, everyone, and thanks for joining us.
Victor Coleman: Throughout 2024, our team remained undeterred and laser-focused on our strategic priorities, driving office and studio leasing, executing on-property sales,
Speaker Change: continuing cost containment and strengthening our balance sheet. We've had many successes in this regard and we remain committed to additional progress in 2025 on our multifaceted plan to reinvigorate earnings growth.
Speaker Change: Touching on some of the highlights in 24, we ended the year with office leasing nearly 20% higher compared to the prior year as we delivered over 2 million square feet of signed leases.
Speaker Change: This included 1.2 million square feet of new leasing or 60% of all activity, the highest level since 2019 and nearly double our post-pandemic average.
Speaker Change: We successfully completed two of our three under-construction development projects, Washington 1000 in Seattle and Sunset Glen House in Los Angeles. And through various cost-cutting initiatives, we achieved approximately $4 million in G&A savings as compared to our initial outlook.
Speaker Change: And as Harout's going to discuss, we anticipate further savings this year.
Speaker Change: And even in a challenging transaction environment, we placed three non-core assets under contract to sell for a total of $94 million, one of which closed in December, the second closed in January, and the third is anticipated to close by the end of the first quarter.
Speaker Change: West Coast Office Fundamentals are showing resilience with the Bay Area as a standout and bellwether for what should follow across our markets.
Speaker Change: In the fourth quarter, both San Francisco and Silicon Valley achieved positive net absorption, capping off post-pandemic record years for gross leasing.
Speaker Change: West Los Angeles, too, had a positive net absorption, while Vancouver remained relatively stable.
Speaker Change: In downtown Seattle and San Francisco Peninsula, where negative net absorption persisted, the potential for favorable shift is starting to emerge as absorption continues to steadily march towards positive territory.
Speaker Change: And in summary, all of our market's gross leasing is reaching post-pandemic highs. Sub-lease availability is improving with virtually no new construction. Therefore, supply for quality office space will become constrained.
Speaker Change: Supporting growing demand, fourth quarter venture funding of $75 billion was at the highest level since second quarter 2022, driven by AI interest in our markets.
Speaker Change: In 2024, San Francisco received 53% and the broader Bay Area received 82% of venture funding for global AI.
Speaker Change: In fact, the top 5 venture investment recipients in 2024, which totaled a half a trillion dollars, were all AI companies headquartered in the Bay Area.
Speaker Change: Given the propensity for AI companies to be office first and the proximity to research and talent the Bay Area affords, we expect a considerable trickle-down effect on office leasing to begin to materialize.
Speaker Change: Last year alone, AI office leasing in the Bay Area reached about 2.4 million square feet, more than doubling in the existing footprints with over 1.4 million square feet of requirements presently in those markets.
Speaker Change: Another favorable trend is that even as the macro uncertainty persists amidst global conflicts and geopolitical tensions, businesses appear poised to benefit
from the new administration's pro-growth, pro-deregulation policies.
Speaker Change: In our markets, we continue to see later-stage startups turn their attention back to growth and fundraising after years of cost-cutting, and fourth-quarter tech layoffs were the lowest level since the first quarter of 2022, and down 90% from their peak in the first quarter of 2023.
Speaker Change: And in addition, CEOs are realizing that with employees in the office four plus days a week, they need more space. And while the East Coast has led in improving office fundamentals to date, we fully anticipate similar trends will emerge on the West Coast.
Speaker Change: Turning to our studios, 2025 is a pivotal year for film and television industry in Los Angeles, with all eyes on the Governor's proposal to more than double the tax credit from $330 to $750 million, which if approved will go into effect July 1.
Speaker Change: particularly in the wake of the recent wildfires which temporarily delayed productions and personally impacted many in the industry, we're pleased to see a groundswell of support to increase filming in Los Angeles.
Speaker Change: The California Production Coalition, Film LA, the Entertainment Union Coalition, Film Liaisons in California Statewide, or FLICS, and Stay in LA, and now the President's Special Coalition comprised of Jon Voight, Mel Gibson, and Sylvester Stallone are all pushing for additional state and local program enhancements and commitments for media companies to increase local production.
Speaker Change: We are specifically part of the California Production Coalition, but active and in communication with all of these groups.
Speaker Change: As Mark's going to expand upon, production in Los Angeles picked up modestly in the fourth quarter.
Speaker Change: In the first quarter, many productions paused or were delayed due to the wildfires, but we're now seeing an uptick in stage leasing inquiries, not just in number, but in quality.
Speaker Change: several of these long-running, first-season episodic television shows, historically the bread and butter of Los Angeles production, that need multiple stages, as well as robust lighting and grip packages.
Some of the pressure from austerity measures may be alleviated.
Speaker Change: as growing number of streamers including Disney, Warner Brothers, Discovery, and Paramount reach profitability. Note, the increase in activity we see pertains to second or third quarter start dates and the incremental demand resulting from the expanded California tax incentives should be an upside.
Speaker Change: with closing anticipated in March. So collectively, we have generated $94 million of gross proceeds over the last two quarters, with all proceeds going to reduced leverage.
Speaker Change: Beyond these three assets, we are pursuing approximately $100 million to $150 million of dispositions in various stages, and Harout's going to discuss additional balance sheet-related enhancements, which are either completed or underway. And with that, I'm going to turn it over to Mark.
