Hudson Pacific Properties, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Hudson Pacific is a California-focused REIT owning and operating office and media and entertainment properties. At year-end, its portfolio comprised 19 office properties and two media and entertainment properties, totaling approximately 5.3 million square feet. All properties were in California.
Financial and operating performance
- Revenue: $166.2 million, up 16.9% from $142.2 million in 2011. Office revenue rose 19.8% to $126.0 million; media and entertainment revenue rose 8.5% to $40.1 million.
- Profitability: Operating income was $14.7 million versus $17.3 million. Net loss was $5.0 million versus $2.2 million, while net loss attributable to common shareholders widened to $17.2 million from $10.4 million; diluted loss per share was $0.41 versus $0.35. The filing attributes the deterioration primarily to higher operating costs, depreciation and amortization, and corporate expenses.
- Property NOI: $88.2 million, up from $75.0 million; office NOI was $72.4 million and media and entertainment NOI was $15.8 million. NOI is a non-GAAP supplemental measure.
- Cash flow: Operating activities provided $42.8 million, compared with $32.1 million. Investing activities used $423.5 million, primarily for acquisitions; financing activities provided $385.8 million. Year-end cash was $18.9 million.
- Debt and liquidity: Notes payable totaled $582.1 million, up from $399.9 million; total liabilities were $650.0 million. A $250 million unsecured revolving facility had $55 million drawn and approximately $204.1 million available at year-end. The company subsequently drew and repaid $60 million using proceeds from its February 2013 stock offering. Management reported covenant compliance. Debt-to-market capitalization was approximately 27.1% as of March 1, 2013, using the company’s stated calculation.
- Dividends: Common dividends declared were $0.50 per share for 2012, unchanged from 2011. Series B preferred stock carries an 8.375% cumulative dividend rate.
Material changes and developments
- Acquired 901 Market Street for approximately $90 million, Olympic Bundy for approximately $89 million, and 10900 Washington for approximately $2.6 million. The company also acquired Pinnacle I through a joint venture; its 98.25% interest was funded in part with an associated $129 million, ten-year loan.
- Replaced a $200 million secured revolver with a $250 million unsecured revolver. Issued common stock in May 2012 for approximately $190.8 million net of underwriting discounts, and issued $57.5 million of Series B preferred stock proceeds net of underwriting discounts.
- Office portfolio occupancy was 93.5% including signed leases not yet commenced, or 88.3% excluding them. Approximately 17.7% of office square footage was scheduled to expire in 2013; 10.7% was available at year-end. Media and entertainment properties were 73.7% leased on a trailing-year basis.
Outlook, risks and unusual items
The filing provides no specific financial guidance. Management’s strategy is to acquire and reposition underperforming properties, improve occupancy and cash flow through leasing and capital improvements, and pursue growth in California markets. It stated that office rents were generally below quoted market rates, while media and entertainment rents were generally around market levels.
- Key risks include concentration in California and in media, entertainment and technology tenants; significant tenant exposure and lease expirations; vacancy, concessions and tenant-improvement spending; and the ability to finance acquisitions and meet debt obligations.
- Variable-rate borrowings expose results to rate increases. Management estimated that a 100-basis-point increase in one-month LIBOR would increase future interest expense by approximately $2.0 million, based on specified year-end borrowings and hedges.
- Other material risks include earthquake and insurance exposure, environmental and regulatory obligations, ground-lease dependencies, joint-venture risks, REIT qualification and distribution requirements, and credit-facility covenants.
- No real estate impairment charges were recorded in 2012 or 2011; no properties were held for sale at year-end. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Investor facts to verify
- Lease commencement, backfill and termination arrangements for major tenants, particularly Bank of America at 1455 Market and AT&T at Rincon Center, and the execution of signed replacement leases.
- 2013 office expirations and the shorter-term lease rollover at media and entertainment properties, including the occupancy and cost impact of renewals and re-leasing.
- Progress, funding needs and final ownership terms for the planned Pinnacle II contribution to the joint venture; the filing said completion was anticipated before the end of first-quarter 2013, subject to conditions.
- Debt maturities, variable-rate exposure, available revolver capacity, covenant headroom and the company’s use of future equity or debt financing.
- The filing contains inconsistent statements about the commencement of REIT tax treatment (2010 in portions of the financial discussion and 2012 elsewhere); verify the applicable tax year and related disclosures.