Fitch Downgrades Hudson Pacific Properties' IDR to 'B+'; Outlook Stable

Published: 2025-06-23 06:46:14 ET HPP

Published on 06/23/2025 at 06:46

Fitch Ratings has downgraded Hudson Pacific Properties, Inc.'s (HPP) and Hudson Pacific Properties, L.P.'s Long-Term Issuer Default Ratings (IDRs) to 'B+' from 'BB-', and HPP's preferred stock rating to 'B-' with a Recovery Rating of 'RR6' from 'B/RR6'.

Fitch has also affirmed Hudson Pacific Properties, L.P.'s senior debt at 'BB-' and revised the recovery rating to 'RR3' from 'RR4'. The Rating Outlook is Stable.

The ratings reflect HPP operating well outside Fitch's leverage sensitivities in 2024, which is anticipated to persist into 2025. Fitch expects improvement in 2026, as lower lease expirations should be more than offset by leasing activity, helping stem the decline in office occupancy seen in recent years due to the pandemic's impact on office demand. The persistent lag from the 2023 writer's strike also appears likely to delay a near-term recovery in HPP's studio business until conditions improve in 2026.

Key Rating Drivers

Deterioration of Property Fundamentals: High lease expirations in 2023 and 2024 drove office portfolio occupancy down to 76.5% in 1Q25, from 78.9% in 4Q24 and 88.0% in 4Q22. Cash same store net operating income (SSNOI) fell by -12.8% in 2024 and is expected to fall by another -13% in 2025, due to lower average occupancy and rents. HPP envisions occupancy in the low 80% range by YE 2025 and mid-80% by YE 2026, supported by consistent leasing with fewer offsetting lease expirations. SSNOI growth should turn positive in 2026. Normalization in the studio business is also expected to contribute to improving results.

Heightened Pressure on Credit Metrics: Fitch expects weaker-than-historical REIT leverage, net debt/recurring operating EBITDA, fixed charge coverage (FCC) and unencumbered assets/unsecured debt (UA/UD), to limit HPP's financial flexibility and for the company to operate outside historical levels for the next few years. Fitch anticipates REIT leverage will remain considerably elevated in 2025 and above 8.0x throughout the forecast period. HPP's leverage has remained above 8x over the past three years (12.0x in 2024, 9.3x in 2023 and 8.5x in 2022). Management's target is a leverage policy of 7.5x-8.5x (including preferred) in a multi-year strategy.

We expect FCC to fall below 1x in 2025 due to elevated capex and lower EBITDA, before subsiding to 1.0x-1.5x from 2026 onward, driven by improving portfolio fundamentals in the office and studio businesses and somewhat lower capex requirements. HPP's FCC was 1.2x in 2024, 1.3x in 2023 and 2.2x in 2022. Additionally, net UA/UD, calculated as unencumbered property NOI divided by a stressed 8.75% capitalization rate, was 0.9x at 1Q25, down from 1.4x at 1Q24, and 1.8x at 1Q23; compared to the typical 2.0x threshold for investment-grade REITs.

Cash Flow Volatility: HPP's portfolio rental income may experience above-average volatility through the cycle due to concentration risk and its studio business's nature. The portfolio is principally located in three West Coast metros, highly exposed to technology and new media companies, which are historically more cyclically sensitive than other industries like legal, defense and government. Although the tech sector might show increased relative resilience, demand for office space could decline due to potential shifts towards flexible working arrangements.

High-Quality, but Concentrated Portfolio: HPP owns class A office properties in the San Francisco (62% of in-service office portfolio annualized base rent [ABR]), Los Angeles (19%), Seattle (12%) and Vancouver (7%) metros. These cities are key technology and new-media hubs, with strong office demand demographics, employment and population growth, high household incomes and education rates. Fitch believes that most of HPP's assets are top-tier or in high quality locations. Additionally, 40% of HPP's ABR comes from investment grade tenants or parent-entities. HPP's markets also benefit from high political and physical barriers to new supply.

Historical Solid Capital Markets Access: HPP completed its inaugural public unsecured bond issuance in 2017 with a $400 million, 10-year issuance of senior unsecured notes, followed by two public bond offerings in 2019 and a green unsecured bond issuance in 2022. HPP previously demonstrated access to unsecured bank term-loan and private placement notes. Fitch expects HPP to maintain unsecured debt capital access, though recently, it has secured financing on five properties to pay down upcoming, unsecured debt maturities to fortify near-term liquidity. Additionally, in June 2025, HPP executed a $600 million equity offering.

