Earnings Call Transcript - HPP Q1 2025

Operator, Operator

Good afternoon. My name is Alex, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Hudson Pacific Properties First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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, Executive Vice President, Investor Relations and Marketing

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. This afternoon, we filed our earnings release and supplemental on an 8-K 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. 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 a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss industry and market trends. Mark will provide an update on our office and studio operations and development, and Harout will review our financial results and 2025 outlook. Thereafter, we'll be happy to take your questions. Victor?

Victor Coleman, CEO and Chairman

Thank you, Laura. Good afternoon, everyone, and welcome to our first quarter call. Our team continues to execute across the business, staying cognizant of the state of our markets, working to maximize flexibility, lease space, and grow occupancy. We are closely monitoring the potential effects of tariffs on our core industries, and we continue to see signs of improving or stabilization of our fundamentals. We remain optimistic that the tariff negotiations will start to settle in the coming months and that pro-growth policies will phase in. Additionally, we're encouraged that the federal government is actively facilitating billions of additional investment into AI and implementing policies to redirect content production back to the United States, which could be a positive for Hudson Pacific. One of the other catalysts we continue to monitor is venture investing, which in the first quarter set a new high watermark with deal value more than doubling year-over-year to $92 billion, which is also 92% above the 10-year average. The Bay Area squarely remains the epicenter of U.S. innovation, receiving nearly 70% of the funding or $59 billion, the most in a decade and more than a four-fold year-over-year increase. AI alone received 70% of the funding, including the five largest investments, with all but one of those companies headquartered in the Bay Area. The Stargate Project, a U.S. based multinational artificial intelligence joint venture created by Oracle, SoftBank, and OpenAI will invest $500 billion in AI infrastructure and jobs over the next five years with $100 billion deployed immediately. AI should remain a bright spot for tech and, by extension, for AI office leasing, which totaled over 0.5 million square feet in San Francisco alone in the first quarter, up significantly year-over-year. Clearly, San Francisco is leading the West Coast recovery, both in terms of tech leasing and the benefits of more moderate pro-business leadership. The first quarter marked the second straight quarter of positive net absorption, and gross leasing was just under 3 million square feet. Beyond continued AI investment, the election of Mayor Lurie has been a game changer for the city. With his focus on public safety, camping cleanup, drug enforcement, and an array of other initiatives to promote economic activity. Case in point, we welcomed 2.5 million visitors to our Ferry Building in the first quarter alone, our best first quarter on record, and a 23% year-over-year increase. Another positive with the city's new financial and zoning incentives for residential conversions is that we are reevaluating the adaptive reuse of some of our office assets and expect to have one or more good candidates in the future. Downtown Seattle too is benefiting from political tailwinds, while direct vacancy increased 90 basis points in the quarter, gross leasing increased 15% to the highest level in a year. The election of Mayor Harrell and a more moderate city council has significantly reduced crime and drug use and accelerated the return to office for both public and private sector employees alike. Nowhere has this been more evident than in Pioneer Square, where year-over-year, our leasing activity, pipeline, and tours have notably increased. We have successfully grown occupancy to 93% at 411 First from 78% in the first quarter last year, and we have another 225,000 square feet in late-stage deals in our pipeline for the other assets in that market. We're also working closely with city officials to expedite the lease-up of Washington 1000, including a potential code amendment to allow building top signage and a partnership with the adjacent convention center to activate our retail spaces. The devastating fires and increasing budget woes made for a challenging quarter for Los Angeles. Fortunately, our Los Angeles portfolio is currently 97% leased, largely under long-term leases. On the studio side, average shows in production remained in the mid-80s. This year, California has seen new production starts accelerate more than other North American and UK markets, but the recovery has favored feature films over episodic TV shows, which is critical to the Los Angeles production. That said, starting last quarter, we noted a higher percentage of inquiries coming from quality productions looking for multi-stage and multi-month or year leases with second and third quarter start dates. Importantly, this trend continues. Our leasing pipeline is as strong as it's been in the last two years. And thus far, as Mark will discuss, our sales team has been very successful at capturing an outsized share of those leases. The reality is that the gravity of Los Angeles challenges finally seems to have created some urgency for local officials to figure out what needs to happen for the city to thrive again. A new district attorney has been a bright spot for public safety, and despite significant budget cuts elsewhere, both the police and fire departments received funding increases. The city is reassessing measure ULA, which has severely impaired multifamily development, and last week passed the motion to reduce onerous regulations, permitting unnecessary fees, and inconsistent safety requirements to make it easier and cheaper to film in Los Angeles. At the state level, the governor's budget proposal is on track to nearly double California's film and tax credit to $750 million, to be voted on and enacted prior to July 1. Two companion bills have been introduced to enhance tax credits' appeal by raising the qualified expense cap, making credits transferable, and expanding eligible productions to include things like episodic TV shows, which, as I mentioned, are so beneficial to the Los Angeles production marketplace. And while it's too early to know precisely what federal incentives will look like, it's extremely positive to see Washington D.C. now fully engaged with Hollywood and well-positioned to receive the net benefit going forward. Finally, we continue to make good progress on non-strategic asset sales to generate liquidity and reduce leverage. In the first quarter, we closed on the previously announced Foothill Research Center and Maxwell dispositions for a combined total of $69 million, with the net proceeds used to pay down our revolver. Subsequent to the quarter, 625 2nd in San Francisco went under contract for sale for $28 million, with closing expected in the second quarter of this year. Collectively, these three transactions have generated an additional $97 million of liquidity, and we continue to work on another approximately $125 million to $150 million of dispositions, of which we'll provide additional updates in the coming quarters. And now I'm going to turn the call over to Mark.

