Hudson Pacific Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Hudson Pacific is a REIT focused on office and studio properties in California and the Pacific Northwest. Its portfolio comprised 55 properties; the in-service office portfolio was 92.9% leased at quarter-end. Financial amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $197.4 million | $174.1 million; up 13.4% |
| Net income (loss) | $(36.9) million | $52.6 million |
| Net income (loss) attributable to common stockholders | $(39.4) million; $(0.26) per diluted share | $48.6 million; $0.31 per diluted share |
| Property NOI | $125.5 million | $111.2 million; up 12.8% |
| FFO attributable to common stockholders and unitholders | $76.4 million | $69.5 million |
| Cash from operating activities | $89.4 million | $64.4 million |
| Cash and restricted cash | $66.1 million at March 31 | $68.2 million at December 31, 2018 |
At March 31, total assets were $7.37 billion and total liabilities were $3.51 billion. Unsecured and secured debt, net of financing costs and discounts, was $2.71 billion; the balance sheet also included $137.4 million of in-substance defeased debt and $66.1 million of joint-venture partner debt. The company reported $380 million of remaining availability on its $600 million unsecured revolver and $230 million undrawn on a $235 million property-secured revolving facility. Its reported debt and Series A preferred units were 33.7% of total market capitalization. The operating partnership was in compliance with financial covenants.
Material changes and drivers
- Net loss reflected a $52.2 million impairment charge on the Campus Center office property held for sale. The prior-year quarter included $37.7 million in real estate sale gains and no impairment.
- Revenue and NOI increased, with same-store NOI up 9.0% and non-same-store NOI up 23.4%. Management attributed growth to leasing and rent increases, studio activity, lease-up, and acquisitions including 10850 Pico and the Ferry Building.
- Interest expense rose 18.8% to $24.4 million, primarily due to acquired-property debt, Ferry Building joint-venture debt, and new senior notes. General and administrative expense increased 16.3% to $18.1 million.
- Cash from operations increased 38.8%. Investing used $128.3 million, including $35.6 million in acquisition deposits; financing provided $36.7 million. Q1 2018 investing cash flow benefited from $237.0 million of property-sale proceeds.
- In February, the operating partnership issued $350 million of 4.65% senior notes due 2029, receiving approximately $343 million net and using proceeds to repay revolver borrowings and $75 million of term debt.
- The company adopted ASC 842 in Q1. It recognized ground-lease right-of-use assets of $272.1 million and lease liabilities of $274.6 million. Office lease and recovery presentation changed, so reported revenue line items are not fully comparable with 2018.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided in the supplied filing text. Management cited cash on hand, operating cash flow, equity issuance, ATM sales, and debt facilities as expected liquidity sources.
- Campus Center was contracted for sale to two buyers for approximately $150 million before credits, prorations, and closing costs; both transactions were expected to close in Q2 2019. The $52.2 million impairment used the sale price as the fair-value basis.
- A joint venture with Blackstone to acquire the 1.45-million-square-foot Bentall Centre in Vancouver was expected to close in Q2 2019. The company had paid $35.6 million in acquisition deposits by quarter-end.
- Redevelopment and development included One Westside, EPIC, and Harlow; completion and stabilization dates for some projects remained undetermined. Management’s stated risks include tenant defaults or non-renewals, vacancy and rental-rate changes, interest rates, financing access, operating costs, acquisition execution, and real-estate market conditions.
- Approximately $365 million of unsecured and secured principal maturities were scheduled for 2020, before any applicable extensions. Floating-rate exposure remains relevant despite interest-rate swaps on $839.5 million of debt.
- Management reported no material litigation expected to adversely affect the company and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Investor verification priorities
- Confirm closing proceeds, timing, and final gain or loss on the Campus Center sales, and whether the expected Q2 closings occurred.
- Verify the Bentall Centre joint-venture closing, funding needs, and ground-lease obligations.
- Assess leasing progress, occupancy, tenant retention, and upcoming lease expirations; 2020 expirations represented 6.8% of office portfolio area.
- Reconcile debt maturities, interest-rate exposure, revolver availability, and covenant headroom, including the effect of new development and acquisition funding.
- Track development costs and leasing incentives: Q1 new office leases averaged $126.15 per square foot in tenant improvements and leasing commissions, versus $61.48 a year earlier.
- Review the effect of ASC 842 and the impairment on comparisons of reported earnings, revenue, and cash flow; evaluate FFO as a supplemental, non-GAAP measure.