Earnings Call Transcript - HPP Q3 2024

Operator, Operator

Good afternoon, my name is Ciara and I will be your conference operator today. At this time, I would like to welcome everyone to Hudson Pacific Properties’ Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. Thank you. At this time, I’d like to turn the call over to Laura Campbell, Executive Vice President, Investor Relations and Marketing.

Laura Campbell, 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 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 industry and market trends and capital recycling. Mark will provide an update on our office and studio operations and development, and Harout will review our financial results and 2024 outlook. Thereafter, we’ll be happy to take your questions. Victor?

Victor Coleman, CEO and Chairman

Thank you, Laura. Good afternoon everyone and welcome to our third quarter call. At Hudson Pacific, we spent nearly two decades acquiring, transforming, developing, leasing, and operating premier real estate and related services in the most sought after locations, catering to dynamic tech and media industries. Over the last several years, our talented team has worked diligently to leverage the strength and resiliency of this unique platform to rise above the multiple unprecedented, once in a generation challenges impacting our core industries and markets. As we sit today, we are gaining additional confidence that the tide is turning. While more time is needed, we believe that as we exit this year and move through 2025, we will stabilize our portfolio and be positioned for a return to growth and ultimately outperformance. The positive office-related indicators that are emerging are numerous. The data clearly shows that office-oriented cultures enhance productivity and performance, and with the U.S. facing the steepest decline in white-collar productivity in 50 years, the push to a four or even five-day workweek has begun. Today, only 1% of the Fortune 100 companies still have fully remote office attendance policies, and 80% of the CEO respondents in KPMG’s most recent survey anticipate their work will be full-time in office in the coming years. This movement, which had early traction with financial companies on the East Coast, is now gaining momentum among tech companies on the West Coast. Recent full-time mandate announcements include Seattle’s largest employer, Amazon, Dell, and San Francisco’s largest employer, Salesforce. Underscoring the momentum in San Francisco in September, Muni ridership surpassed 520,000 average weekday boardings, approximately 75% of pre-pandemic levels, with certain routes recovering to well in excess of 100%. Furthermore, tech layoffs have consistently declined since the first quarter of 2023, now reaching their lowest level since the second quarter of 2022, a 45% improvement year-over-year. Moreover, AI companies, 44% of which are in the Bay Area, have brought venture investors back to the table. 2024 is on pace to be one of the best years for AI funding on record, with the lion’s share going to the Bay Area, which we expect to provide another leasing catalyst in the coming months. AI companies tend to be office-first and since January 2022 have occupied at least 2.3 million square feet in the Bay Area, a footprint that Cushman & Wakefield expects to grow by 200% over the next two years. At present, we’re monitoring 25 tenants in the market seeking about 800,000 additional square feet. Big picture, a recovery that has already taken hold on the East Coast is now gaining traction on the West Coast. In the third quarter, tenant requirements in the West Coast tech-centric office markets increased 17% year-over-year compared to just 7% for the broader U.S. office market. Downtown San Francisco had positive net absorption for Class A product for the first time in two years and year-to-date overall gross leasing is the highest since 2019, with tenant requirements up 20% year-over-year. The San Francisco Peninsula has also had its first quarter of positive net absorption since 2022, and software and internet companies led leasing volume, representing 42% of the top 25 transactions. In Seattle, we’re now seeing midsized demand returning to the market with overall requirements up about 30% year-over-year. All of this activity mirrors what we’re experiencing with our own office portfolio. Now turning to studios, the following three months of Los Angeles show counts have been approximately in the low 80s. Production has started to pick up, nearing 90 shows during October. Although we are moving in the right direction, Los Angeles production has yet to return to any sense of normalcy, which continues to limit demand for our stages and services. Fortunately, office officials in the public realm at all levels have recognized this and a few weeks ago Governor Newsom introduced legislation that, if passed, would more than double the tax credit program to $750 million, making it the largest in the United States. This is a very positive development, and if passed, will go into effect in mid-2025 at a key moment when many companies, such as Netflix, envision production returning to normal. We think new soundstage supply will remain limited, and a comprehensive offering of studios and services will be poised to successfully capture incremental demand which typically builds ahead of production. We remain confident our studio team is the best in the business and recently promoted two senior executives in recognition of their growing responsibilities—Stefanie Bourne, who joined Hudson Pacific in 2021 from Disney, has been promoted to EVP Studios with oversight of sales, production services, operations, and strategic initiatives, and Anne Mehrtens has been promoted to EVP Studio Real Estate and Southern California office operations, having led those functions for over a decade. Lastly, I want to touch on capital recycling. With Fed policy easing and office fundamentals improving, transaction volume across our markets is accelerating. We are strategically tapping into this demand as a key component of our effort to deleverage with a focus on completing additional non-core office asset sales where we can maximize value. Of note, our Bay Area assets are garnering strong buyer interest, and as of the third quarter, we’ve secured a buyer that has gone nonrefundable on Foothill Research Center in Palo Alto for $23 million. We’ve opted to sell at an attractive price per square foot rather than continue to invest in this asset. Inclusive of Foothill, we presently have three sales under contract, and another 300 negotiation, which have the potential to generate gross proceeds totaling $200 million to $225 million. In addition, we have begun discussions with potential partners and lenders on a portfolio of six office assets as both a secured financing and a joint venture opportunity. We’re optimistic the related transactions could close early next year, and we look forward to providing much more detail and additional updates. With that, I’m going to turn it over to Mark.

