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spk09: If you would like to ask a question, press star one on your telephone keypad. I would now like to turn the conference over to our host, Laura Campbell, Executive Vice President of Investor Relations and Marketing. Please proceed.
spk08: Good afternoon, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman, Mark Lamas, President, Root Deer Merriam, CFO, and Art Suazo, EVP, as we sing. This afternoon, we filed our earnings release and supplemental on an 8K 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 earnings released 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, as well as other highlights from the quarter. Mark will provide an update on our office and studio operations and development and Harut will review our financial results and 2024 outlook. Thereafter, we'll be happy to take your questions. Victor?
spk04: Thank you, Laura. Good afternoon, everyone, and welcome to our second quarter call. The results we reported this quarter were in line with our FFO outlook, with our office portfolio performing better than our expectations. This quarter, our team's strong execution resulted in leasing over half a million square feet. This is our highest leasing activity since the second quarter of 2022 and our year-to-date leasing was up 40% compared to last year. Two-thirds of those leases were new, the most since first quarter 2019. Even after another strong quarter of leasing, our pipeline of deals in leases, LOIs, or proposals is healthy at 2 million square feet. with an average requirement of above 15,000 square feet up from about 9,000 square feet two years ago. All of this is a testament to our team's ability to attract and capture demand and successfully move leases through the pipeline to execution. And while still challenging, there's a gradual strengthening across our West Coast office markets almost uniformly relative to the trailing four-quarter average available sublease spaces declining, development pipelines are diminished, Tenant requirements are growing, crime is falling, and transit ridership is improving. Nowhere is this more evident than in San Francisco. The city had its second best leasing quarter in two years at 2 million square feet, with several submarkets experiencing positive or near positive net absorption. There were 13 deals signed over 40,000 square feet, the highest number since the third quarter of 2021. And kudos to our team for signing two of the 10 largest deals. Tenant requirements continue to increase, reaching 6.8 million square feet this quarter, up 50% year over year, to levels not seen since late 2019. Continued strong investment in AI is reigniting the San Francisco office market and spilling over into our other markets, especially Silicon Valley and to some extent Seattle. With over 600,000 square feet of AI leases signed in San Francisco year-to-date and 740,000 square feet of AI tenants already in the market, 2024 is on pace to be another significant AI leasing year. Second quarter US VC investment of $56 billion was the highest quarter in two years, driven by AI mega deals. Reportedly, investors are gaining confidence in the US market's relative performance and getting more pressure from LPs to allocate nearly $300 billion of dry powder. The Bay Area, where we have obviously a significant presence, continues to receive the largest allocation of VC funds, along with about 75% of all AI funding in the first half of the year. We're energized by this positive leasing momentum and by significant funding for businesses that are choosing to locate in our core markets. While we cannot control the timing on leases closing, we expect our office fundamentals will gradually strengthen further as we move ahead. As for our studios, last week the Teamsters ratified their contract with the Alliance of Motion Picture and Television Producers, finally clearing the way for production activity to begin to normalize. This favorable resolution follows an unprecedented 18 months of strikes and difficult negotiations which delayed green lighting and overshadowed typical seasonality. Presently, we estimate that there are only about 80 productions tilling in Los Angeles, compared to approximately 100 during much of the second quarter, as the potential for additional strikes weighed on demand in July. While we expect some level of increased production through the balance of the year, to what levels remain unclear. Beyond the strikes, consolidation, cost cutting, and shifting content mix are altering not just show counts, but also production type, number of episodes, and budgets. All of these factors influence demand for our stages and services, both in Los Angeles and outside of Los Angeles. While we believe Los Angeles will remain the epicenter of entertainment, in recent years, the city has lost some of its substantial lead in global production. Other locations have enhanced their infrastructure and implemented favorable state film tax credits and sector-specific incentives. While the strike exacerbated this trend from 2021 to 2022, growth in the Los Angeles region's total scripted production capture was up less than 1% compared to 4% in total scripted industry output. In 2022, Los Angeles lost nearly $1 billion of production spend due to projects leaving the state for tax credits. While we are working closely with Los Angeles' Mayor Bass, Governor Newsom, and other elected officials and industry experts on this front, Mayor Bass is committed to ensuring the industry continues to thrive in the city of Los Angeles and has established a commission to strategize on incentives and related topics. All of these dynamics are very fluid, and as a result, we currently lack the visibility to assess With reasonable certainty how and when our studio operations will normalize, but they will normalize. And we believe that by the fourth quarter, production should start to get better, even as new content investment remains cautious and more globally distributed. Importantly, we do not require production to return anywhere near our 2021 peak levels for our studio businesses to create meaningful value. At a point of reference, during the fourth quarter of 2022, when we began to experience the early impacts of pending WGA and SAG-AFTRA strikes, we estimate there were approximately 120 productions filming in Los Angeles. During that same period, our in-service studios generated an annualized NOI of $37 million, and our COD businesses generated an annualized NOI of $41 million. Finally, turning to our balance sheet, further deleveraging remains our top priority. We have no debt maturities until the end of 2025, and while we have already seen improvements in some of our leverage metrics, which Harit will comment on shortly, we anticipate that increasing studio cash flow will further strengthen these organically. As part of our proactive multi-pronged approach to managing our leverage, we will continue to pursue opportunistic dispositions and have strong buyer interest on several assets. We expect to be able to execute successfully on these type of transactions just as we did last year. With that, I'm going to turn it over to Mark.
