Hudson Pacific Properties, Inc. (NYSE: HPP) reported a mixed third-quarter performance during their latest earnings call, with CEO Victor Coleman expressing optimism for the future of office demand, particularly in West Coast tech-centric markets. Despite a year-over-year decline in revenue, the company highlighted a strong leasing pipeline, increased production activity in its studio operations, and proactive asset management strategies aimed at stabilizing occupancy and improving financial performance into 2025.
Key Takeaways
- Significant recovery in office demand, particularly in San Francisco and Seattle, with a 17% year-over-year increase in tenant requirements.
- Leasing achievements include 539,000 square feet in Q3, totaling 1.6 million square feet year-to-date, a 25% increase from the previous year.
- Studio operations are improving, with Los Angeles production nearing 90 shows in October and potential legislative support for a $750 million tax credit.
- Q3 revenue dipped to $200.4 million from $231.4 million, attributed to asset sales and lease expirations.
- Occupancy rose to 79.1%, with a leasing pipeline of nearly 2 million square feet.
- Funds from operations (FFO) for Q3 were $14.3 million ($0.10 per share), down from $26.1 million ($0.18 per share) the previous year.
- The company anticipates Q4 FFO per diluted share between $0.09 and $0.13, with no debt maturing until November 2025.
Company Outlook
- Optimism for sustained demand and portfolio stabilization into 2025.
- Expected occupancy stabilization by mid-2024, contingent on maintaining lease momentum.
- Active development project, Sunset Pier 94 studios, expected to complete by end of 2024.
Bearish Highlights
- Q3 revenue decline primarily due to the sale of One Westside and lease expirations.
- Concerns about potential margin pressure as occupancy levels are not expected to stabilize until mid-2025.
Bullish Highlights
- Strong leasing performance, with 1.7 million square feet leased in 2023.
- Positive absorption trends in the Peninsula and San Francisco markets.
- Production activity picking up in studio operations, with legislative support expected to boost the segment further.
Misses
- A decline in revenue and FFO per share year-over-year.
- Increased lease expirations in Q4, including Amazon (NASDAQ:AMZN)'s early termination at Met Park North.
Q&A Highlights
- Discussions with multiple potential tenants for Met Park North after Amazon's lease termination.
- Confidence in recovery of the industry and transition from holds to leased facilities.
- Refinancing plans for debt covenants for 2025 and 2026, with favorable market conditions for interest rates.
- Anticipation of improved NOI from the Quixote business and continued leasing activity.
In summary, Hudson Pacific Properties' earnings call painted a picture of a company adapting to a changing real estate landscape, with a particular focus on the West Coast office and studio markets. While facing some short-term financial headwinds, the company is positioning itself for growth by capitalizing on emerging trends in tenant demand and production activity. Hudson (NYSE:HUD) Pacific's strategic efforts to manage its portfolio and enhance its operations suggest a cautious yet optimistic outlook for the future.
InvestingPro Insights
Hudson Pacific Properties' recent earnings call reflects a company navigating challenges in the real estate market, particularly in the office sector. To complement this analysis, InvestingPro data offers additional insights into the company's financial position and market performance.
According to InvestingPro, Hudson Pacific Properties has a market capitalization of $584.67 million, reflecting its current market valuation. The company's price-to-book ratio stands at a low 0.22, which aligns with one of the InvestingPro Tips indicating that the stock is "trading at a low Price / Book multiple." This could suggest that the market is valuing the company below its book value, potentially presenting an opportunity for value investors.
However, it's important to note that the company's financial performance has been under pressure. The revenue for the last twelve months as of Q2 2024 was $881.22 million, with a concerning revenue growth rate of -14.04% over the same period. This decline in revenue is consistent with the company's reported challenges in the recent earnings call, including asset sales and lease expirations.
InvestingPro Tips also highlight that the stock has "taken a big hit over the last week" and "over the last six months," with a 6-month price total return of -26.2%. This aligns with the overall bearish sentiment in the real estate sector, particularly for office properties.
On a positive note, Hudson Pacific Properties has maintained dividend payments for 15 consecutive years, as noted by InvestingPro Tips. The current dividend yield stands at 4.95%, which may be attractive to income-focused investors despite the recent dividend growth of -60.0%.
For readers interested in a more comprehensive analysis, InvestingPro offers 11 additional tips for Hudson Pacific Properties, providing a deeper understanding of the company's financial health and market position.
Full transcript - Hudson Pacific Properties Inc (NYSE:HPP) Q3 2024:
Operator: Good afternoon, my name is Ciara and I will be your conference operator today. At this time, I would like to welcome everyone to Hudson Pacific Properties’ Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions] Thank you. At this time, I’d like to turn the call over to Laura Campbell, Executive Vice President, Investor Relations and Marketing.
Laura Campbell: Good afternoon, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. This afternoon, we filed our earnings release and supplemental on an 8-K with the SEC and both are now available on our website. An audio webcast of this call will be available for replay on our website. Some of the information we’ll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss industry and market trends and capital recycling. Mark will provide an update on our office and studio operations and development and Harout will review our financial results and 2024 outlook. Thereafter, we’ll be happy to take your questions. Victor?