Mark Lammas: Thanks, Victor. We signed approximately 442,000 square feet of new and renewal leases in the quarter with nearly 60% new deals.
are reported GAAP and cash rent spreads.
Mark Lammas: which were 6% and 9.9% lower in the quarter would have been 2.8% and 4.3% lower respectively but for a new direct lease with an existing subtenant at Rincon Center which fully backfills Salesforce's 83,000 square foot lease expiring in the first quarter of this year.
Mark Lammas: Pipeline remains strong at just over 2 million square feet with an average requirement size of 16000 square feet. This includes approximately 770000 square feet of late stage deals in process comprised of 480000.
Mark Lammas: <unk> and leases and another 290000 in LOI.
Mark Lammas: Excluding held for sale Foothill Research Center, we have under $1 6 million square feet expiring in 2025 with 52% coverage that is deals in leases Lois or proposals roughly.
Mark Lammas: Roughly 70% of those explorations are in the first half of this year, including our five 2025 explorations over 50000 square feet, which collectively total close to 660000 square feet and for which we have 68% coverage.
Victor Coleman: Starting in the third quarter of 2025 through year end 2026, we will average just 230000 square feet expiring per quarter, well below our leasing activity, which has averaged 460000 square feet over the last eight quarters as Victor noted last year, 60% of leases signed were for new requirements.
Victor Coleman: And assuming this trend continues starting in the second half of this year, new leasing should more than cover the quarterly expiring amounts. Thus, we fully expect our office portfolio occupancy to stabilize in the second half of this year and start to grow thereafter.
Victor Coleman: Turning to studios as Victor noted Los Angeles production levels in the fourth quarter incrementally improved where on average there were 86 shows filming compared to 84 in the prior quarter coincident with this level of activity, our trailing 12 month lease percentage for the fourth quarter for our in service stages with 77% leased or 90.
Victor Coleman: Basis points higher than the prior quarter, reflecting additional occupancy at sunset Las Palmas, our acuity stages were 33% leased essentially in line with last quarter.
Victor Coleman: Fourth quarter studio revenues increased by $2 million compared to the prior quarter driven by a $1 $9 million increase in studio ancillary revenue, mostly from more production activity at Sunset, Las Palmas, and a $1 $9 million increase in transportation and location service revenue attributable to higher utilization in both.
Victor Coleman: Segments, partially offset by a $1 $6 million decrease in stage rental revenue at Sunset <unk> and various acuity stages.
Victor Coleman: Of our 56 film and television stages, 43 stages, representing 79% of the related square footage are either leased in contract or subject to holds which are essentially a non binding expression of interest. This is roughly in line with the snapshot, we provided last quarter, but as Victor noted we have seen an uptick in <unk>.
Victor Coleman: Leasing activity for second and third quarters start dates, which along with the proposed tax credits points to the potential for improved occupancy the second half of the year.
Victor Coleman: Despite the indications of stronger future production demand were Los Angeles, we continue to look for ways to rightsize the acuity business during the third and fourth quarters, we terminated certain leases and implemented other cost savings initiatives, which are expected to reduce fixed expenses by $7 $5 million annually as.
Victor Coleman: As part of the cost containment, we elected to cease operations in New Orleans, which will ultimately allow us to focus more intently on our assets in Los Angeles, New York and other core U S markets.
Victor Coleman: As for development in regard to Washington, 1000, we're in discussions with multiple tenants with requirements ranging from 45000 to 250000 square feet.
Victor Coleman: There has been a notable increase in activity for this project from full Florida or greater tenants entering the market focused on upgrading the class a or trophy assets in alignment with return to office mandates.
Victor Coleman: <unk> 94 studios. The project is on time and on budget structural components are complete exterior skin in roofing or nearly finished and the work is shifting to interior mechanical systems and build out.
Speaker Change: Leasing discussions are ongoing with a leading studio and other productions for multi year agreements on one or more stages with delivery anticipated by the end of this year, we expect to begin substantive discussions with tenants on a show by show basis. This summer and now I will turn the call over to our group.
Speaker Change: Mark our fourth quarter 2024 revenue was $209 7 million compared to $223 4 million in the fourth quarter of last year, mostly due to the sale of Onewest side and a single tenant moving out of Maxwell, partially offset by improved studios service and other revenue at acuity and Sunset Las Palmas.
Speaker Change: Following districts or <unk>.
Speaker Change: Fourth quarter <unk>, excluding specified items was $15 5 million or <unk> 11 per diluted share compared to $19 6 million or <unk> 14 per diluted share a year ago.
Speaker Change: Specified items for the fourth quarter totaled 74 cents per diluted share compared to <unk> <unk> per diluted share a year ago.
Speaker Change: Apart from the specified items the year over year change in <unk> was mostly due to items affecting revenue and reduced interest expense.
Speaker Change: Specified items in the fourth quarter included a goodwill impairment and write off of assets related to <unk>, $109 9 million or 75 per diluted share.
Speaker Change: Noncash deferred tax adjustment of $2 1 million or one cents per diluted share and a onetime income tax expense at bento stemming from a legislation change.
