Hudson Pacific Properties, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise noted, financial amounts below are in millions of dollars. Hudson Pacific is a REIT focused on office and media and entertainment properties in California and the Pacific Northwest; at quarter-end it owned 53 office properties and two media and entertainment properties. The operating partnership held substantially all assets and conducted substantially all operations.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $153.5 | $62.8 |
| Net income | $6.0 | $24.6 |
| Net income attributable to common stockholders; diluted EPS | $2.3; $0.03 | $19.2; $0.25 |
| FFO attributable to common stockholders and unitholders | $63.2 | $12.4 |
| Net cash provided by operating activities | $58.9 | $27.1 |
| Cash and cash equivalents at quarter-end | $57.4 | $53.6 at December 31, 2015 |
| Notes payable, principal before unamortized financing items | $2,097.5 | $2,278.4 at December 31, 2015 |
| Dividends declared per common share/unit | $0.20 | $0.125 |
Property NOI was $99.9 million, up $60.2 million, or 151.7%. NOI was 65.1% of revenue, compared with 63.2% in Q1 2015. GAAP operating income was $19.0 million, or 12.4% of revenue, versus $13.3 million, or 21.2%. The filing cautions that FFO and NOI are non-GAAP measures and are not substitutes for GAAP results or cash flows.
At March 31, cash was $57.4 million and restricted cash was $20.0 million. The company reported $400 million of revolving-credit capacity, with $50 million drawn, and a debt-to-total-market-capitalization ratio of approximately 33.2% (including Series A preferred units as debt). Of $2.1 billion in debt, 55.3% was variable-rate; $714.5 million of variable debt was hedged. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by $4.5 million under the stated sensitivity assumptions. The company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue and NOI growth primarily reflected the April 2015 EOP Northern California portfolio acquisition, which added 26 office assets totaling approximately 8.2 million square feet. The acquisition materially expands the year-over-year comparison.
- Same-store NOI rose 9.6% to $38.8 million. Same-store office average rental rate increased 6.0% to $35.34 per square foot, while average occupancy declined to 90.4% from 91.9%. Media and entertainment average occupancy increased to 81.6% from 76.5%.
- Depreciation and amortization increased $51.2 million to $68.4 million, and interest expense rose $11.8 million to $17.3 million, largely reflecting the acquired properties and acquisition-related debt. General and administrative expense increased 35.9% to $12.5 million.
- Net income fell 75.7%, mainly because the real estate sale gain declined to $6.4 million from $22.7 million. Q1 2016 included a $2.1 million unrealized loss on the ineffective portion of derivatives; Q1 2015 included $6.0 million in acquisition-related expenses.
- Operating cash flow increased 117.1%. Investing cash flow was positive $158.2 million, including $212.6 million in real estate sale proceeds; financing cash flow was negative $213.3 million, primarily reflecting debt repayments and distributions. The company sold Bayhill Office Center for $215 million before adjustments and costs.
Outlook, commentary, risks, and unusual items
- Guidance: The filing provides no specific earnings, FFO, occupancy, or other quantitative guidance. Management said it expects to fund near-term needs with cash, operating cash flow and, if needed, the revolving facility; longer-term needs may be met through operating cash flow, debt and equity issuance.
- Post-quarter developments: Patrick Henry Drive sold for $19 million on April 7, 2016. The company agreed on April 25 to sell its fully pre-leased 12655 Jefferson redevelopment for $80 million. On May 4, it reported a long-term renewal with Qualcomm for 365,502 square feet at Skyport Plaza, effective April 1 and extending the lease to August 2022. On May 3, it drew $300 million under two delayed-draw term loans and used proceeds to pay off the revolving facility and 901 Market mortgage and partially repay other loans; it also entered a swap fixing the new seven-year loan’s rate at 3.03%–3.98%.
- Key risks: Most properties are in California, creating geographic concentration. Technology tenants accounted for 28.3% and media and entertainment tenants 13.3% of rentable square feet; the 15 largest tenants represented 27.7%, with no individual tenant above 10% of Q1 revenue. Risks identified include economic and real estate conditions, tenant defaults or non-renewals, interest-rate and operating-cost increases, financing access, leverage, REIT qualification, and environmental or natural-disaster exposure.
- Contingencies and unusual items: Management assessed material loss from ordinary-course litigation as remote. The company disclosed limited principal guarantees of up to $22.4 million for Sunset Gower/Sunset Bronson and $10.5 million for 901 Market, as well as construction-completion guarantees. It recorded no impairment charges. Derivative liabilities rose to $17.7 million from $2.0 million at year-end, and $6.2 million of accumulated hedge losses was expected to be reclassified to interest expense over the following 12 months.
- Other governance and capital items: The board authorized a $100 million share repurchase program in January; no program repurchases occurred in Q1. Blackstone-related agreements include board nomination, equity issuance, redemption and transaction provisions; Blackstone also pledged company shares and operating partnership units for its own margin loan. The company stated it is not a party to that loan and has no obligations under it.
Important facts for investors to verify
- How much of reported revenue and NOI growth reflects the EOP acquisition versus comparable-property performance, and how occupancy and leasing progress across the expanded portfolio.
- The post-quarter loan draws, repayments, hedging and resulting debt mix, interest costs, maturities and covenant headroom.
- The financial effects and closing status of the Patrick Henry Drive and 12655 Jefferson dispositions, and the economics and lease terms of the Qualcomm renewal.
- Whether same-store occupancy weakness, tenant concentration, California exposure or technology and entertainment industry exposure changes materially.
- The assumptions behind FFO and NOI, derivative valuations and future hedge-loss reclassification; also confirm dividend coverage and capital needs against operating cash flow.