Hudson Pacific Properties, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Figures are consolidated and generally in U.S. dollars; financial results reflect the EOP portfolio only from its April 1, 2015 acquisition date.
Business context
Hudson Pacific is a REIT focused on office and media and entertainment properties in California and the Pacific Northwest. At year-end, it reported 54 office properties totaling approximately 14.0 million square feet and two media and entertainment properties totaling approximately 0.9 million square feet. In-service office space was 90.1% leased including signed leases not yet commenced (88.8% excluding them); media and entertainment occupancy was 78.5% on a trailing-12-month basis.
The major strategic event was the April acquisition of 26 Northern California office assets and two development parcels (approximately 8.2 million square feet) from Blackstone. Consideration before closing adjustments was $1.75 billion in cash plus 63.5 million common shares and partnership units. The company also acquired two Los Angeles redevelopment properties and sold First Financial and Bay Park Plaza.
Financial and operating highlights
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $520.9 million | $253.4 million |
| Income from operations | $47.4 million | $48.7 million |
| Net income (loss) | $(16.1) million | $23.5 million |
| Net income (loss) per common share | $(0.19) | $0.15 |
| Net operating income (NOI; non-GAAP) | $331.0 million | $149.1 million |
| Funds from operations attributable to common stockholders and unitholders (FFO; non-GAAP) | $183.4 million | $71.9 million |
| Cash provided by operating activities | $174.9 million | $63.2 million |
| Cash used in investing activities | $(1.798) billion | $(246.4) million |
| Cash provided by financing activities | $1.659 billion | $170.6 million |
- Revenue increased 105.5%, principally because of the EOP acquisition. NOI increased 121.9%; non-same-store NOI rose $181.0 million, while same-store NOI was nearly flat, up $0.8 million. Same-store office NOI declined 0.7%; same-store media and entertainment NOI rose 12.2%.
- Despite higher revenue and NOI, the company recorded a net loss. Depreciation and amortization increased to $245.1 million from $72.2 million; acquisition-related expenses rose to $43.3 million from $4.6 million; and interest expense increased to $50.7 million from $25.9 million. A $30.5 million gain on property sales partly offset these costs. The filing also reports a one-time $6.0 million noncash allocation related to redemption of Series B preferred stock.
- Year-end assets were $6.254 billion and total liabilities were $2.515 billion. Notes payable were $2.278 billion principal ($2.261 billion net carrying value), up from $915.0 million principal at year-end 2014. Debt-to-market capitalization was approximately 35.7%, including Series A preferred units as debt.
- Cash and cash equivalents were $53.6 million. The $400 million unsecured revolver had $230 million drawn, leaving approximately $170 million available. An additional $300 million of delayed-draw term loan capacity was undrawn at year-end. The filing states the company was in compliance with financial covenants.
- Of $2.278 billion in debt principal, 58.8% was variable-rate debt; $806.5 million of variable-rate debt was hedged. Management estimated a 100-basis-point increase in one-month LIBOR would raise annual interest expense by approximately $5.3 million, based on specified year-end borrowings.
- Common dividends declared were $0.575 per share for 2015, versus $0.50 in 2014. The fourth-quarter 2015 dividend was $0.20 per share, compared with $0.125 in each prior 2015 quarter. The 8.375% Series B preferred stock was redeemed for approximately $147.3 million.
Material changes, outlook and risks
- Acquisition and financing: The EOP transaction drove portfolio growth and much of the increase in revenue, assets, debt, depreciation and financing activity. The company refinanced Element LA with a $168 million, 10-year mortgage at 4.59% and issued $425 million of senior notes at fixed rates of 4.34%–4.79%, with maturities from 2023 to 2027.
- Dispositions and subsequent events: First Financial sold for $89 million and Bay Park Plaza for $90 million during 2015. Bayhill, classified as held for sale at year-end, sold on January 14, 2016 for $215 million; proceeds were used to reduce the revolver. In February 2016, Netflix exercised a right of first refusal for the remaining five floors of the ICON tower, bringing the 323,000-square-foot tower to 100% pre-leased.
- Leasing and development: Management said office rents were generally below quoted market rates, but identified availability and lease expirations as execution risks: 15.3% of office space was available and 8.7% was scheduled to expire in 2016. Development, redevelopment and tenant improvements require substantial capital. The filing provides no quantified earnings or FFO guidance.
- Key risks: Geographic concentration in California and the Pacific Northwest; tenant exposure to technology, media and entertainment; vacancies, lease renewals and tenant improvement costs; acquisition integration and development execution; debt refinancing, variable interest rates and covenant restrictions; earthquakes and other uninsured losses; environmental, ADA and ground-lease obligations; and REIT qualification and distribution requirements.
- Blackstone influence and collateral: Blackstone affiliates held an approximate 43.4% fully diluted interest and had governance and nomination rights. The company reported that Blackstone affiliates pledged shares and partnership units securing a $350 million margin loan, with borrowing capacity for an additional $150 million subject to conditions. A foreclosure and sale of pledged securities could pressure the share price; the company said it did not independently verify the lender arrangement.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and the company’s internal controls. The filing reported no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- How much of revenue, NOI and FFO growth is attributable to the EOP acquisition versus organic leasing and same-store performance; review non-GAAP reconciliations and acquisition-related costs.
- Current leasing, occupancy and rental-rate trends, including the 2016 expirations, lease-up pipeline and the performance of recently acquired assets.
- Debt maturities, available revolver and delayed-draw capacity, interest-rate hedges, covenant headroom and refinancing needs.
- Execution, costs and timing for ICON and other development or redevelopment projects, including the effect of tenant improvements and leasing commissions on cash flow.
- Whether the increased common dividend is supported by recurring cash generation after capital expenditures and leasing costs; FFO excludes these significant costs.
- Developments in Blackstone’s pledged securities and ownership rights, and any potential effects on governance, share supply or the stock price.