Mark Lammas, President

Thanks, Victor. We signed 630,000 square feet of new and renewal leases in the first quarter, our highest quarterly leasing activity since the second quarter of 2022. New leasing accounted for 66% of activity and included execution of our second lease with the City and County of San Francisco at 1455 Market for 232,000 square feet over 20 years. Our GAAP rents increased 4.8%, and cash rents decreased 13.6%. Excluding our large lease with the City and County at 1455 Market, a portion of which backfills space previously leased at peak market rents, cash rents would have decreased 8.8%, roughly in line sequentially. Our first quarter trailing 12-month blended net effective rents were 4% higher year-over-year and only 7% lower than pre-pandemic. Net effective rents on new deals alone were up 22% year-over-year and only 4% below pre-pandemic on a trailing 12-month basis. Our trailing 12-month blended lease term was up 96% year-over-year and 54% versus pre-pandemic. Even after removing our two roughly 20-year leases with the City and County of San Francisco, our trailing 12-month lease term was still up 16% year-over-year. Regarding tenant improvements (TIs), we have seen no impact from tariffs to date. Our exposure to TI-related price increases should be minimal as most of our materials are U.S. supplied or could easily be switched to a U.S. supplier. Furthermore, we have been extremely active with our Vacant Suite Prep program in recent years with most of the front and back of the house improvements behind us. Our in-service office properties were 76.5% leased as of the end of the first quarter compared to 78.9% at the end of the fourth quarter last year. A total of 170 basis points of that change, after accounting for square footage backfilled with a portion of the City and County lease, is attributable to a significant known vacate at 1455 Market that we have discussed for some time. During the first quarter, unique tour activity at our assets meaningfully accelerated, up 18% to 1.7 million square feet. The average requirement size also increased by 18% to 13,000 square feet, a new post-pandemic high. Even after signing over 600,000 square feet, our leasing pipeline increased 5% to 2.1 million square feet, with an average requirement size of 19,000 square feet. This included 716,000 square feet of late-stage deals in leases or letters of intent (LOIs), a significant portion of which has subsequently been signed. We have 50% coverage, that is deals in leases, LOIs or proposals on our remaining 1 million square feet of 2025 expirations, 48% of which are in the second quarter alone. We have 76% coverage on our four remaining 2025 expirations over 50,000 square feet, which collectively total 397,000 square feet. While our elevated expirations in the first half of the year have impacted occupancy, starting in the third quarter, we expect occupancy will begin to stabilize and grow thereafter. This is because from the third quarter of 2025 through the end of 2026, we have only 225,000 square feet expiring on average each quarter, which favorably compares to our average trailing four-quarter leasing activity of 530,000 square feet, 62% of which is comprised of new deals. Turning to our studios. As Victor noted, our pipeline remains robust, and our team continues to capture an outsized share of production in the market. At present, 46 of our 53 film and TV stages, or 88% of the related square footage, are either leased or in contract compared to 35 stages, or 69% of the related square footage, last