Earnings Call Transcript - HPP Q3 2023

Operator, Operator

Good morning, and welcome to the Hudson Pacific Properties Third Quarter 2023 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Laura Campbell, Executive Vice President, Investor Relations and Marketing

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. 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 a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss macro conditions in relation to our business. Mark will provide details on our office and studio operations development, and Harout will review our financial results and 2023 outlook. Thereafter, we'll be happy to take your questions. Victor?

Victor Coleman, CEO and Chairman

Thank you, Laura. Good morning, everyone, and thanks for joining our call today. As we head into year-end, with our leasing activity accelerating, we're in a position to begin benefiting next year from both the ongoing sentiment improvement in office and the pending completion of the writers and related actors strikes. Tech employers along the West Coast are finally enforcing in-office policies, mostly 3 to 4 days a week and growing. Foot traffic and public transit ridership is improving, and there's a renewed public sector focus in our markets to address crime and safety and implement more pro-business policies. Close to 90% of our office space outside of the San Francisco CBD is already utilized on either a hybrid or full-time basis. And portfolio-wide, our office-related parking revenue was up 13% year-to-date. San Francisco's outlook is improving as well. In the third quarter, there were over 5 million square feet of requirements in the city, up 80% year-over-year and at fully 75% of pre-COVID levels. Over 40% of these requirements are tech related, and there are now 11 requirements over 100,000 square feet, with AI remaining a key driver of this growing demand. This includes late-stage deals with OpenAI for 450,000 square feet of Uber sublease space in Mission Bay and Anthropic for 230,000 square feet of Slack sublease space in the South Financial District. We're seeing similar strong tenant interest in our assets across markets in the form of increasing tours. The number of tours at our assets, which were already in line with pre-COVID levels, increased 17% sequentially, while aggregate square feet of demand grew 20%. With the writers' strike resolved as of September, we're closely watching the progress of the SAG-AFTRA strike and discussions with AMPTP. Both sides appear motivated to get a deal done soon. We've seen a pickup in preproduction activity on our watch related to in-place leases as well as an increase in tours, especially for production offices used by writers. Once the actors reach an agreement, we expect to experience an increase in stage bookings, positively impacting both occupancy and rental revenue as productions begin to prep. As filming resumes, we'll start to see the ramp-up of our service-related revenue as well. With the holidays approaching, the precise timeline remains difficult to predict. However, assuming that the SAG strike resolves by mid-November, we expect some level of increased activity through year-end, with the recovery picking up through the first quarter and normalized production in the second quarter next year. We continue to build on our studio business. And in the third quarter, we closed on our joint venture with Vornado and Blackstone to develop Sunset Pier 94 as Manhattan's first purpose-built studio. New York has been a high-priority marketplace for expansion for our Sunset Studios brand due to the established talent base, production infrastructure, and recently extended and expanded tax credits. This represents only a $39 million capital commitment, with fee-enhanced returns of approximately 9%. Beyond just project-level NOI, we expect our new footprint in the city to drive further demand for and revenue from our existing New York Quixote businesses, building a full-service platform in the city akin to what we've done successfully in Los Angeles. Our vision is an end-to-end production solution, totally vertically integrated with top-notch facilities and exceptional service. We also remain focused on deleveraging and further fortifying our balance sheet. We have no material maturities until year-end '24 when our loans secured by One Westside mature. In the third quarter, we raised $72 million from the sales of 2 California office assets, which reflect excellent execution by our team in an obviously tough transaction environment. Our dividend reductions have thus far this year yielded $54 million in savings. In terms of dispositions, we currently have 2 assets under contract to sell, with the possibility of adding a third, all with the potential to close by year-end. Additionally, I'll note that we've once again earned top rankings in the GRESB Real Estate Assessment. This is the third consecutive year we've been named a Regional Sector Leader in the Office of Americas and our fifth consecutive year earning 5-star and Green Star ratings. We are very proud of our team for continuing to innovate and make our business more sustainable in ways that create value for our tenants and shareholders. With that, I'm going to turn it over to Mark.