Mark Lammas, President

Thanks, Victor. We had another strong quarter of execution from our leasing team, signing 539,000 square feet of office leases, with 56% being new deals. This brought our year-to-date total to 1.6 million square feet, or 25% ahead of this time last year. Our priority has been to stabilize and grow occupancy. This quarter, we reported occupancy sequentially 40 basis points higher at 79.1%, along with a consistent lease percentage at 80%. In addition, if we adjust for the 100% leased and occupied Foothill Research Center, which we designated as held for sale in the third quarter, sequentially, our occupancy increased 60 basis points to 79.3%, and our lease percentage increased 20 basis points to 80.2%. Our lease economics are improving or stable, with third quarter net effective rents 3% higher than our trailing 12-month average, and only 4% of our pre-pandemic trailing 12-month average. We have continued to extend lease terms, which in the third quarter was approximately six years, slightly above our trailing 12-month average and 42% above our trailing 12-month average a year ago. While we reported GAAP and cash rent spreads, 11.5% and 13.3% on prior levels, but for a 29,000 square foot short-term lease in Los Angeles and two mid-size Bay Area leases totaling 68,000 square feet, one in Palo Alto and the other in downtown San Francisco, our GAAP and cash rent spreads would have been essentially flat. In short, as average lease terms continue to lengthen and tenant improvements and free rent remain in check, our net effective rents have held up even by comparison to the pre-pandemic period, despite occasional setbacks on rent spreads. Our leasing activity pipeline, including deals and leases, letters of intent or proposals remained robust at close to 2 million square feet, about 70% of which are new leases. Quarter-over-quarter, our pipeline in Seattle and Silicon Valley has increased, in part attributable to an 18% to 20% increase in requirement size in those markets. Tours remain active at 1.3 million square feet during the quarter, with a nearly 50% increase in Seattle, which is indicative of the level of interest we are observing at our recently completed Washington 1000 development. To date, we have two tenants through that project, representing a total of 700,000 square feet of requirements, which range in size from 35,000 to 150,000 square feet. Feedback from Seattle’s top brokers during the recent dinner we held at the asset underscores Washington 1000’s superior quality and leasability, only further enhanced by recent market strengthening. Across our office portfolio, if we sustain our leasing momentum of roughly 500,000 square feet per quarter, which our pipeline and tours suggest is reasonable, we expect occupancy to stabilize by the middle of next year, with the potential for meaningful occupancy growth thereafter. We have about 670,000 square feet remaining to expire by year-end. This includes 140,000 square feet at Met Park North, where a full building tenant recently exercised the right to terminate the lease. We are actively exploring options for this asset, which include early discussions with multiple tenants for requirements of 30,000 to 100,000 square feet. Our coverage, which includes deals and leases, letters of intent or proposals on remaining 2024 expirations, is 37%, which increases to 55% accounting for leases and discussions. This is not surprising given that apart from Met Park North, our average lease expiration is roughly 7,000 square feet, and delayed decision making is typical for these smaller tenants. As we look to 2025, excluding the full building lease at Foothill Research Center, which is held for sale, we have less than 1.7 million square feet expiring or 16% of our annual base rent. Our remaining top five expirations next year collectively total 660,000 square feet, and we have approximately 64% coverage. Beyond that, our average expiring lease in 2025 is roughly 6,000 square feet. Turning to studios, in the third quarter, our in-service stages were 76% leased during the prior 12 months, down 220 basis points sequentially, reflecting the previously discussed single tenant vacating last year. Note this lease percentage excludes Sunset Glenoaks for which there is not yet trailing 12-month data. Our Quixote stage lease percentage was up 60 basis points sequentially to 33.4% due to increased commercial shoots at our Quixote West Hollywood and Griffith Park locations. Compared to a year ago, our third quarter studio revenue was $5.6 million higher, even as we had a sequential $8.5 million decline due to lower average production levels in the third quarter compared to the second quarter, primarily affecting our studio ancillary and transportation segments. We currently have signed leases, are in contract, or have client interest on 79% of our film and TV stage square footage or all but 14 of our 59 film and TV stages inclusive of Sunset Glenoaks. This activity includes a notable increase in what the industry calls holds—essentially expressions of interest for specific stages for 2025 production days. Likewise, coincident with a modest improvement in production activity late in and subsequent to the third quarter, we have seen stage leads and tours increase, and transportation and location services utilization has improved. We are optimistic these are early indicators of sustained stronger demand next year. Finally, I will touch on development. We have one active development project, Sunset Pier 94 studios, which will be the first purpose-built studio in Manhattan. Construction is progressing on time and on budget for anticipated delivery by the end of next year. And as of October, we have no further equity contributions. We are in active discussions with a leading studio as well as other productions on multi-year agreements for one or more stages. And with that, I’ll turn the call over to Harout.