quarter. As examples of this strong activity, we are in contract on two longer-term multi-stage leases, one a long-running soap opera and another a returning writer-producer with multiple successful shows. It is also worth highlighting that stages leased or in contract at Sunset Las Palmas since our last call are expected to bring occupancy at that asset to the highest level since early 2023. This strong activity is also reflected in the sequential improvement of our trailing 12-month studio lease percentages. In the first quarter, our in-service stages were 78.7% leased, or 190 basis points higher on additional occupancy again at Sunset Las Palmas. Quixote stages were 43.4% leased or 220 basis points higher after adjusting for the previously mentioned lease terminations, due to increased occupancy at Quixote North Valley as well as on our commercial stages at Quixote Griffith Park in West Hollywood. First quarter studio revenues were $33.2 million, or $2.2 million lower, primarily due to lower Quixote studio ancillary and transportation revenues related to production pauses during the fires. Studio expenses were up $3 million due to a $5.9 million termination fee associated with certain cost reduction measures at Quixote. But for that one-time fee, our operating expenses would have decreased by $2.9 million, reflecting the benefit of completed cost reduction initiatives. To that point, since our February call, we have proactively terminated certain leases and negotiated rent reductions that bring our total run rate savings to $14.2 million on an annualized basis or $13.6 million at share. We remain committed to achieving cost efficiencies to accelerate Quixote's return to profitability and look forward to providing updates on these ongoing efforts. Regarding development, Sunset Pier 94 Studios is on track for year-end delivery with exterior components nearing completion and interior construction well underway. We expect no material impact from tariffs on cost for this project given that the vast majority of materials are already on site or paid for and in off-site U.S. locations. We are in discussions with potential long-term tenants interested in one or more stages and are preparing to launch show-by-show leasing efforts this summer. Studio leasing has largely moved to a show-by-show model and typically occurs two to three months prior to lease commencement. Given we are targeting the first quarter of 2026 for certificate of occupancy and productions must have certainty around space availability prior to committing primarily due to talent schedules, we would expect show-by-show leasing to begin in earnest in the fourth quarter of this year. Finally, regarding the lease-up of Washington 1000, we remain in discussions with multiple large tenants. During the first quarter, we saw an increase in tour activity from multi-floor tenants looking to upgrade their locations. The competitive landscape continues to improve, with Class A direct and large block sublease space being cleared from the inventory. Bellevue has only a few remaining Class A options over 100,000 square feet. Seattle's Class A sublease supply has been reduced from 2 million square feet to less than 300,000 square feet, none of which offer contiguous space of 100,000 square feet or greater. Washington 1000 is the only new construction alternative in Seattle, and with no further supply coming online in the near and midterm, the project remains well-positioned to capture large trophy class users. And with that, I'll turn the call over to Harout.

