Hudson Pacific Properties - Q4 2025

Transcript

Operator (participant)

Ladies and gentlemen, thank you for joining us, and welcome to the Hudson Pacific Properties Fourth Quarter 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you'd like to ask a question, please raise your hand. If you have dialed in to today's call, please press star nine to raise your hand and star six to unmute when called upon. I will now hand the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Laura, please go ahead.

Laura Campbell (EVP of Investor Relations and Marketing)

Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman, Mark Lamas, President, Harout Diramerian, CFO, Art Suazo, EVP of Leasing, and Ken Young, SVP of Leasing. This morning, we filed our earnings release and supplemental on an 8-K with the SEC. 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 our 2025 accomplishments and priorities for 2026, along with industry and market trends.

Mark will provide detail on our office and studio operations and development, and Harout will review our financial results and 2026 outlook. Thereafter, we'll be happy to take your questions. Victor?

Victor Coleman (Chairman and CEO)

Thanks, Laura. Good morning, everyone, welcome to our fourth quarter call. 2025 was a breakthrough year for Hudson Pacific. We didn't just position the company for a return to earnings growth, we fundamentally transformed our capital structure and significantly enhanced our operating efficiency. We executed nearly $330 million of strategic asset sales and attractive valuations, completed more than $2 billion of proactive capital transactions that extended our maturity runway and nearly doubled our liquidity. Our balance sheet now affords us the flexibility to fully execute on our business objectives, paramount of which is the lease-up and stabilization of our best-in-class office portfolio. In 2025, we drove a combined $26 million in G&A and interest expense savings. Beyond that, we continued restructuring Quixote, to date, we have locked in $25 million of annualized expense savings.

We delivered our strongest leasing performance since 2019, signing more than 2.2 million sq ft of office leases across our West Coast portfolio. Strengthening market fundamentals continue to validate our thesis. San Francisco generated over 2.5 million sq ft of net absorption for the year, the third highest annual total on record. Silicon Valley recorded 2.9 million sq ft of positive absorption, marking five consecutive quarters of occupancy gains. The Puget Sound posted its first positive absorption quarter in three years. In L.A., our office portfolio is essentially fully leased long term, positioning us well as the broader markets recover. In our studio businesses, we're operating in a recalibrated environment. Let's be clear: media industry consolidation favors the best located, best operated assets, and that's exactly what we own.

L.A. and N.Y. remain the epicenters of domestic production. Our Hollywood and Manhattan studios continue to lease because productions need premium creative environments, not commodity space. Let me address the AI narrative head-on. Yes, AI is reshaping workflows. In the Bay Area and Seattle, AI is driving explosive company formation, record venture capital deployment, and aggressive hiring across multiple sectors. The narrative of AI reduces office demand ignores the reality. Well-funded, fast-growing companies need space. They're choosing our buildings. In studios, AI is a production tool, not a replacement for physical infrastructure. The dominant theme in both sectors isn't contraction, it's flight to quality. We're the beneficiary. Mark's going to provide details. Our office leasing pipeline has grown to 2.3 million sq ft.

Fourth quarter tours accelerated more than 50% year-over-year, and we're entering 2026 with the lowest office expiration schedule we've had in four years. We're not hoping for recovery, we're already capturing it. Following our significant de-risking in 2025, our priorities are clear and executable: drive occupancy growth to unlock embedded NOI expansion, eliminate Quixote's earnings drag by year-end, and maintain capital discipline through value-driven assets, sales, and strategic deleveraging. On our capital recycling, we sold Element LA in the fourth quarter at a strong valuation. In 2026, we're targeting $200 million-$300 million of additional sales while prioritizing transactions that are FFO accretive through further deleveraging.

For example, we're currently marketing 10950 Washington in Culver City, which we successfully re-entitled for 508 residential units. We have a very strong buyer and joint venture interest throughout. Here's the bottom line: We're sharpening our focus on what we do better than anyone else, owning and operating highly selective office and studio assets in only the best locations. We're deploying capital within our existing portfolio only when returns are clear, attractive, and risk-adjusted. By executing on these priorities, we have a direct path to FFO per share inflection as we move through 2026. With that, I'm gonna turn the call over to Mark.

Mark Lamas (President)

Thanks, Victor. Our leasing momentum once again translated into tangible occupancy gains in the fourth quarter. We signed 518,000 sq ft of leases, driving our office portfolio occupancy to 76.3%, up 40 basis points sequentially, while our lease percentage increased 50 basis points to 77%. Excluding the sale of fully occupied Element LA, occupancy and lease percentages would have increased 90 and 100 basis points, respectively. This marks our second consecutive quarter of positive net absorption, with improvement across all our major markets, except Los Angeles, where we have one multi-tenant asset with stable occupancy. More importantly, we have excellent visibility into continued occupancy growth. We have only 1 million sq ft expiring in 2026, and we already have 60% coverage, deals and leases, LOIs, or proposals on first quarter expirations, with 55% coverage on the remainder.

On our few large expirations, we have full coverage on Picture Shop, 115,000 sq ft at 6040 Sunset, and PayPal's 132,000 sq ft at Fourth and Traction. We also have 60% coverage on Dell EMC's 84,000 sq ft at 875 Howard, we recently renewed Weil, Gotshal & Manges, covering 80% of their 76,000 sq ft lease. Underlying this execution is accelerating tenant demand. Our leasing pipeline now stands at 2.3 million sq ft, up 15% year-over-year, we had 2.1 million sq ft of tours in the fourth quarter, up more than 50% year-over-year. What's particularly notable, average requirement size increased to 25,000 sq ft. In short, tenants aren't just leasing, they're expanding.