Victor Coleman: Thank you, Laura. Good afternoon everyone and welcome to our third quarter call. At Hudson Pacific, we spent nearly two decades acquiring, transforming, developing, leasing and operating premier real estate and related services in the most sought after locations, catering to dynamic tech and media industries. Over the last several years, our talented team has worked diligently to leverage the strength and resiliency of this unique platform to rise above the multiple unprecedented once in a generation challenges impacting our core industries and markets. As we sit today, we are gaining additional confidence that the tide is turning. While more time is needed, we believe that as we exit this year and move through 2025 we will stabilize our portfolio and be positioned for a return to growth and ultimately outperformance. The positive office related indicators that are emerging are numerous. The data clearly shows that office oriented cultures enhance productivity and performance and with the U.S. facing the steepest decline in white collar productivity in 50 years, the push to four or even five day workweek has begun. Today, only 1% of the Fortune 100 companies still have fully remote office attendance policies and 80% of the CEO respondents in KPMG’s most recent survey anticipate their work will be full-time in office in the coming years and this movement, which had early traction with financial companies on the East Coast is now gaining momentum among tech companies along the West Coast. Recent full-time mandate announcements include Seattle’s largest employer, Amazon, Dell (NYSE:DELL) and San Francisco’s largest employer Salesforce (NYSE:CRM). Underscoring the momentum in San Francisco in September, Muni ridership surpassed 520,000 average weekday boardings and approximately 75% of pre-pandemic levels, with certain routes recovering to well in excess of 100%. And to that tech layoffs are slowing, venture fundraising is picking up and after years of cost cutting, venture investors are finally advising portfolio companies to get back out on the offensive. Tech layoffs have consistently declined since the first quarter of 2023, now reaching their lowest level since second quarter of 2022, a 45% improvement year-over-year. Furthermore, AI companies, 44% of which are in the Bay Area, have brought venture investors back to the table. 2024 is on pace to be one of the best years for AI funding on record, with the lion’s share going in the Bay Area, which we expect to provide another leasing catalyst in the coming months. AI companies tend to be office first and since January 2022 have at least 2.3 million square feet in the Bay Area, a footprint Cushman & Wakefield expects to grow 200% over the next two years. At present, we’re monitoring 25 tenants in the market seeking about 800,000 additional square feet. Big picture, a recovery that has already taken hold on the East Coast is now gaining traction on the West Coast. And in the third quarter, tenant requirements in the West Coast tech-centric office markets increased 17% year-over-year compared to just 7% for the broader U.S. office market. Downtown San Francisco had positive net absorption for Class A product for the first time in two years and year-to-date overall gross leasing is the highest since 2019 with tenant requirements up 20% year-over-year. The San Francisco Peninsula has also had its first quarter of positive net absorption since 2022, and software and internet companies led leasing volume representing 42% of the top 25 transactions. And in the Valley, office occupancy losses are starting to recede and tenant requirements are up 33% year-over-year. And in Seattle, we’re now seeing midsized demand coming back to the market with overall requirements up about 30% year-over-year. All of this activity mirrors what we’re experiencing with our own office portfolio. Now turning to studios, the following three months of Los Angeles show counts has been approximately in the low 80s. Production has started to pick up, nearing 90 shows during October. On trend with stronger demand we are seeing for 2025, while we are moving in the right direction, Los Angeles production has yet to return to any sense of normalcy, which continues to limit demand for our stages and services. Los Angeles is still the worldwide leader in film and television production, but to win back productions in an increasingly competitive cost conscious environment, we must have the appropriate financial incentives. Fortunately, office officials in the public realm at all levels have recognized this and a few weeks ago Governor Newsom introduced legislation that if passed, would more than double the tax credit program to $750 million, making it the largest in the United States. This is a very positive development and if passed will go into effect in mid-2025 at a key moment when many companies such as Netflix (NASDAQ:NFLX) envision production to be back to normal. We think new soundstage supply will remain limited and a comprehensive offering of studios and services will be poised to successfully capture incremental demand which typically builds ahead of production. We remain confident our studio team is the best in the business and recently promoted two senior executives in recognition of their growing responsibilities. Stefanie Bourne, who joined Hudson Pacific in 2021 from Disney (NYSE:DIS), has been promoted to EVP Studios with oversight of sales, production services, operations and strategic initiatives. And Anne Mehrtens has been promoted to EVP Studio Real Estate and Southern California office operations, having led at different times those functions for over a decade. I know both alongside with our team and the broader studio leadership team will ensure we continue to benefit from the creative strategies, streamlined operations and exceptional level of service for which we known. Finally, I want to just talk about capital recycling. With Fed policy easing and office fundamentals improving, transaction volume across our markets is accelerating. We are strategically tapping into this demand as a key component of our effort to deleverage with a focus on completing additional non-core office asset sales where we can maximize value. Of note, our Bay Area assets are garnering strong buyer interest and as of the third quarter, we’re under contract with a buyer that has gone nonrefundable on Foothill Research Center in Palo Alto for $23 million. We’ve opted to sell at an attractive price per square foot rather than continuing to invest in this asset. Inclusive of Foothill, we presently have three sales under contract, another 300 negotiation, which have the potential to generate gross proceeds totaling $200 million to $225 million. In addition, we have begun discussions with potential partners and lenders on a portfolio of six office assets as both a secured financing and a joint venture opportunity, and we’re optimistic the related transactions could close early next year, and we look forward to providing much more detail and additional updates. With that, I’m going to turn it over to Mark.
