Hudson Pacific Properties (NYSE:HPP) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Hudson Pacific Properties reported strong leasing activity with 534,000 square feet of new and renewal office leases, resulting in a fifth consecutive quarter of increased office occupancy, now at 86%.
The company reported an 8% growth in same-store cash NOI and core FFO per share year over year and raised its full-year outlook.
Hudson Pacific Properties continues to execute its disposition plan, reducing debt by 14% year over year, with liquidity at $840 million.
The company has a robust leasing pipeline of 2.1 million square feet, significantly mature and poised to support earnings growth into 2027.
Management noted strong demand in AI and tech sectors, particularly in the Bay Area, and positive market trends in San Francisco, Silicon Valley and Seattle.
The studio segment saw improved performance, particularly in New York, while potential catalysts for Los Angeles production include proposed state tax credits.
Several asset sales were completed, contributing to debt reduction and strengthening the balance sheet.
The company’s strategic initiatives include potential residential conversions, notably at 901 Market in San Francisco.
Financial results showed a net loss due to non-cash impairments, but core FFO increased by 11% year over year.
Management remains confident in the ability to convert its leasing pipeline, and future asset sales are expected to be accretive to FFO.
Full Transcript
OPERATOR
Today’s prepared remarks we will host a question and answer session. If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, press Star one again. I will now hand the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Laura, please go ahead.
Laura Campbell (Executive Vice President, Investor Relations and Marketing)
Good morning everyone. Thanks for joining us. With me on the call today are Victor Coleman, Chairman and CEO, 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 today on the call 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 focus on current industry and market trends, Mark will provide detail on our office leasing and studio operations, and Harout will review our financial results and 2026 outlook.
Thereafter, we’ll be happy to take your questions. Victor.
Victor Coleman (Chief Executive Officer)
Thanks, Laura. Good morning everyone and welcome to our third quarter call. This was another quarter of steady progress for Hudson Pacific Properties. We signed 534,000 square feet of new and renewal office leases, and our in-service office occupancy grew for the fifth consecutive quarter, approaching 86%. Together with improved studio performance, that contributed to growth of 8% in same-store cash NOI and in core FFO per share year over year, and we’re once again raising our full-year outlook.
We also continue to execute on our disposition plan and strengthen our balance sheet. Pro forma for our fourth quarter asset sales and senior notes repurchase, total liquidity stands at $840 million, with our share of debt reduced by 14% year over year. And looking ahead, our leasing pipeline stands at 2.1 million square feet, with 1.1 million square feet now in advanced stages, nearly twice the level of a year ago. A pipeline of similar size set the stage for a very strong 2026, and its greater maturity today further positions us to extend our earnings growth into 2027.
Touching our markets, I’m going to begin with the capital fueling demand. U.S. venture-backed companies raised $98.4 billion in the third quarter. While below the outsized first-half totals, it was roughly double the quarterly levels of 2023 and 2024. Year-to-date investment now exceeds $515 billion, already more than 60% above full year 2025, with over 70% of it deployed in our West Coast markets. AI remains the primary driver, accounting for 20 U.S. rounds of $1 billion or more in the quarter, while software also has captured a record share of venture dollars this year.
Several indicators support continued funding. U.S. VC fundraising reached over $100 billion through the third quarter, already ahead of all of 2025 and at a record. Acquisition exit values are recycling capital back into the ecosystem. We’re mindful of the recent volatility in tech stocks, which is largely centered on the capital spending of the largest platforms. That’s a different part of the economy from the one driving demand in our markets. We’ll continue to watch how public market sentiments affect private funding, but so far we haven’t seen it in our pipeline or tour activity.
On the ground, demand continues to build. AI- and tech-driven leasing is broadening the office recovery across the West Coast, with virtually no new supply coming online. San Francisco posted its eighth consecutive quarter of positive net absorption, adding 1.3 million square feet. Citywide vacancy has improved 660 basis points over the past year and asking rents are up nearly 10%. The South Financial District continues to lead, having absorbed more than 2 million square feet so far this year.
With large blocks in the south of market quickly disappearing, we expect tenants to widen their searches into adjacent submarkets, which should benefit our assets greatly. Silicon Valley delivered its strongest leasing quarter since 2019 at 4.1 million square feet. It also absorbed more than 1 million square feet, and active tenant demand rose 12.4 million square feet. With Santa Clara among the leading submarkets, on the Peninsula, net absorption turned positive, led by Redwood City/Redwood Shores at more than 40% of the region’s total, while neighboring Palo Alto remains one of the Bay Area’s tightest office markets, with rents among the highest in the country. Further north in Seattle, net absorption reached its highest level since 2021, while downtown Seattle recorded its first positive quarter in nearly five years on the strength of the CBD.
Pioneer Square has been positive both for the quarter and the year to date. Los Angeles, by contrast, remains more mixed. Leasing volume rose nearly 12% year over year, but net absorption was modestly negative. West Los Angeles captured roughly 40% of all leases in Los Angeles, with Brentwood posting positive absorption this quarter. And in Vancouver, Class A vacancy downtown fell for the fifth straight quarter to its lowest level since 2022. With no new downtown supply expected until at least 2032, conditions are setting up for upward pressure on premium rents.
