Hudson Pacific Properties, Inc.

Good afternoon. My name is Cameron, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hudson Pacific Properties fourth quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I'd like to turn the call over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead.

Good afternoon, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman, Mark Lamas, President, Harut Dirimurian, CFO, and Art Suazo, EVP of Leasing. 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 also be available for replay on our website. Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information, as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss our 2024 accomplishments and priorities for 2025 along with industry and market trends. Mark will provide detail on our office and studio operations and development, and Harut 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 on our multifaceted plan to reinvigorate earnings growth. Touching on some of the highlights in 24, we ended the year with office leasing nearly 20% higher compared to the prior year as we delivered over 2 million square feet of signed leases. This included 1.2 million 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 Oaks in Los Angeles. And through various cost-cutting initiatives, we achieved approximately $4 million in G&A savings as compared to our initial outlook. And as Haroud's going to discuss, we anticipate further savings this year. And even in a challenging transaction environment, we placed three non-core assets under contract to sell for a total of $94 million, one of which closed in December, the second closed in January, And the third is anticipated to close by 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, where negative net absorption persisted, the potential for favorable shift is starting to emerge as absorption continues to steadily march towards positive territory. 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 billion was the highest level since second quarter 2022, driven by AI interest in our markets. In 2024, San 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 a half a trillion dollars, were all AI companies headquartered in the Bay Area. Given the propensity for AI companies to be office-first and 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 2.4 million square feet, more than doubling the existing footprints with over 1.4 million square feet of requirements presently in those markets. Another favorable trend It's that even as the macro uncertainty persists amidst global conflicts and geopolitical tensions, 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 22 and down 90% from their peak in the first quarter of 23. 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 on the West Coast. 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 $330 to $750 million, 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. The California Production Coalition, Film LA, the Entertainment Union Coalition, Film Liaisons in California Statewide, or FLICS, and Stay in LA And now the President's Special Coalition comprised of John Voight, Mel Gibson, and Sylvester Stallone are all pushing for additional state and local program enhancements and commitments from 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's 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 historically the bread and butter of Los Angeles production 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 transactions. On the heels of selling 3176 Porter in the fourth quarter, we sold Maxwell in the early first quarter and Foothill Research Center is also under contract Victor Pechaty, With closing anticipated in March so collectively we've generated $94 million of gross proceeds over the last two quarters with all proceeds going to reduce leverage. Victor Pechaty, Beyond these three assets, we are pursuing approximately 100 to $150 million of dispositions in various stages and roots going to discuss additional balance sheet related enhancements which are either completed or underway and that i'm going to turn it over to mark.

Victor Pechaty, Thanks Victor. We signed approximately 442,000 square feet of new and renewal leases in the quarter with nearly 60% new deals. Our reported gap in cash rent spreads, which were 6% and 9.9% lower in the quarter, would have been 2.8% and 4.3% lower respectively, but for a new direct lease with an existing subtenant at Rincon Center, which fully backfills Salesforce 83,000 square foot lease expiring in the first quarter of this year. Our fourth quarter trailing 12-month net effective rents 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 12-month basis. Our trailing 12-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 21-year lease with the city at 1455 Market from these metrics, our trailing 12-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 tour activity at our assets remain elevated, representing in aggregate 1.4 million 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 million 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 deals and leases and another 290,000 in LOI. Excluding Health for Sale Foothill Research Center, we have under 1.6 million square feet expiring in 2025 with 52% coverage, that is deals in leases, LOIs, or proposals. Roughly 70% of those expirations are in the first half of this year, including our five 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 2025 through year in 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 sixty percent 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 amounts thus We fully expect our office portfolio 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 12-month lease percentage for the fourth quarter for our in-service stages was 77% leased, or 90 basis points higher than the prior quarter reflecting additional occupancy at Sunset Las Palmas. Our COD status were 33% leased, essentially in line with last quarter. Fourth quarter studio revenues increased by $2 million compared to the prior quarter, driven by a $1.9 million increase in studio ancillary revenue, mostly from more production activity at Sunset Las Palmas, and a $1.9 million increase in transportation and location service revenue, attributable to higher utilization in both segments, partially offset by a $1.6 million 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 hold, 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 activity for second and third quarter start dates, which, along with the proposed tax credits, points to the potential for improved occupancy the second half of the year. Despite the indications of stronger future production demand for Los Angeles, we continue to look for ways to right-size the Coyote business. During the third and fourth quarters, we terminated certain leases and implemented other cost savings initiatives which are expected to reduce fixed expenses by $7.5 million 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 multi-year agreements on one or more stages. With delivery anticipated by the end of this year, we expect to begin substantive discussions with tenants on a show-by-show basis this summer. And now I'll turn the call over to Ruth.