spk17: Thanks, Victor. This quarter we signed 540,000 square feet of new and renewal leases. On our first earnings call this year, we indicated our occupancy and lease percentages would likely dip in the first half with the potential to improve thereafter. The 30 and 50 basis point declines in occupancy and lease percentages this quarter are consistent with those early indications. Our gap rents grew 2.6% while our cash rents were off 13.3%. Excluding our 150,000 square foot 21-year lease with the City of San Francisco at 1455 Market, our gap in cash rents would have increased up 8% and 0.9% respectively. Note that more than half of the square footage leased by the city was former block space signed at peak of market 80 plus dollar rents, whereas the rent delta on the yet to be leased block space, most of which was signed in the mid 2010s, would be significantly less. The notable increases this quarter in both net effective rent to $57 per square foot and termed in nine years were driven by mid to large size renewal leases in the Bay Area some signed at $100 plus square foot rents. We had roughly 1.4 million square feet of unique office tours again this quarter, up 20% from this time last year. Compared to first quarter, tour activity increased 60% in San Francisco and 14% in Seattle. Year to date at Washington 1000, we have toured tenants representing in aggregate over 600,000 square feet of mid to large size demand. We also have planned tours for that project representing another 80,000 square feet. To underscore, this represents only very early interest, but we are pursuing all prospects from the entire region with bigger. Washington 1000 is among the best, if not the best, product in the Seattle CBD. On the heels of yet another strong leasing quarter, as Victor mentioned, our over 2 million square foot pipeline is up 8% from last quarter and 5% compared to second quarter last year. This includes 48% coverage, including deals and discussion on our remaining 2024 expirations. On our top 10 vacancies, which collectively total about 2 million square feet, we have 47% coverage. This should allow us to begin to increase occupancy at assets like 1455 Market, 505 First, Page Mill Hill, 901 Market, and 83 King. To put a finer point on our upcoming office expirations, We have roughly 800,000 square feet expiring through year end and 2 million square feet expiring in 2025. Over the last three years, we have leased 470,000 square feet per quarter on average. Assuming we continue to accomplish only that and nothing more, over the next six quarters, we would have leased a total of 2.8 million square feet, exactly enough to address all remaining 2024 and 2025 expirations. Thereafter, our annual office expirations become substantially lower, including in comparison to a majority of office peers. If our pace of leasing continues or even modestly accelerates as market conditions improve, there is a clear path whereby we will not just preserve but achieve sustained growth in occupancy. Turning to studios, on a trailing 12-month basis, our in-service stages were a 78.1% lease compared to 79.4% in the first quarter. which reflects an additional vacant stage at Sunset Las Palmas. Our Coyote stages were 32.8% leased up from 29.8% last quarter due to increased stage occupancy at Coyote North Valley. We currently have signed leases on contract or have client interest on 38 of our 59 film and TV stages. In May, we held our grand opening event for clients at Sunset Glen Oaks with major studio streamers and networks in attendance. Year-to-date, we have conducted over 20 unique tours at that asset, representing 11 active requirements, which resulted in three lease stages with a fourth stage in negotiations. Transportation utilization increased approximately 300 basis points to 24% compared to first quarter. We had more activity in the early half of the second quarter and had been gaining market share even as activity declined with production levels later in the quarter. This is a testament to what our sales team and unique integrated offering can accomplish as production normalizes. Our studio revenue grew 8% relative to first quarter. This is due to $2.1 million of additional stage and studio ancillary revenue from higher occupancy at Coyote North Valley, more Netflix production at Sunset Gower, and initial occupancy and production at Sunset Glen Oaks. It also includes $1 million of incremental services revenue from higher transportation and location services utilization. Finally, I'll note that construction at Sunset Pier 94 is on budget and on time for planned opening in end of 2025. As Manhattan's first purpose-built studio, the project has garnered significant interest from high-profile studios and productions, and we are in discussions with multiple tenants for multi- and single-stage leases. With that, I'll turn the call over to Ruth.
