We came across a bearish thesis on Hudson Pacific Properties, Inc. (HPP) on from Waterboy’s Substack by Waterboy Investing. In this article we will summarize the bulls’ thesis on HPP. Hudson Pacific Properties, Inc. (HPP) share was trading at $5.25 as of Sept 18th.
A prestigious office building, showcasing the diversified real estate portfolio.
Hudson Pacific Properties (HPP), an over-leveraged office REIT with a $643 million market cap, is struggling with several challenges, particularly its heavy exposure to the San Francisco Bay Area. HPP’s stock has plummeted from $25 in early 2022 to $4.74 today, yet the downside risk remains high due to valuation concerns, including a 6.2% implied cap rate and a meagre 4.2% dividend yield. The company’s portfolio consists primarily of Class A office properties, with key tenants in the technology sector, contributing significantly to its NOI. However, the “tech-exodus,” driven by the remote work revolution and high-profile layoffs, has devastated the Bay Area office market, pushing vacancy rates from 6% in 2019 to a record high of 36%.
HPP’s financial metrics paint a troubling picture. Its enterprise value is $5.9 billion, with investments in real estate valued at $6.6 billion across 51 properties. Despite prime locations, occupancy rates in the Bay Area have plummeted to 71.7%, and the company’s overall office portfolio is only 78.7% leased. Compounding these challenges, 33% of HPP’s annual base rent (ABR) is set to expire within the next two years, and management has struggled to meet leasing targets, exacerbating the risk of further declines in occupancy. Recent efforts to retain tenants have been largely unsuccessful, with over-promising and under-delivering becoming a recurring theme.
HPP’s debt situation is equally precarious, with $3.4 billion in total debt and a net debt-to-EBITDA ratio of 14.6x. The company faces significant maturities in the next two years, including $600 million due in late 2025. To alleviate these burdens, HPP has resorted to selling off assets, but given the state of the market, these sales have been at deeply discounted prices. For instance, a prime San Francisco property was recently sold for just $40 million, or $120 per square foot, a fraction of its pre-pandemic value.
Management, led by CEO Victor Coleman, has been criticized for poor capital allocation decisions, including a $255 million stock buyback at $25 per share in 2022, a move that destroyed shareholder value as market conditions worsened. The company’s lack of transparency has further raised concerns, with key operational metrics omitted from recent reports. With a looming debt crisis, significant lease expirations, and a deteriorating office market, HPP faces severe headwinds. Given the company’s current trajectory, a 30% downside risk to $3.25 per share is a reasonable short thesis.
Hudson Pacific Properties, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held HPP at the end of the second quarter which was 26 in the previous quarter. While we acknowledge the risk and potential of HPP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HPP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.