On lease economics, fourth quarter GAAP rents increased 0.4%, while cash rents decreased 9%, a sequential improvement from third quarter. Full year spreads improved year-over-year, and our 2026 expirations are 3% below market, with in-place rents essentially at market, positioning us for spread improvement as we continue lease up. For studios, our operating results reflect steady progress in a disciplined production environment. Our in-service trailing twelve-month stage occupancy increased 330 basis points quarter-over-quarter to 69.1%, driven by full lease up of stages at Sunset Las Palmas. Specific to our in-service Hollywood stages, trailing twelve-month occupancy was notably higher at 86.2%, while Quixote stages reached 53.3%, up 500 basis points quarter-over-quarter.

Studio revenue increased $3.6 million sequentially, studio NOI increased $2.1 million. As Victor outlined, we are evaluating additional targeted cost reductions to mitigate Quixote's earnings drag by year-end. On our two development projects, at Washington 1000, we're in early discussions on several large requirements, ranging from 125,000 sq ft-200,000 sq ft. In the second quarter, we'll deliver 70,000 sq ft of pre-built spec floors, we have strong activity from mid-sized, growth-oriented tenants for that space. Sunset Pier 94 Studios delivered on time and under budget, achieving 90% occupancy within its first quarter of operations. Our pipeline of productions looking to film at the studio underscores the demand for high-quality, purpose-built studio space in Manhattan. I'll turn the call over to Harout.

Harout Diramerian (CFO)

Thanks, Mark. I'll walk through our fourth quarter results and 2026 outlook. Total revenues were $256 million compared to $209.7 million in the prior year, driven by Element LA lease termination fee. G&A was 33% lower at $13 million, compared to $19.5 million in the prior year, representing a substantial improvement in our cost structure. FFO, excluding specified items, was $13.6 million, or $0.21 per diluted share, compared to $15.5 million, or $0.74 per diluted share in the prior year. Specified items totaled $213.6 million, or $3.27 per diluted share, primarily consisting of non-cash Quixote impairment and the Element LA lease termination fee, net of transaction costs.

Same-store cash NOI was $84.8 million compared to $94.3 million in the prior year, primarily reflecting lower average office occupancy. On our balance sheet, we fundamentally strengthened our capital structure in 2025. We reduced our share of net debt by 22%, and debt to undepreciated book value improved 680 basis points to 31.9%. Cash more than doubled to $138 million, and undrawn revolver capacity increased to $795 million, giving us total liquidity of $934 million. We also saved over $5 million on interest expense, mitigating any remaining floating rate exposure and drove broad improvement across our covenant metrics. This gives us significant financial flexibility to execute our strategy, as Victor mentioned.

For the Hollywood Media Portfolio loan, together with our partner, we are working on a resolution ahead of the August 2026 maturity date. We remain fully engaged with Netflix and believe this portfolio is the optimal long-term solution for their L.A. office needs, given the quality, location, and expansion potential of these assets. Turning to our 2026 outlook. Due to the progress Victor and Mark described, we are reinstating full-year FFO guidance at $0.96-$1.06 per diluted share. We anticipate slightly lower FFO in the first quarter relative to the fourth quarter 2025, followed by steady sequential growth throughout the year as our leasing pipeline converts to cash flow. We are introducing annual average in-service office occupancy guidance of 80%-82%. Clearly, our year-end occupancy will exceed this range.

This assumes completion of a 3rd lease with the city and county of San Francisco at 1455 Market by mid-year, with additional material occupancy gains weighed to the 4th quarter. This also reflects the removal of 901 Market and 6040 Sunset from our in-service due to change of use. We're re-entitling the office portion of 901 Market for residential and repositioning 6040 Sunset from a post-production to a class A office to meet existing tenant demand. We expect full-year same-store property cash NOI growth of -1.75% to -0.75%, a significant improvement versus 2025 as our office occupancy ramps up and strong studio NOI growth offset near-term pressure. On Quixote, we're assuming only modest NOI improvement in 2026, driven by completed or planned cost savings.

The fourth quarter non-cash impairment drives $23 million in annual depreciation savings at midpoint, meaningfully benefiting FFO in 2026. Due to our balance sheet optimization and cost discipline, we're projecting interest expense of $151 million-$161 million and G&A of $49 million-$55 million, representing $50 million and $6 million in savings at the midpoints, respectively, versus 2025. As always, our outlook excludes potential dispositions, acquisitions, or capital markets activity. With that, I'll turn the call back to Victor.

Victor Coleman (Chairman and CEO)

Thanks, Harout. Let me be direct about where we stand. We fundamentally transformed Hudson Pacific in 2025 through $330 million of asset sales and $2 billion of capital transactions. We extended our maturity runway, nearly double our liquidity, and reduced costs by $10s of millions annually. We're not just surviving in a challenging environment, but aligning the company to fully realize embedded growth. Demand is accelerating, and we're capturing it. Office tours are up 50%. Our pipeline has grown to 2.3 million sq ft. Prime studios continue to lease despite production headwinds. With only 1 million sq ft expiring in 2026, we have strong coverage in hand. We have a clear line of sight to occupancy growth and NOI expansion.

