Business context and reporting period
Hudson Pacific Properties, Inc. is a REIT whose operating partnership owns and operates office and media and entertainment real estate, primarily in California and the Pacific Northwest. This Form 10-Q covers the three and nine months ended September 30, 2017. At quarter-end, the portfolio comprised 56 properties: 53 office properties and 3 media and entertainment properties, totaling approximately 15.2 million square feet.
Financial performance and position
Amounts below are in millions, except per-share data and percentages. The filing presents consolidated results for the company and operating partnership.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $190.0 | $164.6 | $538.8 | $472.4 |
| Income from operations | $36.2 | $23.7 | $92.8 | $62.6 |
| Net income | $14.5 | $5.2 | $45.6 | $15.2 |
| Net income attributable to common stockholders | $11.1 | $1.8 | $35.1 | $4.9 |
| Basic and diluted EPS | $0.07 | $0.02 | $0.23 | $0.05 |
| NOI (non-GAAP) | $120.3 | $104.1 | $351.4 | $302.9 |
| FFO attributable to common stockholders and unitholders (non-GAAP) | $78.3 | $67.1 | $225.5 | $193.2 |
- Revenue increased 15.5% in Q3 and 14.0% for the nine-month period. NOI increased 15.6% and 16.0%, respectively; same-store NOI grew 5.9% in Q3 and 8.0% year to date.
- Calculated operating margin was approximately 19.0% in Q3 versus 14.4% and 17.2% for the nine months versus 13.2%. NOI was 63.3% of revenue in Q3 and 65.2% year to date, versus 63.3% and 64.1%, respectively.
- Growth reflected acquisitions, the commencement of Netflix’s lease at ICON, higher rents on new leases and increased production/occupancy at Sunset Bronson Studios. Q3 same-store office average occupancy was 93.3% versus 92.7%; ending occupancy was 92.8% versus 94.6%. Same-store office average annual rent was $42.13 per square foot versus $39.50.
- Nine-month net income included $16.9 million of property-sale gains, compared with $8.5 million in the prior year. There were no property dispositions in Q3.
- At September 30, total assets were $6.91 billion, total liabilities $2.93 billion and total equity $3.96 billion. Cash and cash equivalents were $87.7 million; restricted cash was $25.8 million. Total cash plus restricted cash was $113.5 million.
- Notes payable were $2.656 billion before deferred financing costs and excluding the $216 million of debt classified with property held for sale; balance-sheet notes payable, net, were $2.424 billion. Management reported 53.4% of debt as variable-rate, of which $839.5 million was subject to interest-rate derivatives. Debt was approximately 33.5% of total market capitalization, counting preferred units as debt.
- The $400 million unsecured revolver had $250 million outstanding and $150 million of remaining capacity at quarter-end. The operating partnership was in compliance with debt covenants.
- For the nine months, operating cash flow was $239.6 million, investing cash outflow was $384.5 million and financing cash inflow was $150.2 million. Property additions were $224.8 million, acquisitions $257.7 million and property-sale proceeds $81.7 million.
- Common dividends declared were $0.25 per share in Q3, versus $0.20 a year earlier; year-to-date dividends were $0.75 versus $0.60.
Material changes, outlook, and risks
- During the nine months, the company acquired Sunset Las Palmas Studios for approximately $200 million and the remaining land interest at 11601 Wilshire for $50 million. It sold 222 Kearny Street and 3402 Pico Boulevard for gross proceeds totaling $86.8 million.
- In September, the company agreed to sell its 65% interest in the Pinnacle I and II joint venture to Blackstone affiliates for $350 million before adjustments, including assumption of $216 million of secured debt. Closing was expected in Q4 2017.
- After quarter-end, the operating partnership issued $400 million of 3.950% senior notes due 2027, with approximately $396.7 million in net proceeds. Proceeds repaid $150 million of the April 2020 term loan; the balance, together with cash on hand, repaid the $250 million revolver borrowing.
- No specific earnings or operating guidance was provided. Management said short-term liquidity needs are expected to be met through cash, operating cash flow and, if needed, the revolver; longer-term needs may be met with operating cash flow, debt and equity issuance.
- Management identified risks including adverse economic or real estate conditions, tenant defaults or non-renewals, lower rents or higher vacancies, interest-rate and operating-cost changes, financing access, leverage and the ability to sustain cash flows and dividends. The filing states risk factors were not materially changed from the 2016 Form 10-K.
- Future minimum ground-lease payments totaled $456.3 million. The company was evaluating the balance-sheet effects of new lease accounting requirements. It expected no revenue-recognition impact from ASC 606, but said a new standard for sales of nonfinancial assets could materially affect financial statements when property dispositions occur.
- No impairment charges were recorded for the nine months; management assessed ordinary-course legal matters as unlikely to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Pinnacle I and II sale closed on the expected terms and how the proceeds and assumed debt affected subsequent leverage.
- Leasing, occupancy and rent trends at key office assets, including the impact of lease commencements, renewals, expirations and redevelopment or lease-up activity.
- Exposure to variable interest rates, upcoming maturities and covenant headroom; also distinguish quarter-end debt from the post-quarter refinancing.
- Recurring operating cash generation and capital needs, including tenant improvements, leasing costs, development spending and dividend coverage; FFO and NOI are non-GAAP measures and do not represent cash available for distributions.
- Potential financial-statement effects of lease and property-sale accounting changes, and the completion and stabilization timing of development projects.