Hudson Pacific Properties, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Hudson Pacific is a REIT focused on office and studio properties, with a portfolio across the United States, Western Canada and Greater London. Unless noted, financial amounts below are in U.S. dollars and millions.
Business context and operating performance
- At quarter-end, the company reported 65 consolidated and unconsolidated properties totaling approximately 21.2 million square feet. Its in-service office portfolio was 89.3% leased; same-store studio occupancy averaged 84.4% over the preceding 12 months.
- Quarterly revenue rose 14.4% to $260.4 million. Office revenue was $213.5 million and studio revenue was $46.9 million. Nine-month revenue increased 15.2% to $756.3 million.
- Quarterly net loss attributable to common stockholders was $17.3 million, or $0.12 per share, versus a loss of $9.3 million, or $0.06 per share, in Q3 2021. For the first nine months, the common-stockholder loss was $44.5 million, or $0.31 per share, compared with $2.0 million, or $0.01 per share, a year earlier.
- Quarterly NOI, a non-GAAP measure, increased 8.1% to $155.3 million. Same-store NOI fell 7.0% to $120.2 million, while non-same-store NOI rose to $35.2 million, primarily reflecting acquisitions and the delivery of One Westside to Google. Nine-month NOI rose 11.3% to $459.4 million, while same-store NOI declined 1.6%.
- Quarterly FFO attributable to common stockholders and unitholders, a non-GAAP measure, was $64.4 million versus $69.1 million; nine-month FFO was $203.9 million versus $214.7 million. The filing cautions that FFO does not capture capital expenditures and leasing costs and may not be comparable across REITs.
Financial position, cash flow and capital
- Total assets were $9.32 billion at September 30, 2022, compared with $8.99 billion at December 31, 2021. Unsecured and secured debt, net, was $4.45 billion; gross debt excluding joint-venture partner debt and financing discounts was $4.48 billion, up from $3.76 billion at year-end.
- Cash and cash equivalents were $161.7 million; cash plus restricted cash totaled $204.1 million. The $1.0 billion revolving credit facility had $295 million drawn at quarter-end, and the One Westside construction loan had $273.1 million drawn against $414.6 million of capacity.
- For the nine months, operating cash flow was $328.5 million, investing cash outflow was $335.4 million, and financing cash inflow was $14.1 million. Operating cash flow increased 15.1% year over year.
- Interest expense increased 20.9% to $37.3 million in Q3 and 10.9% to $101.8 million for the nine months. Management cited higher variable-rate benchmarks, additional borrowings and interest on new debt.
- The company repurchased $237.2 million of common shares/units during the nine months, including a $200 million accelerated share repurchase. Common dividends remained $0.25 per share per quarter. The company issued $350 million of 5.95% senior notes due 2028; net proceeds were used to repay revolving-facility borrowings.
Material changes, outlook and risks
- Quixote Studios was acquired on August 31 for $357.9 million of consideration, including $197.9 million cash and a $160 million seller note bearing 5.00% interest and due December 31, 2023. Quixote contributed $8.9 million of revenue and $1.3 million of net income after acquisition through quarter-end.
- Nine-month impairment losses were $28.5 million, including $20.0 million related to Del Amo, Northview Center and 6922 Hollywood properties and $8.5 million for the Zio trade name. Del Amo and Northview Center were sold during Q3; 6922 Hollywood was sold October 20 for $96 million, and $85 million of proceeds was used to repay the revolving facility.
- Same-store office occupancy and leasing weakened year over year: Q3 same-store office leased occupancy was 88.2%, versus 92.3% a year earlier. Management linked lower same-store office NOI to lower occupancy and higher utility and cleaning costs as more tenants returned to in-person work. It said the commercial real estate market appeared to be recovering, but leasing and investment remained competitive.
- Management provided no specific financial guidance in the supplied filing text. It identified potential risks from economic and real estate conditions, tenant defaults or nonrenewals, occupancy and rent pressure, higher interest rates and refinancing, access to financing, acquisitions and integration, foreign currency movements, and natural disasters. It noted continuing uncertainty around COVID-19’s effects on office use and leasing.
- The operating partnership was in compliance with financial covenants at quarter-end. Reported covenant headroom included total liabilities to asset value of 44.1% against a 60% limit and adjusted EBITDA to fixed charges of 3.3x against a 1.5x minimum. Debt principal maturities include $320 million in 2023 and $741.3 million in 2025. Construction and executed-lease commitments totaled $312.7 million.
- Management assessed ordinary-course legal claims as unlikely to have a material adverse effect. The company also disclosed up to $20 million of potential Zio earnout consideration in 2024, subject to performance thresholds, and $17.8 million remaining to be contributed to non-real-estate funds.
Important facts for investors to verify
- Whether office leasing, occupancy and same-store NOI stabilize, and how much lease rollover and vacancy affect future cash rents.
- How higher interest rates affect interest expense, variable-rate debt and refinancing—particularly the $320 million of 2023 maturities and the Quixote seller note.
- Quixote’s operating performance and integration, including realization of expected benefits and final purchase-price allocation.
- Progress and funding needs for development projects, tenant improvements and the $312.7 million of commitments.
- Whether reported liquidity, covenant compliance and planned asset sales remain adequate to fund operations, debt service and distributions. The filing reports a subsequent $85 million revolver repayment after the 6922 Hollywood sale.