Hudson Pacific Properties, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unless stated otherwise, financial figures below are in millions of dollars. The company owns, manages, leases, acquires and develops office and media and entertainment properties. At quarter-end it held 14 office properties and two media and entertainment properties, all in California, totaling approximately 4.22 million square feet.
Financial performance and position
- Revenue: Q3 revenue was $36.9 million, versus $17.5 million in Q3 2010. Nine-month revenue was $105.1 million, versus $39.6 million. Office revenue drove most of the increase as properties acquired after the 2010 IPO contributed additional results; media and entertainment revenue was $10.2 million for Q3 and $28.7 million for nine months.
- Profit and loss: Q3 consolidated net loss was $0.8 million, compared with $27,000 of net income a year earlier. Net loss attributable to company shareholders was $2.7 million, or $0.08 per share, versus $0.2 million, or $0.01 per share. For nine months, consolidated net loss narrowed to $0.9 million from $2.2 million; shareholder-attributable net loss was $7.3 million, versus $2.1 million.
- Property operating performance: Nine-month net operating income (NOI, a non-GAAP supplemental measure) rose to $55.5 million from $18.7 million. Office NOI was $43.8 million and media and entertainment NOI was $11.7 million. The filing attributes growth mainly to acquisitions, improved media-property occupancy and production activity. The 2010 comparison is not like-for-like because the IPO and related acquisitions closed in June 2010.
- Cash flow: Nine-month cash from operating activities was $28.1 million, versus $3.4 million. Investing activities used $70.4 million, primarily for acquisitions and property additions; financing activities provided $14.1 million. Cash and cash equivalents declined to $20.7 million from $48.9 million at December 31, 2010.
- Debt and liquidity: Notes payable were $298.7 million carrying value at September 30, versus $342.1 million at year-end 2010. Principal debt was $298.1 million before loan premium; $125.0 million was variable-rate debt, including $50.0 million covered by an interest-rate cap. The company reported $141.2 million of remaining capacity on its secured revolving facility, with $33.0 million drawn, and said it was in compliance with facility covenants. Management reported debt to total market capitalization of approximately 37.9%, counting Series A preferred units as debt.
- Equity and distributions: A May 2011 public offering and concurrent private placement generated approximately $156.7 million after underwriting discount and before transaction costs. The company used about $81.0 million to repay its revolving facility and $14.3 million to repay the Tierrasanta loan. Q3 common dividends were $0.125 per share; preferred dividends were also declared.
Material changes and notable items
- Acquisitions during Q3 included 604 Arizona, 275 Brannan and 625 Second Street. The company also bought the remaining 49% interest in Rincon Center in April 2011 and refinanced its debt with a new $110 million, seven-year fixed-rate loan.
- Nine-month office revenue included early lease termination revenue from a single-floor tenant at City Plaza; the filing does not state a clear amount for this item.
- Office operating costs, depreciation and interest expense increased substantially alongside the expanded property portfolio. Q3 acquisition-related expenses were $0.8 million; nine-month expenses were $0.8 million, down from $2.7 million.
- After quarter-end, the company had a purchase agreement for 6922 Hollywood Boulevard at a gross price of $92.5 million, including assumption of a $42.0 million loan. The transaction remained subject to closing conditions, including loan assumption.
- There were no material changes to the risk factors reported in the 2010 Form 10-K, no off-balance-sheet arrangements, and no material legal proceedings identified. Management assessed the risk of material loss from legal matters as remote.
Outlook, risks and contingencies
The filing provides no quantified earnings or operating guidance. Management said it expects to meet short-term liquidity needs with cash, operating cash flow and, if needed, revolving-facility borrowings; long-term needs may be met through operating cash flow, debt and equity issuance. These expectations depend on access to financing and capital markets. Disclosed risks include California market concentration, tenant defaults or non-renewals, vacancies and rent declines, interest-rate changes, acquisition and integration challenges, insufficient cash flow to service debt, insurance and environmental risks, and maintaining REIT status. Approximately 27% of nine-month 2011 revenue came from media and entertainment tenants; Bank of America accounted for approximately 7% of revenue through its 1455 Market lease.
Key facts for investors to verify
- How much of reported revenue and NOI growth reflects acquisitions, and how do comparable-property trends and occupancy perform?
- What was the amount and timing of City Plaza lease termination revenue, and what recurring rent follows the tenant’s departure?
- What are current borrowing availability, covenant headroom and refinancing needs, particularly for the 10950 Washington loan maturing in February 2012?
- How sensitive are cash flow and debt service to floating rates, including the portion of variable-rate debt not covered by the interest-rate cap?
- Did the 6922 Hollywood acquisition close, and what were its final financing terms and impact on leverage and liquidity?
- Can operating cash flow sustain property investment, debt service and required REIT distributions while cash balances are lower?