Hudson Pacific Properties, Inc. Price & Performance (HPP)

Good afternoon, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman Mark Lomas, President Hrut Deeremarion, CFO and Art Suazo, EVP of Leasing.

This afternoon, we filed our earnings release and supplemental on an eight ks with the SEC both are now available on our website. An audio webcast of this call will also be available for replay on our website. 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, Richard will discuss our 2024 accomplishments and priorities for 2025, along with industry and market trends. Mark will provide detail on our office and studio operation and development and Khruw will review our financial results and 2025 outlook. Thereafter, we'll be happy to take your questions. Victor? Thank you, Laura. Good afternoon, everyone, and thanks for joining us. Throughout 2024, our team remained undeterred and laser focused on our strategic priorities driving office and studio leasing, executing on property sales continuing cost containment and strengthening our balance sheet. We've had many successes in this regard and we remain committed to additional progress in 2025 our multifaceted plan to reinvigorate earnings growth. Touching on some of the highlights in 2024, we ended the year with office leasing nearly 20% higher compared to the prior year as we delivered over 2,000,000 square feet of signed leases.

This included 1,200,000 square feet of new leasing or 60% of all activity. The highest level since 2019 and nearly double our post pandemic average. We successfully completed two of our three under construction development projects Washington 1000 in Seattle and Sunset Glen House in Los Angeles. And through various cost cutting initiatives, we achieved approximately $4,000,000 in and A savings as compared to our initial outlook. And as Surrut is going to discuss, we anticipate further savings this year. Even in a challenging transaction environment, we placed three non core assets under contract to sell for a total of $94,000,000 one of which closed in December, the second closed in January and the third is anticipated to close the end of the first quarter. West Coast office fundamentals are showing resilience with the Bay Area as a standout and bellwether for what should follow across our markets. In the fourth quarter, both San Francisco and Silicon Valley achieved positive net absorption capping off post pandemic record years for gross leasing.

West Los Angeles, too, had a positive net absorption, while Vancouver remained relatively stable. In Downtown Seattle and San Francisco Peninsula were negative net absorption persisted, the potential for favorable shift is starting to emerge as absorption continues to steadily march towards positive territory. And in summary, all of our markets' gross leasing is reaching post pandemic highs Sublease availability is improving with virtually no new construction, therefore supply for quality office space will become constrained. Supporting growing demand, fourth quarter venture funding of $75,000,000,000 was at the highest level since second quarter twenty twenty two driven by AI interest in our markets. In 2024, Samp Francisco received 53% and the broader Bay Area received 82% of venture funding for Global AI. In fact, the top five venture investment recipients in 2024, which totaled $500,000,000,000 were all AI companies headquartered in the Bay Area. Given the propensity for AI companies to be office first, the proximity to research and talent, the Bay Area affords we expect a considerable trickle down effect on office leasing to begin to materialize. Last year alone, AI office leasing in the Bay Area reached about 2,400,000 square feet more than doubling in the existing footprints with over 1,400,000 square feet of requirements presently in those markets.

Another favorable trend is that even as the macro uncertainty persists I mean, global conflicts and geopolitical tensions, we businesses appear poised to benefit from the new administration's pro growth pro deregulation policies. In our markets, we continue to see later stage startups turn their attention back to growth and fundraising after years of cost cutting. And fourth quarter tech layoffs were the lowest level since the first quarter of 'twenty two, and down 90% from their peak in the first quarter of 'twenty three. And in addition, CEOs are realizing that with employees in the office four plus days a week, they need more space. And while the East Coast has led in improving office fundamentals to date, we fully anticipate similar trends will emerge Turning to our studios, 2025 is a pivotal year for film and television industry in Los Angeles with all eyes on the governor's proposal to more than double the tax credit from $3.30 to $750,000,000 which approved will go into effect July 1. Particularly in the wake of the recent wildfires, which temporarily delayed productions, and personally impacted many in the industry, we're pleased to see a groundswell of support to increase filming in Los Angeles.

