Hudson Pacific Properties, Inc. 2026 Q2 Earnings Call

Thanks for joining us. With me on the call today are Victor Coleman, Chairman and CEO, Mark Lammas, President, Harout Diramerian, CFO, and Art Suazo, EVP of Leasing. This morning, we filed our earnings release and supplemental on an 8-K with the SEC, and both are now available on our website, along with an audio webcast of this call for replay. Some of the information we will 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 the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss our second quarter results and current market trends. Mark will provide detail on our office and studio operations, and Harut will review our financial results and 2026 outlook. Thereafter, we will be happy to take your questions.

Victor? Thanks, Laura. Hello, everyone, and welcome to our second quarter call.

This was both a record leasing and highly productive quarter for Hudson Pacific. We signed 1.3 million square feet of new and renewal office leases, headlined by a landmark 891,000 square foot, 24-year lease with the City and County of San Francisco at 1455 Market, which locks in nearly a quarter of a century of cash flow visibility. Occupancy increased 470 basis points, our fourth consecutive quarter of gains, and improved performance across our office and studio portfolios drove same-store NOI up 7.5%. Together, with continued cost reductions in Quixote restructuring, we nearly tripled Core FFO and achieved a 30% increase on a per share basis. We also stayed disciplined on capital, maintaining total liquidity of $876 million while continuing to execute our asset disposition plan.

Importantly, as we look ahead, we reloaded our leasing pipeline to 2.4 million square feet. That leasing strength is playing out against a constructive venture and IPO backdrop. U.S. venture investment totaled $145 billion in the second quarter, its second largest and strongest quarter ever, with funding broadening beyond large language models into defense tech, AI infrastructure, robotics, and space tech. This all points to a wider, more diverse tenant base rather than a single sector bet, which will benefit our portfolio over time. The IPO market is improving too, with pending listings signaling further office demand as newly public companies and the ecosystem around them continue to grow.

Across nearly every market in our portfolio, demand is broadening along virtually no new construction, and that dynamic is strengthening fundamentals, though at different rates across our markets. San Francisco posted its seventh consecutive quarter of positive absorption and its largest year-over-year rent increase since 2020. We are seeing strength at the submarket levels across the peninsula and the valley, led by strong year-to-date positive absorption in Foster City and Redwood City, Redwood Shores, along with multiple headline leases in Santa Clara. In Los Angeles, our leasing efforts are focused on West Los Angeles, which commands the market's most robust activity and highest rents, even as the broader markets remain challenged overall. The Puget Sound extended its recovery for its third consecutive quarter, led by downtown Seattle, which leases came from Anthropic, Docusign, and Stripe, helped drive the first improvement in CBD vacancy in six years.

Downtown Vancouver continues to stand out on fundamentals with vacancy just over 12%, the tightest in our portfolio, with positive net absorption both for the quarter and year to date. Regarding studios, our prime location studios continue to outperform as the production landscape remains mixed. New York show counts improved and Los Angeles was relatively stable as California's production pipeline continues to work through a meaningful backlog of tax credit approval projects not yet in production. Importantly, with SAG-AFTRA, WGA, and DGA all ratifying new four-year AMPTP agreements, the labor risk that drove much of the industry's recent volatility is now off the table. Our strategy remains unchanged. Restructure Quixote while optimizing performance at our best-in-class assets.

Finally, turning to dispositions, we continue to make good progress against our $200 million target, having sold 2001 Gateway after quarter end, with three additional Bay Area office assets currently in contract or negotiation, alongside our 10950 Washington residential development site. Buyer demand for Bay Area office assets has picked up meaningfully this year, allowing us to execute this program on our timeline and to redeploy capital toward our broader strategic priorities. Now, with that, I am going to turn it over to Mark, who is going to talk about leasing and operations.

Thanks, Victor. As you noted, we signed 1.3 million sq ft of office leases in the quarter, 61% new and 39% renewal. On top of the City and County of San Francisco lease for 891,000 sq ft, we executed an additional 402,000 sq ft of leases, 71% of which were new and 29% renewal. Our occupancy increased 470 basis points sequentially to 82.5%, and our lease rate climbed 440 basis points sequentially to 82.8%.

Our portfolio occupancy and lease percentages improved everywhere except the already strong Palo Alto and Vancouver submarkets, both of which ended the quarter effectively 94% leased. Rent spreads grew 17.2% on a GAAP basis and decreased 11.4% on a cash basis. Excluding the city and county lease, GAAP rents were off 3.3% and cash rents were down 9.9%, due primarily to mid-size deals in Palo Alto rolling off of pre-pandemic peak market rents. However, these rents are still quite healthy and north of $80 per square foot. Net effective rents strengthened this quarter, rising 22% sequentially and 9% year-over-year, benefiting significantly from the city and county lease. Trailing 12-month net effective rents were up 7% sequentially and 1% year-over-year. Tours rose nearly 20% year-over-year.

Even with strong second quarter leasing, we reloaded the pipeline to 2.4 million square feet, nearly 70% new leases with an average requirement size north of 20,000 square feet. Excluding 2001 Gateway, which we sold earlier in the third quarter, and 875 Howard, where we now have line of sight on a potential sale, we have just over 50% coverage on approximately 400,000 square feet of leases set to expire through the remainder of the year. This includes 80% coverage on the PayPal lease at Fourth and Traction. At Washington 1000, we now have coverage for approximately 65% of the building, up from 60% last quarter, with active negotiations across nine tenants, including requirements of up to 125,000 square feet. We're seeing strong traction on our newly delivered move-in-ready suites, with eight tenants in the last 30 days touring or scheduling tours.

Tour activity building wide has also increased, driven primarily by new to market tech, AI, and professional services firms. Turning to studios, we continue to see strong interest from leading showrunners and major studios for our prime production space. Our in-service stages were 74.6% leased during the second quarter, up 180 basis points sequentially, driven by an improved lease rate at Sunset Pier 94, up 40 percentage points to 78.5%. Our Hollywood stages, inclusive of Sunset Las Palmas, remain well leased at 95.5%. As part of our Quixote restructuring, we have designated as non-core with plans to exit its leased soundstage facilities and Atlanta area operations, as well as Quixote's pro supplies and stage ancillary businesses, including lighting and grip.

Going forward, we will speak to our studio NOI on a core basis, which in the second quarter reflects Sunset Studios and Quixote's fleet operations in Los Angeles and New York. Core studio NOI was up $3.1 million sequentially and $7 million year-over-year to $4.6 million, with HPP share turning positive for the first time in two years at $2.2 million. Putting a finer point on the Quixote restructuring to date, Quixote generated negative cash NOI of $18.6 million in 2024. Since then, our restructuring efforts have improved annualized run rate cash NOI by approximately $14.3 million, bringing the fleet business to just over $4 million of negative annualized cash NOI at current demand levels, closing roughly three quarters of the gap to our break even objective.

Turning to value creation optionality across the portfolio, we continue to make progress on our re-entitlement and adaptive reuse, an area where our team's expertise is a real differentiator. At 901 Market in San Francisco, we filed our office for residential re-entitlement application, with entitlements expected before year-end. We're also advancing construction drawings in parallel so we can quickly move once approved. Essentially the same playbook we're running at 10950 Washington. We also recently amended the CC&Rs at Metro Center in Foster City and across our Redwood Shores assets to permit residential use, giving us the flexibility to explore residential and mixed-use development. This isn't a reaction to soft leasing demand, as we're seeing healthy interest in these locations. Rather, a proactive step to unlock value by tapping into strong residential demand, independent of where the office leasing cycle stands.