Hudson Pacific Properties, Inc. (HPP) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Hudson Pacific Properties Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Laura, please go ahead

Good afternoon, 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 on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss our second quarter results and current market trends. Mark will provide detail on our office and studio operations and Harout will review our financial results of 2026 outlook. Thereafter, we'll be happy to take your questions. Victor?

Thanks, Laura. Hello, everyone, and welcome to our second quarter call. This was both a record leasing and highly productive quarter for Hudson Pacific. We signed 1.3 million square feet of new and renewal office leases headlined by a landmark 891,000 square-foot 24-year lease with the City and County of San Francisco at [ 1455 ] Market, which locks in nearly 1/4 of a century of cash flow visibility. Occupancy increased 470 basis points, our fourth consecutive quarter of gains and improved performance across our office and studio portfolios drove same-store NOI up 7.5%. Together with continued cost reductions and [ Code ] restructuring, we nearly tripled core FFO and achieved a 30% increase on a per share basis. We also stayed disciplined on capital, maintaining total liquidity of $876 million while continuing to execute our asset disposition plan. And importantly, as we look ahead, we reloaded our leasing pipeline to 2.4 million square feet. That leasing strength is playing out against a constructive venture and IPO backdrop, U.S. venture investment totaled $145 billion in the second quarter, its second largest and strongest quarter ever with -- [ infrastructure ], robotics and space tech. This all points to a wider, more diverse tenant base rather than a single sector bed, which will benefit our portfolio over time. The IPO market is improving, too with pending listings signaling further office demand as newly public companies and the ecosystem around them continue to grow. Across nearly every market in our portfolio, demand is broadening along virtually no new construction and that dynamic is strengthening fundamentals, though at different rates across our markets. San Francisco posted its seventh consecutive quarter of positive absorption and its largest year-over-year rent increase since 2020. We're seeing strength at the submarket levels across the Peninsula and [ Valley ] led by strong year-to-date positive absorption in Foster City and Redwood City River [ stores ], along with multiple headline leases in Santa Clara. In Los Angeles, our leasing efforts are focused on West Los Angeles, which commends the market's most robust activity and highest rents even as the broader markets remain challenged overall. The Puget Sound extended its recovery for its third consecutive quarter led by Downtown Seattle, which leases came from Anthropic, [ DocuSign ] and [ Stripe ] helped drive the first improvement in CBD vacancy in 6 years. And Downtown Vancouver continues to stand out on fundamentals with vacancy just over 12%, the tightest in our portfolio with positive net absorption, both for the quarter and year-to-date. Regarding studios, our prime location studios continue to outperform as the production landscape remains mixed. New York [ show ] counts improved and the Los Angeles was relatively stable as California's production pipeline continues to work through a meaningful backlog of tax credit approval projects not yet in production. Importantly, with [ SAGAftra,WGA ] and DGA, all ratifying new 4-year AMP [ TP ] agreements, the labor risk that drove much of the industry's recent volatility is now off the table. Our strategy remains unchanged. Restructure [ Kioti ] while optimizing performance at our best-in-class assets. Finally, turning to dispositions. We continue to make good progress against our $200 million target having sold 2001 gateway after quarter end with three additional Bay Area office assets currently in contract or negotiation, alongside our [ 10950 ] Washington residential development site. Higher demand for barrier office assets has picked up meaningfully this year, allowing us to execute this program on our time line and to redeploy capital toward our broader strategic priorities. Now with that, I'm going to turn it over to Mark, who's going to talk about leasing and operations.