Mark Lammas, President

Thanks, Victor. Our gross leasing activity accelerated again in the third quarter. We signed nearly 520,000 square feet of leases, including the renewal of our 140,000 square foot tenant at Met Park North in Seattle. Our cash rents increased nearly 9%, largely due to the strength of leases signed in the Seattle and Vancouver markets. These are positive results, thanks to the hard work of our team, but it is still taking considerably longer to get leases signed versus pre-COVID. This is especially true for new deals. As a result, approximately 80% of the leases we signed in the third quarter were renewals. Even with this relatively healthy level of activity, our lease percentage, as expected, dropped 390 basis points to 83%, with 330 basis points of that decline attributable to one tenant Block's move-out at 1455 Market, which we've discussed for more than a year. The sales of 3401 Exposition and 604 Arizona also contributed. Occupancy within our portfolio has been impacted over the last 12 months by a similar large tenant move-out. As we look to 2024, we only have 1 lease, over 100,000 square feet, expiring, specifically Nutanix for 117,000 square feet. This expiration is the result of a 216,000 square foot renewal and extension through 2030 we completed with that tenant in 2022. Thus, with our leasing pipeline steady at 2.1 million square feet, including 400,000 square feet of deals in leases or late-stage LOI, we're optimistic we'll begin to see occupancy in our portfolio stabilize and start to recover in the coming quarters. We currently have 62% coverage, including deals in discussion on our remaining 2023 expirations, which are approximately 5% below market. We have about 37% coverage on our 2024 expirations over 50,000 square feet. Turning to the studios. The trailing 12-month lease percentage for stages at our in-service studios ended the quarter down 580 basis points at approximately 90% leased due to a single tenant opting not to renew on 6 stages at Sunset Las Palmas because of the strike. Underscoring the uniqueness of this situation, this is the lowest lease percentage we've had at that facility during our ownership since 2017. Having acquired Quixote in the third quarter of last year, this is the first quarter we're disclosing the trailing 12-month results for those assets. Quixote stages were 41% leased on a trailing 12-month basis in the third quarter, which obviously includes the strike's impact and is therefore not indicative of the asset's long-term potential. That said, historically, several of Quixote stages have been leased on a short-term, less than 1-year basis. So going forward, we could expect to see lower trended occupancy for those assets versus our predominantly long-term leased in-service portfolio, but also comparatively higher per square foot ABR. You'll note, ABR per square foot for the Quixote Studios was $64 as opposed to $46 for our in-service studios. So there is a trade-off between occupancy and rate, which we would expect to benefit from as production activity ramps up post-strike. Our team has continued to do an exceptional job of leveraging our Quixote stages and services to maximize revenue derived from non-strike impacted productions, including short-form content like print ads, reality TV, and large-scale events. However, similar to occupancy, I'll underscore our third quarter revenue from Quixote as well as our same-store studio assets is far from indicative of long-term potential performance. Year-to-date, the combined studio businesses generated approximately $10 million of cash NOI due to the impact of the strikes. By contrast, our same-store studios generated approximately $34 million of cash NOI in 2022, and we estimate that our Quixote stages and services have the potential to generate $80 million to $85 million of annual cash NOI once normalized production activity resumes. In short, our same-store studio historical performance and initial estimates for Quixote support the potential for as much as $120 million of annual cash NOI compared to just $13 million based on annualized year-to-date results. Moving to development, we're staying disciplined in our approach. Our in-process projects reflect highly differentiated product within our respective markets, and our remaining capital commitments are minimal. Nearly half of this in-process pipeline is studio-related. Sunset Glenoaks Studios in Los Angeles is expected to deliver at the end of the year. And as Victor noted, we've started construction on Sunset Pier 94 Studios in New York, with delivery anticipated by at the end of 2025. Despite the strike, we've continued to tour potential tenants who recognize the exceptional quality and uniqueness of these properties and who have interest in both long-term and show-by-show leases. Clearly, the strike's resolution will accelerate leasing activity for these assets. With respect to our only other in-process development, Washington 1000 will deliver in the first quarter of next year. There are currently 2 million square feet of tenant requirements for Downtown Seattle. This will be the best product in that market, with no other product delivering in South Lake Union, Denny Triangle through year-end 2024. The surrounding neighborhood is vibrant due to the combination of return-to-office mandates and the recently completed convention center, which added hotel, residential, and retail amenities. Our basis is only $640 per square foot, representing a 30% to 40% discount to comparable trades in recent years.