Speaker Change: <unk> 8 million or <unk> <unk> per diluted share note. The acuity goodwill impairment is the result of running our GAAP accounting impairment analysis of NOI in connection with our annual reporting to reflect the slower than anticipated recovery post strike.
Speaker Change: Our fourth quarter same store cash NOI was $94 2 million compared to $106 3 million in the fourth quarter last year, primarily due to lower office occupancy.
Speaker Change: Turning to our balance sheet in January we amended our credit facility to adjust certain definitions and ratios to favorably conform to market precedent and as a long term planning measure as we anticipate keeping the credit facility in place indefinitely, specifically, we lowered the minimum required under key ratios, including <unk>.
Speaker Change: Adjusted EBITDA to fixed charges from one five times to one four times and unencumbered NOI to unsecured interest expense from two times to 175 times.
Speaker Change: We also modified certain definitions to improve how assets are factored into total asset value and unencumbered asset value calculations again to be more consistent with the market terms with the amendment effective as of the fourth quarter of last year, our fourth quarter results show improved credit facility covenant performance across all metrics.
Speaker Change: <unk>.
Speaker Change: In exchange for these modifications lender commitments are now $775 million versus $900 million with a maturity date unchanged at December 2026 with extensions factoring in the recent amendment, we have $518 $3 million of total liquidity comprised of $63 3 million of unrestricted cash and cash.
Speaker Change: <unk> equivalents and $455 million of Undrawn capacity on our unsecured revolving credit facility.
Speaker Change: I also have RMB $54 million of construction loan capacity of which our share is $40 million our share of net debt relative to our share of unappreciated book value is 38, 7% and our percentage of debt fixed or capped at 97%.
Have no debt maturities until November 2025, and we are making good progress on asset sales and secured financings the proceeds from which we tend to use to fully address both our 2025 and 26 maturities. We expect to have additional updates in the near term.
Speaker Change: To underscore the credit facility amendment, along with asset sales and upcoming secured financings are part of multiple concurrent efforts, we are pursuing to enhance our balance sheet regarding our performance under our covenants related to our private placement unsecured notes based on our strategy and projections, we expect to remain compliant.
Speaker Change: Turning to outlook for the first quarter, we expect <unk> per diluted share to range from seven to 11.
Speaker Change: Sir there are no specified items in connection with this guidance.
Speaker Change: Comparing to fourth quarter <unk>, excluding specified items 11 cents per diluted share, we expect studio NOI to be approximately <unk> <unk> lower at the mid point, mostly due to the Los Angeles, wildfires, which hampered incremental improvement to demand this quarter, especially at acuity, we anticipate office.
Speaker Change: Of approximately <unk> <unk> lower at the midpoint due to first quarter lease expirations and to a lesser extent recent and pending asset sales.
Speaker Change: These changes to <unk> office, NOI should be partially offset by further favorable improvements to G&A expense as well as other miscellaneous items equating to approximately one higher at the midpoint.
Speaker Change: Regarding our full year assumptions, we anticipate same store property cash NOI growth of negative 12, five to 13, 5%, reflecting both the recent asset sales and lower office occupancy through the first half of the year followed by occupancy gains in the second half of the year.
Speaker Change: We anticipate additional noncash revenue between $10 million to $15 million. This year due to both upfront free rent and beneficial occupancy from several large to mid sized landlord lease deals presently in negotiation.
Speaker Change: Lastly, we have assumed lower G&A expense of 70% to $76 million in 2025, not only will we receive the full benefit of cost containment measures undertaken last year, but we also expect to achieve additional savings this year ranging from $3 million to $9 million.
Speaker Change: Apart from Foothill Research Center in Maxwell, which were held for sale in the fourth quarter, our outlook excludes the impact of any potential dispositions acquisitions financings and our capital market activity now we'll be happy to take your questions operator.
Speaker Change: Thank you 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: Your first question comes from the line of Tom <unk> with <unk>.
Speaker Change: You May proceed.
Speaker Change: Thank you and good afternoon, everybody, maybe starting with you.
Speaker Change: Since kind of earnings.
Speaker Change: Earnings growth flows through office leasing.
Speaker Change: The last quarter, you had talked about tenant requirements, increasing obviously increased tour activity and your ability to start pushing for longer lease terms as you look out through the start of what you've done in 'twenty, five and kind of what's in that pipeline. How are the fundamentals firming up and are you still able to whether it's start to push on rents or continue to push on <unk>.
Speaker Change: Term.
Speaker Change: What is your kind of negotiating position looking like.
Speaker Change: Sure Tom.
Speaker Change: I think the premise at the beginning was correct.
Speaker Change: Tours.
Speaker Change: We're up quarter.
Speaker Change: Quarter over quarter, the pipeline is up slightly quarter over quarter, but the most important part of that is that.
Speaker Change: Average deal in negotiation has gone up 15% to 16000 square feet and that tells us the downstream.
Speaker Change: We're going to get more volume. It also tells US that there is more kind of larger deals in the pipeline.
Speaker Change: And that's exciting.
Speaker Change: As far as.
Speaker Change: As far as lease term the deals that we have in negotiation are trending in the right direction.
Speaker Change: Our trailing 12.
Speaker Change: Quarter over quarter is up 2% slightly.
Speaker Change: But more telling is our.
Speaker Change: Trailing 12 year over year is up almost 80%.
