Hudson Pacific Properties, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Hudson Pacific is a REIT focused on office and studio properties, primarily in California, the Pacific Northwest and Western Canada. It reported 54 consolidated properties totaling 14.6 million square feet, plus a 20% interest in the unconsolidated Bentall Centre venture.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $208.2 million | $180.7 million | $602.3 million | $530.0 million |
| Net income | $63.0 million | $20.3 million | $38.9 million | $92.5 million |
| Net income attributable to common stockholders | $58.8 million | $17.4 million | $29.8 million | $82.1 million |
| Diluted EPS | $0.38 | $0.11 | $0.19 | $0.52 |
| Property NOI | $129.8 million | $112.9 million | $381.5 million | $336.8 million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $233.6 million | $197.9 million |
| FFO attributable to common stockholders and unitholders | $79.2 million | $73.1 million | $231.1 million | $214.1 million |
Q3 revenue rose 15.2% and NOI rose 15.0%; same-store NOI increased 9.4%. For the first nine months, revenue increased 13.6% and NOI increased 13.3%, including same-store NOI growth of 10.0%. Q3 NOI was approximately 62.3% of revenue, versus 62.5% a year earlier. Office occupancy and rent growth, acquisitions and studio activity contributed to operating growth.
Net income for the nine months declined 58.0%, principally reflecting a $52.2 million Campus Center impairment and the comparison of real estate sale gains. Q3 earnings included a $47.1 million gain on sale of Campus Center developable land. FFO, which excludes real estate sale gains and impairment adjustments, increased in both comparison periods.
Balance sheet, debt and liquidity
- At September 30, total assets were $7.43 billion; real estate, net, was $6.32 billion. Cash and cash equivalents were $56.8 million and restricted cash was $12.6 million.
- Unsecured and secured debt, net, was $2.73 billion; additional obligations included $135.8 million of in-substance defeased debt and $66.1 million of joint-venture partner debt. Debt to total consolidated market capitalization was 34.3% under the company’s stated definition.
- The $600 million unsecured revolver had $80 million drawn and $520 million available. A separate $235 million secured revolving facility had $5 million drawn. The company reported compliance with debt covenants; disclosed covenant ratios were within required limits.
- Operating cash flow of $233.6 million was offset by $207.2 million of investing outflows and $25.2 million of financing outflows. Capital spending on real estate was $275.1 million; common stock and unit distributions paid were $118.7 million.
Material changes, outlook and risks
- On October 3, 2019, after quarter-end, the operating partnership issued $400 million of 3.25% senior notes due 2030. Proceeds repaid the $300 million term loan due in 2020 and the remaining $80 million revolver balance. Moody’s upgraded the company to Baa2 with a stable outlook in October.
- The company sold Campus Center office property and developable land for stated gross prices of $70.3 million and $78.1 million, respectively. The office property had a $52.2 million impairment recorded in Q1; the land sale generated the $47.1 million gain recognized in Q3.
- ASC 842 adoption added a $270.3 million operating lease right-of-use asset and a $273.6 million operating lease liability at quarter-end. The new presentation combines office rental income and tenant recoveries, so reported revenue classifications are not directly comparable with 2018; management provided a supplemental breakdown on the prior presentation basis.
- Development and redevelopment include One Westside, EPIC Hollywood and Harlow; expected completion and stabilization dates are estimates and subject to change. No quantitative earnings or operating guidance is provided in the filing.
- Key risks cited include economic and real-estate-market weakness, tenant defaults or non-renewals, vacancy and rent pressure, interest-rate and operating-cost changes, access to financing, leverage and dividend coverage, development and acquisition execution, REIT qualification, and foreign-currency exposure. The Bentall Centre investment carries Canadian currency exposure, and the company guaranteed $95.2 million of related debt.
- Other commitments include $65.5 million remaining on the Washington 1000 purchase, expected to be settled in 2021, and $17.2 million remaining on a venture-capital fund commitment. Ground-lease liabilities had a $273.6 million present value. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue and NOI growth reflects same-store performance versus acquisitions, lease-up and other non-same-store assets.
- The sustainability of leasing and occupancy: consolidated in-service office portfolio was 94.3% leased; same-store studio occupancy averaged 92.8% over the trailing 12 months.
- Debt maturities and refinancing outcomes, including the post-quarter 2030 notes, and sensitivity to floating rates despite interest-rate hedges.
- Cash requirements for development, tenant improvements, leasing costs and the Washington 1000 and investment-fund commitments.
- The impact of ASC 842 presentation changes when comparing reported office revenues with prior periods, and the assumptions underlying the Campus Center impairment and sale gains.