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Hollywood's Slow Return Weighs On Hudson Pacific Properties

Two years after its acquisition, studio production services company Quixote Studios is weighing on the balance sheet of its new owner, Hudson Pacific Properties. 

Hudson Pacific said in its first-quarter earnings call Friday that it is still feeling the burn from last year's Hollywood work stoppage, particularly as it relates to Quixote.

“Quixote isn't performing quite to our expectations when we guided back in February,” Hudson Pacific Properties President Mark Lammas said during the call. “We're not quite getting the lift that we had hoped either from show counts or other metrics that weigh on the Quixote business, and so it's showing up in second-quarter results.” 

Hudson Pacific Properties' headquarters in Los Angles

Quixote Studios, which HPP acquired in 2022, isn’t hitting the numbers that executives expected in part because productions are not fully recovered to 2022 levels, according to Lammas. Uncertainty continues to cloud the near future of the studio sector as another round of labor negotiations is ongoing

Most of Hudson Pacific’s studio business is in Los Angeles. For the first three months of this year, FilmLA reported a nearly 9% year-over-year drop in shoot days, a metric used to measure the number of days a film crew works in a given period.

Quixote provides production services, such as equipment and studio rentals, trailers and transportation, and also has soundstage space. Its services are more vulnerable to stops and starts in production, unlike soundstages, where tenants are on the hook for rent even if there are production disruptions. 

Across its studio portfolio, in-service HPP assets were 76.9% leased in Q1, earnings show. Last year at this time, they were 86.3% leased. Quarter-over-quarter, revenue from the studios increased 36% “with Quixote driving the bulk of that recovery,” but revenue is still about 30% lower than before the strikes, Lammas said. 

Hudson Pacific posted a net loss attributable to common stockholders of approximately $52.2M, falling further from the $20.4M loss it posted in the first three months of 2023. 

In lieu of full-year guidance, HPP said it was providing a funds from operation outlook for the second quarter of 15 cents to 19 cents per diluted share. First-quarter FFO this year was 15 cents per share, earnings show.

Hudson Pacific executives stopped short of saying they were withdrawing their outlook, instead saying they were “adjusting” it and “not reiterating” it. 

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Last May, Hudson Pacific withdrew its outlook for the full year and cut its dividend, the result of the writers' strike that was ongoing at the time. 

Elsewhere in the studio portfolio, there was some good news, including “promising activity” on most of HPP’s vacant stages and locking down the first lease for the under-construction Sunset Glenoaks studio complex, which is nearly complete. 

Yet, in response to this year’s first quarter studio troubles, chairman and CEO Victor Coleman told analysts that the company was “looking at all different options right now and exploring alternatives” for its lagging studio business.

Those alternatives included “some larger moves, whether it is a spin-off, whether it is a roll-up. We are evaluating all of that, and we're in conversations on that, and I think that will be the strategy for us going forward.”

Studios represent roughly 20% of Hudson Pacific’s business, with office making up the remaining 80%. Both wings of the business saw revenues dip. HPP saw a 15% decrease in revenue from its office portfolio, dropping from $206.6M in Q1 2023 to $175M in the first three months of 2024. It also saw a 14.7% decrease in studio revenue, which dropped to $38.9M in Q1 from $45.6M in Q1 2023. 

On the office side, HPP signed over 500K SF of leases in the first quarter. However, it's still not leasing space like it used to. 80.5% of its office space is leased, a drop from 88.7% at the same time last year. 

HPP is exploring the sale of three office properties totaling 900K SF. Two of them are off-market and one is already under contract, Coleman said. The company alluded to large move-outs on the horizon and already had two larger tenants vacate space at Sunset Las Palmas Studios and in San Francisco that pushed their same-store net operating income down to $108.3M, a drop from $124.4M in Q1 2023. 

Funds from operation for the company were $22M, or $0.15 per diluted share, in the first quarter — down from $48.5M, or $0.34 per diluted share, in the first quarter of 2023.