California Production Coalition FilmLA Entertainment Union Coalition, Film Liaisons in California Statewide or Flicks And Stay In LA and now the President's Special Coalition comprised of John Voigt, Mel Gibson and Sylvester Stallone are all pushing for additional state and local program enhancements and commitments for media companies to increase local production. We are specifically part of the California Production Coalition, but active and in communication with all of these groups. As Mark is going to expand upon, production in Los Angeles picked up modestly in the fourth quarter. In the first quarter, many productions paused or were delayed due to the wildfires. But we're now seeing an uptick in stage leasing inquiries not just in number, but in quality. Several of these long running first season episodic television shows has that need multiple stages as well as robust lighting and grip packages. Some of the pressure from austerity measures may be alleviated. As growing number of streamers including Disney, Warner Brothers, Discovery and Paramount reach profitability. Note, the increase in activity we see pertains to second or third quarter start dates and the incremental demand resulting from the expanded California tax incentives should be an upside. Lastly, I'm going to provide an update on quarter in the fourth quarter, we sold Maxwell in the early first quarter and Foothill Research Center is also under contract with closing anticipated in March.

So collectively, generated $94,000,000 of gross proceeds over the last two quarters, with all proceeds going to reduce leverage. Beyond these three assets, we are pursuing approximately $100,000,000 to $150,000,000 Hudson dispositions in various stages and Harout is going to discuss additional balance sheet related enhancements which are either completed or on their way. And with that, I'm going to turn it over to Mark. Square feet of new and renewal leases in the quarter with nearly 60% new deals. Our reported GAAP and cash rent spreads which were 69.9% lower in the quarter, were would have been 2.84.3% lower respectively, but for a new direct lease with existing subtenant at Rincon Center, [indiscernible] expiring in the first quarter of this year. Our fourth quarter trailing twelve month net effective rents were were 2% lower year over year and 8% lower than pre pandemic. Net effective rents on new deals alone were up 18% year over year and only 6% below pre pandemic on a trailing twelve month basis.

Our trailing twelve month lease term was up 2% quarter over quarter 81% year over year and 24% above pre pandemic. Even after removing our 157,000 square foot twenty one year lease with the city at 1455 Market from these metrics, our trailing twelve month lease term was still up 41% year over year. Our in service office properties were approximately 79% leased as of the end of the fourth quarter compared to 80% in the prior quarter. But for a single tenant terminating 140,000 square feet at Met Park North in December, our lease percentage would have been approximately 80% or essentially unchanged.

During the fourth quarter, Unique TourX representing in aggregate 1,400,000 square feet of requirements.

This is up 6% from third quarter and on par with our all time high in the fourth quarter a year ago, with the average requirement size now at 10,000 square feet.

Our current leasing pipeline remains strong at just over 2,000,000 square feet with an average requirement size of 16,000 square feet. This includes approximately 770,000 square feet of late stage deals in process, comprised of 480,000 of deals and leases and another 290,000 in LOI. Excluding held for sale Foothill Research Center, we have under 1,600,000 square feet expiring in 2025, with 52% coverage that is deals and leases, LOIs or proposals.

Roughly 70% of those expirations are in the first half of this year including our 05/2025 expirations over 50,000 square feet which collectively total close to 660,000 square feet and for which we have 68% coverage. Starting in the third quarter of twenty twenty five, through year end 2026, we will average just 230,000 square feet expiring per quarter, well below our leasing activity, which has averaged 460,000 square feet over the last eight quarters.

As Victor noted, last year 60% of leases signed were for new requirements and assuming this trend continues, starting in the second half of this year, new leasing should more than cover the quarterly expiring occupancy to stabilize in the second half of this year and start to grow thereafter. Turning to studios. As Victor noted, Los Angeles production levels in the fourth quarter incrementally improved, where on average there were 86 shows filming, compared to 84 in the prior quarter. Coincident with this level of activity, our trailing twelve month lease percentage for the fourth quarter for our in service stages 77% leased or 90 basis points higher than the prior quarter reflecting additional occupancy at Sunset Las Palmas. Our Q1 status were 33% leased essentially in line with last quarter.

Fourth quarter studio revenues increased by $2,000,000 compared to the prior quarter, driven by a $1,900,000 increase in studio ancillary revenue, mostly from more production activity at Sunset Las Palmas and a $1,900,000 increase in transportation and location service revenue attributable to higher utilization in both segments, which partially offset by a $1,600,000 decrease in stage rental revenue at Sunset Glen Oaks in various Coyote stages. Of our 56 film and TV stages, 43 stages representing 79% of the related square footage are either leased, in contract or subject to holds.

Which are essentially a non binding expression of interest.

This is roughly in line with the snapshot we provided last quarter.

But as Victor noted, we have seen an uptick in leasing that activity for second and third quarter start dates, which along with the proposed tax credits points to the potential for improved occupancy in the second half of the year. [indiscernible] Despite the indications of stronger future production demand, we're Los Angeles, we continue to look for ways to rightsize the Coyote business.

