Hudson Pacific Properties, Inc. — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014. Financial statement amounts below are in millions of dollars unless stated otherwise. Hudson Pacific is a REIT focused on office and media and entertainment properties, primarily in California and Washington. At quarter-end, it owned 26 office properties and two media and entertainment properties.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $55.6 | $47.4 | Up 17.3% |
| Income from operations | $11.2 | $5.1 | Up $6.1 |
| Income from continuing operations | $4.6 | Loss of $0.4 | Improved |
| Net income | $4.5 | $0.3 | Up $4.2 |
| Net income attributable to common stockholders | $1.3 | Loss of $2.9 | Improved |
| Diluted EPS | $0.02 | Loss of $0.06 | Improved |
| Net cash from operating activities | $19.4 | $15.1 | Up 28.4% |
| Cash and cash equivalents at period-end | $29.1 | $30.4 at Dec. 31, 2013 | Down $1.3 |
| Notes payable, including unamortized premium | $827.4 | $931.3 at Dec. 31, 2013 | Down $103.9 |
Operating expenses rose 5.0% to $44.4 million, slower than revenue growth. The resulting operating margin was approximately 20.2%, versus 10.8% in Q1 2013. Property-level NOI, a company-defined non-GAAP measure, increased to $33.7 million from $28.6 million; NOI margin was approximately 60.5%, compared with 60.3%. Office NOI rose to $30.1 million from $23.2 million, while media and entertainment NOI fell to $3.5 million from $5.3 million. Common and unit holders’ dividends declared were $0.125 per common share or unit, unchanged from the prior-year quarter.
Material changes and drivers
- Office revenue increased 26.3%, primarily reflecting acquisitions completed in 2013 and Merrill Place, acquired in February 2014. Q1 office lease renewals were at weighted-average initial cash rents 17.8% above expiring cash rents.
- Total media and entertainment revenue declined 12.6%, mainly because lower production activity at Sunset Gower reduced other property-related revenue. The industry represented 17% of revenue, down from 23% in Q1 2013.
- The company acquired Merrill Place and 3402 Pico Boulevard for total cash consideration of $75.6 million. Additions to investment property were $25.1 million; investing activities used $100.7 million, versus $19.5 million used a year earlier.
- Financing activities provided $80.0 million, including $197.5 million of common-stock offering proceeds after underwriting discounts, partly offset by $156.1 million of debt repayments. Common shares outstanding increased to 66.8 million from 57.2 million at year-end 2013.
- G&A increased 15.8% to $5.8 million, partly due to the 2014 Outperformance Program, a consulting arrangement with a former executive, and staffing for portfolio growth. Interest expense rose 16.7% to $6.5 million.
Debt, liquidity and risks
At March 31, notes payable before loan premium totaled $822.7 million; $387.6 million, or 47.1%, was variable-rate debt. The company reported a 32.3% debt-to-total-market-capitalization ratio, counting Series A preferred units as debt. A 100-basis-point increase in one-month LIBOR was estimated to increase annual interest expense by $3.2 million, based on the specified exposed balances. Interest-rate caps and a swap hedge portions of variable-rate borrowings.
The $250 million unsecured revolving facility had $40 million drawn, leaving $210 million undrawn subject to covenant compliance and collateral availability. The company reported compliance with its financial covenants. Management expected to fund near-term needs with cash, operating cash flow and, if required, revolver borrowings; longer-term needs could be met with operating cash flow, debt and equity issuance. The filing provides no earnings or revenue guidance.
Near-term maturities include a $13.2 million mortgage due June 2014 and a $40.2 million mortgage due January 2015. The company identifies risks including tenant defaults, early lease terminations or non-renewals, vacancies and rent declines, interest-rate movements, access to financing, geographic concentration in California, real estate market conditions, natural disasters and maintaining REIT qualification. Management stated that ordinary-course legal matters were not expected to have a material adverse effect and assessed material loss risk as remote. No impairment indicators were noted for the quarter. Tierrasanta was classified as held for sale; the filing reports no material changes to previously disclosed contractual obligations outside the ordinary course.
Other notable items and outlook
- Subsequent to quarter-end, the company signed a seven-year lease at 1455 Market Street for 24,438 square feet, with occupancy expected in Q3 2014; a further 24,438 square feet may be leased subject to an existing lease ending early.
- Management cautioned that interim results are not necessarily indicative of full-year results. Forward-looking outcomes depend on market conditions, leasing, acquisitions, financing, operating costs and other risks; no specific forecast was provided.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2014, with no material change in internal control over financial reporting identified during the quarter.
Investor verification points
- Assess whether acquisition-driven office revenue and NOI growth can be sustained, and whether weaker production-related revenue at the media properties persists.
- Review debt maturities, refinancing plans and covenant headroom, particularly the June 2014 mortgage maturity and variable-rate exposure.
- Reconcile cash generation with the acquisition and tenant-improvement spending program, and evaluate reliance on equity issuance and revolver availability.
- Monitor leasing and occupancy at 1455 Market Street, including the conditional additional space, and progress in selling Tierrasanta.
- Distinguish consolidated net income of $4.5 million from the $1.3 million attributable to common stockholders, and consider preferred distributions and share-count growth when assessing per-share results.