Hudson Pacific Properties, Inc. Q4 FY2023 Earnings Call

Hello, everyone. Welcome to the Hudson Pacific Properties Fourth Quarter 2023 Earnings Conference Call. My name is Emily, and I will be coordinating your call today. I will now turn the call over to our host, Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Good morning, 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. Yesterday we filed our earnings release and supplemental on an 8-K with the SEC and both are now available on our website. The audio webcast of this call will be available for replay on our website. 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. Today Victor will discuss our 2023 accomplishments and 2024 priorities along with macro trends across our markets. Mark will provide detail on our office and studio operations and development. And Harout will review our financial results and 2024 outlooks. Thereafter we’ll be happy to take your questions. Victor?

Thanks, Laura. Good morning, everyone, and thanks for joining us. 2023 proved to be a challenging year as higher interest rates fueled recession fears and slowed the pace of office leasing across the country. Many industries, including tech, focused on cost-cutting in part through layoffs and real estate downsizing. And while the nationwide office leasing activity improved incrementally in the fourth quarter, it remained about 10% below the five-year quarterly average. Furthermore, a once-in-a-generation dual studio union strike effectively shut down the entertainment industry. In Los Angeles, 2023 film and TV production in aggregate fell approximately 40% compared to the prior year, led by scripted TV, which fell close to 70%. Against that backdrop and within our portfolio in many of the most impacted markets, our team has remained steadfast in our priorities to navigate these uncertain times. Aggressive leasing further strengthened our balance sheet in part through asset sales, executing our active development opportunities, as well as maintaining a leadership position in ESG. Specifically, we signed 1.7 million square feet of office leases in 2023, averaging over 420,000 square feet per quarter. We executed on over $1 billion of asset sales, which enhanced liquidity, allowing us to address our debt maturities until fourth quarter 2025 and improve our leverage metrics. We’re also on track to deliver our Sunset Glenoaks Studios and Washington 1000 development projects this quarter, and we received multiple ESG accolades. All of this we accomplished while quickly pivoting to streamline studio operations and maximize non-production revenue during a historic strike. The Fed’s January commentary did little to encourage a major shift in corporate sentiment around office leasing, but we continue to observe a variety of trends in our core industries and markets that are favorable. In the fourth quarter, tech leasing rebounded to approximately 15% of all activity, up from 10% in the fourth quarter last year, but still 5% to 10% below pre-pandemic levels. In aggregate, tech layoffs appear to be slowing. Tech employment still exceeds pre-pandemic levels and is relatively strong compared to other industries. AI is in its early innings and has been an important driver of growth, comprising around 40% of leasing activity in the San Francisco market in the fourth quarter. In the years to come, we expect to see second and third waves of AI growth as big tech builds out their own teams and non-tech companies implement AI services, both increasing the demand for office space. Venture funding levels for the full year 2023 were in line with 2020 and are still strong. Most of the funding that has disappeared versus peak years of 2021 and 2022 is for very large deals, say $250 million plus, whereas smaller deals are only 25% off peak. And while tech has embraced the hybrid model, research indicates companies that are working on innovative, evolving technologies have a much stronger preference to be in the office. These are small- to medium-sized companies requiring 30,000 square feet or less that are growing and looking for space to support that growth. This is our area of expertise in Silicon Valley and a trend we should benefit from in our leasing tours and pipeline. Turning to our studio segment, following SAG’s contract ratification in December, production companies have been slow to greenlight new productions. In January, production counts remained approximately 20% below 2021 and 2022. Based on the level of activity we’re seeing in real time; we now anticipate that production levels may not materially improve until the second half of the year. Media companies are still adjusting their business models through both revenue-generating and cost-saving measures, but original content remains integral to subscriber growth. As an example, Netflix, one of our largest tenants, recently reaffirmed $17 billion of content spend for the year, which is in line with their 2021 and 2022 pre-strike spend. On the transactions front, we successfully executed on three asset sales in the quarter, generating almost $890 million of gross proceeds. Most notable of these was our $700 million sale at approximately a 6% cap rate for our One Westside and Westside Two office redevelopment to UCLA, which we owned 7525 with Macerich. The fact that in the five years plus since acquiring this asset, we found not one but two high-quality, innovation-centric end users for this asset is a testament to our ability to identify and execute on unique opportunities and ultimately realize significant value for our shareholders. We’ll be working with UCLA on their build-out for certain elements of this project on a fee basis going forward. We also sold certain tranches of a loan secured by our Hollywood Media Portfolio for $146 million and a parcel of land in North San Jose for approximately $44 million. All of these proceeds served to significantly enhance our leverage and liquidity position. We also received additional ESG recognition in the fourth quarter. We were named an Office Americas Sector Leader by GRESB for the third year in a row and for a second year in a row, NAREIT’s Leader of the Light for Office and one of Newsweek’s America’s Most Responsible Companies. Our focus on ESG continues to further differentiate our platform and assets while providing value for our tenants, our employees, and our shareholders. At Hudson Pacific, we remain committed to our long-term strategy of optimizing our unique portfolio and platform to take advantage of future growth opportunities as they arise. In 2024, our priorities are fourfold: aggressive leasing within our office and studio portfolios, executing on opportunistic dispositions, successfully progressing our New York studio development, and further deleveraging and fortifying our balance sheet. In so doing, as the next wave of growth takes hold, we will be well-positioned to leverage our portfolio, expertise, and relationships to benefit our shareholders. Now I’m going to turn the call over to Mark.

