Hudson Pacific Properties, Inc. — 2019 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019; selected fourth-quarter results are also presented. Hudson Pacific is a REIT focused on office and studio properties in California, the Pacific Northwest and Western Canada. At year-end, its portfolio comprised approximately 14.9 million square feet of office properties, 1.2 million square feet of studios and 2.7 million square feet of development rights. The company conducts substantially all operations through its operating partnership.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $818.2 million | $728.4 million |
| Net income | $55.8 million | $111.8 million |
| Net income attributable to common stockholders | $42.7 million; $0.28 per diluted share | $98.1 million; $0.63 per diluted share |
| Net operating income (NOI; non-GAAP) | $516.7 million | $460.7 million |
| Funds from operations (FFO; non-GAAP) | $315.7 million | $292.9 million |
| Cash from operating activities | $288.0 million | $214.6 million |
| Cash used in investing activities | $316.4 million | $392.3 million |
| Cash from financing activities | $18.5 million | $144.6 million |
- Revenue rose 12.3%. NOI increased 12.1%, including same-store NOI growth of 9.0% and non-same-store growth of 20.3%. NOI was approximately 63% of revenue in both years.
- Office and studio revenues were $733.7 million and $84.4 million, respectively. Same-store office occupancy averaged 94.0%; year-end stabilized office occupancy was 95.1% and leased occupancy was 96.4%. Same-store studios averaged 92.3% leased.
- Net income declined 50.0% and diluted EPS fell from $0.63 to $0.28. Interest expense rose 27.3% to $105.8 million; general and administrative expense rose 17.9% to $71.9 million.
- At December 31, cash and cash equivalents were $46.2 million, with $12.0 million of restricted cash. Unsecured and secured debt was $2.845 billion before deferred financing costs; additional separately reported balances included $135.0 million of defeased debt and $66.1 million of joint-venture partner debt. Debt to total market capitalization, including Series A preferred units as debt, was 32.4%.
- Available capacity included $525 million on the unsecured revolver, $230 million on the Sunset Bronson Studios/ICON/CUE facility and up to $409 million remaining on the construction loan, subject to lender requirements. The company reported compliance with debt covenants. Moody’s upgraded its rating to Baa2 with a stable outlook.
- Common dividends were $1.00 per share for the year, unchanged from 2018. The filing does not provide a specific forward dividend or earnings forecast.
Material changes versus the prior comparable period
- NOI growth reflected higher rents, occupancy and tenant recoveries, plus contributions from recently leased and acquired properties. Operating expenses also increased, including property taxes, insurance, maintenance and staffing.
- The company recorded a $52.2 million impairment on the Campus Center office property and a $47.1 million gain on sale of real estate. Campus Center office and land were sold for gross proceeds of $70.3 million and $78.1 million, respectively.
- Interest expense increased following new senior-note issuances, partly offset by repayment of term loans and revolver borrowings. Year-end debt included $500 million of 4.65% notes due 2029 and $400 million of 3.25% notes due 2030.
- The company adopted ASC 842 in 2019. Office rental and tenant-recovery presentation changed, and prior-year figures were not restated; this limits direct comparison of individual revenue line items.
- Quarterly fourth-quarter revenue was $216.9 million versus $198.4 million in Q4 2018. Q4 net income was $17.0 million versus $19.3 million, and diluted EPS was $0.09 versus $0.10.
Outlook, commentary, risks and unusual items
- Management emphasized value-add acquisitions, active leasing and asset management, and a conservative balance sheet. It stated that office rents were generally below quoted market rates, while studio rents were generally in line with market.
- Two projects were under construction at year-end: Harlow, estimated at 106,125 square feet with completion expected in Q2 2020, and One Westside, estimated at 584,000 square feet with completion expected in Q1 2022. One Westside is fully leased to Google for approximately 14 years, with occupancy expected after construction and tenant build-out.
- Risks include geographic concentration (81.5% of consolidated and unconsolidated properties were in California), exposure to technology and media/entertainment tenants, lease expirations and tenant credit, development and leasing costs, interest rates, natural disasters, environmental matters and access to capital. The 15 largest office tenants represented 38.6% of company-share office annualized base rent; Netflix and Google together represented 15.2%.
- Variable-rate debt was $625.1 million, of which $539.5 million was hedged. Management estimated a 100-basis-point LIBOR increase would raise annual interest expense by approximately $6.3 million. The filing also discusses the expected transition away from LIBOR after 2021.
- The company’s 20% Bentall Centre joint-venture investment is unconsolidated; its share of joint-venture debt was approximately $97.1 million and was guaranteed by the company. Capital-improvement and tenant-improvement commitments totaled $351.3 million at year-end.
- Management reported no material pending legal proceeding and no material uncertainty in its open tax positions. The financial statements received an unqualified audit opinion; the auditor identified real-estate impairment assessment as a critical audit matter.
Important facts for investors to verify
- Whether leasing, occupancy and rent growth support continued same-store NOI growth, particularly as 7.9% of office square footage was scheduled to expire in 2020.
- Actual funding needs and returns for One Westside, Harlow and other development commitments, and whether project schedules and budgets remain on track.
- Debt maturities, variable-rate exposure, hedge coverage and covenant headroom; also clarify the company’s guaranteed exposure to joint-venture debt.
- Tenant concentration and credit developments, especially for major tenants and technology, media and entertainment industries.
- The effect of the Campus Center impairment and disposition, and the comparability of revenue trends following adoption of ASC 842.
- Cash available for dividends after debt service, capital spending, leasing costs and REIT distribution requirements; GAAP net income and FFO do not by themselves measure those cash needs.