Hudson Pacific Suspends Its Dividend: What's Going On?

One of the most distressing updates for an income investor is learning that a stock in their portfolio has suspended its dividend payouts. A dividend cut is bad enough and sometimes takes a stock down a few points. But a dividend suspension initiates a flurry of selling, and a stock can lose a substantial portion of its value in a hurry.

Usually, a stock that suspends its dividend has been declining for some time before the announcement is made. The yield may be so high that investors and pundits begin to suspect it's a yield trap, and analysts may be downgrading the stock as well.

But this was not the case recently. Take a look at one real estate investment trust (REIT) that had risen 86% in less than four months, reaped the benefits of a recent analyst upgrade, earned a great profit on some asset sales, but just shocked the market with the suspension of its September dividend.

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Hudson Pacific Properties Inc. HPP is a Los Angeles-based office REIT with 47 office properties and six studio properties with an emphasis on centers of innovation for media and tech companies in California, Washington and Vancouver, British Columbia.

Hudson Pacific Properties was founded in 2006 by Chairman and CEO Victor Coleman. Soon after its creation, it began purchasing motion picture studios and office buildings on the West Coast. Hudson Pacific Properties went public in 2010 and recently had a market cap of $1.04 billion.  

Office REITs as a subsector were weak last spring, and Hudson Pacific was one of the worst-performing of all REITs, as the stock tumbled from $11.50 in February to an intraday low of $3.97 by May. But shares began to rebound thereafter, rising 86% over the last four months to a recent close of $7.40.

In addition to the market's bearishness on office REITs, Hudson Pacific lost about 20% of its value within a week after the Hollywood strike of actors and writers was announced on May 2. But talk of a strike had preceded the actual announcement for several weeks.

Second-quarter operating results, announced on Aug. 1, were mixed. While funds from operations (FFO) of $0.24 was a big decline from $0.51 in the second quarter of 2022, Hudson Pacific's revenue of $245.17 million beat the consensus estimates of $237.63 million. After a one-day decline, the stock began moving higher again.

The August-September news was positive, and Hudson Pacific was one of the best-performing REITs in both July and August. Hudson Pacific led all REITs with a 38% gain in July and added on another 16% in August.

On Aug. 25, Hudson Pacific announced it had sold two Los Angeles office properties for $72.5 million and would have a realized gain of $22 million for the third quarter.

On Sept. 5, Piper Sandler analyst Alexander Goldfarb upgraded Hudson Pacific Properties from Neutral to Overweight and raised the price target by 50% from $6 to $9. The analyst called Hudson Pacific "too cheap to ignore" and said when the Hollywood strike is resolved, Hudson Properties will see a rebound in net operating income from its studios.

But after the closing bell on Sept. 7, Hudson Properties stunned Wall Street by announcing it would suspend its quarterly dividend of $0.125, commencing with the third quarter dividend that was slated to be paid this month. At the same time, the board declared a dividend on its 4.75% Series C Cumulative preferred stock of $0.296875 per share, payable on Sept. 29 to preferred stockholders of record on Sept. 19.

"As we manage through current market conditions, including addressing the impact of the ongoing Hollywood strike, the board believes that suspending our common stock dividend is a prudent decision," CEO Coleman said. 

It was also announced that the board will continue to monitor the company's financial performance and operating environment to determine when it's appropriate to reinstate a regular quarterly common dividend.

The quarterly dividend was cut this past spring from $0.25 to $0.125 per share after the dividend yield reached more than 20%. That was understandable, and there had been no previous cuts over the last five years. 

It's been a tough year, and Hudson Properties has certainly acted aggressively to defend itself against the headwinds of a decline in West Coast office space and more recently a Hollywood strike that threatens the income from its studios and other Hollywood-related assets. The sale of its two L.A. offices should also help it with upcoming debt maturities. But the suspension of its dividend indicates the board's concern that this won't be enough. The strike now drags on into its fourth month, with no signs of a resolution coming.

Shares of Hudson Pacific Properties dropped over 7% the morning following the announcement as investors tried to assess whether the dividend suspension would ultimately serve a higher purpose in keeping the REIT solvent. But for income investors who are holding shares of Hudson Pacific, it's probably a good time to look for other opportunities.

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