Thanks, Victor. We signed 432,000 square feet of office leases in the fourth quarter, 75% of these were renewal leases and close to 65% of that activity was in the San Francisco Bay Area, including a 57,000 square foot renewal with GitHub at 275 Brannan. Our cash rents decreased just under 10% while GAAP rents decreased 2%, largely driven by two mid-size renewals in the San Francisco Bay Area, the expiring leases for which were signed at the top of the market. But for these two renewals, our cash rent spreads would have been flat. Our in-service office portfolio ended the year at 81.9% leased, with approximately 75-basis-point of 120-basis-point decrease between the third quarter and fourth quarter attributable to the sale of One Westside. We are still seeing tour demand accelerate. During the quarter, we had over 145 tours, representing 1.4 million square feet of requirements, up 4% since last quarter and 50% higher than this time last year. Our leasing pipeline also remains active, with deals and leases LOIs or proposals totaling 1.9 million square feet, slightly below last quarter, but still up almost 6% year-over-year. In 2022 and 2023, we had an atypically high number of office leases expiring, largely the result of short-term renewal leases signed during the pandemic. We also had several large 100,000 square foot plus leases rolling. This year, we have a more manageable 1.5 million square feet expiring, which is aligned with our long-term average. This includes only one tenant and known vacate of just over 100,000 square feet expiring. We currently have a variety of activity that is deals signed in leases, LOIs, proposals or discussions on approximately 40% of that space, which is relatively on track for this time of year. Importantly, while we cannot control how and when demand will return, we remain confident in our portfolio along with our team’s ability to drive tour activity and execute on leasing in an effort to expedite closing timelines. That said, we are not banking on any material improvements in the operating environment this year. Our occupancy will likely be under pressure, at least in the first three quarters of the year, with a potential to return to essentially flat occupancy by year-end. This is based on both our historical leasing trends and informed directly by our team’s detailed space-by-space, lease-by-lease assessment of our portfolio and what we believe should be achievable. Turning to our studios, on a 12-month basis, our in-service studios were 80.4% leased and our stages were 84.7% leased, with the change largely attributable to a single tenant giving back six stages in support space in the second and third quarters due to the strike. Our Quixote Studios and Stages were 29.3% and 30.1% leased, respectively, on a 12-month basis. In terms of our service business, in the fourth quarter, production resumed on certain of our long-term lease stages, which led to a 7% increase in combined lighting and grip, and other services revenue. We also grew our transportation revenue by approximately 10% from live events. Even as it’s taking time for shows to enter production, we have seen a pickup in demand. From December to January, we saw a 45% increase in studio tours and more than a doubling in stage-related inquiries. Utilization across our transportation assets also picked up incrementally in January. Looking out over the next 90 days, 45% of our available stages are booked, which is a new high-water mark since the strike, following a multi-cam reality show taking all three stages at Quixote New Orleans. As for our in-process developments, Sunset Glenoaks is effectively complete and we are awaiting Department of Water and Power sign-off required for Certificate of Occupancy, which we expect to have next month. We pushed out our completion date to the first quarter to reflect this updated timing. We are actively touring and engaging with an array of productions interested in either long-term or show-by-show leases. Construction continues at Sunset Pier 94, which will deliver by year-end 2025 and we are in discussions with multiple tenants interested in long-term multi-stage leases. As for our Washington 1000 development, we are finalizing FF&E and other marketing improvements as we await Certificate of Occupancy, which we also expect to receive next month. Large tenant demand in Seattle has yet to come back in a material way, but we are staying flexible and actively touring full-floor users. The building is stunning and we expect interest to accelerate once tenants can fully experience its impeccable design and fantastic indoor-outdoor amenities, especially vis-à-vis competitive product. And now I’ll turn the call over to Harout.

