Hudson Pacific Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Hudson Pacific is a self-managed REIT focused on owning, leasing, managing, acquiring, and developing office and media and entertainment properties. At quarter-end, it owned 18 office properties and two media and entertainment properties, all in California, totaling approximately 4.93 million square feet. 2012 acquisitions included 10900 Washington, 901 Market Street, Olympic Bundy, and 1455 Gordon Street.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $42.1 million | $36.9 million | $120.9 million | $105.1 million |
| Income from operations | $4.4 million | $4.1 million | $12.5 million | $13.4 million |
| Net loss | $0.3 million | $0.8 million | $2.0 million | $0.9 million |
| Net loss attributable to common shareholders | $3.4 million | $2.7 million | $11.3 million | $7.3 million |
| Basic and diluted loss per share | $0.07 | $0.08 | $0.28 | $0.26 |
| Net operating income (NOI), nine months | Not stated by quarter in the supplied segment data | $64.7 million | $55.5 million |
- Revenue increased 14.0% in Q3 and 15.0% for the nine-month period. Growth largely reflected contributions from acquired office properties; media and entertainment rental revenue also benefited from higher occupancy.
- For the first nine months, office NOI was $53.4 million versus $43.8 million; media and entertainment NOI was $11.4 million versus $11.7 million. Total NOI rose about 16.7%. Approximate total NOI margin was 53.5%, compared with 52.8%.
- Nine-month operating cash flow was $39.7 million, up from $28.1 million. Investing used $202.0 million, mainly for acquisitions; financing provided $175.9 million, including equity proceeds. Cash and cash equivalents were $27.3 million at September 30, up from $13.7 million at year-end 2011. Restricted cash was an additional $10.7 million.
- Notes payable were $359.5 million including the unamortized loan premium ($358.1 million before premium), versus $399.9 million at December 31, 2011. Total assets were $1.345 billion and total equity was $908.2 million.
- The company reported $202.2 million of capacity under its $250 million unsecured revolver, with $10.0 million drawn, and said it was in compliance with financial covenants. Debt-to-total-market-capitalization was approximately 25.8%, counting Series A preferred units as debt.
- Of $358.1 million of debt before premium, $102.0 million was variable-rate debt; $92.0 million of that amount was subject to interest-rate caps. Management estimated a 100-basis-point increase in one-month LIBOR would increase future interest expense by approximately $1.0 million on the identified $102.0 million exposure.
- Common dividends were $0.125 per share for Q3, unchanged year over year. Nine-month declared common dividends were $0.375 per share.
Material changes versus the prior comparable periods
- Q3 net loss narrowed to $0.3 million from $0.8 million, while nine-month net loss widened to $2.0 million from $0.9 million. Nine-month loss attributable to common shareholders increased to $11.3 million from $7.3 million, reflecting, among other items, preferred distributions and higher expenses.
- Nine-month operating expenses rose 18.2% to $108.4 million, exceeding revenue growth. General and administrative expense increased 41.6% to $12.8 million, partly due to the 2012 Outperformance Program and staffing growth. Depreciation and amortization rose 19.4% to $39.4 million, mainly from acquisitions.
- Nine-month interest expense increased 5.5% to $14.0 million. The company issued 13.225 million common shares in May 2012, generating approximately $190.8 million net of underwriting discounts, and issued $57.5 million of Series B preferred stock in January.
- The company replaced its $200 million secured revolving facility with a $250 million unsecured facility in August 2012. Real estate investment, net, increased to $1.184 billion from $1.007 billion at year-end 2011.
Outlook, commentary, risks, and unusual items
- No numerical earnings or operating guidance is provided in the supplied filing text. Management expected to meet short-term liquidity needs through cash, operating cash flow, reserves, and revolver borrowings if needed; longer-term needs could be met through operating cash flow, secured or unsecured debt, and equity or debt issuance.
- Subsequent to quarter-end, the company closed loans secured by 275 Brannan and 901 Market Street, with proceeds intended in part for renovation, tenant improvements, and leasing costs. It also reported new leases at 1455 Market Street with Square and at 901 Market Street with Hotel Tonight.
- On November 8, 2012, a subsidiary acquired Pinnacle I in Burbank for $212.5 million through a joint venture, funded in part with an $83.9 million contribution and a $129.0 million property loan; the company used $38.0 million of revolver borrowings for its contribution. Pinnacle II’s contribution remained conditional on lender approval of an existing loan. If completed, the combined acquisition was expected to total $342.5 million with $218.6 million of property-level financing.
- Key exposures include concentration of all properties in California, exposure to media and entertainment tenants (about 24% of nine-month revenue), tenant and lease-renewal risk, interest-rate and refinancing risk, and the need to fund acquisitions and property improvements. Bank of America represented approximately 6% of nine-month revenue.
- Management reported no real estate impairment charges in the first nine months of 2012 or 2011, no material legal proceedings, and no material change in the risk factors from the 2011 Form 10-K. It assessed material loss from ordinary-course legal claims as remote. The company disclosed a related-party lease assignment involving an independent director’s co-owned entity.
- Management cautioned that interim results are not necessarily indicative of full-year results and that estimates, including property valuation and purchase-price allocations, may differ from actual outcomes. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether acquired properties and planned leasing, especially at 901 Market Street and 1455 Market Street, deliver the occupancy and cash NOI assumed by management.
- The status and final terms of the Pinnacle II contribution, including lender approval, the resulting joint-venture ownership split, and total property-level debt.
- Available revolver capacity and covenant headroom after subsequent borrowing and acquisition activity; the reported $202.2 million capacity is as of September 30, 2012.
- Debt maturities, variable-rate exposure, hedging coverage, and the company’s ability to refinance or fund capital and leasing costs without further equity issuance.
- Whether revenue growth translates into stronger operating results, given rising G&A, depreciation, and interest costs and the increase in nine-month common-shareholder loss.
- Concentration and lease-expiration exposure, including California-wide geographic concentration, media and entertainment industry exposure, and significant tenants.