During the third and fourth quarters, we terminated certain leases and implemented other cost savings initiatives, which which are expected to reduce fixed expenses by $7,500,000 annually. As part of the cost containment, we elected to cease operations in New Orleans which will ultimately allow us to focus more intently on our assets in Los Angeles, New York and other core U. S. Markets. As for development, in regard to Washington 1000, we are in discussions with multiple tenants with requirements ranging from 45,000 to 250,000 square feet. There has been a notable increase in activity for this project from full floor or greater tenants entering the market focused on upgrading to Class A or Trophy assets in alignment with return to office mandates. As for Pier 94 Studios, the project is on time and on budget. Structural components are complete, exterior skin and roofing are nearly finished and the work is shifting to interior mechanical systems and build out. Leasing discussions are ongoing with a leading studio and other productions for multiyear agreements on one or more stages. Delivery anticipated by the end of this year, we expect to begin substantive discussions with tenants on a show by show basis this summer.

Now, I'll turn the call over to Rup. Thanks, Mark.

Our fourth quarter twenty twenty four revenue was $209,700,000 compared to $23,400,000 in Hudson quarter of last year, mostly due to sale of One Westside a single tenant moving out of Maxwell, partially offset by improved studio service and other revenue at Coyote and Sunset Las Palmas following the strikes. Our fourth quarter FFO excluding specified items was $15,500,000 or $0.11 per diluted share, compared to $19,600,000 or $0.14 per diluted share a year ago.

Specified items for the fourth quarter totaled $0.74 diluted share compared to $0.05 per diluted share a year ago.

Apart from the specified items, the year over year change in FFO was mostly due to items affecting revenue and reduced interest expense.

Specified items in the fourth quarter included a goodwill impairment and write off of assets related to hundred and $9,900,000 or $0.75 per diluted share. A non cash deferred tax adjustment of $2,100,000 or $0.01 per diluted share and a one time income tax expense at Dental stemming from a legislation change of $800,000 or $0.01 per diluted share. Note, the Qyote goodwill impairment the result of running our GAAP accounting impairment analysis of NOI in connection with our annual reporting to reflect the slower Our fourth quarter same store cash NOI was 94,200,000.0 hundred and $6,300,000 in the fourth quarter. Last year, primarily due to lower office occupancy. Turning to our balance sheet. In January, we amended our credit facility to adjust certain definitions and ratios to favorably confirm to market precedent and as a long term planning measure as we anticipate keeping the credit facility in play indefinitely. Specifically, we lowered the minimum [indiscernible] under key ratios including adjusted EBITDA to fixed charges from 1.5x to 1.4x. And unencumbered NOI to unsecured interest expense from 2x to 1.75x. We also modified certain definitions to improve how assets are factored into total asset value and unencumbered asset value calculations.

Again to be more consistent with market terms. With the amendment effective as of the fourth quarter of last year, our fourth quarter results show improved credit facility covenant performance across all metrics. In exchange for these modifications, lender commitments are now $775,000,000 versus 900,000,000 with a maturity date unchanged at December 2026 with extensions. Factoring in the recent amendment, we we have $518,300,000 of total liquidity comprised of $63,300,000 of unrestricted cash and cash equivalents and $455,000,000 of undrawn capacity on our unsecured revolving [indiscernible] We also have $154,000,000 of construction loan capacity of which our share is $40,000,000 Our share of net debt relative to our share of undepreciated book value is 38.7% and our percentage of debt fixed or capped was 90.7%. We have no debt maturities until November 2025 and we are making good progress on asset sales and secure financings the proceeds from which we tend to use to fully address both our 2025 and 2026 maturities, we expect to have additional updates To underscore the credit facility amendment along with the asset sales and upcoming secured financings are part of multiple concurrent efforts are pursuing to enhance our balance sheet. Regarding our performance under our covenants related to our prior placement unsecured notes.

We Based on our strategy and projections, we expect to remain compliant. Current outlook. For the first quarter, we expect FFO per diluted share to range from $0.07 to $0.11 per diluted share. There are no specified items in connection with this guide. Comparing to fourth quarter FFO, it's dollars 0.11 per diluted share we expect studio NOI to be approximately $0.02 lower at the midpoint, mostly due to the Los Angeles wildfires which hampered incremental improvements to demand this quarter, especially at We anticipate office NOI of approximately $0.01 lower at the midpoint due to first quarter lease expirations and to a lesser extent recent and pending asset sales. These changes to Studio Inn office NOI should be partially offset by further favorable improvements to G and A expense as well as other miscellaneous items equating to approximately $0.01 higher at the midpoint. Regarding our full year assumptions, we anticipate same store property cash NOI growth of negative 12.5% to 13.5%. Reflecting both recent asset sales and lower office occupancy through the first half of the year, followed by occupancy gains the second half of the year. We anticipate additional non cash revenue between $10,000,000 to $15,000,000 this year due to both upfront free rent and beneficial occupancy from several large to mid sized landlord build lease deals presently in negotiation.