Thanks, Victor. As you noted, we signed 1.3 million square feet of office leases in the quarter, 61% new and [ $0.39 ] renewal. On top of the City and County of San Francisco lease for 891,000 square feet, we executed an additional 402,000 square feet of leases, 71% of which were new and 29% renewal. Our occupancy increased 470 basis points sequentially to 82.5% and our lease rate climbed 440 basis points sequentially to 82.8%. Our portfolio occupancy and lease percentages improved everywhere, except the already strong Palo Alto and Vancouver submarkets, both of which ended the quarter effectively 94% leased. Rent spreads grew 17.2% on a GAAP basis and decreased 11.4% on a cash basis. Excluding the City and County lease, GAAP rents were off 3.3% and cash rents were down 9.9% due primarily to midsized deals in Palo Alto, rolling off of pre-pandemic peak market brands. However, these rents are still quite healthy at north of $80 per square foot. Net effective rent strengthened this quarter, rising 22% sequentially and 9% year-on-year, benefiting significantly from the City and County lease. Trailing 12-month net effective rents were up 7% sequentially and 1% year-over-year. Tours rose nearly 20% year-over-year. Even with strong second quarter leasing, we reloaded the pipeline to 2.4 million square feet, nearly 70% new leases with an average requirement size north of 20,000 square feet. Excluding [ 2001 ] Gateway, which we sold earlier in the third quarter and [ 75 ] Howard, where we now have line of sight on potential sale, we have just over 50% coverage on approximately 400,000 square feet of leases set to expire through the remainder of the year. This includes 80% coverage on the [ PayPal ] lease at Fort [ attraction ]. At Washington 1000, we now have coverage for approximately 65% of the building, up from 60% last quarter with active negotiations across 9 tenants, including requirements of up to 125,000 square feet. We're seeing strong traction on our newly delivered move-in ready suites with 8 tenants in the last 30 days touring or scheduling tours. Tour activity building wide has also increased driven primarily by new-to-market tech, AI and professional services firms. Turning to studios. We continue to see strong interest from leading showrunners and major studios for our prime production space. Our in-service stages were 74.6% leased during the second quarter, up 180 basis points sequentially driven by an improved lease rate at Sunset Pier 94 up 40 percentage points to 78.5%. Our Hollywood stages inclusive of Sunset Las Palmas remain well leased at 95.5%. As part of our TOD restructuring, we have designated as noncore with plans to exit its lease sound stage facilities in Atlanta area operations as well as [ Acuity's ] pro supplies and stage ancillary businesses, including lighting and grit. Going forward, we will speak to our studio NOI on a core basis, which in the second quarter reflects Sunset Studios and [ Acuity's ] fleet operations in Los Angeles and New York. Core studio NOI was up $3.1 million sequentially and $7 million year-over-year to $4.6 million, with HPP share turning positive for the first time in 2 years at $2.2 million. Putting a finer point on the [ KO ] restructuring to date, [ Cote ] generated negative cash NOI of $18.6 million in 2024. Since then, our restructuring efforts have improved annualized run rate cash NOI by approximately $14.3 million bringing the fleet business to just over $4 million of negative annualized cash NOI at current demand levels, closing roughly 3/4 of the gap to our breakeven objective. Turning to value creation optionality across the portfolio. We continue to make progress on our reentitlement and adaptive reuse, an area where our team's expertise is a real differentiator. At [ 901 ] Market in San Francisco, we filed our office to residential reentitlement application with entitlements expected for year-end. We're also advancing construction drawings in parallel so we can quickly move once approved. Essentially the same playbook we're running at [ 10950 ] Washington. We also recently amended the [ CC&Rs ] at Metro Center in [ Foster ] City and across our Redwood Shores assets, to permit residential use, giving us the flexibility to explore residential and mixed-use development. This isn't a reaction to soft leasing demand as we're seeing healthy interest in these locations rather a proactive step to unlock value by tapping into strong residential demand independent of where the office leasing cycle stands. In short, these entitlement efforts will create development options to enhance our current portfolio value. And now Harout will take you through our financial results and outlook.

