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

All right. Good afternoon. Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's office REIT analyst. We're pleased to have with us from Hudson Pacific Properties Chairman and CEO, Victor Coleman; President, Mark Lammas; CFO, Harout, Sura Marion, EVP of Leasing Art Shaza and Investor Relations, Laura Campbell. I'll turn it over to Victor for opening remarks, and then we can jump into Q&A. .

Thank you for having us. It's always a pleasure to attend this conference. It's an interesting time for Hudson. We've come out of, I think, a much more of a challenging window into a much more of a positive window. For those of you who are less familiar with the story, I'll give you a brief update as to who we are. We're a leading owner and operator and developer of top-tier office, real estate across our high barrier markets on the West Coast, which includes San Francisco, Los Angeles, Seattle and Vancouver. We also run a studio platform that's unique among public companies. We're the only REIT that has a studio platform in it, and we're the largest independent studio owner and operator in Los Angeles, and we have a relatively new studio that we opened a year ago almost here in New York. As of Q2, our portfolio has about 46 properties in it, combined about almost 14.5 million square feet, high-quality tenant base, investment-grade, boot chip companies and about 50-50 mix of tech and AI on 1 side and inclusive of media and then diversified fire-related tenants, including legal, government, retail, financial, business services, health care, et cetera. Our top tenants to the portfolio include no particular order, City Sa Francisco, which we just signed almost 1 million square foot lease with Google, Netflix, Amazon and then a whole host of other tech and related media-related companies. Today, the story has really been consistent in the last 10 months, we've talked about throughout our earnings calls and throughout our projections of the company, where we were and where we're going. We were at one point in late '19, a 92% lease company, and we went all the way down to 75%. And we said by the end of this year, -- we have an 8 handle. We're already at 82%. We expect to be at 85%. And by the end of '27, we expect to be back up to 90% plus. The year so far for us has been a record in leasing -- we had our largest leasing quarter last quarter at 1.3 million square feet. And we are looking at sort of our same-store office growth right now from an NOI grew to 7.5%, and our core FFO also grew up 30%. So as we sit today, one of the office companies that all of us have gone through different times and challenging times. But from our standpoint, we have the largest growth potential and we're proving it out quarter-over-quarter. And every market that we're in on the office side, we are ahead on leasing. We are ahead on all fundamentals in every single market with the exception of North San Jose, which we're about to go ahead to market after this quarter. On the studio side, -- we purchased a few companies. We slimmed those companies down. We were running a negative in those businesses, almost $20 million a year. We said by the end of this year, we'd be -- we're on track for that. We've gone from 20 negative approximately down to $4 million negative. And given the current composure of the studio business, which we can get into and talk about. We just extended our loan is expiring a Hollywood media loan, which is predominantly operated and tenanted with Netflix to an extension that was very, very beneficial to us and to the tenant, and we're working through an extension on that tenant as we sit right now. So I think overall, mindful that the company itself has gone through some rougher times. The wind has definitely turned at our back. We have capital today of almost $900 million of untapped at facility. Interest -- our interest expense is lower by almost 20%, and we have about $2 million of dispositions in the company right now. So with that, I think I'll turn it over to you, Jana and we can go into some questions.

Great. Maybe following up on the leasing. Second quarter activity was phenomenal, highlighted by the 1455 Market lease with City of San Francisco -- just kind of curious on any new or emerging themes across tenants, sectors, sizes or submarkets?

Sure. I'll start, and then Art can jump in. I think -- the first theme is that we -- what we're seeing is a consistent flow of tours, which correlate into interest level that correlates into LOIs and then to leases. Our pipeline right now is about 2.4 million square feet. So we've consistently gone at 500,000 square foot a quarter. As you mentioned, I said earlier in my comments, 1.3 million square feet last quarter. We have a couple of large deals that we're working on right now. But our core really throughout the whole portfolio is our average size 20,000 to 30,000 square foot tenants. Interestingly enough in the portfolio trending is the term of the leases have gone up -- they were really hovering in the high 40 months range, and we're over 63 months now. Concessions are constant. We haven't seen any spike in that. Obviously, with cost of tenant improvements have gone up like everybody else, but not insurmountable and lease terms are offsetting that. More importantly, our mark-to-market rents are all trending in the right direction, which is above market. And we seem to be at a pretty good space clearly in the Bay Area. We have the most activity we've had, I think, in the history of the company. But now that's sort of following on just some great activity in Seattle we're starting to see that 18th month window that we said was difference between the Barrie and the Pacific Northwest, we're seeing that. I would say we're fortunate in Los Angeles were, I think, leased in Los Angeles and our assets there in the office but Los Angeles is much slower. The activity is really specific to a few markets and asset quality only. But overall, leasing has been a real surprise. And I think we set some lofty goals and we've achieved them and exceeded them.