Third, our execution roadmap is clear and achievable: convert our leasing pipeline, eliminate Quixote's earnings drag, and maintain capital discipline. This gives us line of sight to sequential FFO growth starting the second quarter of this year and the strengthened earnings power in 2027 and beyond. The structural advantages of our markets remain intact. What's changed is our cost structure, balance sheet strength, and the ability to capture the flight to quality. To provide greater transparency and detail on our multi-year strategy, we'll be hosting an Investor Day in the second half of 2026. We look forward to sharing more details soon on that. With that, I'm gonna turn the call over to you, operator, for any questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you'd like to ask a question, please raise your hand now. If you have dialed in to today's call, please press star nine to raise your hand and star six to unmute when called upon. Please stand by while we compile the Q&A roster. Your first question comes from the line of Blaine Heck with Wells Fargo Securities. Your line is now open.

Blaine Heck (Executive Director and Senior Equity Research Analyst)

Great. Thanks, and good morning. Victor, I wanted to ask if there was really anything to read into the write-down of Quixote with respect to your ultimate plans for that business. You know, would you be open to exploring a sale during the year, and do you think there are interested buyers in the market? You know, similarly, on the studio portfolio side, would you guys be kind of open to broader sales in that segment?

Victor Coleman (Chairman and CEO)

Hi, Blaine, how are you? listen, let me So specific to Quixote, and Glenoaks, as we mentioned in our prepared remarks, you know, Quixote, we're looking to manage that business down, so it will be a flat business by the end of the year. Alternatively, there's nothing to read into on Glenoaks in terms of our current situation there. I mean, that asset has not performed to our liking, and I think by the end of the year, we'll evaluate what our alternatives are gonna be with that asset. In terms of the marketplace and selling off in the marketplace, it's still early in evaluating all of the studio business. There is some green shoots, as we've commented on. There's also some slowdown.

I think we're proving out that the asset quality is performing in our location, given our Sunset portfolio is virtually 100% leased, and the track record's been very strong. We continue to evaluate the alternatives, and we don't have a set game plan at this stage to say, this is the direction we're gonna go in.

Harout Diramerian (CFO)

For the Quixote business, the write-down, because it's an operating business, there's different accounting rules that govern that, and you're required to evaluate that business on a regular basis, and that's what drove the write-down in the fourth quarter.

Blaine Heck (Executive Director and Senior Equity Research Analyst)

Great. That's all very helpful. just two questions on the upcoming CMBS maturity on the Hollywood Media Portfolio. Can you just talk about kind of the tenor of those conversations with the lenders? You know, do you see an extension as a potential outcome, and would you expect to need an equity infusion of any sort for the refinancing or potential extension there?

Victor Coleman (Chairman and CEO)

Blaine, you know, we're unable to just discuss specifics over our loan extension negotiations, 'cause currently today, there's ongoing dialogue, and we're focused on the best outcome for us and our shareholders, you know, including the respect of capital allocation. We're not gonna get into an open dialogue on a conference call as to the status, but we're in constant communication, and we're happy with the progress so far.

Blaine Heck (Executive Director and Senior Equity Research Analyst)

Okay, fair enough. Last question. You know, the city has an option to purchase 1455 for no less than $200 a square foot by the end of 2027. I wanted to ask if there's any opportunity to monetize that asset prior to that? If and when the additional leasing is executed, would the city have a right of first refusal? Can you just talk through the terms of that agreement?

Victor Coleman (Chairman and CEO)

First of all, the structure of that deal with the city is a floor of $200, it's a fair market value purchase. It's a one-time window of opportunity. We are looking at obviously expanding them, which you know of right now, very confident on the ability for us to execute that in the near term. At which point, the city has not indicated any interest at all to buy it, they would have to float a bond. They do have that in their current agreement, our assessment of the value of that is well in excess of $200 a foot.

That being said, we have been approached by multiple JV partners who are interested in participating in some form of a JV on that asset once it's stabilized. We will review that at the right time. It will not impair the conversations around the city, and if they decide to purchase it will be obviously at a valuation that we've created with a JV partner, which is a win-win for all of us.

Blaine Heck (Executive Director and Senior Equity Research Analyst)

Okay, great. Thank you. Nice quarter.

Victor Coleman (Chairman and CEO)

Thanks so much.

Operator (participant)

Thank you. Your next question comes from the line of Alex Goldfarb with Piper Sandler. Your line is now open.

Victor Coleman (Chairman and CEO)

Alex, are you there?

Alex Goldfarb (Managing Director)

Hey, yeah, just hitting the unmute. You hear me?

Victor Coleman (Chairman and CEO)

Yep, we can now.

Alex Goldfarb (Managing Director)

Excellent. Thank you, and obviously, appreciate the return of annual guidance. That's a good thing. Two questions. The first up is, as you guys look at the leasing costs, of what you've signed already and the pipeline that you've outlined versus asset sales, do you feel comfortable that you'll have enough cash generated internally from asset sales and cash on hand to do all the leasing, or do you think that you know, you'll have to contemplate some other, you know, sort of, capital event?