Thanks, Mark. Total revenues were $188.3 million compared to $190 million in the prior year, primarily due to asset dispositions most significantly the sale of Element LA, almost entirely offset by improved office occupancy. As a result of ongoing cost-saving initiatives, G&A improved 11% to $12 million compared to $13.5 million in the prior year. The latter adjusted to exclude the prior year expense associated with the onetime cancellation of noncash compensation agreements. We nearly tripled core FFO to $23.1 million, up from $8 million in the prior year, while core FFO on a per diluted share basis increased 30% to $0.35, up from $0.27 in the prior year. Adjustments to core FFO, including noncore TOD lines of business totaled $7.5 million or $0.11 per diluted share compared to $19.2 million or $0.64 per diluted share in the prior year. We grew same-store cash NOI 7.5% to $90.2 million compared to $83.9 million in the prior year, driven by higher office and studio occupancy. Turning to our balance sheet. Total liquidity of $876 million includes $81 million of cash and full availability of $795 million on our credit facility. Interest expense was 20% lower year-over-year representing $9.7 million of savings and all of our debt is fixed or capped. Regarding the [ Holy Media ] portfolio alone. Subsequent to quarter end, the loan transferred to the special servicer ahead of its third quarter maturity. The borrower and the special servicer have since agreed on terms for a longer-term extension along with a 30-day extension to finalize documentation. Wrapping up our 2026 outlook, we are raising our full year core FFO to a range of $1.12 to $1.20 per diluted share up from the prior range of $1.10 to $1.18 per diluted share. This updated range reflects at the midpoint, approximately $0.01 of outperformance in the second quarter compared to our initial expectations as well as approximately $0.01 attributable to improved expectations for the second half of the year. As we have previously noted, even with the first and second quarter outperformance, we anticipate third quarter expirations will impact occupancy and earnings results with a rebound in the fourth quarter. As a reminder, this updated range excludes the previously announced closures of [ Kids ] stage and Atlanta operations and the associated stage ancillary and [ ProSupply ] segments from core FFO. And as always, our outlook excludes potential dispositions, acquisitions or capital markets activity. With that, I'll turn the call back to Victor for closing remarks.

Thanks, Harout. Simply put, the second quarter reflects exactly the execution we said we'd deliver. Record leasing, our fourth consecutive quarter of occupancy growth, a transformative long-term agreement with the City and County of San Francisco, and a [ code ] restructuring that's now yielding measurable earnings benefits. We still have work ahead of us, but each of these actions reinforces the same outcome, a clear incredible path to sustained FFO per share growth. Operator, now I'd like to turn it back to you for questions.

[Operator Instructions] Your first question comes from the line of [ Jamie Feldman ] with Wells Fargo.

So West LA, you're talking about a recovery and then you still have decent upside to get to stabilization in North San Jose, [ Denny ] Triangle. Can you just talk more about those markets, but especially West L.A. if there's a real inflection point happening or how we should think about what's to come?

Well, I mean, [ Westlake ], you guys cover other our peers. You're seeing -- it's a bifurcated marketplace, right? You've got -- you've got Brentwood and Century City and Beverly Hill is doing exceptionally well. I think Westwood and Santa Monica are a little slower. Olympic [ Corridor ] is a little lower -- but again, there is 0 construction in the near future for new product. And so good spaces pretty much leased up or in spoken for and being expanded upon -- and I think you're seeing a momentum potentially drive into some of the other marketplaces like Santa Monica and hopefully in Westwood and overall, the West side. Culver City has been strong all the way through, but there's a very little product there and everything is -- that's being built in that marketplace is already pre-leased.

But I guess more on the demand side, like what's changing?

Well, listen, we've talked about the fire tenants being massively impactful in West L.A, majority of which is led by law firms. The streaming/entertainment companies have taken sort of homes in specific marketplaces like Apple and [ Culver ], Sony and [ Culver ], Netflix and Hollywood and Amazon spreads for themselves between obviously Santa Monica and [ Culver ] Lionsgate, Beverly Hills. And so entertainment companies, WME, the same are all in those marketplaces. And then their ancillary guys are growing. Implications around AI is just not that strong here yet. They're small growth tenants. But I do think it's entertainment and fire, and that's sort of the [ nuclear ]. Art, do you want to comment on that?

