Hudson Pacific Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Hudson Pacific is a REIT focused on office and studio properties, primarily on the U.S. West Coast and in Vancouver. Its portfolio included 62 consolidated and unconsolidated properties totaling approximately 18.8 million square feet. The unaudited statements are interim results and may not indicate full-year performance.
Financial performance and position
- Revenue: Q2 revenue was $198.6 million, up 1.0% from $196.7 million a year earlier. Six-month revenue was $404.8 million, up 2.7% from $394.0 million.
- Profit and earnings: Q2 net income attributable to common stockholders was $3.7 million, or $0.02 per diluted share, versus $9.8 million, or $0.06, in Q2 2019. Six-month common-stockholder income was $14.5 million, or $0.09 per diluted share, compared with a $29.6 million loss, or $0.19 per share, in 2019. The prior-year loss included a $52.2 million impairment charge.
- Property performance: Q2 NOI, a company-defined non-GAAP measure, was $126.0 million, essentially flat year over year. Same-store NOI fell 6.3% to $109.1 million, while non-same-store NOI rose 73.5% to $17.0 million. Six-month NOI increased 2.4% to $257.8 million, although same-store NOI declined 3.0%.
- FFO: FFO attributable to common stockholders and unitholders was $76.6 million in Q2, versus $75.5 million; for the first half it was $158.5 million, versus $151.9 million. FFO is non-GAAP and does not capture capital expenditures and leasing costs.
- Cash flow: First-half operating cash flow was $137.5 million, down from $145.7 million. Investing used $166.9 million, versus $270.0 million, and financing provided $28.0 million, versus $117.7 million. Cash and restricted cash totaled $56.9 million at June 30.
- Debt and liquidity: Unsecured and secured debt was $3.00 billion gross ($2.97 billion net of financing costs); in-substance defeased debt was $133.4 million and joint-venture partner debt was $66.1 million. The company reported $45.1 million cash, $400 million undrawn on its $600 million unsecured revolver, and additional availability under studio and One Westside facilities. It was compliant with debt covenants; net debt was 42.9% of consolidated market capitalization under the company’s stated calculation.
- Margins and occupancy: Office same-store occupancy averaged 94.2% in Q2, while year-end office leasing was 94.0% (including signed leases not yet commenced). Studio same-store occupancy averaged 92.7% over the 12 months ended June 30.
Material changes and unusual items
- Office rental revenue increased, including from leases commencing at newer properties; lower same-store office parking and other revenue and higher property expenses weighed on results. Studio revenue and NOI declined, primarily amid temporary COVID-related closures.
- Interest expense rose to $27.9 million in Q2 from $26.6 million and to $54.3 million for the first half from $50.9 million, reflecting debt issuance and borrowings. The company recorded a $2.3 million Q2 unrealized loss on non-real-estate investments, or $2.8 million for the first half.
- At June 30, the company had recorded a $50 million non-refundable deposit related to the Hollywood Media Portfolio joint venture. On July 30, Blackstone affiliates acquired a 49% interest at a stated gross portfolio valuation of $1.65 billion; the company retained 51%. The venture also closed a $900 million mortgage loan. Combined proceeds to the company from the interest sale and its share of financing were approximately $1.27 billion before closing adjustments and costs. Management expected to use about $780 million to repay revolver borrowings and Term Loans B and D, with the remainder available for investment, repurchases or general corporate purposes.
- The company repurchased $35.4 million of shares during the first half. Common dividends were $0.25 per share for Q2; management said the board would continue to evaluate dividend policy in light of pandemic uncertainty.
Outlook, risks and contingencies
- COVID-19: The company collected approximately 97.3% of Q2 contractual rents: 99.0% from office tenants, 100.0% from studio tenants and 48.7% from storefront retail tenants. As of July 27, it had collected 94.8% of July contractual rents. These rates exclude rents deferred or abated under COVID-related amendments. Management said the pandemic’s effect on third-quarter and later rental revenue could not be determined and provided no clear quantified earnings guidance.
- Management cited risks to tenant rent payments, leasing demand, access to capital, and development schedules. Construction timing could be affected by public-health restrictions. A prolonged downturn could also lead to lease terminations, tenant bankruptcies, impairment, or reduced capacity to pay distributions.
- The company reported no material legal proceedings and assessed the risk of material loss from ordinary-course claims as remote. It guaranteed approximately $93.1 million of debt associated with its unconsolidated Bentall Centre venture; the July studio venture financing includes customary non-recourse carveout guarantees.
- Met Park North’s $64.5 million mortgage, due August 1, 2020, was paid off on July 31. The company reported no unsecured debt maturities before 2022; the debt schedule shows substantial principal payments in 2022.
Important facts for investors to verify
- Rent collections, deferrals and abatements by tenant category, particularly storefront retail, and any subsequent changes in receivables or allowances.
- Completion and use of the Hollywood Media Portfolio proceeds, including the planned debt repayments and resulting debt, interest expense and liquidity.
- Whether office and studio occupancy, leasing activity and same-store NOI recover or weaken as leases roll and tenants respond to work-from-home and production conditions.
- Debt maturities, covenant headroom, floating-rate exposure and the impact of derivative losses expected to be reclassified to interest expense.
- The board’s future dividend decisions and the funding needs for development, tenant improvements and leasing costs.