Thanks, Mark. Our fourth quarter 2023 revenue was $223.4 million, compared to $269.9 million in the fourth quarter of last year. This decline is mostly attributable to the sales of Skyway Landing, 604 Arizona, and 3401 Exposition, previously communicated tenant move-outs at 1455 Market and 10900-10950 Washington, as well as a reduction in studio services and other revenue due to the related union strikes. Our fourth quarter FFO, excluding specified items, was $19.6 million or $0.14 per diluted share, compared to $70.2 million or $0.49 per diluted share in the fourth quarter last year. Specified items for the fourth quarter 2023 consisted of a deferred tax asset write-off expense of $6.6 million or $0.05 per diluted share and transaction-related expenses of $0.2 million or $0.00 per diluted share. Prior year specified items consisted of transaction-related expenses of $3.6 million or $0.03 per diluted share. Our fourth quarter AFFO was $21.5 million or $0.15 per diluted share, compared to $62.1 million or $0.43 per diluted share in the fourth quarter last year. Our fourth quarter same-store cash NOI was $116.1 million, compared to $127.4 million in the fourth quarter last year, with a change mostly attributable to the large vacate at 1455 Market and mid-sized tenant move-outs in the San Francisco Peninsula and Silicon Valley, combined with a single tenant vacating spaces at Sunset Las Palmas during the strike. Note that our 2023 full year outlook assumed a 1.5% same-store cash NOI growth at the midpoint, including One Westside, which was sold five days prior to the end of the fourth quarter and where we experienced the full benefit of cash rents in 2023. Our full-year office same-store cash NOI growth would have been 3.8%. This also includes 170 basis points of growth attributable to the WeWork letters of credit, which we drew down in the fourth quarter and were not accounted for in our 2023 full-year guidance assumptions. Turning to the balance sheet, following our $482.2 million mortgage loan refinancing at Bentall Centre with Blackstone and the full repayment of our construction loan from the sale of One Westside and Westside Two, we have no maturities until November 2025. Further, we use the net proceeds from One Westside and Westside Two, as well as the sales of Cloud10 and the Hollywood Media Portfolio to repay outstanding amounts under our unsecured revolving credit facility. As a result, we improved our share of net debt to undepreciated book to 36.5% and our share of net debt to EBITDA at 8.9%. We finished the year with approximately $800 million in total liquidity comprised of approximately $100 million of cash and cash equivalents and $700 million of undrawn capacity under our unsecured revolving credit facility. The undrawn capacity of our credit facility reflects a reduction under commitments to $900 million in association with favorable adjustments made to our related definitions and covenant calculations this quarter. We also have another approximately $200 million of undrawn capacity under our Sunset Glenoaks and Sunset Pier 94 construction loan. Now I’ll discuss our 2024 outlook. As always, this outlook excludes the impact of any potential dispositions, acquisitions, financings, or capital markets activity or disruptions in studio operations related to an active strike. We’re providing a first quarter and initial full-year 2024 FFO outlook in the range of $0.15 per diluted share to $0.19 per diluted share and $1 per diluted share to $1.10 per diluted share, respectively. There are no specified items in connection with this guidance. We are introducing first quarter guidance to provide greater visibility around how our initial expectations for earnings and the early part of the year compare to our full-year projections. More specifically, while we are seeing steady improvement in production activity since SAG’s contract ratification in December, most of the current activity relates to returning shows rather than new productions, the acceleration of which is an important driver of demand for our Quixote Studios and Services. We expect new activity to continue to ramp up into the second half of the year, which should in turn contribute to steady improvement in our quarterly FFO outlook. Now will be how to take questions.

Thank you. Our first question today comes from Alexander Goldfarb with Piper Sandler. Please proceed.

Good morning everyone. I have two questions. First, many of us on the call have a solid understanding of real estate, but we're not as familiar with the movie business. As we review the guidance and the first quarter expectations, could you clarify the media walkthrough and the ramp? Also, Victor, regarding your comment about the studios taking longer, is there an expectation that the $100 million of NOI lost due to the strikes will be recuperated this year, or could the recovery extend to 2026 or later?

So let me start with a generic, Alex. So thanks for the questions. And then I’ll let Harout jump in on the first part. We’ll walk you up the ramp a little bit. So our prepared remarks sort of indicated in the last quarter that we assumed when the strike was ending in November and then it wasn’t ratified until December, the production was ceased and desisted until January. The current state of affairs right now is any production that was in filming is back up and running now. Anything that was greenlit now has to be greenlit again and the timeline has been delayed because writers had stopped writing. They couldn’t write. And so we assumed that we would have a back-end year and that’s been the assumption and how we’ve ramped you up to the second half of the year. It may be second quarter, late second quarter. We were very comfortable; it can be third quarter and fourth quarter, and seasonality is not going to play as much of an issue going forward on that basis. In terms of $100 million, we think we’re going to get there this year, but it could trickle through the first quarter. It’s clearly been January. The holds for the sound stages and the activity is there. The production is not even executed because the script writing and other aspects around that have not been completed. We do think there are multiple holds going to be executed for leasing and I think we’re pretty much comfortable that how we’ve looked at this analysis being, this quarter is going to be low relative to the fourth quarter, which will be high. That step up is exactly where we believe that it’s going to be. Harout, you want to walk through it?

