Hudson Pacific Properties, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Hudson Pacific is a REIT focused on office and media and entertainment properties, primarily in California and Washington. At quarter-end it owned 25 office properties and two media and entertainment properties. The EOP Northern California portfolio acquisition closed on April 1, after the reporting period.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $62.8 million | $55.6 million | +13.0% |
| Net operating income (NOI) | $39.7 million | $33.7 million | +17.9% |
| Income from operations | $13.3 million | $11.2 million | +18.8% |
| Income before property-sale gain | $1.9 million | $4.6 million | Down 59.1% |
| Net income | $24.6 million | $4.5 million | Includes $22.7 million sale gain |
| Net income attributable to common stockholders; diluted EPS | $19.2 million; $0.25 | $1.3 million; $0.02 | EPS increased |
| Operating cash flow | $27.1 million | $19.4 million | +$7.7 million |
NOI was about 63% of revenue; this is a supplemental, non-GAAP operating measure, not a GAAP profit margin. Office revenue rose to $52.9 million and media and entertainment revenue to $9.9 million. Same-store NOI increased 10.7%; office same-store average occupancy rose to 92.2% from 86.7%, and average annual rent per square foot increased 5.7% to $33.50. Management attributed gains mainly to leasing at 1455 Market and Rincon Center, and lease-up at 901 Market and 3401 Exposition.
Balance sheet, cash flow and capital
- At March 31, cash and cash equivalents were $247.9 million, total assets $2.80 billion, total liabilities $906.7 million and total equity $1.88 billion.
- Notes payable were $787.2 million including loan premium ($784.6 million before premium), down from $918.1 million at year-end 2014. The company had no borrowings on its $300 million revolving facility at quarter-end.
- Cash flow from investing was a $204.0 million use, including $261.6 million in acquisition deposits, partly offset by $88.3 million of proceeds from the First Financial sale. Financing provided $407.0 million, principally reflecting $385.6 million net proceeds from the January common-stock offering and $219.2 million of joint-venture contributions, offset in part by debt repayments and distributions.
- Common dividends declared were $0.125 per share, unchanged from Q1 2014. The filing reports no formal earnings or operating guidance.
Material changes, outlook and risks
- First Financial sale: Sold in March for approximately $89 million before adjustments, producing a $22.7 million gain. The gain materially lifted reported net income; income before the gain fell year over year, in part because acquisition-related costs rose to $6.0 million from $0.1 million.
- Acquisition and financing after quarter-end: On April 1, Hudson Pacific acquired 26 Northern California office assets totaling about 8.2 million square feet, plus two development parcels, for $1.75 billion cash and 63,474,791 shares and operating-partnership units. The company reported approximately $2.08 billion of consolidated debt after closing, including $1.74 billion of variable-rate debt. A separate $550 million two-year term loan was fully drawn for the acquisition; the amended credit facilities also increased revolving capacity to $400 million and provided additional term-loan commitments.
- Following the acquisition, management reported debt to total market capitalization of approximately 29.6%, versus 21.6% at March 31. It cited cash from operations, cash on hand, debt and equity issuance as expected sources for liquidity and future capital needs. A 100-basis-point LIBOR increase on the post-acquisition unhedged variable-rate exposure was estimated to raise annual interest expense by $10.2 million, assuming specified swaps were effective.
- Risks include increased leverage and floating-rate exposure, refinancing and covenant risk, tenant defaults or non-renewals, acquisition integration and execution, development and leasing outcomes, and concentration in California and media and entertainment tenants. About 16% of Q1 revenue came from media and entertainment tenants. Management identified no material expected loss from ordinary-course litigation; a shareholder lawsuit challenging the acquisition-related arrangements had its preliminary-injunction motion denied, and the company said it would defend the case.
- The acquisition also introduced Blackstone-affiliate governance, transfer, registration and voting rights, including three board-nominee rights subject to ownership thresholds. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Important facts for investors to verify
- How the acquired portfolio performs against its purchase price and management’s leasing, development and integration assumptions.
- Post-acquisition debt balances, variable-rate exposure, hedging coverage, covenant headroom and refinancing needs.
- Whether recurring property operations and cash generation support dividends, given that Q1 reported profit included a substantial property-sale gain.
- Lease-up, occupancy and rent trends, including tenant concentration and the effect of space taken offline for ICON development.
- The final effects of Blackstone’s ownership and governance rights, related transfer or equity issuance restrictions, and the outcome of the shareholder litigation.