Turning to our studio business, production levels in Los Angeles and New York continue to move in different directions, but as Mark’s going to discuss, our prime locations are performing well in both. Third quarter Los Angeles on-location shoot days were 5% lower year over year and remain 29% below the five-year average. New York, meanwhile, is surging, with third quarter production spending up 87% year over year to $1.6 billion, approaching California’s $1.8 billion.
Filming permits in New York City were up 27% year to date as of September. Looking ahead, we see potential catalysts for Los Angeles production at the federal level. Legislation introduced this fall would create a 20% to 30% film and TV tax credit that stacks on top of the existing state credits, and supporters are pushing to pass this before year-end. In a bold move this week, Governor Newsom proposed raising the state’s annual credit from $750 million to at least $1 billion and, for the first time, extending eligibility to above-the-line compensation, closing the gap with competing states.
This proposal will require legislative action and will likely carry into the next administration, but it’s a clear signal of the state’s commitment to bringing production back. We’re also continuing to sharpen the portfolio through opportunistic asset sales, and year to date we closed nearly $190 million of non-core, FFO-accretive dispositions. That includes $90.5 million from 2001 Gateway and 875 and 899 Howard in the third quarter, $75.5 million of sales for the SkyPower Plaza in the fourth quarter, and $23 million of sales of non-core assets from Quixote across both quarters. The office sales took largely vacant, capital-intensive assets off the books, allowing us to focus capital on leasing at our highest-potential properties.
Consistent with our capital allocation priorities, we used the majority of the net proceeds, which Harout is going to discuss shortly. As we refine the portfolio, its quality continues to be recognized externally. We were named as a GRESB Sector Leader for the sixth consecutive year and earned a five-star rating in the 2026 real estate assessment. We also ranked first among U.S. listed office companies for the second consecutive year and first among all listed participants in the Americas.
That recognition reflects the investments we’ve made to keep our portfolio young, modern, efficient, and resilient, as well as our management team’s commitment to quality and discipline. Now with that, I’m going to send it over to Mark to talk through leasing and operational details.
Mark Lammas (President)
Thanks, Victor. We signed 74 leases totaling approximately 534,000 square feet in the third quarter, with activity evenly balanced between new leasing and renewals. Tech tenants provided a significant source of demand at 28% of activity, and roughly two-thirds of our leasing was in the Bay Area, where Palo Alto led all submarkets at over 110,000 square feet. This included a 65,000 square foot renewal and expansion lease with Rivian and Volkswagen Group Technologies at Clock Tower Square, which addressed one of the four 2028 expirations over 50,000 square feet.
Our in-service occupancy increased 310 basis points sequentially to 85.6%, our fifth consecutive quarter of gains, and our leased rate climbed 330 basis points to 86.1%. Adjusted for asset sales and the temporary removal of Fourth & Traction in our Los Angeles Arts District from our in-service portfolio, our occupancy and leased rate increased 80 and 100 basis points, respectively, on a like-for-like basis. Regarding Fourth & Traction, the City of Los Angeles adopted seismic retrofit requirements several years ago that applied to the building, so this is work we need to do.
PayPal’s recent expiration gives us a window to complete it, and we have several prospective long-term tenants with requirements of up to 75,000 square feet interested in the building. That’s precisely why we’re moving quickly now so the work is done before they move in. We expect to finish the seismic work by end of second quarter next year, but will work with those tenants to phase in occupancy floor by floor. Rent spreads grew 6% on a GAAP basis and 0.4% on a cash basis, driven by new and renewal leasing at our Peninsula and Silicon Valley assets. Third quarter net effective rents increased 30% year over year and, on a trailing 12-month basis, were up 9%. Tour activity remained strong with 116 tours covering nearly 2 million square feet in the third quarter. Tour count was up 13% year over year, and the average requirement of 17,000 square feet remains well above the roughly 10,000 square feet typical in 2023 and 2024.
Average requirement sizes grew most on the Peninsula and in Silicon Valley, where they roughly doubled this quarter, and in Seattle, where they rose almost 50%. Even after signing 2.4 million square feet year to date, up 40% from last year, our pipeline has remained above 2 million square feet for seven consecutive quarters, roughly 25% above our long-term average. Almost 60% of the pipeline is new leases supporting continued occupancy gains, while the renewal portion has grown to over 800,000 square feet, the highest level we’ve tracked, and as Victor noted, more than 1 million square feet is in late-stage negotiations.
The quality and momentum of our pipeline are as strong as we’ve seen, and we’re highly confident in our ability to convert a significant portion of it. Turning to our expirations, we have approximately 50% coverage on both the remaining 144,000 square feet expiring in 2026 and the 1.1 million square feet expiring in 2027. We define coverage as deals and leases, LOIs, or proposals. For the first half of 2027, coverage is over 50%, including full coverage on the Salesforce and Twilio space at Rincon Center in San Francisco, where we’re in late-stage negotiations. Second-half 2027 expirations are mostly smaller leases averaging about 6,000 square feet, and those tenants typically do not engage until about a quarter before expiration.
At Washington 1000, consistent with last quarter, we have coverage on approximately 65% of the building with active negotiations across 10 tenants whose requirements range up to 125,000 square feet, including over 60,000 square feet of late-stage deals. Activity at our move-in-ready spec suites has increased meaningfully since their June completion, and plans and pricing are complete for the next phase of spec suites on the fifth and sixth floors.