spk11: Thanks, Mark. Our second quarter 2024 revenue was $218 million compared to $245.2 million in second quarter last year, primarily due to asset sales and two move outs, one at Fortune 55 Market and one at Sunset Las Palmas Studios, partially offset by improved studio and studio revenue from increased production activity at Sunset Gower. Our second quarter FFO excluding specified items was $24.5 million or $0.17 per diluted share compared to $34.5 million or $0.24 per diluted share in the second quarter last year. Specified items consist of transaction-related income of $0.1 million or $0.00 per diluted share and a one-time derivative fair value adjustment of $1.3 million or $0.01 per diluted share. The year-over-year change in FFO is mostly due to the items affecting revenue, along with less FFO allocated to non-controlling interests following our purchase of our partner's ownership interest in Fortune 55 market. Our second quarter AFFO was $24.2 million, or $0.17 per diluted share, compared to $31.1 million, or $0.22 per diluted share, in the second quarter last year, with a change largely attributable to the previously mentioned items affecting FFO. PARTIALLY IMPROVED BY REDUCED NONCASH REVENUE ADJUSTMENT AND 4 MILLION LESS IN RECURRING CAPEX SPEND. OUR SECOND QUARTER SAME STORE CASH NOI WAS 105.2 MILLION COMPARED TO 119.3 MILLION IN THE SECOND QUARTER LAST YEAR, MOSTLY GIVEN BY PREVIOUSLY MENTIONED TENANT MOVEOUTS AT 465 MARKET AND SUNSET LOST THOMAS. AT THE END OF THE SECOND QUARTER, WE HAD 706 MILLION OF TOTAL LIQUIDITY COMPRISED OF 78 MILLION OF unrestricted cash cash equivalents and 628 million of undrawn capacity on our unsecured revolving credit facility there is also additional capacity of approximately 196 million specific to our sunset glen oaks and sunset pier 94 construction loads our share of which represents 54 million dollars we continue to take proactive steps to reduce leverage and strengthen related metrics compared to a year ago we improved our share of net debt relative to our share of undepreciated bulk value by 104 basis points to 37.3%, and increased our percentage of debt fixed or capped by 690 basis points to 92.2%. Importantly, as Victor noted, we have no maturities until November 2025. One housekeeping matter before we discuss our outlook. With construction on something that was complete as of the second quarter, we are now accounting for it as a consolidated property. Turning to our outlook. We are providing third quarter FFO outlook of $0.08 to $0.12 per diluted share with no specified items. Our third quarter outlook assumes that our in-service studio and QOD businesses NOI is lower in the third quarter given the operating conditions are currently less favorable than the first half of the year. And it will take time following the recent ratification of the Teamsters Agreement to green light and prep for new productions. Our office leasing performance in the second quarter was ahead of our expectations. However, our third quarter outlook assumes lower average occupancy and NOI driven by lease expirations in the second and third quarter, even as we anticipate occupancy has the potential to be flat at the end of the third quarter. Regarding our full-year FFO assumptions, we are lowering the range of same-store property cash NOI growth to negative 12.5% to 13.5% due to the same-store studios, specifically lower absorption at Sunset Las Palmas. A reminder that our same-store portfolio excludes our QOD business and now consolidates Sunset Glen Oak Studio. As always, our outlook excludes the impact of any potential dispositions, acquisitions, financings, and or capital market activity. We will return to providing full year FFO guidance outlook once we believe production levels have normalized to a point that we can more accurately anticipate and project future cash flows related to show by show lease studio and service assets, primarily at our QOD business. Now we'll be happy to take questions. Operator?
spk09: Thank you. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove your question for any reason, press star followed by two. And if you are using a speakerphone, please pick up your handset before asking your question. Our first question today comes from Blaine Heck with Wells Fargo. Your line is now open.
spk14: Great, thanks. Good afternoon. Victor, I was hoping you could comment maybe a little bit more on the asset sales that you had talked about last quarter and, again, a little bit this quarter. You know, maybe just how the reception's been, where you guys might be in that process, and maybe any color on potential pricing.
spk04: Yeah, Blaine, thanks. Good to hear your voice. So the asset sales, you know, we are still in active discussions and in discussions beyond just conversations on at least a few assets. I don't want to get into details and numbers, and I don't want to get into details on the amounts, but we're confident that we're going to execute on our asset sales like we did last year.
spk14: Okay, that's helpful. Just to quickly follow up on that, are these the same assets that you were targeting last quarter, or has there been any change to kind of the composition of those potential sales?
spk04: Let me think about it. They're predominantly the same assets with the exception of one.
spk14: Okay. One new asset. Okay, got it. And then, you know, I had asked last quarter about whether there were any kind of strategic alternatives you guys might be exploring, and I thought you gave a very candid answer that essentially all options were still on the table. So just wanted to follow up there and maybe get any update to your thoughts on that subject and whether you know, larger changes are still a consideration for you guys.
spk04: Well, you know, as I said last time, listen, as a company, as the chairman, as the board of directors always evaluate all potential opportunities and we're going to determine whether they're viable and obviously they're going to be acutely discussed to look at what would maximize long-term value for our shareholders. There is nothing imminent at all that is currently in place today, but as I said, we're always evaluating and looking at alternatives.
