HPP - NYSE

Ladies and gentlemen, thank you for joining us, and welcome to the Hudson Pacific Properties Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Laura, please go ahead.

Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. This morning, we filed our earnings release and supplemental on an 8-K with the SEC, and both are now available on our website, along with an audio webcast of this call for replay. Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss industry and market trends, Mark will provide an update on our office and studio operations and development, and Harout will review our financial results and 2025 outlook. Thereafter, we'll be happy to take your questions. Victor?

Thanks, Laura. Good morning, everyone, and thank you for joining us today. I'm pleased to report another solid quarter of execution for Hudson Pacific in regards to our strategic priorities. We're on track for our strongest office leasing year since 2019, having locked in another quarter of signed leases north of 500,000 square feet, bringing year-to-date leasing to 1.7 million square feet. With significantly lower expirations in 2026, our office occupancy is squarely at an inflection point as we achieved positive absorption in the third quarter. We're seeing clear evidence of a recovery taking hold in the West Coast office, particularly as we benefit from the continued expansion of AI and technology companies in our markets. And on the studio side, even as the broader production environments remain challenging, demand for well-located best-in-class assets, such as our Hollywood Studios, enabled us to drive sequential occupancy improvement in the third quarter. From a capital structure perspective, we've significantly strengthened our financial foundation. On the heels of our office portfolio CMBS financing and significant equity raise in the first half of the year, we successfully refinanced our 1918 8th Street Seattle office asset and amended and extended our credit facility, bringing total capital markets activity year-to-date to well in excess of $2 billion. With $1 billion of liquidity, 100% of debt fixed or capped and no maturities until the third quarter next year, we are now in a position of strength to capitalize on ample embedded growth opportunities, or say it otherwise, leasing, leasing and then more leasing. Looking at broader market dynamics, ongoing transformation across our West Coast markets reinforces our strategic positioning, U.S. venture capital investment remained strong in the third quarter, with year-to-date deal value already tracking about 15% above full year 2024 levels. This marks one of the strongest funding environments since the 2021 peak, with AI accounting for nearly 2/3 of the U.S. deal value year-to-date and the San Francisco Bay Area capturing more than half, reaffirming the region's leadership in innovation and capital formation. These trends underscore growing optimism, which in turn sets a constructive backdrop for the industry's driving markets as well as the need for West Coast office space heading into 2026. In San Francisco and the Peninsula, leasing accelerated sharply in the third quarter, led by tech and AI tenants such as Roblox, while Silicon Valley recorded its fourth consecutive quarter of declining vacancy as demand from AI, software and hardware firms expanded. In Seattle, AI investments surpassed $1.5 billion to date, contributing to the first decline in availability in nearly 4 years. These are encouraging indicators that venture-backed tenants are once again growing, hiring and leasing space in the very markets where Hudson Pacific is most deeply embedded. Over 80% of the third quarter leasing activity occurred at our Bay Area assets, including 100,000-plus square foot AI tenant at Page Mill Center in Palo Alto, exactly the type of growth-oriented tenant that validates our market thesis. Our portfolio stands poised to capture the resurgence in demand as AI companies scale operations and require more substantial teams. Turning to our studios. While Los Angeles shoot days declined 30% in the third quarter relative to last year, we remain confident in our long-term prospects with California's recently expanded and extended film and television tax credit already creating strong momentum. Since July, the program is allocated to 74 new productions compared to only 18 the same period last year. These include 18 television series and 10 feature films expected to shoot in Los Angeles, with tax credits recipients required to begin filming within 180 days of allocation. While it's difficult to predict future show counts, this represents a sizable pipeline, especially when compared to the 80 to 85 production filming in Los Angeles on average over the last several quarters. We feel our Los Angeles studios and services are well positioned to capture our share of future demand. Regarding acquisitions. In the third quarter, we acquired our partner's 45% interest in our Hill7 office property in Seattle, in consideration for which we assume the partner's $45.5 million share of the joint venture's debt and receive $1.4 million of cash on hand. This acquisition gives us multiple paths to unlock value at a Class A, well-located property like Hill7 by proactively restructuring the existing loan and ultimately growing occupancy and cash flow as the Seattle market recovers. We have seen a notable increase in inquiries, tours and proposals for available space at Hill7, and we remain committed to operating a best-in-class portfolio in Seattle over the long term. Our approach to asset sales remains disciplined and strategic. We're under no pressure to transact and will move only when it clearly enhances shareholder value. When we see compelling pricing, particularly for non-core properties or those requiring significant reinvestment, we'll look to recycle that capital into our highest conviction assets and markets. It's a selective purposeful approach that positions Hudson Pacific to capitalize on the recovery gaining momentum across our West Coast footprint. And with that, I'm going to turn the call over to Mark to discuss our office and studio operations and updates for our development pipeline.