Yes. I mean I think the demand drivers, [ Jamie ], are positive. They're modestly improving. There was an improvement in net absorption, gross leasing was up slightly, things like that, that we're monitoring very closely. And that's coming from the small to midsized tenants in the market. As you know, in all this talk about West L.A. improving, what selling has been driving the AN market for several years, and it will continue to do so as the demand drivers continue to increase.

Okay. And then if I can ask another, just the studio loan, can you just talk about how you're including that in guidance? Or anything you can say about expectations of what that could look like for numbers or how we should be modeling it?

Yes. So we can't get into any specifics because we're still finalizing documentation but what we can say is in our guidance, we've kept things the same, and that is our expectation.

Okay. So [ just ] like same interest expense that you've got now don't change anything?

Correct.

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

Congrats on the strong office leasing and the improvements at [indiscernible] I guess maybe first question on the guidance. The main change seems to be the outperformance in second quarter G&A. Are there any other kind of puts and takes that are driving the FFO guidance increase given the strong leasing outlook?

Just around guidance. So yes, our second quarter was very strong, but not that strong compared to our own expectations. We did [ our ] own expectations by about $0.01 and our projections are higher about a $0.01. So the leasing expectations that we've experienced in the second quarter and the projections are in line with our previous guidance. So nothing has really changed from that expectation, which is why you're not seeing any massive increase in our projections and our guidance.

And then maybe just on the transaction market, given the asset sale post quarter and just a few more that may come. If you can just kind of comment on what you're seeing the kind of demand and depth of buyers like?

Well, as I mentioned in my prepared remarks, I mean, San Francisco is seen an influx of interest levels. And so we have [ close ] one deal, as we mentioned, and we've got three others, two of which are in contracts and one is imminently going to be in contract that sort of show indicative interest level of the demand in the marketplace for our asset quality. And we're comfortable with our pricing. I think we've exceeded our expectations in three out of the four assets that we are selling. There is one asset that potentially could be an owner user. And so that pricing is going to be dependent on time line and occupancy for the [ user ]. But overall, the demand drivers right now for the disposition market from our standpoint are very strong.

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

Two questions. First, Harout, on the updated guidance, you guys said it excludes the [ Citi ] restructuring, but that would be a positive to guidance, would it not? So if you were to include that, guidance would increase. I just want to make sure I'm thinking about it right.

It would not increase. We -- just like last quarter and the guys provided last quarter, we've removed the impact of the [ Cote ] restructuring. So it's not impacting the numbers that we have shared. So just like our core FFO doesn't include that in our results, and neither does our guidance.

But isn't that a drag on earnings? And once that drag is away like you're streamlining the portfolio and there's less cost going forward? I understand [ the ] in between, there's a negative, but wouldn't that be a positive [ term ]

Alex, you're precisely right. It is a drag. So that is to say it operates at a loss. So the removal of it improves core FFO, right?

So our net extract it, but our core FFO is not.

Okay. now I'm thinking about it right. Second question is, Art, on Seattle, as we think about the interplay between the East side and [indiscernible] there's -- like we want to get really enthusiastic and say, "Hey, Seattle could turn quickly and things are going well at the same time, office moves slower than we all think. As we think about the CBD rebound -- do you think this is a later this year, '27 event? Or you think it takes longer than that just based on how office always, as I say, seems to take longer than we'd like.

Yes. I mean the good news is the word rebound is being used. We're already seeing green shoots, Alex. We've been talking about the greater Puget Sound with 3 quarters of positive absorption. We saw for the first time in 6 years, the CBD this quarter had positive absorption. We're seeing demand drivers continue to increase across downtown Seattle. And specific to our portfolio, specific to our pipeline, Seattle, for the last 2 quarters, has the most deals in negotiation than any submarket that we have including the [ Valley ], including San Francisco. And to us, I mean, that's a tremendous sign of what's to come. And it's really being driven by not just the larger tenants that have come back in the market that we've talked about the last 2 or 3 quarters. It's really the 10,000 to 30,000 square foot tenants and the expansion of those tenants in the market, which, by the way, is predominantly driven by growth in the professional service firms, the fire sector and governmental firms that are there. So we're seeing it real time and it's demonstrated by the fact that this last quarter, there were 3 larger deals done in downtown Seattle. Again, that demonstrates that the larger tenant demand is broadening beyond just [ Bellevue ] as people had thought before.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Just a follow-up then on Seattle. Wondering if you can talk about how -- what you're seeing in the Seattle market is or is not impacting activity at Washington 1000 and kind of leasing potential there?

