Art and Science in Picking High Yield Bonds

Hudson Pacific Properties bonds offered an asymmetric credit opportunity because the market was overstating the risk of San Francisco offices and the company’s studio exposure while underestimating an AI-led leasing recovery.

• San Francisco had the highest office vacancy among major U.S. cities, at 36%, but Hudson Pacific’s portfolio was concentrated in Silicon Valley and San Francisco, which represented 42.1% and 22.4% of Q2 2026 net operating income.
• Purpose began buying the HPP 4.65% bonds due April 1, 2029 in the first half of 2025 at prices of $73.50 to $80.75, equivalent to yields of 10.5% to 13.5%; the bonds traded around $94 at publication.
• Hudson Pacific reached 82.5% office occupancy in Q2 2026 after four consecutive quarterly gains and signed 1.3 million square feet of leases, including multi-year leases with the City and County of San Francisco.
• San Francisco office vacancy fell to 29.2% in Q2 2026 from 36.9% in Q3 2024, while Kidder Mathews estimated CBD office cap rates at 7.34% and CBRE put stabilized Class A cap rates at 8% to 9.5%.
• After excluding the Sunset Pier 94 Studios and BXHPP joint ventures, Purpose estimates a 13% cap rate implied by the bonds versus roughly 7% for the office assets, arguing that the studio exposure could be left behind at limited equity cost.

Takeaway: The thesis is that improving AI-driven demand, falling vacancy and a mispriced non-recourse studio risk should support both Hudson Pacific’s asset value and its bonds, although the recovery remains concentrated in the best buildings and future outcomes are uncertain.