Hudson Pacific Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Hudson Pacific is a REIT focused on office and studio properties in California and the Pacific Northwest. At quarter-end, its portfolio comprised 54 properties totaling approximately 14.7 million square feet. Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where shown.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $180.7m | $190.0m | $530.0m | $538.8m |
| Operating income | $36.4m | $36.2m | $107.3m | $92.8m |
| Net income | $20.3m | $14.5m | $92.5m | $45.6m |
| Net income attributable to common stockholders | $17.4m | $11.1m | $82.1m | $35.1m |
| Diluted earnings per share | $0.11 | $0.07 | $0.52 | $0.23 |
| Property NOI (non-GAAP) | $112.9m | $120.3m | $336.8m | $351.4m |
| FFO to common stockholders and unitholders (non-GAAP) | $73.1m | $78.3m | $215.1m | $225.5m |
- Q3 revenue declined 4.9%; nine-month revenue declined 1.6%. Q3 operating margin was approximately 20.1% versus 19.0% a year earlier; nine-month operating margin was approximately 20.2% versus 17.2% (calculated from reported operating income and revenue).
- Net income increased substantially, principally reflecting real-estate sale gains: $3.7m in Q3 and $43.3m for nine months, versus none and $16.9m, respectively, in the comparable periods. Lower depreciation and interest expense also supported results. FFO declined in both periods.
- Same-store NOI rose 4.1% in Q3 and 2.7% for nine months; total NOI fell 6.2% and 4.2%, respectively, mainly because of dispositions, redevelopment downtime and lower non-same-store office NOI.
- Operating cash flow was $197.9m for nine months, down 17.4% year over year. Investing cash outflow was $57.3m, versus $384.5m; financing cash outflow was $178.7m, compared with $150.2m of financing inflow in 2017.
- Cash and cash equivalents were $52.5m at September 30; cash plus restricted cash was $63.2m, down from $101.3m at year-end 2017. The company reported $490m of undrawn capacity on its $600m revolving facility and up to $257m available under a construction loan, subject to lender requirements.
- Unsecured and secured debt was $2.351bn before financing costs, plus $139.0m of in-substance defeased debt; reported net debt was $2.333bn. Debt to total market capitalization was 31.9%. The operating partnership reported covenant compliance and no loan defaults.
Material changes and business developments
- Completed approximately $464.8m of gross property dispositions in the first nine months, including Peninsula Office Park for $210m, and recorded $43.3m in aggregate gains. These sales reduced the portfolio and contributed to weaker non-same-store office revenue and NOI.
- Acquisitions included two studio properties and a 75%-owned joint venture acquisition of Westside Pavilion and 10850 Pico. The company plans to redevelop One Westside into approximately 500,000 square feet of creative office space while retaining retail and entertainment space.
- The March 2018 amended credit agreement increased revolving-facility capacity from $400m to $600m and extended its stated maturity to March 2022, with a possible one-year extension. The company repaid Rincon Center debt and, with the One Westside acquisition, assumed $139m of debt backed in substance by $149.2m of U.S. government securities.
- Subsequent to quarter-end, the company acquired a 55% interest in a joint venture that purchased San Francisco’s Ferry Building for $291m and purchased 6660 Santa Monica for $10m. It also committed up to $20m to a real-estate technology venture fund.
Management commentary, outlook and risks
- Management attributed same-store office improvement to higher rents on new leases at selected properties, while noting offsets from expirations and higher property expenses, including ground rent. Studio performance benefited from higher rental rates and production activity.
- Management identified dispositions and Campus Center’s redevelopment-related vacancy following a tenant early termination as key drags on non-same-store office results. New leases and recently completed developments partly offset the declines.
- The filing gives no numerical earnings, revenue, NOI or FFO guidance. Management expects to fund working capital, acquisitions, capital expenditures, tenant improvements, leasing costs, dividends and debt repayments through operating cash, cash reserves, equity issuance, revolving borrowings and other financing.
- Risks cited include real-estate and economic conditions, tenant defaults or nonrenewals, vacancy and rent changes, interest-rate and operating-cost increases, access to financing, debt-service and dividend capacity, acquisition and development execution, insurance, environmental and weather events, and maintaining REIT status.
- Future minimum ground-lease payments were $505.1m, undiscounted, as of quarter-end; the company was still evaluating the lease liability and right-of-use asset to be recorded under ASC 842, planned for adoption January 1, 2019. The filing reports no material legal proceeding, no impairment charge for the nine months, and effective disclosure controls.
Important facts for investors to verify
- Whether lease-up and redevelopment at Campus Center, One Westside, Maxwell, EPIC and other projects progress on schedule and within budget, and when they contribute NOI.
- Leasing, occupancy and rent trends, particularly same-store office leased occupancy (94.3% for the nine-month comparison cohort versus 96.0% a year earlier) and the effect of tenant expirations or early terminations.
- How much reported earnings growth reflects recurring property operations versus gains on sales, and why FFO declined despite higher GAAP net income.
- Debt maturities, variable-rate exposure, hedge coverage, covenant headroom and the financial effect of the One Westside defeasance and subsequent acquisitions.
- The eventual ASC 842 impact, including the ground-lease liability and asset, and any effect on reported results, leverage measures or investor comparisons.