Harout Diramerian, CFO

Thanks, Mark. Our third quarter 2023 revenue was $231.4 million compared to $260.4 million in the third quarter of last year, primarily due to the sales of 6922 Hollywood, Skyway Landing, and Northview Center, previously communicated tenant move-outs at Skyport Plaza and 10900 to 10950 Washington as well as a reduction in studio services and other revenue due to the related union strikes. Our third quarter FFO, excluding specified items, was $26.1 million or $0.18 per diluted share compared to $74.1 million or $0.52 per diluted share in the third quarter last year. There are no specified items for this quarter. Prior-year specified items totaled $0.07 per diluted share. The year-over-year change in FFO is attributable to the previously mentioned asset sales and tenant move-outs, higher operating expenses associated with the Quixote acquisition, and higher interest expense. Our third quarter AFFO was $28.1 million or $0.20 per diluted share compared to $55.8 million or $0.39 per diluted share, with the change largely attributable to the previously mentioned items affecting FFO. Our same-store cash NOI grew to $126.7 million, up slightly year-over-year, with the same-store office cash NOI up 3.5%, largely driven, once again, by significant lease commencements at One Westside and Harlow. The 40.9% decline in same-store studio cash NOI reflects, as Mark mentioned, a single tenant's decision not to renew on 6 stages at Sunset Las Palmas due to the strike. During the third quarter, we repaid our $50 million Series E private placement notes with funds from our unsecured revolving credit facility. At the end of the quarter, we had $555 million of total liquidity, comprised of $75 million of unrestricted cash and cash equivalents and $480 million of undrawn capacity on our unsecured revolving credit facility. There is additional capacity of $295 million under our One Westside, Sunset Glenoaks, and Sunset Pier 94 construction loans. At the end of the quarter, our company share of net debt to company share of undepreciated book value was 38.6%, and 77.1% of our debt was fixed or capped. The reduced percentage of fixed or capped debt reflects the expiration of the hedge associated with our Bentall Centre loan until the refinancing is complete and a new hedge is put in place. On a pro forma basis, for the new hedge, our percentage of fixed and capped debt would be 79.7%. Regarding our upcoming maturities, as noted, we're in the process of completing our refinancing on our Bentall Centre asset, of which our 20% ratable share is $90.4 million. Thereafter, our only remaining expiration through 2024 is our loan secured by One Westside and Westside Two, which matures in December 2024, and of which our 75% ratable share is $243.5 million. Specific to our covenants, our percentage of unsecured indebtedness to unencumbered asset value increased in the third quarter to 57.7%, up from 53.7% in the second quarter. This increase was anticipated per our projections, and we expect to remain compliant.

Victor Coleman, CEO and Chairman

Turning to our outlook. While we remain positive about the strike's near-term resolution, we still don't have sufficient visibility around the nature and timing of the post-strike ramp-up in production. We continue to maintain our approach on our 2023 FFO outlook and studio-related assumptions, again, providing certain assumptions related to our office outlook. We're reaffirming our office same-store cash NOI growth projection ranging from 1% to 2%. As always, this outlook excludes the impact of any potential dispositions, acquisitions, financings, and/or capital markets activity. Should the strike resolve by year-end, we would anticipate reinstating our full-year FFO outlook for 2024 when we report our fourth quarter 2023 results next year. Now, we'll be happy to take your questions. Operator?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question today comes from Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb, Analyst

So two questions. I'll be first just sticking with the Bentall asset. Your partner has been busy exiting a number of other office assets that they've owned. I assume that Blackstone is like studios too, given that they just upped with the Hudson studio here in New York. Can you just give a sense of Bentall if this is an asset that they're committed to and you guys will stay in? Or should we look for you guys to exit Vancouver?

