Famed investor Michael Burry, renowned for his prescient bet against the U.S. housing market prior to the 2008 financial crisis, has made a strategic move in Q2 2024 by initiating a new position in Hudson Pacific Properties Inc (NYSE: HPP).
According to the 13F filing submitted by his firm, Scion Asset Management, on August 14, 2024, Burry’s fund acquired 1.14 million shares of Hudson Pacific, reflecting his interest in this beaten-down real estate investment trust (REIT).
The acquisition is notable, especially as Hudson Pacific’s stock has plummeted 51% year-to-date, mirroring the broader struggles in the office REIT sector, particularly in its key markets on the West Coast.
In addition to his move on Hudson Pacific, Burry also made notable adjustments to Scion’s portfolio. He completely exited positions in several stocks, including Safe Bulkers, Star Bulk Carriers, and BP Plc.
On the flip side, he added new stakes in Olaplex Holdings, Molina Healthcare, and BioAtla, while increasing his holdings in Chinese tech giants Baidu and Alibaba.
Interestingly, Alibaba has now overtaken JD.com as Scion’s top holding, highlighting Burry’s continued confidence in China’s economic prospects despite the current market volatility.
Hudson Pacific’s Q2 2024 performance: A mixed bag
Hudson Pacific reported its Q2 2024 financial results on August 7, which were a mixed bag, reflecting the ongoing challenges faced by the company. Hudson reported Funds From Operations (FFO) of $0.17 per share, in line with analyst expectations, while revenue came in at $218 million, slightly beating estimates by $1.17 million.
However, the year-over-year comparison reveals a more concerning picture. Revenue declined by 11.1% from the same quarter last year, primarily due to asset sales and the loss of key tenants at significant properties.
The company’s net loss attributable to common stockholders widened to $47 million, or $0.33 per share, compared to a loss of $36.2 million, or $0.26 per share, in Q2 2023. This deterioration was largely driven by decreased revenue, despite efforts to reduce depreciation and interest expenses.
Furthermore, Hudson Pacific’s adjusted FFO (AFFO) also fell to $0.17 per share from $0.22 per share in the previous year, underlining the operational headwinds the company faces.
Wall Street’s downgrade
The response from Wall Street has been largely negative. On August 8, Piper Sandler downgraded Hudson Pacific from “Overweight” to “Neutral,” citing the company’s concentration in the Los Angeles area, where the office and studio markets have been particularly hard-hit.
Analyst Alexander Goldfarb noted that while there is some hope for improvement in late 2024, the timing and extent of a recovery remain uncertain.
Similarly, Wolfe Research downgraded Hudson Pacific to “Peer Perform” on August 14, aligning with Goldman Sachs’ decision to cut its price target on the stock from $6.50 to $4.70 while maintaining a “Neutral” rating.
BMO Capital Markets also revised its outlook on Hudson Pacific, downgrading the stock to “Market Perform” and lowering its price target to $6.00 from $8.00.
The downgrade was driven by Hudson Pacific’s weaker-than-expected Q3 FFO guidance, which was 55% below BMO’s estimates. The firm cited ongoing challenges in the office leasing market, declining occupancy rates, and a lack of visibility in the studio business as key reasons for the downgrade.
Fundamental weaknesses emerge
Fundamentally, Hudson Pacific is grappling with significant challenges. The company’s same-store cash net operating income (NOI) declined by 11.8% year-over-year, primarily due to the loss of major tenants at its 1455 Market and Sunset Las Palmas Studios properties.
The office portfolio’s occupancy rate dropped to 78.7% by the end of Q2, down from 79.0% in the previous quarter and 85.2% a year ago. The decline in occupancy is a critical concern, as it directly impacts the company’s ability to generate stable rental income.
As of June 30, 2024, the company had $706.5 million in total liquidity, including $78.5 million in cash and $628 million in undrawn capacity under its revolving credit facility.
However, with no debt maturities until the end of 2025, the company might face significant refinancing risks in the coming years, particularly as it approaches $1.5 billion in debt maturities in 2025 and 2026.
Driving growth in a challenging environment
Hudson Pacific’s growth strategy hinges on its ability to navigate the ongoing challenges in the office and studio markets. The company is focusing on leasing execution, with over 500,000 square feet of office leases signed in Q2 2024.
Notable deals include a 157,000-square-foot lease with the City and County of San Francisco and a 48,000-square-foot renewal lease with a financial services company at the Ferry Building.
Despite these efforts, the company has revised its full-year FFO outlook downward, now expecting FFO of $0.08 to $0.12 per diluted share in Q3 2024, compared to the consensus estimate of $0.23.
This revision reflects the ongoing challenges in the office market and the slower-than-anticipated recovery in the studio segment.
Additionally, the company’s same-store cash NOI growth assumptions have been adjusted downward, highlighting the difficulty in maintaining and growing its income stream.
Valuation concerns
From a valuation perspective, Hudson Pacific’s stock appears cheap on the surface, with shares trading at a significant discount to their historical averages.
However, this discount reflects the market’s skepticism about the company’s ability to navigate the challenges it faces. The company’s price-to-FFO ratio has compressed significantly, and while this may attract value investors, the risks associated with the company’s operational and financial outlook cannot be ignored.
Risks
The broader office REIT sector has been under pressure due to the shift towards remote work and the resulting increase in office vacancies. The company’s reliance on the tech and media sectors, which have been slow to return to the office, further complicates its recovery prospects.
As Hudson Pacific navigates these challenges, investors must weigh the potential rewards against the risks. Michael Burry’s decision to take a new position in the stock may signal his belief in the company’s long-term prospects, but it also underscores the high level of risk involved.
The company’s fundamentals remain weak, with declining occupancy rates, reduced FFO, and significant refinancing risks on the horizon. Given these factors, it is essential to approach Hudson Pacific with caution.
Now, let’s see what the charts have to say about the stock’s price trajectory, as technical analysis could offer additional insights into whether this stock is poised for a turnaround or further decline.
Trading near support
Hudson Pacific’s stock dropped 85% between April 2022 and June 2023. Though the stock managed to bounce back from $4 levels to almost $10 last year, it has given most of those gains this year as it trades around $4.50.
HPP chart by TradingView
Despite the weakness on the long-term charts, Hudson Pacific’s stock has taken support near $4.20 multiple times over the past year, which suggests strong buyer activity near that level. Hence investors who like Dr. Burry are bullish on the stock have a low-risk entry on their hands now.
They can initiate long positions near $4.50 with a stop-loss at $4.15. If the REIT does manage a turnaround or the economic environment improves it will result in bullish momentum emerging which can again take the stock near $10.
Traders who continue to remain bearish on the stock must not initiate any fresh short positions at current levels as the stock is trading very close to its medium-term support. Short positions must only be considered if the stock gives a daily closing below $4.20.
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