spk14: Great, thanks. I'll leave it there.
spk16: Thanks, Blaine.
spk09: Our next question today comes from Ronald Kimden with Morgan Stanley. Your line is now open.
spk13: Hey, just two quick ones from me. Just one. Is there a quick way to sort of bridge going from 17 to 10 cents, you know, quarter to quarter? Just what are the components of that? Just trying to figure out what pieces are driving that.
spk11: Sure. So the main drivers are lower same store NOI at Coyote and our same store studios. And that's related to drop in activity at Gower and lower show counts in general. And then also lower office NOI, you know, related to the second and third quarter expirations, which results in lower average occupancy in the quarter. We still expect, however, that by the end of the third quarter, we could be in line with what we reported in the second quarter in occupancy.
spk13: Got it. That makes sense. And then we noticed that you disclosed 239,000 square feet of early terminations in the quarter. Just curious, what was that driven by? Where there are sort of any one timers in the office rent figures that we should be thinking about? Thanks.
spk07: Yeah, this is art. You know, there were really two major drivers. One was we work in totality for one hundred and twelve thousand square feet. And then there was a default for forty thousand square feet. And those are the big ones. The good news on those is there is good news on those is that we already have a pipeline behind that or negotiations to backfill most of that space.
spk11: And to answer the second half of that question, we did not get any lease termination revenue from the WeWork, so that's not in any of the numbers.
spk13: Okay, great. That's it for me. Thanks so much.
spk09: Our next question comes from Nick Ulico with Squocia Bank. Your line is now open.
spk12: Thanks. I think earlier, Mark, you said something about, you know, the coverage on the expirations for this year. 48%. I just want to make sure that was right. And then I don't know if you have a number you could share on 2025 expirations.
spk17: Yeah, so you're right on the 48%. That's the coverage on the 800 or so expiring back up the year.
spk07: On 25, I'm just looking at our... Yeah, so on 25 right now, we're sitting at about 25% coverage on it. Final point on the 48%. Our average tenant size is below 7,000 square feet. A lot of these guys are just barely engaging right now, so that 48 can go up very clearly.
spk12: Okay, thanks. And then I guess turning to AI, you talked about that a bit earlier. What we've heard is that in many cases these firms will want to have – more pre-built space or that they've taken sublease space because of that issue. They don't want to put much capital in. Can you just talk about maybe how you've situated your portfolio, whether it's spec suites or anything else that you think you could be competitive to grab that tenant in the city of San Francisco versus the Valley?
spk07: Yeah, so it's bifurcated, right? So you're talking about AI with the large growth And you're talking about kind of the early stage AI that we deal with on the peninsula and through the valley. I'll deal with the second one first. In the valley, our pre-built space, which we have about 300,000 square feet of in the valley, and it's been our bread and butter. That space is attracting these tenants because they don't have to plan it, they don't have to think about it, and we get immediate movement. So we're doing really well. in those um in those on the larger spaces you know oftentimes we'll pre-build a single floor in in this case you know if they're looking for multiple floors we haven't built out multiple floors um which is why a lot nor has anyone for that matter which is why they they've been gravitating to really um top-end uh subley space
spk12: Okay, thanks. And anything you're able to just share, just following up on terms of like the pipeline or some of the leasing activity you've done, what the composition has been of AI firms?
spk07: AI and tech, yeah, I'll share with you. So as we mentioned in our prepared remarks, it's still a little bit more than 2 million square feet. It's grown quarter over quarter. It's chiefly 65% new to renew deals. And I will say this, you know, year over year, um, year over year, our tech, uh, as a, as a, uh, as a composition of, of, of the pipeline has grown 15% to almost 40%. Right. Um, so we're starting to see more, more tech in the pipeline. We're also seeing, uh, the size of the tenant grow. So kind of the midsize tenant is carrying the day 20 to 60,000 square feet, and that's up actually 40% year over year. Of that, you know, most of that is in the city. Most of the AI, as you've seen, is in the city for the larger users. We've seen it in the Valley, again, in really the startup realm. We've seen maybe three or four midsize AI deals in Seattle. But the preponderance of all of that is in San Francisco. And of the tech that I just mentioned to you, I would say that maybe 20% of that is AI. Okay, so if we carry 40% tech, 20% of that is AI.
spk12: Appreciate it.
spk09: Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is now open.
spk00: Hi. Good afternoon, everyone. I was wondering if you could talk a little bit about office retention, what it's been this year, maybe how it compares to history. the expectation for the rest of the year? And then as you look forward into 2025, whether you have any insight yet one way or the other on any of the maybe larger lease expirations?
spk07: Sure, this is Art. Mark had mentioned that it's about 48% the retention. We think we can get it better than that. Why? Because there's a lot of smaller tenants that still haven't engaged yet in the fourth quarter. So we can get that north of 50%. We feel we can get it north of 50%. You know, that stacks up to the last, I would say, the last three or four years for sure. But, you know, 25, 25, again, it's very early, and we have about 25% coverage on those expirations. So, obviously, that number is going to grow.
