Hudson Pacific Properties, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Hudson Pacific is a REIT focused primarily on office and studio properties in California and the Pacific Northwest. Its portfolio comprised 54 properties and approximately 14.6 million square feet. The filing presents the company and its operating partnership on a consolidated basis.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Total revenue | $174.1 million | $168.3 million; up 3.5% |
| Operating income | $35.1 million | $28.5 million |
| Net income | $52.6 million | $24.2 million |
| Net income attributable to common stockholders | $48.6 million; $0.31 per diluted share | $20.5 million; $0.14 per diluted share |
| FFO attributable to common stockholders and unitholders | $69.5 million | $71.9 million; down 3.4% |
| Property NOI | $111.2 million | $113.1 million; down 1.7% |
| Operating cash flow | $64.4 million | $85.7 million |
| Cash and restricted cash | $75.0 million | $101.3 million at December 31, 2017 |
| Notes payable, gross | $2.261 billion | $2.439 billion at December 31, 2017 |
Revenue growth reflected studio revenue gains, including the 2017 acquisition of Sunset Las Palmas Studios. Net income growth was substantially driven by $37.7 million of real estate sale gains, versus $16.9 million a year earlier; it should not be read as equivalent growth in recurring property operations. Common dividends were $0.25 per share for the quarter. The filing does not provide a conventional net profit margin discussion.
Material changes and operating trends
- Same-store NOI rose 3.4% to $73.0 million, while non-same-store NOI fell 10.0% to $38.2 million; total NOI declined 1.7%.
- Same-store office average occupancy declined to 92.6% from 95.1%; ending leased percentage was 94.2% versus 95.6%. Average annual rent per square foot increased to $45.10 from $41.40. Same-store studio occupancy was broadly stable at 90.2%.
- Office revenue was essentially flat overall. Same-store rent and tenant recoveries increased, but property operating expenses also rose, including from property-tax adjustments and ground rent. Office non-same-store results were affected by property sales and the Campus Center redevelopment, partly offset by new leases and lease-up.
- Q1 dispositions generated $241.0 million of gross sales proceeds from Embarcadero Place, 2600 Campus Drive and 2180 Sand Hill, producing $37.7 million in recognized gains. 9300 Wilshire sold after quarter-end for $13.8 million and also generated a gain.
- Interest expense declined 6.5% to $20.5 million, reflecting lower debt outstanding, amended credit terms and increased capitalized interest. General and administrative expense rose 12.7% to $15.6 million.
Debt, liquidity, and capital spending
- At March 31, 2018, gross notes payable were $2.261 billion; net notes payable were $2.241 billion. Debt to total market capitalization, counting preferred units as debt, was 30.6%.
- The amended credit agreement increased the unsecured revolving facility to $600 million and extended its maturity to March 2022. $20 million was drawn, leaving $580 million available. The company also reported up to $257 million available under a construction loan, subject to lender requirements, with $5 million drawn.
- The operating partnership reported compliance with financial covenants and no loan defaults. Six interest-rate swaps had $839.5 million aggregate notional value.
- Investing cash flow was positive $133.5 million, largely reflecting property-sale proceeds; additions to investment property were $103.5 million. Financing cash outflow was $224.2 million, including debt repayments and distributions.
- The company reported $449.3 million in future undiscounted minimum ground-lease payments. It expects to adopt ASC 842 on January 1, 2019 and was still evaluating the impact, including lease liabilities and right-of-use assets for ground leases.
Outlook, risks, and unusual items
The filing gives no specific earnings, FFO, occupancy, or revenue guidance. Management identifies cash on hand and operations, equity issuance, the ATM program, revolving-credit borrowings, and additional debt financing as potential sources for liquidity needs, including capital spending, leasing costs, dividends and debt repayment. The company had not used its ATM program in Q1 and had $104.9 million remaining under its $125 million authorization.
Near-term operating considerations include Campus Center redevelopment, ongoing development and lease-up, and the revenue impact of property dispositions. Management cited risks including tenant defaults, lease nonrenewals, vacancy or rent pressure, higher interest rates and operating costs, access to financing, the ability to service debt and maintain dividends, regional real-estate conditions, natural disasters, and maintaining REIT status. The company reported no material legal proceedings, no off-balance-sheet arrangements, and no impairment charges in Q1. It formed a 75%-owned joint venture with Macerich to redevelop Westside Pavilion; the planned project includes approximately 500,000 square feet of office space and 100,000 square feet of retail and entertainment space, with a future property contribution anticipated.
Most important facts for investors to verify
- Whether the decline in total NOI and operating cash flow persists after adjusting for dispositions, redevelopment downtime and lease-up.
- Occupancy, renewal spreads and leasing progress, particularly for office properties and development projects.
- How much reported earnings growth depended on property-sale gains, compared with recurring FFO and same-store NOI.
- Debt maturities, floating-rate exposure, covenant headroom and remaining liquidity under the revolver and construction loan.
- Capital requirements and execution risks for Campus Center and Westside Pavilion, and the eventual accounting impact of ASC 842.