Victor Coleman, CEO and Chairman

Thank you for the question, Alex. We have had numerous discussions with Blackstone regarding this asset. While I can't speak on their portfolio performance, we believe this could be their top office asset. They are currently fully engaged and ready to continue ownership, with plans to remain in Vancouver and potentially extend our relationship regarding this asset.

Alexander Goldfarb, Analyst

Okay. For the second question, I’m unsure if this was specifically about Quixote or studios in general. You mentioned that the current figure is $13 million compared to a potential of $120 million. I would like to gain a clearer understanding, particularly as we anticipate the strikes resolving and the NOI recovery. To put it simply, what is the current state of NOI and what is its potential growth? I'm reiterating this question based on your mention of being at $13 million now with a possible $120 million associated with the studios.

Victor Coleman, CEO and Chairman

Sure. Let me start with an overview, and then Mark and Jeff can add more details. As you know, the strike has now been ongoing for six months, and we can discuss its current status if that’s what you’re interested in. Regarding the financials, we are anticipating a loss of EBITDA for the year in the vicinity of $100 million. If we manage to stabilize and the strike continues, the loss could be closer to the $120 million mentioned in Mark’s remarks, which includes Quixote, our South Lake operations, and the various revenue streams and cost-saving measures we have implemented over the past nine months.

Mark Lammas, President

Yes, Alex. You can clearly see the breakdown by segment, reflecting our year-to-date NOI for the studio business. This forms the basis for the annualized figures we mentioned earlier. More importantly, what we aim to provide is a sense of the potential. The year 2022 for our same-store assets was a standard operating year with normal occupancy at the stages. Up until the last month of that year, production activity was steady until it started to decline in anticipation of the strike, serving as a solid benchmark. Throughout our acquisitions of Zio, Star Waggons, and ultimately Quixote, we've indicated what we believe to be the potential EBITDA on a normalized basis. Jeff and his team have been working on synergy-related savings and top-line improvements, which we estimate will yield around $15 million. When combined with the $70 million from the preceding pre-synergy run rate NOI, this leads us to the normalized annualized NOI range of $80 million to $85 million. These elements contribute to reaching the $120 million target.

Operator, Operator

Our next question comes from John Kim at BMO Capital Markets.

John Kim, Analyst

Just sticking to the NOI uplift in studios, looking at your presentation in September, you go from 120 to 159, including developments. And the U.K. Waltham Cross was not included in that NOI contribution. I was just wondering if there was an update on that project.

Victor Coleman, CEO and Chairman

Currently, we are still in the design and entitlement phases, and we do not expect to start the Waltham Cross project in 2024. We are exploring some other options regarding the size of the deal, possibly in two phases, which will affect pricing. This is why it is not included in the cash flow moving forward.

John Kim, Analyst

Okay. And on the development yields that you're expecting on the 2 current developments, does that include any additional revenue from Quixote?

Victor Coleman, CEO and Chairman

No, that's just a straightforward development deal. It's a complex situation and it's a very good question. We need to consider this carefully. This is a Sunset asset, which includes both Pier 94 and Sunset Glenoaks. Quixote represents the operating business asset, and that contributes an enhanced number on top of that. For all the service revenue, we will account for it through Quixote regarding those Sunset-owned assets. However, there is separate ownership, so we need to keep the returns distinct.

John Kim, Analyst

Okay. So that yield is just the studio rental yield. And you do expect Quixote to service the studio?

Victor Coleman, CEO and Chairman

Yes. The 9 yields that was in the remarks were for Pier 94, and that's just the Sunset yield on the studio for Hudson.

John Kim, Analyst

My final question is on your dispositions. You mentioned 2 to 3 that may close this year. Any commentary that you could provide on the dollar amount in the yield?

Victor Coleman, CEO and Chairman

No. We just don't do that. I appreciate you asking. We have 3 assets, 2 are under contract. Hopefully, the third will be. And as we get closer to closing, we'll share the numbers and the assets and the size.

Operator, Operator

Our next question comes from Michael Griffin at Citi.