spk00: And just to clarify that 48% retention is that just coincidentally I think you mentioned 48% coverage for the second half expressions are there two different steps that just happened to be 48%.
spk15: Okay.
spk00: But two different steps that happened to both be 48%.
spk17: No, no, he's just saying we have coverage on the 800,000 feet that represents the ability to retain that expiration.
spk00: Okay, I think I got that. Maybe I'll catch circle back on that, but then maybe on the dividend. So it's at 5 cents a quarter now wondering if you can comment on how that compares to your expected taxable income for the year and what could cause any incremental change to the dividend one way or the other at this point.
spk11: Sure, it's a bit early to compare to taxable only because there's half the year left. Like we always evaluate dividend every quarter. It's really the board's decision when it comes to the status of our dividend.
spk00: OK, so early in the year. Got it. Thanks.
spk09: Our next question comes from John Kim with FEMA. Your line is now open.
spk15: Thank you. I still don't really understand guidance for the third quarter. You have it at 10 cents at midpoint. That's down 41% sequentially. Your original guidance provided six months ago implied 29 cents per quarter in the second to fourth quarter. And I understand the studio is down, but at its peak, the studio is only 11% of NOI. So I guess a lot of this is from occupancy, but the expiration was known a few months ago. So I just don't really understand how it could drop so much in one quarter. And I was wondering if there was anything that surprised you or anything incrementally new looking at the third quarter.
spk11: It's a good question. So like we said, our office is actually a little bit improved compared to our previous guidance or even our full year guidance that we provided early in the year. It is really due to the both Coyote business and the same store studio business, they're just not performing in line with our projections both the full year and next quarter. That's the driver of it. I know, again, from the percentage you're holding in terms of percentage of the company, that's the percentage of NOI, but that's not a percentage of FFO. The FFO is also driven by the interest and the G&A, which there's a larger movement as a result. So it's not just, if you just take it as percentage NOI, yes, it feels large, but when you compare it to FFO, it's a bigger number. And, you know, assuming our understanding is correct and the recovery is it, that is going to turn around pretty drastically once studio activity picks up and number of shows increase.
spk15: So same-store studio NOI was $7.6 million in the second quarter. Does that become a significantly negative number in the third quarter?
spk11: No. The $7.6 is the, I think, in-service studio number. So we expect that to come down. And same with Coyote.
spk17: Let me just maybe take a somewhat different tact on it. Harut gave you the drivers of the difference between the 17 cents or 16 under NAEY redefinition and the 10 cent midpoint, right? That's half studio related, half average office occupancy related. Hopefully that's fairly clear. As it relates to your sort of the reach back to the earlier guidance and sort of trying to bridge, if you will, to that early, early number and the 10 cents I think what you have to appreciate is that the QOD business especially is highly, highly leveraged to its fixed cost. And so if show counts and the other drivers that really drive that business markedly improve, you can generate a heck of a lot of incremental FFO off that. And if they don't improve, which for the time being at least, show counts are pretty stagnant, what you realize is that you're kind of bumping along not too far away from, say, where we reported NOI, negative $3 million. And as we sit today, our third quarter expectations is that it's going to take a little while for the show counts to meaningfully improve. And so we just haven't been able to really get the real list off, if you will, in terms of the impact that Coyote has the potential to make on FFO.
spk15: Mark, you mentioned the fixed cost nature of Coyote. I just wanted to ask about same-store studio expenses being up 33% this quarter. I would have thought it would be a lower number than that.
spk17: Oh, shoot. The sequential, I don't know. Harood's looking at it.
spk11: I apologize. I wasn't prepared for that specific question.
spk15: It's just the same stored studio expenses that was up a lot.
spk17: Yeah, it could be. We did enjoy pretty high production levels at Sunset Gower in the quarter. In fact, higher than we had initially projected. Lighting and grip, when production levels are high, it tends to mean lighting and grip is high, and they carry with it higher operating expenses. So that's likely the reason for the sequential increase.
spk15: Thank you.
spk09: Our next question comes from Alexander Goldtard with Piper Sandler. Your line is now open.
spk03: Hey, good afternoon. Good afternoon down there. Just two questions first and sort of, you know, piggybacking on John Kim's question on the earnings. You know, it seems like the earnings this year obviously, you know, have come down. pretty quickly, just given the issues that you guys have been dealing with, especially on the studio front. When things right size and occupancy for office improves, studios rebound, should we think about the quarterly progression of earnings rebounds to be as sharp and upward as it has been on the down? Just trying to get a sense of how long it will take to get earnings back to where it was with expectations at the beginning of the year versus where we stand right now?