Sure. So, Alex, good question on the impact on the media, on our guidance. So, the media, specifically, Quixote and the timing around the activity there is contributing about $0.15 of our FFO. So meaning had that normalized quicker, we’d have $0.15 more of FFO, and you can kind of see that in our result of activity for the remainder of the year. We’re going from roughly a midpoint of $0.17 in Q1 to an average of, I think, almost $0.30 the rest of the year if you back into the number and that basically is the biggest drivers. Quixote as a result of, again, the slow ramp-up of the studio business. I think if you normalize for that we’d be much more in line.

Okay. The second question is for Art. One of the positives we were looking forward to this year is that last year, Block had a significant impact. This year, the specifics of the lease exposure are much smaller, with the largest being around 90,000, then 80,000, and then it decreased sharply. So, the overall impact is much less. Given your comments about leasing and that occupancy might drop through the third quarter, tech leasing remains sluggish. Are you still confident that this year's lease exposure will not have the same large impacts we saw last year, or do you think that despite smaller tenants, we might encounter similar issues this year?

Alex, this is Mark. I want to elaborate on the softness we experienced in the early part of the year. I'll provide some details, and then Art can discuss the status of our upcoming expirations. Our expectations for the first half of the year indicate that we are likely to see lower occupancy levels compared to where we finished last year, but we anticipate steady improvements in the latter half. Specifically, regarding numbers, we have 24 expirations totaling about 107 million square feet by December 31, 2023. Assuming a conservative retention rate of 40%, which is lower than our typical performance, that translates to around 700,000 square feet. We have already executed 75,000 square feet of that, leaving us with approximately 1 million square feet to lease from existing availability. We have secured about 160,000 square feet, so we have around 840,000 square feet left to lease, which requires substantial effort to return to our year-end occupancy levels. As mentioned in our prepared remarks, the team is conducting in-depth assessments of every asset and available space as we approach year-end. We believe achieving that goal is feasible, which is why we expressed confidence in returning to our year-end 2023 occupancy by the end of this year.

And Alex, we currently have 40% of our processes inactive, which we feel good about. You mentioned small tenants, and that's correct. That number is expected to increase because our average tenant size is significantly below 10,000 square feet. These tenants are not engaging yet, so this doesn’t reflect their potential impact. Once they start engaging, the aggregate number from small tenants will significantly benefit us.

Thank you.

The next question comes from Michael Griffin with Citi. Please go ahead.

Sorry, sorry, I was on mute there. Question for Harout. Just kind of on the cash balance and sources and uses. If we look, I guess, relative to last quarter from this quarter, your cash balance went up about $25 million. But then I’m just trying to reconcile the $700 million that came in from the One Westside proceeds and then paying off the construction loans there gets me to about $500 million or so. Maybe you have net cash proceeds. So could you walk me through kind of where the remainder of that went and any commentary around that would be helpful?

Sure. Just to clarify, the $700 million isn't entirely ours; we have a 25% partner. After accounting for some closing costs, there's about $16 million that we expect to receive by the end of 2024. The remaining funds were initially used to pay down the construction loan, and our net proceeds went toward reducing our line of credit. Essentially, every additional dollar we had went to paying down that line of credit. We are also expecting another $16 million, which will be split between us and Macerich and should arrive at the end of 2024.

Gotcha. That’s helpful. And then maybe just the more broad question on your markets and distressed opportunities you’re seeing out there. Obviously, it seems like, one of the priorities is to pay down debt and get the balance sheet in better order. But if you do see distress out there, could you look to capitalize on any opportunities?

Yeah. Michael, listen, we were not seeing distress that is attracting us right now. We are evaluating price per pound and the cap rate movements in all of our markets. But there’s not a tremendous amount of deals out there that are truly the forefront deals that I guess Hudson would want to partake in right now. We’ve got our finger on the pulse clearly as to what’s in the marketplace. I would say the activity that you’re seeing that has been, obviously, given back to some of the lenders or certain sellers looking to sell assets. There’s more about it like an owner-user type aspect versus a value-add aspect right now. That being said, I think we’re going to see some opportunities that may be intriguing with existing partners on assets that we may have opportunities of taking out at some pretty good valuations for the company to move forward on if there’s upside in those assets. So we’re in the market, I would say, of course, everybody’s focused on San Francisco because of its depressed aspect, but there’s only been a few deals done there. There’s going to be opportunities in Seattle. There’s going to be opportunities in the Valley and there’s also going to be opportunities in Los Angeles.

Great. That’s it for me. Thanks for the time.

The next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks. Good morning. I was hoping you guys could give a little bit more color. I know you guys are done breaking out studio versus office same-store guidance, but I do think that coming into 2024, there was some optimism that the studio side could show some better results in the services business that could offset some headwinds on the office side. So, any sort of general color you could give on the contribution of each of those to the overall same-store number would be really helpful?