Beyond our current pipeline, tour activity has picked up noticeably from tenants with near-term occupancy needs, most of them new to the market. As has been reported, Weil, Gotshal & Manges, our tenant at Towers at Shore Center in Redwood Shores, is winding down operations. Weil occupied 89,000 square feet across two leases; 38,000 square feet expired after quarter end and the remaining 51,000 square feet runs through 2038. Weil recently completed an estimated $700 per square foot build-out, leaving pristine space that ranks among the Peninsula’s best for professional service firms, with in-place rents at market.
Beyond the public announcements, we haven’t heard from Weil about their plans for the Redwood Shores lease. Given the quality of the space and the demand for both the asset and Redwood Shores more broadly, we’re confident we could re-lease it efficiently. In our studio segment, our in-service stages were 74.7% leased on a trailing three-month basis in the third quarter, stable compared to the prior quarter. Our Hollywood stages remain well leased at 95%, and Sunset Pier 94 continued to ramp with its lease rate up another 370 basis points to 82.2%. In contrast to the broader Los Angeles market, our prime location stages and production fleet saw higher production activity and spend compared to the same quarter last year, though activity softened from the last quarter.
Together with lower operating expenses both sequentially and year over year, and the continued wind-down of non-core Quixote operations, our share of core studio NOI improved to $4.3 million from $2.2 million last quarter and up considerably from negative $2.5 million a year ago. Lastly, in terms of additional avenues for value creation, after quarter end we secured entitlements to convert approximately 164,000 square feet of office space at 901 Market in San Francisco into 136 residential units above the existing retail. As we did at 10950 Washington, we’ve created real optionality, giving us multiple paths to respond to market demand and maximize value. We’re advancing construction drawings and evaluating pricing, and we will determine the best path forward in the coming quarters.
This remains part of a broader effort as we continue to evaluate residential and mixed-use opportunities alongside our office assets in Palo Alto and across the Peninsula. And now Harout will take you through our financial results and outlook.
Harout Diramerian (Chief Financial Officer)
Thanks, Mark. In the third quarter, total revenues were $180.9 million compared to $186.6 million in the prior year, primarily due to asset dispositions, most significantly the sale of Element LA, partially offset by improved office occupancy and increased studio production activity. G&A improved 10% to $12.3 million compared to $13.7 million in the prior year, resulting from cost-cutting initiatives. We reported net loss of $218.1 million, or $3.38 per diluted share, compared to $136.5 million, or $2.12 per diluted share, in the prior year, primarily driven by non-cash impairments of Skyport Plaza and Hill7 and a loss on the sale of 875 and 899 Howard. The deconsolidation loss related to Sunset Glenoaks accounted for the loss reported in the prior-year period. Excluding these items, our underlying performance continued to strengthen.
Core FFO grew to $18.6 million, up approximately 11% from $16.7 million in the prior year, and increased approximately 8% on a per diluted share basis to $0.28 from $0.26. This was driven by higher same-store NOI across both our office and studio properties and lower non-real estate depreciation from the wind-down of non-core Quixote operations, partially offset by asset sales. Adjustments to FFO totaled negative $2.8 million, or negative $0.04 per diluted share, primarily reflecting gains on non-core Quixote lease terminations, a prior-period property tax refund, and the sale of non-real estate assets, partially offset by non-core Quixote costs.
This compares to positive $2.0 million, or $0.03 per diluted share, in the prior year. We grew same-store cash NOI 8.3% to $85.2 million compared to $78.7 million in the prior year, driven by improved office occupancy and increased studio production activity. Turning to the balance sheet, we ended the quarter with $956 million of liquidity, including $161 million of unrestricted cash and full availability of $795 million on our revolver. Net debt to undepreciated book value was 32.1%, and our debt was 100% fixed or capped at a weighted average interest rate of 4.9% during the quarter. Together with our joint venture partner, we extended the $1.1 billion Hollywood Media Portfolio CMBS loan to November 2027, providing additional flexibility as we continue to execute our business plan for the portfolio.
The extension required no principal paydown. The spread is unchanged, and we fixed SOFR at 3.5% through the extended maturity, slightly better than the swaps it replaced. Subsequent to quarter end, we repurchased $200 million of senior notes, $100 million each of our 2027 and 2028 notes, at a discount to par. We funded the repurchase with cash on hand and borrowings under our revolver. We then closed sales of Skyport Plaza and a non-core Quixote asset and used the net proceeds to pay down the revolver to $30 million. Pro forma for these transactions, HPP’s share of debt is $2.7 billion, a reduction of $425 million, or 14%, from a year ago, and HPP’s share of net debt to cash-adjusted EBITDAre improves to 11.4 times from 11.8 times at quarter end.
Pro forma liquidity is $840 million, consisting of $75 million of unrestricted cash and $765 million of revolver availability, which includes $333 million of commitments expiring this December. Beyond the senior notes, our remaining 2027 maturities are non-recourse, property-level joint venture loans, primarily the Hollywood Media Portfolio CMBS, which we just extended. For our 2027–2028 maturities, we expect to utilize a combination of liquidity, asset sales, and capital markets in a disciplined manner.