Mark Lamas (President)

Hi, Alex, this is Mark. Yeah, we saw that in your note. I think your estimate of $250-$300 is, you know, a decent estimate. I would just say, when you do a complete sources and uses, and you look at all cash flow relative to capital requirements, including, you know, a fully loaded amounts for all TI, both renewal and new leasing, and preferred dividends and the like, what you see is, you peak out on the line balance at about $160, and then thereafter, that line balance just goes down on its own, and that's without assuming any asset sales of any kind. We never even get, you know, sort of, We have more than ample liquidity to just get the portfolio into the low 90s.

Even and could obviously improve that liquidity quite a bit if we, you know, did any kind of capital raise, like a asset sale or anything like that.

Alex Goldfarb (Managing Director)

The second question is, on the studio business, I think last time you spoke about the tax credits, and there was sort of a shot clock in when people had to you know, start production versus when they were granted the tax credits. With that in mind, should we expect a strong ramp in sort of the back half of this year on the studio production, or are things taking a little bit slower, even though there is the shot clock?

Mark Lamas (President)

It's possible, Alex, that we'll see improvement. You should know, though, that the guidance we've given you does not assume an improvement. It holds show counts in line with average show counts that we saw in 2025, which were in the high 70s.

Alex Goldfarb (Managing Director)

Is the shot clock, is that not applicable then? I thought people had to go into production once they're granted.

Victor Coleman (Chairman and CEO)

Listen, it is applicable, and we've seen little fallout from the tax credits that have been granted to the ones that have not started production at this stage. They are allowing it be, to be a little bit longer in terms of, in terms of pre-prep, stage prep, and the likes of that. We think, you know, as Mark said, we've underwritten this as a minimal amount of growth, with the upside and a potential green shoot that this will kick in second half of this year, and we're confident that that's gonna happen, but we've been very conservative in our underwriting. One other thing, though, there is one green shoot, which is the proliferation of these micro dramas, which are really led here in Los Angeles.

just by way of background, I mean, this was a marketplace in 2021 that had a total of $500 million of revenue for micro dramas. In 2025, that number increased to $7 billion and is projected to be $11 billion in 2026. We're gonna capitalize on that in the production business in Los Angeles. That is not included in our numbers, but we look to that to be a potential good side.

Alex Goldfarb (Managing Director)

Thank you.

Victor Coleman (Chairman and CEO)

Thanks, Alex.

Operator (participant)

Thank you. Your next question comes to the line of Rich Anderson with Cantor Fitzgerald. Your line is now open, please go ahead.

Rich Anderson (Managing Director)

Okay, good morning out there. On the Quixote wind down, as you described it, how does that happen? I mean, are you allowing leases to expire unrenewed? Or, like, what could you provide any color on what that might look like, and what might be left behind, you know, as we fast-forward to this time next year in the Quixote platform?

Victor Coleman (Chairman and CEO)

Rich, listen, obviously, you know I can't discuss our game plan on an open call like this, right? Because we have fiduciary obligations, and we have obligations with specific landlords that we are tenants of. Suffice to say, this business has no debt on it, so it's a unique opportunity for the company to retain certain assets that are debt-free and get out of certain obligations that we can get out of in a clean manner. We're evaluating which of the obligations that we want to get out of, and at the end of the day, we'll still have an OpCo business that, as I said, is debt-free, that will have revenue producing. If it's on track to where we look at the current usage rate right now, we make some money on that business.

if it's greater than that, we make a lot more money in that business. I just can't sit here and tell you, this is what we're gonna drop, and this is what we're gonna work with, 'cause that would be, obviously a disadvantage to, the Quixote enterprise and to Hudson in general.

Rich Anderson (Managing Director)

Fair enough. the For, with regards to the office space and the 1 million sq ft or thereabouts of expiring, in 2026, what is your expectation on, the retention rate in that, in that process? You know, with regard to the 2.3 million sq ft of leasing pipeline, like, how much of that is stuff outside of this expiration schedule? How, you know, how much of it is, you know, vacant space, existing vacant space? Is there any, is there any way to sort of paint that picture for us?

Victor Coleman (Chairman and CEO)

Yeah-

Rich Anderson (Managing Director)

I'm wondering if the demand is sort of going towards a flight to quality type of movement that we're hearing a lot in the office space these days.

Victor Coleman (Chairman and CEO)

You took the words out of my mouth. I mean, what we're seeing is flight to quality, which is the asset quality that we own as a company, has been attractive, and we've seen that momentum shift upward. I think overall, and we mentioned this, we started seeing it highly at the end of last year. Overall, we've seen our portfolio have a tremendous amount of interest in tours over the renewal process and the new tenant process. Specific to your question, I'm gonna have Art jump in here and sort of address some of the facts. Suffice to say, we're very confident, given we have 1 million sq ft of expirations in 2026, and the activity on those expirations has been very strong.

Some are gonna be front-ended, some are gonna be back-ended. We're comfortable that we're gonna get higher in terms of our retention rate. Overall, to the square footage, we're well on track for that for this year, given the activity.

Rich Anderson (Managing Director)

Mm-hmm

Victor Coleman (Chairman and CEO)

And some of the large tenants that we're negotiating with right now. Art, jump on in.