Thank you, Victor. I'll walk through our third quarter office leasing performance, which demonstrates the strong execution and market momentum Victor highlighted. We executed 75 office leases totaling 515,000 square feet during the quarter, 67% of which were new deals, underscoring our continued success in attracting new tenants to our high-quality assets. Our in-service office portfolio ended the quarter at 75.9% occupied, up 80 basis points sequentially and 76.5% leased, up 30 basis points sequentially, representing steady progress in our leasing efforts. GAAP rents were 6.3% lower compared to prior levels, while cash rents were 10% lower. This primarily reflects 40,000 square feet across 6 smaller leases in Palo Alto, rolling from peak market pre-pandemic rents to still healthy close to $80 per square foot triple net rents. Importantly, we're seeing clear signs of rental rate stabilization across the Peninsula and Silicon Valley with improving tenant demand and space absorption, positioning us well for future rent growth. While our 2026 expirations are about 3% below market, quarterly rent spreads always reflect a snapshot of backfill leases expired over the last 12 months. As we saw this quarter, geography, tenant size and other factors influence these results. Our various leading indicators of future strong quarterly leasing activity continued to show positive momentum. Touring at our assets accelerated significantly in the third quarter, comprising 2.1 million square feet of unique requirements, up nearly 20% sequentially and 60% year-over-year. This reflects growing demand across our markets, 2/3 of which is technology related and 1/3 is specifically AI. Our leasing pipeline of deals and leases proposals or LOIs stands at 2.2 million square feet with nearly 600,000 square feet in advanced stages. We're now seeing on average 20,000 square foot requirements for tours, while within our pipeline, average requirements are approaching 25,000 square feet, underscoring that companies are becoming more confident about their growth trajectories and space needs. Hudson Pacific's lease expiration profile is now very favorable, allowing our team to focus more on occupancy growth opportunities rather than simply defensive renewals. We only have 140,000 square feet of remaining 2025 expirations, all less than 20,000 square feet, and we're in leases or negotiations to address close to half of that footage. Looking forward to 2026, we have 1 million square feet expiring, representing approximately 8% of our in-service portfolio. That's about 40% less square footage expiring than our average annual expirations over the last 4 years. Given our strong leasing momentum, we're already in leases or active negotiations on approximately 50% of 2026 expirations, which is ahead of our historical pace. Notably, we have 75% coverage on our 4 expirations exceeding 50,000 square feet. With only 30% of our in-service portfolio subject to pre-pandemic leases and 75% of our availabilities in quality assets and Bay Area markets leading the West Coast recovery, we are poised to grow occupancy and cash flow. Turning to our studio operations. We continue to make strides in positioning our business optimally for the current environment while preserving upside potential as a production recovery takes hold. On a trailing 12-month basis, our in-service studio stages were 65.8% leased, representing a 220 basis point sequential increase, driven primarily by additional occupancy at Sunset Las Palmas and, to a lesser extent, Sunset Glenoaks. Our Quixote Studios were 48.3% leased on a trailing 12-month basis, representing a sequential increase of 90 basis points. We are now seeing the benefits of our cost-savings initiatives. And in the third quarter, despite sequentially lower revenue, studio NOI adjusted for onetime expenses increased by $4 million sequentially, finishing in positive territory for the first time in more than a year. This represents yet another step forward in alignment with our overarching goal of positioning our studio business and Quixote in particular, to operate profitably in any market environment. On the development front, Sunset Pier 94 Studios, Manhattan's first purpose built studio is on time and budget for a year-end delivery and first quarter grand opening. As we approach completion, we have strong interest from multiple high-quality productions looking to lease significant portions of the facility for 6 months to a year with a potential to renew for additional term thereafter. The quality and location of Sunset Pier 94 is unmatched, and we expect demand to further accelerate as we approach completion. In the third quarter, we received entitlements to redevelop our 10900-10950 Washington office property in Culver City into a mixed-use project with approximately 500 residential units and ground floor retail. With housing and short supply, 10900-10950 offers a premier multifamily location where the demand in rents achievable make for an extremely compelling development site. We are evaluating our options to maximize value, which could include bringing in a partner to develop the site with Hudson Pacific contributing the land or selling outright. We look forward to providing additional updates on this unique value-creation opportunity in the coming quarters. And with that, I'll turn the call over to Harout for our financial results, capital structure and outlook.

