Hudson Pacific Properties, Inc. — Q3 2016 Form 10-Q
Business context and period. For the quarter and nine months ended September 30, 2016. Hudson Pacific is a REIT focused on office and media and entertainment properties, primarily in California and the Pacific Northwest. At quarter-end it owned 52 office properties and two media and entertainment properties. The filing combines the company and its operating partnership; amounts below are consolidated and in millions unless noted.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $164.6 | $151.6 | $472.4 | $366.2 |
| Income from operations | $23.7 | $4.2 | $62.6 | $33.6 |
| Net income (loss) | $5.2 | ($1.8) | $15.2 | ($13.3) |
| Net income (loss) attributable to common stockholders | $1.8 | ($3.9) | $4.9 | ($9.9) |
| FFO attributable to common stockholders and unitholders | $67.1 | $63.1 | $193.2 | $106.4 |
Q3 same-store and total NOI were $71.8 million and $104.1 million, respectively, up 12.1% and 11.1%. Nine-month total NOI was $302.9 million, up 29.7%; same-store NOI rose 12.2%. Total NOI divided by revenue was approximately 63.3% for Q3 and 64.1% for the nine-month period; NOI is a company-defined non-GAAP measure. Q3 diluted EPS was $0.02; nine-month diluted EPS was $0.05. Dividends declared were $0.20 per common share/unit in Q3 and $0.60 year to date.
For the first nine months, operating cash flow was $196.8 million (versus $121.1 million), investing cash outflow was $220.0 million (versus $1.742 billion), and financing cash inflow was $59.0 million (versus $1.650 billion). Cash and cash equivalents at September 30 were $89.4 million.
At September 30, notes payable were $2.427 billion gross ($2.408 billion net of financing adjustments), versus $2.278 billion gross at year-end 2015. Variable-rate debt was $1.29 billion, or 53.1% of notes payable; $839.5 million was covered by interest-rate contracts. The company had $400 million of revolving-credit capacity, of which $120 million was drawn. It reported a 33.4% debt-to-total-market-capitalization ratio, counting Series A preferred units as debt, and compliance with financial covenants.
Material changes and notable items
- Revenue growth reflected the 2015 EOP Northern California portfolio acquisition, the July 2016 purchase of 11601 Wilshire Boulevard for $311 million, and improved leasing and occupancy. Q3 same-store office occupancy averaged 94.7%; media and entertainment occupancy averaged 87.1%, versus 76.8% a year earlier.
- Q3 office and media NOI benefited from higher rents and lease-up, including at 1455 Market, Skyport Plaza, Sunset Gower and Sunset Bronson. Nine-month non-same-store NOI also included acquired assets and lease-up. Comparisons are affected by acquisitions and property sales.
- Interest expense increased 37.7% in Q3 and 60.8% year to date, reflecting higher debt balances and effective rates. General and administrative expense rose 38.1% in Q3, partly due to the 2016 outperformance plan and executive retention awards.
- The company sold three properties during the first nine months for gross proceeds of $287.4 million and recorded $8.5 million of gains. 12655 Jefferson was classified as held for sale at quarter-end and was subsequently sold on November 1, 2016.
- Equity offerings in May and July generated $880.5 million net during the nine months; proceeds were used to redeem approximately 29.3 million operating-partnership units. The company also issued $200 million of senior notes during 2016. No share repurchases occurred through September 30.
- On October 7, 2016, a joint venture acquired Seattle’s Hill7 property for $179.8 million; it also obtained a $101 million, 3.38% fixed-rate mortgage loan. This occurred after the reporting date.
Outlook, risks and contingencies
The filing provides no numerical earnings or operating guidance. Management expected to fund short-term needs with cash, operating cash flow and, if needed, its revolving facility; longer-term needs were expected to be met through operations, debt and equity issuance. These expectations depend on access to capital and market conditions.
Key disclosed risks include concentration in California; exposure to technology and media and entertainment tenants; tenant defaults, lease terminations or non-renewals; vacancy and rent changes; interest-rate and financing risks; acquisition and development execution; and maintaining REIT status. The 15 largest tenants represented 22.4% of rentable square feet; no single tenant exceeded 10%. The company disclosed $510.2 million of future minimum ground-lease payments and $2.6 million of outstanding letters of credit. Management considered ordinary-course legal claims unlikely to cause a material adverse effect. No impairment charges were recorded. The filing reports no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether leasing, occupancy and same-store NOI trends persist, and how much reported growth depends on acquisitions and other non-same-store assets.
- Debt maturities, floating-rate exposure, hedge effectiveness and the company’s capacity to meet covenant and debt-service requirements.
- Capital needs and expected returns for development and redevelopment projects, including the ICON projects and Hill7 joint venture.
- Tenant concentration, lease expirations, and exposure to California, technology and media and entertainment markets.
- Use and dilution effects of equity issuance, operating-partnership unit redemptions, and the stated dividend level.