Art Suazo (EVP of Leasing)

Yeah, Rich, to put a finer point on it, we're really, we feel great 'cause we're pacing well ahead of last year or the previous years, because tenants are engaging. This is the key: Tenants are engaging much earlier and with more conviction and more confidence in what their requirement is. That's really the reason we're pacing well ahead of schedule. You know, we have, as we mentioned, we have much lower expirations this year. You know, the average tenant size, the average tenant renewal size is 7,800 sq ft, and we're managing that process very well.

Rich Anderson (Managing Director)

What amount, if any, is being early renewals into out years 2027 and 2028 from that pipeline?

Art Suazo (EVP of Leasing)

Like, beyond 2026, how much that's early renewal?

Rich Anderson (Managing Director)

Yeah.

Art Suazo (EVP of Leasing)

The average tenant size in 2027 is likewise pretty small, and they don't tend to engage.

Rich Anderson (Managing Director)

Okay

Art Suazo (EVP of Leasing)

That early. it, the 2.3 million sq ft will have a very small component of that would be early 2027 renewals.

Rich Anderson (Managing Director)

Okay. Thanks very much. Good quarter.

Victor Coleman (Chairman and CEO)

Thanks, Rich. Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is now open.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Great. Hopefully you can hear me. Just two quick ones. Thanks on the guidance. Just starting with sort of the occupancy guidance, just trying to get the apples to apples on sort of the delta of 26, this 80%-82%, is that comparable to the 76/3 reported? Just can you talk about just the trajectory of that build? I think you said it was second half weighted and so forth.

Ken Young (SVP of Leasing)

No, that's right. You're exactly on. It does start from the 76 that we reported, 76/3, sorry, and it grows from there. That is a comparable. It is back date, back-weighted. Like I said in my prepared remarks, it has an influence on the city deal that we've been talking about as well.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Great.

Ken Young (SVP of Leasing)

The fourth quarter being, you know, the strongest as momentum builds throughout the year.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Great. My, my follow-up to that was just on the same-store and why, and I know that's, maybe that's not the same-store occupancy trajectory. Just if occupancy is up, is it just the spreads that are keeping it negative? Just maybe some of the pieces into the same-store NOI number?

Ken Young (SVP of Leasing)

That's a great question. There's a few pieces to that. One, we're still carrying, in the first quarter of 2025, a drag from the Square lease, so that's still carrying a negative trend. Once you go past Q1 2025 versus Q1 2026, we're gonna see a positive same-store NOI, cash NOI, throughout the rest of the year. The second part of it is also free rent in some of our leases in 2026, so that's also dragging it. Yes, we're gonna have great occupancy, and it's being dragged a little bit by the free rent, but you're gonna see a constant improvement in our same-store cash NOI starting Q2.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Great. If I could just sneak a quick one in, just an update on Washington 1000 and the leasing there would be great. Thank you.

Victor Coleman (Chairman and CEO)

I mean, listen, the activity in Washington 1000 has picked up. We are, we're starting the process of our spec suite business, we've got a fair amount of activity around a few floors of activity there. Specific to size, I mean, Art, do you want to talk about some of the range of size tenants that we're looking at Washington 1000 right now?

Art Suazo (EVP of Leasing)

Yeah, the increase in activity, Victor, is, you know, on the larger side, the over 100,000 sq ft large block size. We've got four tenants that we're in, you know, in discussions with, one in proposals, and on the kind of ready-built, move-in-ready space for high-growth tenants. We've got proposals out for four of those tenants. They range from 8,000 sq ft-50,000 sq ft. You know, over the last literally, over the last quarter, as Bellevue's tightened and the greater Puget Sound has shown, you know, positive absorption, the high-demand tenants coming from the Bay Area has really added to the increase in demand.

As a matter of fact, our tour activity spiked in the fourth quarter to over 700,000 ft, which is 35% of our total tour activity. That usually is, you know, precursor of what's to come.

Victor Coleman (Chairman and CEO)

Just as a sidebar, Ron, at the end of the day, because you brought it up, Washington 1000's input for our overall leasing is very small for 2026 in terms of the overall number.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Helpful. That's it for me. Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Jana Galan with Bank of America. Your line is now open.

Jana Galan (Director)

Thank you. Good morning out there. Following up on the occupancy comments and the 81% guidance, in the past, you've talked about a mid-80% lease target at year-end 2026. I was just curious if that's still intact, or is that conservative now?

Victor Coleman (Chairman and CEO)

I, you know, the range implies ending the year higher, you know, to get to that average. You know, I would leave it at that, you know.

Jana Galan (Director)

Okay. you know, congrats on the success of Sunset Pier 94. I'm just curious if there's something that New York City is doing to kind of incentivize or encourage the media industry that maybe L.A. should implement.

Victor Coleman (Chairman and CEO)

That's a great question. I can tell you what we said all along when we were building this project, it was a first purpose-built studio. We've got a tremendous amount of eyes on it. The two tenants that we put in it are very high-quality tenants. It's going to show very well on the production side. I do think the activity in New York has picked up greater than we thought. We're monitoring, obviously, all of our competitive set in that marketplace right now. The activity just seems slightly stronger. In terms of the tax credits, I think they're equal for Los Angeles and New York.

I believe overall, what you're gonna find is the two barbells of the country, which is Los Angeles and New York, are really doing much better than anywhere else when it comes to production. You know, I'll sort of hold my comments to leadership because I think both cities are in the same boat when it comes to that.

