Hudson Pacific Properties, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2023, compared with the same 2022 periods. Hudson Pacific is a REIT focused on office and studio properties, operating mainly through Hudson Pacific Properties, L.P. Its consolidated and unconsolidated portfolio comprised 61 properties totaling approximately 20.6 million square feet across the U.S., Western Canada and Greater London.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $231.4 million | $260.4 million | $728.9 million | $756.3 million |
| Net loss | $35.8 million | $6.8 million | $82.0 million | $10.9 million |
| Net loss per common share | $0.27 | $0.12 | $0.67 | $0.31 |
| Net operating income (NOI) | $119.3 million | $155.3 million | $394.0 million | $459.4 million |
| FFO attributable to common stockholders and unitholders | $26.1 million | $64.4 million | $116.9 million | $203.9 million |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $223.0 million | $328.5 million |
At September 30, 2023, total assets were $9.0 billion, net real estate investment was $7.1 billion, and total equity was $3.6 billion. Unsecured and secured debt, net of financing costs, was $4.42 billion; joint-venture partner debt was an additional $66.1 million. Cash and cash equivalents were $75.0 million, plus $19.1 million of restricted cash. Nine-month investing cash outflow was $124.5 million and financing cash outflow was $290.2 million.
In-service office properties were 83.1% leased. Same-store office occupancy averaged 84.5% in Q3, versus 88.3% a year earlier; same-store studio occupancy averaged 83.5%, versus 84.4%.
Material changes versus prior periods
- Q3 revenue declined 11.1%, NOI declined 23.2%, and net loss attributable to common stockholders increased to $37.6 million from $17.3 million. Nine-month NOI fell 14.2%; net loss attributable to common stockholders was $94.2 million versus $44.5 million.
- Studio performance weakened sharply: Q3 studio segment NOI was a $3.8 million loss, compared with $20.2 million of profit. Management attributed lower studio rental and service activity to the WGA and SAG-AFTRA strikes. Nine-month non-same-store NOI also fell substantially, reflecting strike impacts and office property sales.
- Interest expense rose to $53.6 million in Q3 from $37.3 million and to $162.0 million for nine months from $101.8 million, primarily due to higher benchmark rates and borrowing levels. Nine-month operating cash flow fell 32.1%.
- Q3 included $16.1 million of gains on sales of 604 Arizona and 3401 Exposition; nine-month gains on real estate sales were $23.2 million. The Quixote note was settled at a $10.0 million discount, producing a corresponding debt-extinguishment gain. No real estate impairment was recorded in 2023; 2022 included $28.5 million of impairment losses for the nine-month period.
Liquidity, outlook, risks and unusual items
- The company had $1.0 billion of revolver capacity, with $520.0 million drawn, and $414.6 million of One Westside/Westside Two construction-loan capacity, with $324.6 million drawn. Management identified operating cash, cash reserves, revolver and construction-loan borrowings, joint-venture funding, and potential debt or equity financing as liquidity sources.
- Debt maturities after extension options include $324.6 million in 2024, $741.3 million in 2025 and $1.56 billion in 2026. The operating partnership was in compliance with covenants; however, unsecured indebtedness to unencumbered asset value was 57.7% against a 60% limit, and adjusted EBITDA to fixed charges was 2.1x against a 1.5x minimum.
- The company suspended its quarterly common-stock dividend in Q3 2023; common-unit and performance-unit distributions were also suspended. The filing gives no specific resumption date or quantitative earnings guidance. Preferred dividends continued.
- Development exposure includes $170.3 million of construction and lease-related commitments. Guarantees support certain unconsolidated joint-venture debt and construction obligations. Management assessed the likelihood of loss on specified completion guarantees as remote. The filing reports no material legal proceedings and no loan defaults.
- Key risks cited include continued production strikes, weaker leasing or tenant defaults, higher interest rates and operating costs, refinancing and credit-rating risk, access to capital, and the ability to generate cash to service debt and sustain distributions. Subsequent to quarter-end, Bentall Centre’s joint-venture loan was amended, extending maturity to 2027 and changing its rate benchmark and spread.
Important facts for investors to verify
- Whether studio rental demand and service revenues recover following the labor strikes, and the effect on studio NOI and cash flow.
- Office leasing, occupancy, tenant retention and lease expirations, particularly as same-store office occupancy fell year over year.
- Debt maturities, variable-rate exposure, remaining borrowing capacity, covenant headroom and refinancing access.
- Cash available after development spending and commitments, and the conditions or timing for any common-dividend resumption.
- Development budgets, completion and lease-up assumptions, and the scale of guarantees and funding obligations at joint ventures.