Hudson Pacific Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Hudson Pacific is a REIT focused on office and media and entertainment properties, primarily in California and the Pacific Northwest. It reported 52 office properties and two media and entertainment properties at quarter-end.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $168.3 million | $153.5 million | +9.6% |
| Income from operations | $28.5 million | $19.0 million | +49.9% |
| Net income | $24.2 million | $6.0 million | +304.2% |
| Net income attributable to common stockholders | $20.5 million | $2.3 million | — |
| Diluted EPS | $0.14 | $0.03 | — |
| NOI | $113.1 million | $99.9 million | +13.2% |
| FFO to common stockholders and unitholders | $71.9 million | $63.2 million | +13.8% |
| Net cash from operating activities | $92.9 million | $58.9 million | +$34.0 million |
NOI was approximately 67.2% of revenue, versus 65.1% in the prior-year quarter. Net income included $16.9 million of gains on real estate sales, compared with $6.4 million a year earlier; the increase in reported profit therefore reflects disposition gains as well as operating improvement. Interest expense rose 27.1% to $21.9 million. Common dividends declared were $0.25 per share, up from $0.20.
Operations and material changes
- Same-store NOI increased 3.6% to $76.2 million; non-same-store NOI rose 40.2% to $36.9 million, reflecting acquisitions, leasing and occupancy, partly offset by property sales.
- Same-store office average occupancy was 95.6%, compared with 93.6%; average annual rent was $40.24 per square foot, versus $38.93.
- Same-store media and entertainment NOI fell 20.3% to $4.2 million. Management cited unusually high production activity in the prior-year quarter that did not recur, Netflix using a stage for storage during its move into Icon, and higher operating expenses.
- The company sold 222 Kearny Street and 3402 Pico Boulevard for gross proceeds of $51.8 million and $35.0 million, respectively, recognizing $16.9 million in aggregate gains.
- In January, the company issued shares and used its proceeds to repurchase 8.9 million operating partnership units. A March stock offering generated $647.7 million net proceeds; the company used proceeds to repay a $255 million revolving-credit balance and for general corporate purposes. Blackstone and Farallon reported no remaining ownership following the January transaction.
Cash, debt and liquidity
- Cash and cash equivalents were $115.7 million at March 31, 2017, up from $83.0 million at year-end. Restricted cash was $18.0 million.
- Operating cash flow was $92.9 million. Investing activities used $51.9 million, including $76.2 million of property additions and $56.3 million in acquisition deposits, partly offset by $81.7 million of sale proceeds. Financing activities used $8.3 million.
- Notes payable were $2.407 billion in principal ($2.388 billion net of financing costs), down from $2.708 billion in principal at December 31, 2016. The company reported $400 million of undrawn revolving-credit capacity at quarter-end.
- $1.17 billion, or 48.6%, of debt was variable rate; $839.5 million was covered by interest-rate derivatives. The operating partnership was in compliance with its financial covenants and reported no loan defaults.
- Debt to total market capitalization was approximately 30.7%, counting Series A preferred units as debt. The company stated it expects to meet liquidity needs through operating cash flow, cash on hand, debt and equity financing, and its revolving facility.
Outlook, risks and unusual items
The filing provides no specific earnings, FFO or operating guidance. Management described anticipated sources of liquidity and capital but cautioned that access to debt and equity markets depends on leverage, asset values, lending limits and market conditions. On May 1, 2017, after quarter-end, the company completed its $200 million acquisition of Sunset Las Palmas Studios; it had drawn $150 million on its revolver in April to fund the purchase. The company also expected, but could not guarantee, a third-quarter 2017 purchase of the remaining land interest at 11601 Wilshire for $50 million.
Key disclosed risks include California market concentration; tenant defaults, early lease terminations or non-renewals; changes in rental rates, vacancy and operating costs; interest-rate exposure and debt service; reliance on capital markets; and acquisition, development and REIT-qualification risks. Media and entertainment and technology tenants accounted for 15.8% and 28.5% of rentable square feet, respectively; no single tenant exceeded 10%. Management assessed ordinary-course legal claims as unlikely to have a material adverse effect. No material changes to the prior 10-K risk factors were reported.
Investor verification priorities
- Assess recurring operating performance separately from the $16.9 million of disposition gains; review FFO and same-store NOI alongside GAAP earnings.
- Verify that leasing, occupancy and rent gains persist, and monitor the media and entertainment segment’s production activity, stage use and expenses.
- Track variable-rate exposure, hedge effectiveness, debt maturities and remaining revolver capacity, including the post-quarter borrowing for Sunset Las Palmas.
- Review the purchase price allocation and expected contribution from Sunset Las Palmas, and confirm whether the 11601 Wilshire land purchase closes as planned.
- Evaluate the sustainability of the $0.25 quarterly dividend against operating cash flow, capital spending, leasing needs and debt obligations.