Yahoo Finance Hudson Pacific Properties, Inc. (NYSE:HPP) Q1 2024 Earnings Call Transcript
Hudson Pacific Properties, Inc. (NYSE:HPP) Q1 2024 Earnings Call Transcript May 2, 2024
Hudson Pacific Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to Hudson Pacific Properties First Quarter 2024 Earnings Conference Call. My name is Lydia, and I will be your operator today. [Operator Instructions]. I'll now hand you over to Laura Campbell, Executive Vice President, Investor Relations and Marketing, to begin. Please go ahead.
Laura Campbell: Good morning, 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. Yesterday, 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 also 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 a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss industry and market trends as well as other highlights from the quarter. 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. Hello, everyone, and welcome to our first quarter call. Macroeconomic pressures have persisted into 2024 with the Fed contemplating keeping rates higher for longer. On the office side, speaking thematically across our markets, vacancy and negative net absorption remains stubbornly high as many existing tenants continue to downsize and yet demand in terms of new requirements is recovering. Sublease is stabilizing with backfills exceeding new additions and minimal construction starts have significantly curtailed new supply. Remote-first companies are becoming rarities and more business-friendly public safety focused policies are taking hold, contributing to meaningful reductions in crime across our urban markets.
In line with these more positive trends and backed by our team's persistence and creativity, our office leasing activity, along with the percentage of newly signed deals accelerated in the first and second quarters of the year. We have always been focused on ensuring our portfolio meets the needs of today's and tomorrow's workforce. And in addition to new construction, we have consistently adapted, renovated or otherwise repositioned our older products which will only pay further dividends as the pipeline of new supply wanes. Today, over 70% of our in-service portfolio was either built or substantially renovated after 2010 such that our average building age, when factoring in substantial CapEx improvements is approximately 10 years. Over 95% of our properties have functional outdoor space, 90% have end-of-trip facilities with bike storage, showers and lockers, 60% have fitness centers, 95% offer EV charging, 92% are LEED certified, and 100% are carbon neutral.
Further, our expertise in place-making throughout our combination of strategic CapEx, retail tenanting, programming and events as demonstrated by our successful stewardship of the Ferry Building in San Francisco and Bentall Center in Vancouver is becoming more important than ever. We are now leveraging those learnings to the benefit of our entire portfolio, especially in our more urban markets. In terms of the studios, upon the strike's resolution late last year, our team hit the ground running to market our stages and services. In the first quarter, as filming resumed, revenue improved across essentially every segment of our studio business. We also have promising activity on a majority of our vacant stages, inclusive of negotiating our first lease at Sunset Glenoaks.
However, as has been well documented by the media, post strikes, the film and television industry has recovered far more slowly than anticipated. Most of our studio business is in Los Angeles, where FilmLA recently reported shoot days in the first quarter were down 9% year-over-year. And while film production has largely recovered, television production, one of the primary demand drivers for our stages and services was up 16% in the first quarter compared to last year, even as the number of pilots increased nearly tenfold. There are several reasons why the ramp-up is different than what occurred following the pandemic. Many believe studios are curtailing production due to the pending IATSE and Teamsters Local 399 union contract expirations in May and July, respectively.
Broadly speaking, the industry seems eager to avoid another strike. And thus, IATSE negotiations are on track to be completed by late May with all 13 Hollywood locals, reaching craft-specific agreements as of last week. Other factors include logistical and resource constraints as multiple productions attempt to restart simultaneously. Industry consolidation and shifting business models as networks pursue profitability. Unfortunately, with the IATSE and Teamsters contract expiration is imminent, it is challenging to more fully assess how these other factors will weigh on stage and services demand for the balance of the year. But there is no question that high-quality, original content will remain essential for the studios growing their subscriber bases and building valuable IP.
Thus, while the industry is evolving, we will see long-term fundamentals as compelling. Turning to dispositions. We continue to opportunistically pursue potential sales with the goal of further deleveraging and fortifying our balance sheet. While we cannot yet disclose which assets we are actively exploring the sale of 3 office assets, collectively representing around 900,000 square feet. We are also looking at a potential recapitalization of a fourth office asset in the Bay Area. While we are most focused on dispositions, this quarter, we had a unique opportunity to purchase our partner's 45% interest in 1455 Market. We then executed a 20-plus-year lease at 157,000 square feet at 1455 Market with the city of San Francisco, which has expressed interest to grow significantly in that building.
This is the largest direct deal in downtown since 2021. The city's commitment to mid-market neighborhood, both through its actions and its representative's commentary related to this lease speaks volumes. We continue to believe in the long-term demand drivers for San Francisco office space and our ability to create further value at 1455 Market at very attractive all-in basis with no leverage. Finally, during the first quarter, we were once again included in S&P Sustainability Yearbook. And last month, we published our sixth annual corporate responsibility report. Key accomplishments for the year include reducing Scope 1 and 2 carbon emissions by 36% from our 2018 baseline, such that we are on track to meet our science-based 50% reduction target by 2030.