Interest expense for the quarter was $40.9 million, which improved modestly from the prior year, and $117.4 million year to date, a 12% improvement versus the first three quarters of ’25. Wrapping up our 2026 outlook, we’re increasing and narrowing our full-year core FFO to a range of $1.15 to $1.21 per diluted share, up from the prior range of $1.12 to $1.20. This updated range reflects, at the midpoint, approximately $0.01 of outperformance in the third quarter compared to our initial expectations, as well as approximately $0.01 attributable to improved expectations for the fourth quarter. While we have received no indication that Weil Gotshal will stop paying rent, we’ve taken a conservative approach and excluded their rent from our guidance for the balance of the year.
The 200 basis points improvement to average in-service office occupancy reflects actual results for the first three quarters and estimates for the fourth quarter. The 175 basis point improvement to same-store property cash NOI growth reflects the full-year estimates of the properties which now contribute to the same store. In both cases, the improved estimates are essentially attributable to the sales of 875 Howard and Skyport Plaza and the temporary removal of Fourth & Traction from the in-service and same-store portfolio for seismic upgrades ahead of releasing.
After these changes, the company would have likely maintained its prior outlook on both metrics. As a reminder, this updated range excludes the previously announced wind-down of non-core Quixote operations from core FFO and, as always, our outlook excludes potential dispositions, acquisitions, or capital markets activity beyond those completed to date. With that, I’ll turn the call back to Victor for closing remarks.
Victor Coleman (Chief Executive Officer)
Thank you, Harout. This was another quarter of steady execution. Leasing remains strong, occupancy continues to grow and we further strengthened our balance sheet with improving demand, supporting the recovery in our markets, a healthy pipeline and potential tailwinds from proposed federal and state production incentives. We’re well positioned heading into 2027. We look forward to sharing more on our Investor Day on December 1st where we’ll provide a deeper look at our long-term strategy, the outlook for our office and studio businesses and our capital allocation priorities heading to 2027. Thank you to the entire Hudson team for their hard work and to our tenants, partners and shareholders for their continued support. With that, let’s turn it open for questions.
OPERATOR
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Blaine Heck with Wells Fargo. Blaine, your line is open.
Please go ahead.
Blaine Heck (Analyst at Wells Fargo)
Great, thanks. Good morning out there. You’ve made additional progress with the asset sales and subsequent note repurchases, but I was hoping you could walk us through just the general overview of the sources and uses for the remainder of upcoming unsecured maturities. You know, how much you’re expecting can be addressed with available cash and additional dispositions and whether you expect to need to raise debt or equity capital for any significant portion of those maturities.
Victor Coleman (Chief Executive Officer)
So thanks, Blaine. I’ll start with, you know, we are not remotely interested in raising equity at these levels and we don’t need to raise equity to address our debt issues. Our first majority of the debt comes through end of next year and as you noted, we’ve already taken care of 200 million of the 750, so we’re down at 550. We’ve got multiple areas that we are evaluating and if you come to our Investor Day, we’re going to outline a plan that’s going to detail it throughout all of ’28 and we’re comfortable on executing that plan.
To give you some highlights, we do have some additional assets which we’re not talking about now, very few that are going to fall in the disposition category. And we also have JV opportunities with additional assets that we’re going to announce lease-up on for fully leased assets and long-term maturities with credit tenants that are unencumbered that we can also convert. So we have lots of optionality. As we said, we’re attacking this plan methodically as we’ve dictated and to date we’ve executed it exactly how we’ve looked.
Blaine Heck (Analyst at Wells Fargo)
Okay, great. Thanks, Victor. And you executed on the CMBS extension this quarter, so I was hoping you could provide a little commentary on any further discussions you’ve had with Netflix and whether you’ve gained any insight on how they’re thinking about their future space needs between your properties and potentially Radford.
Victor Coleman (Chief Executive Officer)
Yeah, I can’t comment on Radford other than the fact that Netflix has not closed that transaction and they are not deciding to close it until sometime maybe later in the year or not. That’s, you know, not a concern of ours. I can tell you that the replacement of Radford for their existing office doesn’t fit the footprint. As we’ve talked about in the past, we have and continue to have very fruitful, very productive conversations with them. I think we will have some resolution on some levels of that hopefully by year end and continuing these conversations positively for them to extend beyond 2031 is looking in the direction that we’re comfortable with.
Blaine Heck (Analyst at Wells Fargo)
Thanks, Victor.
OPERATOR
Your next question comes from the line of Yana Galan with Bank of America. Yana, your line is open. Please go ahead.
Yana Galan (Analyst at Bank of America)
Thank you. Good morning and congrats on the quarter. Appreciated all the leasing commentary. And being that it was about two-thirds in the Bay Area, I’m curious for the forward 1.1 million pipeline, if you could comment on geographic distribution and maybe mix of new and renewal within that.
Arthur X Suazo (Executive Vice President)
Sure. This is Art. You know, so the mix of new and renewal within the pipeline is also 60/40, 60 new growth tenants. And relative to the distribution of the pipeline, again two-thirds in the Bay Area. The quickest growing portion of our pipeline and tour activity for the last two quarters has been Seattle. And so the next, you know, large movers will be in Seattle and I believe will continue to be in Seattle. And of course Seattle, Vancouver and LA make up a small portion of that pipeline.
Yana Galan (Analyst at Bank of America)
And anything new on Washington 1000 or anything you can share on kind of the activity of the larger space?