So, we made a decision a while ago to only provide same-store for the company overall instead of breaking it out between the two. But you can see that the preponderance of our business is the office side and that’s been the driver of our projection. There’s some growth, obviously, in the media side, but the driver for at least 2024 is office. But just as a reminder, the Quixote business, which is the operating business, is not in our same-store numbers. So if you add that in and we change the definition of same-store, I think, we’d be up 5% year-over-year. So just to give you some context there.

Okay. That’s helpful, Harout. Just a follow up on that to dig in on the office side. You do have a lot of vacancy at 1455 Market from the Block move out. Can you just give us an update on your thoughts around backfilling that space and what’s included in guidance, if anything?

Yeah. Let me start and I’m going to have Art dig in. We have right now in negotiations about 155,000 feet of deals. I think that could grow substantially with some existing negotiations and interest levels over the next 12 months to 24 months. The assets uniquely positioned because of the current build-out with Block and Uber. That space is so unique and large floor plates that seem to be where the interest level is. Clearly, the deals that we did with Block and Uber were at a different timeline. The market has shifted back to not necessarily where those levels were, but at least closer to where they were than where the rents would have been when they exited. So we still have some headroom there and I think we’re comfortable with some of the aspects on those deals that we’re looking at.

Yes, the majority of our vacancy is in 1455 for the reasons Victor mentioned. It's important to note that it comprises two buildings. The value is not just in the build-out, but also in the 90,000 square foot spaces on the podium and the 25,000 square foot spaces in the tower, which are very attractive to potential users. Currently, there are 150,000 square feet we are negotiating actively. I want to emphasize that we expect growth from these tenants to occur quite soon.

Great. That’s helpful. Last question for me. Can you talk about the impairment charge you guys took in the quarter and what that was driven by just the situation around that?

Yeah. Sure. We were required to evaluate our assets. It’s a GAAP evaluation, not a market evaluation, to be clear. It’s not an indication of fair value, but just kind of an indication of where there might be some impairment in terms of the valuation compared to our book balance. And so it primarily relates to a couple of assets that compared to the undiscounted cash flow don’t seem to be long-term value adds. So, I don’t know what I’ll say about that, but that’s it.

Okay. So just to be clear, this isn’t to suggest that you guys are looking to kind of dispose of any assets, but this was a revaluation that was triggered by something else.

Correct.

Okay. Thank you, guys.

Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi. This is Julien Blouin for Caitlin. Thanks for taking the question. I had a question on G&A. It looks like G&A is going to be a little bit higher year-over-year and certainly higher than we were expecting. I guess, last year, I think you mentioned, you were looking to reduce costs and re-evaluating G&A and the company has yet to reinstate the regular dividend to common shareholders. I guess what is driving G&A higher and are there any opportunities to lower it?

Let me address the second question first. Yes, there are opportunities to reduce it, and we will continuously assess the G&A to ensure it is appropriately sized. The year-over-year increase is mainly due to an incentive plan. While the expense appears high, it is closely tied to stock price and returns. This aligns management's interests with those of investors, as shares will not be issued unless specific targets are met. For accounting purposes, these shares are valued at their targets, which can make the figures look elevated year-over-year. However, this does not mean that we will actually incur those costs, as shares will not be issued if we do not meet those goals.

Harout and just mortgage last year.

Thank you, Mark. Just to remind you, in the previous year, we removed that portion of the incentive plan in 2023, which resulted in an increase from 2023 to 2024. When you compare G&A from 2024 to 2022, the increase isn’t as significant. It’s a small increase, but that’s what led to the year-over-year increase. There’s a difference in the incentive plan between 2023 and 2024.

Got it. Okay. That’s helpful. And then maybe one quick one on the covenants. I guess the debt service coverage and adjusted EBITDA covenants tightened again in the fourth quarter. I know some of the others got sort of amendments and were helped by the flexibility received. I guess, how do you expect those specific covenants to trend in the coming quarters and will an improvement in the studio NOI eventually start to help these metrics?

Certainly. I don't want to overlook the improvement we've seen. Last quarter, there was significant concern regarding the ratio of unsecured debt to unencumbered asset value, which was at 57.7%. This quarter, it has improved to 41.8%. It's important to note that while some of this improvement can be attributed to changes in definitions, much of it results from our management's efforts to reduce debt and pay off liabilities through asset sales. This is crucial; it's not solely about definitional changes related to a line of credit. Regarding your questions about EBITDA and fixed charges, those figures are trailing indicators. Currently, we're still facing higher interest expenses before the debts are paid down. Once we're past that, we expect to see a positive shift. Additionally, we anticipate that the studio business will contribute to this improvement. While I’m not suggesting we’ll immediately reach 2.6% again, our projections indicate that there will be improvements throughout the year.