We continue to operate our assets on a carbon neutral basis with our LEED and ENERGY STAR certification among the best in the office sector. And last year, we began manufacturing 100% solar electric trailers as part of Quixote's Verde line, which is setting the standard for sustainable trailers in the industry and on average, outperforms our non-solar product in terms of pricing and utilization. And most recently, GlobeSt. once again named Hudson Pacific as Best Place to Work, which is a nod to our exceptional people and culture. With that, I'm going to turn it over to Mark.
Mark Lammas: Thanks, Victor. As Victor noted, our office leasing momentum has accelerated since the start of the year. In the first quarter, we signed over 500,000 square feet of leases with 65% of that comprised of deals along the San Francisco Peninsula and in Silicon Valley. We signed nearly 300,000 square feet of new leases or 57% of all activity. Both total and new leasing were the highest levels since fourth quarter of 2022, and our average transaction size for new leases was the largest since first quarter 2021. Significant signings included 82,000 square feet of new and renewal leases with an 8-year term with consumer electronics company, TDK InvenSense at Concourse which backfilled approximately 30,000 square feet of former Nutanix space and approximately 11-year 54,000 square foot new lease with a software company at Bentall Centre, a 5-year 36,000 square foot new lease with a biotech company at Metro Center and an approximately 6-year 24,000 square foot lease with a semiconductor company at Metro Plaza.
Quarter-over-quarter, we also had relative improvement in our other leasing metrics. Our GAAP rents grew 6.2%, while our cash rents were off by 5.4% from prior levels which reflects, in large part, the competitive rent structure negotiated to retain InvenSense for 8 years at Concourse. Similarly, net effective rents were modestly down in the quarter, with lower annual leasing costs and a 23-month increase in average term. Our in-service office portfolio was 80.5% leased as of the end of the quarter, down approximately 140 basis points compared to last quarter. This is in line with our expectations and mostly related to midsized tenant move-outs in Seattle and the Bay Area, the largest of which were Dell EMC with 43,000 square feet at 505 First and Nordstrom Rack with 45,000 square feet at 901 Market.
We had nearly 140 tours at our office assets, representing 1.4 million square feet of requirements, which includes year-over-year a 20% increase in number and a 30% increase in average size of requirements in Silicon Valley. Our current leasing pipeline of 1.9 million square feet includes an average requirement size around 20,000 square feet. Upon signature of the 150,000 square foot new lease with the City at 1455 Market subsequent to the quarter, we still have 290,000 square feet of deals either in leases or LOI. Our coverage on our remaining 2024 expirations that is deals and leases, LOIs proposals or discussions is 45%. Turning to the studios. Our market intel points to approximately 100 productions currently filming in Los Angeles, up from around 30 during the strikes and about 80 at the end of last year, but still significantly below more typical levels of, say, 120 to 125.
Most of these are returning productions meaning they were already filming prestrikes. That, and the fact major studios directed most new films and shows back to their own facilities is further curtailing demand for independent studios like ours. As more productions are green lit and the major still up, our capture rates should start to improve. Even as tours at our studio slowed in February and March, active stage leads that is films or shows in preproduction with which we have been in contact, increased about 30% quarter-over-quarter, a potential indicator of healthier future production levels. On a trailing 12-month basis, our in-service studios were 76.9% leased and our stages were 79.4% leased in the first quarter, which reflects a single tenant vacating space at Sunset Las Palmas during the strikes.
Trailing 12-month occupancy at Quixote studios and stages remained flat quarter-over-quarter at 27.1% and 29.8%, respectively. We have either in place or uncommenced leases are in negotiations or have expressions of interest on all the 10 of our 54 in-service and Quixote stages used primarily for film and TV production. We have 7 stages at Quixote that are leased primarily for commercial shoots. In the first quarter, those were 35% occupied, up approximately 800 basis points quarter-over-quarter. This activity points to the potential for near-term occupancy gains even as those will take time to appear within our trailing 12-month lease percentage given the weightings of prior strike-impacted quarters. The resumption of production has led to improved performance in nearly every revenue segment of our studio business.
Quarter-over-quarter, our studio revenue increased 36% with Quixote driving the bulk of that recovery. Most impactful, studio ancillary revenue grew by $6.9 million and transportation revenue grew by $2.7 million. Utilization across all our transportation assets was approximately 8% higher when compared to both third and fourth quarter last year. But operations have yet to fully recover and revenue remains about 30% below prestrike levels. That delta is most pronounced within our Transportation segment, a major component of Quixote's business where first quarter revenues were still roughly half of prestrike levels. Turning to development. Subsequent to the quarter, we substantially completed our Washington 1000 office tower in Seattle. Professional services and legal remain most active in the downtown market, while large tech demand has been slower to return.
