Hudson Pacific Properties, Inc. Q2 FY2026 earnings call

Overall Portfolio & Market Trends

• Achieved a record leasing quarter, with the fourth consecutive quarter of sequential occupancy growth, driven by a transformative 891,000 square foot 24-year lease with the City and County of San Francisco at 1455 Market that locks in long-term cash flow visibility.
• Same-store NOI grew 7.5% year-over-year, core FFO nearly tripled to 23.1 million, and core FFO per diluted share increased 30% year-over-year to 0.35.
• U.S. venture investment reached 145 billion in Q2 (the second strongest quarter on record), with funding broadening beyond large language models to defense tech, AI infrastructure, robotics, and space tech, creating a more diverse tenant base for the portfolio. The improving IPO market is also expected to drive future office demand.
• All markets show strengthening fundamentals with virtually no new construction: San Francisco posted 7 consecutive quarters of positive absorption and its largest year-over-year rent increase since 2020; Puget Sound extended its recovery to 3 consecutive quarters with the first CBD vacancy improvement in 6 years; downtown Vancouver has the tightest vacancy in the portfolio at just over 12%; West Los Angeles leads LA market activity with the highest rents.

Leasing Activity

• After signing 1.3 million square feet of leases in Q2, the active leasing pipeline was reloaded to 2.4 million square feet, 70% of which are new leases with an average requirement size over 20,000 square feet.
• Tour activity for newly delivered move-in-ready suites has increased, driven by new-to-market tech, AI, and professional services tenants. Key properties have strong upcoming lease coverage: 80% coverage for the expiring PayPal lease, and 65% coverage for 1000 Washington (up from 60% last quarter) with active negotiations across nine tenants.

Disposition Strategy

• The company is on track to exceed its 200 million full-year asset disposition target, having closed the sale of 2001 Gateway after quarter-end, with three additional Bay Area office assets and the 10950 Washington residential development site in contract or active negotiation. Buyer demand for quality Bay Area office assets has increased meaningfully in 2026, allowing the company to execute on its timeline and redeploy capital to strategic priorities.

Value Creation & Restructuring

• Proactive re-entitlement and adaptive reuse work is ongoing to unlock portfolio value: the Office to Residential re-entitlement application for 901 Market in San Francisco has been filed with approvals expected by year-end; CC&Rs for Foster City Metro Center and Redwood Shores assets have been amended to permit residential use, adding development optionality independent of the office leasing cycle.
• Coyote restructuring is on track, with three quarters of the original cash gap to breakeven closed. Non-core studio and ancillary operations are being exited to streamline the business and eliminate ongoing cash drag.

Office Segment

Total leasing volume for the quarter was 1.3 million square feet (61% new leases, 39% renewal leases). Portfolio occupancy increased 470 basis points sequentially to 82.5%, and leased rate climbed 440 basis points sequentially to 82.8%. Same-store office NOI contributed to the overall 7.5% year-over-year growth in total same-store NOI, reaching $90.2 million for the quarter. Gap rent spreads grew 17.2%, while cash rent spreads decreased 11.4% (excluding the large 891,000 square foot San Francisco city/county lease, gap rents decreased 3.3% and cash rents decreased 9.9%).

Core Studio Segment (Sunset Studios and Curious Fleet operations in Los Angeles and New York)

In-service stages were 74.6% leased in Q2, up 180 basis points sequentially. Core studio NOI was 4.6 million year-over-year, up 7 million year-over-year and up 3.1 million sequentially. HPP's share of core studio NOI turned positive for the first time in two years at 2.2 million. Hollywood stages (including Sunset Las Palmas) remain well- leased at 95.5%, while Sunset Pier 94 lease rate increased 40 percentage points to 78.5%.

Non-Core Coyote Segment

As part of ongoing restructuring, non-core Coyote operations (Atlanta sound stage facilities, pro supplies, lighting/grit ancillary businesses) are marked for exit. Coyote generated an 18.6 million negative cash NOI in 2024; restructuring efforts have improved annualized run rate cash NOI by 14.3 million, bringing the current annualized negative cash NOI to just over 4 million, closing 75% of the gap to the breakeven target.

