Hudson Pacific Properties, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparison is primarily with FY2020. Hudson Pacific is a REIT that owns and operates office and studio properties, principally in California, the Pacific Northwest, Western Canada and Greater London.
Business context and portfolio
At year-end, the portfolio comprised 66 properties totaling approximately 20.2 million square feet, including 15.8 million square feet of office properties, 1.5 million square feet of studio properties and approximately 3.0 million square feet of estimated development rights. In-service office space was 92.8% leased, including leases not yet commenced, and 91.8% occupied. Same-store studio space averaged 85.7% leased for the year. Technology and media/entertainment tenants accounted for substantial portions of the portfolio; Google, Netflix and Amazon represented 20.2% of the company’s share of office annualized base rent.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $896.8 million | $805.0 million | +11.4% |
| Net income | $29.0 million | $16.4 million | +76.6% |
| Net income attributable to common stockholders | $6.1 million; $0.04 per share | $0.4 million; $0.00 per share | Increased |
| Net operating income (NOI; non-GAAP) | $561.0 million | $505.2 million | +11.0% |
| FFO to common stockholders and unitholders (non-GAAP) | $293.7 million | $283.6 million | +3.5% |
| Cash from operating activities | $314.9 million | $302.0 million | +4.2% |
Total revenues less property-level operating expenses imply an NOI margin of approximately 62.5% in FY2021 versus 62.8% in FY2020. This calculation uses the filing’s reported segment revenues and expenses and is not a GAAP margin measure.
Cash used in investing activities was $754.2 million, while financing activities provided $486.7 million. Year-end cash and cash equivalents were $96.6 million, with restricted cash of $100.3 million. Unsecured and secured debt was $3.765 billion before deferred financing costs; separately reported in-substance defeased debt was $128.2 million and joint-venture partner debt was $66.1 million. Debt to total market capitalization, counting Series A preferred units as debt, was 47.0%. The company reported compliance with financial covenants and credit ratings of Baa2 from Moody’s and BBB- from S&P and Fitch.
Material changes and notable items
- NOI growth was driven mainly by non-same-store properties and acquisitions; non-same-store NOI rose 96.2%, while same-store NOI increased 1.5%. Same-store office occupancy declined to 91.9% average from 94.7%; same-store studio occupancy declined to 85.7% from 90.0%.
- Office rental revenue increased, helped by 1918 Eighth, One Westside and Harlow. Studio service and other revenue rose materially, partly reflecting increased production services and the acquisitions of Zio and Star Waggons.
- The company acquired Zio and Star Waggons for aggregate consideration of $232.4 million, including contingent consideration, and acquired the 5th & Bell Seattle office property for approximately $118.9 million. It also invested in the Sunset Waltham Cross Studios development through a joint venture.
- FY2021 results included a $16.6 million unrealized gain on non-real-estate investments, $8.9 million in transaction-related expenses, a $6.3 million loss on extinguishment of debt and a $2.8 million impairment charge on Del Amo. These items affect comparison of net income across periods.
- The company issued $425 million of 4.750% Series C preferred stock, generating approximately $414 million in net proceeds before transaction expenses, and increased its unsecured revolving credit facility capacity to $1.0 billion, with maturity extended to December 2025 and two six-month extension options.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or FFO guidance. Management said the pandemic had not caused significant operating disruptions in FY2021 and that physical occupancy had begun to increase, but emphasized uncertainty around office return patterns, future leasing demand and the pandemic’s effects. Management stated that it would continue evaluating dividend policy while seeking to maintain REIT qualification.
Key risks include the concentrated geographic footprint (77.6% of consolidated and unconsolidated properties were in California), exposure to technology and media/entertainment tenants, lease renewals and vacancies, significant near-term lease expirations, development execution and capital needs, interest-rate exposure, refinancing and access to capital, and potential COVID-19 effects. Approximately 14.5% of the company’s share of office square footage was scheduled to expire in 2022; the filing also disclosed a tenant’s election to terminate its NFL Enterprises lease effective December 31, 2022. A 100-basis-point increase in one-month LIBOR was estimated to increase annual interest expense by $11.0 million after swaps. Four non-strategic properties were classified as held for sale. Management said ordinary-course legal matters were not expected to have a material adverse effect. The financial statements received an unqualified audit opinion; the auditor identified purchase-price accounting for Zio and Star Waggons as a critical audit matter. Internal-control assessments were effective, although the acquired businesses were excluded from the 2021 assessment.
Important facts for investors to verify
- Leasing and occupancy trends, particularly office renewals, the 2022 expiration schedule, and the NFL Enterprises termination.
- Whether acquisitions and studio-service growth translate into sustainable cash flow and FFO, apart from fair-value gains and other unusual items.
- Debt maturities, variable-rate exposure, hedge coverage, covenant headroom and available borrowing capacity after outstanding draws.
- Progress and funding needs for Sunset Glenoaks and other development or repositioning projects, along with the status and proceeds of the four properties held for sale.
- Dividend sustainability and the company’s ability to meet REIT distribution requirements while funding capital expenditures, leasing costs and debt service.