Harout Diramerian, CFO

Thanks, Mark. Our third quarter 2024 revenue was $200.4 million compared to $231.4 million in the third quarter of last year, almost entirely due to the sale of One Westside and the expiration of the Block lease at 1455 Market, partially offset by improved studio revenue following the resolution of the related union strikes. Our third quarter FFO, excluding specified items, was $14.3 million or $0.10 per diluted share compared to $26.1 million or $0.18 per diluted share a year ago. Specified items for the third quarter totaled $0.05 per diluted share, consisting of a $3.9 million one-time straight-line rent reserve related to the transition of a tenant to cash basis reporting, a $2.2 million non-cash revaluation of a loan swap unqualified for hedge accounting, a $1.2 million non-cash deferred tax write-off, and a $0.3 million transaction-related expense. The year-over-year change in FFO, excluding these specified items, was mostly attributable to the factors affecting revenue and lower FFO from non-controlling interests following our purchase of our partner’s interest in 1455 Market earlier this year. Our third quarter AFFO was $15.8 million or $0.11 per diluted share compared to $28.1 million or $0.20 per diluted share in the third quarter last year, with a change largely attributable to the previously mentioned items affecting FFO. Our third quarter same-store cash NOI was $96.9 million compared to $113.2 million in the third quarter last year, mostly due to tenant move-outs, including Block at 1455 Market. Turning to our balance sheet. As Victor noted earlier, we are proactively pursuing multiple paths to increase liquidity including asset sales, joint venture partnerships, and secured financings. We have no debt maturing until November 2025. Our share of net debt relative to our share of undepreciated book value is 37.4% and our percentage of debt fixed or capped is 91.5%. At the end of the third quarter, we had $696 million of liquidity comprised of $91 million of unrestricted cash and cash equivalents and $605 million of undrawn capacity on our unsecured revolving credit facility. We also have $195 million of construction loan capacity, of which our share is $53 million. Turning to our outlook. For the fourth quarter, we expect FFO per diluted share to range from $0.09 to $0.13 per diluted share. We anticipate fourth quarter NOI for our Quixote business to moderately improve compared to our third quarter results due to the improved production activity that Victor and Mark highlighted. We expect fourth quarter NOI for our in-service office and studio portfolios to remain at levels consistent with the third quarter results adjusted for previously mentioned straight-line rent reserves. We anticipate having lower office occupancy in the fourth quarter, reflecting the full building tenant vacating Met Park North in early December. But for this early termination and the designation of Foothill Research Center as held for sale, we believe our office occupancy would have shown another sequential increase. Similarly, solely due to the removal of Foothill Research Center from our same-store pool, we are updating the range of the same-store property cash NOI growth to a negative 13% to 14% from a negative 12.5% to 13.5%. As always, our outlook excludes the impact of any potential dispositions, acquisitions, financings, and or capital markets activity. And now I’ll turn the call back to Victor.

Victor Coleman, CEO and Chairman

Thank you, Harout. Each quarter we are executing office leasing and we are on track to significantly outperform our activity last year, along with the west coast office fundamentals that are undoubtedly strengthening. On the studio side, we have contracts or interest in nearly 80% of our film and TV stages, while Los Angeles production levels are challenging but improving, and the proposed state tax credit legislation and potential City of LA incentives stand to meaningfully boost demand. Based on these factors, we believe we’re on the path to stabilize and start to grow occupancy and cash flow across our entire portfolio next year. And with that, the momentum of asset sales and our positive discussions with joint venture partners and lenders, we expect to have the balance sheet and liquidity to achieve our business objectives. Now with that, we’ll be happy to take questions.

Operator, Operator

Our first question today comes from Blaine Heck with Wells Fargo. Your line is now open.

Blaine Heck, Analyst

Great, thanks. Good afternoon. Just starting on the sales, Victor, can you just talk about the drivers behind what looks like an accelerated effort on the asset sales side and the rationale behind looking at the additional six office asset securitization? Any expectations for cap rates you can provide there? And then lastly, just maybe how we should expect all of those moves to kind of affect your covenant.