Harout Diramerian, CFO

Thanks, Mark. Our first quarter 2025 revenue was $198.5 million compared to $214 million in the first quarter of last year. The change is due to both asset sales and lower occupancy within our office portfolio. Our first quarter FFO, excluding specified items, was $12.9 million or $0.09 per diluted share compared to $24.2 million or $0.17 per diluted share a year ago. Specified items for the first quarter totaled $0.07 per diluted share, consisting of one-time Quixote cost-cutting expenses of $0.05 per diluted share, a loss on early extinguishment of our Element LA debt of $0.01 per diluted share, and a non-cash derivative fair value adjustment of $0.00 per diluted share. By comparison, specified items for the first quarter of 2024 consisted of transaction-related expenses of $0.01 per diluted share. Excluding these specified items, the year-over-year change in FFO was mostly attributable to factors affecting revenue. Our first quarter same-store cash NOI was $93.2 million compared to $103.4 million in the first quarter of last year, mostly due to lower office occupancy. Turning to our balance sheet. In the first quarter, we completed a CMBS financing for a portfolio of six office properties for $475 million and used the net proceeds to fully repay our $168 million loan secured by Element L.A., with the remainder paying down amounts outstanding on our credit facility and for general corporate purposes. After successfully hedging the entire financing shortly following the transaction, the loan now bears an all-in rate of 7.14%, or 50 basis points below corresponding rates at the time of closing. As one of the largest office-backed CMBS transactions completed this year, this was a significant win for our team. As of the end of the first quarter, we had $838.5 million of liquidity, comprised of $86.5 million of unrestricted cash and cash equivalents, and $702 million of undrawn capacity under the unsecured revolving credit facility. We also had another $31.4 million at HPP's share of undrawn capacity under Sunset Pier 94 Studios construction loan. We have routinely discussed various paths to enhance our balance sheet and maturity schedules, including the repayment of our unsecured notes. Subsequent to the quarter, we tendered to repay all $465 million outstanding under our Series B, C, and D private placement notes. To date, we have repaid $254 million of the Series B notes and $50 million of the Series C notes, with the balance to be repaid on or before May 9. We are also now in the process of refinancing our only other 2025 maturity from loans secured by 1918 8th, which is fully leased to a leading investment-grade tech tenant through 2030. Those conversations have been constructive as expected, and we look forward to providing additional updates. Turning to outlook, for the second quarter, we expect FFO per diluted share to range from $0.03 to $0.07 per diluted share. Compared to the first quarter FFO of $0.09 per diluted share based on the midpoint of our second quarter guidance, we anticipate office NOI to be approximately $0.05 lower due to the full impact of first quarter leasing expirations and, to a lesser extent, recent and pending asset sales. We expect the full quarter impact of higher interest expense from the six asset CMBS transaction to be approximately $0.04, and lower office NOI and the higher interest expense will be partially offset by $0.03 of higher combined studio NOI and $0.02 of lower G&A expense. Regarding our full-year guidance metrics, most amounts remain unchanged from those provided last quarter, with the only exceptions being an increase to our full-year interest expense of $12 million stemming from the recent CMBS financing and a decrease to our full-year G&A expense of $3 million. Our full-year weighted average shares outstanding is also expected to be approximately $500,000 higher. Lastly, compared to our initial 2024 G&A guidance, our previously announced 2025 G&A guidance reflected a projected savings of approximately $10 million. We continue to implement further cost-cutting measures, resulting in the $3 million additional G&A reduction noted earlier. Apart from 625 2nd, which was held for sale in the first quarter and the early repayment of the private placement notes, our outlook excludes the impact of any potential dispositions, acquisitions, financings, and/or capital markets activity. Now, we will be happy to take your questions.

Operator, Operator

Thank you. Our first question for today comes from Seth Bergey of Citi. Your line is now open. Please go ahead.

Seth Bergey, Analyst

Hi. Thanks for taking my question. I just wondered if you could comment a little bit on the cash rent spreads that you achieved in the quarter. Were those in line with expectations? Any color you can provide on concessions and how those are trending? Thanks.

Mark Lammas, President

This is Mark. As mentioned in our prepared remarks, the impact of the city deal at 1455 was significant. Adjusted for that, we would have reported a negative 8.8 instead of the 13.6 reflected in the supplemental. This had a considerable effect. The primary factor here is the expiration of over 90,000 square feet of space from Uber and some space from Bank of America, particularly the Uber space which was at peak market rents from the last cycle. So this aligns with our expectations. A clear indicator of how the overall economics are performing is that our net effective rents are holding up quite well. As noted in our prepared remarks, year-over-year, on a trailing 12-month basis, net effective rents are up by 4% and only 7% lower than the trailing 12 months pre-pandemic. We could analyze this in multiple ways, but overall, it is clear that rents and lease economics have remained very strong, especially compared to pre-pandemic levels.

Arthur Suazo, EVP of Leasing

Yes. To clarify that, on a per square foot per year basis, tenant improvements and commissions were down by almost $1, specifically about $0.97.

Seth Bergey, Analyst

Thanks. That's helpful. And I guess just on the recent news with tariffs, kind of are you seeing that impact the studio business or any change in behaviors from tenants if there are tariffs implemented on foreign films?