Michael Griffin, Analyst

I have a question about leasing. You mentioned Seattle and Vancouver as markets where you're seeing relative strength. Is there something about these markets that gives you more confidence compared to San Francisco and L.A.?

Victor Coleman, CEO and Chairman

So let me start on just the general, and then Art's sitting here. So Michael, he can jump in on that. So listen, Vancouver has been positioned throughout pre-pandemic, pandemic, and currently today, right? The vacancy is very low. The rental rates have not moved considerably in either direction, and it's been absolutely consistent and could be one of the best markets. But yes, as we've talked in the past, it's very small. What we've seen in the shift in Seattle is generally that when the workforce has gone from 3 days a week going to 4 now in that area, some of the high-quality space in both Bellevue and Seattle is getting eaten up. And there are a few deals right now that are about to be announced in both those markets, but we're seeing the quality space being eaten up in those markets, a lot more efficiently than, I would say, specific to Los Angeles, we don't have that kind of space available in Los Angeles for the same level and size of tenants. Plus, I think what's the underlying tone in Los Angeles, and Art's going to talk about some of the demand numbers. But because we have a strike here and we are a media entertainment-related city in Los Angeles, where we're sitting right now, things have slowed dramatically until we get back up and running. So it's not just the studio business, it's the overall industry itself for people growing in real estate.

Arthur Suazo, EVP of Leasing

And the ground is following really, Michael, in Seattle, as Victor mentioned, with return to office, really starting to take hold more and more with the mandates. It's really the growth of tech users coming back into the market that we've seen really grow over the last 3 quarters, right? Also, it's not lost that San Francisco obviously has shown the most growth in demand, really the 80% growth in demand year-over-year and probably 25% quarter-over-quarter because of that same reason, because of tech. In Los Angeles, we're really only talking about relative to our portfolio, West Los Angeles and the reasons Victor stated with regards to the strike. Entertainment and media were really driving that market through the pandemic and keeping it healthy. And we'll start to see those numbers come back, but it's still very, very modest level of activity.

Michael Griffin, Analyst

Great. That's helpful. And then maybe one question on occupancy, if I can. I think Mark, in his prepared remarks, kind of alluded to a stabilized expectation for occupancy, heading into 2024. Should we read that as kind of flat from current levels there? Anything you can provide there would be helpful.

Mark Lammas, President

Our forecast indicates consistent improvement as we move into 2024 and even into 2025. We noted the transition from the expirations we faced over the last year to a period of 1.5 years with very few large expirations, only one exceeding 100,000 feet. This aligns well with the pipeline regarding the source of demand. Therefore, we anticipate steady improvement from this point forward and into the foreseeable future.

Operator, Operator

Our next question comes from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows, Analyst

So we've had the writers' strike and actors strike. I'm wondering if you have a view on whether cruise will strike, if that's anything you've heard about.

Victor Coleman, CEO and Chairman

Next year, yes. We haven't heard anything about that at this stage. They typically align more with the Directors Guild, and they settle beforehand. As I mentioned, we're in a unique timeline, with multiple industries potentially looking to strike. The two biggest are SAG-AFTRA and WGA, and they've always led the way. We're hopeful that won't happen, but so far, we've heard nothing.

Caitlin Burrows, Analyst

Okay. And then also, Harout actually marked last quarter, you mentioned that you guys had stress-tested your covenants through the end of '24 and that you would remain, even in the worst quarter, over 300 basis points clear of the limit. So now you just have 230 basis points remaining buffer on the unsecured indebtedness to unencumbered asset value covenant. So wondering if you could go through why it might have exceeded that stress test that you mentioned last quarter and your confidence in the trend, going forward, and ability to forecast that?

Harout Diramerian, CFO

Yes, we are still largely aligned with our expectations, although the calculation is quite complex as it relies on trailing numbers that need to be adjusted. There are one-time items that must be excluded, but I would say we are materially in line. I appreciate your point about the 300 basis points. After stress testing the numbers, we remain confident in our compliance. I am not sure there is much more to add other than that we are focused on this issue, we are reviewing all of our leasing expectations, and we have incorporated the sales Victor mentioned earlier into all of our projections. We expect to maintain compliance.