Victor Coleman, CEO and Chairman

Thanks, Blaine. Well, listen, I’m not going to comment on the actual sales directly until we have them non-refundable, which to date is not the case. As I said, we’ve got three under contract, of which one is non-refundable. We got three more that we’re in negotiations that should go under contract, and the combined total of those are between $200 million and $225 million. The assets should be looked at as non-core; we always evaluate assets in the portfolio that may or may not fit into our long-term strategy with capital allocation and with excess work around leasing or capital improvements or the future growth of those assets. So that’s how we identify them. They’re not core to the portfolio, and they’re not what we would call as our best and highest quality assets. I do think, you touched on the joint venture and in the CMBS structure, we’ve allocated some time and energy around six assets that we’ve received very, very strong response from joint venture partners and from our CMBS debt allocation for that portfolio. We’re exhausting our talents around that. We should have, I think, more definitive information by early first quarter next year, but so far it’s on track. Don’t want to get into cap rates at all at this time. Suffice to say, our ownership interest in that is going to be equal to what’s been in our past JVs, which is roughly around 50%. So that’s the intent for that aspect. Lastly, in terms of covenants, there is not going to be any impact on covenants. We are working through that right now, and we feel confident that this form of liquidity is another avenue for us to go on the offensive down the road.

Blaine Heck, Analyst

Okay. Great. We’ll look forward to more updates there. I guess just second question. Thanks for your commentary on the studio side. I guess I’m still wondering how much of an effect some of this movement out of LA and into other markets has changed the kind of stabilized run rate of studio production that can come from LA. And whether you think that all of that is reversible with Governor Newsom's tax credit proposal?

Victor Coleman, CEO and Chairman

Well, listen, I think overall, the blanket of the studio business and the entertainment business overall has been affected nationwide. It’s not just California, it’s Georgia and New York that have also been impacted based on the shifts during the strike. In terms of the movement back to LA, Los Angeles still is the entertainment capital of the world. We are seeing an uptick quarter-over-quarter in our prepared remarks from a show count. I think the movement by Governor Newsom and the impetus right now of Mayor Karen Bass for tax credits on both sides are going to help the industry regain some sense of normality. The direction right now is from the holds that we have and the conversion from holds to leased facilities and our operating businesses all look on track for 2025, and it could be in the first to fourth quarter to really see a massive impact. We’re confident we’re moving in the right direction here, and we’re confident that production is going to be enhanced by actions from Gavin Newsom and Mayor Bass. It’s important to note that the situation is similar nationwide, as opposed to just domestically in the U.S., where we’re starting to see a greater pickup in production that could follow suit here as well.

Blaine Heck, Analyst

That’s helpful. Thanks, Victor.

Victor Coleman, CEO and Chairman

Thanks, Blaine.

Operator, Operator

Our next question comes from Alexander Goldfarb with Piper Sandler. Your line is now open.

Alexander Goldfarb, Analyst

Good afternoon out there. Just going to two questions. First, I guess, Victor, continuing on Blaine’s question on the debt covenants. Looking at the 2025 and 2026 maturities, they’re certainly meaningful amounts. And as you sit here with your leasing that you have coming up and expected asset sales and NOI, how are you looking at that debt as far as— is all of that scheduled to be dollar for dollar refinanced, or do you think that some of this will be subject to negotiations?

Victor Coleman, CEO and Chairman

I’m not sure what you mean by subject to negotiations. I mean, listen, we intend on refinancing. We’re in conversations right now on secured debt that’s coming due and in 2025 we’ve gotten a very good response on that. I don’t think we are concerned about the value of those assets and the equity that we have in place as those assets come due. I’m not going to comment, Alex, on where we see rate, but we’re looking at either floating or fixed terms that could be 5% or 7%. The market is very conducive to that right now, and we feel that they’re going to get executed and we have all the confidence that we’ll get it executed well before expiration at the end of 2025.

Alexander Goldfarb, Analyst

Okay. And then the second question is, as we look into next year, I realize we’re still far out from giving 2025 guidance, but from what you’re talking about, it sounds like the studio— it sounds like the businesses overall have bottomed. The recovery is a little slow; hopefully the Hollywood stuff with the tax credit passes and that incentivizes. It sounds like the leasing is making some progress, but still some vacancy that needs to be addressed in the uncovered exposures. Is the $0.11 in the fourth quarter, is that a number that we should think about for a quarterly run rate for next year? Or are there things that you would point to that would make that quarterly run rate materially higher?

Victor Coleman, CEO and Chairman

Yes, I would not look at the $0.11 as a quarterly run rate for next year. I think you have to consider it higher. As I said in the prepared remarks, and as Harout mentioned, we will address our full year guidance at our next quarter’s call. I do think that the entertainment business's trajectory from where it was to where it is now and its anticipated future will manifest in a material change, and we're confident in that change being executed. Some transactions currently on hold are going to be secured for stages being leased and we expect demand to increase. So, yes, I wouldn’t read into the $0.11 as being our run rate going forward.

Alexander Goldfarb, Analyst

Thank you, Victor.

Victor Coleman, CEO and Chairman

Thanks, Alex, as always.

Operator, Operator

Our next question today comes from Michael Griffin with Citi. Your line is now open.