Yes. No, that absolutely is. In fact, we're seeing, as I mentioned to Alex, we have more activity in our pipeline, which is active deals in negotiation in Seattle than any other market. It's over 600,000 square feet for the market. Washington 1000, we had talked about the 9 deals we have in negotiation represents over half of that. So 300,000 -- about 350,000 square feet of deals in different stages that have been impacted, and we feel like we've had more momentum than we ever had. Even as we speak, kind of the last 30 days, tour activity has increased kind of in the end of summer, tour activity has increased tremendously.

Okay. Got it. And then just on the maybe same-store NOI side, it looks like guidance suggests a deceleration in the second half. I think you guys mentioned earlier that there could be like lease expirations or low retention in the second half. So wondering if you could talk about that a little bit and the expectation for, yes, I guess, like occupancy in the back half.

Sure. As far as the guidance goes, what I basically [ say ], not in the second half, but primarily the third quarter. We have two large expirations that are impacting our numbers in the third quarter that we've previously spoken about. This is not the first time we brought it up. and we expect to rebound again in the fourth quarter.

On the occupancy question, if you're waiting on that answer. We've maintained that midpoint at 81%. When we initially launched that guidance, we had indicated that if you kind of run the math from the beginning to the end of the year, it suggests that we should end the year towards the mid -- kind of mid 80-ish range and that remains intact.

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

Just maybe continuing with that mid-80% occupancy year-end and maybe looking at sort of the 2.4 million square foot leasing pipeline. Is there any sort of large leases that are needed to required to hit that mid-80% occupancy range? And then maybe just sort of diving into that 2.4 million square feet a little bit more. You mentioned an average size of over 20,000 square foot. But are there any sort of leases or potential leases that are well over that 100,000 square foot range?

Dylan, so yes, we have a series of leases that are -- the average size that we're talking about, and that's the majority of the portfolio. There are a couple of deals that are multi-tenant floors and leases that are large, but we're still [ banking ] on our bread and butter, which is the 20,000 to 30,000 floaters that are out there right now. And that seems to be the consistent aspect of where our properties are lined up not to say, as Art [ had ] mentioned, in Seattle as an example, I mean there have been now a handful of deals either closed or about to close over 100,000 feet. And I think there's more for sure in that marketplace behind it. There is clearly more in the city that are larger tenants. Specific to our portfolio, we do have our fair share but what we're really talking about on the 2.4 million square feet is the average-sized tenants 20,000 to 30,000 [ putters ].

Okay. That's helpful. And then maybe just touching on sort of capital markets. Obviously, you mentioned confident in hitting that [ $200 million ] target this year. But as you sort of think about beyond '26, I mean, is there any desire to sort of continue bringing assets to market to potentially help deleverage the balance sheet, given the strength that you've seen in capital markets and hopefully, that continues.

So Dylan, as you know, you've covered us for a long time. We've increased our optionality for the ability for us to lower our debt metrics and the likes of that. And that will continue working on these dispositions right now, confident that they're all going to go through, and we're going to exceed that $200 million number that we talked about at the beginning of the year. We have other options that are out there with assets that could either be put in the marketplace given the activity in the market or we have options on refinancing certain assets or just financing assets that are unencumbered as well. So we've got -- and we've got other alternatives. The nice thing is we do have some time. We're acutely aware of what our needs are and what the demand market is at the end of the day, and I think we're comfortable with our ability to execute on all fronts.