Arthur X Suazo (Executive Vice President)
Yeah, absolutely. So, you know, we continued the momentum that we had last quarter. Currently there are 10 deals in negotiation, three of which are on the three remaining market-ready suites. One of those deals is in late stages for 15,000 square feet. The remaining seven deals in negotiation, one for 50,000 square feet, is in late-stage leases and the rest are in various phases. Behind that, we have six tenants who are looking for more market-ready suites that have really started to tour and be in discussions with us. So we’ve planned and we’ve priced the next phase, call it two floors of market-ready suites that we’re going to be ready to go once we’re in leases with the others.
Yana Galan (Analyst at Bank of America)
Thank you.
OPERATOR
Your next question comes from the line of Tom Catherwood with BTIG. Tom, your line is open. Please go ahead.
Tom Catherwood (Analyst at BTIG)
Thank you and good morning everybody. Mark, maybe in your prepared remarks you mentioned strength in Redwood Shores kind of multiple times and that’s been one of the markets that has kind of lagged behind the recovery of your other Peninsula assets. Can you talk a little bit about what’s changed there in terms of demand and then maybe how much progress you think you can make there in the near term?
Mark Lammas (President)
Yeah, we’re well leased, generally speaking, in Redwood Shores. I don’t know that a lot has changed. I mean, we’ve seen steady demand from smaller tenants throughout that market and well diversified — professional services, tech, obviously, given its location. And so I think we’ve just benefited from what has been steady quarter-over-quarter demand we’ve captured. We’ve outpaced the overall market consistently. I don’t know what else to say about it.
Art can add some further color on it though.
Arthur X Suazo (Executive Vice President)
Yeah, absolutely, Tom. You know, so I think the strength of that market for us is the small tenant — our market-ready, move-in-ready suites. We’ve deployed probably over 200,000 square feet over the last several years. Right now we have well over, I’d say close to 100,000 feet of move-in-ready suites with great coverage. And that’s how we’re outperforming the market. Right. We understand the size of the tenant, as Mark indicated. You know, they’re generally under 20,000 square feet.
And that’s precisely how we’re meeting the market.
Tom Catherwood (Analyst at BTIG)
Let me just follow up on that. I get that things are getting better, but if we go back to a year ago, I mean, yes, you’ve added 500 basis points of leasing there, but you’ve added a lot more in other parts of the Peninsula. So is this something that you think you can get into the mid-80s as we move forward? Is this — I mean, historically it has tended to lag behind — how deep is that potential demand that you’re looking at?
Mark Lammas (President)
Yeah, I mean we were well into the 80s. I feel like we can get back well over 80 as well. There’s been lift, as you know, on the Peninsula. There’s been significant lift with Palo Alto, with Redwood City. And we’re now seeing this wave of small- to mid-sized tenants that we’re aggressively pursuing. So yeah, we could get well into the 80s.
Tom Catherwood (Analyst at BTIG)
Okay. And then just last one for me, maybe moving over to Quixote with the $23 million sale, what is left, and then kind of what is the timeline for resolving the remainder of non-core? And I get it could be lumpy. But in general, what are your expectations for resolving what is left there in terms of just the wind down?
Mark Lammas (President)
We are down to just a few more leases associated with the non-core Quixote business and we think those will be wrapped up by year end. I think just in terms of a scorecard, we’re on schedule, if not a bit ahead, and we’ve been able to extricate ourselves at a price, if you will, below what we had initially targeted. So we think we’re executing extremely well on the wind down. Once that wind down is complete, we’ll be at that point a transportation company exclusively based in New York and largely in Los Angeles — roughly a thousand vehicles of various types with six or so locations to either house those vehicles or maintain those vehicles.
And importantly, and you see it in our third quarter results, even with show counts sort of stubbornly for now at least stuck at 70, we almost hit the break-even target. We were at negative 600,000 for the quarter, which is darn close to where we hope to get. And with just a touch of improvement in show count, we think we would be at break-even. So that’s kind of what the business we think looks like when the wind down process is over, and once that’s done, we’ll have to just step back and, you know, kind of assess what comes next.
Victor Coleman (Chief Executive Officer)
Yeah. And lastly on that piece, Tom, you know, we’re still maintaining our market share, which is extremely high for that business.
Tom Catherwood (Analyst at BTIG)
Got it. Appreciate the answers. Thanks everyone.
OPERATOR
Your next question comes from the line of Ronald Camden with Morgan Stanley. Ronald, your line is open. Please go ahead.
Ronald Camden (Analyst at Morgan Stanley)
Great. Just starting on the same-store NOI in the quarter that you posted — as you’re thinking about sort of flipping the calendar, what are some of the puts and takes to how same-store NOI should evolve with occupancy and commencements and everything? Just trying to get a sense if this level is sort of the right run rate going forward. Thanks.
Harout Diramerian (Chief Financial Officer)
Hey Ron, great question. So I don’t know if we’re ready to talk about 2027, but I’ll give you some high-level amounts. As leasing continues to improve and as free rent burns off, we expect the same-store cash NOI to continue to improve. So that’s the trajectory. There may be some additional free rent for new leases in the upcoming year, but ultimately the trajectory should be growing on a go-forward basis.