Mark Lammas: Thanks, Victor. We had another strong quarter of execution from our leasing team, signing 539,000 square feet of office leases with 56% being new deals. This brought our year-to-date total to 1.6 million square feet or 25% ahead of this time last year. Our priority has been to stabilize and grow occupancy. And this quarter, we reported occupancy sequentially 40 basis points higher at 79.1%, along with a consistent lease percentage at 80%. In addition, if we adjust for the 100% leased and occupied Foothill Research Center, which we designated as held for sale in the third quarter, sequentially, our occupancy increased 60 basis points to 79.3% and our lease percentage increased 20 basis points to 80.2%. Our lease economics are improving or stable with third quarter net effective rents 3% higher than our trailing 12-month average and only 4% of our pre-pandemic trailing 12-month average. We have continued to extend lease term, which in the third quarter was approximately six years, slightly above our trailing 12-month average and 42% above our trailing 12-month average a year ago. While we reported GAAP and cash rent spreads, 11.5% and 13.3% on prior levels but for a 29,000 square foot short-term lease in Los Angeles and two mid-size Bay Area leases totaling 68,000 square feet, one in Palo Alto, the other in downtown San Francisco, our GAAP and cash rent spreads would have been essentially flat. In short, as average lease terms continue to lengthen and TIs and free rent remain in check, our net effective rents have held up even by comparison to pre-pandemic period in spite of the occasional setback on rent spreads. Our leasing activity pipeline, including deals and leases, LOIs or proposals remained robust at close to 2 million square feet, about 70% of which are new leases. Quarter-over-quarter, our pipeline in Seattle and Silicon Valley has increased, in part attributable to an 18% to 20% increase in requirement size in those markets. Tours remain active at 1.3 million square feet during the quarter with a nearly 50% increase in Seattle, which is indicative of the level of interest we are seeing at our recently completed Washington 1000 development. To date, we have two our tenants through that project, representing a total of 700,000 square feet of requirements, which range in size from 35,000 to 150,000 square feet. Feedback from Seattle’s top brokers during the recent dinner we held at the asset underscores watching on 1000 superior quality and leasability only further enhanced by recent market strengthening. Across our office portfolio, if we sustain our lease momentum of roughly 500,000 square feet per quarter, which our pipeline in tours suggests is reasonable, we expect occupancy to stabilize by the middle of next year with the potential for meaningful occupancy growth thereafter. We have about 670,000 square feet remaining to expire by year-end. This includes 140,000 square feet at Met Park North, with a full building tenant recently exercised the right to terminate the lease. We are actively exploring options for this asset, which include early discussions with multiple tenants for 30,000 to 100,000 square foot requirements. Our coverage, which includes deals and leases, LOIs or proposals on remaining 2024 expirations is 37%, which increases to 55% accounting for leases and discussions. This is not surprising given that apart from Met Park North, our average lease expiration is roughly 7,000 square feet and delayed decision making is typical for these smaller tenants. As we look to 2025, excluding the full building lease at Foothill Research Center, which is held for sale, we have less than 1.7 million square feet expiring or 16% of our ABR. Our remaining top five expirations next year collectively totaled 660,000 square feet, and we have approximately 64% coverage. Beyond that, our average expiring lease in 2025 is roughly 6,000 square feet. Turning to Studios. In the third quarter, our in-service stages were 76% leased during the prior 12 months, down 220 basis points sequentially, reflecting the previously discussed single tenant vacating last year. Note this lease percentage excludes Sunset Glenoaks for which there is not yet a trailing 12-month data. Our Quixote stage lease percentage was up 60 basis points sequentially to 33.4% due to increased commercial shoots at our Quixote West Hollywood and the Griffith Park location. Compared to a year ago, our third quarter studio revenue was $5.6 million higher even as we had a sequential $8.5 million decline due to lower average production levels in the third quarter compared to the second quarter, primarily affecting our studio ancillary and transportation segments. We currently have signed leases are in contract or our client interest on 79% of our film and TV stage square footage or all but 14 of our 59 film and TV stages inclusive of Sunset Glenoaks. This activity includes a notable increase in what the industry cause holds, essentially expressions of interest for specific stages for 2025 production days. Similarly, coincident with a modest improvement in production activity late in and subsequent to the third quarter, we have seen stage leads and tourist increase, and transportation and location services utilization has improved. We are optimistic these are early indicators of sustained stronger demand next year. Finally, I will touch on development. We have one active development project, Sunset Pier 94 studios, which will be the first purpose-built studio in Manhattan. Construction is progressing on time and on budget for an anticipated delivery by the end of next year. And as of October, we have no further equity contributions. We are in active discussions with a leading studio as well as other production on multi-year agreements for one or more stages. And with that, I’ll turn the call over to Harout.
Harout Diramerian: Thanks, Mark. Our third quarter 2024 revenue was $200.4 million compared to $231.4 million in third quarter of last year, almost entirely due to the sale of One Westside and the expiration of the Block lease at 1455 Market, partially offset by improved studio revenue following the resolution of the related union strikes. Our third quarter FFO, excluding specified items was $14.3 million or $0.10 per diluted share compared to $26.1 million or $0.18 per diluted share a year ago. Specified items for the third quarter totaled $0.05 per diluted share, consisting of a $3.9 million one-time straight-line rent reserve related to the transitioning a tenant to cash basis reporting, a $2.2 million non-cash revaluation of a loan swap unqualified for hedge accounting, a $1.2 million non-cash deferred tax write-off and a $0.3 million transaction related expense. The year-over-year change in FFO excluding these specified items was mostly attributable to the factors affecting revenue and lower FFO from non-controlling interests following our purchase of our partner’s interest in 1455 Market earlier this year. Our third quarter AFFO was $15.8 million or $0.11 per diluted share compared to $28.1 million or $0.20 per diluted share in the third quarter last year with a change largely attributable to the previously mentioned items affecting FFO. Our third quarter same-store cash NOI was $96.9 million compared to $113.2 million in the third quarter last year, mostly due to tenant move outs including Block at 1455 Market. Turning to our balance sheet. As Victor noted earlier, we are proactively pursuing multiple paths to increase liquidity including asset sales, JV partnerships and secured financings. We have no debt maturing until November 2025. Our share of net debt relative to our share of undepreciated book value is 37.4% and our percentage of debt fixed or capped is 91.5%. At the end of the third quarter, we had $696 million of liquidity comprised of $91 million of unrestricted cash and cash equivalents and $605 million of undrawn capacity on our unsecured revolving credit facility. We also have $195 million of construction loan capacity of which our share is $53 million. Turning to our outlook. For the fourth quarter, we expect FFO per diluted share to range from $0.09 to $0.13 per diluted share. We anticipate fourth quarter NOI for our Quixote business to moderately improve as compared to our third quarter results due to the improved production activity that Victor and Mark highlighted. We expect fourth quarter NOI for our in-service office and studio portfolios to remain at levels consistent with the third quarter results adjusted for previously mentioned straight-line rent reserves. We anticipate having lower office occupancy in the fourth quarter, reflecting the full building tenant vacating Met Park North in early December. But for this early termination and the designation of Foothill Research Center as held for sale, we believe our office occupancy would have shown another sequential increase. Similarly, solely due to the removal of Foothill Research park from our same-store pool, we are updating the range of the same-store property cash NOI growth to a negative 13% to 14% from a negative 12.5% to 13.5%. As always, our outlook excludes the impact of any potential dispositions, acquisitions, financings and or capital markets activity. And now I’ll turn the call back to Victor.