Value-Add Strategy Risk: HPP's external growth strategy focuses on acquiring and stabilizing office assets via lease-up and property development. We view the risk/reward of its value-add acquisitions as between core investments and ground-up development. However, HPP completed only one acquisition last year, emphasizing asset dispositions with $122 million in sales since early 2024 with an additional $100 million-$125 million expected in 2025. As of March 31, 2025, HPP had one consolidated development property in the pipeline, with a fully funded $350 million investment, expected to generate NOI in 2H26.

Peer Analysis

HPP's ratings are supported by its high-quality portfolio, with strong market positions in West Coast CBD office markets with high political and geographic supply barriers. The company's portfolio is less seasoned and has higher tenant industry concentration risk than office REIT peers, SL Green Realty Corp. (BB+/Stable) and Vornado Realty Trust (BB+/Stable).

HPP's investment strategy entails moderate execution risk, emphasizing value-add acquisitions and moderate development. In the last few years, results have strayed from historical financial policy levels due to decreasing portfolio occupancy and negative impact of the 2023 writer's strike on its studio business. Historically, HPP has accessed unsecured debt markets via private placements and public bonds.

The two-notch differential between HPP's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'B+' IDR. Based on 'Fitch's Corporate Hybrids Treatment and Notching Criteria,' these preferred securities are deeply subordinated and have loss-absorption elements that would likely result in poor recoveries in the event of a corporate default.

Fitch rates the IDRs of the parent REIT, HPP, and subsidiary operating partnership, Hudson Pacific Properties, L.P., on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors. This is based on the entities operating as a single enterprise with strong legal and operational ties.

Key Assumptions

SSNOI to decline -13% in 2025, as occupancy is expected to trough in 2Q25 before improving by YE 2025. We then project positive low-to-mid-single digit SSNOI growth in 2026-2027, as leasing initiatives continue against a backdrop of fewer lease expirations and as development projects deliver;

HPP pays off $465 million of private placement notes in 2025 and refinances other existing secured debt;

The studio business generates around $4 million NOI in 2025, given lagged recovery from the 2023 writer's strike, ramping up towards the 2022 NOI level by 2027.

Recovery Analysis

Fitch's recovery analysis uses a direct capitalization approach for HPP typically used for REITs. We implement a stressed EBITDA for Hudson Pacific based on Fitch's Stress case 2026 EBITDA to assume a going-concern EBITDA, to which we apply a 10% administrative claim. We separate the estimated EBITDA from secured assets to calculate their overall derived value. At the midpoint 8.75% stressed cap rate level, this results in 63% recovery of the mortgage value; therefore, there is no residual value from the mortgaged assets to apply to the the unsecured notes recovery.

However, we estimate approximately $109 million of going-concern EBITDA would be generated from the assets that are unencumbered. At the 8.75% stress cap rate level, this generates 68% recovery on the $1.65 million of unsecured debt outstanding as of March 31, 2025 pro forma for the payoff of the series B, C, D notes in May 2025 through use of the credit facility, which in turn will be paid off with proceeds from the public equity offering in June 2025. This translates to a 'RR3' (+1 notching) recovery, and would result in a 'BB-' rating on the unsecured debt.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Fitch's expectation of REIT leverage remaining above 10.0x;

Persistently lower demand for office space and/or the studio business exhibited through lower leasing activity;

An unusually strong regional economic or tech industry downturn in HPP's west coast markets;

Fitch's expectation of REIT FCC remaining below 1.2x.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch's expectation of REIT leverage (net debt/recurring operating EBITDA) being sustained below 9.0x;

HPP demonstrating its financial policy commitments through a cycle or improving tenant diversification;

Strong recovery in NOI studio business back towards pre-writer's strike expectations;

Fitch's expectation of REIT FCC being sustained above 1.5x;

The Outlook could be revised to Stable through tangible progress of occupancy returning to above 85%.

Liquidity and Debt Structure

HPP has a sufficient liquidity position. The company's sources cover uses by 1.7x, based on our base-case liquidity analysis for the April 1, 2025 to Dec. 31, 2026 forecast period, which incorporates HPP's projected development and capex. Of the company's remaining 2025 debt maturities as of April 1, 2025, HPP's $259 million series B notes were paid off in May 2025 as were the $150 million series D notes due 2026 and the $56 million series C notes due 2027.

The company has one remaining mortgage loan (1918 Eighth) representing $314 million (although HPP has a 45% partner on the asset). We estimate that committed, unfunded development expenditure and recurring and non-routine leasing and maintenance capex represent the other anticipated uses of capital through 2026, at roughly $297 million combined.

Issuer Profile

Hudson Pacific Properties, Inc. (NYSE: HPP), a fully integrated real estate investment trust, owns, acquires and (re)develops a high-quality portfolio of office and media and entertainment properties in high-growth, high-barrier-to-entry submarkets throughout Northern and Southern California and the Pacific Northwest.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.