Operator, Operator

Our next question comes from Blaine Heck at Wells Fargo.

Blaine Heck, Analyst

So just following up on covenants and thinking about some of your options to bring your metric away from the limit, I understand increasing income would certainly help on some of them. But just taking the income side out of the equation, I guess, what can you do on the balance sheet side? I believe if you kind of draw down the rest of your line, that puts you in violation. But if you could confirm that, it'd be helpful. Have you looked into any additional secured debt on the media portfolio, is that a possibility? Or does it just really come down to dispositions at this point?

Mark Lammas, President

Dispositions are a significant contributor, and we anticipate that the previously mentioned dispositions will positively impact the unsecured metrics on the balance sheet. Additionally, we have other assets in the portfolio that we have discussed in the past, which are not part of the credit facility, and we're exploring options related to those. This should provide a substantial amount of liquidity as well.

Victor Coleman, CEO and Chairman

We also have other assets in the portfolio that we've mentioned, Blaine, in the past that are not part of the facility or credit facility that we are looking at options around that, which enhances a fair amount of liquidity as well.

Mark Lammas, President

Yes. And just maybe just reiterate that point, there are other levers, Blaine, beyond just disposition. So there are unencumbered assets that we could put debt on that don't run through the unencumbered metrics, that we could put that would be accretive. There are other assets we own that are not real estate assets, they are notes. Those we have the ability to sell those. Those would be accretive to the metrics. So there are a number of levers, if you will, that we can pull beyond asset sales that would all improve those metrics.

Blaine Heck, Analyst

Okay. That's helpful. We noticed the term on leases signed during the quarter was significantly shorter than normal, I think, right around 3 years. Can you just talk about that, whether there was anything specific that might have skewed that downward? And whether those shorter terms are prevalent in kind of the leases you have in the pipeline as well?

Arthur Suazo, EVP of Leasing

Blaine, it's Arthur. No, they're not prevalent. The sequential decrease was mainly due to two transactions. The first was a 6-month, 35,000 square foot office use transaction in Pioneer Square, which we did to try to keep the tenant long term. The second was a 24-month extension on the 140,000 square foot expiration in Denny Triangle, again with the intent to further extend the lease later on. With the combined effect of these two deals, our weighted average lease term was consistent with the prior two quarters' average of about 45.5 months. So yes, there were a couple of outliers, and that explains it.

Blaine Heck, Analyst

All right. And then last one, given that you launched the tenant at Sunset Las Palmas, is that now the focus on the leasing side within your studio segment? And how does that affect your ability to lease up Glenoaks? I guess, are they kind of competitive properties at this point kind of going for the same tenants or separate?

Victor Coleman, CEO and Chairman

We experienced a loss of a tenant due to their production ceasing, which was their right to exit, and this led to a cancellation of their show because of the strike. This marks the first vacancy we’ve had since we acquired that asset, and the same can be said for Glenoaks, Gower, and Bronson. Glenoaks remains competitive with high activity levels and surprising interest, especially as it is a unique purpose-built facility. As I mentioned earlier, we are already seeing writers’ rooms and other activities starting up. Once the actor strike concludes, the demand for purpose-built facilities will increase significantly. We believe this situation is temporary rather than a long-term trend. I anticipate that the parent company that left us will be among the first to reach out and want to bring a show back. We will have leasing options at Las Palmas similar to those available at Glenoaks and our other Quixote facilities.

Operator, Operator

Our next question is from Rich Anderson at Wedbush.

Rich Anderson, Analyst

So you guys have done really good work converting your studio business into longer-term leases. I know this topic has come up a couple of times now. But as an exit out of the actors strike situation, do you think the market or the business could step back in and want to continue this theme of more short-term leases at the outset and that you'll have to absorb more of that as you kind of get back to work? Or do you think that won't be sort of something you have to give away to get rolling again?