Victor Coleman: Thank you, Harout. Each quarter we are executing office leasing and we are on track to significantly outperform our activity last year along with the west coast office fundamentals that are undoubtedly strengthening. On the studio side, we have contracts or interest in nearly 80% of our film and TV stages, while Los Angeles production levels are challenging but improving and the proposed state tax credit legislation and potential City of LA incentives stand to meaningfully boost demand. And based on these factors, we believe we’re on path to stabilize and start to grow occupancy and cash flow across our entire portfolio next year. And with that, the momentum of asset sales, our positive discussions with JV partners and lenders, we expect to have the balance sheet and liquidity to achieve our business objectives. Now with that, we’ll be happy to take questions. Operator?
Operator: [Operator Instructions] Our first question today comes from Blaine Heck with Wells Fargo (NYSE:WFC). Your line is now open.
Blaine Heck: Great, thanks. Good afternoon. Just starting on the sales Victor, can you just talk about the drivers behind what looks like an accelerated effort on the asset sales side and the rationale behind looking at the additional six office asset securitization? Any expectations for cap rates you can provide there? And then lastly, just maybe how we should expect all of those moves to kind of affect your covenant.
Victor Coleman: Thanks, Blaine. Well, listen, I’m not going to comment on the actual sales indirect until we have them non-refundable, which to-date is not the case. As I said, we’ve got three under contract of which one is non-refundable. We got three more that were in negotiations that should go under contract and the combined total of those are between $200 million and $225 million. The assets, how you should look at those assets as being non-core, we always evaluate assets in the portfolio that may or may not fit into our long-term strategy with capital allocation and with excess work around leasing or capital improvements or the future growth of those assets. So that’s how we identify them. They’re not core to the portfolio and they’re not what we would call as our best and highest quality assets. I do think, you touch on the JV and in the CMBS structure we’ve allocated some time and energy around six assets that we’ve got a very, very great response from JV Partners and from our CMBS debt allocation for that portfolio. We’re exhausting our talents around that. We should have, I think, more definitive information by first quarter – early first quarter of the year, but so far it’s on track. Don’t want to get into cap rates at all, at this time. Suffice to say, our ownership interest in that is going to be equal to what’s been in our past JVs, which is roughly around 50%. So that’s the intent for that aspect. Lastly, in terms of covenants, there is not going to be any impact in covenants. We are working through that right now and we feel confident that this form of liquidity is another avenue for us to go on the offensive down the road.
Blaine Heck: Okay. Great. We’ll look forward to more updates there. I guess just second question. Thanks for your commentary on the studio side. I guess I’m still wondering how much of an effect some of this movement out of LA and into other markets has changed the kind of stabilized run rate of studio production that can come from LA. And whether you think that all of that is reversible with Governor Newsom tax credit proposal?
Victor Coleman: Well, listen, I think overall, the blank of the studio business and the entertainment business overall has been affected nationwide. It’s not just California. It’s California, it’s Georgia, and New York in general are all impacted based on the shift in the strike. In terms of the movement back to LA, LA still is the entertainment capital of the world. We are seeing an uptick quarter-over-quarter in our prepared remarks from a show count. And I think the movement by Governor Newsom and the impetus right now of Mayor Karen Bass for tax credits on both sides are going to help us as an industry get back to some sense of normality. I think the onslaught, the direction right now is from the holds that we have and the conversion from holds to leased facilities and our operating businesses all look on track for 2025, and it could be in the first quarter all the way through the fourth quarter to really see a massive impact. And so we’re confident that we’re in the right direction here. Blaine, and we’re also confident that production is going to be enhanced by the impetus of what Gavin Newsom and Mayor Bass has put in place. So I think all of that’s going to be impactful and put California to where it was. And I just want to reiterate, it’s not different here than it is anywhere else other than for domestic U.S. I mean, yes, overseas, I think you’ve seen a much greater pickup as of late in production and that hopefully would follow suit here as well.
Blaine Heck: That’s helpful. Thanks, Victor.
Victor Coleman: Thanks, Blaine.
Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Your line is now open.
Alexander Goldfarb: Good afternoon out there. Just going to two questions. First, I guess, Victor, continuing on Blaine’s question on the debt covenants. Looking at the 2025 and 2026 maturities, they’re certainly meaningful amounts. And as you sit here with your leasing that you have coming up and expected asset sales and NOI, how are you looking at that debt as far as – is all of that scheduled to be dollar for dollar refinanced, or do you think that some of this will be subject to negotiations?
Victor Coleman: I’m not sure what you mean by subject to negotiations. I mean, listen, we are intended on refinancing. We’re in conversations right now on a secured debt that’s coming due and in 2025 we’ve got a very good response on that. And I don’t think we are all concerned about the value of those assets and the equity that we have in place and those assets are coming due. I’m not going to comment, Alex, on where we see rate, but we’re looking at either floating or fixed and a term that could be 5% or 7%. And the market is very conducive to that right now. So we feel that they’re going to get executed and we have all the confidence that we’ll get it executed well before expiration at the end of 2025.