Lastly, we have assumed lower G and A expense of $70,000,000 to $76,000,000 In 2025, not only will we receive the full benefit of cost containment measures, undertaken last year, but we also expect to achieve additional savings this year ranging from $3,000,000 to $9,000,000 Apart from Foothill, Research Center and Maxwell, which were held for sale in the fourth quarter, Our outlook excludes the impact of any potential dispositions acquisitions, financings and or capital market activity. We'll be having ticket questions. Operator?

Thank you. At this time, I would like Your first question comes from the line of Tom Catherwood with BTIG. You may proceed.

Thank you, and good afternoon, everybody.

Maybe Art starting with you.

Kind of the earnings growth flows through office leasing. Last quarter you talked about tenant requirements increasing, obviously increased tour activity and your ability to start pushing for longer lease terms. As you look out through the start of what you've done in 2025 and kind of what's in that pipeline, how are the fundamentals firming up? And are you still able to whether it's start to push on rents or continue to push on term? What is your kind of negotiating position? Looking like Sure, Tom.

I think your premise at the beginning was correct. [indiscernible] are up quarter over quarter. The pipeline is up slightly quarter over quarter, but the most important part of that is [indiscernible] Tells us that there's more common larger deals in the pipeline. And that's exciting. As far as As far as lease term, the deals that we have in negotiation are trending in the right direction. A trailing 12 quarter over quarter is up 2% slightly. But more telling is our trailing 12 year over year is up almost 80%. So, that's very encouraging. And everything we have in our pipeline tells us that we're heading in that direction. Appreciate that Art. And then second one for me, Victor, on the third quarter call, you mentioned pursuing secured financing on a portfolio of six assets.

What's your current view on when that gets Hudson? And kind of what's the back up plan to address maturities if that transaction doesn't come to fruition?

Listen, we're not going to comment on a timeline, but suffice to say that we're in process right now on multiple of events that will accommodate our rightsizing the balance sheet. And we feel confident that one or more of these are going to come through. And it should be fairly imminent.

Appreciate the answers. Everyone. Thanks Tom. Your next question comes from the line of Nick Joseph with Citi.

You may proceed. Hey there, it's Michael Griffin on with Nick. Art, maybe just going back to the leasing pipeline. I mean, it seems like it's pretty positive for the year ahead. Obviously, the news we've heard about both AI and tech company in office requirements seems to be helping your market somewhat. But can you give us a sense of the type of tenants that are looking, how likely they are to to commit? Is it more firms that are testing the water or do you feel pretty confident that a lot of these deals are going to get over the finish line?

Yes. I'm supremely confident that a lot of these deals will get over the finish line. I can go backwards The pipeline as I mentioned to Tom, the deal size has grown. Which is encouraging to us. But more importantly, right now, we're seeing more deals in late stage about 800,000 square feet, which we mentioned in our prepared remarks, that are really inside the five yard line. Right? And so it's more than ever. And so we're seeing a little bit more urgency and I we're seeing a little bit more urgency because We're seeing a little bit more urgency because Some of these tenants that are realizing they need to get back to the office, return to office, as I like to call work from work, They're running out of time. And so that's also going to be a good to move deals along Additionally, our coverage those deals in the pipeline and we mentioned part of it in the prepared remarks, we have high coverage on some of the expirations going forward.

Some of the large expirations. For example, at 14.55 Uber and the B of A expiration, which is total like 390,000 square feet. We have over 50% coverage on those right now and those are deals inside the five yard line. So again, everything is moving in the right direction, and it's not just again, it's not just a handful of deals and a handful of markets. It's across the portfolio.

Great. That's very helpful. Appreciate that Art. And then maybe just turning to the studios. Obviously the space has been through the ringer the past couple of years. It feels like even in the best of times in Quijote as a pretty limited visibility business. So you took the impairment this quarter And as you think about maybe disposition opportunities, I mean, does it make sense to stick with this platform longer term? I mean, do you think you're getting credit for it versus just the underlying studio real estate? I know it fits into the whole broader media ecosystem, but if there are any updated thoughts there, that'd be interesting. Yes. This is Mark. Thanks, Mike. We are we remain believers obviously in studios in general. We've been in it from the beginning through the ups and downs various changes. And continue to believe that Los Angeles is going to wage a comeback here. Victor touched on things like the tax credit increase all of the various industry groups that are getting involved, local, changes, all designed to pull production back to Los Angeles where it belongs.