Jana Galan (Director)

Thanks. Maybe just real quick on the FFO guidance. I just wanted to clarify, that excludes debt refinancing, but curious if you could just give some type of, you know, thinking around, the spread between where the CMBS or whatever, path you choose to refinance, kind of what the difference in spread there could be arranged?

Art Suazo (EVP of Leasing)

We're not prepared to comment on that. It's part of the negotiation, and, you know, we'd like to keep that outside of our, we've never provided any speculative financing in any of our FFO guidance.

Jana Galan (Director)

Sure. Thank you.

Victor Coleman (Chairman and CEO)

Thanks, Jana.

Operator (participant)

Thank you. Your next question comes from the line of Tom Catherwood with BTIG. Your line is now open. Please go ahead.

Tom Catherwood (Managing Director and REIT Analyst)

All right. Thanks, guys. You know, Victor, following up on the comment that you made, that you're not hoping for recovery, you're seeing it, if that continues, and, you know, let's say everything goes according to plan in 2026, what does HPP look like this time next year? What's that longer term vision?

Victor Coleman (Chairman and CEO)

Well, I think this, and Tom, at the end of the day, what we're looking at is you're gonna have a stabilized occupancy. I think we've been conservative, even though the numbers are large, coming from the base of, you know, a mid-76 number in terms of occupancy to an average of what we think is year-end in somewhere in the low to mid-80s. You're gonna see the stabilized portfolio perform the way we've sort of envisioned it in the last few years to where we're getting to that point. In a year from now, the focus is still going to be on the core business, which is somewhere around 87% of the portfolio is our core office business, and it's going to even greater when it comes to the revenue stream.

The banter and conversation around the studio business, if it's just flat to down, will go away relative to where the performance of the office building business is. You know, we are a pure play office company with a studio component, and I think in the last few years, with the massive headwinds we've had with return to office, with COVID, and with the strike around studios, people have jaded their thought process and focused a lot of attention on the studio business, when really, from a revenue standpoint, it's less than 15% of the company, and that will be even less a year from now. As a company, you'll see we're gonna be, you know, a best-in-class office REIT, which is what we've always strived to be.

Tom Catherwood (Managing Director and REIT Analyst)

No, I appreciate those thoughts and thinking bigger picture, Victor. I guess what has us a little concerned is, you know, if you execute as expected, but for whatever reason, whether it's AI fears or whether it's broader economic slowdown, whatever it might may be, the market doesn't recognize the progress, and you don't get a cost of capital that you think is appropriate, what do you do then? Like, if you achieve everything you're set out to, and you don't get recognized for it, what happens next?

Victor Coleman (Chairman and CEO)

Well, I think what happens next is exactly what we've been evaluating all the way through, which is depending on the capital structure and the markets, you know, we will look, the board always looks for alternatives for the highest value of the company. In the last few years, those alternatives have not been on the table. Those alternatives are on the table now, and the reverse inquiries have been coming our way in a much more feverish pitch, and so we'll evaluate it at the time. I'm confident that we're gonna execute on all forms of our platform, and as you've seen in the past, literally, in the past 90 days, we haven't made an announcement on anything, and yet our stock has been affected dramatically.

It's not based upon the fact that what we're doing, so give us the chance to get it done, and then we'll visit the process at that time.

Tom Catherwood (Managing Director and REIT Analyst)

Well, appreciate those answers. That's it for me. Thanks, everyone.

Victor Coleman (Chairman and CEO)

Thanks. Thanks, Tom, for the follow-up.

Operator (participant)

Thank you. Your next question comes from the line of Seth Bergey with Citigroup. Your line is now open.

Seth Bergey (Senior Analyst)

Hey, thanks for taking my question. I guess just going back to Quixote, you know, should investors kind of think about the impairment as, you know, a final true-up, or is there a risk of additional impairment if, you know, utilization and show counts are below expectations? You know, just, you know, curious on kind of the shift from, you know, hoping to get to kind of break even by 1Q 2026 to kind of now year-end, you know, what changed? You know, I believe you've talked about kind of 95 show counts as the KPI to get towards break even. Is that still the right way to think about it?

Victor Coleman (Chairman and CEO)

Seth, let me just clarify. We never came out and said 1Q 2026 to be break even. We said we're tracking down for year-end 2026. We've always said that we'd be at break even. Nothing's changed on that process, and it does not include us looking at, like, show counts going up, as Mark said. We're gonna be consistent and conservative on the show count basis.

I do think that there will be a thought process. I'm not saying that we're going to have any further write-downs, or I'm not saying we're not gonna have further write-downs, we've taken, like, effectively goodwill to zero. There's a ton of name recognition and marketing value in these enterprises that we own, we've taken those to zero from a conservative standpoint. We'll see where we sit in six to 12 months from now. I think that's been always the thought process is we're gonna ride this through 2026, at that time, I think we'll be in a much clearer position to discuss actual valuation and actual growth or flatlining or where the status is of that business. We're confident by year-end, we'll be at best, sorry, at worst, flat.

Seth Bergey (Senior Analyst)

Okay, great. you know, maybe just, you know, as we think about kind of the leasing momentum, how should we kind of think about CapEx for this year and next year as that kind of picks up?