Okay. Great. That’s really helpful. Thank you.

The next question comes from John Kim with BMO Capital Markets. Please go ahead.

Thank you. On the studio and service ramp in the second half of the year, getting you to about $0.30 FFO per quarter. Does it improve in 2025 as you realize some of those synergies in Quixote and you get the full benefit of Glenoaks, or is $0.30 maximum?

Oh! No, no. We expect. Sorry, John. So just to be clear, it’s not, I just want to make sure I’m not misconstruing. It’s not $0.30 for the media business. It was $0.30 overall based on the math, okay? But the media business, we expect it to continue to improve year-over-year. So we definitely think there’ll be improvement, not only from the synergies of the business, but also just the overall business itself as it continues to get back to normalization. So 2024, again, because Q1 is a much lower year, just that alone is going to increase in 2025 without everything else that we just mentioned.

Okay. So getting to $0.30 in the third quarter and fourth quarter would imply $0.28 FFO in the second quarter. What are the chances that that disappoints just given the slower ramp-up of production?

It’s really hard to know. We just finished the first quarter, so commenting on the second quarter and thinking it might disappoint is a bit premature. I don’t believe we would have provided the guidance we did if we expected it to disappoint. Therefore, we feel pretty comfortable with those numbers, and that’s all I can say.

Okay. My next question is on leasing activity. I think, Mark mentioned, two-thirds of that was in the Bay Area this past quarter, but then also tour demand has accelerated. I was wondering if you could break down that tour activity among your major markets: LA, Seattle, San Francisco, and Silicon Valley.

Sure. This is Art. Tour activity is closely linked to our active pipeline. I would estimate that 65% of the $1.9 million is evenly distributed across the Bay Area, meaning about $1.2 million is located there. The team is working hard to push all of these through the pipeline. The pace at which we can finalize these deals will be crucial. Regarding the earlier part of your question about tour activity, it serves as an indicator for everything else. We've seen a 6% quarter-over-quarter increase in both the number of tours and the square footage, which is encouraging for the upcoming quarters. In terms of distribution, Seattle accounts for about 20% to 25%, while the rest pertains to LA, where we have minimal vacancy or expirations, along with Vancouver.

I may have missed this, but what was the 6%? I thought the activity was 50% higher.

The tour activity.

The tour activity was 6% higher?

Yeah. Year-over-year, it’s 50% higher, right, 6% sequentially, yeah.

The next question comes from Rich Anderson with Wedbush. Please go ahead.

Hey. Good morning. On the topic of sort of green lighting new production and understanding, it’s going to take some time because the writers were on strike as well. To what degree did that take you off guard like it did the street, apparently, in terms of how the cadence of your quarterly guidance, your quarterly results that we’re envisioning for 2024? But a bigger question is, does this suggest that there could be like this pent-up option or activity, I should say, in the back half of the year? You don’t want to guide to that, but maybe there’s a real chance to have a 2x type of catch-up in your studio business on the other side of all this. Is that something that’s at least possible?

Well, let me sort of make a sort of a general comment. I mean, once the stages are leased, they’re leased, right? So, you’re going to have the revenue stream on the stages whenever they’re fully leased. In terms of the ancillary revenue in the Quixote business, yeah, I mean, still on the market share for our transportation business, we still have 70% of the market share. So, when that industry is fully up and running, we’re going to benefit from it. I don’t know if, you know, Rich, I don’t know if it took us off guard. I mean, listen, what took us off guard was the fact is that the industry stopped and it never started even when the strike was over. It didn’t start until January because it wasn’t ratified until December. They didn’t work in December. So, there is a ramp-up period. We’ve always said that that ramp-up period should be fairly aggressive and we’re going to benefit from it. I guess what surprised us was really the green lighting of shows was truly the writers didn’t write. I mean, as opposed to if you look back at COVID, there was communication and writing and when they got to the point that they were going to produce content, it started right away. This is just taking time. As we mentioned in our pair of remarks, the majority of our tenants in the industry have still maintained a budget of production content that is going to be for this year. It will be back-ended, but they’re not coming off of their numbers and we don’t think it’s going to be the case for 2025 or going forward. So, I think, we’re pleasantly looking for production to start and once that ramp-up starts, it should continue.

Okay. And then second question is on 2025. Mark, you said, we’re back to 1.5 million square feet for 2024 in terms of office expirations, but it pops back up a little bit in 2025 and approaching 2 million square feet and 18% of the portfolio. Do you guys see anything there that is sort of on your radar screen, sort of like a watch list further out or are things feeling a little bit more stable with a longer-term view?