I would just say, as it relates to Tote Keogh specifically, not sitting in our hands just waiting for show counts to go up. We have already undertaken various cost savings initiatives. To date starting in the third quarter largely completed in the fourth quarter, we cut about $7,500,000 of expenses. The resulting impact pro form a to 24 is like $4,200,000 of NOI improvement annualized. We're in process on another wave of cost cutting initiatives on the order of, call it, dollars 6,000,000 of savings generating 5,000,000 of NOI improvement again in pro form a to twenty twenty four operating results. So we're looking for ways to right size that business from a cost point of view and improved margins, enhanced NOI As show counts improve, that obviously will further improve the results, but we're going to improve those results one way or the other.

Yes. And I just want to jump in. Beyond Netflix, obviously, the other streamers Disney and Warner Brothers and Paramount, now they're reaching the levels of profitability And with this Paramount merger, collectively, this is going to alleviate a lot of the negativity that has come to fruition in the last couple of years around the studio business. Business. I mean, Los Angeles is still the lead marketplace for film and TV production globally. And we are seeing, unfortunately, with the circumstances of the fires, we're seeing a massive production turnaround and a support for the community around that, that the entertainment business and industry in general is leading. And so that is what's changed. I mean, at the beginning of the year, obviously, this devastating event occurred And then the backside of that event is the conglomeration of all these entities that are out there that we are all affiliated with that I mentioned in my prepared remarks that have come now to the table to say, let's rebuild LA.

Whatever acronyms you want LA Rises or Steadfast LA or Rebuild LA, they're all coming to the table. And that is what we're seeing is transferring to more than just interest. But holds on stages and production being greenlit going forward.

Great.

That's it for me. Thanks for the time. Thank you. The next question is from the line of Blaine Heck with Wells Fargo.

Great, thanks. Good afternoon. Just starting on the sales sector, a couple of questions there. It sounds like you're close to finished on the first three that were under contract, but just with respect to the three additional sales, can you give some more color on where you think stand in the negotiations?

And do you think we can expect those to go under contract soon? And then it sounds like the target for total proceeds is up slightly from your commentary last quarter at the mid point. So is that a change in mix, better proceeds on the sales so far or better expected proceeds on those that you still expect to sell.

So, Blayne, I'll start with the first part of the question. Yes, I mean, the three are done. I mean, one is gone non refundable. Because we mentioned that last quarter. It's just been a timing close. And so that deal is in process. We have two other deals right now at one in contract stage and another in LOI negotiation. The reason and we're confident that both those deals are going to make. The reason that the sort of the range is a little higher is we are realizing good pricing. These deals the deals that we're talking about have been marketed deals. And I think it's a testament to our ability to generate this liquidity and maximize value. And some of the comps have been very good comps and some of the ones we're looking at are going to be equally as good. But we've also had some reversing create on some assets that are two that we're working on right now. Which would make that number a little higher. That's still in flux and that that asset that I'm referring to is not a marketed asset. So we're keeping that a little bit more closer to the vest at this time.

And as as we get closer, we'll provide you guys with more updates on it. It. Okay, great. That's really helpful. And then thanks for all the commentary on the studio set. Side. I guess in the press release you talked about high caliber shows returning. Can you just expand on what that means? Are these large shows that need a lot of studio space? Is that that what makes them high caliber? And then with respect to returning, are these shows that were on hiatus? Or have they maybe moved to other markets and are coming back to LA?

Well, yes, by returning, we don't necessarily mean literally a returning show. What we mean is coming back to LA looking for stages in LA as opposed to other competing markets. And by high quality, we mean television, episodic, the kind of bread and butter that makes LA fries and that come to studios, high quality studios like we have in Hollywood Sunset Glenovs Just to give you a point of reference, we were seeing on average one long term TV episodic type show come through our available stages, about one on average for October, November, December. As of last month, six of those shows came through in January. So good early indicator that we're starting to see that recovery coming from [indiscernible] shows that use more stages use heavier lighting and grip packages, all the things that we rely on to make the stages [indiscernible] their name show runners who either worked in LA in the past or worked in our facilities they're coming back with shows that are multiple year running shows and we haven't seen that momentum in some time.

