Strong Leasing Momentum and AI Expansion Fuel Growth Hudson Pacific Properties (NYSE:HPP) reported a robust leasing performance in Q4 2024, marking a significant rebound in office demand. CEO Victor Coleman revealed that leasing activity surged nearly 20% year-over-year, with over 2 million square feet of leases signed. Notably, AI companies accounted for 2.4 million square feet of leased space in the Bay Area, underscoring the sector’s expanding footprint. With $75 billion in venture funding flowing into AI during Q4, the company anticipates continued leasing strength in 2025.
Financial Performance: Balancing Growth and Cost Management CFO Harout Diramerian reported Q4 revenue of $209.7 million, slightly down from the prior year due to asset sales and a tenant move-out. Funds from operations (FFO), excluding specific items, stood at $15.5 million or $0.11 per diluted share. Cost-cutting efforts led to approximately $4 million in general and administrative (G&A) savings, reflecting the company’s disciplined financial management.
Despite these cost optimizations, same-store cash net operating income (NOI) fell to $94.2 million from $106.3 million in Q4 2023, driven by lower office occupancy. The quarter also included a goodwill impairment charge of $109.9 million tied to Quixote Studios, highlighting ongoing challenges in the studio segment.
Leasing Pipeline and Future Outlook President Mark Lammas emphasized that Q4 saw 442,000 square feet of office leases, with 60% being new deals. Encouragingly, net effective rents on new leases were up 18% year-over-year and only 6% below pre-pandemic levels. The company maintains a strong leasing pipeline, exceeding 2 million square feet, signaling potential growth in occupancy rates later in 2025.
Looking ahead, management provided Q1 2025 FFO guidance of $0.07 to $0.11 per diluted share, factoring in reduced studio NOI from wildfire impacts and lower office NOI due to expirations and asset sales. However, these factors are expected to be offset by further G&A savings.
For full-year 2025, Hudson Pacific expects same-store property cash NOI growth to range between negative 12.5% and 13.5%. Management remains optimistic about a demand uptick in the latter half of the year, particularly for Los Angeles studio properties, spurred by proposed state tax credits and improved production activity.
Analyst Sentiment: Cautious Optimism Prevails During the earnings call, analysts expressed measured optimism about the company’s leasing trajectory, particularly in tech-driven markets. Key insights from the Q&A session include:
- Tenant Pipeline and Lease Negotiations: EVP Art Suazo noted that the average deal size in the pipeline has grown to 16,000 square feet, indicating stronger demand. Late-stage deals totaling 770,000 square feet remain in play.
- AI and Tech Sector Impact: Citi analyst Michael Griffin inquired about AI-driven leasing momentum. Suazo emphasized that urgency among tenants has increased, with 800,000 square feet of deals in late-stage negotiations.
- Studio Business Concerns: Wells Fargo analyst Blaine Heck questioned the studio segment’s outlook. Lammas detailed ongoing cost reductions of $7.5 million annually, with further initiatives targeting an additional $5 million in NOI improvement.
Comparing Q3 vs. Q4: Increased Confidence in AI-Driven Growth Compared to Q3 2024, Hudson Pacific’s management displayed greater confidence in AI and tech-related leasing activity. While Q3 focused on broad market stabilization, Q4 discussions shifted toward H2 2025 occupancy gains. Leasing activity remained strong, albeit slightly lower than Q3’s 539,000 square feet. Analyst focus also evolved from general market conditions in Q3 to AI and tech growth in Q4.
Challenges and Risks: Navigating Studio Headwinds and Occupancy Concerns Despite the leasing momentum, management acknowledged headwinds in the studio segment. The slower-than-expected post-strike recovery and wildfire-related disruptions weighed on studio revenue. Additionally, tenant lease renewals and potential margin pressures from declining early 2025 occupancy remain risks. The availability of sublease space and tenant decision-making timelines could also impact growth.
Hudson Pacific’s strategic positioning, bolstered by AI-driven leasing demand and disciplined financial management, presents a compelling growth trajectory. As the company eyes occupancy improvements in H2 2025, investors and analysts will closely monitor execution on leasing, cost containment, and studio segment stabilization.
