Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Hudson Pacific is a REIT that owns and operates office and media and entertainment properties, primarily in California and Washington. At quarter-end, it reported 53 office properties and two media and entertainment properties.
Financial performance and position
| Metric | Q3 2015 / September 30, 2015 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $151.6 million for Q3; $366.2 million for nine months | Q3 2014: $68.2 million; nine months 2014: $185.9 million |
| Net income (loss) | Q3: $(1.8) million; nine months: $(13.3) million | Q3 2014: $11.4 million; nine months 2014: $22.6 million |
| Common-stockholder EPS | Q3: $(0.04); nine months: $(0.12) | Q3 2014: $0.11; nine months 2014: $0.19 |
| Property NOI | Q3: $93.7 million; nine months: $233.5 million | Q3 2014: $36.8 million; nine months 2014: $108.2 million |
| Cash flow from operations | $121.1 million for nine months | $58.3 million for nine months 2014 |
| Cash and cash equivalents | $46.7 million | $17.8 million at December 31, 2014 |
| Notes payable | $2.09 billion, before loan premium | $918.1 million at December 31, 2014 |
NOI is a company-defined, non-GAAP measure. Approximate NOI as a share of revenue was 61.8% in Q3 2015 versus 54.0% in Q3 2014; the comparison reflects a substantially larger acquired-property contribution. FFO attributable to common stockholders and unitholders was $63.1 million for Q3 and $106.4 million for nine months; FFO is also non-GAAP.
Material changes versus comparable periods
- Revenue and NOI rose sharply, primarily because the company acquired the 26-property, approximately 8.2-million-square-foot EOP Northern California portfolio from Blackstone on April 1, 2015. The portfolio added $169.4 million of revenue and $0.4 million of net income in the nine-month period.
- Despite higher NOI, GAAP results turned to a loss. Nine-month depreciation and amortization increased to $170.9 million from $52.0 million, interest expense rose to $34.1 million from $19.5 million, and acquisition-related expenses were $43.4 million versus $0.3 million.
- Same-store office NOI increased 2.9% in Q3 and 2.7% for nine months. Q3 same-store office ending occupancy was 92.0%, down from 94.1% a year earlier; ending leased occupancy was 92.9%, versus 94.8%. Same-store media occupancy averaged 77.3% in Q3, compared with 76.7%.
- Investing activity included the EOP acquisition and purchases of 4th & Traction and 405 Mateo, both redevelopment projects. The company sold First Financial for $89.0 million and Bay Park Plaza for $90.0 million, recording $30.5 million of gains on property sales for the nine months.
Liquidity, debt and capital
- Nine-month investing cash outflow was $1.74 billion, funded largely by $1.65 billion of financing cash inflow. Financing included new borrowings, a January common-stock offering that generated approximately $385.6 million net of underwriting discounts, and a $217.8 million contribution from a joint-venture partner at 1455 Market.
- The $400 million unsecured revolving facility had $105 million drawn at quarter-end; the company reported covenant compliance. It also reported a 32.6% debt-to-total-market-capitalization ratio under its stated definition.
- Approximately 83.4% of notes payable was variable-rate debt, although some borrowings were hedged. Management estimated that a 100-basis-point LIBOR increase would increase annual interest expense by approximately $10.5 million under the stated exposure assumptions.
- After quarter-end, the company paid down $20 million on the revolving facility and $85 million on the two-year term loan. On October 9, it refinanced Element LA with a $168 million, ten-year, fixed-rate, interest-only mortgage; remaining proceeds were used to repay other corporate debt.
Outlook, risks and unusual items
- The filing provides no specific earnings or operating guidance. Management expected to meet short-term liquidity needs with cash, operating cash flow and, if needed, revolving-credit borrowings; longer-term needs could be met with operating cash flow, debt and equity issuance.
- Management cited risks including adverse economic or real-estate conditions, tenant defaults or non-renewals, vacancies or lower rents, higher interest and operating costs, access to financing, acquisition integration and execution, and maintaining REIT qualification. The portfolio’s concentration in California creates geographic exposure; media and entertainment tenants represented approximately 8% of nine-month revenue.
- Management reported no material legal proceedings and assessed the risk of material loss from ordinary-course legal matters as remote. No impairment charges were recorded in the periods presented. Disclosure controls were deemed effective; integration of the acquired EOP portfolio into internal financial controls was ongoing.
- The acquisition materially increased the scale of the company and brought governance and transfer provisions involving Blackstone-affiliated stockholders, including board nomination rights and restrictions on certain equity issuances. These arrangements are described in the filing.
Important facts for investors to verify
- Whether EOP portfolio leasing, occupancy and operating performance develop as expected, and how acquisition-related costs and purchase-accounting adjustments affect reported results.
- Current debt balances, maturities, covenant headroom and the extent of variable-rate exposure after the disclosed post-quarter debt repayments and Element LA refinancing.
- Same-store occupancy trends, particularly the decline in office leased and occupied percentages, and the effects of temporary stage and building closures for the ICON development.
- The terms and potential effects of Blackstone-related governance, equity issuance, unit redemption and transfer rights.
- The sustainability of distributions in light of operating cash flow, capital expenditures, leasing costs, debt service and REIT distribution requirements.