Mark Lamas (President)

Well, think about how you should expect a run rate spend, say, quarterly, somewhere in the range of where we came out in the fourth quarter, which is roughly $31 million. From an average run rate point of view, that's a probably a decent estimate for where 2026 TILC and recurring should shake out.

Seth Bergey (Senior Analyst)

Great, thank you.

Victor Coleman (Chairman and CEO)

Highly dependent on the leasing activity.

Mark Lamas (President)

Yeah, it gets lumpy, as you know, right?

Victor Coleman (Chairman and CEO)

Mm-hmm.

Mark Lamas (President)

You know, but you know that. On average, that's a decent run rate.

Seth Bergey (Senior Analyst)

Okay. Thank you for that.

Victor Coleman (Chairman and CEO)

Mm-hmm. Thanks, Seth.

Operator (participant)

Your next question comes from the line of Dylan Burzinski with Green Street. Your line is now open. Please go ahead.

Dylan Burzinski (Senior Analyst)

Hi, guys. Thanks for taking the question. Most of my partner wants have been asked, but just, I guess diving into, you know, Seattle as a market, obviously, where we're seeing the strong trends and demand growth in San Francisco. I know Seattle has sort of been a market of really two different cities, that being Bellevue and Seattle CBD. Just sort of curious if you're finally starting to see further green shoots as it relates to you guys' portfolio being located primarily in Seattle CBD. Maybe if you can layer on any sort of concern associated with what seems to be a changing political environment that sort of leaned more progressive this last election cycle.

Victor Coleman (Chairman and CEO)

Yeah. Dylan, thanks. Let me take your first part of your question. We've always sort of been in the thought process that it's a 12-18 month lag to San Francisco, and I think we still feel that's exactly the direction. There are two large tech companies, one of the largest in the world, is going to sign a 300,000 sq ft lease almost any day now in the city. Another large tech company is gonna sign over a 125,000 sq ft lease in the city. Effectively takes the remaining space in that marketplace that's been sublease space and low commodity price space off the market. Bellevue is Bellevue, as you well know. It's performed very well.

It virtually has no vacancy of any size for large tenants in that marketplace. The last bigger block is under negotiation right now, which is also 400,000 sq ft. It's trending the right way. The labor force is exactly what we thought it would be. It's strong, it's tech related, it's AI centric. I think the growth prospects there have shown us that we are on the precipice of seeing Seattle turn this year sometime. You bring up the political situation. You know, if you take a look at San Francisco and Mayor Lurie or San Jose and Mayor Mahan, I mean, the progressive growth around being sort of centric has really helped pro-business in those markets.

I think it's early for us to look at the city and the current mayor standing there, but so far, the word that our teams on the ground are telling us is that there is some pro-business growth. This millionaire's tax, you know, this bill, it's a very complicated bill. I think the bottom line is, and I can get into it a little bit. The bottom line is, We're optimistic that this is not gonna pass. The writers of the bill included a word, which is terms of receipt in front of the word income. Effectively, this is a, you know, an excise tax, not an income tax.

As a result, it's like, I don't know, you could, you know, say it's like tax on sleeping guests based on how many shoes they have in the closet. It should be a tax on the shoes, not on the guests. Effectively, this is going to go away, and what we're seeing, as a negative could turn to be flat and maybe positive. Overall, we're optimistic, and as our prepared remarks and as Art mentioned earlier, we're seeing a lot of tenant activity right now, in what we have not seen, which is larger space.

Dylan Burzinski (Senior Analyst)

That was incredibly helpful, Victor. Thanks so much. That's it for me.

Victor Coleman (Chairman and CEO)

You got it, Dylan. Take care.

Operator (participant)

Your next question comes from the line of John Kim with BMO. Your line is now open.

Victor Coleman (Chairman and CEO)

John, you there?

Operator (participant)

May be having trouble getting to John, so we'll just move on to Caitlin Burrows with Goldman Sachs. Caitlin, your line is now open. Please go ahead.

Caitlin Burrows (VP)

Hi, everyone. I guess this is the first time in a while that you've had full year guidance. Could you go through what you think has changed that gives you confidence in issuing full year 2026 guidance versus recent years?

Harout Diramerian (CFO)

Sure thing. Hey, Caitlin. I think we feel a lot more comfortable in our ability to look beyond maybe a quarter out for Quixote. We feel comfortable of our ability to project, and that's really the main driver that's been holding us back for a while from providing full year guidance. I think the other components of our guidance have been, actually already been provided, right? We've been providing a grid that provided all the other components, including all the other parts of guidance. That's it.

Caitlin Burrows (VP)

Okay. On the office side, I realize there, I think, the main focus is probably on occupancy and leasing, but on the rents and pricing side, can you give your updated thoughts on how in-place rents compare to market and maybe how that varies by market?

Victor Coleman (Chairman and CEO)

I think we mentioned in our prepared remarks, we're 3% below on expiring 2026. We're a little bit above on 2027, blended slightly above on a combination of 2026 and 2027. That's why we feel like, you know, there's a chance we're gonna see a quarter or maybe more sometime this year, where we actually post positive cash spreads. It'll just depend on the makeup of the, whatever flows through that quarter in terms of the lease composition, I think, you know, we're heading in that direction.

Caitlin Burrows (VP)

Okay, got it. Then maybe just a quick one on Pier 94. You guys mentioned that it's 90% leased now. Could you give any other detail on, A, how long are those leases, and B, like, what we should expect in terms of contribution for 2026?