• Full-year 2026 core FFO per diluted share guidance is raised to a range of $1.12 to $1.20, an upward revision from the prior range of $1.10 to $1.18. The midpoint of the new range reflects approximately one cent of upside from Q2 outperformance relative to initial expectations, plus one additional cent from improved second half performance expectations.
• Guidance excludes the impact of ongoing Coyote non-core business closures and any potential future dispositions, acquisitions, or capital markets activity. Core FFO guidance excludes negative contributions from exiting non-core Coyote operations, so the streamlined portfolio will improve core FFO results relative to prior periods that included the drag.
• The company reaffirms expectations that large pre-notified lease expirations will create a temporary headwind to occupancy and earnings in the third quarter of 2026, with a rebound in occupancy and earnings expected in the fourth quarter. Full year end occupancy is still projected to land in the mid-80% range, unchanged from prior guidance.

• The Hollywood Media Portfolio Loan matured in Q3 2026 and was transferred to special servicer prior to maturity. While the borrower and special servicer have agreed to extension terms, documentation is not yet finalized, and the outcome remains uncertain until finalized.
• Studio production activity in Los Angeles remains soft as the state's tax credit approval backlog has delayed the start of new productions, and summer is a historically slow period for production activity. While labor agreements have reduced industry volatility, a meaningful recovery in show counts is still dependent on new projects moving into production, which has not yet occurred at scale.
• While broad office market fundamentals are improving, recovery remains uneven across submarkets, with some weaker submarkets still experiencing soft demand. Office leasing also typically progresses slower than market expectations, which could delay projected occupancy gains.
• Non-core Coyote operations still have an annualized negative cash run rate of 4 million, and the remaining exit process for five outstanding studio leases is ongoing, with potential for additional near-term costs during the wind-down.

Q: What are the key demand dynamics and market split in West LA, and is there an inflection point for recovery? / A: West LA has a bifurcated market, with high-end submarkets (Brentwood, Century City, Beverly Hills, Culver City) performing exceptionally well, while other areas (Westwood, Santa Monica, Olympic Corridor) are slower. There is no new construction in the near term, so available high-quality space is increasingly absorbed. Demand is driven primarily by anchored entertainment companies and their growing ancillary businesses, with small to mid-sized tenant demand slowly improving. AI demand has not yet meaningfully materialized in the market.

Q: Can you comment on the type of buyer demand you are seeing for office assets in the current transaction market? / A: There are three distinct buckets of active buyer demand. Revamped core capital targets high-quality, high-end assets. Opportunistic capital is at the forefront, focused on value-add opportunities including lease-up or repositioning. There is also consistent demand from owner-users and residential developers for entitled conversion projects, given strong residential demand across many of the company's markets. Activity is balanced across all three groups.

Q: What is the breakdown of the 2.4 million square foot leasing pipeline by industry, and how much is new versus renewal leases? / A: After the large Q2 leasing volume, the pipeline still grew modestly from 2.3 million to 2.4 million square feet. The pipeline is now evenly split 50-50 between AI/tech ecosystem tenants and non-tech tenants (professional services, finance, insurance, real estate, and government agencies), showing a much broader demand base than in recent quarters. 70% of the pipeline is new leases, while 30% is renewal leases, aligning with the company's expectation of ongoing occupancy growth.

Q: What is the path to breakeven for the core Coyote fleet business after exiting non-core operations? / A: When restructuring began, Coyote had an 18.6 million annual negative NOI, and at that time show counts were around 90. Through cost cutting, the current annualized negative NOI is now just 4 million with show counts at 70. If show counts increase modestly to 80, the business will hit breakeven; if show counts return to 90, it would generate 4-5 million in annual positive cash NOI. Guidance assumes no improvement in show counts for now, and the business is ahead of plan even with lower current show counts.

Q: What is the outlook for studio production demand after the ratification of new labor agreements? / A: Labor risk is fully removed with all new four-year agreements ratified, which removes major industry uncertainty. New York production has already picked up meaningfully, while LA remains in a typical summer lull, and California's tax credit approval backlog has delayed new production starts. The company expects a clearer picture of LA production volumes by fall, with core owned studio space remaining very well leased. Production has held up best in New York, Los Angeles, and Vancouver, while other secondary production markets are faring worse.