Hudson Pacific Properties, Inc. — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014; the filing was signed November 7, 2014. Hudson Pacific is a REIT owning, managing, leasing, acquiring and developing office and media and entertainment properties, primarily in California and Washington. At quarter-end, it held 25 office properties and two media and entertainment properties.
Financial performance and liquidity
- Third quarter: Revenue was $68.2 million, up 27.8% from $53.3 million a year earlier. Operating income was $12.6 million versus $5.2 million; net income was $11.4 million versus a $2.8 million net loss. Net income attributable to common stockholders was $7.6 million, or $0.11 per share, compared with a $5.7 million loss, or $0.10 per share. The quarter included a $5.5 million gain on property sale.
- First nine months: Revenue was $185.9 million versus $148.1 million. Operating income was $37.0 million versus $17.6 million; net income was $22.6 million versus a $5.9 million net loss. Common-stockholder income was $12.2 million, or $0.19 per share, versus a $14.8 million loss, or $0.27 per share.
- Property operations: Nine-month NOI was $108.2 million, up from $85.8 million: office NOI was $97.2 million versus $73.6 million, while media and entertainment NOI declined to $10.9 million from $12.3 million. Same-store office NOI increased 1.9% for the first nine months and 2.2% in Q3; excluding one-time supplemental property tax expense, management reported growth of 2.4% and 7.4%, respectively. Q3 same-store NOI margin was 52.6%, compared with 61.0%.
- Cash flow: Nine-month operating cash flow was $58.3 million, up from $43.9 million. Investing used $166.7 million, compared with $390.5 million, while financing provided $147.4 million, compared with $357.0 million. Cash and cash equivalents were $69.4 million at September 30, up from $30.4 million at year-end 2013.
- Balance sheet and debt: Total assets were $2.32 billion and notes payable were $920.9 million, including $917.2 million before unamortized loan premium. The company had a $300 million revolving facility with $95 million drawn, leaving $205 million of stated undrawn capacity, subject to facility terms and collateral support. It also drew a new $150 million unsecured term loan. Management reported a 33.3% debt-to-total-market-capitalization ratio, counting Series A preferred units as debt; 52.8% of principal debt was variable-rate.
- Distributions: Common dividends were $0.125 per share in Q3, unchanged year over year. Nine-month declared dividends were $0.375 per share.
Material changes versus comparable periods
- Revenue and earnings benefited from acquisitions, notably the Seattle portfolio and Merrill Place, as well as higher office rents and occupancy. The 2014 acquisitions of Merrill Place and 3402 Pico cost $75.6 million in total.
- Q3 office operating expenses included a one-time $4.7 million property-tax expense tied to reassessments; tenant recoveries included $3.6 million of related prior-period tax recoveries. Management said the net supplemental tax expense reduced Q3 same-store office NOI by $1.1 million.
- Q3 media and entertainment other property revenue rose with higher production activity at Sunset Gower. For the first nine months, that segment’s NOI fell 10.7%.
- Tierrasanta was sold July 16 for approximately $19.5 million before adjustments, producing the $5.5 million gain. The prior-year comparison included a $5.6 million impairment charge related to City Plaza.
- On September 23, the company amended and restated its credit arrangements, increasing the revolving facility from $250 million to $300 million, extending its maturity to September 2018 and adding the five-year $150 million term loan. Proceeds repaid a $95 million secured loan and $55 million of prior revolver borrowings.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or occupancy guidance. Management expected short-term needs to be met through cash, operating cash flow and, if needed, the revolver; long-term needs through operating cash flow, debt and equity issuance. Access to capital depends on leverage, unencumbered assets, lender restrictions and market conditions.
- A 100-basis-point increase in one-month LIBOR was estimated to increase annual interest expense by $4.2 million, based on the specified unhedged borrowings. Interest-rate caps and a swap covered $156.5 million of variable-rate principal. The company reported compliance with facility financial covenants.
- Concentration risks include the portfolio’s predominant location in California and media and entertainment tenants, which generated approximately 16% of nine-month revenue, down from 21% in 2013. Other stated risks include adverse real estate or economic conditions, tenant defaults or non-renewals, interest rates, financing access, vacancy, insurance, natural disasters and maintaining REIT status.
- Management assessed material loss from ordinary-course legal proceedings as remote and reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no materially affecting change in internal control over financial reporting was identified.
- After quarter-end, the company repaid the $39.7 million 6922 Hollywood mortgage on October 2, ahead of its January 2015 maturity. On October 17, it acquired a vacant 93,952-square-foot Playa Vista office property for $38.0 million using revolver borrowings; plans contemplated a creative-office conversion.
Important facts for investors to verify
- Underlying same-store performance after the one-time property-tax reassessment effects, including the difference between reported and adjusted NOI growth and the Q3 margin decline.
- Lease-up, conversion costs and financing needs for the vacant Playa Vista acquisition, and the performance of recent acquisitions and redevelopment projects.
- Debt maturities, refinancing plans and actual revolver availability; the filing’s debt schedule showed substantial 2015 and 2018 maturities, with the 6922 Hollywood loan subsequently repaid.
- Exposure to floating interest rates, effectiveness and remaining terms of hedges, and sensitivity to rate increases.
- Whether acquisition-driven revenue growth translates into sustained cash flow and per-share results, considering increased G&A, preferred distributions and the January 2014 common-stock issuance.