Victor Coleman, CEO and Chairman

I’m not sure what we’ll give away, Rich, but as we’ve consistently stated, we believe that once the strikes are resolved, there will be a significant increase in activity across the board. We will determine whether to prioritize short-term or long-term strategies as we move forward. We have many options available to us. Jeff can elaborate on the sales team's insights, but he is already experiencing a surge in inquiries for different options. Initially, we achieved great success with show-to-show arrangements, and then we transitioned to long-term leases with equal success. We are ready to assess what the best economic terms will be, and we are open to both approaches. As we’ve noted, show-to-show offers a much higher revenue stream than long-term leases, and we are comfortable pursuing either path. We anticipate that the numbers will reflect a significant uptick in activity once the strikes end and we return to more stable revenue, which we hope will happen soon. Jeff, do you want to share your thoughts on the sales?

Jeff Stotland, Sales Team Representative

Yes. I would just add that, Rich, when we go a show-by-show model, I think it separates us as a differentiator in the industry because we have a really good team capable with all of our relationships with the studios and understanding how shows get greenlit, booked, and that whole process. It really enables a company like ours to succeed. Whereas anybody who's got sort of a one-off studio development, who doesn't have those relationships, just hoping a long-term lease is going to save them, is going to have more trouble. So I actually think we're in a competitive advantage situation when the industry goes back to predominantly show by show. And that's how we're really building the business to capitalize on that.

Rich Anderson, Analyst

Okay. Second question. Douglas Emmett has Warner Brothers known vacant for next year, not related to you, but perhaps a systemic observation about the industry, does that give you pause at any level about just the longer-term sort of view on content and the studio business overall? Or did you see that as completely unrelated?

Victor Coleman, CEO and Chairman

I believe that's completely unrelated. As I mentioned, we are observing significant interest in studio occupancy, content, and growth. I can't provide any comments on Warner Brothers or their recent $500 million write-off or any other decisions they're making. However, they are not the only players in the market. Companies like Apple, Amazon, Netflix, HBO, Showtime, Cinemax, Disney, ABC, NBC, CBS, Paramount, and others are all seeking space and content in our markets and globally. This is simply part of the growth trajectory we are experiencing.

Rich Anderson, Analyst

Okay. My last question is about New York City, which is an interesting area for expansion. I see it as a starting point for growth in the metropolitan region. There’s a Netflix project near my home in Fort Monmouth, New Jersey. I'm interested in how you view the New York City metropolitan area as a growth opportunity moving forward. What long-term opportunities do you see there?

Victor Coleman, CEO and Chairman

I think New York is, as I mentioned in my prepared remarks, a marketplace that we've been very eager to get into. I give the team high marks for being disciplined and not buying into the marketplace, on the upswing. This is a purpose-built facility that will be first of its kind in the City of Manhattan. I think as a result of that, it will give an entree for us to look at some other opportunities in our venture with Blackstone, which is their interest level there and other markets as well. As I said, discipline has been something that we've been very focused on. This is a 3-year deal in the making. And at the end of the day, our team, which is already doing business through our operating companies with Quixote and Zio and Star Waggons and the likes of that in the surrounding areas of New York and all the other studios in that neighborhood, we'll see how that ends up going forward. But right now, we're positioned to continue to evaluate and be disciplined.

Operator, Operator

Our next question is from Ron Kamdem of Morgan Stanley.

Ronald Kamdem, Analyst

Two quick ones. Just going back to the covenant question, taking a different take at it, what are some of the hurdles to actually adding Quixote to the calculation, right? Because presumably, that would help. But just trying to figure out, what are some of the hurdles for that to get into the calculation? Or is that even realistic?

Mark Lammas, President

It's realistic. I wouldn't describe it as a hurdle. It is running through our TAV. At the time that we reset the facility in '21, we had line of sight to what at that time was two relatively small operating businesses. The lenders were amenable to flowing it through TAV. We did not anticipate the growth of that part of our business. And so we did not anticipate through, for the unencumbered metrics, the potential impact that those could have. We're in constant contact with our lenders, we have amazing relationships with them. They are very aware that those businesses grew and that had anticipated that type of growth, they would have been factored into those unencumbered metrics. I do think that we're watching our calculations, our metrics and so forth. And there may be a time and an opportunity to pull those into the unencumbered metrics, and they're amenable to that.

