Hudson Pacific Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019. Amounts are in U.S. dollars. Financial statement amounts below are in millions unless otherwise stated.
Business context
Hudson Pacific is a REIT focused on office and studio properties, primarily on the U.S. West Coast and in Vancouver. At quarter-end, its consolidated and unconsolidated portfolio comprised 62 properties totaling approximately 18.8 million square feet. The in-service office portfolio was 94.8% leased; same-store studios averaged 92.4% leased over the prior 12 months.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $206.2 | $197.4 | +4.5% |
| GAAP net income (loss) | $13.9 | $(36.9) | Turned profitable |
| Net income (loss) attributable to common stockholders | $10.8; $0.07 per share | $(39.4); $(0.26) per share | Turned profitable |
| Net operating income (NOI) | $131.7 | $125.5 | +5.0% |
| Funds from operations (FFO) attributable to common stockholders and unitholders | $81.9 | $76.4 | +7.2% |
| Cash from operating activities | $90.1 | $89.4 | +0.7% |
| Cash used in investing activities | $(78.1) | $(128.3) | Lower outflow |
| Cash from financing activities | $333.9 | $36.7 | Higher inflow |
Office revenue increased 6.0%; studio revenue declined 8.0%, mainly due to lower studio service revenue. Same-store NOI rose 0.4%, while non-same-store NOI increased 51.7%, supported by newly commenced office leases. Studio NOI declined 12.2%. Operating expenses increased 3.6% across the segments. The prior-year comparison includes a $52.2 million impairment charge related to the Campus Center property; there was no impairment charge in Q1 2020.
Debt and liquidity
At March 31, 2020, cash and cash equivalents were $392.1 million ($404.1 million including restricted cash), compared with $46.2 million in cash at December 31, 2019. Unsecured and secured debt, net of financing costs, was $3.234 billion; principal before those costs was $3.260 billion. The company also reported $134.2 million of in-substance defeased debt and $66.1 million of joint-venture partner debt.
As a precautionary response to COVID-19, the company drew an additional $415.0 million on its $600 million unsecured revolver. At quarter-end, $110 million remained available on that facility, with stated additional availability of $230 million on the Sunset Bronson/ICON/CUE facility and $408.9 million on the One Westside construction loan. The filing reports compliance with debt covenants. Net debt to total consolidated market capitalization was 41.8% under the company’s stated calculation.
The company had $64.5 million of secured debt due August 2020; it reported no unsecured debt maturities until 2022. The board declared and paid a $0.25-per-share common dividend for the quarter. Management said the board would continue evaluating dividend policy in light of pandemic uncertainty.
Outlook, risks and unusual items
Management provided no quantified earnings or revenue guidance. It stated that the pandemic’s effects on rental revenue in Q2 2020 and later periods could not yet be determined. As of May 1, 2020, the company had executed $2.2 million of rent deferrals and $0.4 million of abatements, with another $1.3 million under discussion. Management cautioned that these early requests and collections may not predict subsequent periods.
Risks include tenants’ ability to pay rent, lease terminations or non-renewals, reduced studio ancillary revenue as production slows, lower demand or rents, financing access and delays to development or redevelopment. Construction timelines may be affected by COVID-19 restrictions. The company drew on its revolver to preserve liquidity and said it was managing costs, including reducing third-party services and seeking relief on ground leases.
Other notable items include $17.4 million of other comprehensive loss, primarily reflecting derivative and foreign-currency translation losses; a $581,000 unrealized loss on a non-real-estate investment; and a $0.2 million loss from the unconsolidated Bentall Centre venture. The company’s maximum exposure to that venture includes its investment and an $89.6 million debt guarantee. No material legal proceedings were reported.
Investor verification priorities
- Track rent collections, tenant relief requests, deferrals and abatements after May 1, 2020, especially as studio tenants’ production activity changes.
- Confirm the availability and terms of stated borrowing capacity, covenant headroom and the refinancing plan for the $64.5 million secured maturity in August 2020 and 2022 maturities.
- Assess the board’s subsequent dividend decisions and their implications for liquidity and REIT distribution requirements.
- Monitor leasing, occupancy and development schedules, including the fully leased One Westside project and potential pandemic-related construction delays.
- Review studio service revenue trends, same-store NOI, and the performance and debt guarantee exposure of the Bentall Centre joint venture.