Thanks, Mark. I'll take everyone through our third quarter financial results, which reflect solid operational execution amid our ongoing focus on leasing. Total revenues for the quarter were $186.6 million compared to $200.4 million in the prior year, primarily resulting from asset sales and lower occupancy as we continue working through our lease-up process. G&A expenses improved substantially to $13.7 million compared to $90.5 million in the prior year, representing a 30% reduction. This savings reflects the successful implementation of various organizational efficiency measures and underscores our commitment to rightsizing our cost structure while maintaining operational excellence. We generated FFO, excluding specified items in the third quarter, of $16.7 million or $0.04 per diluted share compared to $14.3 million or $0.10 per diluted share in the prior year. The year-over-year 17% increase resulted from improved G&A, interest expense and studio NOI, partially offset by lower office NOI. Note that third quarter FFO per diluted share reflects the share count increase following our second quarter common equity offering. Specified items in the third quarter totaled $2 million or $0.00 per diluted share and primarily consisted of onetime expenses associated with cost-saving initiatives and financing activities. In the prior year period, specified items were $7.5 million or $0.02 per diluted share. Our third quarter same-store cash NOI was $89.3 million compared to $100 million in the prior year, mostly due to lower office occupancy. As Victor highlighted, we significantly strengthened our balance sheet and capital structure. In the third quarter, our activities included the $285 million refinancing of 1918 Eighth, which underscores our ability to access the debt markets on favorable terms for assets with our high-quality portfolio. We also amended and extended our credit facility, which provides us with $795.3 million of capacity through the end of next year and $462 million through the end of 2029, with continued strong participation from our core banking group. Our liquidity position is strong at $1 billion, comprised of $190.4 million of unrestricted cash and cash equivalents and $795.3 million of undrawn credit facility capacity. We have another $15.9 million at HPPs share of undrawn capacity under the Sunset Pier 94 construction loan. 100% of our debt is fixed or capped, providing for predictable debt service costs that support our financial planning and cash flow management. Looking ahead, our next debt maturity isn't until the loan secured by our Hollywood Media Portfolio owned jointly with Blackstone matures in the third quarter of 2026. In anticipation, we continue to focus on operational enhancements at those assets and have a plan in place with Blackstone to approach the refinancing in the first quarter of next year with the goal of maximizing our financial flexibility. Turning to outlook. For the fourth quarter, we anticipate FFO of $0.01 to $0.05 per diluted share. To bridge from our third quarter FFO of $0.04 per diluted share, we expect lower studio NOI due to typical seasonality, we do not expect fourth quarter average show counts to reflect the benefit of tax incentives as productions receiving allocations have up to 6 months to begin filming. We also anticipate slightly elevated G&A in line with our full year G&A expense assumptions, which remains unchanged from last quarter. Lower stage occupancy and potential ongoing challenges required the Sunset Glenoaks joint venture to reconsider the risks associated with the underlying project financing and treatment of the venture as consolidated for accounting purposes. Based on these considerations, Sunset Glenoaks has been deconsolidated, leading to the following adjustments to our full year outlook assumptions, lower interest expense, lower FFO from unconsolidated joint ventures and higher FFO attributable to noncontrolling interests. Our full year same-store cash NOI growth assumption also remains unchanged from last quarter. As always, our outlook excludes the impact of potential dispositions, acquisitions, financings and/or capital markets activity during the remainder of the year. And now I'll turn the call back over to Victor for closing remarks.

Thanks, Harout. As we wrap up today's call, I want to emphasize that Hudson Pacific is uniquely positioned at the intersection of the AI-driven technology expansion, the West Coast office market recovery and the return of a more robust studio demand. Our strategic focus and high-quality assets in innovation hubs is already paying dividends with our strongest leasing year since 2019 and positive absorption inflection point. While our strengthened balance sheet, $1 billion of liquidity, 100% fixed debt and no maturities until Q3 '26, provides the financial flexibility to capitalize on embedded growth opportunities. The momentum we're seeing from record AI investment to expanding venture capital activity reinforces our conviction that were in the early stages of a meaningful recovery and Hudson Pacific is ready to capture this opportunity. Now we'll be happy to take questions. Operator?

[Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Piper Sandler & Co.

Alex, you there? Operator, let's go to the next question, please?

Your next question comes from the line of Ronald Kamdem with Morgan Stanley.

Can you hear me?

Yes, we can, Ron.

Okay. Great. Just a couple of quick ones from me. Just starting I would love -- I see the leasing coming through. I love sort of an update on just high level where you think occupancy trends over the next sort of 12, 24, 36 months? And if you could tie in sort of any high-level commentary on the implication for same-store NOI, that would be great as well.

Yes. Thanks, Ronald. We indicated in our prepared remarks where our expirations are, right, with 140,000 the fourth quarter, about 1 million next year on 67% of the activity just this quarter is all new leasing, and we've got 50% coverage on next year's expirations ahead of where we would typically be at this point. So all indications are, we are heading into positive net absorption territory and hopefully picking up steam, right, because at [ 500-plus thousand ] per quarter for quite some sequential quarters now, we're going to be outpacing those expirations by quite a bit. So trending in the right direction, not going to get too specific here about exact percentages on where we're going to land either year-end or heading into next year, but I think reasonable to expect that you're going to see -- and you saw it this quarter, you're going to see more positive net absorption. On the NOI -- same-store NOI, I think those are obviously correlated. You're seeing a little bit of a lag. We -- third quarter average same-store office occupancy dipped a little bit, right? We sequentially went down from like 73.3% to 72.8%. The -- and in comparison to last year, you're really -- you're comparing yourself to higher occupancy in that previous year, right, in the higher 70s with some pretty high rent paying tenants, not the least of which were Uber at 1455. We had Amazon and Met Park North. We had Picture Shop at 6040. Those were the main contributors to the prior year NOI that are no longer flowing through the number. In the same way that office occupancy is trending up. So we finished actually higher sequentially at 75.9%, so higher even than the average occupancy. The average occupancy flowing through the same store is also going to go up. While we need to get somewhere, I think, north of 76% because in fourth quarter, we were 76.3% average occupancy in the same store. So somewhere higher than that, plus the studios need to come -- either be stable or improve a bit, and then you're going to start to see that -- you're going to see same-store NOI start to move in a positive direction.