Thanks, Mark. Our fourth quarter 2024 revenue was $209.7 million compared to $223.4 million in the fourth quarter of last year, mostly due to the sale of one Westside and 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 15.5 million or 11 cents per diluted share compared to 19.6 million or 14 cents per diluted share a year ago. Specified items for the fourth quarter totaled 74 cents per diluted share compared to 5 cents 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 QOD of $109.9 million, or $0.75 per diluted share, a non-cash deferred tax adjustment of $2.1 million, or $0.01 per diluted share, and a one-time income tax expense at Bentall, stemming from a legislation change of 0.8 million or one cents per diluted share. Note, the Coyote Goodwill impairment is the result of running our gap accounting impairment analysis of NOI in connection with our annual reporting to reflect the slower than anticipated recovery post strike. Our fourth quarter same store cash NOI was 94.2 million compared to 106.3 million 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 conform 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 required under key ratios, including adjusted EBITDA to fix charges from 1.5 times to 1.4 times. and unencumbered NOI to unsecured interest expense from two times to 1.75 times. 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 million versus $900 million with a maturity date unchanged at December 2026 with extensions. Factoring in the recent amendment, we have $518.3 million of total liquidity comprised of $63.3 million of unrestricted cash and cash equivalents and $455 million of undrawn capacity on our unsecured revolving credit facility. We also have $154 million of construction loan capacity, of which our share is $40 million. Our share of net debt relative to our share of undepreciated book value is 38.7%, and our percentage of debt fixed or capped is 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 intend to use to fully address both our 2025 and 2026 maturities We expect to have additional updates in the near term. To underscore the credit facility amendment, along with asset sales and upcoming secured financings, are part of multiple concurrent efforts we are pursuing to enhance our balance sheets regarding our performance under covenants related to our prior placement unsecured notes. 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 guidance. Comparing to fourth quarter FFO excluding specified items, $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 Coyote. 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 and office NOI should be partially offset by further favorable improvements to G&A expense, as well as other miscellaneous items equating to approximately $0.01 higher at the midpoint. Regarding our four-year assumptions, we anticipate same-store property cash unawary 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 in the second half of the year. We anticipate additional non-cash revenue between $10 million to $15 million this year due to both upfront free rent and beneficial occupancy from several large- to mid-sized landlord-built lease deals presently in negotiation. Lastly, we have assumed lower G&A expense of $70 to $76 million. 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 to $9 million. Apart from Foothill Resource 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. Now we'll be happy to take your questions. Operator?

Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. 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, since the earnings growth flows through office leasing, the 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 25 and 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. You know, I think your premise at the beginning was correct. You know, the tours are up quarter over quarter. The pipeline is up slightly quarter over quarter. But the most important part of that is that the average deal in negotiation has gone up 15% to 16,000 square feet. And that tells us the downstream, you know, You know, we're going to get more volume. It also tells us that there's more common larger deals in the pipeline. And that's exciting. As far as the lease term, the deals that we have in negotiation are trending in the right direction. You know, our trailing 12 quarter over quarter is up 2% slightly. But more telling is our trailing 12 year over year is up almost 80%. So, um, that's very encouraging and everything, 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 done and kind of what's the backup plan to address maturities if that transaction doesn't come to fruition?

Tom Greene, Thanks Tom listen we we're not going to comment on a timeline but suffice to say that we're in process right now on a multiple of events that will accommodate. Tom Greene, Our right side in the balance sheet and we feel confident that one or more of these are going to come through, and it should be fairly imminent.

