HPP

Hudson Pacific Properties, Inc. - 10-Q Summary (Q1 2011)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Hudson Pacific Properties, Inc., a Maryland corporation and Real Estate Investment Trust (REIT), for the period ended March 31, 2011. The Company owns, manages, and develops office and media/entertainment properties, primarily located in California. As of the reporting date, the portfolio consisted of 11 office properties and two media/entertainment properties. The Company completed its IPO and formation transactions in June 2010, meaning year-over-year comparisons are significantly impacted by the inclusion of properties acquired post-IPO.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 217% to $34.8 million. Office revenues surged 638% to $25.6 million, driven by the inclusion of properties acquired during the IPO and in late 2010. Media & Entertainment revenues grew 22% to $9.2 million due to improved occupancy and higher production activity.
• Expense Increases: Total operating expenses rose 255% to $30.0 million, primarily due to the expanded portfolio. Depreciation and amortization increased 319% to $11.4 million. General and administrative expenses were $3.1 million in Q1 2011, whereas they were negligible in Q1 2010 prior to the IPO.
• Profitability: While Net Income decreased to $0.1 million, the Net Loss attributable to common shareholders was $(2.5) million, compared to a profit of $0.7 million in the prior year. This shift is largely due to preferred stock dividends ($2.0 million) and non-controlling interest allocations.
• Liquidity: Cash and cash equivalents decreased to $38.3 million from $48.9 million at year-end 2010, despite strong operating cash flow, due to debt repayments and dividend distributions.

Outlook, Risks, and Subsequent Events

• Debt Refinancing: In February 2011, the Company closed a $92.0 million term loan to refinance the Sunset Bronson property and pay down the revolving credit facility. In April 2011, the revolving credit facility was amended to reduce interest rate spreads (LIBOR + 250-325 bps) and remove the LIBOR floor.
• Acquisitions: Subsequent to the quarter end, the Company acquired the remaining 49% interest in the Rincon Center property for approximately $38.7 million and refinanced the property with a new $110.0 million loan.
• Capital Markets: On May 3, 2011, the Company completed a secondary offering of common stock and a concurrent private placement, raising approximately $156.7 million in gross proceeds to repay debt and fund future acquisitions.
• Risks: The Company faces concentration risks as all properties are in California and a significant portion of revenue (26% in Q1 2011) comes from the media and entertainment sector. Interest rate risk is managed via swaps and caps, though a portion of debt remains variable.

Investor Verification Checklist

• Portfolio Composition: Verify the impact of the Rincon Center acquisition (completed post-quarter) on future leverage and NOI.
• Debt Maturities: Review the maturity schedule of the $332 million debt portfolio, noting the refinancing of the Rincon Center loan in April 2011.
• Dividend Coverage: Assess the ability to maintain the $0.1250 quarterly common dividend given the net loss attributable to shareholders and preferred dividend obligations.
• Concentration Risk: Evaluate the stability of the media/entertainment tenant base, which accounts for a significant portion of revenue.
• Secondary Offering Proceeds: Confirm the allocation of the $156.7 million raised in May 2011 toward debt reduction versus new acquisitions.