Really helpful. And if I could just ask a follow-up on the studio. I think we've been talking about sort of the recovery path and trying to understand the shape. It sounds like you are seeing more activity, but just in terms of like what are the key sort of milestones and data points that we should be looking for to get a sense that this is -- the recovery is really getting going in a way that's favorable?

So a couple of points on that. I mean, listen, the content spend is still constant and going up. I think you will see some pretty impressive numbers with the [ Skydance Paramount ] purchase. At the end of the day now, their new content spend is sort of rivaling the numbers that Netflix is, which is in excess of $20 billion a year. So those numbers are going to obviously, permeate in. And specific to California, as we sort of mentioned in our prepared remarks, with the new tax credits in place and the number of productions that have to commence within the first 6 months of approval, you're going to see that number just organically grow. And I think we're going to be able to capitalize on that in the production side, not just from the OpCo side, but the PropCo side as well, which we're already seeing in our Hollywood assets, which we've seen that we've picked up occupancy there to almost 100%. We only have 2 stages vacant now. And that is also a leading indicator in the production that we're seeing in the activity right now. Early on, it's very attractive, as Mark mentioned in his remarks over Pier 94. So it's trending that way. I think that the effectiveness of the credits are doing what they should be doing. We still have some work to go, though.

Your next question comes from the line of Dylan Burzinski with Green Street.

I think I don't know if it was Victor or Mark that mentioned how rents are sort of stabilizing across Silicon Valley and the Peninsula. Just sort of curious how rents are sort of trending across the rest of the portfolio. If you can provide comments as it relates to San Francisco, given the strong depth of AI demand there as well versus what you're seeing in Los Angeles and Seattle, that would be helpful.

Yes, I'll let Art jump in.

Yes, I'll jump in right now. Yes, so they've been holding steady pretty much across the portfolio. We're even seeing improvement in some of the submarkets, specifically in San Francisco, with the tech demand so high and AI growth so apparent. We're seeing the growth really in the North and South Financial District, more than the other submarkets at this point, but we're really starting to see the growth in other submarkets as well. Seattle is holding pretty firm. And again, we can talk about the growth of tech and AI there that's going to cause the rates to increase over the next several quarters. But I think for now, it's really standing path. And in L.A., this building that we're in 11601, which is our headquarters building, we're seeing a tremendous increase in rental rate growth. We don't have any leasing on the west side of L.A. And so that's really our only look into the rental rates.

And then, Victor, you mentioned obviously not having the need to sell anything, given where the balance sheet is at and the capital raise you guys did last quarter. But I'm just sort of curious, I think in the past, you guys have talked about just bringing non-core assets to market and just doing a normal process of capital recycling. So just given what seems to be an improving backdrop, obviously, on the fundamentals front, potentially leading to an improvement in the capital market side of things. Just do you guys still have continued desire to bring assets to market that you guys sort of no longer deem a fit within the context of your guys' go-forward portfolio?

Yes. Dylan, listen, as the market continues to stabilize, we're going to make further progress on our occupancy, as you're seeing it right as we speak. And of course, I think we're all very pleasantly surprised with the activity specifically in the Valley and how strong it has been. And as you saw by the prepared remarks that Mark said, I mean, our average tenant size is going up, and that's leading us to having the ability to evaluate some of the assets that we can now look to sell in the marketplace at numbers that could be much higher than they were, let's say, 12 or 18 months ago. So that's always going to be some place that we're going to reflect into and see what the opportunity is to capitalize on some form of external growth and disposing of assets. So we've got a list of a few assets that are there. As I said in my remarks, we're not planning on selling some assets, but there will be assets that will be sold. We're just not going to identify them until at the end of the day, it's going to be a number that we're going to probably look at that's going to be a combination of assets that we could have sold in the past and now we're going to try to sell them going forward. And I think those opportunities are going to come fast and furious, specifically in the Valley because everybody is focused on the city right now. And I think now the Valley is also opportunistic.

Your next question comes from the line of Blaine Heck with Wells Fargo Securities.

Victor, we've been talking about the influx of demand in San Francisco from AI for several quarters now. And clearly, you guys have benefited as evidenced by the ex AI lease. But we've also more recently seen some layoffs coming through that could be attributed to AI displacement. So I guess my question is, do you see any of your submarkets or tenant industry as more susceptible to that potential negative trend as we look ahead?

So Blaine, listen, of course, everybody is focused on AI. But if you look at the leases that we're signing, they are tech and tech-related leases, but we've signed a lot of fire-related tenants. And the expansion of those tenants, I think, is evident currently today. There is obviously a backdrop of what's the initial impact on labor for AI going forward. But what we're seeing right now, it's not impacting the core businesses that are signing, which is legal firms, insurance firms, which you would think would be impacted. They still are signing leases and taking space that is on a positive basis. A lot of education is coming to the marketplace at the same time, don't underestimate that. I think the financial institutions have yet to really show up on -- specifically in San Francisco, the way they had in the past. So they're less active, and that would be more of an impact. And clearly, you're hearing and seeing a lot of the financial institutions shipping employees to secondary tier markets where they can have lower cost of rents and the likes of that. And so I think we're finding that the impact is not as great immediately. One true sign, though, and Art can get into some statistics which is, I think, very, very unique to this past quarter's data that we've seen is now we're seeing a drop in sublease dramatically impacted in some instances in throughout all of our markets, but really in the Peninsula and in the city. The sublease space is coming back to the tenants because they realize they want that space now for future growth.