We're looking at a couple of shows right now that have been in the marketplace ten plus years that are coming back and looking at our studios. So it's much stickier than the ones that we've sort of seen in the last twenty four months. That have been pilots that may or may not have got picked up.

Got it. Very helpful. Thank you, guys. Your next question comes from the line of Connor Mitchell with Piper Sandler. You may proceed.

Hey, thanks for taking my question. I just have a couple. So first going back to some of the guidance you provided, the the cash NOI of negative $13,000,000 Harout gave gave some information on it regarding the occupancy fee, pre rent. But just to make sure I'm understanding correctly, do you see the think negative 13% cash NOI guidance, primarily due to the occupancy impact in the first quarter, the dividend regaining some strength or is it the free rent or some combination or something else that I might be missing?

No, you hit on that. It is a combination So there's a lot of deals that are in the works that Art working on that have upfront free rent so the GAAP NOI will definitely reflect that, but the cash NOI will be picked up on the later half of the year. Some of the timing occupancy, the rest is the structure of the deals that we are anticipating. Okay, that's helpful. And then thinking about the impairments You took on Quiote This is not a JV and I understand there's just a GAAP accounting involved. But just wondering how you guys can kind of think about the actual value of it now versus the purchase the purchase price that you guys took on in 2022?

So the impairment, it's really an annual GAAP requirement. And unlike real estate, it doesn't work the same way. So you have a different metrics and you've got to factor in all the NOI and projections. Ultimately, this just stems from the slower start of the recovery post the strike. That's all really impacted. And doesn't really impact the future of the business or how we look at it. And it's all goodwill by the way to be clear. It's not the assets themselves.

Yes. So essentially, you can maybe look value being slightly higher than the book value currently after the impairment, but you guys still have you still have confidence in the Coyote business like you mentioned earlier in the remarks, correct?

That's correct. Okay. Your next question comes from the line of Ronald DeCambium with Morgan you may proceed.

Hey, just two quick ones from me. I think, Juan, just looking at the guidance, I think I remember last year you talked about sort of stress testing the covenants and so forth, just can you just remind us when you do that exercise for this year, how would you think about the confidence trending this year? [indiscernible] the reality is like we said, we feel like we'll be covenant compliance We look at the projections granularly and just to almost for the last six or eight quarters, every quarter we've exceeded our internal expectations of the covenants. So we feel confident we'll remain covenant compliant.

Okay, got it. And then just staying on the sort of the same guidance topics, Just from a high level from this 78% sort of occupancy, maybe talk through how we should expect occupancy to trend for the year. I know it's going to get better in the second half.

But just maybe any numbers would be helpful. Thanks. [indiscernible] provide specific occupancy guidance. But I think you can discern what will happen in terms of the cadence over the quarter by simply looking at quarterly lease expirations in the supplemental Art outlined kind of what the pipeline looks like. Somewhat elevated, expirations first quarter, tapering off a little bit second quarter. So 70% of all expirations in '25 are weighted to the first half of the year.

That's where we're going to feel the most pressure on occupancy.

So we expect to see a dip.

In the first quarter. We actually believe there's an opportunity to even see recovery thereafter. [indiscernible] by second quarter relative to that where we end the first quarter. So that and then it should just steadily improve thereafter. And I would add we believe it will steadily improve beyond 25 given where expirations and activity is Great. Thanks. That's it for me.

Your next question comes from the line Caitlin Burrows with Goldman Sachs. You may receive Hi, everyone. I guess we've talked a lot about volume and interest of lease leasing, but on the pricing side, leasing spreads were down in 2024. So So do you expect the leasing spread of like down, call it double digits on a cash basis to continue in 2025 or like as you think about stabilizing occupancy occupancy, how much is it like a rate versus occupancy decision these days or is rate kind of secondary at this point?

Okay. Yes. So on leasing spreads, Of course, they're not necessarily indicative what we're seeing holistically in terms of net effective rents.

You're just seeing a comparison on face rates relative to expiring grants. But couple of things about that. Right now 2025 and even 2026 marked to market on rents is somewhere we're like call it six ish 7% above market. So that gives you an idea of kind of where expiring rents are relative to market. Now those don't necessarily translate into what you see on cash spreads that get reported in activity because they don't the timing of that doesn't always work out identically. But that gives you an idea where spot mark to market is for each of those three years. As for like the actual lease economics to kind of answer your initial question, have held up incredibly well. I mean, we outlined it in the prepared remarks in terms of net effect I would just emphasize that whether you look at the latest set of results and compare trailing twelve months to almost any period of time year over year, pre COVID rents. We continue to be in the low single digits off of even pre pandemic net effective rents. And I would add, there's been a couple of quarters in there when we were essentially back to pre pandemic net effectives. [indiscernible] the underlying reasons for that is essentially we've lost little to no ground on straight line rents.

