Hudson Pacific Properties, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2011. Hudson Pacific owned 11 California office properties and two media and entertainment properties. The company is a REIT and operates through its controlled operating partnership. Comparisons with 2010 are not like-for-like: the IPO and formation transactions closed June 29, 2010, and multiple properties acquired afterward contributed revenue in 2011 but little or none in the comparable 2010 periods.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $33.4 | $11.1 | $68.2 | $22.1 |
| Income from operations | $4.4 | $1.8 | $9.3 | $4.3 |
| Net income (loss) | $(0.2) | $(2.8) | $(0.1) | $(2.2) |
| Net loss attributable to common shareholders | $(2.1) | $(2.6) | $(4.6) | $(1.9) |
| Interest expense | $4.5 | $2.3 | $9.2 | $4.4 |
Q2 basic and diluted loss per share was $0.07; six-month loss per share was $0.18. The 2010 statements show no comparable per-share figures because the company had not yet completed its IPO. Common dividends declared were $0.125 per share for Q2 and $0.25 per share for the six-month period.
Six-month property net operating income (NOI), a non-GAAP measure, was $37.5 million, or approximately 54.9% of revenue, versus $10.0 million, or approximately 45.2%, in 2010. Office NOI was $29.9 million and media and entertainment NOI was $7.6 million. The filing cautions that NOI is not a GAAP measure or a measure of cash available for needs.
Cash flow and liquidity. Six-month operating cash flow was $14.5 million, compared with $1.7 million in 2010; investing cash outflow was $8.2 million, compared with $12.9 million; financing cash inflow was $31.8 million, compared with $91.5 million. Cash increased to $86.9 million from $48.9 million at year-end 2010. At June 30, the company reported approximately $141.2 million available under its $200 million secured revolving facility.
Debt and balance sheet. Notes payable totaled $275.0 million, down from $342.1 million at December 31, 2010. Debt before loan premium was approximately $274.9 million, including $92.0 million of variable-rate mortgage debt; $50.0 million of that balance was subject to an interest-rate cap. Debt to total market capitalization was approximately 30.7%, with Series A preferred units counted as debt. The company was in compliance with its credit-facility covenants. Total assets were $1.042 billion and total equity was $704.6 million.
Material changes and unusual items
- Revenue growth chiefly reflected properties added since the IPO and later 2010 acquisitions, rather than a directly comparable same-property trend. Media and entertainment revenue also benefited from improved occupancy and related production activity.
- Six-month office revenue included early lease termination revenue from a single-floor City Plaza tenant; the filing does not state its amount separately in the supplied text.
- The company raised approximately $156.7 million from a May common-stock offering and concurrent private placement, after underwriting discounts and before transaction costs. It used approximately $81.0 million to repay revolving-facility borrowings and $14.3 million to repay the Tierrasanta loan.
- In April, Hudson acquired the remaining 49% of Rincon Center for approximately $38.7 million before closing costs and prorations, and refinanced the property with a $110 million, seven-year fixed-rate loan at 5.134%. It also refinanced the Sunset Gower/Sunset Bronson debt with a $92 million loan at LIBOR plus 3.50%.
- The revolving facility was amended in April: its spread fell to LIBOR plus 2.50%–3.25% from 3.25%–4.00%, and the 1.50% LIBOR floor was removed. The facility has an accordion option up to $250 million under specified conditions.
- 2011 general and administrative costs included corporate operations not present in the 2010 comparison, and 2010 included $2.4 million of IPO and formation-related acquisition expenses. Depreciation and interest expense also rose as the portfolio and debt expanded.
Outlook, risks and contingencies
The filing provides no quantified earnings or operating guidance. Management expects to meet short-term needs through cash, operating cash flow and, if necessary, the revolving facility; long-term needs may be funded with operating cash flow, debt and equity. Management identified acquisition, capital-improvement, debt repayment and dividend requirements as liquidity needs.
Key disclosed risks include economic and real estate weakness, lease defaults or non-renewals, lower rents or higher vacancies, interest-rate and financing risk, and maintaining REIT status. All properties are in California. Media and entertainment tenants generated approximately 27% of six-month 2011 revenue; Bank of America contributed approximately 8%. The company also disclosed that $43 million of First Financial debt matured in December 2011 and $30 million of 10950 Washington debt matured in February 2012. Management assessed material loss from ordinary-course legal proceedings as remote; no material off-balance-sheet arrangements were reported. Disclosure controls were deemed effective, with no material change in internal control over financial reporting identified.
Subsequent events: the filing describes a pending agreement to acquire 625 Second Street for $56.4 million, including assumption of a $33.7 million loan; a July 1 agreement to acquire 6922 Hollywood for $92.5 million, including assumption of approximately $42.1 million of debt and $5 million of consideration in common shares; and the completed July 26 acquisition of 604 Arizona for $21.5 million. The first two transactions remained subject to closing conditions.
Important facts for investors to verify
- How much of revenue and NOI growth reflects acquired properties, and what are comparable-property occupancy, rents and operating costs?
- What was the amount and earnings impact of City Plaza lease termination revenue, and is it recurring?
- Confirm debt maturity, refinancing and interest-rate exposure, including the cap’s coverage, facility availability and covenant headroom.
- Assess the cash cost and funding plan for the announced acquisitions, their closing status, and the debt assumed.
- Review tenant concentration, particularly the California and media and entertainment exposure, and the large Bank of America lease.
- Reconcile GAAP net loss to the larger loss attributable to common shareholders, including preferred distributions and non-controlling interests.