Ronald Kamdem, Analyst

I want to follow up on Washington 1000's performance in the first quarter. There hasn't been any pre-leasing yet, so I'm interested in knowing about any activity happening there. Are there tenants showing interest or any letters of intent? I would like to get a sense of the current activity and what would be a realistic timeline for signing the first leases.

Arthur Suazo, EVP of Leasing

Yes. First of all, yes, it's not really pre-leased market, but we're very well situated right now. It's the newest best-in-class building in the market. In addition to that, there are no other deliveries through the end of '24. So again, we're very well situated. As Victor mentioned on one of the other questions, we're starting to see an uptick in large deals in the CBD and across Bellevue. There's a lot of quality sublease space, it's going to get leased up here, you'll read about in the following quarters, which makes us even more desirable, again. And in turn, it's ticked up our early interest and tours.

Operator, Operator

Our next question comes from Tom Catherwood from BTIG.

Thomas Catherwood, Analyst

I appreciate your insights on the increase in preproduction activity. Can you provide more details on how far in advance the production planning needs to begin in order to secure studio space? Is this leading to any early discussions with users beyond the preproduction activities you mentioned?

Victor Coleman, CEO and Chairman

Tom, that's a great question. There's no exact science to this, but I can share our observations. While SAG-AFTRA is on strike, they can't sign any agreements until the strike ends. The writers can now finalize office spaces and start developing scripts, but they can't secure sound stages or similar facilities. This is our current situation. If the strike were to conclude today, it would take about two weeks to ratify the agreement. Following that, there would be another six to eight weeks of determining which shows will go into production first and how that will be prioritized. During that time, they would begin to explore available opportunities at our facilities and others. After that, there would be a clear timeline for the mill space, editing, and other preproduction activities. Therefore, we expect to be fully operational for approximately three quarters next year, with potential for improved financial results in the first quarter if things progress quickly. However, given the holidays, I believe they probably won’t resume until January 1, despite being on holiday for six months.

Thomas Catherwood, Analyst

Got it. Really helpful. And then second question, maybe, Mark, following up on the levers that you mentioned in response to Blaine's covenant question, what is your appetite to potentially monetize the retained bonds on the Hollywood media portfolio to fund either incremental investments or delevering?

Mark Lammas, President

I mean I think it's an interesting potential source of liquidity and opportunity to create liquidity, improve the metrics. It's something worth exploring. And I guess I'll leave it at that. We'll just have to see how other things unfold.

Operator, Operator

Our last question on the call comes from Dylan Burzinski from Green Street.

Dylan Burzinski, Analyst

I guess just going back to occupancy and the expectations over the next, call it, 18 months to 2025, are you able to share what sort of level of new leasing activity is embedded in those expectations?

Mark Lammas, President

Not at this time. Historically, we've been asked this question, and we've tried to provide insights into where we might be at certain points. However, I think this has likely led to some misunderstandings about our leasing activity and the progress we are making. When the time comes to provide new guidance, we might consider using a metric, but I don't think it will be as detailed as differentiating between new and renewal leases. It may be worth considering something that our peers do, like occupancy ranges, but I don't expect it to align exactly with your inquiry about new leases.

Dylan Burzinski, Analyst

That's fair. And then I guess just one more. Are you able to comment on sort of expectations for net effective rents? And obviously, it's going to differ by market. But if you can just go broad strokes across your footprint, that would be helpful.

Mark Lammas, President

I'm sure you're monitoring the trends in net effective rents, which have remained stable. Comparing the trailing 12 months to the pre-pandemic period, we're approximately aligned with the recent data, showing about a 4% decrease. Overall, net effective rents have remained consistent, fluctuating slightly above and below in various quarters. However, we don't set specific net effective targets for forecasting purposes.

Arthur Suazo, EVP of Leasing

Chiefly because the composition changes quarter-to-quarter.

Operator, Operator

Thank you. This conference has now concluded. You may now disconnect.