Hudson Pacific Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context
The company is a REIT that owns, operates, acquires and develops office and media and entertainment properties, primarily in California and Washington. At quarter-end it reported 24 office properties and two media and entertainment properties, totaling approximately 6.17 million square feet. The portfolio expanded materially during 2013, including the Seattle portfolio and Pinnacle II.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $53.3 | $40.6 | $148.1 | $116.4 |
| Income from operations | $5.2 | $4.5 | $17.6 | $12.1 |
| Income (loss) from continuing operations | $(2.6) | $(0.2) | $(1.9) | $(2.5) |
| Net loss | $(2.8) | $(0.3) | $(5.9) | $(2.0) |
| Net loss attributable to common stockholders | $(5.7) | $(3.4) | $(14.8) | $(11.3) |
| Basic and diluted loss per share | $(0.10) | $(0.07) | $(0.27) | $(0.28) |
For the nine-month periods, property-level NOI rose to $85.8 million from $62.5 million; NOI margin was approximately 58% versus 54%. Office revenue growth was primarily acquisition-driven. Media and entertainment revenue increased modestly for the nine-month period, while Q3 revenue declined, mainly due to lower production activity at Sunset Gower. Q3 operating expenses rose 33.7%, including higher depreciation and interest costs associated with the enlarged portfolio.
- Cash flow, nine months: Operating activities provided $43.9 million, versus $39.7 million. Investing activities used $390.5 million, primarily for acquisitions and property additions, partly offset by City Plaza sale proceeds. Financing activities provided $357.0 million. Cash and cash equivalents were $29.3 million at September 30, 2013, up from $18.9 million at year-end 2012.
- Debt and liquidity: Notes payable were $891.2 million including an unamortized loan premium, compared with $582.1 million at December 31, 2012. Debt before premium was $885.3 million; 46.8% was variable-rate debt, some of it hedged. The company reported a 41.0% debt-to-total-market-capitalization ratio, counting Series A preferred units as debt. Its $250 million unsecured revolver had $80 million drawn; the filing reports approximately $237.3 million of total capacity, subject to borrowing conditions. The company stated it was compliant with facility covenants.
- Balance sheet: Total assets were $2.10 billion and total equity was $1.10 billion at quarter-end. The common dividend declared was $0.125 per share for Q3, unchanged from Q3 2012.
Material changes and significant items
- Revenue grew 31.5% in Q3 and 27.2% for the nine-month period, substantially reflecting acquisitions. Office lease renewals during the first nine months covered about 196,137 square feet; initial stabilized cash rents averaged 4.1% above expiring cash rents.
- The company acquired 3401 Exposition, Pinnacle II, the Seattle portfolio and 1861 Bundy in 2013. It also issued 9.2 million common shares in February, generating approximately $189.9 million net of underwriting discount.
- City Plaza was sold on July 12, 2013 for approximately $56 million before adjustments and costs. The sale resulted in a $5.6 million impairment charge, contributing to a $4.0 million nine-month loss from discontinued operations.
- A one-time $1.1 million net lease-termination payment from Bank of America at 1455 Market Street contributed to nine-month office revenue and operating cash flow.
- Q3 interest expense increased to $7.3 million from $4.5 million, and nine-month interest expense rose to $18.7 million from $14.0 million, reflecting higher debt levels. Management estimated that a 100-basis-point increase in one-month LIBOR would increase annual interest expense by $3.5 million on specified unhedged borrowings.
Outlook, risks and subsequent events
The filing provides no quantified earnings or revenue guidance. Management expected to meet short-term liquidity needs through cash, operating cash flow and, if needed, the revolver; longer-term needs may be funded with operating cash flow, debt and equity issuance. It cautioned that these plans depend on financing availability, leverage, asset values and capital-market conditions.
- Key disclosed risks include tenant defaults, lease expirations or non-renewals, vacancy and rent changes, interest-rate movements, debt-service capacity, access to financing, acquisition and redevelopment execution, REIT qualification, property taxes, environmental and natural-disaster exposure, and geographic and tenant-industry concentration. Most properties were in California; media and entertainment tenants generated 21% of nine-month revenue.
- After quarter-end, the company closed a loan of up to $65.5 million secured by Element LA to fund redevelopment and leasing costs, and repaid the $33.7 million 625 Second Street loan using a revolver draw. It also signed 12-year and 15-year leases for all of 3401 Exposition and Element LA, respectively; commencement was scheduled for 2014 and 2015.
- In October, a holder required redemption of 80,000 Series A preferred units; the company elected to pay $25 per unit in cash. Management assessed ordinary-course legal matters as having remote risk of material loss. Disclosure controls were concluded effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- How much of reported revenue and NOI growth reflects acquisitions versus same-property performance, and the latest occupancy, leasing and rent-roll trends.
- Actual revolver availability and covenant headroom, given the stated facility size, drawn balance and reported capacity, as well as upcoming debt maturities and refinancing plans.
- Exposure to variable interest rates after accounting for caps and swaps, and the effect of rate changes on interest expense and cash available for distributions.
- Redevelopment and lease-up budgets, timing and tenant commencement conditions at Element LA and other projects.
- The effect of City Plaza’s impairment and sale, lease-termination income, preferred distributions and common-share issuance on recurring earnings and per-share results.