Speaker Change: So that's very encouraging and everything everything we have in our pipeline tells us that we're heading in that direction.
Okay.
Speaker Change: I appreciate that.
Speaker Change: Then second one for me Victor on the third quarter call you mentioned pursuing secured financing on a portfolio of six assets Whats. Your current view on when that gets done and kind of what's the backup plan to address maturities if that transaction doesn't come to fruition.
Tom: Thanks, Tom listen we were.
Speaker Change: Not going to comment on a timeline, but suffice to say that we're in process right now on a multiple of events that will accommodate.
Speaker Change: Right sizing the balance sheet, and we feel confident that one or more of these are going to come through and it should be fairly eminent.
Speaker Change: Got it I appreciate the answers thanks, everyone.
Tom: Thanks, Tom.
Speaker Change: Your next question comes from the line of Nick Joseph with Citi.
Tom: <unk>.
Nick Joseph: Hey, there.
Nick Joseph: Michael Griffin on with Nick maybe just going back to the leasing pipeline I mean, it seems like it's a pretty positive for the year ahead, obviously the news we've heard about both AI and Tech company and office requirements seem to be helping you or your market somewhat but can you give us a sense of the type of tenants.
Nick Joseph: That are looking.
Nick Joseph: How likely they are to commit is it more firms that are testing the water or you feel pretty confident that a lot of these deals are going to get over the finish line.
Nick Joseph: Yes, I am supremely confident that a lot of these deals to get over the finish line if I can go backwards.
Nick Joseph: The pipeline.
Nick Joseph: As I mentioned, Tom that the deal the deal size has grown.
Nick Joseph: It is encouraging to us, but more importantly, right now we're seeing more deals in late stage.
Nick Joseph:
Ladies boutique LOI and leases about 800000 square feet, which we mentioned in our prepared remarks.
Nick Joseph: That are really inside the five yard line right and so it's more than more than ever and so we're seeing a little bit more urgency and I think we're seeing a little bit more and see because.
Nick Joseph: We're seeing a little bit more urgency because.
Nick Joseph: Some of these tenants that are realizing they need to get back to the office return to office was I'd like to call work from work.
Nick Joseph: Yeah.
Nick Joseph: They are running out of time and so that's also that's also going to be a good impetus to.
Nick Joseph: To move deals along additionally, our coverage.
Nick Joseph: Those deals in the pipeline.
Nick Joseph: We mentioned part of it in the prepared remarks.
Nick Joseph: We have high coverage on some of the expirations going forward some of the large exploration. So for example.
Nick Joseph: At $40 55.
Nick Joseph: Over and the Bofa exploration, which is in total like 390000 square feet. We have we have over 50% coverage on those right now and those are deals inside the five yard line. So again everything is moving in the right direction and it's not just again, it's not just a handful of deals and a handful of markets.
Nick Joseph: Across the portfolio.
Great.
Nick Joseph: Very helpful. Appreciate that art.
Speaker Change: Then maybe just turning to the studios and obviously the space has been through the ringer the past couple of years.
Nick Joseph: It feels like even in the best of times I mean <unk> is a.
Pretty limited visibility business. So you took the impairment this quarter.
Nick Joseph: As you think about maybe disposition opportunities I mean does it make sense to stick with this platform longer term I mean, do you think youre getting credit for it versus just the underlying studio real estate I know it fits into the whole broader media ecosystem, but there any updated thoughts there that'd be interesting.
Nick Joseph: Yes. This is mark thanks, Mike.
Speaker Change: We are.
Speaker Change: We remain believers obviously in studios in general.
Speaker Change: We've been in it from the beginning.
Speaker Change: Through the ups and downs.
Speaker Change: Various changes and.
Speaker Change: Continue the bill.
Speaker Change: I believe that Los Angeles is going to wait to come back here Victor touched on things like the tax.
Credit increase all of the various industry groups that are getting involved local changes all designed to pull production back to Los Angeles, where it belongs I would just say as it relates to <unk>, specifically, we're not sitting on our hands just waiting for show counts to go up.
Speaker Change: We have already undertaken various cost savings initiatives.
Speaker Change: To date, starting in the third quarter largely completed in the fourth quarter, we've cut about $7 5 million.
Speaker Change: <unk> expenses, the resulting impact pro forma at 24 is like $4 2 million of NOI improvement annualized.
Speaker Change: We're in process on another wave of cost cutting initiatives on the order of call it $6 million savings generating 5 million of NOI improvement again pro forma.
Speaker Change: 24 operating results. So we're looking for ways to.
Speaker Change: Right size that business from a cost point of view and.
Speaker Change: Improved margins enhance NOI.
Speaker Change: As show counts improve that obviously, we will.
Speaker Change: Further improved the results, but we're going to we're going to improve those results one way or the other and I just wanted jumping beyond Netflix obviously, the other streamers like Disney and Warner Brothers and Paramount.
Speaker Change: Now they are reaching the levels of profitability and with this paramount merger collectively this is going to alleviate a lot of the negativity that has come to fruition in the last couple of years around the studio business I mean, Los Angeles is still the lead marketplace for film and television production globally, and we are seeing unfortunately with the circumstances of the fires.
Speaker Change: We're seeing a massive production.
