Hudson Pacific Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The REIT owned 26 office properties and two media and entertainment properties in California and Washington.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $62.1 | $47.4 | $117.7 | $94.8 |
| Operating income | $13.2 | $7.3 | $24.4 | $12.4 |
| Net income (loss) | $6.7 | $(3.4) | $11.2 | $(3.1) |
| Net income (loss) attributable to common stockholders | $3.4 | $(6.2) | $4.6 | $(9.1) |
| Basic and diluted EPS | $0.05 | $(0.11) | $0.07 | $(0.17) |
| Operating income margin | 21.2% | 15.4% | 20.7% | 13.1% |
For the first half, property-level NOI was $71.4 million, or about 60.6% of revenue, versus $55.4 million, or about 58.4%, a year earlier. NOI is a non-GAAP supplemental measure. Common dividends were $0.125 per share for Q2 and $0.25 per share for the first half, unchanged year over year.
Cash flow, debt and liquidity
- First-half operating cash flow was $35.9 million, up from $31.0 million. Investing cash outflow was $127.1 million, mainly reflecting $75.6 million of acquisitions and $51.5 million of property additions. Financing cash inflow was $93.6 million; cash increased $2.4 million to $32.8 million.
- At June 30, total assets were $2.235 billion and total liabilities were $937.1 million. Notes payable were $852.5 million, including a $4.2 million unamortized loan premium, down from $931.3 million at December 31, 2013.
- The $250 million unsecured revolver had $80 million drawn, leaving $170 million of stated undrawn capacity, subject to covenants and borrowing-base support. The company reported covenant compliance. Its debt-to-total-market-capitalization ratio was approximately 31.1% using its stated calculation.
- Of $848.3 million in notes payable before loan premium, $414.5 million, or 48.9%, was variable-rate debt. Management estimated that a 100-basis-point increase in one-month LIBOR would increase annual interest expense by $3.5 million for the specified exposed borrowings. Interest-rate caps and a swap cover some variable-rate exposure.
Material changes and management commentary
- Revenue growth was primarily acquisition-driven, reflecting the Pinnacle II contribution, the 2013 Seattle portfolio acquisition and the February 2014 acquisitions of Merrill Place and 3402 Pico. Office revenue rose 40.2% in Q2 and 33.3% in the first half; media and entertainment revenue declined 4.4% and 8.8%, respectively.
- First-half office lease renewals covering approximately 37,987 square feet achieved weighted-average initial cash rents 11.8% above expiring cash rents. Management also cited higher occupancy at Sunset Bronson.
- Q2 office parking and other revenue included an approximately $1.6 million net early-termination payment from Fox Interactive Media. Media and entertainment property-related revenue was lower amid reduced production activity at Sunset Gower.
- First-half general and administrative expense increased 21.4%, partly due to the 2014 outperformance program, consulting costs for a former executive and staffing growth. Interest expense increased 14.2%, reflecting higher debt balances and financing for acquisitions and redevelopment.
- After quarter-end, Tierrasanta was sold on July 16 for $19.5 million before customary adjustments; proceeds were used toward the Merrill Place acquisition through a like-kind reverse exchange. On July 31, the company signed a 15-year lease for 40,558 square feet at 901 Market, scheduled to commence in Q2 2015.
Outlook, risks and unusual items
The filing provides no numerical company earnings or revenue guidance. The 2014 executive cash-bonus program, approved August 4, ties awards to FFO per share, stabilized office leased percentage, total shareholder return and discretionary criteria; it is an incentive plan, not company guidance. Management said it expected to fund near-term needs from cash, operating cash flow and, if necessary, the revolver, and longer-term needs from operations, debt and equity issuance.
Key risks include tenant defaults, non-renewals or early terminations; vacancy and rent-rate changes; financing availability and debt service; variable interest rates; real estate market and operating-cost changes; and maintaining REIT qualification. The portfolio’s geographic concentration in California and exposure to media and entertainment tenants increase concentration risk. The company said material-loss risk from ordinary-course litigation was remote and reported no material changes to its previously disclosed risk factors. It also noted that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much revenue and NOI growth came from acquired properties versus comparable-property performance, and whether leasing gains persist.
- The recurring earnings impact of lease-termination payments and the timing and economics of the 901 Market lease commencement.
- Liquidity after acquisitions and capital spending, revolver covenant headroom, and the ability to refinance maturities, including $218.9 million due in 2016 and $294.1 million due in 2018.
- Exposure to higher interest rates, the effectiveness and duration of hedges, and the cost of planned acquisitions, redevelopment and tenant improvements.
- The terms and outcomes of the Tierrasanta sale and 1031 exchange, and whether the company’s stated leverage and liquidity measures remain appropriate as the portfolio grows.