Victor Coleman, CEO and Chairman

Well, first of all, I think on a global basis, it's still early to tell what the impact of tariffs will be. As they keep moving around, as a company, we're acutely aware of the downside, which obviously could be recession or even potentially stagflation. As a result, we're preparing ourselves for the negative or positive flip side on that and watching to see what tenants are signing versus not. And, on a global basis, we really have seen no impact of loss of tenants or interest level in any assets up and down the West Coast. In terms of the tariff news on the federal level, for good or for bad, it's an awareness that I think we're very happy that it's got to the federal level. The state has proposed a $750 million tax credit that is expected to be approved hopefully by July 1. So that, along with either a tariff or some form of federal support for the studio industry, only makes it I think a more heightened awareness aspect of the need for additional support, and we feel that it will be a positive at the end of the day. It may come in the form of a federal relief fund on taxes overall to benefit production in the United States, which we would welcome greatly.

Seth Bergey, Analyst

Great. Thanks.

Operator, Operator

Thank you. Our next question comes from John Kim of BMO. Your line is now open. Please go ahead.

John Kim, Analyst

Thank you. Can you just discuss the paydown of the private placement notes? Only the Series B is due this year, and presumably, you're using the revolver to prepay this and the remaining $211 million that's outstanding. If that's the case, how do you plan to adjust the revolver going forward?

Harout Diramerian, CFO

Hey, John. It's Harout. Thank you for asking the question. So you're right. We are using the revolver. I think we stated earlier when we did the CMBS, it was to address maturities in 2025. This was just a two-step process. Once you pay down the Series B notes, you only have a little bit of private placements left, which have more restricted covenants, and it clears the path of our unsecured debt through 2027 without the revolver. We are in constant discussions. I think we've stated in the past that we have a very good relationship with our lead line bankers, and we see that instrument as an evergreen instrument. We're going to continue to have it beyond 2026. Once we get closer to that maturity, we will extend that in due course.

John Kim, Analyst

Okay. And then your guidance of $125 million to $150 million of asset sales for the remainder of the year seems a little light. I realize you're not selling your best assets, and 625 2nd sold for a pretty big discount to book value as a result of that. But is this realistically what you're going to sell? How many assets does that contemplate?

Victor Coleman, CEO and Chairman

John, as you know, we don't identify the assets until they're under contract. So I can just say we're going to be consistent in that process. The range that was quoted in the prepared remarks is for three assets. They are assets that are non-core to the portfolio and similar to what we've sold in the past. I would say that's a conservative number. We've been approached and looking at evaluating potentially other assets, but those are the three that we're working on right now.

John Kim, Analyst

Okay. But something like Sunset Waltham Cross, I know that's already being repositioned. Is that part of this guidance, or is it something that may be sold this year or in a subsequent year?

Victor Coleman, CEO and Chairman

As I said, we're not going to talk about assets until they're under contract.

John Kim, Analyst

Okay. Understood. Thank you.

Victor Coleman, CEO and Chairman

Thanks, John.

Operator, Operator

Thank you. Our next question comes from Connor Mitchell of Piper Sandler. Your line is now open. Please go ahead.

Connor Mitchell, Analyst

Hey. Thanks for taking my question. I guess just following along that line of thinking. I'm just curious how your thought process has changed regarding additional asset sales or thinking of different properties that might kind of fall into that bucket or projects that you may have removed from the potential list since you put this plan into motion. And just kind of wondering how the team has thought about the whole process since you initiated it and how the environment has changed throughout.

Victor Coleman, CEO and Chairman

I believe we will remain consistent with our numbers. Last quarter, we indicated a range of $150 million to $200 million in dispositions. Now, we're adjusting that to approximately $100 million to $150 million because we have already completed $95 million in sales. This aligns with our plans. As I've mentioned before, we are not aiming to sell our best assets; instead, we are targeting non-core assets that are manageable and won't significantly affect our funds from operations. That is the direction we are taking. Regarding market changes, the assets we are currently considering for sale align closely with what we have previously sold. These include users, high net worth individuals, and small investment funds. The demand for these assets among these buyers has remained steady. There isn't a large amount of quality product available in our markets, so these assets meet the current demand.