Alexander Goldfarb: Okay. And then the second question is, as we look into next year, I realize we’re still far out from giving 2025 guidance, but the trajectory that you guys are talking about sounds like the studio – it sounds like the businesses overall have bottomed. The recovery is a little – is a little slow, hopefully the Hollywood stuff with the tax credit passes and that incentivizes there sounds like the leasing is making some progress, but still some vacancy that needs to be addressed in the uncovered exposures. Is the $0.11 in the fourth quarter, is that a number that we should think about for a quarterly run rate for next year? Or are there things that you would point to that would make that quarterly run rate materially higher?
Victor Coleman: Yes, I would not look at the $0.11 as a quarterly run rate for next year. I think you have to look at it higher. And as I said in the prepared remarks, and as Harout said in his prepared remarks, we will address our full year guidance at our next quarter’s call. I do think that the impact of where the entertainment business was to where it is, to where it’s going, we’ll see a material change and we’re confident in that change being put in place. Hopefully by – as I said, some of the transactions that are on hold that are going to be secured to stages being leased and the demand going back up. So, yes, I wouldn’t read into the $0.11 as being our run rate going forward.
Alexander Goldfarb: Thank you, Victor.
Victor Coleman: Thanks, Alex, as always.
Operator: Our next question today comes from Michael Griffin with Citi. Your line is now open.
Michael Griffin: Great. Thanks. Just wanted to go back to the studios for a second. And it seems like things are maybe getting better into the fourth quarter. So I know you didn’t specify around kind of the Quixote piece of the fourth quarter guide, but is it fair to assume we should see an increase in NOI there relative to the third quarter? And then maybe stepping back, you talked about the tax credit being beneficial obviously for the industry. But is there a worry that maybe similar to the worry about the Teamsters strike this year, production could be delayed until the tax credit gets enacted. And do you think there’s the political capital to go forward with the tax credit like this?
Victor Coleman: So let me address the latter part first, Michael. At the end of the day, listen, I think we’re all very confident, the industry is confident that this legislation is going to pass. The Governor would not have come out as strongly as he did with the amount of $750 billion, which is going to be the highest in place tax credit for the entertainment business. And as a result, I think the modifications could be minimal. We’ll see what happens in the coming months. But it’s all sort of earmarked for it to be voted on and in place by mid-year 2025. That’s the anticipation. The citywide mandates that are being put in place. There’s already a committee in place that is promoting back to Los Angeles production at its highest levels. There’s a city tax proposal out to enhance production in Los Angeles. There are multiple factors that I think are supporting it. And just to answer your question in specifics, it doesn’t mean they’re going to wait till everything’s in place. I think directionally that’s what we were waiting for is leadership and direction both on the state level and on the city level. And then overall, just in the production companies to see that this is a direction because it will take hold for two, three, four years. This is not a one and done process. And I think that’s how we’re looking at when people are looking for production. They’re going to look at multiple savings over multiple venues, over multiple productions over a short-to-medium timeframe. So, I wouldn’t envision this to say it’s going to be impacted day one when it’s voted on. A lot of it will have some tailwinds and get us to a point where you’re going to see upsourcing and production going forward immediately in the first second quarter of 2025.
Michael Griffin: Appreciate that, Victor. And then just maybe circling back again on the transaction activity. And I realized there were a number of things that you can’t yet disclosed. But maybe on the Foothill Research Center, I think you set a purchase price of about $23 million. By my math, that’s about $120 a square foot. I know that was part of a portfolio. I think you acquired around 2014 or 2015. So can you give us a sense of how that valuation compares to maybe when you bought the portfolio or the property back then and then maybe just some broad commentary around how transaction volumes and value has changed over the past call it pre-COVID until now.
Victor Coleman: Yes, let’s just talk about Foothill. I wouldn’t read into the price per foot on Foothill, because if there’s five months of term left in that lease, there’s a ground lease that’s expiring. It’s very short term ground lease that candidly I think it would have cost us capital dollars as well as some favorable aspects around our existing ground lease portfolio with Stanford that would have impacted the viability of that asset to be re tenanted going forward. So really we looked at highest and best use of dollars and that’s what we decided to do sell that asset. And when you understand who we sold it to, I think you’ll sort of figure out the strategy and the structure around that. That being said, I would not equate that to market conditions. It is a unique transaction in the market and it’s a unique transaction to both the buyer and the seller’s relationship. In terms of overall acquisition and transaction activity. I think we’re pleasantly surprised. We’ve been patient. We, I think identified the right kind of assets and as I said earlier, they’re not the assets in the portfolio that are our highest quality assets. They’re the assets that we have to put some capital dollars in or there is some tenant risk that we’re, that we may or may not be aware of, or some capital expenditures that are down the road. And we’ve been patient in the type of buyers and the type of activity. And I think our investments team and our outside brokerage team has done an excellent job at identifying appropriate buyers for those assets. And some of them have been or we will announce have been or will be owner users. So they’re unique to the assets in specifics. As I did mention, in my prepared remarks, we’ve not seen a tremendous amount of transactions in the marketplace that would be what I would say Hudson-esque [ph] acquisitions. If we had access to an unlimited amount of capital and wanted to go in the offensive today, there’s not an asset in the marketplace on the west coast that us as a company would have said we would have liked to have owned. And we missed out. So I think that gives you sort of an indication as to where we think the market is. But we know there will be assets coming to the market. We’ve identified where they are and what they are, it’s going to be a timing issue. And with the – obviously the increase in financing activity and the Fed easing, I think they’re going to come to market in 2025, and you’ll see what kind of opportunities are out there, which will truly test and improve out where real cap rates are.
Michael Griffin: Great. That’s it for me. Thanks, Victor.
Victor Coleman: Thank you.
Operator: Your next question today comes from Caitlin Burrows with Goldman Sachs (NYSE:GS). Your line is now open.
Caitlin Burrows: Hi, everyone. I think in the prepared remarks, you guys talked about how if you kept up this pace of leasing about 500,000 square feet per quarter, that could support occupancy stabilization in mid-2025. So I guess I was just wondering if you could talk a little bit about the kind of leasing cadence that you’re seeing, how confident you are that that can stay at that pace and maybe like any other details on the size and type of kind of leasing requirements that you’re seeing?