Michael Griffin, Analyst

Great. Thanks. Just wanted to go back to the studios for a second. And it seems like things are maybe getting better into the fourth quarter. So I know you didn’t specify around kind of the Quixote piece of the fourth quarter guide, but is it fair to assume we should see an increase in NOI there relative to the third quarter? And then maybe stepping back, you talked about the tax credit being beneficial obviously for the industry. But is there a worry that maybe similar to the worry about the Teamsters strike this year, production could be delayed until the tax credit gets enacted? And do you think there’s the political capital to go forward with the tax credit like this?

Victor Coleman, CEO and Chairman

Let me address the latter part first, Michael. At the end of the day, listen, I think we’re all very confident; the industry is confident that this legislation is going to pass. The Governor would not have come out as strongly as he did with the amount of $750 million, which is going to be the highest tax credit for the entertainment business. As a result, I believe the modifications could be minimal. We’ll see what happens in the coming months, but it’s all sort of earmarked for a vote by mid-year 2025. The citywide mandates already have committees in place promoting a return to the highest levels of production in Los Angeles. There’s also a city tax proposal out to enhance production in Los Angeles. Multiple factors are supporting it. Just to answer your question specifically: it doesn’t mean there’s going to be a wait until everything’s in place. I think directionally, that’s what we are waiting for is leadership and direction, both on the state level and the city level, and within production companies to see this direction as it will take hold for two, three, or four years. This is not a one-and-done process. I think when people are looking for production, they will consider multiple avenues for savings across different venues and productions over the short-to-medium term. So I wouldn’t envision saying it’s going to be delayed until the tax credit is enacted. A lot of it will have some tailwinds that should get us to a point where we will see an uptick in production by the first and second quarters of 2025.

Michael Griffin, Analyst

Appreciate that, Victor. And then just maybe circling back again on the transaction activity. And I realized there were a number of things that you can’t yet disclose. But maybe on the Foothill Research Center; I think you set a purchase price of about $23 million. By my math, that’s about $120 a square foot. I know that was part of a portfolio. I think you acquired around 2014 or 2015. So can you give us a sense of how that valuation compares to maybe when you bought the portfolio or the property back then and then maybe just some broad commentary around how transaction volumes and value have changed from pre-COVID to now.

Victor Coleman, CEO and Chairman

Let’s just discuss Foothill. I wouldn’t read into the price per foot on Foothill because there are only five months of term left in that lease, and there’s a ground lease that’s expiring. It’s very short-term, and candidly, I think it would have cost us capital dollars as well as favorable aspects around our existing ground lease portfolio with Stanford that would have impacted the viability of that asset to be re-tenanted going forward. So we looked at the highest and best use of our dollars to determine to sell that asset. When you understand who we sold it to, I think you’ll sort of figure out the strategy and the seller-buyer relationship. In terms of overall acquisition and transaction activity, I think we’re pleasantly surprised. We’ve been patient in identifying the right assets. As I mentioned earlier, they’re not the highest quality assets within the portfolio. They are the assets that require additional capital or there is some tenant risk or potential capital expenditures down the road. We’ve been discerning in the type of buyers and activity, and I think our investments team and our outside brokerage team has done a commendable job identifying appropriate buyers for those assets. Some of them we will announce as owner-users, which are unique to the specifics of those assets. I did mention in my remarks that we haven't seen a tremendous amount of transactions that would align with what we would consider Hudson-esque acquisitions. If we had access to unlimited capital and wanted to be aggressive today, I wouldn't identify an asset on the west coast that we would be eager to acquire. I think that gives you sort of an indication where we believe the market stands. But we are aware that there will be assets coming to the market. We know where they are and what they are; it’s going to be a timing issue. With the increase in financing activity and the Fed easing, I believe they will come to market in 2025, and you will observe what kinds of opportunities emerge, which will adequately reflect real cap rates.

Michael Griffin, Analyst

Great. That’s it for me. Thanks, Victor.

Victor Coleman, CEO and Chairman

Thank you.

Operator, Operator

Your next question comes from Caitlin Burrows with Goldman Sachs. Your line is now open.

Caitlin Burrows, Analyst

Hi, everyone. I think in the prepared remarks, you guys talked about how if you kept up this pace of leasing about 500,000 square feet per quarter, that could support occupancy stabilization in mid-2025. So I guess I was just wondering if you could talk a little bit about the kind of leasing cadence that you’re seeing, how confident you are that that can stay at that pace, and maybe any other details on the size and type of leasing requirements that you’re seeing?

Victor Coleman, CEO and Chairman

Yes, Caitlin. I’ll start. Listen, I think we’re truly very pleased with all three quarters of leasing, particularly the most recent quarter. It’s indicative that, as indicated in the prepared remarks, we did 1.7 million square feet and we're right now in excess of 1.6 million square feet with just three quarters completed. The pipeline is consistent as Mark mentioned in his remarks, and we’re confident we’re going to execute on that. This is why we mention that in 2025, we should see some stabilization and continued occupancy growth. Art would like to comment on the positive absorption markets we’re seeing for the first time in a long time.