We will collaborate on this with Art. As you know, we have Uber scheduled for early 2025 at 325,000 feet. Victor mentioned our activities at 1455 Market, which will help manage the expiration and might even give us a head start in that area. After that, the expirations in 2025 will start to decrease. We also have Google for 180 at Foothill, which we are monitoring. I don’t want to delve too much into Art’s insights, but as we progress through the year, the size of the expirations will at least lessen, and there is some movement happening on that front. Art, would you like to add anything?

Yeah. To put a finer point on what Mark said about 1455, yeah, some of the space we have actively in negotiation and the deals behind that or the square footage behind that are both on the Uber and the Squarespace, so looking at both of them concurrently. And then beyond that, there’s some mid-sized deals that we’re in negotiations on that are perhaps right-sizing, but nothing that’s alarming beyond the first kind of couple of deals that Mark mentioned.

Okay. Fair enough. Thanks.

The next question comes from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good afternoon, everybody. Victor, in the press release and your prepared remarks, you noted your commitment to deleverage. Can you provide your thoughts on near-term levers to progress towards that and maybe what parts of the portfolio you consider untouchable when it comes to raising capital to repay debt?

Great question. First of all, we have a few deals right now that we’ve got some reverse inquiries on. We’re currently not marketing any asset to deleverage the portfolio, but we have at least three transactions that have come to us and two of which are by users. I think we maintain that we want to look at our B assets in the portfolio and eventually get rid of them at the right price and the right terms and the right conditions. There is no fire sale going on because we did a phenomenal job in the $1 billion last year that sort of re-wrote the ship from the capital market standpoint. But we do have a couple of assets that I think will fall into the category of disposition for the first half of this year and potentially the ones that are, as you look at it, like off the table, there really is only one asset that we currently have in the portfolio that would be considered a Class A asset that we’ve got a reverse inquiry on that we would consider. The rest of them are not things that we can’t live without, I guess I would put it that way.

Appreciate those thoughts. Thanks, Victor. And then maybe moving over to San Francisco, the GitHub renewal was a welcome surprise, especially given CEO’s prior plans to go fully remote. Can you share any insights you may have into their change in real estate strategy and maybe whether there’s any read-through for other tech tenants in your portfolio?

On a general note, many of these tenants have reassessed their work-from-home policies. As mentioned in the prepared remarks, we feel confident that we are nearing the end of this situation. Frankly, we are somewhat surprised at how long it has taken, and the West Coast appears to be slower in this regard, which we are all experiencing daily. You all are aware of my opinions on this matter. That said, there seems to be an overall increase in demand for in-person interaction, onboarding, and company culture, with GitHub serving as a prime example. They recognized their need for additional space, although not all of it, but they did require some. We hope to see similar trends with other companies we are currently engaging with, who we initially thought were headed in a different direction but have now returned seeking lease renewals. Overall, it appears that most tech tenants have made their choices regarding their strategies and how they plan to implement them.

That’s right. Tom, it was a win all around for the reasons Victor mentioned, and we are seeing that with the other tenants. They’re this idea about right sizing and really discovery period to figure out. They figure out now people are coming back. They figured out we need space. Now they’re just trying to figure out how much space, and this is a great example of that.

And just a quick follow-up on that. Is this, and again, I know each lease is different, each tenant is different. But is this a trend you’re seeing more of in specific markets or is the kind of rethinking and setting of the real estate strategy pretty consistent across your portfolio?

I believe this decision-making is consistent across the entire organization. It begins with cost savings and bringing employees back, which has been quite challenging, but we are overcoming that hurdle. Now, we are observing this trend everywhere.

Can you provide some context on what the studio achieved in 2023 and how much of that is included in the guidance for 2024 compared to the ultimate figure of over 120? Additionally, regarding the same-store NOI, I'm seeking clarity on the down 12. What are the contributing factors? How much can we attribute to the major lease expirations, and what other elements should we consider in relation to this significant number?

Sure. I just want to make sure I understand the 120. I’m guessing that’s the media number, that would disclose that the consolidated number that also includes the Quixote activity, not just the same-store. So that Quixote activity, as I said previously, is not in the same-store number. So the 14%, sorry, the number that we disclosed for the same-store is without Quixote. So if you factor that in, I think, I mentioned earlier, would be roughly at a 5% year-over-year increase, which is part of the whole activity for the company. In terms of the drivers year-over-year on the office side. I mean, a big one, obviously, is Square bringing that number down and then WeWork giving back some space at a couple of our buildings. And we also, as I mentioned in my remarks, we received some security deposit and impact in 2023. That’s not reoccurring in 2024. So, impacting the numbers year over year.

Got it. Okay. And then, my last question would be about the disposition activity. How are you all approaching that? Are there any other assets in the market? What is the best way for us to think about that? Thanks.

Well, as usual, I mean, we’re not going to tell you what we’re disposing of. So, we’re not going to do it until we make the announcement of those assets. But I think I just covered that in the last question. The ones we’re looking at right now are all reverse inquiries, and there’s at least three of them, and there may be more.