Speaker Change: Turnaround and a support for the community around that that the entertainment business and industry in general is leading and so that is what's changed I mean, the end of the year obviously.
Speaker Change: Devastating event occurred.
Speaker Change: And then the backside of that event is the conglomeration of all of these entities that are out there that we're all affiliated with that I mentioned in my prepared remarks that have come now to the table to say lets rebuild law. So whatever acronyms you want lay rises or steadfast L a or rebuild la they're all coming to the table and that is what we are.
Speaker Change: Scene is transfer into more than just interest but holds on stages and production being green light going forward.
Speaker Change: Great. That's it for me thanks for the time.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Blaine Heck with Wells Fargo. You May proceed.
Speaker Change: Okay.
Speaker Change: Great. Thanks, Good afternoon, just starting on the sales mix. There are a couple of questions. There. It sounds like you're close to finished on the first three that were under contract but.
Speaker Change: Just with respect to the three additional sales can you give some more color on where you think you stand in the negotiations.
Speaker Change: Do you think we can expect those to go under contract.
Speaker Change: Then it sounds like the target for total proceeds is up slightly from your commentary last quarter at the midpoint. So is that a change of mix better growth that you've done the sale, so far or better expected proceeds on those that you still expect itself.
Speaker Change: Yeah.
Speaker Change: So.
Speaker Change: I'll start with the first part of the question, Yes, I mean the <unk>.
Speaker Change: <unk> are done I mean, one is gone nonrefundable elsewhere, because we mentioned that last quarter.
Speaker Change: Been a timing close and so that deal is in process. We have two other deals right now.
Speaker Change: One in contract stage and another.
Speaker Change: In LOI negotiation, the reason and we're confident that both of those deals are going to make.
Speaker Change: The reason that.
Speaker Change: The sort of the range a little higher is we are realizing good pricing.
Speaker Change: The deals that we're talking about have been marketed deals and I think it's a testament to our ability to generate this liquidity and maximize value in some of the comps have been very good comps in some of the ones. You are looking at are going to be equally as good but we've also had.
Speaker Change: Some reverse inquiry on some assets that are slightly larger and that's what we've looked at potentially considering that beyond the two that we're working on right now which would make that number a little higher that's still in flux and.
Speaker Change: That asset that I'm, referring to is not a marketed asset so we're keeping that at a little more.
Speaker Change: More closer to the vest at this time and as you know.
Speaker Change: As we get closer we'll provide you guys with more updates on it.
Speaker Change: Okay, Great that's really helpful.
Speaker Change: And then thanks for all the commentary on the studio set side I guess in the press release, you talk about high caliber shows returning can you just expand on what that means are these large does that need a lot of studio space that what makes them high caliber and then with respect to returning our these shows that we're on high.
Speaker Change: Or have they maybe moved to other markets and are coming back.
Speaker Change: Well, yes by returning we don't necessarily mean literally a return and show what we mean is coming back to la <unk> looking for stages in L. A as opposed to other competing markets.
Speaker Change: By high quality, we mean television episodic the kind of bread and butter that makes la thrive in that Tom Just studios high quality studios like we have in Hollywood or Sunset gone out.
Speaker Change: Just to give you a point of reference we were seeing on average one long term.
Speaker Change: <unk> episodic type show come through our available stages about one on average for the October November December.
Speaker Change: As of last month six of those shows came through in January so.
Good early indicator that we're starting to see that recovery coming from the.
Speaker Change: These bigger share.
Speaker Change: Those that use more stages use heavier lighting and grip packages all of the things that we rely on to make the stages our.
Speaker Change: And I believe they are they're named show runners who've either worked in L. A in the past our work in our facilities. They are coming back with shows that are.
Speaker Change: Multiple year running shows and we haven't seen that momentum in some time and we're looking at a couple of shows right now that have been in the marketplace.
Speaker Change: 10, plus years that are coming back and looking at our studios. So it's much stickier than the than the ones that we've sort of seen in the last 24 months that have been.
Speaker Change: Pilots that may or may not have picked up.
Speaker Change: Got it very helpful. Thank you guys.
Speaker Change: Your next question comes from the line of Conor Mitchell with Piper Sandler You May proceed.
Conor Mitchell: Hey, Thanks for taking my question I just have a <unk>.
Conor Mitchell: So first going back to some of the guidance you provided the.
Conor Mitchell: Cash NOI of negative 13.
Conor Mitchell: Can you give some information on it regarding.
Conor Mitchell: Occupancy prereqs, but just to make sure I'm understanding correctly do you see the.
Conor Mitchell: Negative 13 cash NOI guidance, primarily.
Conor Mitchell: Due to the occupancy impact in the first quarter the dip if ed regaining some strength or is it the free rent or a combination or something else that I might be missing.
Conor Mitchell: No.
Conor Mitchell: You hit on that it is a combination so there is a lot of deals.
Conor Mitchell: <unk>.
Conor Mitchell: <unk> in the works that are working on that have upfront free rent.
Conor Mitchell: The GAAP NOI will definitely reflect that but the cash NOI will be picked up on the later half of the year. So it's some of the timing occupancy. The rest is the structure of the deals that we are anticipating.
Conor Mitchell: Okay. That's helpful and then.
Speaker Change: Thinking about the impairment you took on Cody.
This is not a JV and I understand there is just a GAAP accounting involved.
