Hudson Pacific Properties, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012. Hudson Pacific is a California-focused REIT owning, managing, leasing, acquiring and developing office and media and entertainment properties. At quarter-end it reported 15 office properties and two media and entertainment properties, totaling approximately 4.45 million square feet.
Key financial results
Amounts below are in millions of dollars unless otherwise noted. Comparisons are with Q1 2011.
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $38.2 | $34.8; up 9.8% |
| Property NOI | $22.1 | $19.4; up 14.2% |
| NOI margin | 57.8% | 55.6% |
| Operating income | $5.5 | $4.8 |
| Consolidated net income | $0.5 | $0.1 |
| Net loss attributable to company shareholders | $2.6; diluted loss per share $0.08 | $2.5; diluted loss per share $0.11 |
| Net cash provided by operating activities | $12.0 | $11.6 |
| Cash and cash equivalents, March 31 | $21.9 | $13.7 at December 31, 2011 |
| Notes payable, including unamortized premium | $361.1 | $399.9 at December 31, 2011 |
| Total assets | $1,160.5 | $1,152.8 at December 31, 2011 |
Office revenue rose 16.5% to $29.9 million, largely reflecting properties acquired in the second half of 2011. Media and entertainment revenue declined 8.8% to $8.4 million, primarily from lower production-related activity and related property revenue. Operating expenses increased 9.4% to $32.8 million; general and administrative expense rose 43.5% to $4.5 million, reflecting growth-related staffing and the 2012 Outperformance Program. Interest expense was $4.9 million, broadly unchanged year over year.
Cash flow, debt and liquidity
- Operating cash flow of $12.0 million was approximately offset by $12.0 million of investing outflows, including an $8.9 million deposit for a potential acquisition. Financing provided $8.1 million; cash increased $8.2 million during the quarter.
- Debt outstanding before loan premium was $359.3 million, including $102.0 million of variable-rate debt; $92.0 million of that variable-rate borrowing was covered by interest-rate caps. Management estimated a 100-basis-point LIBOR increase would raise annualized interest expense and affect future earnings and cash flow by $0.3 million under the stated assumptions.
- The company reported $161.8 million of total capacity under its secured revolving credit facility, with $10.0 million drawn. It was in compliance with facility covenants at March 31, 2012.
- Debt-to-total-market-capitalization was approximately 34.8%, counting Series A preferred units as debt. The company declared a $0.125 common dividend per share for the quarter.
- During the quarter, the company issued 2.3 million Series B preferred shares, generating approximately $56.1 million after underwriting discounts and before transaction costs. The preferred stock carries an 8.375% annual dividend rate.
Material changes and unusual items
- Q1 2012 office growth primarily reflects acquisitions completed in Q3 and Q4 2011. In Q1 2011, office parking and other revenue included a $2.0 million early lease-termination payment at City Plaza; there was no comparable payment in Q1 2012.
- Media and entertainment other property-related revenue fell because of slower production activity, including lower lighting-equipment rental, parking and telecommunications revenue.
- After quarter-end, on April 5, 2012, Hudson Pacific acquired the adjacent 10900 Washington Boulevard property for $2.6 million before closing costs and prorations, funded through its credit facility.
- No real estate impairment charges were recorded in either comparable quarter. The company reported no material legal proceedings or material changes to its previously disclosed risk factors.
Outlook, risks and contingencies
The filing provides no specific earnings or operating guidance. Management expects short-term liquidity needs to be met with cash, operating cash flow, reserves and, if needed, revolver borrowings; longer-term needs may be funded through operating cash flow, debt and equity issuance. The company identifies risks including California geographic concentration, tenant defaults or lease nonrenewals, media and entertainment industry demand, interest-rate changes, access to financing, acquisition execution, property costs and maintaining REIT status. All properties are in California; Bank of America represented approximately 7% of revenue in each comparable quarter. Management assessed the risk of material loss from ordinary-course legal matters as remote. The company also noted that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether revenue and NOI growth from 2011 acquisitions translates into sustained same-property performance, particularly as media and entertainment activity remains softer.
- The distinction between positive consolidated net income and the continuing net loss attributable to common shareholders after preferred distributions and other allocations.
- Current revolver availability, debt maturities and refinancing needs, and the effect of variable interest rates despite the disclosed caps.
- The economics and funding of the potential acquisition associated with the $8.9 million deposit, and the post-quarter 10900 Washington acquisition.
- Tenant concentration, lease rollover and California market exposure, including the filing’s stated reliance on major tenants and the media and entertainment sector.