Hudson Pacific Properties, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Hudson Pacific is a REIT focused on West Coast office and studio properties; its operating partnership holds substantially all assets and conducts substantially all business. At quarter-end, the portfolio included 64 consolidated and unconsolidated properties totaling approximately 20.0 million square feet. In-service office space was 91.7% leased; same-store studios averaged 89.6% occupied.
Financial performance and liquidity
- Revenue: $213.1 million, up 3.3% from $206.2 million. Office revenue rose 3.1%; studio revenue rose 5.9%.
- Profit: Net income was $11.4 million, down 18.2% from $13.9 million. Net income attributable to common stockholders was $5.0 million, or $0.03 per diluted share, versus $10.8 million, or $0.07, a year earlier.
- NOI and margins: Property NOI increased 2.6% to $135.1 million. Same-store NOI fell 3.1% to $118.3 million, while non-same-store NOI increased 74.9% to $16.8 million, mainly reflecting 1918 Eighth. NOI as a share of revenue was approximately 63.4%, versus 63.9% in Q1 2020 (calculated). Common-stockholder net margin was approximately 2.3%, versus 5.2% (calculated).
- FFO: FFO attributable to common stockholders and unitholders was $72.5 million, compared with $81.9 million. FFO is a non-GAAP measure.
- Cash flow: Operating cash flow was $114.7 million, up 27.3%. Investing activities used $97.2 million, including $95.9 million of real estate additions. Financing activities provided $2.3 million, versus $333.9 million in Q1 2020, when debt borrowings were substantially higher.
- Debt and liquidity: Unsecured and secured debt totaled $3.485 billion before unamortized financing costs; the balance-sheet net amount was $3.455 billion. Cash and cash equivalents were $134.3 million, with restricted cash of $35.1 million. The $600 million revolving facility was undrawn; One Westside construction-loan capacity was $414.6 million, with $159.0 million drawn. Debt to total market capitalization was 45.6%; the company reported compliance with debt covenants.
- Distributions: The quarterly common dividend remained $0.25 per share. The board said it would continue evaluating dividend policy in light of COVID-19 uncertainty.
Material changes versus Q1 2020
- Revenue and total NOI grew, but net income, common-stockholder earnings, and FFO declined. The $5.8 million unrealized gain on non-real-estate investments helped support Q1 2021 net income; Q1 2020 had a $0.6 million unrealized loss.
- Same-store office occupancy declined to 91.7% average from 95.1%; same-store studio occupancy declined to 89.6% from 92.4%. Same-store NOI pressure reflected reduced office parking and other activity, lease terminations, and studio vacancies, partly offset by increased studio filming activity.
- Interest expense increased 14.6% to $30.3 million, primarily due to the Hollywood Media Portfolio and 1918 Eighth loans. Depreciation and amortization increased 12.2% to $82.8 million, including effects from 1918 Eighth and accelerated lease-intangible amortization after a tenant termination.
- Office same-store rental rates rose, while leasing costs for new leases increased: total tenant improvement and leasing commission costs were $92.76 per square foot for new leases, compared with $42.79 in Q1 2020.
Outlook, risks, contingencies, and unusual items
- No specific earnings, revenue, or FFO guidance was provided. Management said COVID-19 caused no significant disruption in Q1 but emphasized that effects on tenants, rent collection, leasing demand, markets, and capital access remained uncertain.
- The company collected approximately 98% of Q1 contractual rents: 99% from office tenants, 100% from studio tenants, and 54% from storefront retail tenants. These rates exclude rents deferred or abated under COVID-related amendments. Management reported 98% collection of April contractual rents as of May 3, 2021.
- Management reported no secured or unsecured debt maturity before 2022. Principal payments shown for 2022 include approximately $817.3 million of unsecured and secured debt and $128.2 million of in-substance defeased debt, before any applicable extensions.
- One Westside, fully leased to Google for an anticipated approximately 14-year term after completion, was under construction, with estimated completion in Q1 2022 and stabilization in Q2 2023. Outstanding construction-agreement obligations were $192.7 million.
- Potential exposures include a $101.6 million guarantee related to the company’s share of Bentall Centre joint-venture debt, plus commitments to contribute up to $16.7 million to two venture funds. Management assessed ordinary-course legal claims as remote for material loss and reported no material legal proceeding.
- LIBOR transition is a stated risk for loans and derivatives indexed to LIBOR. The filing also identifies risks from COVID-19, tenant defaults or nonrenewals, vacancy and rent changes, interest rates, financing access, foreign currency movements, and REIT qualification.
Important facts for investors to verify
- Whether office and studio occupancy, leasing activity, rent collections, and same-store NOI recover or weaken in subsequent quarters.
- Repayment, refinancing, and extension plans for 2022 debt maturities, alongside covenant headroom and available borrowing capacity.
- One Westside construction spending, completion timing, and lease commencement assumptions; also the scale and funding of development commitments.
- Dividend sustainability given the board’s stated ongoing review, cash needs, debt service, and continuing capital expenditures.
- How much of reported earnings and period-to-period change reflects recurring property operations versus unrealized investment gains, noncash items, and non-GAAP FFO adjustments.