Hudson Pacific Properties, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are in millions of dollars unless otherwise stated. The company is a California-focused REIT owning office and media and entertainment properties; at quarter-end it reported 17 office properties and two media and entertainment properties.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $40.6 | $33.4 | $78.8 | $68.2 |
| Operating income | $2.7 | $4.4 | $8.1 | $9.3 |
| Net income (loss) | $(2.2) | $(0.2) | $(1.8) | $(0.1) |
| Net loss attributable to company shareholders | $(5.2) | $(2.1) | $(7.9) | $(4.6) |
| Net operating income (NOI) | Not stated for quarter | Not stated for quarter | $42.7 | $37.5 |
- Six-month revenue rose 15.6%, mainly from office acquisitions completed in the second half of 2011. Media and entertainment revenue was essentially flat year over year for the half.
- Six-month NOI increased 13.9%; NOI margin was approximately 54.1%, compared with 54.9% in the prior-year period. NOI is a non-GAAP supplemental measure.
- Six-month operating cash flow was $22.4 million, versus $14.5 million. Investing used $112.4 million, including $93.5 million for acquisitions and an $8.9 million deposit for a potential acquisition. Financing provided $178.8 million.
- Cash and cash equivalents were $102.5 million at June 30, 2012, versus $13.7 million at year-end 2011. Restricted cash was an additional $10.2 million.
- Notes payable were $348.7 million before unamortized loan premium ($350.3 million carrying value), down from $397.9 million before premium at year-end. Of the June balance, $92.0 million was variable-rate debt; the company had no borrowings under its secured revolver and reported $167.4 million of capacity. It stated its debt-to-total-market-capitalization ratio was approximately 26.3%, counting Series A preferred units as debt.
- Common dividends declared were $0.125 per share for the quarter. The six-month cash-flow statement reports $10.8 million of dividends paid to common stock and unit holders and $6.5 million to preferred holders.
Changes, outlook and risks
- Q2 revenue increased 21.6%, but operating expenses rose 30.8%; quarterly net loss widened to $2.2 million. For the six-month period, operating expenses rose 19.9%, while operating income declined to $8.1 million from $9.3 million.
- Management attributed revenue growth chiefly to acquisitions. Higher office operating costs also reflected acquired properties, a prior-year property-tax saving, and approximately $0.9 million of supplemental Technicolor property tax for earlier periods. Increased G&A included the new 2012 Outperformance Program and staffing growth. Acquisition-related expense was $0.4 million for the half.
- In May, the company raised approximately $190.8 million net from a common-stock offering; it also issued $57.5 million of Series B preferred stock in January. The offering proceeds were intended to fund acquisitions, repay revolver borrowings, and support general corporate purposes.
- On August 3, 2012, after quarter-end, the company replaced its $200 million secured revolver with a $250 million unsecured revolver. At closing, $208 million was available and none was drawn; the facility includes an accordion feature up to $400 million, subject to specified conditions.
- No earnings or operating guidance is provided. Management described short-term liquidity as supported by cash, operating cash flow and, if needed, revolving credit; longer-term needs may be funded through operations, debt and equity issuance. These funding sources depend on market access, leverage, asset values and lender restrictions.
- Key exposures include the concentration of all properties in California, media and entertainment tenants contributing 23% of six-month revenue, tenant leasing and renewal risk, interest-rate changes, property operating costs and REIT qualification. Bank of America accounted for approximately 6% of six-month revenue. A 100-basis-point increase in one-month LIBOR was estimated to increase annual interest expense by $0.9 million on the $92 million variable-rate loan, notwithstanding interest-rate caps.
- Management assessed material-loss risk from ordinary-course legal proceedings as remote; it reported no real-estate impairment charges in the six-month period. Disclosure controls were deemed effective, with no material change to internal control over financial reporting identified.
Important facts for investors to verify
- Whether acquired-property revenue growth translates into improved same-property performance, occupancy and cash NOI; acquisitions were the primary stated growth driver.
- Property-tax and other expense normalization, including the $0.9 million retrospective supplemental tax charge and prior-year tax saving.
- Debt maturities, fixed-versus-floating exposure, hedge coverage, covenant headroom and borrowing availability under the post-quarter unsecured revolver.
- Use of equity proceeds and status, economics and financing of the potential Olympic Bundy and other acquisition plans; the filing reports an $8.9 million deposit for a potential acquisition.
- Lease concentration and renewal exposure, including media and entertainment demand and the Bank of America lease profile.
- The effect of cumulative preferred dividends and equity issuance on common-shareholder results; the company reported a six-month common-shareholder loss of $7.9 million despite higher revenue and NOI.