Art Suazo, EVP of Leasing

Yes. To put a finer point on what Victor said, this 2 million square feet is spread across the Bay Area, with 1.1 million square feet of that activity. There’s 500,000 square feet in Seattle, and the remaining 400,000 square feet is evenly split between Vancouver and LA, which encourages us greatly. We’re extremely confident that we will surpass 500,000 square feet, especially since the 1.6 million square feet that Victor just mentioned equates to an average of 530,000 square feet year-to-date. So we’re already ahead of that, and our team’s ability to execute will only enhance these numbers. We are definitely improving these figures. Regarding net absorption, we’re seeing positive absorption in the Peninsula for the first time in a long time; we’re seeing it in San Francisco, and we observe Class A space with positive absorption for the first time in several years. More importantly, across greater San Francisco, which previously averaged over a million square feet in negative absorption during the pandemic, negative absorption has reduced to just 106,000 square feet. Over the last several quarters, we’re starting to see a significant positive shift, and we’re very excited about what we’re seeing.

Caitlin Burrows, Analyst

Got it. Okay. And then I was trying to take notes as you guys were speaking in the prepared remarks. Some of them were kind of fast, but I wrote something to myself about the studio business, a positive development for mid-2025. You made a comment about Netflix and their operations, and I was hoping you could elaborate on that a little bit more, regarding if there is any visibility into that.

Victor Coleman, CEO and Chairman

We find that streaming companies are beginning to see improvements not only in quality but also quantity. They’ve greenlit more shows than in previous quarters, and while it’s important to note that nothing happens overnight, once they greenlight projects, the production will subsequently move forward, turning holds into occupancy. We’re witnessing this activity pickup across the board.

Caitlin Burrows, Analyst

Got it. Thank you.

Victor Coleman, CEO and Chairman

Thanks.

Operator, Operator

Your next question comes from John Kim with BMO. Your line is now open.

John Kim, Analyst

Thank you. Your G&A guidance went down about $1 million in your guidance, but it’s still expected to increase year-over-year. When you look at it on a year-to-date basis versus your NOI, it’s at 22% versus 17% last year. I realize you expect a recovery in NOI and earnings going forward, but is there anything you could do on the overhead front to reduce the cost and normalize it closer to earnings?

Harout Diramerian, CFO

Sure. A good question, John. This is Harout. First, we’re constantly looking for ways to reduce our G&A, as evidenced by our revised guidance. Secondly, the increase in G&A is primarily related to incentive-based shares that we added in 2024 that we didn’t have in 2023; those aren’t cash G&A, and they will only reflect how the shares perform.

Victor Coleman, CEO and Chairman

Regarding G&A savings, we routinely evaluate all our G&A. However, it’s directly correlated with our NOI. As we see our NOI increase and we finalize these leases and future leasing arrangements, I believe that number will normalize significantly.

John Kim, Analyst

Okay. And looking at your lease expiration schedule in the fourth quarter and comparing it to last quarter, the square footage that’s expiring rose by almost 150,000 square feet, and the annual base rent declined slightly. I just wanted to see why that occurred. I imagine some is mixed, but with some leases that expired in the second and third quarters, were they just extended on a short-term basis with no rent associated with it? What exactly happened?

Victor Coleman, CEO and Chairman

I mean, that’s—listen, I can get the guys to provide more detail, but we announced that at our Met Park North, Amazon exercised their termination, which accounted for almost 100% of that number.

John Kim, Analyst

Okay. So that expiration was moved to the fourth quarter.

Victor Coleman, CEO and Chairman

Correct.

John Kim, Analyst

Okay. Thank you.

Operator, Operator

Your next question comes from Katie Elders with Jefferies. Your line is now open.

Unidentified Analyst, Analyst

Hi, yes, this is actually Peter on the line. Just wanted to go back to some of the comments on coverage on your expirations. So maybe one for Mark or Art. I think you said for the remaining five largest expirations in 2025, you have 64% coverage. Could you remind us how you define coverage and help us think through historically what the success rate is in translating when you have coverage on a lease to actually getting a renewal?

Art Suazo, EVP of Leasing

Yes, this is Art. So the coverage deals in proposals; we make a distinction between leases, right? Our team has been successful at a clip of about 70% to 75% on deals that we negotiate leading to actual leases.

Unidentified Analyst, Analyst

Okay. So is the way to think about it then, kind of 75% success rate on that, with 64% as a gauge?

Art Suazo, EVP of Leasing

Yes.

Unidentified Analyst, Analyst

Okay. Got it. And then one other. I just want to ensure I heard Harout correctly in your comments. Was the change in the same-store guidance simply due to the removal of Foothill Research Center? Was there anything else to call out in terms of inside there?

Harout Diramerian, CFO

Yes, that’s the biggest driver. Without that, we would have been the same.

Unidentified Analyst, Analyst

Okay. All right. That’s all for me. Thanks.