Speaker Change: But just wondering how you guys kind of think about the actual value of it now versus the purchase.
Speaker Change: The purchase price that you guys took on in 2022.
Speaker Change: So.
Speaker Change: The impairment, it's really an annual cap requirement and unlike real estate.
Speaker Change: It doesn't work the same way so you have a different metrics and you've got to factor in.
Speaker Change: All the NOI and projections ultimately that's just stems from the slower start of the recovery post the strike that's already impacted and it doesn't really impact the future of the business or how we look at it.
Speaker Change: And it's all goodwill by the way.
Speaker Change: The assets themselves.
Speaker Change: Yes, so essentially you can maybe look at the value being slightly higher than the book value currently after the impairment, but you guys still have.
Speaker Change: You're still confident in the acuity business like you mentioned earlier in the remarks correct.
Speaker Change: That's correct.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Ronald Camden with Morgan Stanley You May proceed.
Ronald Camden: Hey, just two quick ones for me I think one just looking at the guidance I think I remember last year, you talked about sort of stress testing the covenants and so forth. Just can you just remind us when you do that exercise of this year, how we should think about the covenant is trending this year.
Speaker Change: Okay.
Ron: Hey, Ron.
Ron: The reality is like we said we feel like we'll be covenant compliance, we look at the projections Granularly and just.
Ron: Just to put it another way is almost for the last six or eight quarters every quarter, we've exceeded our internal expectations on the covenants and so we feel confident will remain covenant compliant.
Speaker Change: Okay got it and then just staying on this.
Ron: The same guidance topics just from a high level from the 78.
Ron: Percent sort of occupancy maybe talk through how we should expect occupancy to trend through the year I know, it's going to get better in the second half.
Ron: Just maybe any numbers would be helpful. Thanks.
Ron: Yes, we do.
Speaker Change: Don't provide specific.
Ron: Occupancy guidance, but.
Ron: I think you can discern what will happen in terms of the cadence over the quarter by simply looking at quarterly lease expirations in the supplemental.
Ron: Art outline kind of what the pipeline looks like somewhat elevated explorations first quarter tapering off a little bit second quarter, so 70% of all explorations and 25% weighted to the first half of the year, that's where we're going to feel the most pressure on occupancy.
Ron: We expect to see a dip in the first quarter, we actually believe there's the opportunity to even see recovery thereafter.
Ron: Even.
Ron: By second quarter relative to that where we ended the first quarter. So that and then it's just steadily improve thereafter and I would add.
Ron: We believe it will steadily improve beyond 25, given where explorations and activity is.
Ron: Pointing.
Ron: Great. Thanks, that's it for me.
Speaker Change: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. You May proceed.
Ron: <unk>.
Caitlin Burrows: Hi, everyone I guess, we've talked a lot about volume and interest of leasing but on the pricing side leasing spreads were down in 2024. So do you expect that at least in Friday's down call. It double digits on a cash basis.
Caitlin Burrows: To continue in 2025 are like as you think about stabilizing occupancy how much is it like a rate versus occupancy decision. These days sorry.
Caitlin Burrows: Right kind of secondary at this point.
Caitlin Burrows: Okay.
Caitlin Burrows: Yeah, so on leasing spreads.
Caitlin Burrows: Of course, they are not necessarily indicative of what we're seeing holistically in terms of net effective rents youre just seeing a comparison on phase III realm.
Caitlin Burrows: Relative to expiring rents, but a couple of things about that right now 2025, and even 2020 states mark to market on rents is.
Caitlin Burrows: Somewhere.
Caitlin Burrows: Like call it six 7% above market.
Caitlin Burrows: So that gives you an idea of kind of where expiring rents are relative to market now those don't necessarily.
Caitlin Burrows: Translate into what you see on cash spreads that get reported in activity because they don't know the timing of that doesn't always work out identically, but that gives you an idea where the spot mark to market is for each of those two years as for like the actual lease economics to kind of answer. Your initial question those have held up incredibly well I mean, we outlined it in the prepared.
Caitlin Burrows: Remarks in terms of net effective rents, but I would just emphasize that.
Caitlin Burrows: Whether you look at the latest set of results.
Caitlin Burrows: And compare trailing 12 months to almost any period of time year over year pre COVID-19 rents, we continue to be in the low single digits.
Caitlin Burrows: <unk> of.
Caitlin Burrows: Even pre pandemic net effective rents and I would add there's been a couple of quarters in there when we were essentially back to pre pandemic net effective.
Caitlin Burrows: And the underlying reasons for that is essentially move last little to no ground on straight line rents again.
Caitlin Burrows: Almost any point at a period of comparison and we've been able to stretch term out while maintaining ti and Lcs per annum. So we're.
Caitlin Burrows: Net effective I have held up incredibly well and I would say is some of the more recent quarters are an indicator.
Caitlin Burrows: There is a real possibility, we'll start to see net effect is higher than pre pandemic soon.
Caitlin Burrows: Got it and then.
Speaker Change: Maybe just back to Washington, 1000 wondering if you could give some more detail on the tour activity type of tenants coming through and whether they would be relocating or expanding into the space. And then also like if you were to sign a lease today, how quickly would you realize that NOI.
Speaker Change: Yeah. This is art Caitlin.
