Hudson Pacific Properties, Inc. Q4 FY2024 earnings call

Key Accomplishments in 2024

• Office leasing nearly 20% higher YOY with over 2 million sq ft signed leases; 1.2 million sq ft new leasing (60% of activity, highest since 2019).
• Successfully completed two of three under construction development projects: Washing 1000 in Seattle and Sunset Glenhos in Los Angeles.
• Achieved approximately $4 million in G&A savings vs initial outlook, with further savings anticipated in 2025.
• Placed three non-core assets under contract to sell for total $94 million, with proceeds going to reduce leverage.

Industry Trends

• West Coast office fundamentals resilient, Bay Area standout; all markets' gross leasing reaching post-pandemic highs. Sublease availability improving with virtually no new construction. Fourth quarter venture funding $75B, highest since Q2 2022, with Bay Area AI-related funding significant.
• California proposal to more than double film/TV tax credit to $750M (effective July 1) boosts studio outlook; production in LA picked up in Q4, with uptick in stage leasing inquiries.

Transactions

• Sold 3176 Porter, Maxwell; Foothill Research Center under contract with closing anticipated in March. Pursuing approximately $100M-$150M of additional dispositions.

Office

• In Q4 2024, office leasing was nearly 20% higher than the prior year with over 2 million square feet of signed leases, including 1.2 million square feet of new leasing (60% of all activity, highest since 2019 and nearly double post-pandemic average).
• Reported GAAP and cash rent spreads were 6% and 9.9% lower in the quarter, but would have been 2.8% and 4.3% lower without a new direct lease at Rincon Center. Trailing 12-month net effective rents were 2% lower YOY and 8% lower than pre-pandemic; net effective rents on new deals alone were up 18% YOY and 6% below pre-pandemic on trailing 12-month basis. Trailing 12-month lease term was up 2% QoQ, 81% YOY, and 24% above pre-pandemic.
• In-service office properties were approximately 79% leased as of end of Q4 2024.

Studios

• Los Angeles production levels in Q4 incrementally improved, with average 86 shows filming compared to 84 in prior quarter. Trailing 12-month lease percentage for in-service stages was 77% leased, 90 basis points higher than prior quarter. Studio revenues increased $2 million QoQ, driven by ancillary and transportation/location service revenue, partially offset by decrease in stage rental revenue.
• 43 out of 56 film and TV stages (79% of related square footage) were either leased, in contract, or subject to hold.

First Quarter Outlook

• FFO per diluted share expected to range from $0.07 to $0.11 per diluted share. No specified items. Studio NOI expected to be approximately $0.02 lower at midpoint due to LA wildfires; office NOI expected to be approximately $0.01 lower at midpoint due to Q1 lease expirations. G&A expense improvements partially offset these declines.

Full Year Assumptions

• Same-store property cash NOI growth expected to be negative 12.5% to 13.5%, reflecting asset sales and lower office occupancy in first half, followed by occupancy gains in second half.
• Anticipate additional noncash revenue between $10M to $15M in 2025 due to landlord build lease deals.
• G&A expense expected to be $70M to $76M, with full benefit of cost containment measures and additional savings of $3M to $9M.

• Macro uncertainty including global conflicts and geopolitical tensions could impact business.
• Wildfires in Los Angeles temporarily delayed productions and impacted studio activity.
• Potential challenges in securing timely secured financing for portfolio of six assets to address maturities.

Q: Tom Catherwood asked Art Suazo about office leasing pipeline fundamentals and negotiating position.

A: Art Suazo said tour activity is up, average deal size in negotiation has gone up, lease terms are trending in the right direction with trailing 12-year-over-year up almost 80%.

Q: Tom Catherwood asked Victor Coleman about secured financing on six assets.

A: Victor Coleman said they're in process on multiple events to accommodate balance sheet rightsizing and feel confident one or more will come through soon.

Q: Michael Griffin asked Art Suazo about leasing pipeline tenants and commitment likelihood.

A: Art Suazo said supremely confident many deals will get over the finish line, with late-stage LOI and leases about 800,000 sq ft in the pipeline, showing more urgency.

Q: Michael Griffin asked about Quixote studio disposition and long-term viability.

A: Mark Lammas said they've undertaken $7.5M in cost savings, with another $6M in process, rightsizing the business; Victor Coleman added streamers reaching profitability and support for LA production will help.

Q: Blaine Heck asked about sales progress and proceeds.

A: Victor Coleman said three sales are done, with two others in contract or LOI negotiation, and proceeds range higher due to good pricing and potential reversion on some assets.

Q: Blaine Heck asked about high-caliber shows returning to studios.

A: Mark Lammas said 'returning' means shows coming back to LA for stages, 'high caliber' refers to long-term TV episodic shows needing multiple stages; Victor Coleman added named showrunners with multi-year shows are coming back.

Q: Ronald Kamdem asked about covenant compliance and occupancy trend.

A: Victor Coleman said they feel confident in covenant compliance, with occupancy expected to dip in Q1 then steadily improve in second half and beyond.

Q: Caitlin Burrows asked about leasing spreads and pricing.

A: Art Suazo said net effective rents have held up well, with recent quarters indicating potential to be higher than pre-pandemic; leasing spreads don't fully reflect this due to timing and other factors.

Q: Dylan Burzinski asked about leasing pipeline and Seattle recovery.

A: Victor Coleman and Harout Diramerian said average deal size is growing, pace of deals is picking up, and Seattle's economic differences and tenant behavior are factors; Harout added tours have maintained activity.

Q: Rich Anderson asked about G&A cost reduction and Quixote rightsizing.

A: Victor Coleman said G&A guidance shows $10M decrease YOY, all from corporate overhead; Mark Lammas said Quixote cost savings include eliminating leases and monitoring other locations.

Q: John Kim asked about G&A reduction comparison to peers and breakdown by division.

A: Victor Coleman said they've reduced G&A, with all savings from corporate overhead; Quixote savings are part of Quixote NOI adjustments.