Hudson Pacific Properties, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with Q3 and the first nine months of 2020. Hudson Pacific is a REIT focused on office and studio properties. Unless noted, financial amounts below are in millions of dollars.
Business context
At quarter-end, the portfolio comprised 65 consolidated and unconsolidated properties totaling approximately 20.0 million square feet. The in-service office portfolio was 91.2% leased; same-store studios averaged 87.6% leased for the trailing 12 months. The company owns and operates substantially through Hudson Pacific Properties, L.P.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $227.6 | $196.3 | $656.4 | $601.1 |
| Net income (loss), consolidated | $(6.2) | $(1.4) | $12.3 | $19.6 |
| Net income (loss) attributable to common stockholders | $(9.3) | $(5.4) | $(2.0) | $8.9 |
| Basic and diluted EPS | $(0.06) | $(0.04) | $(0.01) | $0.06 |
| Segment NOI | $143.7 | $121.2 | $412.9 | $378.9 |
| FFO attributable to common stockholders and unitholders | $69.1 | $63.2 | $214.7 | $221.6 |
Q3 segment NOI was 63.1% of revenue, compared with 61.7% a year earlier; nine-month NOI was 62.9% of revenue versus 63.0%. These are simple calculations from reported segment NOI and revenue, not GAAP margins. The filing cautions that NOI and FFO are non-GAAP supplemental measures.
- Cash flow: Nine-month operating cash flow was $285.5, up from $247.9. Investing used $560.6, versus $305.2 used in 2020; financing provided $345.8, versus $403.3. Cash and cash equivalents were $110.5 at September 30; restricted cash was another $109.7.
- Debt: Unsecured and secured debt, net, was $3,910.4, up from $3,399.5 at year-end 2020. Including in-substance defeased debt and joint-venture partner debt, reported debt balances totaled about $4,105.6. Debt to total market capitalization was 49.1%. Management reported compliance with financial covenants.
- Liquidity: The $600.0 revolving facility had $300.0 drawn, leaving $300.0 of capacity. The One Westside construction loan had $414.6 of capacity, with $220.2 drawn. The company also cited operating cash flow, equity issuance, joint-venture proceeds and additional financing as liquidity sources.
- Distributions: Common dividends were $0.25 per share for Q3 and $0.75 per share for the first nine months, unchanged from the comparable 2020 periods.
Material changes versus prior periods
- Q3 revenue increased 16.0%, and segment NOI increased 18.6%. Nine-month revenue rose 9.2% and segment NOI 8.9%.
- Growth reflected the 1918 Eighth property and new leases, studio service activity, and the August acquisitions of Zio Entertainment Network and Star Waggons. Same-store office occupancy declined from 93.4% to 90.3% on a Q3 average basis; same-store studio occupancy declined from 91.1% to 87.6% on the reported trailing-year basis.
- Common-stockholder results weakened year over year for the nine-month period, shifting from $8.9 income to a $2.0 loss. Higher depreciation and interest, acquisition-related expenses, debt-extinguishment costs and impairment contributed; a $11.6 unrealized investment gain partly offset these items.
- Cash investing outflow increased, including $209.9 of cash consideration for the two service-business acquisitions and $73.1 of contributions to unconsolidated real estate entities. The company also raised $45.0 net from ATM share sales.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific earnings, FFO or occupancy guidance. Management said the board would continue to evaluate dividend policy in light of pandemic uncertainty.
- COVID-19: Management reported no significant Q3 operating disruptions and increased physical occupancy as the economy reopened, but highlighted uncertainty around return-to-office trends, leasing demand, rent collection and future pandemic effects.
- Acquisitions: Zio and Star Waggons were acquired for stated consideration of $140.0 and $92.7, respectively. Zio includes up to $35.0 of additional performance-based consideration; its $22.8 preliminary fair value and the purchase accounting remain subject to change. Acquisition-related costs were $5.8 in Q3.
- Debt refinancing and impairment: The Hollywood Media Portfolio loan was refinanced from $900.0 at LIBOR + 2.15% to $1.1 billion at LIBOR + 1.17%; the transaction generated a $6.2 loss on extinguishment of debt. A $2.8 impairment was recorded on the Del Amo property after management shortened its expected hold period.
- Commitments and exposures: Outstanding construction obligations were $179.9. The company’s proportionate share of Bentall Centre joint-venture debt was approximately $102.7 and is guaranteed by the company. Legal claims were assessed by management as presenting remote risk of material loss.
- Other risks: Several borrowings and derivatives were LIBOR-linked; the company identified transition-to-SOFR uncertainty following the announced end of USD LIBOR publication after June 30, 2023. Foreign-currency exposure relates to Canadian and UK joint ventures. The 2023 debt maturity schedule includes approximately $1.27 billion of unsecured and secured principal before extension options.
Investor verification checklist
- Review same-store office leasing, occupancy, rent collections and lease expirations, particularly the 2022–2025 expiration schedule.
- Check the final purchase accounting, acquired-business performance and any Zio earnout payments against the provisional estimates.
- Assess refinancing and repayment plans for the 2022–2023 maturities, available borrowing capacity and covenant headroom.
- Track development spending and the $179.9 construction commitments, including One Westside’s schedule and leasing commencement.
- Evaluate dividend sustainability against operating cash flow, capital needs, debt service and management’s continuing COVID-related policy review.
- Consider the effect of variable rates and LIBOR transition, as well as the Bentall Centre guarantee and foreign-currency exposure.