Hudson Pacific Properties, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Hudson Pacific is a REIT focused on office and studio properties, operating primarily in California, the Pacific Northwest and Western Canada.
Business context and portfolio
At year-end, the portfolio comprised 64 properties totaling approximately 20.0 million square feet: 15.6 million square feet of office properties, 1.2 million square feet of studio properties and 3.2 million square feet of estimated developable land rights. In-service office properties were 93.5% leased including leases signed but not commenced (92.7% occupied); same-store studios averaged 90.2% leased during 2020.
Financial and operating performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $805.0 million | $818.2 million | Down 1.6% |
| Net income | $16.4 million | $55.8 million | Down 70.6% |
| Net income attributable to common stockholders | $0.4 million; $0.00 per share | $42.7 million; $0.28 per share | — |
| Property NOI (non-GAAP) | $505.2 million | $516.7 million | Down 2.2% |
| Same-store NOI (non-GAAP) | $436.8 million | $466.0 million | Down 6.3% |
| FFO attributable to common stockholders and unitholders (non-GAAP) | $283.6 million | $315.7 million | Down 10.1% |
| Net cash from operating activities | $302.0 million | $288.0 million | Up 4.9% |
| Net cash used in investing activities | $1.007 billion | $316.4 million | Higher use, primarily from acquisition spending |
| Net cash from financing activities | $796.1 million | $18.5 million | Higher, reflecting financing and joint-venture proceeds |
Calculated property NOI as a share of total revenue was approximately 62.8%, compared with 63.2% in 2019. Office NOI was $473.7 million (down 0.8%); studio NOI was $31.5 million (down 19.6%). The filing says office service and other revenue, studio revenue and studio activity were affected by pandemic-related restrictions and reduced filming.
Year-end cash and cash equivalents were $113.7 million; cash plus restricted cash totaled $149.5 million. Unsecured and secured debt was $3.432 billion before unamortized financing costs, versus $2.845 billion in 2019. Including $131.7 million of in-substance defeased debt and $66.1 million of joint-venture partner debt, disclosed consolidated debt and partner debt totaled approximately $3.630 billion. Debt-to-market capitalization, counting preferred units as debt, was 48.2%. The company reported compliance with debt covenants and $600 million of undrawn revolver capacity; its One Westside/10850 Pico construction facility had $414.6 million of capacity, with $106.1 million drawn.
Material changes versus 2019
- Same-store NOI fell $29.2 million, driven by reduced office parking and ancillary revenue, lower rental revenue and increased office expenses; studio NOI also declined as filming and related services slowed.
- Non-same-store NOI increased $17.7 million, mainly from lease commencements and the December acquisition of 1918 Eighth, partly offset by vacancies at Del Amo and lower income at Maxwell.
- Interest expense rose 10.0% to $116.5 million. The year included new debt associated with the Hollywood Media Portfolio and 1918 Eighth, offset in part by repayment of revolving borrowings and term loans.
- In July, Blackstone acquired a 49% interest in the Hollywood Media Portfolio at a gross portfolio valuation of $1.65 billion. Hudson Pacific retained 51% and operating responsibility. The joint venture arranged a $900 million mortgage; proceeds from the interest sale and asset-level financing were approximately $1.27 billion before transaction adjustments and costs. About $849.5 million was used to repay debt.
- The company acquired 1918 Eighth in Seattle through a 55%-owned joint venture; the property purchase price before specified adjustments and closing costs was $625 million, and the joint venture borrowed $314.3 million.
- Hudson Pacific repurchased 3.5 million shares in 2020 for approximately $80.1 million before costs. Annual common dividends remained $1.00 per share.
Outlook, commentary and risks
- Management reported no significant operating disruption from COVID-19 during 2020 but cautioned that the pandemic’s future effects were uncertain. Fourth-quarter contractual rent collection was 97.7% for office, 99.9% for studios and 50.8% for storefront retail; figures exclude rents deferred or abated under COVID-related amendments.
- The board said it would continue evaluating dividend policy to preserve liquidity. The filing provides no numerical earnings, FFO or occupancy guidance.
- One Westside, a 584,000-square-foot project, was under construction and fully leased to Google for approximately 14 years, with occupancy anticipated to begin in 2022 after construction and tenant improvements. Completion was estimated for first-quarter 2022.
- Approximately 11.0% of the company’s share of office portfolio square footage was scheduled to expire in 2021; 10.2% was available at year-end. The 15 largest office tenants represented 38.6% of company-share office base rent; Google and Netflix together represented 12.8%.
- Key risks include pandemic-related tenant and leasing disruption; exposure to technology and media/entertainment tenants; geographic concentration, with 78.2% of consolidated and unconsolidated properties in California; refinancing and interest-rate risk; development execution; and environmental, regulatory and natural-disaster exposures. A 100-basis-point increase in one-month LIBOR was estimated to raise annual interest expense by $8.5 million after swaps.
- Two senior executives, the Chief Investment Officer/Chief Operating Officer and the Executive Vice President of Operations, resigned in February 2021. Management stated it was not party to legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Review the audited statements and reconcile the sharp decline in GAAP net income with the changes in NOI and FFO; FFO is non-GAAP and does not capture capital expenditure and leasing costs.
- Track office lease renewals and vacancy, particularly 2021 expirations, and tenant credit or space decisions among major tenants.
- Confirm dividend decisions, rent collections and the treatment or recovery of deferred and abated rent as pandemic effects evolve.
- Assess debt maturities, interest-rate exposure, refinancing terms and the debt and guarantees associated with joint ventures, especially the Hollywood Media Portfolio loan.
- Monitor One Westside delivery, lease commencement and remaining development commitments, along with the capital required for tenant improvements and other projects.
- Consider the post-filing executive departures and subsequent share repurchases; the filing reports $14.7 million of repurchases in January 2021.