Hudson Pacific Properties, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also presents fourth-quarter results. Hudson Pacific is a REIT focused on office and media and entertainment properties, primarily in California and the Pacific Northwest. At year-end, it reported 26 operating properties totaling approximately 6.2 million square feet, plus land assets.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $205.6 million | $160.5 million |
| Operating income | $28.0 million | $14.3 million |
| Net loss | $2.6 million | $5.0 million |
| Net loss attributable to common stockholders | $14.8 million | $17.2 million |
| Net loss per common share | $0.27 | $0.41 |
| Operating cash flow | $41.5 million | $42.8 million |
| Capital investment and acquisitions, cash used in investing | $424.0 million | $423.5 million |
- Revenue rose 28.1%, mainly from acquisitions. Office revenue increased 37.5% to $165.4 million; media and entertainment revenue was essentially flat at $40.1 million.
- Property-level net operating income (NOI), a non-GAAP measure, increased to $118.0 million from $85.5 million. NOI margin was approximately 57.4% of revenue versus 53.3%. Operating margin increased to approximately 13.6% from 8.9%.
- Depreciation and amortization was $70.1 million, interest expense was $25.5 million, and acquisition-related expense was $1.4 million. The filing does not provide a clear EBITDA figure in the supplied text.
- Cash and cash equivalents were $30.4 million; restricted cash was $16.8 million. Operating cash flow declined 3.0% year over year.
- Year-end notes payable were $931.3 million, including a $5.3 million unamortized loan premium; debt before the premium was $926.0 million, up from $580.9 million. Debt to total market capitalization was reported at 39.2% at year-end. The $250 million unsecured revolver had $155 million drawn, and the company was in compliance with its financial covenants.
- Common dividends were $0.50 per share for 2013, or $0.125 quarterly. Series B preferred stock carries an 8.375% cumulative dividend.
Material changes versus 2012
- Portfolio expansion included the Seattle office portfolio, acquired for approximately $368.4 million, and acquisitions of 3401 Exposition, Pinnacle II through a joint venture, and 1861 Bundy. City Plaza was sold for approximately $56.0 million; the sale generated a $5.6 million impairment charge.
- Office occupancy was approximately 95.4% for the stabilized portfolio including signed, uncommenced leases; excluding those leases, it was 90.1%. Media and entertainment properties were 69.9% leased on a trailing-year basis.
- Office rental growth and acquisitions lifted NOI, while higher depreciation, interest expense, and general and administrative costs partly offset the gains. Total operating expenses increased 21.5% to $177.6 million, and interest expense rose 33.6%.
- Office lease renewals covering approximately 232,967 square feet had initial stabilized cash rents averaging 5.0% above expiring cash rents. Media and entertainment rental revenue fell 2.5%, primarily due to lower occupancy.
Outlook, risks, and unusual items
- The filing gives no specific earnings or FFO guidance. Management described continued acquisition and value-add leasing as core growth strategies, while noting outcomes depend on occupancy, rental rates, capital availability, and market conditions.
- Lease rollover is a material exposure: approximately 6.3% of office square footage was scheduled to expire in 2014, and substantially all media and entertainment leases other than the KTLA lease were due to expire in 2014 or 2015. Media leases are generally short term.
- Tenant concentration is notable: the 15 largest office tenants represented 60.2% of office annualized base rent; Warner Bros. Entertainment and Warner Music Group together represented 12.4%. The filing also discloses early termination rights for certain tenants, including Saatchi & Saatchi and GSA.
- Geographic and industry concentration exposes the company to California and Pacific Northwest economic conditions, natural disasters, and media, entertainment, and technology demand. Approximately 20% of 2013 revenue came from media and entertainment tenants.
- Interest-rate sensitivity: management estimated that a 100-basis-point increase in one-month LIBOR would raise annual interest expense by approximately $4.2 million, based on year-end debt and hedges.
- Tenant-related commitments totaled $116.0 million. The company cited environmental, ADA, ground-lease, refinancing, covenant, and REIT-qualification risks. It reported no material pending legal proceedings and no off-balance-sheet arrangements.
- After year-end, the company completed a common-stock offering generating approximately $195.8 million after underwriting discounts, used $155 million to repay its revolver, and subsequently drew on the facility for acquisitions. It also acquired Merrill Place and 3402 Pico Boulevard. Former President Howard Stern resigned in January 2014 and entered a one-year consulting agreement with a $2.5 million annual fee.
Important facts for investors to verify
- Reconcile the filing’s reported office occupancy measures and determine how much of the 95.4% stabilized occupancy depends on leases not yet commenced.
- Review the debt maturity schedule, variable-rate exposure, hedge terms, and post-year-end revolver borrowings against acquisition needs and tenant commitments.
- Assess upcoming office and media lease expirations, tenant termination options, and the credit concentration among major tenants.
- Evaluate whether acquisition-driven revenue and NOI growth can translate into improved per-share results after interest, depreciation, capital spending, and equity issuance.
- Confirm the effect of the City Plaza impairment and sale, post-year-end equity issuance, and subsequent acquisitions on comparable results, leverage, and share dilution.