Connor Mitchell, Analyst

Okay. I appreciate that color. And then, Mark, you gave a lot of good information on some of the expirations coming due in '25 and the coverage associated with that. I think it was 50% covered for the remaining expirations during the year. I'm just wondering if you could give us any more color on how we should think about occupancy and the cadence throughout the remainder of the year along with some of the information on coverage, expirations, and then the leasing pipeline and late stages of some of those deals you discussed?

Mark Lammas, President

Yeah, I'll give a little bit of response to that, and then Art can unpack some of the further details on it. But our occupancy expectations remain on track for what our expectations were in the last phone call. Heading into the end of the fourth quarter, heading into the new year, we knew we had a considerable amount of square footage expiring in the first quarter, still a significant amount in the second, less than the first, but still a relatively high amount. And then it was going to significantly taper off in terms of expirations in the back half and beyond. And on account of that, even though the pipeline was quite significant and our team managed to get 630,000 over the line, which is obviously a strong quarter, we still had a lot of expirations more than even that 630,000. So the occupancy you're seeing or the lease percentage you're seeing at the end of the first quarter is right in track, actually slightly better than what our own model expectations were. We believe that could be the bottom. There's a very good chance it could be the bottom in terms of lease and occupied percentage. Starting as early as the end of the second quarter, certainly by the time we get to the end of the third quarter, we expect to see sequential improvements in lease and occupied percentages. Given how low expirations are all the way into '26 and beyond, we expect that general trend should continue for some time.

Arthur Suazo, EVP of Leasing

Hey, Connor. It's Art. And Mark talked about in his prepared remarks, our pipeline obviously grew 5% to almost 2.2 million square feet. This is after the 630,000 square feet that we transacted. What gives us confidence going forward isn't just that this number appears out of nowhere. It's the leading indicator, which is tours. And the tours grew by 18% to 1.7 million square feet. Not only did the number increase, but the average tour size increased, which tells us that single-floor, multi-floor deals are out in the market in a bigger way, in a larger way than they have been in the past. So that gives us confidence with the pipeline. Of the 2.2 million square feet that we have currently, we also mentioned just over 700,000 square feet or late-stage LOI or in leases that we feel extremely confident about closing certainly in the next couple of quarters in addition to just the deals and proposals that have really come out since the quarter ended. So all those things said, we continue to refill the pipeline and continue to transact at a high level going forward.

Connor Mitchell, Analyst

Okay. Thanks, everyone.

Operator, Operator

Thank you. Our next question comes from Tom Catherwood of BTIG. Your line is now open. Please go ahead.

Tom Catherwood, Analyst

Thank you. I want to go back to the comment you just made on large block leasing. And obviously, you got the big deal done with the City, San Francisco at 1455 Market. But can you walk us through activity on other large block vacancies, maybe specifically Hill7, Met Park North, 11601 Wilshire and any other material ones?

Arthur Suazo, EVP of Leasing

Sure. Let me start with Hill7. HBO is moving out, and they are actually reducing their space in Bellevue, which leaves us with 112,000 square feet available. We are currently in negotiations for 58,000 square feet. At 505, our floor plates range from 40,000 to 45,000 square feet and are not divisible. We are negotiating for around 145,000 square feet there, and we are making significant progress. For 11601, we have about 60,000 square feet under negotiation, with 40,000 square feet of that ready to sign in leases, and we’re close to being 95% leased at 11601. Apologies for my earlier confusion with the numbers, I got a bit carried away with my excitement.

Tom Catherwood, Analyst

I'm sorry. What was that number on 11601?

Arthur Suazo, EVP of Leasing

11601, we're very close to getting to about 95% leased very shortly.

Tom Catherwood, Analyst

Okay. Got it. Thank you for that, Art. And then maybe for the debt on the Hollywood media portfolio, I get that it doesn't come due until next August, but given uncertainty, the market is likely assuming the worst. What, in your view, is the actual downside risk for the studio refinancing? With higher California tax credits and Victor, which you mentioned, potential federal relief, is selling your stake one of the options under active consideration?

