Hudson Pacific Properties, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2017. Hudson Pacific is a REIT focused on office and media and entertainment properties, with 55 properties totaling approximately 15.2 million square feet across California and the Pacific Northwest.
Financial performance and position
- Revenue: Q2 revenue was $180.5 million, up 17.0% year over year. First-half revenue was $348.8 million, up 13.3%.
- Profit: Q2 net income was $7.0 million versus $4.0 million; income attributable to common stockholders was $3.6 million, or $0.02 per diluted share, versus $0.8 million, or $0.01. First-half net income was $31.1 million versus $10.0 million; common-stockholder income was $24.1 million, or $0.16 per diluted share. First-half results included $16.9 million of gains on property sales.
- NOI and margins: Q2 NOI, a company-defined non-GAAP measure, increased 19.3% to $118.0 million; NOI margin was approximately 65.4%, versus 64.1%. First-half NOI increased 16.2% to $231.1 million; margin was approximately 66.3%, versus 64.6%. Same-store NOI grew 10.4% in Q2 and 8.7% for the first half.
- Cash flow: First-half operating cash flow was $141.0 million, up from $108.9 million. Investing activities used $309.7 million, including $257.7 million for acquisitions; financing activities provided $151.0 million. Cash and restricted cash totaled $90.5 million at period-end, including $73.2 million of cash and equivalents.
- Debt and liquidity: Notes payable were $2.62 billion principal ($2.60 billion net of financing costs), down from $2.71 billion at year-end 2016. About 52.7% was variable-rate debt; $839.5 million of variable-rate exposure was hedged. The revolver had $210 million drawn and $190 million available. Management reported compliance with debt covenants. Debt to total market capitalization was approximately 32.8%, including preferred units as debt.
- Distributions: The Q2 common dividend was $0.25 per share, compared with $0.20 a year earlier.
Changes versus the prior comparable period
- Revenue and NOI growth reflected stronger same-store leasing and rents, the commencement of Netflix’s lease at Icon, improved occupancy at certain properties, 2016 acquisitions, and the May 2017 acquisition of Sunset Las Palmas Studios.
- Q2 same-store office occupancy averaged 94.7%, versus 94.3%; ending leased percentage declined to 95.4% from 96.5%. Same-store media and entertainment occupancy averaged 89.9%, versus 85.3%.
- Interest expense rose 23.2% in Q2 and 25.1% for the first half, primarily reflecting higher debt balances. First-half gains on property sales increased to $16.9 million from $8.5 million.
- During the first half, the company acquired Sunset Las Palmas Studios and the remaining land interest at 11601 Wilshire, and sold 222 Kearny Street and 3402 Pico Boulevard. It issued common stock in January and March; March offering proceeds were used partly to repay revolver borrowings.
Outlook, commentary, and risks
- The filing provides no specific earnings, FFO, or operating guidance. Management expects to fund short-term needs from cash, operating cash flow and, if needed, the revolver; long-term needs may be funded through operations, debt and equity issuance.
- Management cited leasing, acquisitions and portfolio growth as contributors to operating improvement. It also cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include interest-rate and refinancing exposure, tenant defaults or non-renewals, market and occupancy changes, acquisition execution, access to capital, and maintaining REIT status. The portfolio is concentrated in California; tenants are concentrated in technology and media and entertainment industries.
- Future minimum ground-lease payments were $458.2 million undiscounted. Management reported no material litigation, no impairment charges, no loan defaults, and no material changes to previously disclosed risk factors. The company identified a potentially material future accounting impact from ASU 2017-05; the amount was not yet known.
Most important facts for investors to verify
- Whether leasing and occupancy trends, including the lower ending office leased rate, continue to support same-store NOI growth.
- How variable-rate debt, upcoming maturities and revolver capacity affect interest expense and refinancing needs.
- How much reported first-half profit growth depends on property-sale gains versus recurring property operations.
- Whether acquisition integration, development and redevelopment projects deliver expected leasing and returns.
- The eventual effects of new revenue, lease and asset-sale accounting standards, and the costs and obligations associated with long-term ground leases.