Yes. Victor, I was going to say to your point, it's AI and tech really grabbing the headlines everywhere because it's a sexy thing to say. But it's not a 90-10 situation, Blaine. It's really 55% of our pipeline is tech and half of that is AI. This 45% of our pipeline is fire sector, professional service firms, education that we're availing ourselves up as well.

Great. That's really helpful color. Just switching gears with respect to Quixote. You guys have done a good job of improving efficiencies in that business. Can you just give us an update on how much more you can cut on the cost side or whether that effort has kind of run its course at this point? And any color on your ultimate plans for that business would be helpful.

Yes. Listen, I think we're making some headway, as you said, we've got more to go. We've got some things in plan. Obviously, I'm not going to disclose the exact numbers and the time line, but it's in the works right now. We're on the precipice of breaking even. That's been the objective for first quarter of '26, and we're getting there along the way and comfortable that I think that we'll achieve that. From that point on, we'll have to look at where the market is, where the show counts are, what's the absorption from our market share from the OpCo side and then see what's the next phase in that business. We've always said we're going to be reacting to where the future of this business is going to go. We've come through what we would call is the 100-year storm. And hopefully, we're coming out of it and may be better off than we think. We're not optimistic yet, but we're at least seeing the positive signs. Mark, do you want to comment?

No. Yes, I think you summed it up. I would just say, Blaine, in our prior call, we mentioned a cost saving of approximately $23 million per annum -- pro forma $23 million to $24 million. And if you look at our most recent results, it bears that out perfectly. Last year, in the third quarter, we had $25 million -- nearly $25 million of expenses for Quixote. In this quarter, adjusted for those onetime items, we're at $19 million. And so if you run the run rate on that, you'll see it supports the annual savings target that we had mentioned, which I think is, for us, a nice confirmation that our cost savings is coming through.

Your next question comes from the line of Richard Anderson with Cantor Fitzgerald.

Rich, you there?

Excuse me, sorry. Okay, I'm on, I'm now I think.

I thought you were with Alex.

Yes, I know. I did say I buy rating on the

Well, as Mark sort of checking the stats because I don't think it was -- I think the last time it was probably in '22, but he's going to look, but he probably doesn't have it. But I can tell you, we did say on our last call, I think somebody had asked the question, where is the bottom? And I think I commented that we were at it. And so that sequential move, yes, it's -- listen, it's positive. We're nowhere near satisfied to where it's going to be. As you know, the indications as we said, between what we have in our pipeline and deals that are out to be negotiated, both on the 50% of the deals that we have for next year that we're already in negotiations on and new leasing, we're moving on that track. But I don't really know what that number is, Mark?

I mean there may have been a blip in there somewhere, but it's got to be 2, if not more than 2 years since we've had a sequential positive quarter, both on leasing and occupancy. We bottomed out, as Victor said, essentially 2 quarters ago, we were at 75.1, and then we sequentially did another 75.1 in occupancy and of course, we're 80 basis points higher than that this quarter. So you can easily discern that bottoming and then sequential improvement, but that's been a long time in the making. It's -- we can get it to you, Rich, but it's got to be over 2 years since we've had that.

Okay. Great. Second question for me. Understanding you got a lot going on besides AI, but I'm curious about the kind of the shared knitting of an AI-oriented lease. Are companies maybe taking less lease term or maybe different types of assets, maybe not high rise, but more low-rise, suburban, just not making an overcommitment yet to AI in terms of the space -- the type of space and the commitment they're making time-wise. I'm wondering if it's different with AI than it is for your other more conventional office tenants.

I think the only thing that -- and Art is going to jump in and tell you about the stats around it. But the only thing that's different is they're looking for growth, right? They're much more growth-oriented. If they want 100,000 feet today, they want a line of sight for another 50,000 or 100,000 tomorrow. And that is obviously going to be correlated to high-quality buildings with some potential role that they can absorb when tenants move out or vacancy in place. And that's been consistent throughout. But I think that theme has also been always with tech. They want the ability to grow, but also they want the ability to have their own security and safety amongst their employees. They're spending a ton of money on personnel. They want to make sure that the environment is conducive to their people and not other companies. And there's been a big negotiation now, which we hadn't seen until early on in the tech years where the competitive landscape of other tenants going in the same building, they refuse to have similar tenants in similar working class or proprietary information being in their buildings.

Yes. Victor hit the nail on the head. It's really about path to growth, being able to control their growth, being able to control their security. There's talk about high-rise versus low-rise. I don't -- they're looking for quality Class A or trophy assets with growth top of mind. No question about that. They also are looking more for kind of richly amenitized space. That's a big driver for the AI users. And which is another reason they're looking at second-generation really high-quality second-generation space, a, to cut cost, and b, to move in quicker. So those are really the key items.

Okay. And then if I sneak on one quick one. On the tax credits for studios, obviously, an improvement. But do you think it's enough versus other areas of the world in terms of trying to move production elsewhere outside of LA? Do you think that enough has been done or do you think it needs to be something even more substantial to keep production in California?