Tom Greene, got appreciate the answers thanks everyone.

Tom Greene, 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 and office requirements seems to be helping your market somewhat, but can you give us a sense of you know, the type of tenants that are looking, you know, how likely they are to commit? Is it more, you know, 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?

Yeah, I'm supremely confident that a lot of these deals will get over the finish line if I can go backwards. The pipeline, you know, 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 LOI and leases, about 800,000 square feet, which we mentioned in our prepared remarks, that are really inside the five-yard line. And so it's more than ever. And so we're seeing a little bit more urgency, and I think we're seeing a little bit more urgency because you know, some of these tenants that are realizing they need to get back to the office, return to office, or as I like to call work from work, they're running out of time. And so that's also going to be a good impetus to move deals along. Additionally, our coverage, you know, 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 1455, Uber and the B of A expiration, which is in 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 a very helpful, appreciate that art. Um, and then maybe just turning to the studios, obviously the space has been through the ringer the past couple of years. Um, you know, it feels like even in the best of times and Quijote as a pretty limited visibility business. So you took the impairment this quarter, you know, 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.

Yeah, this is Mark. Thanks, Mike. We remain believers, obviously, in studios in general. We've been in it from the beginning through the ups and downs, various changes. And You know, 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 Coyote specifically, we're not sitting on 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've cut about $7.5 million of expenses. The resulting impact pro forma to 24 is like $4.2 million of NOI improvement annualized. We're in process on another wave of cost-cutting initiatives on the order of, call it $6 million of savings, generating $5 million of NOI improvement, again, in pro forma to 24 operating results. So we're looking for ways to right-size that business from a cost point of view and, you know, improve margins, enhance NOI. You know, as show accounts improve, that obviously will further improve the results, but we are going to improve those results one way or the other.

Yeah, and I just want to jump in. You know, beyond Netflix, obviously the other streamers like Disney and Warner Brothers and Paramount, you know, now they're reaching the levels of profitability. And with this paramount merger collectively, you know, 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. 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, the beginning of the year, obviously, the devastating event occurred. And then the backside of that event is the conglomeration of all these entities that are out there that we're all affiliated with that I mentioned in my prepared remarks that have come now to the table to say, let's rebuild LA. So 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. You may proceed.

Great. Thanks. Good afternoon. Just starting on the sales, Victor, 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 you 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 midpoint. So is that a change of mix, better proceeds on the sales so far, or better expected proceeds on those that you still expect to sell?

So, Blaine, 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, 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 range is a little higher is we are realizing good pricing. 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 reversion create on some assets. that are slightly larger, and that's what we've looked at potentially considering that beyond the two that we're working on right now, which would make that number a little higher. That's still in flux, and that asset that I'm referring to is not a marketed asset, so we're keeping that a little more closer to the vest at this time. And as, you know, as we get closer, we'll provide you guys with more updates on it.

Okay, great. That's really helpful. And then thanks for all the commentary on the studio side. I guess in the press release, you talk 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 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 L.A.? ?

well yeah by returning we don't necessarily mean literally a returning show what we mean is coming back to la looking uh for stages in la as opposed to other competing markets and um by high quality we mean television episodics the kind of bread and butter that makes la fries and that uh come to studios high quality studios like we have in hollywood or sunset glenhouse um 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 the, you know, these bigger shows that use more stages, use heavier lighting and grid packages, all the things that we rely on to make the stages work.

And, you know, Blayde, they're named show runners who've either worked in LA in the past or worked in our facilities. They're coming back with shows that are, you know, multiple year running shows. And we haven't seen that momentum in some time. And we're looking at a couple of shows right now that have been in the marketplace, you know, 10 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 24 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. First, going back to some of the guidance you provided, the cash NOI of negative 13, Harut gave some information on it regarding the occupancy and free rent. But just to make sure I'm understanding correctly, do you see the negative 13 cash NOI guidance primarily due to the occupancy impact in the first quarter, the dip, and then regaining some strength? Or is it the free rent or some combination or something else that I might be missing?