Yes. Directionally, we're in a great place Victor mentioned, we're close to 2.4 million feet of deals in the pipeline, which has maintained over the last -- certainly, over the last 3 quarters, right? If you think about it, we had a quarter of 1.3 million square feet of gross leasing last quarter. We're still at close to 2.4 million feet. Why because the tour activity remains at peak levels for us. We're 2.1 million feet of tours a quarter, which is up 2% year-over-year. And again, it's those tours that are driving the activity in the pipeline and through the pipeline into execution. And so we've been seeing this more I'd say we've seen the momentum growing for some time now, but we've experienced it over the last 4 quarters. We have 4 quarters of positive absorption in our portfolio. We moved occupancy 740 basis points over the last year. So we're doing all the right things. We're executing on the ground. And as the team continues to aggressively pursue the tour activity, I think we're going to see more of that growth into the future. And because over the next 3 years, expirations are at a reduced level, you're going to see more absorption in the years to come.

Maybe just touching on potential larger expirations that you'd want to call out or known move-outs over the next year and kind of just status of discussions on renewals and...

Yes, the large expirations over the next, call it, the next 1.5 years or so. We have -- we have about 75%, 80% coverage, which means to known vacate, we're in negotiations already to backfill the space, the largest of which going forward is Redfin at Hill 7 in Seattle, they're 112,000 feet, they are downsizing in half. We're either -- we're in negotiations at Hill 7 to keep them or Washington 1000. So one way or the other, we're going to keep their tenancy at 50,000 feet the large expirations coming up in San Francisco, which is Twilio at the end of the year, which is 83,000 square feet -- and Salesforce in April of '27, which is also 83,000 square feet, which are full floors at Rincon Center. We are 100% covered. We're in late-stage negotiations with a tenant right now for those spaces. So large spaces are certainly accounted for and kind of deepen the negotiations. And then beyond that, the smaller tenancy, we're doing a good job. We're probably about 65% covered on the small tenants looking forward into '27. And that's a good number considering a lot of the smaller tenants don't communicate their needs until 3 to 4 months out.

And just I would just make one clarification. We have one large tenant in an asset in San Francisco -- that has left the building, and it comes due now, but we're selling that asset. So it's going to -- it looks as if it will have a that asset is under contract to be sold.

Yes. You might see that as Dell for 83,000 square feet at 835, and that's the tendency that Victor is referring to.

Maybe touching on Seattle a little bit more. It's great to hear that kind of the tour activities definitely picked up, and we heard kind of similar commentary from some of your peers. Curious if you could just talk to some of those positive trends there and kind of also L.A., where it's kind of been stopped in start?

Yes. We'll start in Seattle. I mean listen, right now, Seattle -- PGS has had 3 consecutive quarters of positive absorption, but that has predominantly been around Bellevue and Bellevue's success. Now that Bellevue is pretty much leased. There's 2 buildings that have any material vacancy. It's really shifted into core Seattle. Corcel has had its first quarter of positive absorption last quarter. And we did talk about this window of 18 months between the Bay Area and Seattle, the labor force the overlap of tech, AI and then ancillary businesses. And now we're seeing that come from fruition in Seattle. Seattle's biggest downturn in the past was sublease space. And now the majority of the high-quality space is off the market. our assets are seeing like our peers, the high-quality assets, they're seeing a tremendous amount of flow. You've got -- just to name a few, you've got Seattle Transit for over almost 200,000 square feet. You've got Apple for 150,000 square feet. You've got REI for about 150,000 square feet. You've got Disney for 200,000 square feet. These are large tenants, all looking in Seattle -- that's just going to help absorb the process. We have what we believe is the nicest, newest asset. We know it's the newest, so I have to say it's the nicest in the market, which is Washing 1000. We signed our first lease in that asset. We've got almost 250,000 square feet of leases and coverage that we're working on. And we're not -- we have not underwrite stabilization until second quarter next year?

No, by the end of the year. .