Victor Coleman (Chairman and CEO)

Let's talk first of all about our size, right? We're only a 25% holder of that asset, and yes, we have-

Caitlin Burrows (VP)

Mm-hmm

Victor Coleman (Chairman and CEO)

Management fee income and the likes of that, so that's gonna be constant throughout our ownership. You know, we have two tenants right now occupying 100% of the space. One is a longer term lease, the other is a shorter term lease. We've got backup for the shorter term lease right now. I think the downtime we're looking potentially will be maybe one month or two from the move-out to the move-in of the new tenants, and the activity around the new tenants is also a longer term lease. We're comfortable that, like our Sunset portfolio is doing in Hollywood, we're gonna, you know, outpunch our competitors in terms of the progress. I don't believe there's. I've looked at the stats in New York.

There's not a studio out there, but one that's even remotely close to the occupancy levels and has the activity that we do. We're confident we're gonna consistently see that going forward.

Harout Diramerian (CFO)

If you get a chance, Caitlin, you should go see it. It's pretty impressive.

Caitlin Burrows (VP)

I've definitely driven by, but I haven't been inside, but sounds good. Thanks.

Harout Diramerian (CFO)

You got it.

Operator (participant)

Thank you. Your next question comes from the line of Vikram Malhotra with Mizuho. Your line is now open.

Vikram Malhotra (Managing Director)

Hi, good morning, guys. I guess, you know, you've given a lot of information on the trajectory, very low expirations. As you say, you hope to build occupancy. You know, obviously, software is in the crosshairs of at least fear, if not reality, at this point. We don't know what's gonna happen. I'm wondering if just in, if you've been able to just look through your tenant list, can you give us specific, more specifics, what's your exposure, not to IT, but more specific software, and if there's any kind of, I guess, bucketing you've done in what may be deemed as a watchlist for you guys?

Mark Lamas (President)

Yeah, absolutely. By the way, you know, we obviously read your note with a lot of interest. I thought it was a really good, comprehensive note. Anyway, on our side, you know, identifying, you know, which companies may, you know, face hiring freezes or ultimately downsize is challenging. I would say particularly since we haven't seen any broad-based indications of AI-driven disruption across the sector yet. That said, we have reviewed our tenant base carefully, and we estimate that somewhere between, say, 1.5% and 2.5% of our total ABR is associated with software tenants that might, at some point, experience AI-related pressures.

Vikram Malhotra (Managing Director)

Okay, that's helpful. Just going back to the Quixote business, I understand it might be tough to predict break even or improvement in shows, but more just from a valuation perspective, like how we should think about valuing your cash flows and ultimately when the NOI is, you know, when it's positive. At this point, like, is there anything you can share in terms of comps or how we should just think about separating that away from the core office business, just in terms of valuation? It seems like you said, we focus a lot on it. It's the smallest part of the business, but given the uniqueness of the Quixote business, it's just hard to value. Any thoughts on, like, how we should think about that?

Victor Coleman (Chairman and CEO)

Well, the fact that you're actually mentioning the word Quixote and value in the same sentence is more than anybody in the street has mentioned. I mean, the market and the street gives us zero value for it, and quite frankly, they've been giving us negative value. We look at it, as we said, if we get to a flat level, that will determine it. We've not put anything in 2026 in terms of a value to the bottom line for Quitoxe to the company overall. I think that's where, you know, we've evaluated our full year guidance based on Quixote not contributing value, and that's been the variable the last couple of years that we've been impacted by.

As I said, we've got a six to 12 month timeline internally to determine where that company goes and what the value of that company is. Because there is no debt, there will be some value, we just haven't attributed it to this time. You can look at it that way.

Vikram Malhotra (Managing Director)

Sorry, if you can just clarify, as you have more, I guess, leases or deals being struck on new stage requirements, like, is there anything changing in the structure of these agreements or leases versus, say, like, two years ago?

Victor Coleman (Chairman and CEO)

No, that's a good question, though. I think people have sort of thought about that. No, I, you know, overall, the demand still is primarily for four-wall sets and then the ancillary revenue, which is lighting and grip, trailers, all the services, whether it's catering, whatever the equipment rentals are, that's all been consistent, and it's packaged in a vertical integration for the leasing of the studios. That business has not changed. The demand for that business has not changed once the production start. As I mentioned earlier, the micro dramas business is going to change that a little bit because set design and the likes of that will not be the same.

There are already going to be sets that will be designed and in place, and the revolving production on that will be a much quicker turnaround, but the revenue stream should be the same.

Vikram Malhotra (Managing Director)

Thank you.

Operator (participant)

Thank you. We will try one more time with John Kim from BMO. John, your line is open, if you can try to unmute.

Victor Coleman (Chairman and CEO)

Well, operator, it looks like John's busy today, so thank you.

Operator (participant)

Okay, thank you. That concludes the question and answer session. I will now turn the call back to Victor Coleman, Chief Executive Officer and Chairman, for closing remarks.

Victor Coleman (Chairman and CEO)

Thank you for participating in our call today, and appreciate all the input from everybody. We'll keep you posted and updated as the quarter continues and the year continues. Have a great day.

Operator (participant)

This concludes today's call. Thank you for attending. You may now disconnect.