Operator, Operator

Your next question comes from Rich Anderson with Wedbush. Your line is now open.

Rich Anderson, Analyst

Thanks. Good afternoon. So just looking back, when you bought the Peninsula, Silicon Valley portfolio in 2015, that was 15 million square feet, 53 assets. Just looking at your disclosure on Page 17, excluding San Francisco, you’ve got 17 assets in those markets, 5.5 million square feet. I don’t know if that’s apples to apples in terms of what has happened over the past 10 years, but what is your appetite and interest in the sort of the non-San Francisco Bay Area assets that remain in the portfolio? Is that where you would see maybe a significant portion of future sales going forward?

Victor Coleman, CEO and Chairman

Yes, Rich, I’m not sure about your math because I think you said 15 million square feet. It was almost 8.2 million square feet, not 15 million square feet. Regardless, your question pertains to the Peninsula and the quality of those assets regarding potential disposition over time. Given the activity we currently have on the six assets, one of which comprises half the portfolio. That being said, we’re excited to retain several high-quality assets in that portfolio. We’ve received inquiries to exit some assets in that area that aren't part of the six assets mentioned earlier.

Rich Anderson, Analyst

Okay, fair enough. Yes, I was looking at the combined company at the time of that deal, so apologies for that 8.2. I’m obviously incorrect in stating 15. The second question is, Victor, at some point you mentioned that the studio business has resulted in around $100 million of lost EBITDA because of all that has transpired. How has that number changed in terms of the potential recapture going forward? Has that figure increased or stabilized? I’m just curious what we might expect in terms of the recapture of potential EBITDA as studio business begins to stabilize and improve going forward?

Victor Coleman, CEO and Chairman

Understood. I mean, Mark, you want to jump in?

Mark Lammas, President

Yes. Rich, it’s difficult to recreate what you were considering with the $100 million. Historically, we’ve mentioned that the same-store studios have contributed on a consolidated basis around $34 million in 2022. Our Quixote has historically provided pro formas that suggest potential generation of around $60 million in EBITDA. Together, that approximately indicates the $100 million. The same-store studios continue to perform well. We got some stages back during the strike at Sunset Las Palmas, which are being backfilled. We expect the current occupancy to improve. Show counts in the third quarter were in the low 80s, increasing to 90 by October. We believe they’ll continue to enhance into 2025, judging by the number of active holds and tours, and as production improves, so too will EBITDA for the Quixote business. We demonstrated last fourth quarter annualized results at $44 million. If we attain that 120ish show count level, we could revert towards that upper level, and combined with the same-store figures, you might observe roughly $75 million of run rate EBITDA across the studios.

Rich Anderson, Analyst

Okay, great. Great clarification. Thanks, Mark.

Mark Lammas, President

Thanks, Rich.

Operator, Operator

Your next question comes from Tom Catherwood with BTIG. Your line is now open.

Tom Catherwood, Analyst

Thank you so much and good afternoon everybody. Maybe starting with Art, a two-part question on Seattle for you. First, how is sublease availability impacting demand for Washington 1000, if at all? And then second, over in Pioneer Square, you’ve made progress at 411 First this year. What are your expectations for 505 First to 95 Jackson over the near term?

Art Suazo, EVP of Leasing

Certainly. I’ll start with the sublease. The reduction of sublease availability is a positive fundamental shift consistent across our portfolio, not just in Seattle. This quarter alone demonstrated significant improvement in San Francisco and Seattle, with the market absorbing 400,000 square feet in San Francisco and 350,000 square feet in Seattle, reflecting high-quality space availability allowing us to compete effectively. Regarding your second question, yes, 411 showcases our VSP program at work which we consistently discuss. The market demand is for smaller spaces, specifically under 10,000 square feet. We leased 411 to 94%, highlighting its success. As for 505, we are seeing increased demand for larger floor plates, about 45,000 square feet. In Seattle, we’re starting to see growth in 20,000 to 50,000 square foot tenant requirements, which is our target range, and we expect to make significant progress shortly.

Tom Catherwood, Analyst

Excellent. Appreciate that, Art. And then lastly for Mark, it looks like you opened a new hub for Quixote in Atlanta. Have you been moving assets and staff to that market from the West Coast? And is the new hub in response to visible demand in that market, or is it more speculative in nature?

Mark Lammas, President

It’s not a new hub. There was always an Atlanta presence from the beginning of the Quixote acquisition. So there’s nothing new; it acknowledges Atlanta’s status in domestic content creation. We have approximately 10% of our overall fleet stationed there. Over the years, as Atlanta has engaged in content creation, that fleet has been successfully utilized. As the domestic market improves, we anticipate that utilization in Atlanta will likewise benefit. The nice aspect of Quixote’s business is the portability of the fleet. Should demand arise, we have capabilities in Atlanta to enhance our fleet easily. Now we are waiting to see overall improvement in the domestic landscape.

