Hudson Pacific Properties, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited quarterly results. Dollar amounts are in U.S. dollars.
Business context
Hudson Pacific is a REIT focused on office and media and entertainment properties in Northern and Southern California and the Pacific Northwest. At year-end, its portfolio included 54 office properties (about 14.1 million square feet), two studio properties (about 0.9 million square feet), and approximately 2.5 million square feet of undeveloped density rights. In-service office properties were 91.2% leased, including signed leases not yet commenced; the media and entertainment portfolio averaged 89.1% leased during 2016.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $639.6 million | $520.9 million |
| Income from operations | $89.4 million | $47.4 million |
| Net income (loss) | $43.8 million | $(16.1) million |
| Net income (loss) attributable to common stockholders | $27.2 million | $(16.4) million |
| Diluted EPS | $0.25 | $(0.19) |
| Net operating income (NOI, non-GAAP) | $410.9 million | $331.0 million |
| Funds from operations (FFO, non-GAAP) | $261.2 million | $171.3 million |
| Cash from operating activities | $219.6 million | $174.9 million |
| Cash used in investing activities | $(524.9) million | $(1,797.7) million |
| Cash from financing activities | $334.8 million | $1,658.6 million |
Office revenue increased 23.2%; media and entertainment revenue increased 18.6%. NOI rose 24.1%, including 13.7% growth in same-store NOI. Management attributed growth to the EOP portfolio and 2016 acquisitions, leasing gains and higher studio occupancy and production-related revenue. FFO is a non-GAAP measure and does not include the full economic cost of property depreciation, capital spending and leasing costs.
For the fourth quarter, revenue was $167.2 million, income from operations was $26.8 million, net income was $28.5 million and net income attributable to common stockholders was $22.3 million, or $0.18 per diluted share. Fourth-quarter 2015 net loss was $2.7 million.
Balance sheet, debt and liquidity
- Year-end cash and cash equivalents were $83.0 million; restricted cash was $25.2 million.
- Notes payable were $2.71 billion before deferred financing costs, up from $2.28 billion at year-end 2015. The company reported a debt-to-market-capitalization ratio of approximately 34.5%, counting Series A preferred units as debt.
- Variable-rate debt was $1.47 billion, or 54.3% of total debt; $839.5 million of variable-rate debt was subject to interest-rate derivatives. Management estimated a 100-basis-point increase in one-month LIBOR would raise annual interest expense by approximately $6.3 million under the specified debt assumptions.
- The $400 million unsecured revolving facility had $300 million drawn at year-end. The company reported compliance with debt covenants and no loan defaults. It had no off-balance-sheet arrangements.
- Operating cash flow increased 25.6%. Investing outflows were substantially lower than in 2015, reflecting lower acquisition spending and higher property-sale proceeds. Financing cash flow included $1.45 billion of common-stock proceeds and $1.45 billion of cash used to repurchase operating-partnership units.
- Common dividends declared were $0.80 per share for 2016, up from $0.575 in 2015. The board retains discretion over future dividends.
Material changes and transactions
- Acquired 11601 Wilshire, Hill7 and Page Mill Hill for a combined stated purchase price of approximately $640.8 million. Acquisitions completed in 2016 contributed $14.0 million of revenue and a $3.5 million net loss during their included ownership periods.
- Sold four properties for gross proceeds of approximately $367.4 million and recognized $30.4 million of gains on property and land-option sales. The 222 Kearny Street sale closed in February 2017 for $51.8 million; $45 million of proceeds was applied to the revolver.
- Capitalized development and redevelopment activity continued. At year-end, eight properties were classified as under development; the filing described expected completion and stabilization dates for certain projects but did not provide company-wide earnings guidance.
- In January 2017, a common-stock offering and operating-partnership unit repurchase ended Blackstone’s and Farallon’s ownership interests. Hudson Pacific stated it then owned approximately 99.6% of the operating partnership’s common units.
- Management early adopted accounting guidance on the definition of a business and employee share-based payments in the fourth quarter. The property-acquisition guidance affected accounting for two fourth-quarter acquisitions.
Outlook, risks and contingencies
Management emphasized leasing, proactive asset management, selective acquisitions and conservative balance-sheet management. It said office rents were generally below quoted market rents, while media and entertainment rents were generally near quoted market levels. These are management assessments, not guarantees of future performance.
- Geographic and tenant concentration: properties are concentrated in California and the Pacific Northwest, with meaningful exposure to technology and media and entertainment tenants. The 15 largest office tenants generated 34.0% of office annualized base rent; Google and Uber together represented 7.2%.
- Leasing and rollover: 11.2% of office square footage was available at year-end and 11.3% was scheduled to expire in 2017. Studio leases are generally short term, often one year or less.
- Capital and interest-rate exposure: acquisitions, tenant improvements, development spending, refinancing needs and variable-rate debt may require additional capital or increase costs. Debt agreements contain financial and operating covenants.
- Development, ground leases and property risks: projects face construction, cost, permitting and lease-up risks; 13 properties were subject to ground leases. Environmental, ADA, earthquake and other natural-disaster risks could result in costs or losses, including losses exceeding insurance coverage.
- REIT status: the company must satisfy complex tax qualification and distribution requirements. Failure to qualify could create substantial corporate taxes and reduce funds available for distributions.
The company reported no legal proceedings believed material and no impairment charges in 2014–2016. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- How much of revenue and NOI growth came from acquisitions versus same-store performance, and whether same-store leasing gains continue.
- Progress on 2017 lease expirations, available office space, tenant renewals and any early termination rights held by major tenants.
- Debt maturities, revolver utilization, covenant headroom and sensitivity to interest rates as hedges and financing arrangements change.
- Development and redevelopment budgets, committed capital, completion timing, lease-up and expected returns.
- Effects of the January 2017 offering and unit repurchase on share count, ownership, leverage and per-share measures.
- Reconciliation of non-GAAP NOI and FFO to GAAP results, and the recurring cash costs of dividends, tenant improvements and leasing commissions.