Victor Coleman: Yes, Caitlin, I’ll start off. Listen, I think we’re really very pleased with all three quarters of leasing, but the most recent quarter, it’s just indicative of as the prepared remarks were made, in 2023, we did 1.7 million square feet, and we’re right now in excess of 1.6 million square feet. And we’re only three quarters in. The pipeline is consistent as Mark said in his prepared remarks, we’re confident we’re going to execute on that. And that’s why we come across to say that in 2025 we should see some stabilization and continue to increase in occupancy to a stabilized level. I do think Art would like to probably comment on just what markets we’re seeing positive absorption in for the first time in some time.
Art Suazo: Yes. Just to put a finer point on what Victor said, this 2 million square feet is spread across the bay area is 1.1 million square feet of that activity. There’s 500,000 square feet in Seattle, and the remaining 400,000 square feet is split evenly between Vancouver and LA, which obviously we’re encouraged about. We’re extremely confident that we will achieve more than 500,000 square feet, especially because of the 1.6 million square feet. Victor just mentioned puts us at 530,000 square feet on average right now, year-to-date. So we’re already ahead of that. And with our team’s ability to execute, we can improve these. We definitely improve these numbers. On the net absorption, we’re seeing positive absorption in the Peninsula for the first time in a long time; we’re seeing in San Francisco, we’re seeing Class A space with positive absorption for the first time in several years. More importantly, in greater San Francisco, where negative absorption is averaged a little bit over a million square feet across quarter through the pandemic, negative absorption was down to 106,000 square feet. So, over the last several quarters, we’re really starting to see this thing turn and we’re very excited about what we see.
Caitlin Burrows: Got it. Okay. And then I was trying to take notes as you guys were speaking in the prepared remarks. Some of them were kind of fast, but I wrote something to myself about like on the studio business, a positive development for mid-2025. And you made a comment about Netflix and things being, I don’t know, closer to normal or normalized rate for them. I think I was wondering if you could just talk about that Netflix comment a little bit more and the visibility into that like, I don’t know, did they tell you or just that comment? Thanks.
Victor Coleman: Well, I think what we’re finding is the streaming companies are seeing an uptick in quality, which we’ve talked about for a long time, and now it’s an uptick in quantity. And so they’ve greenlit more shows than the prior quarters. And we just think that nothing happens overnight, Caitlin. But once they greenlit them or green light them, I guess is the correct term, then the production will start to move in motion and that’s how we convert holds to occupancy. And so we’re seeing that. And our direct correlation with Netflix is not too dissimilar than we have with other of our studio partners that occupy our space. And we’re just seeing that activity pickup.
Caitlin Burrows: Got it. Thank you.
Victor Coleman: Thanks.
Operator: Your next question comes from John Kim with BMO. Your line is now open.
John Kim: Thank you. Your G&A guidance went down about $1 million in your guidance, but it’s still expected to increase year-over-year. And when you look at it on a year-to-date basis versus your NOI, it’s at 22% versus 17% last year. I realize you expect a recovery in NOI and earnings going forward, but is there anything you could do on the overhead front to kind of reduce the cost and normalize it closer to earnings?
Harout Diramerian: Sure. A good question, John. This is Harout. So first, we’re constantly looking for ways to reduce our G&A, as evidenced by our revised guidance. Secondly, the increase in the G&A is primarily related to incentive based shares that we added in 2024 that we didn’t have in 2023, they’re not cash G&A. It’s really going to be reflective of how the shares are performing.
Victor Coleman: And in terms of John, G&A savings and the likes of that, we are constantly looking at evaluating all of our G&A. But yes, it’s correlated to our NOI. And as we see our NOI increase and we’re completing these leases and the future leases that we have, I think that’s going to right size itself fairly quickly.
John Kim: Okay. And looking at your lease expiration schedule in the fourth quarter and comparing that to the same metric last quarter, the square footage that’s expiring went up almost 150,000 square feet that the ABR went down a little bit. I just wanted to see why that happened. I imagine some of that is mixed, but with some of these leases that expired in the second, third quarter, were they just extended on a short-term basis with no rent associated with it or what exactly happened?
Victor Coleman: I mean, that’s – listen, I can get the guys to get in detail, but we announced that at our Met Park North, Amazon exercise their termination and that was almost 100% of that number.
John Kim: Okay. So that got moved up – the expiration got moved up to the fourth quarter.
Victor Coleman: Correct.
John Kim: Okay. Okay. Thank you.
Operator: Your next question comes from Katie Elders with Jefferies. Your line is now open.
Unidentified Analyst: Hi, yes, this is actually Peter on the line. Just wanted to go back to some of the comments on coverage on your expirations. So maybe one for Mark or Art. I think you said for remaining five largest expirations in 2025, you have 64% coverage. You just remind us how you sort of define coverage and help us think through sort of historically what the success rate in translating when you have coverage on a lease to actually getting a renewal done?
Art Suazo: Yes, this is Art. So the coverage deals in proposals, NOIs we make a distinction in leases, right? And to give you a percentage on success rate, I think our team’s been at a clip of about 70%, 75% on deals that we have in negotiation that we take to lease.
Unidentified Analyst: Okay. So is the way to think about it then kind of 75% success rate on that, 64% is like a sort of a good way to gauge it?
Art Suazo: Yes.
Unidentified Analyst: Okay. Got it. And then one other. I just want to make sure I heard Harout correctly in your comments. Was the change in the same-store guide simply just the removal of Foothill Research Center? Was there anything else to call out in terms of inside there?
Harout Diramerian: Yes, that’s the biggest driver. Without that, we would have been the same.
Unidentified Analyst: Okay. All right. That’s all for me. Thanks.
