Hudson Pacific Properties' Q3 2025: Contradictions on Occupancy Recovery, AI's Impact, Studio Trends, and Lease Stability

Business Commentary:

* Office Leasing and Market Recovery: - Hudson Pacific Properties executed 75 office leases totaling 515,000 square feet in Q3, 67% of which were new deals. - The company achieved positive absorption in the third quarter, signaling an inflection point in office occupancy, with 75.9% occupancy at the end of the quarter. - - Recovery trends are driven by growing demand in the West Coast office markets, particularly from AI and technology companies.

• Studio Business and Tax Credit Impact:
• Hudson Pacific's in-service studio stages achieved a 220 basis point sequential increase in occupancy to 65.8%.
• The company's revenue from studio NOI increased sequentially due to cost-saving initiatives and tax incentives, with additional productions expected to commence within 180 days.

• California's expanded film and television tax credit is creating momentum for the studio business, with 74 new productions allocated since July.

• Capital Structure and Financial Strength:

• Hudson Pacific refinanced assets, including the $285 million refinancing of 1918 8th Street Seattle and added $795.3 million to its credit facility, enhancing liquidity to $1 billion.
• The company's balanced capital structure features 100% of debt fixed or capped and no maturities until Q3 '26, ensuring financial flexibility.

• Investment and Development Activity:

• The company acquired a 45% interest in the Hill7 office property in Seattle and plans to evaluate strategic options for mixed-use development in Culver City.
• These strategic moves aim to unlock value and capitalize on embedded growth opportunities within Hudson Pacific's West Coast footprint.

Contradiction Point 1

Occupancy and Leasing Recovery Dynamics

It involves differing expectations regarding the pace and timing of occupancy and leasing recovery, which are critical for understanding the company's financial performance and strategic direction.

Was leasing sequentially positive in occupancy and lease percentage for the first time in years? - Richard Anderson(Cantor Fitzgerald & Co.)

2025Q3: This is the first time in over 2 years that occupancy and leasing have shown sequential improvement. - Mark Lammas(President & Treasurer)

How should we think about the pace of occupancy recovery? - Blaine Heck(Wells Fargo)

2025Q2: We're on track for a high 7 handle year-end and a mid-8 handle in 2026, based on leasing and pipeline activity. - Victor Coleman(CEO)

Contradiction Point 2

Impact of AI on Leasing and Tenant Behavior

It involves differing views on the impact of AI on leasing and tenant behavior, which can affect the company's strategic planning and financial forecasting.

How do you view the potential impact of AI layoffs on your submarkets and tenant sectors? - Blaine Heck(Wells Fargo Securities)

2025Q3: While AI impacts are noted, the core tenancy of legal and financial firms remains stable. Financial institutions are shifting to secondary markets. The drop in sublease is favorable, indicating positive demand. - Victor Coleman(CEO)

Are there any significant concerns about future move-outs or tenant credit issues that could complicate recovery? - Blaine Heck(Wells Fargo)

2025Q2: AI firms have certain leasing preferences, but it has had no material impact on sublet demographics of our tenants. While some are in sublease, many are in full-service leases. - Victor Coleman(CEO)

Contradiction Point 3

Studio Occupancy Trends

It involves differing perspectives on the occupancy trends in the studio business, which directly impacts revenue and operational expectations.

Can you provide an update on occupancy trends over the next few years and their impact on same-store NOI? - Ronald Kamdem(Morgan Stanley)

2025Q3: Occupancy is moving in the right direction with positive net absorption expected. Last year's expiration profile was favorable. While average occupancy dipped, it is now trending up. - Mark Lammas(President & Treasurer)

What are your expectations for occupancy for the rest of the year? - Connor Mitchell(Piper Sandler)

2025Q1: Our studio occupancy levels are certainly coming down, and we'll stabilize and improve, which will ultimately drive our NOI in a positive direction over time. - Victor Coleman(CEO)

Contradiction Point 4

Studio Lease Variability and Stickiness

It involves differing viewpoints on the stability of studio leases, which affects the predictability of future cash flows and revenue.

How variable and sticky are studio leases, and are there concerns about future demand? - Vikram Malhotra(Mizuho Securities USA LLC)

2025Q3: Stability in the studio business is based on long-term leases, with Netflix ensuring consistent demand. Quixote has seen improved financial performance. - Victor Coleman(CEO)

Can you update on occupancy and expectations for the rest of the year? - Connor Mitchell(Piper Sandler)

2025Q1: Quixote occupancy dropped to 90% and will remain at this level until the end of the year. Quixote occupancy is expected to rise in 2025 and beyond as production activity increases. - Victor Coleman(CEO)