spk17: Yeah, I mean, it could be very sharp. What I was just, you know, walking you through in the prior question points to that. I mean, COD has the potential, as you know, to generate you know, considerably higher NOI than, you know, the negative three or previous quarters before that. And if you just run the math, I mean, there's not that much incremental cost associated with improving that NOI. And so it essentially drops to the bottom line. And FFO would, you know, could go up pretty quickly and significantly when that happens.
spk03: Okay. And then the second question is, Victor, on the asset sales that you're contemplating, as you guys look at the portfolio, and especially where some of the assets may have been weaker as of late, do you envision a scenario where maybe surgically you can remove some of the weaker assets and that way end up with a Hudson that is much more concentrated in the top tier assets across the portfolio and that the laggers you can remove, or it's easier said than done?
spk04: Alex, so, you know, listen, on a general comment, as you well know, once the debt markets open up, you know, the disposition market is going to increase. And so we have allocated our energy around two tiers, right? The assets that we don't think are long-term assets for the portfolio going forward, which will make the enterprise a much higher quality enterprise and those assets are already identified and to some extent are in conversations um you know we we've looked at them there are a couple assets that are in that bucket that clearly are not saleable in this market given where the debt markets are um the other alternative is for us to also look at where we get a much higher capital amount to um Victor Pechaty, To the bottom line of the company and, as a result, we would look at a couple of the maybe better assets in the portfolio, but, but the goal is exactly how you sort of. Victor Pechaty, stated it we're looking at having a much higher quality portfolio with high quality assets that are going to be performing it's just taking us some time to get through that but they've already been identified.
spk03: Victor Pechaty, Okay, thank Thank you Victor.
spk04: You're welcome.
spk09: Our next question comes from Tom Catherwood with BTIG. Your line is now open.
spk05: Thank you, and good afternoon, everybody. Maybe Mark and Harut, sorry to keep sticking with guidance here, but following up on John's question, if we do a quick back of the envelope on the guidance swing quarter over quarter, it implies studio performance could be pretty close to in line with the four Q23 numbers. which was the peak of the strike impact. Is that really what you're building into guidance for next quarter?
spk11: I don't think it's exactly that low. Like I said, I don't know if I gave estimates around the numbers. We expect a sequential drop, but I don't think we expect one to be as low as Q4.
spk17: Tony Doan- 2023 I don't think so either or not, I mean just if you look at Q4. Tony Doan- chiodi and a lie, it was 11 eight negative the most recent quarters three nine singing show counts sort of stay. Tony Doan- At around you know where you know in the 80s level which they did in July and probably don't really start showing meaningful improvement until maybe late September. You're not, even at that level, I don't think you're approaching 10, you know, negative 11.8 on Coyote. And that's, you know, you know, so we're not making that level of assumption on the Coyote business. We're really assuming it sort of stays more or less where it is today.
spk11: Maybe similar to Q1 for Coyote. Yeah.
spk05: All right. Thank you for that clarification. And then, Victor, following up on your response to Blaine's question about the asset sales, you mentioned one more being added to the bucket. Just to clarify, was that one in addition to kind of what has been expected before, or did something fall out of the potential sales pool?
spk04: Something fell out of the sales pool, and this was the reverse inquiry by a user that we're talking to. And they're almost roughly the same valuation. This one's a little higher.
spk05: Got it. Appreciate that. Then last one for me, just quickly, if I can. Art, in terms of the lease senior pipeline, specifically in Silicon Valley and the peninsula, do you have a sense of how much of that is tenants relocating from properties within the market and sub-market versus tenants maybe relocating from other markets?
spk07: Yeah, generally there, it's not relocating from other markets. Generally, it's growth, right? Because our bread and butter is kind of the 5,000-foot, perhaps a startup, high-growth company that we're banking on. And those are taking more space. Beyond that, it's space within the market. But we're seeing more and more of that, growth users taking additional space.
spk05: Appreciate the answers. That's it for me. Thanks, everyone.
spk09: Our next question comes from Michael Griffin with Citi. Your line is now open.
spk02: Great, thanks. Victor, I want to go back to your opening comments around how you don't think studio production needs to return to peak levels for it to start contributing to your business. I was wondering if you could expand on this a bit. Does this mean that just the rate of change in the recovery is going to be beneficial? And I recall when you initially did the Quijote deal, I think it was about $80 million of run rate EBITDA
spk17: of initial expectations do you think that's still possible as the business recovers um this mark i'm going to try to tackle that um you know it really starts with la show counts uh improving the levels consistent with periods less affected by either a pandemic or a strike such as 2019 or 2022 the average of which is about 120 shows um Even if we assume that current production budgets, which are, you know, reflecting real cost-cutting measures, even if we assume those cost-cutting measures continue to limit the number of trailers and other production vehicles at, say, seven vehicles per production, and also we hinder our ability to push stage and service rates back to more historic norms, as long as LA show counts simply reach something like 115 or 120 shows, our QOD stages should get to about 65 to 70% occupied, and our projected annual NOI for QOD should reach between 45 and 50 million. From there, any number of improvements have the potential to push NOI to 60 and above 60. For example, if you get to 75% QOD stage occupancy, that drives another $5 million NOI increase. And if trailer and other vehicle counts go from the current seven or so vehicles took back to the historic levels of eight to eight and a half, that drives another seven to 10 million of NOI. And then of course, obviously as market conditions tighten with show counts improving, we could then look to potentially push rates. We might be able to increase our market share a little bit. And all of those would ultimately contribute to getting that NOI number, not just a 60, but somewhere, you know, well north of that.