Victor Coleman, CEO and Chairman

Well, listen, I don't know what the potential risk is, given the fact that it's fully leased in terms of the office side at 775,000 square feet until '31 or '32. The occupancy in the sound stages, with the exception of two, are also master leased for a long period of time. The option of selling is not on the table at this time from our standpoint. It really hasn't come across for consideration. I do think that we've mentioned this before; we and our JV partner own the bottom tranche and a piece of the next tranche of the debt, that could be converted to equity, and that takes care of any downside potential if there was some form of additional capital needed to get financing done in that asset. It's already in place in the form of debt that we can convert to equity. I think we're very comfortable that the market will accommodate us refinancing that. And make no mistake, I mean, we are in the market having conversations as we speak. We're not waiting until the end for us to look at our options. So we're evaluating them now. And to date, we've had some very good interest from our existing lenders and new lenders are coming to the table.

Harout Diramerian, CFO

Yeah, that's right. I think the other thing just to add is that, over the last year or so, we have some vacancy on Sunset Las Palmas, as Victor and Mark indicated; we've shown an increase in occupancy, which helps the NOI on that asset and therefore makes it even more refinanceable, at least makes the refinancing easier.

Tom Catherwood, Analyst

Okay. But let me just clarify, Victor, it sounds like your comment is, if there is a paydown required, you don't expect it to be more than the B piece that is held by you and your partner. Is that what you were saying?

Victor Coleman, CEO and Chairman

What we're seeing is that we expect no paydown. That's our plan for the market. Who knows what will happen in the end? But we already have that fallback option ready instead of bringing new equity into the deal.

Mark Lammas, President

Yes. To clarify, the debt that Blackstone and Hudson collectively own would represent a 15% remargin. Therefore, even if some remargins are expected, we have already accounted for the majority of that.

Harout Diramerian, CFO

Yeah. And maybe to give an example, we're in the market for 1918 and have them right now, that requires no remargin. So obviously, the cloud media debt is further away and obviously a different setup. But the point being is that we have a long time to go, and either it could be a larger margining or no margining. It's too early to know right now.

Tom Catherwood, Analyst

Got it. Appreciate the answers. Thanks, everyone.

Operator, Operator

Thank you. Our next question comes from Young Ku of Wells Fargo. Your line is now open. Please go ahead.

Young Ku, Analyst

Great. Thank you. Just wanted to touch upon your debt covenants a little bit. It looks like your NOI to interest expense coverage fell a little bit quarter-over-quarter. I was just wondering if you could provide some color on what we should be expecting for the rest of the year given that there are so many parts.

Harout Diramerian, CFO

Sorry, what was the last part?

Victor Coleman, CEO and Chairman

Expectations for the rest of the year.

Harout Diramerian, CFO

No, I think we've addressed this enough. We continue to meet our covenant obligations and anticipate remaining compliant. We review our projections every quarter, and similar to this quarter, we have exceeded our expectations in terms of our coverage. This means we performed better than we predicted. Therefore, we expect to maintain this performance in upcoming quarters.

Young Ku, Analyst

Are you able to kind of renegotiate some of the covenant minimum landscape with lenders?

Mark Lammas, President

We just did. I mean, we recently completed a second amendment at the end of last year that improved both the ratios themselves but also underlying definitions that work through those ratios.

Harout Diramerian, CFO

Those are for the credit facility. The bonds we have not attempted to, and I think those have more room in them.

Young Ku, Analyst

Got it. Okay. Thank you for that. And then just turning to 2026, you guys talked about lease expirations for the whole year, about 800,000 square feet. Can you kind of provide some color on whether you have there are some potential move-outs that you're looking at? Or how do you feel about the retention for '26? I know it's kind of early.

Arthur Suazo, EVP of Leasing

Yes. I mean you hit the nail on the head with a low expiration year, but there are really three large tenants that we're tracking in that market. Wilshire is a three-floor tenant. Towers about ashore. Three-floor tenants, we're renewing them in two floors, so call it, 53,000 square feet of the 75. At Met Park North, we have 24-hour fitness, which is 45,000 square feet, and we're working on a renewal to keep them there as well. And then the last one is at 875 Howard, pivotal software; they're in 80,000 square feet, and they're already out of the market, so we're currently marketing the space. So those are the large three, and the rest of those are smaller tenants that we'll be discussing over the next six to nine months.