Ronald Camden (Analyst at Morgan Stanley)
Great. And then my second one is just the leverage. Looked like it ticked up a little bit during this quarter maybe. Can you talk about, as you’re thinking about whether it’s funding some of the capex for the leases or asset sales and so forth, just where do you think that should trend to as NOI comes online and you’re managing sources and uses? Thanks.
Harout Diramerian (Chief Financial Officer)
Sure. So, you know, the leverage increased quarter over quarter, but it’s again below our expectations and it’s almost entirely due to the PayPal lease expiring at Fourth & Traction. So all within our expectations. In fact, we beat our expectations and I think we said in our prepared remarks when you pro forma in the note purchases and asset sales, leverage ticks back down. You know it’s going to be a little up and down in the short term, but overall we expect it to start dropping and that’s our plan.
So again, similar to the same-store cash NOI, as free rent burns off those leverage metrics will definitely improve.
OPERATOR
Thank you. Yes. Yep, I got you. Thank you. Your next question comes from the line of John Kim with BMO Capital Markets. John, your line is open. Please go ahead.
John Kim (Analyst at BMO Capital Markets)
Thank you. You talked about 50% coverage on next year’s expiration. I was wondering if you could provide some more commentary on what that comprises of. So like renewal versus new leases. Renewal will have no downtime. And then how much of those leases are in documentation versus LOIs or proposals.
Arthur X Suazo (Executive Vice President)
Sure. This is Art. Let me start with kind of the largest, kind of the largest five deals we have out there. The most significant of which is at Rincon Center with Salesforce. Salesforce and Twilio combined, it’s 163,000 square feet. We have 100% coverage on that. But to round out the top, the top five deals, you know, we have very close to 70% coverage on those deals. Behind that, John, you know, as we move through the year and you know, we cater to a lot of small tenants, very hard to get a read, a further read on, you know, what their decision is, you know, more than, you know, more than, you know, three months out. So our total, you know, our total coverage right now is 50%. However, as we move through the year, we’ll be getting more commitments from these smaller tenants who usually wait to the end. So we feel like we’re in really good shape.
And then moving into 28, you know, our largest tenants make up about 550,000 square feet. And right now we have 100% coverage on those.
John Kim (Analyst at BMO Capital Markets)
Okay. And as you do that leasing, occupancy has trended positively, but when you look at AFFO today, it’s negative. Can you just walk us through the bridge and how that gets, how it gets positive, the timing of that? I realize that leasing CapEx, a lot of it is front-end loaded, but at the same time you have a fair amount of debt maturities over the next couple years. So just, if you could just provide some more color on AFFO turning positive going forward.
Harout Diramerian (Chief Financial Officer)
Sure. I feel like a broken record here. A big part of the AFFO turning positive again is free rents burning off. And you’re right, it’s a timing issue. Once again, our AFFO results this quarter well exceeded our expectations. The timing of CapEx is very lumpy, as you said, and that’s not always easy to predict. However, this is good-news capital. So as we spend the money, we’re going to be receiving additional NOI in future periods that will help reduce that AFFO burden.
So we expect it by the back half of next year to turn around. It is challenging to do exact timing only because the timing of the CapEx is volatile by nature.
John Kim (Analyst at BMO Capital Markets)
Yeah. Okay, thank you.
OPERATOR
Your next question comes from the line of Dylan Brzezinski with Green Street. Dylan, your line is open. Please go ahead.
Dylan Brzezinski (Analyst at Green Street)
Morning, guys. Thanks for taking the question and appreciate your comments around the demand pipeline and leasing and whatnot. But I guess, and I think you alluded to it in your prepared remarks around just sort of everything going on in the world of AI. A lot of these stocks being down massively, a lot more uncertainty, sort of the direction of the industry over, at least over the near term. I mean, as you sort of look at the leasing pipeline, have you guys seen any sort of pause or lack of communication going on amongst those tenants that sort of operate within this industry?
Just trying to get any sort of gauge on whether or not we could see either a pullback or a slowdown in terms of the appetite of space demand from these companies over the next few months.
Victor Coleman (Chief Executive Officer)
Dylan, it’s Victor. Listen, I think a lot of people are perceiving that to be the case. I can tell you from a front-row seat, we’re not seeing that at all in the deals that we’re doing. A lot of the deals we’re doing are big tech companies, and so they’re not just AI-correlated, even though the preponderance of the growth of AI is obviously in the Bay Area. But we’re seeing a tremendous amount of support around AI-related tenants. And as I said, I think you’re going to see, when we talk about the coverage we currently have, our coverage is deals that are in leases, and these are tech companies, these are not AI companies, and they’re credit-quality companies. We’re going to announce deals and it’s going to support, I think, what we’re seeing on the ground with the amount of activity and the amount of backfill that we see with new tenants coming to the marketplace or expanding tenants.
So we’re comfortable as we sit right now, and I don’t think much is going to shake the tree on the deals we’re working on and about to announce in the next quarter or two. So I think that will give you sort of a feel of the market.
Arthur X Suazo (Executive Vice President)
Dylan, if I can add to that, you know, a lot of these tenants are smaller, you know, smaller tenants in the market, and they’re looking for near-term opportunities. That’s why, you know, obviously our market-ready, move-in-ready suites have been so successful. So on the contrary, you know, they’re looking to move in quicker, not prolong the process.
