Hudson Pacific Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Hudson Pacific is a REIT focused on office and studio properties in California, the Pacific Northwest and Western Canada. At quarter-end, the consolidated portfolio included 55 properties; in-service office occupancy was 91.8% and leased area was 94.1%. Same-store studios averaged 92.6% leased over the prior 12 months. Financial amounts below are in U.S. dollars; “million” is used for readability.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $196.7 million | $175.2 million | $394.0 million | $349.3 million |
| Net income (loss) | $12.8 million | $19.7 million | $(24.1) million | $72.3 million |
| Net income (loss) attributable to common stockholders | $9.8 million; $0.06/share | $16.2 million; $0.10/share | $(29.6) million; $(0.19)/share | $64.8 million; $0.42/share |
| Net operating income (NOI) | $126.2 million | $112.7 million | $251.7 million | $223.9 million |
| FFO attributable to common stockholders and unitholders | $75.5 million | $71.6 million | $151.9 million | $141.1 million |
| Operating cash flow | Not separately provided for Q2 | $145.7 million | $102.5 million |
Approximate NOI margin was 64.2% in Q2 versus 64.4% a year earlier, and 63.9% for the first half versus 64.1%. NOI and FFO are non-GAAP measures and should be considered alongside GAAP results.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $48.2 million; restricted cash was $13.4 million. Cash plus restricted cash totaled $61.5 million, down from $68.2 million at year-end 2018.
- Unsecured and secured debt principal was $2.85 billion, compared with $2.64 billion at December 31, 2018. Separately reported in-substance defeased debt was $136.6 million and joint-venture partner debt was $66.1 million. Debt to total consolidated market capitalization was 35.3% under the company’s stated calculation.
- The $600 million unsecured revolver had $185 million drawn and $415 million available. A separate $235 million secured studio-property revolver had $5 million drawn. The company reported covenant compliance; actual covenant measures included 3.7x adjusted EBITDA to fixed charges against a 1.5x minimum.
- Six-month investing cash outflow was $270.0 million, including $189.3 million of real-estate additions and $64.4 million contributed to unconsolidated entities. Financing cash inflow was $117.7 million. Operating cash flow exceeded dividends and distributions paid of $79.6 million, though this comparison does not account for capital investment and other uses.
- Ground-lease accounting resulted in a $270.9 million operating lease right-of-use asset and a $273.9 million operating lease liability. The filing reports a 32-year weighted-average remaining ground-lease term and $584.9 million of future minimum ground-lease payments.
Changes versus prior comparable periods
- Q2 revenue rose 12.3% year over year and NOI rose 12.0%; first-half revenue rose 12.8% and NOI rose 12.4%. Management attributed growth to same-store leasing and occupancy gains, acquisitions including 10850 Pico and Ferry Building, and lease-up activity. Same-store office occupancy and rents also improved.
- First-half GAAP results shifted to a $24.1 million net loss from $72.3 million income in 2018. The 2019 period included a $52.2 million Campus Center impairment and no property-sale gains; the 2018 period included $39.6 million of real-estate sale gains. Q2 net income also declined year over year.
- Interest expense increased to $50.9 million for the first half from $39.8 million. Management cited debt assumed with acquisitions, joint-venture debt and the 4.65% senior notes, partly offset by debt repayments.
- First-half operating cash flow increased 42.1%, while investing cash flow swung from $7.5 million provided to $270.0 million used, mainly because 2018 included $250.2 million of property-sale proceeds and 2019 included the Bentall Centre investment.
- Comparisons of revenue line items are affected by adoption of ASC 842 on January 1, 2019: office rental and tenant recoveries are presented together in 2019, while 2018 is presented under prior accounting rules. Management supplies a supplemental recast for comparison.
Outlook, commentary and notable items
- The filing provides no specific earnings or FFO guidance. Management expects to fund operations, investments, leasing costs, dividends and debt repayments through operating cash flow, cash reserves, debt facilities and, as appropriate, equity or debt offerings.
- Campus Center, identified as non-strategic, was classified as held for sale after a $52.2 million impairment. Its office building and developable land sold after quarter-end for $70.3 million and $78.1 million, respectively; net proceeds of approximately $145 million were applied to the unsecured revolver.
- Hudson Pacific acquired a 20% interest in Vancouver’s Bentall Centre joint venture and serves as operating partner. Its maximum exposure is limited to its investment plus a $96.2 million debt guarantee. Foreign-currency translation may affect other comprehensive income.
- Development and redevelopment include One Westside, EPIC Hollywood and Harlow. Management also identifies substantial potential future development projects, with timing for several listed as undetermined. The filing does not provide a consolidated cost-to-complete figure.
- Studio NOI was broadly flat in Q2. Management cited lower production-related service revenue amid a tenant mix shift toward streaming providers, partly offset by higher studio rents and occupancy.
- Risks include tenant defaults, non-renewals and vacancies; rent and interest-rate movements; financing access and debt service; development and acquisition execution; operating costs; foreign exchange; and maintaining REIT status. Management said risk factors were not materially changed from the 2018 Form 10-K. Ordinary-course litigation was assessed as remote for material loss; no material proceedings were reported.
Important facts for investors to verify
- How much of reported revenue and NOI growth is organic same-store improvement versus acquisitions, lease-up and accounting presentation changes.
- The effects of the Campus Center sales, impairment and revolver paydowns, including the realized gain on the land sale.
- Debt maturities, refinancing needs and interest costs, particularly the disclosed 2020 and 2022 maturities, and the impact of variable rates and hedges.
- Leasing progress, upcoming expirations, tenant concentration and required tenant-improvement and leasing-commission spending; first-half new-lease costs per square foot increased substantially year over year.
- Capital requirements and completion or stabilization risks for One Westside, EPIC, Harlow and proposed future projects, as well as the Bentall Centre guarantee and remaining investment commitments.
- Whether operating cash flow can support dividends alongside development, leasing and debt obligations. The filing reports a $0.25 quarterly common dividend and $0.50 per share for the first half.