Hudson Pacific Properties, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Hudson Pacific is a REIT focused on office and media and entertainment properties. At quarter-end, it owned 19 office properties and two media and entertainment properties, all in California, totaling approximately 5.33 million square feet.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date | Change or context |
|---|---|---|---|
| Total revenue | $49.4 million | $38.2 million | Up 29.2% |
| Net income | $0.3 million | $0.5 million | Consolidated result |
| Net loss attributable to common stockholders | $(2.9) million; $(0.06) per share | $(2.6) million; $(0.08) per share | Preferred distributions are a significant attribution item |
| Property NOI | $29.7 million | $22.1 million | Up 34.4%; non-GAAP measure |
| Operating cash flow | $15.1 million | $12.0 million | Up 26.0% |
| Cash and cash equivalents | $141.6 million | $18.9 million at December 31, 2012 | Quarter-end balance |
| Notes payable | $530.0 million | $582.1 million at December 31, 2012 | Before loan premium; $529.0 million principal subtotal |
Office revenue increased 28.8% to $38.5 million, largely reflecting properties acquired in 2012. Media and entertainment revenue rose 30.5% to $10.9 million, supported by higher occupancy and production activity. Operating expenses increased 33.0% to $43.6 million, including depreciation and amortization up 55.8% to $18.9 million. Interest expense increased 14.3% to $5.6 million. The filing does not provide a clear consolidated operating margin or net margin.
Cash used in investing activities was $19.5 million, principally for tenant improvements. Financing activities provided $127.1 million, including approximately $189.9 million of net proceeds from the February common-stock offering, offset in part by debt repayments and distributions. The company used $60 million of offering proceeds to repay revolver borrowings; the remaining proceeds were designated for development or redevelopment, acquisitions, or general corporate purposes.
At March 31, the company had no borrowings under its $250 million unsecured revolving facility and reported approximately $203.8 million of undrawn capacity, subject to covenants and borrowing-base availability. It reported compliance with financial covenants. Variable-rate debt was $145.4 million, or 27.5% of notes payable; $92 million was subject to interest-rate caps. Management estimated a 100-basis-point LIBOR increase would raise annual interest expense by $1.5 million on specified unhedged variable-rate loans. Debt-to-total-market-capitalization was approximately 27.5%, counting Series A preferred units as debt.
Common dividends declared were $0.125 per share for the quarter. The company also has cumulative preferred securities, including 8.375% Series B preferred stock and 6.25% Series A preferred units.
Material changes and unusual items
- Revenue and NOI growth reflected the full-quarter contribution of properties acquired during 2012; the results are not solely same-property growth.
- Office parking and other revenue included an approximately $1.1 million net payment related to early termination of a Bank of America lease at 1455 Market. The tenant accounted for approximately 11% of Q1 2013 revenue, down from 15% in Q1 2012.
- Media and entertainment operating expenses benefited from an approximately $0.8 million property-tax reimbursement following reassessment of Sunset Gower.
- The February 2013 offering of 9.2 million common shares at $21.50 per share increased common shares outstanding and strengthened cash and equity. Cash rose to $141.6 million from $18.9 million at year-end; notes payable declined from $582.1 million.
- Accumulated depreciation and amortization increased, alongside acquisition-related asset growth; the company reported no real estate impairment charges in either comparative quarter.
Outlook, risks, and contingencies
The filing provides no quantified earnings or operating guidance. Management expected to meet short-term liquidity needs through cash, operating cash flow, reserves, and, if needed, the revolver; longer-term needs through operating cash flow, secured or unsecured debt, and equity or debt issuance. It noted that access to capital depends on leverage, unencumbered asset value, lender restrictions, market conditions, and investor perceptions.
Key disclosed risks include the portfolio’s concentration in California, exposure to media and entertainment tenants (approximately 22% of revenue in both comparative quarters), tenant defaults or lease non-renewals, vacancy and rental-rate changes, interest-rate movements, financing availability, and maintaining REIT qualification. Management assessed material loss from ordinary-course legal proceedings as remote and reported no material legal proceedings. No material changes to the 2012 Form 10-K risk factors were reported. The company reported no off-balance-sheet arrangements and no material change to contractual obligations outside the ordinary course.
Important facts for investors to verify
- How much of revenue and NOI growth reflects acquisitions versus comparable-property performance, and how results evolve after the one-time lease termination payment.
- Bank of America’s remaining occupancy, lease terms, and replacement or re-leasing plans at 1455 Market.
- Near-term maturities, refinancing requirements, revolver availability under covenants, and the sensitivity of cash flow to interest rates.
- Tenant concentration and operating exposure to California and the media and entertainment sector.
- Cash available for planned development, tenant improvements, acquisitions, debt service, and dividends; distinguish consolidated net income from the loss attributable to common stockholders.