Business context and reporting period
Hudson Pacific Properties, Inc. is a REIT that owns and operates office and studio properties, primarily in Northern and Southern California and the Pacific Northwest. This Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing, not a standalone quarterly report. At year-end, the portfolio included 55 properties and approximately 17.7 million square feet, including 13.9 million square feet of office properties and 1.2 million square feet of studio properties.
Financial and operating highlights
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $728.4 million | $728.1 million | Essentially flat |
| Net income | $111.8 million | $94.6 million | Up 18.2% |
| Net income attributable to common stockholders | $98.1 million; $0.63 per diluted share | $67.6 million; $0.44 per diluted share | Higher |
| Net operating income (NOI) | $460.7 million | $474.6 million | Down 2.9% |
| FFO attributable to common stockholders and unitholders | $292.9 million | $306.1 million | Down 4.3% |
| Cash from operating activities | $214.6 million | $293.0 million | Down 26.7% |
| Dividends declared per common share | $1.00 | $1.00 | Unchanged |
Office revenue declined 2.2% to $652.5 million; studio revenue increased 24.4% to $75.9 million, largely reflecting acquisitions. Same-store NOI rose 1.9%, while non-same-store NOI fell 10.4%, principally due to asset sales and Campus Center being taken offline for redevelopment. Stabilized office occupancy was 94.4%; in-service office occupancy was 90.8% on commenced leases, or 93.0% including signed leases not yet commenced. Same-store studio occupancy averaged 93.1%.
Year-end cash and cash equivalents were $53.7 million, with $14.5 million of restricted cash. Net balance-sheet unsecured and secured debt was $2.624 billion; the filing separately reports $138.2 million of in-substance defeased debt and $66.1 million of joint-venture partner debt. The company had $400 million drawn on its $600 million revolver and $5 million drawn on a construction facility with up to $257 million available, subject to lender requirements. Debt and Series A preferred units equaled approximately 36.8% of total market capitalization. The company reported compliance with its financial covenants.
Changes, outlook, and risks
- During 2018, the company acquired properties for stated purchase prices totaling $521.0 million and sold five office properties for gross proceeds of $464.8 million. Dispositions generated $43.3 million of gains. The revolving-credit balance increased by $300 million, net of paydowns.
- Cash used in investing activities was $392.3 million, including property acquisitions, investment-property additions, and purchases of U.S. Government securities. The company repurchased $50 million of stock in November 2018.
- Development and redevelopment included EPIC, Harlow, Maxwell, and Campus Center. Management reported that One Westside was fully leased to Google after year-end, with an expected 2022 commencement; EPIC was fully leased to Netflix, with expected commencement in late 2019. These are forward-looking timing and execution assumptions.
- No formal numerical earnings or FFO guidance is provided in the filing. Management describes a strategy of leasing, repositioning and selective development, while noting that future performance depends on occupancy, rental rates, costs, financing access, and market conditions.
- Key risks include geographic concentration (90.1% of properties in California), tenant and industry concentration (technology and media/entertainment), lease expirations and available space, development costs and lease-up, interest-rate exposure, and natural disasters including earthquakes. The 15 largest office tenants generated 37.2% of office annualized base rent; Google and Netflix together accounted for 10.7%.
- ASC 842 lease accounting took effect for the company on January 1, 2019; the filing says it was still finalizing the calculation of right-of-use assets and lease liabilities. Ground-lease minimum payments were $571.4 million undiscounted. The company also had an unfunded commitment of up to $20 million to a real-estate technology venture fund.
- Management reported no material pending legal proceedings and no off-balance-sheet arrangements. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Reconcile the decline in operating cash flow and FFO with the increase in reported net income; assess the effects of dispositions, acquisitions, noncash items, and gains on sales.
- Review debt maturities, variable-rate exposure, and hedge coverage. The filing reports $1.32 billion of variable-rate debt, of which $839.5 million was subject to derivatives; a 100-basis-point LIBOR increase was estimated to raise annual interest expense by $4.8 million.
- Track 2019 lease expirations, the 15.3% of office square footage reported available, and leasing costs. 2018 tenant-improvement and leasing-commission costs averaged $61.93 per square foot across reported leases.
- Confirm delivery, tenant occupancy, and expected rent commencement for development and redevelopment projects, especially One Westside, EPIC, Harlow, and Maxwell.
- Assess the sustainability of the $1.00 annual dividend against cash generation, capital spending, debt service, and REIT distribution requirements.