Tom Catherwood, Analyst

Appreciate that.

Operator, Operator

Our next question comes from Dylan Burzinski with Green Street. Your line is now open.

Dylan Burzinski, Analyst

Yes. Good afternoon, guys. Thanks for taking the question. I think over the last several quarters you’ve talked about being able to achieve or ending the year in terms of office occupancy flat versus the end of last year’s figures. But it doesn’t seem like that’s the case any longer. I’m just trying to understand what has changed in the last several months, which prevents you from achieving flat occupancy year-over-year. I realize some of that’s likely due to Amazon, but could you talk about what’s new that’s being incorporated into the occupancy metrics now and then two, has anything changed on the leasing front? It seems like leasing momentum has picked up throughout the year. Your thoughts on that would be helpful.

Art Suazo, EVP of Leasing

Yes, you mentioned one of the two crucial factors; we are confident we would have been flat or slightly improved by year-end were it not for two changes. First, Amazon’s termination increased our expirations by year-end by 140,000 square feet, and the transition of Foothill Research Center affected our occupancy percentage by around 20 basis points. Absent these two developments, we anticipated finishing the year at or above current occupancy levels.

Dylan Burzinski, Analyst

And I guess just one more for me, touching on the return to office momentum you’re witnessing across the tech landscape, especially with larger tech companies like Amazon. New York showed that as RTO increased, there was a swift correlation to leasing activity and minimal downsizing upon vacate. How do you see this correlating with what you expect on the West Coast? The pickup in RTO doesn’t seem to correlate with a direct improvement in leasing demand, possibly due to cyclical factors or other reasons. Just share your thoughts on this as you observe the RTO momentum.

Victor Coleman, CEO and Chairman

On a macro wise note, Art mentioned it and we highlighted it in our prepared remarks. We’ve observed a phenomenal decrease in sublease space. If you categorize A versus B space, Class A is generally all occupied, which will correlate with some macro movement on RTO. We believe the momentum shift is in place for a wave on the West Coast similar to what we’ve witnessed on the East Coast. Tech companies are just beginning to resume operations, and companies like Amazon are not fully back until January 9th. Once we understand who is returning, how much space they require, we will be able to gauge the following steps. One distinction between the tech sector and finance sector is that many tech companies are realizing the need to expand space but want control over it. By this, I mean they are requesting full buildings or total availability of security and ingress or egress, which makes it slightly harder to choose asset selections. Once the available single-tenant assets are taken off the market, we expect to witness a much larger wave of demand. Thus, on a macro basis, we are confident we will see a marked impact by mid-2025.

Art Suazo, EVP of Leasing

Victor accurately articulated it. Additionally, let me note that as we finalize deals even with tenants currently navigating the return-to-office discussions, they are increasingly keen to secure future growth even while leasing, which reflects a more comprehensive perspective.

Dylan Burzinski, Analyst

Right. Great. That’s incredibly helpful detail. Thanks, Victor and Art.

Victor Coleman, CEO and Chairman

Thanks, Dylan.

Operator, Operator

Your next question comes from Ronald Kamdem with Morgan Stanley. Your line is now open.

Ronald Kamdem, Analyst

Hey, just two quick ones. Just looking at the NOI margin in the quarter; was that due to seasonality or what drove it down? As you mentioned, occupancy isn’t likely to bottom until the mid-next year. As occupancy declines at the start of next year, should we expect further margin pressures?

Victor Coleman, CEO and Chairman

I’m sorry, are you referring to margin pressure on studio properties or on office properties?

Art Suazo, EVP of Leasing

Got it. I believe the impact there is basically due to leasing activity within the middle of the quarter, so we had the one tenant write-off, which brought the margins down. My apologies.

Ronald Kamdem, Analyst

Okay, great. And then just my second question was to follow up on Amazon. Obviously, you still have two leases with them. Just what is the nature of conversations? Any small update on their plans regarding those leases? Clearly, there's a lot of term left on those.

Victor Coleman, CEO and Chairman

Ron, we’re in active conversations with them. Naturally, we can’t get into specifics, but suffice to say, Amazon is engaged with us regarding existing assets and some potential growth throughout our Pacific Northwest portfolio. In Hudson’s portfolio for Met Park North, we were not surprised to see them relinquish it. We anticipated this might happen at the start of the year rather than towards the end. However, we did renew them for a short duration to allow flexibility, thus they are looking to expand their portfolio outside of that area.

Ronald Kamdem, Analyst

Great. That’s it from me. Thank you.

Victor Coleman, CEO and Chairman

Thanks.

Operator, Operator

Thank you. There are no further questions at this time, so I’d like to turn the call back to Victor Coleman, CEO and Chairman for closing remarks.

Victor Coleman, CEO and Chairman

Thanks so much for participating today and we appreciate the support of Hudson Pacific. Have a good rest of your evening.

Operator, Operator

This concludes today’s conference call. Goodbye. You may now disconnect.