Hudson Pacific is effusive about Blackstone deal, defensive about office space
REIT reports $3.7M in net income in Q2; CEO touts pending sale of 49% of soundstage portfolio to investment giant
Hudson Pacific Properties reported a dip in second quarter net income, attributing it to retail tenants that deferred their rent payments because of the coronavirus.
But taking into account the massive impact the pandemic has had on retail and office landlords, the real estate investment trust’s net income of $3.7 million and revenue of $199 million in Q2, was not a sharp fall off from the same period last year, when it reported $9.8 million in profits on $197 million in revenue.
The modest change in earnings belies a company going through a major transition. The Los Angeles-based office, retail and studio landlord is set to receive a major injection of capital from Blackstone Group, but it also faces questions about its office leases as Google and other tenants tell employees to work from home.
Blackstone is planning to buy a 49 percent stake in HPP’s Hollywood office and soundstage properties for film production, a portfolio valued at $1.65 billion and largely leased to Netflix. HPP owns three studio lots and 36 sound stages totaling 1.2 million square feet of space across 41 acres, as well as 900,000 square feet of adjoining office space.
HPP executives said during the earnings call Thursday that the Blackstone deal was “imminent” and that proceeds from the deal would more than double Hudson Pacific’s liquidity — from $1.1 billion to $2.4 billion.
Company CEO Victor Coleman said Blackstone’s blockbuster buy-in “provides validation to the stock market” for HPP’s decision to “assemble the largest collection of independent soundstages in the United States.”
The company now has “ample liquidity,” Coleman said, “to enhance business with Blackstone” and also entertain stock buybacks.
The company’s lease signings have fallen since the third quarter in 2019, when it inked 550,000 square feet of leases. The fourth quarter saw that number decline to 435,000 square feet, then nearly 235,000 square feet in Q1 2020 and just 110,000 square feet of lease in the most recent quarter, when office leasing nosedived in L.A.
On the call, Coleman discussed possible acquisitions, including buying out Macerich’s 25 percent share of One Westside Pavilion, the $475 million office project pre-leased to Google, a move also floated in an October earnings call.
“The intent is eventually to hold 100 percent of the asset,” Coleman said, adding that given Macerich’s “capital needs” — the Santa Monica-based retail REIT has been hammered by a drop in rent payments — HPP “will make this transaction.”
So far, HPP has maintained its rent collection rate. The REIT reported that it had collected 97.3 percent of rent payments during the second quarter, only slightly down from previous quarters.
But HPP faces its own vulnerabilities, including studio production sidelined amid the pandemic, which has led to uncertainty about soundstage leases.
HPP president Mark Lammas characterized the lack of content production as a dispute between producers and actor-and-writer unions over coronavirus testing.
Despite a rising number of Covid-19 cases in L.A. County, Lammas said he anticipated production would begin as soon as next month, and would ramp up in the fourth quarter.
“Content producers are under significant pressure” to provide streaming subscribers new material, Lammas said.
And as with many office landlords, HPP faces an existential question about demand.
Coleman said that despite Google’s policy that its employees can work remotely until at least July 2021, the tech giant has not wavered in its agreement to lease roughly 300,000 square feet of office space at One Westside Pavilion.
“Our construction continues unabated,” Coleman said about the redevelopment project.
He seized on a Wall Street Journal article from last week, whose headline said that companies were beginning to question benefits of working from home.
He said it highlights a “lack of mentorship” and “impaired efficiency” that accompanies a remote work environment.