End of '27. So it looks like we'll be ahead of that pace, which is nice. I think the prime markets in Seattle, which is Denny, self like Union and Pioner Square are seeing this attractiveness back to where it was in '19 and '20. And negativity in Seattle is the political environment. But despite what that's going on, unlike San Francisco, even with Matt Mahan in San Jose, those markets are pro business. I think Seattle wants to be attract the labor force and tech and I is directionally moving that way. But as you heard about the tenants that I talked about, they're not all tech tenants, they're not all AI tenants. So it's nice to see that Seattle is getting the traction that we as a going to happen is maybe a little later than we had hoped, it's better late than never. Los Angeles is a city that has so much going forward from a standpoint of revenue coming in. We just finished World Cup like everybody else in the country did. We've got Super Bowl in February. We've got the Olympics in '28. We've got infrastructure plays that are going on right now. And there is just this groundswell of Los Angeles should come back. Right now, though, you look at L.A. and it's really 3 strong markets in Los Angeles that are leading the pack. It's no particular but they're really Hills, Century City and Brent we're 99% leased in an asset that I've owned twice now since 1998 never even remotely close to that level in Brentwood. It's a multi-tenant building, and we're seeing the highest rents we've seen in that asset of all time. The same story is repetitive in Century City. The same story is repetitive in Beverly Hills. But then you start looking at some of the ancillary marketplaces like the Valley, whether it's Woodland Hills and Sino Studio City for Banlangen, I don't even talk about downtown because downtown is downtown, and we all know what the value is of those assets, they've never really move. But if you look at Westwood, you look at Santa Monica, you look at even parts of Culver City that has really done very well because of Apple and Amazon. But other than that, the growth has not been there. Los Angeles has some massive headwinds, but we still feel that at the right moment in time and with what's happening, hopefully, with the revival of the entertainment business, over the long term. Los Angeles should attract business, and it should definitely attract media and tech and hopefully some AI. The bright spot industry is robotics and aerospace. And with SpaceX and all the robotic companies, you're seeing a little momentum around El Segundo, I think it's early, but I do think there will be some follow-on around that.

And then maybe just a little bit deeper on L.A. and your tenants, large tenant Netflix recently bought some studio space. Just kind of curious how negotiations or discussions are going with them, how they're thinking about their space needs and maybe it's the need for more space for kind of the sports or live streaming, particularly with Olympics and other things coming up.

So we extended our loan, our loan, as everybody knows, we extended for 15 months. It was a collaboration of Blackstone and Hudson and our servicer, which was a win-win-win across the board. The terms of that were extremely beneficial to us. in that it was no difference in interest rate. We have 1.1% over SFR. We had a small reserve, which we had already had cash. So nobody wrote a check -- and there is a minimal cash flow sweep because there's some free rent burn off with Netflix. This enables us to continue our conversations with Netflix. They have not closed on a studio deal. They put it off. So that deal is not closed. It's now put off till the end of October at the earliest. It will not impact our conversations with Netflix. I don't want to get into the details of the conversation, but they come with an expiration in 2031. And even if they were to move 100% out of our property, they could never be completed to wherever they want to go by '31. So worst-case scenario, they're going to have to renew for at least 1 of their option periods, which is 5 years. And that's the absolute downside. And from our standpoint, the rent is already baked in at market, and there's annual increases in the rent, and there's a restoration cause. That being said, we are in complete dialogue with them on multiple facets in multiple areas. And in the next 15 months, we'll be able to address that, I think, effectively. And we're confident that the resolution is going to be a win-win for both sides.

And congratulations on the extension of the ProlywoodMedia portfolio alone and the terms. I know that was a major priority of the team. Can you talk to the balance sheet a little bit and kind of talk about how you're thinking about the next kind of key priority items over the next few quarters.

Yes, we have about $200 million in potential sales proceeds coming through in the next several quarters, we've got an untapped credit facility of almost $900 million. We have a two, it will be two assets of size that will be fully leased and unencumbered that we could switch out for debt. We will have the access to high-yield markets in our bonds. I think as a company, we want to maintain the flexibility of having both secured and unsecured debt. So we're committed to that. We're working on a couple of strategies right now. But as you know, if you follow our bonds, our bonds are trading at very good levels. And so we're not in a rush. I had said earlier this year, and I reiterate our last call in earnest, we'll start talking about replacing the first 2 tranches in '27, which is November '27, and then 4 months later, in '28, the $750 million. We have -- just but why I mentioned, we have the ability to full capacity to replace those outright without issuing any more bonds if we wanted to go the direction of what I just talked about. I think it's going to be a combination. We are -- as a company, we're working earnestly and Harout is taking the lion's share of the responsibility to get us rated at least another notch up from where we are today. We're confident we can get that done before you have to go back to the bond market. So we've got flexibility. We've got optionality and we're in a very good position to make the right determination as to which direction we're going to go in. And I think we're confident that something will work in our favor on a multitude of 1 of those plans that we can execute on, and I think will be beneficial.