Dylan Brzezinski (Analyst at Green Street)
That’s helpful. And then maybe just on capital markets, obviously a lot has happened since you guys sort of executed on those dispositions or at least first took those out to market and you kind of alluded to looking to sell additional assets, I guess. Have you put anything on the market today? And if so, have you seen any changes to buyer appetite, buyer underwriting or anything like that?
Victor Coleman (Chief Executive Officer)
Well, listen, I think we’ve been very fortunate. The deals we’ve closed have had zero renegotiation. Given the interest rate environment, I think we’re very happy about those executions, and for the most part we would have probably thought we would have some portion of retrading, but that was a zero for the deals. Now, the one deal that is still about to, is in the process of our disposition plan which we’ve talked about, which is 10950, has had impact, I think directly correlated to multifamily and the returns on multifamily and the interest rate levels that were quoted, let’s say six to 12 months ago versus where it is today. I think we’re very happy with the price range that we’re getting on that asset. It’s better than we thought it would be. So we do have some room there, but that would be the only thing that correlates to some form of renegotiation.
Other assets in the marketplace currently today that we’re looking at, there’s only a few, and those really, I think we are pretty solid around pricing around that. That things could change. Nothing’s going to close this year. Probably it’s going to be. It’s going to be next year. So we’ll have to see where that sort of shakes out from demand and interest level.
Dylan Brzezinski (Analyst at Green Street)
Great. Appreciate that color, guys. Thank you.
Victor Coleman (Chief Executive Officer)
Thanks, Dylan.
OPERATOR
Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Caitlin, your line is open. Please go ahead.
Caitlin Burrows (Analyst at Goldman Sachs)
Hi, everyone. I guess just on the topic of residential conversions, San Francisco, I know you have the 901 Market project. Can you give an update on that project? And then also more broadly, are you seeing more resi conversions happen in San Francisco or not so much?
Victor Coleman (Chief Executive Officer)
You know, I think, listen, I’ll take the latter part first, Caitlin. We’re not seeing that much activity, and I think that’s why 901 has gotten a lot of interest and activity. We are confident that we will get that approved. Whether we sell it as a conversion or sell the asset or lease it up, that’s going to be determined. But right now it’s going in the right direction where the interest level is very high and the location is changing. Right. I mean, it wasn’t a location that during COVID was a lot worse than it is today.
Some of the stuff around us has already been cleaned up. And what the city is doing literally across the street is also helping out the future viability of that asset. So we’re comfortable with it. We don’t have a specific timeline as to decision-making, but we have a lot of interest of multifamily people who want to invest and either buy that asset from us.
Caitlin Burrows (Analyst at Goldman Sachs)
Got it. Okay. And then just on the Hollywood Media extension, I feel like we were talking about that for a long time going into it, so congrats. But perhaps that also suggests it’s already time to be thinking about what happens in November 2027. So can you go through what needs to happen between now and then for you to be able to refinance that debt? Assuming that is the goal?
Mark Lammas (President)
Yeah, I think, Caitlin, you know, our first priority is to continue our conversations, which, as Victor mentioned, have been very productive with our largest tenant there, and we need to follow through on that. The extension gives us ample time to do that. We need to follow through on that conversation, and only after we have, you know, clarity around their requirement and how that ultimately shakes out, will it ultimately be productive to then re-engage with the lender.
Caitlin Burrows (Analyst at Goldman Sachs)
Got it. Okay, thanks.
OPERATOR
Your next question comes from the line of Seth Bergey with Citi. Seth, your line is open. Please go ahead.
Seth Bergey (Analyst at Citi)
Hey, thanks for taking my question. I guess just on the first one with the kind of alluding to potential asset sales or JVs, could you just broadly talk about where you think pricing is for maybe some of the core assets with high cost, high quality credit that you mentioned in various markets?
Victor Coleman (Chief Executive Officer)
In terms of pricing, you mean cap rates or price per square foot or Yeah, I think, listen, we’re not going to openly discuss cap rates on a call like this because that obviously puts us in a situation where we’re going to be backed into a valuation. I would just say that, you know, today if you look at the market conditions on the assets we’re looking at, people are paying a premium right now for vacancy because of the demand and lack of future development for the next three to five years. And so that is one cap rate and one return that’s not in place; it’s going to be a future IRR.
And then, still today, there are lots of capital partners and capital providers and interest level for acquisitions that want stable WALT-related assets with high credit. And that will range as well. But as I said, I mean, even when we go out to the marketplace publicly with a broker, we don’t come out with a price. So we’re not going to talk about cap rates. But suffice to say, the asset qualities that we’re looking at are some of the best that would be entered in the market right now.
Seth Bergey (Analyst at Citi)
Thanks. And then I guess just my second one, you’ve kind of used the term coverage on some of the activity on Washington 1000 and some of the kind of upcoming lease expirations. Just kind of what level of confidence do you have that kind of coverage either translates into signed leases or can you kind of define that in terms of how much of the coverage is leases that are out or, you know, in earlier stages of kind of the lease execution process.
Victor Coleman (Chief Executive Officer)
I think it’s important to sort of note what the past has sort of delivered for the company. As we said in our prepared remarks, you know, again, we had a great quarter with leasing in excess of 500,000 square feet. Consistently we’ve done that quarter over quarter for almost eight or nine quarters in a row. And we’re ahead of our expectations on leasing. We thought the year would be roughly around 2 million square feet. We’re over that through three quarters.
