Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hudson Pacific Properties Inc (HPP, Financial) reported its highest leasing activity since Q2 2022, with over 0.5 million square feet leased.
- The company's office portfolio performed better than expectations, with a healthy pipeline of deals totaling 2 million square feet.
- San Francisco experienced its second-best leasing quarter in two years, with significant AI investment driving demand.
- The Teamsters ratified their contract, potentially normalizing production activity in the studio segment.
- Hudson Pacific Properties Inc (HPP) has no debt maturities until the end of 2025, providing financial stability.
Negative Points
- Second quarter 2024 revenue decreased to $218 million from $245.2 million in the same quarter last year, primarily due to asset sales and tenant move-outs.
- FFO excluding specified items dropped to $24.5 million from $34.5 million year-over-year.
- The company anticipates lower average occupancy and NOI in Q3 due to lease expirations.
- Studio operations remain uncertain with visibility on normalization still lacking.
- Same-store property cash NOI growth outlook has been lowered to negative 12.5% to 13.5% due to lower absorption at Sunset Las Palmas.
Q & A Highlights
Q: Victor, I was hoping you could comment maybe a little bit more on the asset sales that you had talked about last quarter and again a little bit this quarter now. Maybe just how the reception been where you guys might be in that process? And maybe any color on potential pricing?
A: Yes, great. Thanks, and good to hear your voice. So the asset sales, you know, we're still in active discussions. And beyond just on conversations on at least a few assets, I don't want to get into details and numbers and I don't want to go into details on the amounts, but we're confident that we're going to execute food on our asset sales like we did last year.
Q: Are these the same assets that you were targeting last quarter had better than any changes to the kind of the composition of those potential sale?
A: Let me think about their predominantly the same assets with the exception of one. Okay. one maybe helpful in that up. Just okay.
Q: I had asked last quarter about whether there were any kind of strategic alternatives you guys might be exploring. And I thought you gave a very candid answer that essentially all options we're still on the table. So just wanted to follow up there and maybe give any update your thoughts on that subject and whether larger changes are still there consideration for you guys?
A: Well, you know, as I said last time, listen, as a company as the Chairman as the Board of Directors always evaluate all potential opportunities, order to determine whether they're viable and obviously they're going to be acute. We discussed to look at what would maximize long-term value for our shareholders. There is nothing imminent at all that that is currently in place today. But as I said, we're always evaluating and looking at alternatives.
Q: Is there a quick way to sort of bridge going from 17 to $0.1 a quarter to quarter? Just what are the components of that?
A: Just trying to figure out what pieces of driving that. Sir, on the so the main drivers are lower same store NOI at COD in our same-store studios. And that's related to a drop in activity at Galleria and lower cell counts in general and then also lower office and arrive in our relate to the SEC Q3 expirations, which resulted in lower average occupancy in the quarter. We still expect, however, that by the end of the third quarter, we couldn't be in line with what we reported in the second quarter and occupancy, but that makes sense.
Q: We noticed that you disclosed 239,000 square feet of early terminations in the quarter. Just curious what was that driven by end where there's sort of any one-timers in the office rent figures that we should be thinking about?
A: Yes, this is Art. There were really two major drivers. one was we work on in totality for 112,000 square feet and then there was a default for a 40,000 square feet. And those are the big ones. The good news on those is there is good news on those is that we already have a pipeline behind that. We're in negotiations to backfill most of that space. And to enter the second half that question, um, we did not get any lease termination revenue from the we work. So that's not many of the numbers.
Q: I think come earlier, Mark, you said something about the coverage on the expirations for this year. I thought you said 48% as our mixture. That was right. And I don't know if you have a number you could share on 2025 expirations?
A: Yes. So you're right on the 48 that that's the coverage on the 800 or so in spite of that back up year on 25 and looking at our. Yes. So 25 right now, we're sitting at about 25% coverage on it on a finer point. On the 48, our average tenant size is below 7,000 square feet. Lot of these guys are just barely engaging right now. So that number that 48 can go up very clearly.
Q: Can you talk about maybe how are you situated your portfolio, whether it's on the spec suites or anything else that you think you can be competitive to create that tenant in them, City of San Francisco versus the Valley?
A: Yes. So there it's bifurcated, right. Do talking about a I with the big large with the large growth and you're talking about kind of the early stage AI. that we deal with on the peninsula into the valley, I'll deal with the second first in the Valley RVT from prebuilt space, which we have about 300,000 square feet of in the Valley. And we've it's been our bread and butter that that space is attracting these tenants because they don't have to bid on the planet. They don't have to think about it and we get immediate immediate moving. So we're doing really well in those, um, in those on the larger spaces, you know, oftentimes will preempt a single floor. In this case, if they're looking for me multiple floors, we haven't built out multiple floors on, which is why a lot of nor has anyone for that matter, which is why they have been gravitating to really top end sublease space.
Q: I was wondering if you could talk a little bit about office retention on what it's been this year, maybe how it compares to history, the expectation for the rest of the year. And then as you look forward into 2025, whether you have any insight yet one way or the other on adding any of that maybe larger lease expirations?
A: Sure. This is Art market mentioned that it's about 40%, 48% retention. We think we can get a better than that. Why? Because a lot of smaller tenants that still have an engaged yet in the fourth quarter, so we can get that in north of 50%, we feel we can get it north of 50%. That steps up to the last, I would say, the last three or four years for sure, um, but AL IL 25, 25, again, it's very early, and we have about 25% coverage on on those expirations. So obviously, that number is going to grow.
Q: Just to clarify that 48% retention, is that just coincidentally, I think you mentioned 48% coverage for Arden, the second half expectations that there are two different sets that just happened to be 48% affects about giving Ind AS, but two different stats that happened about a 48%.
A: No, Dan, and I'll cover a few ways. You just saying we have coverage on the 800,000 feet that represents the ability to retain Net
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
