Hudson Pacific Properties, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Hudson Pacific is a REIT owning, managing, leasing, acquiring and developing office and media and entertainment properties. At quarter-end, its 23 properties were all in California.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $47.4 | $39.1 | $94.8 | $75.9 |
| Income from operations | $7.3 | $2.4 | $12.4 | $7.6 |
| Income (loss) from continuing operations | $1.1 | $(2.5) | $0.7 | $(2.3) |
| Net income (loss) | $(3.4) | $(2.2) | $(3.1) | $(1.8) |
| Net loss attributable to common stockholders | $(6.2) | $(5.2) | $(9.1) | $(7.9) |
| Basic and diluted loss per share | $(0.11) | $(0.13) | $(0.17) | $(0.21) |
- Six-month net operating income (NOI) was $55.4 million, up from $41.0 million. NOI margin was approximately 58.4% of segment revenue, compared with 54.1% in 2012, calculated from the filing’s segment data.
- Cash provided by operations for the first half was $31.0 million, versus $22.4 million. Investing used $68.6 million, versus $112.4 million; financing provided $115.1 million, versus $178.8 million.
- Cash and cash equivalents were $96.3 million at June 30, compared with $18.9 million at year-end 2012. Total assets were $1.83 billion and total equity was $1.11 billion.
- Notes payable were $630.6 million before loan premium ($637.1 million on the balance sheet), up from $580.9 million before premium at year-end. Debt to total market capitalization was approximately 31.4%, counting Series A preferred units as debt.
- Of $630.6 million in notes payable, $158.7 million was variable-rate debt; $92.0 million was covered by interest-rate caps. The $250 million revolving facility had approximately $240.6 million of undrawn capacity, and no amount was drawn at quarter-end. The company reported compliance with its financial covenants.
- Common dividends declared were $0.125 per share for Q2 and $0.25 per share for the first half. Preferred dividends and distributions are also payable.
Changes and notable transactions
- Revenue rose 21% in Q2 and 25% for the first half, largely reflecting acquisitions, including 901 Market and Pinnacle I, and the June acquisition of Pinnacle II. First-half office revenue increased 29%; media and entertainment revenue increased 12%.
- Management reported renewed office leases at cash rents 6.6% above expiring rents in Q2 and 3.5% above for the first half. Media and entertainment rental revenue fell 6.7% in Q2, which management attributed to lower occupancy.
- Operating expenses and depreciation increased with portfolio growth; interest expense rose 26% in Q2 and 20% for the first half. First-half cash flow also benefited from a $1.1 million lease-termination payment related to 1455 Market Street.
- The company issued 9.2 million common shares in February 2013, generating approximately $189.9 million after underwriting discounts, before transaction costs.
- After quarter-end, the company closed its approximately $368.6 million acquisition of a four-building, 836,419-square-foot Seattle office portfolio on July 31, 2013. It used cash, property-level debt and revolver borrowings. A $64.5 million seven-year loan secured by Met Park North also closed that day.
- City Plaza was sold on July 12, 2013, for approximately $56 million before closing adjustments and costs. It was classified as held for sale at quarter-end, and its sale-related impairment was recognized in Q2.
Outlook, risks and unusual items
- The filing provides no quantified earnings or operating guidance. Management said it expects to meet short-term needs with cash, operating cash flow and, if needed, the revolving facility; longer-term needs may be funded through operating cash flow, secured or unsecured debt, and equity or debt issuance.
- A $5.4 million impairment charge on City Plaza contributed to discontinued-operations losses of $4.6 million in Q2 and $3.8 million for the first half. The filing cites the estimated loss on sale as the basis for the charge.
- Management estimated that a 100-basis-point increase in one-month LIBOR would increase annual interest expense by $1.6 million on the specified variable-rate borrowings. The filing lists principal maturities of $53.1 million in 2014 and $228.3 million in 2016.
- Risks include concentration in California real estate and media and entertainment tenants: approximately 22% of first-half revenue came from that industry. Other stated risks include leasing and occupancy, interest rates, financing access, acquisitions, property costs, natural hazards and maintaining REIT status.
- Management assessed material loss from ordinary-course legal proceedings as remote, reported no material changes to previously disclosed risk factors, and concluded disclosure controls were effective.
Important facts for investors to verify
- Seattle acquisition financing, post-close revolver borrowings, integration and leasing, including commencement of Amazon’s expected Met Park North lease.
- City Plaza’s final sale proceeds and realized disposition result compared with the recorded impairment.
- Debt maturity and refinancing exposure, covenant headroom, and sensitivity to interest rates as variable-rate borrowings and acquisition debt change.
- Whether lease renewals and occupancy gains sustain property-level NOI growth, particularly in the media and entertainment portfolio.
- Cash available for dividends after capital expenditures, leasing costs, debt service and acquisition spending; the filing’s stated results do not provide a clear FFO or AFFO value.