Listen, I never think it's enough. This is a captured business that I think the leaders, both on the statewide in city and county-wide took for granted for a very long time and realized now that they have to be competitive. I do believe that there is going to be more changes that are just more than beyond just tax credits, both above the line and below the line. And the below line is really important for the unions right now and they're focusing on that. There is other things that we have talked about, and we're seeing implemented like fees, license fees, filming fees, ease of production. Right now, it is beating the markets that really took a lot of infrastructure away from us, like the Georgias and the New Mexicos and the New Orleans of the world. But at the end of the day, you can always do more, and we've been pushing very hard with the -- all the entities, both on the federal and the state side, film commissions and the city and the mayor and the governor to help enhance this. And it's clearly evident that they recognize they need to do more. We just hope it's going to be enough and quickly.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler & Co.

Victor, I'm unmuting, new challenge with this new technology.

Are you talking, Alex? Can I hear you? Sorry, Alex, you there?

Yes. I feel like a dinosaur. My kids would have fun, call me a fud. So 2 questions here, Art, just going to Northern California specifically, we hear a lot of talk that more of the AI and more of the growth is in San Francisco, but your overall comments suggest that the Peninsula is picking up with activity. So can you just give a sense of the dynamic between what the leasing is like in San Francisco itself and then how the leasing is going in the Peninsula? And if it's big tech in the Peninsula or if you're starting to see a lot of the smaller start-ups and other smaller tenants active in the Peninsula?

Sure. A couple of quarters ago, I mean, the talk was it was chiefly -- 2, 3 quarters ago, chiefly it was the big AI users in the city. And then I would say over the last 1.5 quarters, we've really started to see the migration of some of these larger users who are taking 200,000, 300,000 feet in the city, now taking 50,000, 100,000, 150,000 square feet down across the Valley and the Peninsula. So it's really -- I think it's really evened out in terms of growth. And obviously, in the Valley we see more of kind of the early-stage tenants -- incubator stage tenants that are growing into 5,000, 10,000, 15,000 feet, which will become the next 25,000, 50,000 square foot tenant. So we're really seeing brisk activity across all of Northern California at this point.

Okay. And then Victor, just going back to the entertainment and the tax credits. By your comments on the 180-day sort of shot clock, if you will, it sounds like we really shouldn't expect a material pickup until the back half of next year. I realized Harout's not giving guidance yet, but just from sort of getting our expectations in line for how the studio ramp would go, it sounds like it's really a back half next year based on that 180-day shot clock. Is that fair? Or you think it could be sooner?

Listen, I never want to go earlier on comments, especially if you're giving me a lifeline to go longer. But I think the 180 sort of takes us to the second quarter of next year. And you're not going to see it right now. Obviously, we're in November and December is obviously the quietest month of the year for production. So by the time they start filming, it should be really effective for the second quarter. And then clearly, going forward, there will be another launch of shows that are approved. I believe it's November 19, so you're going to see that. And then you take that 180 from that time line is really gets you almost till May. So at the end of the day, yes, you're going to see the second half of the year for sure, but I do think you'll have an impact after the first quarter.

Your next question comes from the line of Vikram Malhotra with Mizuho.

It was pretty simple. I just got an unmute request, so I think I clicked it, but this is great. I think this format is pretty cool. So I like that you did it. Just -- maybe just going back to the core office side, you talked a lot about fire AI. I'm just wondering, bigger picture, like as your strategy evolves to grow from the bottom with so much vacancy in other peer buildings and just the markets, like how do you gain share consistently? Are there pockets where you're saying we're giving up on price incentives? Are there like specific buildings that you're looking at and saying like, "Hey, we need different strategies." Like I'm just trying to figure out, like in this environment as you bottom, but to grow from the bottom, just how competitive is it? What are your peers doing? Is it just a price war?

Yes, Vikram, I think that's a great sort of astute point, is it really just pricing to the bottom. And we don't see that for 75% of our portfolio. Because that part of the portfolio is Class A. There's a demand there. We've seen us compete with maybe 1 or 2 other projects. It's not a list of 10 that we're competing with, and we're getting more than our fair share. And it looks like going forward, we're going to continue to get much more than our fair share given what we've seen on the pipeline going forward. But I would say we've talked about this in the past. There is 20% or so of our portfolio, we have assets that are going to fight the fight with other assets in the marketplace. And hopefully, we'll get more than our fair share, but we're willing to take our fair share at the end of the day. And whatever it takes to go out and lease those assets, we're not going to turn anything down. No, we're not giving it away by no means because the market is going to dictate that across the board. But at the end of the day, I think it's safe to say that we will be much more further ahead given where, as you can see with all the statistics that have come to market, the lack of development that is coming to the marketplace, there is 0 in all 3 of our major markets, which is the Bay Area, the Pacific Northwest and here in Los Angeles. So those marketplaces have 0 new development. So organically, as you see the demands continue to drive in fire and other related businesses that are outside of tech and AI, those buildings will lease.