Speaker Change: First of all is unquestionably the Washington 1000 Premier.
Speaker Change: <unk> constructed asset in the market the only one.
Speaker Change: Downtown core and the team continues to doggedly pursue all prospects across the Puget Sound. We had mentioned that we're in discussions with with tenants from 45000 square feet to 250000 square feet.
Speaker Change: And actually in negotiations with two of those prospects that have 2026 lease commencement date, so we anticipate transacting in the coming quarters.
Speaker Change: If I can share it really it at a macro level.
Speaker Change: Tech demand is increasing and growing stability with the city of Seattle, and what I mean by growing stability, meaning.
Speaker Change: Enhanced security cleaner safer Streetscapes stricter return to office revitalized retail.
Speaker Change: Certainly elevated foot traffic. We are encouraged that this is going to generate more activity for Washington 1000.
Speaker Change: Thanks.
Dealing Burzynski: Your next question is from the line of dealing Burzynski with Green Street.
Speaker Change: May proceed.
Speaker Change: Good afternoon, guys. Thanks for taking the question.
Speaker Change: Morning.
Speaker Change: Touch on the leasing pipeline you guys commented in the press release that it's call it.
Speaker Change: Well over 2 million square feet, which is generally in line with where it's been really throughout 2024. So just trying to sort of square the leasing pipeline comments with some of your remarks around.
Speaker Change: <unk> in sort of leasing demand from tech.
Speaker Change: There is something more sort of missing because it doesn't seem like according to the leasing done during the quarter combining that with your comments on the leasing pipeline that things are improving all too much. So I just wanted to hear your thoughts on that and then sort of anything we might be missing.
Speaker Change: Well, let me start sort of a macro basis I mean, they are clearly.
Speaker Change: Clearly improving I mean, we've leased more space by new and renew tenants in the last year than we had since effectively 19. So we're seeing the numbers Pan out and 2 million feet is is in line with what we did last year and that's what's in the pipeline right now, but that 2 million feet is going to be offset by what's explore.
Speaker Change: And you have to look at 'twenty five 'twenty six 'twenty seven we sort of set the table.
Speaker Change: If anybody knows is we're going to have the least amount of explorations in 'twenty six 'twenty seven than we've had in five plus years and so it does magnify, what's available and what's coming available given where the pipeline is and it is supportive of the deals that we did in the last 12 months and what's the.
Speaker Change: The ones that are on the table right now which are some good sized leases that are going to come to come to.
Come to fruition in the portfolio right.
Speaker Change: As I mentioned earlier, the average deal size of the pipeline is growing.
Speaker Change: Points to what Victor just talked about I think most importantly, the pace of the deals is picking up we're starting to see a little bit more urgency out there.
Speaker Change: With these deals.
Speaker Change: And more importantly is our the tourists right the tour spiked kind of early last year.
Speaker Change: We maintain that level of tour activity and the team has done an amazing job of pulling those forward. So it's about reloading the pipeline, yes. It looks like its static at 212 2 million feet, but we're also transacting 2 million feet, which is a big difference.
Speaker Change: Okay.
Speaker Change: That's helpful. I appreciate the comment I guess, just one sort of <unk>.
Speaker Change: Clicking into Seattle.
Speaker Change: Do you guys envision it seems like proposition one.
Pat: Pat do you guys sort of envision that.
Pat: <unk> further separating out the recovery in Bellevue versus sort of the city of Seattle, How do you kind of just provide your thoughts on that would be helpful.
Pat: Yes, unless IRA.
Pat: Repeat the other day.
Pat: I may not agree with all of it but thats okay. Its not the first time, you and I have not agreed on things in the past, but given given that I think.
Speaker Change: The two things that maybe maybe you guys missed over on that was one the lack of space that is available in Bellevue right now I mean, it's not.
Pat: There's very few plus.
Pat: Class a space that are comparable to the class a space.
Pat: Between Bellevue and Seattle economically, though I think that's the big difference right I mean, Seattle's average price of class a space is $50 a foot and Bellevue is average space is about $65 a foot. So that economic difference is a big momentum shift for companies to want to make a move versus the $1 billion debt.
Pat: Employees are going to pay for.
Pat: A 5% head tax.
That the employer sorry, not employees the employers are going to pay for so I think that clearly is going to stand out also I think the number of people that are getting paid those dollars for four relative terms given the valuation shifts in the class a real estate I think thats indicative of <unk>.
Pat: Seattle being very supportive I mean, I concur with your analysis, South Lake Union, but Danny South Lake Union has been it's been very much attracted.
Pat: And the activity that we're seeing in pioneer square right now we've seen two large tenants.
Pat: <unk> earmarked to go to Bellevue recently changed direction.
Pat: Even with <unk>.
Pat: And now they're now Theyre looking specifically in Seattle at Pioneer square to move and their objectives are really because of rental differences in the quality of the real estate is available.
Pat: Lastly.
Pat: I would be remiss to say because I think you sort of just pointed out.
Pat: It is to us surprising that given the momentum shift in Seattle and given the opposition between the council the mayor virtually every CEO and every company like ours.
Pat: Supporting one b and not supporting <unk> that the unions did prevail at such a high percentage. So the momentum around the progressiveness in Seattle that we've been all talking about and really praising the city for did take a step back and I think we would concur with your analysis on that.