Great. And then can you kind of help investors kind of level set expectations around the CapEx and TI spend associated with the leasing that's being done and kind of walk us through the time line to positive AFFO.

Yes. I think, listen, the capital that's going to be outlaid is directly correlated to good news on leasing. And the leases that we're doing all have increases. So you're going to see a pretty nice sequential jump in FFO immediately on a straight-line basis, and then you're going to see a pretty impressive AFFO jump by the end of the direction that we're looking at is pretty much all baked in. For us to get to that 90% number at the end of 2017, that's not baked in yet in terms of how we're projecting for the rest of this year and then for the majority of next year is all going to be correlated on leasing. So the direction of our capital outlay is going to be directly correlated to how the structure of the company's FFO and AFFO is going to come into play. As I said, I don't think anybody has as much mark-to-market movement as well as FFO growth that we do just because of where we came from our basis by which we were -- and so we're pretty excited about that and the execution. -- the variability on that is going to be cost of construction and time delays. We can't control either one of those, but we'll be in a position, we think, to execute on the leases that are in place and the ones that we're about to sign to get these tenants in as soon as possible. And we've got the tools to do so. It's just going to be dependent upon where the economy is in the construction costs and labor costs around that.

Maybe switching gears to the studio business and just kind of latest color on kind of the Okay. Number of days shooting and...

Yes, let's talk a little bit about it. Listen, I think -- the studio business has gone from a real high on our portfolio through a real low. And I think now it's rebounding the other way. It can't get much worse I'll be candid. So it can only go up from here. We had a strike that was exactly 3 years ago, so it came into play, and it's just permeated throughout the industry. I can say on that basis, all 3 unions that were potential strike unions have all settled for the next go around for the next 3 years, there's not going to be any impact in terms of Stryker impediments along that way. . Specifically to -- before we sort of get into the query side, specifically to the actual industry itself. -- both California and New York have implemented a tax plan where I think it is working. It is not working to the level and the experience that I think some would have liked because the majority of both of those plans are below the -- is in New York bulliness well they allow above the line, but it's capped above the lot. Yes. So it's -- everything in California is below line. New York is partial above the line in California is not. This federal bill that is being proposed right now is a bipartisan bill. It's getting great traction. We're very close and affiliated to it. It will be federal tax benefit on all production in the United States. It can be increased to 30% on a couple of levels. One is if you are independent production it can go an extra 10% to 30%. Two is if you're a show that was filing in the United States that went somewhere else and now comes back, you get the extra 10%, that is above and beyond the state of California and the state of New York tax incentives that are in place today. So it's an additional 20%, 30%. But most importantly, it's on both above and below the line, and that's going to be very helpful. It's already seen some traction. And it's just another external source that will help, I think, jump start the industry that is not going anywhere. The industry is definitely going to continue to survive. The majority of these spectrum companies are spending in an ordinate amount of time and money on live content and live content is shot in studios, and that's enhancing for us. Business that I had mentioned that we were losing almost $20 million a year on it. We curbed that now to right around 4%, and we think we're going to be closer to about breakeven by year-end or somewhere around then. We've made a massive amount of headway. We are not stopping there. We think that the business, as I mentioned, we're sort of the last man standing in the operational side of that business. So we're going to have opportunities come our way. how much we're going to somebody is going to do well in that business. And I think we'll have a part of it because of our portfolio and what we currently own today. Our ownership of our Sunset Studio portfolio is 97% leased or something like that? So we're -- and our New York portfolio here is 100% leased. So we're doing well beyond what market conditions are and we've got the ability to continue on. I do think that, as I mentioned earlier, it can't get worse than it is today. So the upside is at least somewhat brighter.

And maybe if you could talk a little bit about the kind of rightsizing of that business and how you're achieving from a negative $20 million to potentially positive down the line?