No, you heard on that, it is a combination. So, you know, there's a lot of deals that are in the works that aren't working on that have upfront free rent. So the gap NOI will definitely reflect that, but the cash NOI will be picked up on the later half of the year. So it's 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, uh you took on coyote um this is not a jv and i understand there's just a gap accounting involved um but just uh wondering how you guys think how to think about the the actual value of it now versus the the purchase um the purchase price that you guys took on in uh 2022. so the uh the impairment it's really an annual gap 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 fair. It's not the assets themselves.

Yeah. So essentially you can maybe look at the value being slightly higher than the book value currently after the impairment, but you guys still have, you still have confidence in the QOD business like you mentioned earlier in the remarks, correct? That's correct.

Okay, thank you. Your next question comes from the line of Ronald Camden with Morgan Stanley. You may proceed.

Hey, just two quick ones from me. I think one, just looking at the guidance, I think I remember last year you talked about Ron Papsdorf, sort of stress testing the covenant and so forth, just he just remind us when you do that exercise for this year, how would you think about the covenants trending this year thanks.

Ron Papsdorf, hey ron ron the reality is like we said, we feel like will be coming to compliance, we look at the projections. Ron Papsdorf, granularly and you know just to put another way, almost the last six or eight quarters. every quarter we've exceeded our internal expectations of the covenants. And 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 through the year. I know it's going to get better in the second half, but just maybe any numbers would be helpful. Thanks.

TAB, Mark McIntyre, yeah but you know we don't provide specific occupancy guidance, but I think you know you can discern what will happen in terms of the cadence over the quarter by simply looking at quarterly lease expirations in the supplemental. TAB, Mark McIntyre, Art outline 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 even 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'll steadily improve beyond 25, given where expirations and activity is pointing.

Great. Thanks. That's it for me. Your next question comes from the line of Caitlin Burrows with Goldman Sachs. You may proceed.

Hi, everyone. I guess we've talked a lot about volume and interest of leasing, but on the pricing side, leasing spreads were down in 2024. 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, how much is it like a rate versus occupancy decision these days? Or is rate kind of secondary at this point? Okay.

Yeah. So on leasing spreads, uh, you know, of course, you know, they're not necessarily indicative of what we're seeing holistically in terms of net effective rents, right. You're just seeing a comparison on face rates, uh, relative to expiring rents, but a couple of things about that right now, 2025 and even 2026 mark to market on rents is somewhere we're like, call it six ish, 7% above market. Um, 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 the timing of that doesn't always work out identically. But that gives you an idea of where the spot mark to market is for each of those two years. As for like the actual lease economics to kind of answer your initial question, those have held up incredibly well. I mean, we outlined it in the prepared remarks in terms of net effective rents. But I would just emphasize that whether you look at the latest set of results and compare trailing 12 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. And the underlying reasons for that is essentially we've lost little to no ground on straight line rents, again, on almost any period of comparison. And we've been able to stretch term out while maintaining TIs and LCs per annum. So we're, you know, net effectives have held up incredibly well. And I would say some of the more recent quarters are an indicator of there's a real possibility we'll start to see net effect is higher than pre-pandemic soon.

Got it. And then maybe just back to Washington 1000, 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?

Yeah, this is Art, Caitlin. You know, first of all, unquestionably, 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 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, you know, we anticipate transacting in 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 that this is going to generate more activity for Washington 1000.

Your next question is from the line of Dylan Brzezinski with Green Street. You may proceed.

Good afternoon, guys. Thanks for taking the question. Just wanting to sort of touch on the leasing pipeline. I think you guys commented in the press release that it's caught a little over 2 million square feet, which is generally in line with where it's been really throughout 2024. So just trying to sort of square the leasing pipeline comments with some of your remarks around recovery and sort of leasing demand from tech. Is there something we're sort of missing? Because it doesn't seem like, according to the leasing down here in the quarter, combining that with your comments around the leasing pipeline, that things are improving all too much. So I just want to hear your thoughts on that and then sort of anything we might be missing.