Again, on almost any point of period of comparison, we've been able to stretch term out while maintaining TIs and LCs per annum. [indiscernible] [indiscernible] have held up incredibly well and I would say some of the more recent quarters are an indicator there's a real possibility we'll start to see net effect is higher than pre pandemic And then maybe just back to Washington January, wondering if you could give some more detail on the tour activity type of tenants coming through and whether they would be relocating or expanding into the space? And then also like if you were to sign a lease today, how quickly would you realize that NOI? Yes. This is Art, Caitlin.

First of all, unquestionably, the Washington 1000 is the premier newly constructed asset in the market, the only one in our downtown core and the team continues to doggedly pursue all prospects across the Puget Sound. We had mentioned that we're in discussions with with tenants from 45,000 square feet to 250,000 square feet. And actually in negotiations with two of those prospects that have 2026 lease commencement date. So we anticipate transacting the coming quarters. If I can share really at a macro level, the tech demand is increasing and growing stability with the City of Seattle. And what I mean by growing stability meaning enhanced security, cleaner, safer streetscapes, stricter return to office, revitalized retail and certainly elevated foot traffic We're encouraged this is going to generate more activity for Washington 1,000.

Thanks. Your next question is from the line of Dylan Berzynski with Green Street.

You may proceed.

Good afternoon, guys. Thanks for taking the question. Just wanting to touch on the leasing pipeline that you guys commented in the press release that it's caught a little over 2,000,000 square feet, which is generally in line with where really throughout 2024. So just trying to sort of square the leasing pipeline comments with some of your remarks around a recovery in sort of leasing demand from tech. Is there something we're sort of missing? Because it doesn't seem like according to the leasing done during the quarter, combining that with your comments on the leasing pipeline, if things are improving all too much, so just want to hear your thoughts on that and then sort of anything we might be missing Well, Dylan, let me start sort of a macro basis. I mean, they're clearly improving. I mean, we've leased more space by new and renewed tenants in the last year than we had since effectively 2019. So we're seeing the numbers pan out. And 2,000,000 feet is in line with what we did last year and that's what's in the pipeline right now. But that 2,000,000 feet is going to be offset by what's expiring.

You have to look at 25, twenty six and twenty seven. And we've sort of set the table and you, if anybody knows this, we're going to have the least amount of expirations in 2026 and 2027 than we've had in five plus years. And so it does magnify what's available and what's coming available given where the pipeline is. And it is supportive of the deals that we did in the last twelve months and what's the ones that are on the table right now, which are some good sized leases that are going to come Come to fruition in the portfolio. Right. As I mentioned earlier, the pipeline is growing. Points to what Victor just talked about. I think most importantly, the pace of the deals is picking up. We're starting to see a little bit more urgency out there with these deals. And more importantly, [indiscernible] are the tours, right? The tours spiked kind of early last year we've maintained that level of tour activity. The team has done an amazing job of pulling those forward. So it's about reloading the pipeline. Yes, it looks like it's static at 2,100,000 feet, 2,000,000 feet. We're also transacting 2,000,000 feet, which is a big difference.

That's helpful. Appreciate the comment. Guess just one sort of double clicking into Seattle.

I mean, do you guys envision it seems like Proposition 1A going to get passed. Do you guys sort of envision that further separating out the recovery in Bellevue versus sort of the city of Seattle.

Can you kind of just provide your thoughts on that? That would be helpful. Yes, I'm not sure I read your piece the other day. I may not agree with all of it, but that's okay. It's not in the first time you and I have not agreed on things in the past. But given that, I think the two things that maybe you guys missed over on that was one, the lack of space that is available in Bellevue. Right now. I mean, it's not there's very few Class A space that are comparable to the Class A space. Between Bellevue and Seattle. Economically though, I think that's the big difference, right? I mean, Seattle's average price of Class A space is $50 a foot. And Bellevue's average space is about $65 a foot. So the economic difference is a big momentum shift for companies to want to make a move versus the $1,000,000 that employees are going to pay for, a 5% head tax that the employers sorry, not employees, the employers are going to pay for So I think that clearly is going to stand out. Also, I think the number of people that are getting paid those dollars for relative terms given the valuation shift in the Class A real estate.