Good morning. Thanks for answering the question. I just want to go back to the studio side, and again, we’re all trying to just ramp up and understand the kind of the variable non-variable piece of it. But is the tour activity that you mentioned being up 40%, 45%? Is that a good leading indicator? Like what are the indicators you are monitoring to kind of realize that, hey, the ramp is real or likely and especially the new production as opposed to stuff that just stopped?

So, Vikram, I’ll start with that. Listen, the activity is holds, right? I mean, holds on space is the first way, and as a result, they’re reaching out for vacant spaces on the sound stage side. Once they get picked up, then the equipment starts going out the door from that point on. And as I mentioned earlier, anything that was in production is now back in production. So it’s all sort of happening at the same time. Mark?

Yeah. Just to add a little more detail, that’s exactly what we’re monitoring. As Victor has now responded to this three or four times at this point. Everything that was.

Hello? Hello?

Apologies, everyone. It appears that the speakers have disconnected. Please be patient and please wait. Please standby…

No. We’re here. We are here. Hello, operator. We’re here.

Yeah. This is Vikram. I’m sorry. I don’t know where you got cut off, but I don’t think anyone could hear you.

Yeah. Sorry, Vikram.

Oh! We were just adding a little bit of color in response to your question. We are watching where TV, television, and film show accounts are, and I don’t know if you heard this, but the good news is we are back above where we were at this time last year. But we are still below 2021 and 2022 levels under 21% by say 18% by 25% under 22% by 18%. 2021 was an exceptionally high year because of making up for the pandemic. In any event, as we project out by show count for LA, which is where the lion’s share of our Quixote business is and our stages are, we do anticipate show count to be at a normalized level at or close to 2021 or 2022 levels sometimes towards the end of the second quarter, early third quarter. That’s one of the key barometers that we’re keeping an eye on as we think about the recovery in the studio business.

Got it. Okay. That’s helpful context. Just on the office side, you mentioned the occupancy is under pressure. The first, I think, three quarters when you expect to ramp back up. I’m just wondering, I think you said 40% on the expiration, but in the pipeline, or perhaps, these are like leases in LOI or just stuff that sign but not commence. Like what gives you the insight into sort of the down 3 and then up in the fourth quarter? That seems very specific.

Our modeling process is very detailed and specific. It involves input from each member of our leasing team regarding their assigned assets, analyzing the likelihood of lease renewals on a suite-by-suite basis. When we evaluate the results at the end of a quarter, they are based on precise inputs rather than vague estimates. The analysis indicates that we experienced some softness in occupancy during the first half of the year, followed by a steady recovery in the third and fourth quarters.

Okay.

I don’t know what else…

I can follow up. I was just wondering whether it’s the lease rate or the occupancy because if it is occupancy, it must have been your co-designing…

Yes. It is. I was being very specific about occupancy just because that’s what’s informing guidance.

Okay. Got it. Okay. And then just last one, Harout, could you clarify? I was just confused on what changed in the Stockholm plan that was not there last year and is there this year? I was wondering, like, have the metrics on which you award stock changed or something else? I was just confused, like you said, something was not there last year, but it is this year.

Yeah. So last year we didn’t have our part of the Stockholm plan that is driven by share metrics, if you will, like share stock price metrics that did not exist last year.

Can I just reiterate that the senior management team voluntarily forfeited a portion of our long-term incentive program, which accounts for one of the year-over-year differences.

Okay. That’s helpful. That’s clearly about. Thanks so much.

Our final question today comes from Dylan Burzinski with Green Street. Dylan, please go ahead.

Yeah. Thanks. Thanks for taking the question, guys. Just one quick one, so given everything that’s going on across your markets in terms of just vacancies and steadily availability continuing to move higher here. I guess, do you guys expect to be able to maintain base rents in this environment or can we finally start to see pressure on this front?

Yeah. I think that’s a really good point. Right now, we did have a slight mark-to-market last year and the year before on an upward mobility. I think we’re looking at being flat right now to slightly down. The interesting thing is, Dylan, we’re not seeing the concessions add in the same way from a free rent change and/or increase in any CapEx or TI’s. That being said, I think we are comfortable at our rent matrices that we’re going out with, and we’re not getting pushed around a ton on that, at least with the deals that are in negotiations right now. We’re going to continue to monitor that, but it’s not something that’s surprising us to say, oh, we’re coming off some big numbers or we’re coming off current rent numbers. It’s always going to be based upon the availability and the quality of the space, and we still maintain that our quality is high enough to sort of absorb the kind of rental rate structure that we’re currently at.

Perfect. Thanks for that color. Have a good going guys.

Thank you, Dylan. Sorry that we went over and I apologize for those who we couldn’t get to the questions, too. But I know lots of you will be reaching out to the team. Thanks so much, Operator. Have a good day.

Good-bye.