Well, Dylan, let me start sort of on 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, you know, effectively 19. So we're seeing the numbers. Dan Mansoor, pan out, and you know 2 million feet is is in line with what we did last year and that's that's what's in the pipeline right now, but that 2 million feet is going to be offset by what's expiring. Dan Mansoor, And you have to look at 2526 and 27 and we we sort of set the table and you, you have anybody knows this. Dan Mansoor, You know we're going to have the least amount of explorations and 26 and 27 that we've had in you know 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 12 months and what's, you know, the ones that are on the table right now, which are some good-sized leases that are going to come to fruition in the portfolio.

Right. As I mentioned earlier, you know, the average deal size of the pipeline is growing, which 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 is are the tours right the tour spiked kind of early last year we've maintained that level of tour activity the team's done an amazing job of pulling those forward so it's about reloading the pipeline yes it looks like it's static at two one two two million feet but we're also transacting two million feet which is a big difference that's helpful appreciate the comments

I guess just one sort of, you know, double-clicking into Seattle. I mean, do you guys envision, it seems like Proposition 1A is going to get passed. I mean, do you guys sort of envision that further separating out the recovery in Bellevue versus sort of the city of Seattle? If you can kind of just provide your thoughts on that, that would be helpful.

Yeah, I read your piece the other day. I may not agree with all of it, but that's okay. It's not been 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 that economic difference is a big momentum shift for companies to want to make a move versus the million dollars 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 to 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 change 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 that's available. Lastly, I would be remiss to say, because I think you sort of did point it 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, you know, 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 Wade Bush. You may proceed.

TAB, Mark McIntyre:" hey thanks good afternoon so heard on the. TAB, Mark McIntyre:" 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 and i'm curious like. TAB, Mark McIntyre:" You know where you're at now in terms of additional flexibility, should you need it, you know you lost. 125 million of commitments as a result. I mean, you know, what is the, is this where we should expect things to stand for forever or, you know, for the foreseeable future? Or is there additional flexibility that you can take advantage of if needed, you know, 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, you know, at least 25 and into 26. And once we do that, we will then address the recast, which will extend the revolver for even a longer time. And may be expanded depending on market conditions.

Okay. But is 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 revolver on market terms. That's really what we're doing, just trying to set up a good future for our coverage of the financing that we have coming up.

Okay. Second question is on the right sizing of Coyote. It was mentioned you stopped operations in New Orleans. I'm curious, is this kind of a first in a series of steps? What's your flexibility to do the same in other markets within the Coyote platform? I'm curious how you're thinking about future adjustments to Coyote on a go-forward basis. Thanks.

Yeah, 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 million more of cost saving initiatives that we're looking at. that pro forma to 24 would improve NOI on an annualized basis another 5 million. So that's kind of phase two. You know, we'll continue to monitor the market, and we're always looking to be more efficient, cut expenses where necessary. But, you know, we'll let you know where we, you know, come out in the next phase of this thing when they're done and continue to 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.

No, I said that wrong. I apologize. And then in terms of, I think the rental, the lease payments, correct me if I'm wrong, $25 million-ish a quarter. Is that right? And how could that adjust down as time passes?

Well, in that $7.5 million I mentioned of completed deals, about $4.5 million is directly related to eliminating leases. um of uh and i would say roughly half the three the six million i mentioned about deals and process is also eliminating uh studio related leases okay all right thanks very much your next question is from the line of john kim with bmo capital market never seen thank you on that topic on uh cost reduction and

Some of your peers were more aggressive as far as stating a G&A reduction goal and executing that as sort of the first step in terms of getting their stock re-rated. Is that something that you have considered?

John, yes. In fact, if you look at where we guided G&A last year at this time compared to where we guided this year, I believe that's about a $10 million decrease year over year. So we're definitely addressing that, and that's reflected in the numbers you see. So we recognize some of it in 2024, and we'll have more in 2025, and we're going to continue to look ways to do that.

And how much of that is corporate overhead versus KOD and other divisions?

All of that is overhead. All the QOD savings that Mark outlined relate to the QOD business and the QOD 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 in 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.