Business context and reporting period
Hudson Pacific Properties, Inc. is a REIT whose operating partnership holds substantially all assets and conducts substantially all business. The portfolio focuses on office and studio properties in California and the Pacific Northwest. This Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. At quarter-end, the portfolio comprised 53 properties totaling approximately 14.6 million square feet.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $175.2 million | $180.5 million | $349.3 million | $348.8 million |
| Income from operations | $35.8 million | $28.1 million | $70.9 million | $56.6 million |
| Net income | $19.7 million | $7.0 million | $72.3 million | $31.1 million |
| Net income attributable to common stockholders | $16.2 million | $3.6 million | $64.8 million | $24.1 million |
| Diluted EPS | $0.10 | $0.02 | $0.41 | $0.16 |
| FFO attributable to common stockholders and unitholders | $72.5 million | $75.3 million | $142.0 million | $147.2 million |
| Net operating income (NOI) | $112.7 million | $118.0 million | $223.9 million | $231.1 million |
For the six months, operating cash flow was $102.5 million, down from $141.0 million. Investing activities provided $7.5 million, versus $309.7 million used in the prior-year period; financing activities used $145.3 million, versus $151.0 million provided. Cash and restricted cash totaled $66.0 million at June 30, 2018, compared with $101.3 million at year-end 2017.
At June 30, total notes payable were $2.381 billion ($2.362 billion net of financing costs and discounts), down from $2.439 billion gross at December 31, 2017. Debt to total market capitalization, including Series A preferred units as debt, was 29.9%. The $600 million unsecured revolver had $140 million drawn and $460 million available; the company also reported up to $257 million of construction-loan capacity, subject to lender submissions. It was in compliance with financial covenants.
Material changes versus the prior comparable period
- Q2 revenue decreased 3.0%, while six-month revenue was essentially flat. Q2 NOI fell 4.5% and six-month NOI fell 3.1%; same-store NOI increased 2.4% and 2.9%, respectively, but non-same-store NOI declined 16.0% and 12.8%.
- Higher reported net income reflected, in part, real-estate sale gains: $39.6 million in the first half of 2018 versus $16.9 million in 2017. FFO declined 3.7% for the quarter and 3.5% for the half year.
- Same-store office occupancy was lower year over year: 92.4% average in Q2 versus 93.7%; for the first half it was 92.5% versus 94.4%. Average annual same-store office rent per square foot rose to $45.61 for the half year from $42.19.
- Office revenue and NOI were pressured by property sales and the Campus Center redevelopment following a tenant early termination. Lease commencements and lease-up, including at ICON, CUE, 450 Alaskan and Hill7, partly offset the declines. Studio results benefited from higher production activity and the 2017 Sunset Las Palmas Studios acquisition.
- In March 2018, the company amended its credit agreement, increasing revolver capacity from $400 million to $600 million, extending maturity to 2022 and reducing applicable spreads. It repaid Rincon Center debt in February.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings, FFO or occupancy guidance. Management expects liquidity needs—including operations, acquisitions, capital expenditures, tenant improvements, leasing costs, distributions and debt repayments—to be funded through operating cash, cash reserves, equity and debt financing, including the revolver. Management cautions that interim results are not necessarily indicative of full-year results.
On July 27, 2018, the company sold Peninsula Office Park for $210 million before adjustments and closing costs; proceeds were used to repay the unsecured revolver. The filing states the transaction resulted in a gain but does not provide a clear amount. The company had $508.0 million of future undiscounted ground-lease payments, including $436.8 million thereafter. It planned to adopt ASC 842 on January 1, 2019; the analysis was incomplete, and qualifying indirect leasing costs are expected to be expensed rather than capitalized.
Principal disclosed risks include adverse market or real-estate conditions, tenant defaults or nonrenewals, lower rents or higher vacancy, rising interest rates and operating costs, access to financing, debt-service and dividend capacity, acquisition and development execution, REIT qualification, and environmental or weather-related events. Management reported no material legal proceedings, no loan defaults, and no impairment charges in the first half. Disclosure controls were deemed effective.
Important facts for investors to verify
- Separate recurring property performance from the $39.6 million of first-half property-sale gains; review the quarter’s lower NOI and FFO.
- Track office occupancy, lease expirations and tenant concentration, including the effect of Campus Center’s redevelopment and lease-up at newer properties.
- Confirm the impact of the Peninsula Office Park sale and revolver repayment on post-quarter debt, liquidity and reported gain.
- Review the debt maturity schedule, floating-rate exposure, hedge coverage and compliance with loan covenants.
- Assess the cost and funding requirements of development and capital projects, and the eventual balance-sheet effects of ASC 842 ground-lease accounting.