Hudson Pacific Properties, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2022. Hudson Pacific is a REIT whose portfolio includes office and studio properties, primarily in California, the Pacific Northwest, Western Canada and Greater London. At quarter-end, its consolidated and unconsolidated portfolio comprised 66 properties and about 21.4 million square feet. The company reported 92.3% leased in-service office space; same-store studio occupancy averaged 84.0% over the prior 12 months.
Financial performance and position
- Revenue: Q2 revenue was $251.4 million, up 16.6% year over year; first-half revenue was $495.9 million, up 15.7%. Studio revenue growth included contributions from the 2021 Zio and Star Waggons acquisitions.
- Profit and per-share results: Q2 consolidated net income was $3.5 million versus $7.0 million a year earlier, while net loss attributable to common stockholders was $7.4 million, or $0.05 per share, versus income of $2.3 million, or $0.02 per share. First-half consolidated net loss was $4.1 million versus net income of $18.4 million; common-stockholder loss was $27.2 million, or $0.19 per share, versus income of $7.3 million, or $0.05 per share.
- NOI and margins: Q2 property NOI, a non-GAAP operating measure, increased 13.6% to $152.2 million; NOI margin was about 60.5% of revenue, versus 62.2% in Q2 2021. First-half NOI increased 13.0% to $304.1 million; margin was about 61.3%, versus 62.8%. Same-store NOI rose 3.1% in Q2 and 1.3% for the first half; most total NOI growth came from non-same-store properties and studio services.
- FFO: FFO attributable to common stockholders and unitholders was $73.0 million in Q2, essentially unchanged from $73.0 million in 2021; first-half FFO was $139.4 million versus $145.6 million. FFO is a non-GAAP measure and does not reflect capital and leasing costs.
- Cash flow: First-half operating cash flow was $190.1 million, up from $172.9 million. Investing used $104.3 million, compared with $204.0 million; financing provided $32.8 million, versus $26.5 million. Cash and restricted cash totaled $315.6 million at quarter-end, including $266.5 million of cash and cash equivalents.
- Debt and liquidity: Gross unsecured and secured debt was $4.154 billion at June 30, up from $3.765 billion at year-end; net debt on the balance sheet was $4.129 billion. The company also reported $126.4 million of in-substance defeased debt and $66.1 million of joint-venture partner debt. Its $1.0 billion revolving facility had $485 million drawn, and its One Westside construction loan had $270.7 million drawn against $414.6 million of capacity. The company was in compliance with covenants; debt to total market capitalization was 61.6%.
- Shareholder distributions: The common dividend remained $0.25 per share per quarter. The company spent $200 million on accelerated share repurchases and repurchased an additional $37.2 million of shares during the first half.
Material changes versus prior comparable periods
- Q2 revenue growth reflected higher office rents, including the delivery of One Westside to Google and the acquisition of 5th & Bell, as well as studio-services revenue following the Zio and Star Waggons acquisitions.
- Same-store office occupancy softened: quarter-end leased and occupied rates were 91.7% and 90.2%, respectively, compared with 93.0% and 92.1% a year earlier. Same-store studio occupancy averaged 84.0%, versus 88.0%.
- First-half interest expense rose 5.9% to $64.6 million despite lower gross interest expense, reflecting reduced capitalized interest and increased amortization of financing costs. Q2 general and administrative expense rose 27.8% to $21.9 million.
- Common shares outstanding fell from 151.1 million at December 31, 2021 to 141.6 million at June 30, 2022, primarily reflecting repurchases.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or operating guidance. Management identified cash, operating cash flow, equity and ATM issuance, revolver and construction-loan borrowings, joint-venture capital and additional debt as potential liquidity sources.
- Management said COVID-19 had not materially affected operations to date, but uncertainty remained around office utilization, renewals, rental rates, concessions and tenant demand. It also cited economic and real-estate weakness, higher interest rates and refinancing risk, vacancies, tenant defaults, financing access, foreign-currency movements and development or acquisition execution risks.
- First-half impairment charges totaled $23.8 million: $15.3 million related to the Del Amo property, held for sale, and $8.5 million for the Zio trade name following its planned rebranding. Del Amo’s estimated fair value was $2.75 million.
- Four properties were classified as held for sale. Subsequent to quarter-end, the company agreed to sell Northview Center for $46.0 million. It also repaid the $126.4 million defeased debt on July 1, 2022, using proceeds from government securities that matured in June.
- Construction and lease-related commitments were $322.1 million. The company had $20.0 million remaining to contribute to certain non-real-estate funds; it also committed, with a strategic partner, to contribute at least 20% of EquiBlue’s targeted $300 million initial fund. Management assessed ordinary-course legal matters as not expected to have a material adverse effect.
- Debt includes meaningful floating-rate exposure. The filing notes a $110 million Series A note maturity in January 2023 and $160 million of debt principal due in 2023; the defeased debt due in 2022 was repaid after quarter-end.
Investor verification priorities
- Confirm leasing trends, upcoming expirations, tenant retention and the cost of new leases; compare occupancy with the filing’s reported leasing and tenant-improvement metrics.
- Track floating-rate debt costs, refinancing needs and covenant headroom, especially the 2023 maturities and development-loan draws.
- Assess whether operating cash flow and available borrowing capacity can support development spending, leasing costs, dividends and remaining commitments.
- Review the assumptions behind the Del Amo valuation and held-for-sale plans, and monitor completion, leasing and funding of Washington 1000 and studio projects.
- Reconcile GAAP losses with FFO and NOI, noting the effects of impairments, preferred dividends, noncontrolling interests and non-cash items.