spk02: Gotcha. Appreciate the color on that, Mark. And then maybe for Harut, just updated thoughts maybe around issues with potential covenants. You know, I imagine that EBITDA is expected to decrease with the third quarter relative to the second quarter. I think you might be pushing up on a couple covenants there. So any thought or updated around how we should think about that?
spk11: Hey, Michael. Good question. So, you know, we always project out our covenants and like this quarter, our projections came in, our actuals came in better than our projections and all of our covenants and our results. So given that, even our lower expectations in the future, we don't think we're going to break any covenants or You know, I think, you know, maybe next quarter might be similar to this quarter. So, you know, we feel pretty confident, but, you know, our projections are solid in terms of our expectations.
spk02: Great. That's it for me. Thanks for the time.
spk03: Thanks, Michael.
spk09: Our next question comes from Dylan Brzezinski with Green Street. Your line is now open.
spk16: Good afternoon. Thanks for taking the question, guys. Just wanted to go back to your comments around tenant demand or tenant requirements picking up in San Francisco. Can you kind of talk about some of the drivers of that? Obviously, I'm sure it's a pickup and activity from AI companies, but if you can sort of give any other details as to the other drivers of that. And then as sort of a parallel to that, a lot of the reason why market vacancies have continued to go higher in San Francisco is because of space givebacks by big tech. Can you kind of just talk about expectations for there to be a continuation of this, a change in this? Because as we sort of think about where big tech is investing their capital today, it's primarily in the AI and data center infrastructure. And so just curious if you can give us any insight into, you know, any potential for this space give back from this segment of the market.
spk07: Sure, Dylan. This is Art. You know, listen, yeah, AI has been clearly driving the market last year that was responsible for about 1.7 million square feet. We started off the first half of the year strong with about 600, just a little over 600,000 square feet and the active AI pipeline, uh, the demand sits. I mean, I think we, we reported it with somewhere around seven, but it's since it's gone, it went to print. I mean, we're literally looking at and pushing up against another million square feet. So we're tracking as we did last year. Uh, but don't forget, you know, yes, AI is driving the market. Now tech is coming back in the market in a more meaningful way. But the bread and butter, not just for San Francisco, but for all the markets through the pandemic, was professional service law firms leasing space. That continues. It's just been overshadowed in the headlines because of AI and because of tech coming back. Everybody's anxiously awaiting. But that sector has continued to grow as well. Not at the same rate, but it also, like I said, it's going to bolster the markets. Relative to tech, big tech givebacks, we were seeing them wholesale for a while. I think these givebacks have become more measured. I think some of these big tech have made decisions about how they're going to give back or how they're going to utilize space and how they're going to give it back. Listen, they're up against some expirations in the next year and a half, and I think they're going to deal with it then. But I think we've seen a far more measured approach about what that means. going forward. And I think that the demand that you're seeing in the market, uh, when executed is, is going to, uh, hopefully more than offset any of those give backs.
spk04: Hey, Dylan inspector. Also, I just want to just give some macro highlights in the city. I know you guys are on top of this stuff, but you know, we were fault. We follow this very closely. And you know, when, when I made my prepared remarks, the reduction in crime, I mean, we're seeing that it's, you know, that it's, it's, it's hitting its lowest mark in the last five years. We're seeing, obviously, activation centers, areas that are being capitalized for activation centers in the city that is going well. BART exits have gone up almost 7%. The San Francisco tent counts are down since 2018. They're at their lowest levels. They're at a 41% reduction in tents. And the homelessness... is down 13%. So these are all factors that are helping the macro basis for growth in San Francisco. And I've always said, you know, when San Francisco turns, it will turn quicker than people think. And I think that's what's driving some of this activity.
spk07: And, you know, one more thing, Dylan, you know, other than the obvious demand drives, you know, gross leasing and things like that, the number I'm looking at is the sublease, yeah, It was, excuse me, the net absorption, which was negative 290,000 square feet, which seems like normally a high number. It's been trending through the pandemic. It's been trending to about a million one, right? So if you think about it, it's come down over the last few quarters. But it was trending at a million one. It's now kind of moving back to a manageable number.