And Vikram, if I can add to what Victor said, regarding the assets that you're referring to, the type of asset you're referring to, if I could add kind of a tactical piece to this thing that gives us a competitive edge is we have -- in those assets, we have over 300,000 feet, closer to 350,000 square feet of ready-built spaces for these tenants that are in great condition and move-in ready condition that really have carried the day for us. And it allows -- especially now allows tenants to move in a lot quicker. And so that's been the difference maker in those assets that you're referring to.

Okay. And then just on the studio side. So like if I take the 3 big segments, your long lease, long duration lease stages, ones that are shorter in the Quixote business. Just assuming Quixote doesn't come back for a while, for whatever reason, it's more variable. Can you remind us of the stickiness of the other 2 businesses, what's the variability there? Like how should we think about sort of from here on a downside scenario?

Well, if you look at the Sunset portfolio, virtually with the exception of Glenoaks right now, it's almost 100% leased. And the stickiness is those longer-term leases take us until almost '31 for the most part. I mean there are a couple of shows that go through 2026 and '27, but the lion's share goes through '31 with our Netflix leases, which is almost uniformly that way. Clearly, the show by show, the ones we have currently have right now have all gotten picked up for the next seasons. So we're feeling good about that stickiness for those shows. And that's the directional force of what we're seeing. We're looking right now at 40%. Tenant it's taking 40% of our Pier 94 asset, which is a show that will go at least a couple of seasons. And so that, I think, is sort of the future of where this industry is going and the competitive landscape at the end of the day, it's going to be a show by show versus a long-term lease. On the Quixote side, we have the same thing. We have some sticky shows right now, and we have some vacancies.

Your next question comes from the line of Tom Catherwood with BTIG.

Great. You guys hear me?

Yes, we can.

Perfect. Perfect. So I wanted to go back to Alex's question on demand in the Peninsula. And Art, I think last quarter, you mentioned discussions with 4 tenants looking for something like 100,000-plus square feet each in San Jose. Can you provide an update on those and your kind of overall leasing expectations in that market?

Yes. Sure, Tom. Those -- we did talk about there were 4 tenants across the Valley and the Peninsula, one of which we executed on and the other 3 are still in process. We're starting to see more demand in the kind of 50,000 square foot range at the airport, which I think was going to carry the day. And our team there has got demand drivers kind of in hand relative to those deals.

So is your expectation that we could see an acceleration in leases executed in that airport market in the near term?

Yes, we're definitely going to start to see an acceleration of that, and we've already started to see that in the Peninsula as well.

I think we've been pleasantly surprised with the size increase of tenants in the Peninsula in the last 6 months. And the line of sight for future tenants, including the 3 that we're referring to, there's many behind them in that sort of 40,000 to 80,000 foot range that are in the marketplace.

Great. Perfect. And then second one for me, going up to Seattle on Hill7 specifically, what's the leasing outlook for that building? And how much did the need for incremental leasing CapEx play into the buyout of your partner's position?

I'll talk about the activity at Hill7. And currently, we're in negotiation with 3 multi-floor tenants, totaling about 139,000 square feet, and there are various stages, but it would address nearly all of the existing vacancy.

Yes. And in terms of the economics around that, listen, it's -- we look at it as an opportunity. We have an allowance that is already in place for TIs to a certain amount of the leasing that Art's referring to. So it won't be coming out of pocket. It's already allocated to the building. And we just think that the asset with the quality space that's in place right now, it's going to need very little TIs. The build-out is very, very impressive, and that's why the demand is there. This would be an asset that we would have to reposition, but fortunately, we don't. And so I think the opportunities with the tenants that we're looking at is really like a plug and play. And we're optimistic that we're going to get some of those deals done relatively quickly.

And so again, that sounds very positive, Victor. Great to hear that. But that being the case, then what drove the buyout of the tenant? Was it concerned -- it can't be refinancing concerns that debt doesn't come up until '28. What was the kind of catalyst that brought that to a head at this point in time?

No, it's a good question. It is putting in capital in the future, and we're better positioned for that and we see a bigger upside than our partner did. And so that's -- you're exactly right, it's exactly that.

And this is not new for the partner to exit. They've done this with other -- specifically other REIT partners, they've just walked away from assets.

Your next question comes from the line of Jana Galan with Bank of America.

Just a quick one on the office leasing this quarter. It looks like the average lease term came down for both new and renewal leases. Were there any large one-offs influencing this? Or are AI firms just prone to shorter lease term? And as this segment increases in your portfolio, how should we think about kind of the TIs, leasing commissions and maybe faster lease commencements?

Yes. The tenant -- the large tenant we signed a deal on in Palo Alto was really what underlied the sequential downtick, if you will, in term. I mean just in terms of overall economics leasing is holding up well. I mean you may have noticed that net effectives came down a bit sequentially, but they stayed in the same range of where they landed now for quite some time. Where if you look at net effectives on a trailing 12-month basis relative to pre-pandemic, we're approximately 10% off, which has kind of been -- that towards the upper end of the range of where we've been for quite some time now. I still think things are trending back towards closer to pre-pandemic net effectives. It's just we had this quarter a little bit of a dip. On other economic fronts, rates are holding fine. TIs, you'll notice ticked up a little bit. Again, same lease associated with that. I think where we'll see the benefit in terms of that TI spend is that, that was first-generation space. We completely repositioned that asset, taking it offline. So the spend sort of correlates with the condition of that space to get that tenant move in. And I think we'll see a benefit from that when we renew that tenant, we'll get a sort of more bang for our buck, if you will. But in terms of overall TIs, if you look at TIs per annum for the -- on a trailing 12-month basis, they're actually 14% lower than pre-pandemic trailing TIs per annum. So again, a good sign that lease economics are holding.