Operator: Your next question comes from Rich Anderson with Wedbush. Your line is now open.
Rich Anderson: Thanks. Good afternoon. So just looking back, when you bought the Peninsula, Silicon Valley portfolio in 2015, that was 15 million square feet, 53 assets. Just looking at your disclosure on Page 17, excluding San Francisco, you’ve got 17 assets in those markets, 5.5 million square feet. I don’t know if that’s apples to apples in terms of what has happened over the past 10 years, but what is your appetite and your interest in the sort of the non-San Francisco Bay Area assets that remain in the portfolio? Is that where you would see maybe a significant portion of future sales going forward? Thanks.
Victor Coleman: Yes, Rich, I’m not sure about your math on that because I think you said 15 million square feet. It was almost like 8.2 million square feet was the size of the portfolio, not 15 million square feet. But regardless, your question is about the Peninsula and the quality of those assets in the Peninsula and whether or not they’re earmarked for potential disposition over a period of time. I would say that given the activity that we currently have on the six assets, one of which the number of the assets in that marketplace is half. So the majority of the assets are in other markets as well. That being said, there’s some very high quality assets in that portfolio that we are still very excited to be owners of. And there’s a couple in the Redwood (NYSE:RWT) Shores area we’ve commented on in the past. There – that’s a marketplace that I think we would exercise some prudent guidance if we could exit those assets in that marketplace. And we’ve had some reverse inquiries on that that are not a part of the – yes, sorry, I was going to say we’ve had reverse increase. They’re not part of the six assets. Go ahead, Rich.
Rich Anderson: Okay, fair enough. Yes, I was looking at the combined company at the time of that deal, so apologies for that 8.2, I’m obviously wrong in saying 15. And then the second question is, Victor, you had said at some point along the way that the studio business has resulted in, and correct me if I’m wrong, $100 million of lost EBITDA because of all the things that have happened. How has that number changed in terms of the potential recapture going forward? Has that gone up or has it stabilized in that range? I’m just curious what we’re looking at as a possible recapture of EBITDA as studio business starts to stabilize and improve going forward? Thanks.
Victor Coleman: Got it. I mean, Mark, you want to jump on?
Mark Lammas: Yes. Rich, hard to perfectly recreate what you have in mind on the $100 million. Historically we’ve pointed to the fact that the same store studios have contributed on a consolidated basis around, call it $34 million in 2022. On that we – our view around Quixote [ph] is that it has the potential, historically too – based on historical pro formas to generate call it 60-plus million of EBITDA. So those two combined get you essentially to that $100 million EBITDA. The same source studios continue to hold up well. We got back some stages during the strike at Sunset Las Palmas, they are being backfilled. We’ve got four or five of those stages are currently spoken for. As production improvements we’re expecting to see that those get absorbed into 2025. That takes the Quixote [ph] for the time being you’re seeing the results come through. Show counts in the third quarter were in the low-80s. They got to 90 by October. We think they’re going to continue to improve here on out judging by the number of holds we have, the tours we’ve got, the indications of interest we have across the services business. And as those show counts improve, so will the EBITDA for the Quixote [ph] business. And we think, and we demonstrated in the fourth quarter annualized 2022 results, that was $44 million at a clip. If we can get to that 120-ish show count level, we should be right back around that level and that in combination with that same store you’re looking at about $75 million of run rate EBITDA across the studio platform.
Rich Anderson: Okay, great. Great colour. Thanks Mark.
Mark Lammas: Thanks Rich.
Operator: Your next question comes from Tom Catherwood with BTIG. Your line is now open.
Tom Catherwood: Thank you so much and good afternoon everybody. Maybe starting with Art, two-part question on Seattle for you. First, how is sublease availability impacting demand for Washington 1000 if at all? And then second over in Pioneer Square (NYSE:SQ), you’ve made progress at 411 First this year. What are your expectations for 505 First to 95 Jackson over the near term?
Art Suazo: Sure. I’ll start with sublease. The reduction of sublease supply is one of the positive fundamental shifts consistent across all our portfolio, not just in Seattle. And this quarter alone we see the most significant improvement in San Francisco and Seattle where the market has absorbed 400,000 square feet and 350,000 square feet respectively, much of which is high quality space allowing us to compete more effectively. The second question is, yes, 411. So we – yes, that was our VSP program at work. We’ve talked about it constantly. It’s the market demand is in smaller space is 5,000, certainly under 10,000 square feet. We lease 411 to 94% and it was just a great success story there at 505. Those are larger floor plates, about 45,000 square foot plates. As we’ve talked about we’re starting to see demand grow significantly. And in Seattle, we’re starting to see the 20 to – kind of 20,000 to 50,000 square foot tenants, which is right in our wheelhouse, increase out there, touring constantly. We feel that there’s one to three – one to three floor tenant out there that we’re going to make some real headway on very, very shortly.
Tom Catherwood: Excellent. Appreciate that, Art. And then last one for me, maybe for Mark, it looks like you opened a new hub for Quixote in Atlanta. Have you been moving assets and staff to that market from the West Coast? And is the new hub in response to visible demand in that market or is it more spec in nature?
Mark Lammas: It’s not a new hub. I mean, there was always an Atlanta presence from the inception at the time of purchase that Quixote [ph]. So there’s nothing new. It is obviously a recognition of the status of Atlanta in terms of the overall domestic landscape on content creation. We’ve got roughly, I don’t know, 10-ish plus percent of our overall fleet station there. And over the years as Atlanta has seen its share of content creation, that fleet has been very well utilized. So when things pick back up domestically, we expect to see it improve in Atlanta and we’ll see that utilization likewise go up. We also have the freedom. The good news of one of the best attributes of the Quixote [ph] business is that fleet is by definition transportable. So we have the requisite facilities in Atlanta. So we could enhance our fleet there. If we see growing demand for it, we could do it readily. And at this point we’re just waiting to see things improve across the border domestically.