Pat: Great really appreciate that detail very helpful. Thanks.
Pat: Thanks Dylan.
Speaker Change: Your next question comes from the line of Rich Anderson with Wedbush You May proceed.
Rich Anderson: Hey, Thanks, good afternoon, so hurt on the.
Speaker Change: On the revolver Covenant adjustments I believe this is the second.
Time that you guys have made adjustments there correct me if I'm wrong.
Speaker Change: And I'm curious like.
Speaker Change: Where you're at now in terms of additional flexibility should you need it.
Speaker Change: Last $125 million of commitments as a result, I mean, what is the.
Speaker Change: Is this where we should expect things to stand for for forever or for the foreseeable future or is there additional flexibility that you can take advantage of it if needed.
Speaker Change: A year or two from now.
Rich Anderson: Hey, rich so I think we feel very comfortable with where the revolver is right now obviously things can change, but it sets us up very nicely to execute in all the different <unk>.
Capital needs, we need for the next at least 25 and into 'twenty six.
Rich Anderson: And once we do that we will then address the recast which will extend the revolver framed in a long time.
Rich Anderson: And may be extended depending on market conditions.
Rich Anderson: Okay.
Rich Anderson: But as this is just a balancing act between the commitments you lose them.
And the reduction of the covenants is that the right way to think of I apologize for the amateur sounding question.
Rich Anderson: But I just want to make sure I understand.
Rich Anderson: No for sure is this creating more flexibility and putting our our revolver on market terms.
That's really what we're doing and just trying to set up a good future for our coverage of the financings that we have coming up.
Speaker Change: Okay. Second question is on the right sizing of Coty.
Rich Anderson: You mentioned you stopped operations in New Orleans.
Rich Anderson: Curious is this kind of a first in a series of steps could there what's your flexibility to to do the same in other markets within the acuity platform I'm curious, how you're thinking about.
Rich Anderson: Future adjustments to acuity on a go forward basis. Thanks.
Rich Anderson: Yes.
Rich Anderson: Is the first.
Rich Anderson: We are looking at.
Rich Anderson: Some other states locations in warehouses.
Rich Anderson: <unk>.
Rich Anderson: <unk>.
Rich Anderson: There would be obviously payroll associated with some of that downsizing, so I kind of mentioned that.
Rich Anderson: So theres about $6 million more of cost saving initiatives that we're looking at that.
Rich Anderson: Pro forma to 'twenty four would improve NOI on an annualized basis and another $5 million. So that's kind of phase III.
Rich Anderson: Uh huh.
Rich Anderson: We will continue to monitor the market and we're always looking to be more efficient cut expenses where necessary but.
Rich Anderson: We'll let you know where we come out in the next phase of this thing when Theyre done.
Rich Anderson: And and continue to be flexible depending on how the market improves.
Rich Anderson: So those savings.
Rich Anderson: Involve exits like in the case of New Orleans.
Rich Anderson: Not really because new Orleans was if you recall, it's a small location that came with a much larger acquisition. It was the only space location.
Rich Anderson: That was outside of the state of California. So at this point, we're just looking at.
Rich Anderson: Isolated opportunities to eliminate a stage here or there.
Rich Anderson: It doesn't exit a market at this point.
Rich Anderson: I said that wrong I apologize, but and then in terms of I think the rental.
Rich Anderson: The lease payments and correct me, if I'm wrong $25 million ish, a quarter is that right.
Rich Anderson: How could that just down as time passes.
Rich Anderson: Well in that $75 million I mentioned of completed deals about $4 5 billion is directly related to.
Rich Anderson: Lease.
Rich Anderson: Eliminating leases.
Rich Anderson: And I would say roughly half the three of the $6 million I mentioned about deals in process is also eliminating studio related leases.
Rich Anderson: Okay, alright, thanks very much.
Rich Anderson: Yeah.
Speaker Change: Your next question is from the line of John Kim with BMO capital market.
Rich Anderson: We're seeing it.
Speaker Change: Thank you on that topic.
Rich Anderson: Cost reduction.
Rich Anderson: Some of your peers were more aggressive as far as stating a G&A reduction goals executing that as sort of the.
The first step.
Rich Anderson: In terms of getting their stock related is that something that you have considered.
Rich Anderson: Hey, John Yes. In fact, if you look at where we guided G&A last year at this time compared to where we guided this year I believe that's about a $7 million.
Rich Anderson: Sorry, $10 million decrease year over year, So we're definitely addressing that.
Rich Anderson: And that's reflected in the numbers you see so we recognize some of it in 'twenty 'twenty four and we'll have more than 25% and we're going to continue to look ways to do that.
Rich Anderson: And how much of that is corporate overhead versus Cody and.
Rich Anderson: Other divisions all of that is cover overhead all acuity savings up Mark.
Rich Anderson: Outlined related to the <unk> business and acuity NOI.
Rich Anderson: Okay got it thank you.
Rich Anderson: There are no further questions at this time I'd like to turn the call back to Victor Coleman, CEO and chairman for closing remarks.
Rich Anderson: Thanks, so much for participating on our call and we look forward to providing you more input as the quarter evolves.
Speaker Change: This concludes today's conference call you may now disconnect.
Rich Anderson: Goodbye.