Young Ku, Analyst

Got it. Great. Thank you. And then just one last thing. I think you guys talked about a couple of production leases that you are looking at on the studio side. Can you comment on the size of those leases you're planning?

Victor Coleman, CEO and Chairman

We are currently working on two production leases that are either finalized or under negotiation. We will make official announcements once filming begins. Both leases include space for support services and mill space. One lease is for over three years with options, while the other is with a production company we've partnered with multiple times before. This demonstrates the loyalty we are experiencing; although most agreements are done show by show, we have managed to secure some significantly longer-term leases, outperforming the market.

Young Ku, Analyst

Okay. But you can't really comment on the size yet?

Victor Coleman, CEO and Chairman

Well, I'd said, both are two stages with support staff. We don't talk about square footage and the likes of that. Each show is two stages.

Young Ku, Analyst

Okay. Great. Okay. Perfect.

Operator, Operator

Thank you. Our next question comes from Peter Abramowitz from Jefferies. Your line is now open. Please go ahead.

Peter Abramowitz, Analyst

Yes. Thanks for taking the questions. It looks like in the FFO reconciliation here, you added back some of the expenses related to cost-cutting initiatives at Quixote. I guess could you just kind of dig into what those expenses were, the efforts that you're making to cut expenses in Quixote, and then what you incurred in the quarter as the cost of doing that?

Mark Lammas, President

The costs primarily stem from early lease terminations. In some cases, we have stages that we've exited, such as three in New Orleans last year, and we've also removed some underutilized stages in Los Angeles. This is a significant part of our overall cost-cutting efforts. I'll share the total amount shortly. Additionally, we've eliminated obsolete parts of our transportation fleet, allowing us to vacate parking areas for that fleet. There are also reductions in headcount and related factors contributing to our cost savings. In total, we've managed to cut around $14 million in costs, which we believe will improve NOI by approximately $9 million on a run rate basis compared to last year’s results. Looking ahead, with our current show count around 90, we estimate that a negative $19 million in cash NOI would have been closer to a negative $10 million on a pro forma basis. Ideally, we aimed to return to breakeven in Quixote with show counts near 100, where we could see positive NOI around $8 million to $9 million. However, due to these cuts, we now think we can achieve breakeven with only about 95 shows, effectively lowering the threshold for getting back to breakeven.

Peter Abramowitz, Analyst

Thank you for the clarification. I have one more question. It seems that non-same-store studio expenses were around $29.5 million this quarter, primarily attributed to Quixote. What do you anticipate the run rate will be moving forward after these expense reductions?

Harout Diramerian, CFO

I think if you just take out the $5.9 million that we highlight, and I think you can see that on Page 20 of the supplementals. You cut down the $5 million, you're back to $23.5 million. I think roughly. So that gets you to a potential normalized. We still have some other work that we're working on. So from the perspective of what we've disclosed, that's the number to use.

Mark Lammas, President

Yes, I mean, once you adjust for those one-time expenses, your NOI for the Quixote business stands at $7.5 million. The average show count for the first quarter is in the low 80s. So regarding the show count, if we aim for 90, that number should annualize to around a negative $10 million. If we reach 95, we should break even. And with 100, we should be approaching positive NOI of about $10 million, possibly just under that amount.

Peter Abramowitz, Analyst

Got it. Thank you. And then I guess just one more while we're on the topic of expenses. It looks like you lowered the G&A guide. Just wondering if you could comment on what you're doing there and what drove that.

Harout Diramerian, CFO

So in the theme of cost-cutting and we're continuing the cost-cut, I think we've commented last quarter and last year, and we're just reducing payroll-related costs is what we're doing.

Peter Abramowitz, Analyst

All right. That's all for me. Thanks.

Operator, Operator

Thank you. 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.

Victor Coleman, CEO and Chairman

Thanks, everybody for participating in this quarter's call. We look forward to speaking to you all again soon. Goodbye.

Operator, Operator

Thank you all for joining today's call. You can disconnect your lines.