Beware The Perceived Discount: Hudson Pacific Properties’ Risks Amid Studio Hopes

Investors often chase “discounted” stocks, lured by the promise of hidden value. But when it comes to Hudson Pacific Properties (NYSE: HPP), the real estate investment trust (REIT) specializing in tech and media properties, the current price—hovering near $2.20 per share in early 2025—may mask deeper vulnerabilities. While the stock trades at a fraction of its June 2024 price of $4.72, the “perceived discount” belies a company navigating occupancy declines, rising debt, and uncertain demand. Here’s why investors should proceed with caution—and what could turn the tide.

The Numbers Tell a Cautionary Tale

HPP’s third-quarter 2024 results underscore its struggles. The company reported a net loss of $97.9 million, or $0.69 per diluted share, compared to a loss of $37.6 million a year earlier. While REITs are often valued by Funds from Operations (FFO), even this metric has weakened: Q3 2024 FFO fell to $14.3 million ($0.10 per diluted share) from $26.1 million ($0.18) in 2023.

The drop in FFO stems from declining occupancy rates and lease expirations. Office occupancy in Q3 2024 was 79.1%, a slight improvement from the prior quarter but still below pre-pandemic levels. Studios fared worse: leased space fell to 73.8%, with stage occupancy at 75.9%, dragged down by a single tenant departure at Sunset Las Palmas Studios.

Debt and Liquidity: A Tightrope Walk

HPP’s total debt stands at $4.14 billion as of September 2024, with no maturities until November 2025. While its liquidity of $695.7 million—including $90.7 million in cash and $605 million in undrawn credit—provides a buffer, the company’s leverage ratio (net debt to undepreciated book value) hit 37.4%, a level that could deter lenders if occupancy doesn’t rebound.

The suspension of common stock dividends in late 2023, while preserving cash, signals management’s focus on survival over shareholder returns. Preferred stockholders, however, continue to receive dividends—$0.296875 per share quarterly, or $1.19 annually—highlighting the prioritization of certain investors.

The Silver Lining: Studio Demand and Policy Winds

HPP’s fate hinges on its studio portfolio, which CEO Victor Coleman calls a “high-barrier, high-margin business.” Here’s the bullish case:

1. California’s Film Tax Credit: Governor Newsom’s proposed $750 million tax credit program could revive production activity, which fell sharply during the 2023 writers’ strike. If approved, it could push studio occupancy toward pre-pandemic levels.
2. Tech Tenant Momentum: West Coast tech firms, driven by 4-5 day in-office mandates and AI/venture capital investment, are leasing 25% more space YTD 2024 than in 2023. HPP’s focus on Silicon Valley and Los Angeles hubs positions it to capitalize on this trend.

The Risks: Execution and External Factors

• Occupancy Recovery: Studios need more than tax credits—they require studios to book productions. Competing markets like Georgia and New Mexico offer deeper tax incentives, posing a threat.
• Debt Maturity Cliff: While no debt matures until late 2025, rising interest rates could complicate refinancing if FFO doesn’t stabilize.
• Earnings Volatility: The company’s same-store property cash NOI is projected to decline 13-14% in 2024, a trend that must reverse for the stock to justify its 2025 forecast of $16.06 (up 240% from June 2024).

Conclusion: A Gamble on Turnaround

HPP’s stock trades at a perceived discount because its fundamentals are fragile. The $2.20 price tag reflects skepticism about occupancy recovery and debt management. Yet, the California tax credit and tech demand offer a path to growth—if executed flawlessly.

Investors should weigh two facts:
1. Current Metrics: A net loss, declining FFO, and a reliance on preferred dividends suggest near-term pain.
2. Upside Potential: If studios rebound and offices stabilize, the $16.06 forecast (implied by algorithmic models) becomes plausible—but it’s a long shot requiring multiple favorable outcomes.

For now, the discount is real. The value? That’s another question.

In real estate, location matters. But for HPP, execution matters more. Until occupancy climbs and losses turn to profits, this “discount” remains a gamble—and not one for the faint of heart.