Your next question comes from the line of Lauren McNichol with Citigroup Global Markets.

Lauren, are you there?

[Operator Instructions]

All right. We'll come back to Lauren. Let's move on to John.

Your next question comes from the line of John Kim with BMO Capital Markets.

I wanted your thoughts on Mayor Mamdani. No, I'm just joking. There was a Mayor race with a socialist front runner similar to what we had in New York. But I was wondering if you believe that has impacted leasing decisions or any economic decisions in Seattle over the last couple of months?

Listen, I'm getting live updates, John, right now as we speak. And as of the last -- there's going to be a poll drop, I think, at 11 a.m. this morning. But I think if it was a 54-46 in favor of Bruce. And so -- and it looks like it's -- the City Council is going to be [ 6 3 ] still as a firm hold. I think we're going to see -- it was an amazingly low turnout. I think historically low turn out in Seattle. So we're going to see what the impact is at the end of the day. Clearly, you know where our position is on that. At the end of the day, Seattle, the shift on this potentially could be impactful only because not based on the politics, just based on the background of the potential new mayor, if she gets elected, I mean she has no background in terms of running any governmental agency or any history of that. And so I think the process in Seattle could be slowed, but let's hope that Bruce gets in, and we'll know that in the next couple of days.

Fingers crossed. Okay. Second question is on your economic and leased occupancy, they both trended in the right direction this quarter. But it seems like you've walked back from the target that you mentioned last quarter of high 70s, low 80s by year-end. I was wondering if that was still on the table. And as part of that, if there's any update on 1455 Market since that seems to be a pretty big needle mover?

So I'll start on that because it was -- I think if you recall, I said, leased -- I specifically said leased, and I said some time by year-end or first quarter, and I know you like to hold us to specific correlated numbers. The trajectory is there. Whether it gets there by December 31 or it gets there by March 1, it's there. And so I wouldn't worry about is this immediate and impactful on a moment in time. And so specific to 1455, negotiations are moving along at the pace that we are very happy with. But it is a city entity, and the process will take time. But I believe our team is extremely confident that, that deal will get done in a matter of time. That being said, as you heard by our prepared remarks and by what you've seen with our pipeline, we're very comfortable with our renewability for the remainder of '25 and all of '26 and the percentages around that, and the new tenant absorption and the activity around that, we're very comfortable with that as well. Mark, do you want to jump in?

No, I think you summed it up.

1455?

Yes, that's what I said, I was talking about the city. That's what I was referring.

Your final question comes from the line of Lauren McNichol with Citigroup Global Markets.

This is Seth Bergey. Is the line unmuted?

Yes, you are. You kicked Laura out...

No, she's here with me. I guess my first question is on the 4Q guide, $0.01 to $0.05. At this point in November, kind of what gets you to the low and high end of the range?

Seth, it's Harout. It's -- I think we -- in my prepared remarks, I mentioned that the driver at this point is really around the studio business. It is slower activity in the fourth quarter. So if that were to tick up, I think that puts us in the higher end of the range. And if that were to tick down, it would put us in the lower end of the range. That's really the biggest driver at this point of the year.

Okay. And then I guess just on that, how should we think about the recovery, the shape of the recovery? I think you mentioned some seasonality in the fourth quarter. And then they have 6 months. So is that kind of a 6 months kind of where you would expect to kind of see the pickup? Or would you kind of expect to see like a steady increase until that time period?

Yes. That's about -- that's the right time frame. The new -- the enhanced credit went into effect in July. There was a round of awards right out of the gate, roughly, I don't know, 20-something awards. More recently, there were another, I don't know, 40-plus awards for a total of 74. They -- we think, and our numbers are pretty good on this, that roughly 15% of that is currently in production. So there is squarely a lag between the amount of shows that have been awarded and those that are under production. So we -- that should hit within that 180-day time frame from the 2 different awards starting in July.

Okay. Great. And if I could ask just one more. I believe on the last call, you kind of mentioned there are some pickup in tour activity Washington 1000 and some space requirements that you were kind of engaged with there. Could you just kind of give us an update on that activity?

Sure, Seth. You're absolutely right. But this tour activity we talked about last quarter has increased even more based on the demand drivers -- the positive demand drivers we're seeing in Seattle. Tour activity increased 171,000 square feet quarter-over-quarter, which is to say it went from 200,000 feet to 371,000 square feet. We're currently in some form of negotiation with 4 tenants with requirements of 50,000 square feet or more. And 2 of them are in later stages. So we feel really good about that. And as the competitive landscape continues to improve in Seattle, we feel that we're even better positioned now than we ever have been.

There are no further questions at this time. I will now turn the call back to Victor Coleman, Chief Executive Officer and Chairman, for closing remarks.

Thank you again for participating in our third quarter call. We look forward to giving you updates as we go. We'll speak to you after the New Year, hopefully.