One exception, Apple is expected to take approximately 200,000 square feet of sublease space across the street from their main building in South Lake Union. Bellevue's recent success story has been organic growth within that submarket rather than migration from the city and the 770,000 square feet of mid- to large-sized tech leasing in the first quarter alone is a huge positive for the region overall. Our Washington 1000 Marketing Center will open in May, and we are taking an aggressive, multipronged approach to getting the building leased. The quality of this asset will garner some of the highest rents in the market. That said, with our basis at just $640 per square foot, we can be very competitive on pricing. At the end of the first quarter, we also substantially completed Sunset Glenoaks, a key milestone in that we can now also pursue productions with near-term start dates.
Our grand opening event will take place this month and we are in negotiations with a pilot for 1 stage as we continue to field inquiries and tours. At Sunset Pier 94, which is under construction and will deliver end of 2025, we are in discussions with a tenant to lease the entire facility on a longer-term basis. This is a strong indicator of demand for Manhattan's first purpose-built studio. And now I'll turn the call over to Harout.
Harout Diramerian: Thanks, Mark. Our first quarter 2024 revenue was $214 million compared to $252.3 million in the first quarter last year, primarily due to asset sales, a large tenant vacating space at 1455 Market in the third quarter of last year and lower occupancy and utilization of studio stages and services, respectively due to the strikes. Our first quarter FFO, excluding specified items, was $24.2 million or $0.17 per diluted share compared to $49.7 million or $0.35 per diluted share in the first quarter last year. Specified items consisted of transaction-related expenses of $2.2 million or $0.01 per diluted share compared to prior year transaction-related expenses of $1.2 million or $0.01 per diluted share. The year-over-year change in FFO is attributable to previously mentioned items affecting revenue offset by reduced interest expense following repayment of the construction loans secured by One Westside and Westside Two, and less FFO attributable to noncontrolling interest resulting from the purchase of our partner's ownership in 1455 Market.
Our first quarter AFFO was $28.5 million or $0.19 per diluted share compared to $35 million or $0.24 per diluted share in the first quarter last year with a change largely attributable to previously mentioned items affecting FFO offset by higher cash and lower GAAP revenue and approximately $10 million less in recurring CapEx spend. Our same-store cash NOI was $108.3 million compared to $124.4 million, mostly driven by 2 tenant move-outs, one at 1455 Market and the other at Sunset Las Palmas Studios. At the end of the first quarter, we had $734 million of total liquidity comprised of $114 million of unrestricted cash, cash equivalents, and $620 million of undrawn capacity on our unsecured revolving credit facility. There is additional capacity of approximately $200 million under our Sunset Glenoaks and Sunset Pier 94 construction loans.
Our share of net debt compared to our share of undepreciated book value was 37% while 91.9% of our debt was fixed or capped and no material maturities until November 2025. Turning to outlook. Our in-service office and studio portfolios continue to perform materially in line with our full year outlook that we provided in February of this year. For our same-store office assets, this reflects both gradual improving office, operating conditions, combined with our positive leasing momentum. Regarding our same-store studio assets, this reflects the more predictable cash flow derived from multiyear leases and by extension, our ability to capture revenue generated by returning production. However, as Mark and Victor discussed, we currently have limited visibility as to how and when production will normalize, particularly given the expiration of the IATSE and Teamsters contracts in May and July of this year, respectively.
This is especially true for our Quixote business, which the majority of our stages and services are currently leased show by show and thus, its performance more dependent on production levels. We are therefore only providing an FFO outlook for the second quarter of $0.15 to $0.19 per diluted share alongside key assumptions related to our full year 2024 outlook. There are no specified items in relation to the second quarter FFO outlook. Regarding our full year FFO assumptions, we are adjusting our range for same-store property cash NOI growth to negative 11.75% to negative 12.75% due to potential for delayed occupancy recovery at Sunset Las Palmas through the remainder of the year. A reminder that our same-store FFO excludes our Quixote business.
While we can more confidently project for our same-store studios given the preponderance of long-term leases, the performance of our same-store office assets are the primary driver of this metric. These assumptions also include approximately $2 million of increased interest expense based on our current expectation that interest rates will remain higher for the balance of the year, and we reduced our FFO attributable to noncontrolling interest by $9 million due to our purchase of our partner's 45% ownership in 1455 Market in the first quarter. Our outlook assumes IATSE and Teamsters do not strike and production begins to pick up in early June following the successful resolution for IATSE contract negotiations, but in advance of Teamsters, which has notably smaller membership and hopefully streamlined negotiations.
As always, our outlook excludes the impact of any potential dispositions, acquisitions, financing and/or capital markets activity. We will continue to provide a full year FFO outlook once we believe production levels have normalized to the point where we can more accurately predict future cash flows related to our Quixote business. Now we'll be happy to take your questions. Operator?
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