I think that's indicative of Seattle being very supportive. I mean, I concur with your analysis Southlake Union, but Denny Southlake Union has been very much attracted And the activity that we're seeing in Pioneer Square right now we've seen two large tenants that were earmarked to go to Bellevue recently changed direction, even with Prop 1A. And now they're looking specifically in Seattle at Pioneer Square to move And their objectives are really because of rental differences in the quality of the real estate available. Lastly, I would be remiss to to say because I think you sort of did pointed out It is to us surprising that given the momentum shift in Seattle, and given the opposition between the council, the mayor, virtually every CEO and every company like ours supporting 1B and not supporting 1A that the unions did prevail at such a high percentage So that the momentum around the progressiveness in Seattle that we've been all talking about and really praising the city for did take a step back. And I think we would concur with your analysis on that.

Great. Well, really appreciate that detail. It's very helpful. So thanks. Thanks, Dylan.

Your next question comes from the line of Rich Anderson with Wedbush.

Hey, thanks. Good afternoon. So, Harout, on the revolver covenant, adjustments, I believe this is the second time that you guys have made adjustments there, correct me if I'm wrong. And I'm curious like Where you're at now in terms of additional flexibility should you need it? You lost hundred and $25,000,000 of commitments as a result. I mean, what is the is this where we should expect things to stand for forever or for the foreseeable future? Or is there additional flexibility that you can take advantage of if needed a year or two from now?

Hey, Rich. So I think we feel very comfortable with where the revolver is right now.

Obviously, things can change, but it sets us up very nicely to execute in all the different capital needs we need for the next at least '25 and into '26. And once we do that, we we will then address the recast, which will extend the revolver for even a longer time. And maybe extended depending on market conditions.

Okay. But this was just a balancing act between the commitments you lose and the reduction of the covenants. Is that the right way to think about it? I apologize for the amateur sounding question. But I just want to make sure I understand No, for sure. It's just creating more flexibility and putting our our revolver on market terms. That's really what we're doing, just trying to set up a good future for our coverage of the financings that we have coming up.

Up. Okay. Second question is on the rightsizing of Chiyoti.

It was mentioned you stopped operations in New Orleans.

I'm curious, is this kind of a first in a series of steps or What's your flexibility to do the same in other markets within the Chiyoti platform? I'm curious how you're thinking about future adjustments to QOT on a go forward basis? Yes. I mean, this is the first.

We are looking at some other states locations and warehouses.

And there would be obviously payroll associated with some of that downsizing.

So I kind of mentioned that Rich, that there's about $6,000,000 more of cost saving initiatives pro form a to $24,000,000 would improve NOI an annualized basis another $5,000,000 Hudson that's kind of phase two.

We'll continue to monitor the market and we're always looking be more efficient, cut expenses where necessary. But We'll let you know where we come out in the next phase of this thing when they're done. And continue be flexible depending on how the market improves. So those savings may involve exits like in the case of New Orleans?

Not really because New Orleans was if you recall, it's a small location that came with a much larger acquisition. It was the only stage location that was outside of the state of California. So at this point, we're just looking at isolated opportunities to eliminate a stage here or there. It doesn't exit a market at this point.

Not an exit. I said that wrong. I apologize. But and then in terms of I think the rental the lease payments are correct me from around $25,000,000 ish a quarter, is that right? And how could that adjust down as time passes? Well, in that $7,500,000 I mentioned of completed deals, about $4,500,000 is directly related to lease eliminating leases And I would say roughly half the three of the $6,000,000 I mentioned about deals and process is also eliminating studio related leases. Okay.

All right.

Very much. Your next question is from the line of John Kim with BMO Capital Markets. Thank you. On that topic on cost reduction, some of your peers were more aggressive As far as stating a G and A reduction goal and executing that.

Sort of the first step in terms of getting their stock rerated? Is that something that you have considered? [indiscernible] In fact, if you look at where we guided G and A last year at this time compared to where we guided this year. I believe that's about a $7,000,000 sorry, dollars 10,000,000 decrease year over year. So we're definitely addressing that and that's reflected in the numbers you see. So we recognized some of it in 2024.

And we'll have more in '25 and we're going to continue to look ways to do that. And how much of that is corporate overhead versus Chiyotene and other divisions.

All of that is overhead. All the QOD savings that Mark outlined related to the QOG business and the QOG NOI.

Okay, got it.

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. Thanks so much for participating on our call and we look forward to providing you more input as the quarter evolves.

This concludes today's conference call. You may now disconnect.