Tom Catherwood: Appreciate that.
Mark Lammas: I think you might be referring to a new, but we have a relatively new presence in Albuquerque. That fleet has done incredibly, incredibly well because Albuquerque has been one of the bright spots domestically.
Operator: Our next question today comes from Dylan Burzinski with Green Street. Your line is now open.
Dylan Burzinski: Yes. Good afternoon, guys. Thanks for taking the question. I think over the last several quarters you guys talked about being able to achieve or ending the year in terms of office occupancy flat versus end of last year’s figures. But it doesn’t seem like that’s the case any longer. So just trying, just curious, trying to figure out sort of what has changed in the last several months to where you guys no longer feel like you guys can reach, flat occupancy year-over-year. I realize some of that’s probably Amazon related, but maybe if you can just talk about sort of, why that’s kind of new news and being incorporated and occupancy now and then two, like has anything changed on the leasing front? It seems like if anything at all, like leasing momentum has picked up throughout the year. So just more thoughts on that would be helpful.
Art Suazo: Yes, I mean, you singled out one of the two factors we would be, we’re confident we would have been flat if not slightly improved by year end, but for two changes. One, Amazon expense in the early termination, which increased our expirations by year end by 140,000 feet and then the held for sale for Foothill roughly at the 20 basis point impact on occupancy percentage. And best of those two new developments, we expected to finish the year at or above current occupancy levels.
Dylan Burzinski: And then I guess just one more for me, I mean touching on the return to office momentum that you guys are seeing across the tech landscape, especially with some of the larger tech companies like Amazon. I mean what we saw in New York was as RTO picked up, you saw a pretty swift correlation to an improvement in leasing activity and minimal downsizing upon vacate. I guess one of the things we’re trying to figure out is, how does that parallel with what you guys expect to happen on the west coast? It seems like the pickup in RTO is not necessarily causing a direct improvement in leasing demand, whether it be due to cyclical factors or something else. So just as you guys sit here today and look at the momentum you’re seeing in RTO. I mean, can you sort of talk about any offsetting impact associated with that? I mean it seems like Amazon is still and some of the other larger tech companies are still giving back space. So can you kind of just talk about some of the puts and takes and how you guys see that playing out over the next 12 months?
Victor Coleman: So Dylan, macro wise, Art mentioned it and we mentioned it in our prepared remarks. I mean you’ve seen a phenomenal downturn in sub lease space, right? And so, and if you really classify A versus B, the A space is pretty much all taken and so that will correlate to some form of a macro move on RTO. I think we feel the momentum shift is in place for a similar wave on the west coast that we’ve seen on the east coast. And these tech companies are just getting back, right? I mean, Amazon is not back five days until January 9th, I think is the date, and so is Dell and so is Salesforce. And then the follow suit on that will be who’s back, how much do we need, and then where do we go from there? I do think one of the differences on the tech side versus the finance side, East Coast being the finance and West Coast being the tech, is a lot of these tech companies are realizing that they have a desperate need to increase their space, but they want to control their space. And what I mean by that is they’re all coming out and saying, hey, we want the entire building or we want the entire availability of security or ingress and egress and the likes of that. So it’s making it a little more challenging to pick and choose which assets they want to be at. I think once those assets that are available today, that are single tenant assets, come off the marketplace, then you’re going to see a much bigger way. So on a macro basis, I think that’s what we feel and we’re confident we’re going to see that impact by second third quarter of 2025.
Art Suazo: Victor said it exactly right, Dylan. And on top of that, let me just say, as we’re doing deals even with tenants in the process of return to office and trying to decide what their footprint looks like, more than ever, we’re having conversations about future growth even as they’re leasing space. Right. So they want to talk about how they can secure future growth, in the lease, because this potentially may not be good enough. That’s the inference.
Dylan Burzinski: Right. Great. That’s incredibly helpful detail. Victor and Art, thank you so much.
Victor Coleman: Thanks, Dylan.
Operator: Your next question comes from Ronald Kamdem with Morgan Stanley (NYSE:MS). Your line is now open.
Ronald Kamdem: Hey, just two quick ones. Just looking at the NOI margin in the quarter, maybe was that seasonality or what sort of drove it down? And as you, I think you mentioned occupancy not really bottoming till the sort of the middle of next year, as that occupancy declines at the beginning of next year, is that, should we expect more margin pressure?
Victor Coleman: I’m sorry, are you referring to margin pressure on the studio properties? On the office properties?
Ronald Kamdem: On the office properties.
Art Suazo: Got it. I think the impact there is just basically leasing activity in the middle of the quarter. So we, like we said, we wrote off that one tenant and that drove down some of the margins. I Apologize. Yes.
Ronald Kamdem: Okay, great. And then just my second question was just to follow up on Amazon. Obviously, you still have two leases with them. Just what are conversations are like any sort of update on their plans with those leases? Clearly a lot of term on those, but wondering if they’re how they’re utilizing that space. Thanks.
Victor Coleman: Ron, we’re in active conversations. Obviously we don’t get into the details, but suffice to say, Amazon is talking to us on existing assets and some future growth throughout our Pacific Northwest portfolio. So we’re confident in their ability to continually grow within our markets. And candidly in the Hudson portfolio, you know, the Met Park North asset was not something that we were surprised that they were going to turn around and give back. We just thought it would be probably beginning of the year versus the end. But remember, we did renew them for a very short timeframe for a reason and they were looking to expand their portfolio outside of that.
Ronald Kamdem: Great. That’s it for me. Thank you.
Victor Coleman: Thanks.
Operator: Thank you. There are no further questions at this time, so I’d like to turn the call back to Victor Coleman, CEO and Chairman for closing remarks.
Victor Coleman: Thanks so much for participating today and appreciate the support of Hudson Pacific. Have a good rest of your evening.
Operator: This concludes today’s conference call. Goodbye. You may now disconnect.
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