spk16: Appreciate those comments. And then maybe just a follow up to some of that. Are you seeing, I know Governor Newsom really recently ordered the state agencies to address homeless encampments. Are you seeing that sort of be, obviously that's recent news, but are you seeing that sort of be talked about in recent discussions? And then, you know, obviously it seems like recession odds are higher today than they were two or three weeks ago. And so are you at all hearing any discussions on that with tenants or? I think, listen, the recession is too early to tell, right?
spk04: This is, you know, it's sort of new news. It's come out in the last, you know, less than 30 days. In terms of the governor's movement to move the encampments, it's absolutely affected San Francisco. I think more so than it has for sure in Los Angeles. Because, you know, listen, there's an election in San Francisco, right? So London Breed is up. for reelection. And so she's going to push on that as a platform where, you know, Karen Bass, Mayor Bass doesn't have to do that. She's got another two plus years to go.
spk16: Great. Thanks for the details, guys. Really appreciate it. Thanks, Dylan.
spk09: Our next question comes from Peter Abramowitz with Jeffries. Your line is now open.
spk01: Yes, thank you for taking the questions.
spk10: Just wanted to go back to those comments about kind of the ability to drive some meaningful value in the studio portfolio, even if things don't get back to where they were before the strike. I guess, is there anything you can do or anything you're expecting to do on the expense side to kind of close some of the gap and get back to the NOI run rates you sort of underwrote when you did the Quixote deal? Just to sort of close that gap, because obviously demand and the revenue side is not going to be quite where you were probably expecting it a couple of years ago.
spk17: Yeah, there's some measures we can do and are doing. I mean, we did on the heels of the acquisition of Quixote, the third of the three companies in the fall of 22, we did implement a lot of efficiency measures, including two pretty sizable RIFs. And so we believe we've largely right-sized the headcount. There are other things we are looking into really at the operations level, looking at our footprint in terms of our various facilities, ways to save costs there. on looking at efficiencies on the manufacturing side in terms of our trailer manufacturing. And so we'll just continue to pursue those and try to make inroads on the cost side to try to help improve those margins.
spk10: Okay, that's helpful. And then you published an interesting chart, I think, in your Navy presentation that utilization, transportation utilization, the studio business had gone from about 10% during the back half of last year up close to 30 by April. Apologies if I missed this up front here to covered it, but you just provide an update on where that is as of as of July.
spk17: Yeah. Well, we mentioned in our prepared remarks of the 24%, I would, I would vent, you know, that's, you know, if you think about where we finished the quarter at 82 shows in LA, you know, to be at 24% utilization at show counts at that level really points to a lot of, you know, potential here. I mean, 30% was back when show counts were, in the low 100 range. To put a finer point on it, we averaged 96 in the second quarter, and we only just tapered down to 80 towards the end of June. We're sitting at about 80 as of the end of July. We might, you know, hopefully we start coming off that bottom soon. But if we're at 24 at 80, we could easily get to 30 quickly on We think we are picking up market share on the trailer side through a lot of credit to our sales team, picking up on, you know, improving relations, picking up just more sales. So, well, you know, I think 30, you know, something we can get to quickly. And then if show counts get to the levels we were just talking about, the 115, 120 level, you know, we should be back above 50 plus percent utilization.
spk01: All right, that's all for me. Thank you.
spk09: Our next question comes from Rich Anderson with Wedbush Securities. Your line is now open.
spk06: Thanks. Good afternoon. I was asked and asked a similar question on QOD specifically on the expense side, the 25 million you run roughly per quarter, something a lot of that is lease expense. Have you have you inquired or thought about, you know, sort of a rent restructure for the 23 leased studios? Or has it not gotten that bad?
spk04: Rich, hey, no. But, Rich, what we have done is, you know, we are, I mean, you're absolutely right. A lion's share of that is lease costs. But we are also looking at some consolidations that are not studio lease costs, but transpo storage lease costs and the likes of that and consolidating. We're in conversations on that. You have several leases that expire in the next, you know, like 24 to 36 months. that we're working on a master plan around that. So that will also help the overhead process.
spk06: Is there any scenario where you could own some of those studios at some point down the road? Yeah. Yeah. Yeah. Okay. That's all I need out there. And then last question, um, the, um, someone brought up recession and I had it on my list too. What, but let's put all the noise of the very thing that's happened to, you know, in terms of strikes and so on aside, What does a recession do to the production business generally? If you look back in history, what happens?
spk04: Historically, the entertainment industry has performed exceptionally well during recessionary times because it's providing a cheaper form of entertainment, clearly. Not to say that anybody wants a recession, but at the end of the day, it's always performed well. That was part of the prepared remarks. Even in a downturn,
spk09: um content will be produced yep okay that's all i had thanks very much thanks rich thank you all for your questions there are no longer questions in queue so i will pass the conference back over to victor coleman for any closing or further remarks thank you so much for participating in our second quarter call and we look forward to speaking you guys all soon that will conclude the conference call Thank you all for your participation. You may now disconnect your line.
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