And so when we look at the term coverage, we are confident that we’re going to execute on the transactions, and they’re either in leases, in LOIs, or in negotiations. I would say of the 50% coverage, which is the comment that we had made, we are in leases for 50% of those 50%. The entire 50% of those deals are at some form or function. So we are comfortable that either in the fourth or the first quarter that will be executed.
Seth Bergey (Analyst at Citi)
Great, thank you.
OPERATOR
Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander, your line is open. Please go ahead.
Alexander Goldfarb (Analyst at Piper Sandler)
Oh, hey, good morning. Morning out there. Just a few quick questions first. Harout, obviously you guys did a pretty successful oversubscribed debt tender. Just curious, you know, your thoughts on that being a pathway forward as you think about additional maturities and, you know, is that solely timed with asset sales or are there other fundings that you would think about doing the debt tender with?
Harout Diramerian (Chief Financial Officer)
So, you know, we’ll always explore opportunities to go to the capital markets if they’re beneficial, i.e., tender and other items. And yes, this last one was based upon asset sales. However, if the opportunity presents itself and we have capital available either for asset sales or asset-level financing or anything else and the tender market is available, we’d explore it for sure. But as we get closer to maturity, I think that becomes less and less likely.
Victor Coleman (Chief Executive Officer)
Yeah, Alex, the interest level in that transaction was much higher than what we executed, but we had committed to 200 at the time. We didn’t know where the market conditions would be and we’re happy with the execution. We’ll always look back to revisit. Now that we’ve done that once, it enables us to evaluate it going forward for multiple opportunities.
Alexander Goldfarb (Analyst at Piper Sandler)
Okay. And then, understanding that you’re not providing ’27 guidance. But, you know, as we think about your business plan, dispositions have clearly been a part of that. And as we think about ’27, there’s obviously the signed but not yet commenced leases that will be coming online. But should we anticipate, you know, a decent amount of dispositions next year that would be offsets, or do you think next year, from a platform perspective, most things should be additive apart from, obviously, you know, balance sheet debt items?
Victor Coleman (Chief Executive Officer)
Yeah. As I mentioned, I mean, we don’t have a game plan for 2027 to be an excessive disposition year of assets. So it’s going to be more on the organic growth, the performance on the leasing and cash flow and getting to AFFO positive, and then alternatives around the assets that we currently have that are unencumbered, which will create multiple avenues for us to address the latter issue, which is the upcoming debt end of ’27, early ’28.
Harout Diramerian (Chief Financial Officer)
Just to add to that, the asset sales, at least the last few, have been non-income-producing asset sales and I think those are the type of assets we’ve been targeting. So they would be accretive to FFO in the future and AFFO.
Alexander Goldfarb (Analyst at Piper Sandler)
Okay, thank you, Victor. Thank you, Harout.
Victor Coleman (Chief Executive Officer)
Thanks, Alex.
OPERATOR
Your final question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard, your line is open. Please go ahead.
Richard Anderson (Analyst at Cantor Fitzgerald)
Thank you. So on Quixote, you know, I see the numbers, the studios are down from 3.6 million of a loss last quarter to 1.9 million. So it looks like it’s pacing as you mentioned, Mark. But then, you know, the services is still, you know, a minor loss, 600,000. But even if you get break-even on the services, what’s the bull case to owning that long term? I mean, do you have a view that that can actually start to pick up? I know you’re banking on show counts, but I’m just curious what your long-term thesis is on the service side of Quixote.
Mark Lammas (President)
Hey, listen, I think, you know, Rich, the long-term vision on the services side is always going to be under a conversation. I mean, we have some tailwinds now given the federal bill that is going to be presented and should come through maybe even as early as December, if not first quarter of next year. And with, you know, as we said in our prepared remarks, with the sort of new announcement that was this week by Governor Newsom on increasing the California tax credits to a billion dollars, but more importantly including the above and below the line, which is a huge windfall for the industry and the business, I think it’s still, we’re accomplishing what we want to accomplish, which is getting this to break even. We’re comfortable with that.
And then from that point on, you know, we’ll see where the valuation of the business is and what transpires from a show count and what transpires from a demand standpoint. But things aren’t going to get worse, they’re only going to get better.
Richard Anderson (Analyst at Cantor Fitzgerald)
Okay. And then secondly on Glen Oaks, I don’t know if this was mentioned, so I apologize if it’s repetition, but, you know, I know you have, it’s in the Blackstone JV and, you know, the longer-term plan is perhaps a sale, but is there an alternative use of that asset if it’s not working as a studio asset?
Mark Lammas (President)
Yeah, we’ve looked at alternative uses. There are a few areas. There is obviously some entitlement changes that we’ve evaluated and whether it’s worth capital outlay to that given the asset and what’s happening. I think in the near term we’ll have some resolution around that asset and whether or not it’s part of our portfolio or not. So we’re looking at all different avenues. At the same time, we’re, you know, trying to lease it out as best we can.
Richard Anderson (Analyst at Cantor Fitzgerald)
Yep. Thanks very much.
OPERATOR
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.
Victor Coleman (Chief Executive Officer)
I want to thank everybody for participating. I want to thank the Hudson team for all the hard work in the last quarter and we’re going to strive to year-end at the same success levels. Thanks very much.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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