Hudson Pacific Properties, Inc. - Quarter Report: 2019 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2019
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______ to ______
Commission File Number: 001-34789 (Hudson Pacific Properties, Inc.)
Commission File Number: 333-202799-01 (Hudson Pacific Properties, L.P.)
______________________________________
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
(Exact name of registrant as specified in its charter)
Hudson Pacific Properties, Inc. | Maryland (State or other jurisdiction of incorporation or organization) | 27-1430478 (I.R.S. Employer Identification Number) | ||||||
Hudson Pacific Properties, L.P. | Maryland (State or other jurisdiction of incorporation or organization) | 80-0579682 (I.R.S. Employer Identification Number) | ||||||
11601 Wilshire Blvd., Ninth Floor Los Angeles, California 90025 | ||
(Address of principal executive offices) (Zip Code) | ||
(310) 445-5700
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Hudson Pacific Properties, Inc. Yes x No o | Hudson Pacific Properties, L.P. Yes x No o | ||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Hudson Pacific Properties, Inc. Yes x No o | Hudson Pacific Properties, L.P. Yes x No o | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Hudson Pacific Properties, Inc.
Large accelerated filer x | Accelerated filer o | |||||||
Non-accelerated filer o | Smaller reporting company o | |||||||
Emerging growth company o | ||||||||
Hudson Pacific Properties, L.P.
Large accelerated filer o | Accelerated filer o | |||||||
Non-accelerated filer x | Smaller reporting company o | |||||||
Emerging growth company o | ||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Hudson Pacific Properties, Inc. o | Hudson Pacific Properties, L.P. o | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Hudson Pacific Properties, Inc. Yes o No x | Hudson Pacific Properties, L.P. Yes o No x | ||||
Securities registered pursuant to Section 12(b) of the Act:
| Registrant | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||||
| Hudson Pacific Properties, Inc. | Common Stock, $0.01 par value | HPP | New York Stock Exchange | |||||||||||||||||
The number of shares of common stock of Hudson Pacific Properties, Inc. outstanding at May 1, 2019 was 154,375,000.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2019 of Hudson Pacific Properties, Inc., a Maryland corporation, and Hudson Pacific Properties, L.P., a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or “our Company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.
Hudson Pacific Properties, Inc. is a real estate investment trust, or REIT, and the sole general partner of our operating partnership. As of March 31, 2019, Hudson Pacific Properties, Inc. owned approximately 99.2% of the ownership interest in our operating partnership (including unvested restricted units). The remaining approximately 0.8% interest was owned by certain of our executive officers, directors and outside investors, including unvested operating partnership performance units. As the sole general partner of our operating partnership, Hudson Pacific Properties, Inc. has the full, exclusive and complete responsibility for our operating partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of Hudson Pacific Properties, Inc. and the operating partnership into this single report results in the following benefits:
•enhancing investors’ understanding of our Company and our operating partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•eliminating duplicative disclosure and providing a more streamlined and readable presentation because a substantial portion of the disclosures apply to both our Company and our operating partnership; and
•creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between our Company and our operating partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between our Company and our operating partnership in the context of how we operate as an interrelated, consolidated company. Hudson Pacific Properties, Inc. is a REIT, the only material assets of which are the units of partnership interest in our operating partnership. As a result, Hudson Pacific Properties, Inc. does not conduct business itself, other than acting as the sole general partner of our operating partnership, issuing equity from time to time and guaranteeing certain debt of our operating partnership. Hudson Pacific Properties, Inc. itself does not issue any indebtedness but guarantees some of the debt of our operating partnership. Our operating partnership, which is structured as a partnership with no publicly traded equity, holds substantially all of the assets of our Company and conducts substantially all of our business. Except for net proceeds from equity issuances by Hudson Pacific Properties, Inc., which are generally contributed to our operating partnership in exchange for units of partnership interest in our operating partnership, our operating partnership generates the capital required by our Company’s business through its operations, its incurrence of indebtedness or through the issuance of units of partnership interest in our operating partnership.
Non-controlling interest, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our operating partnership. The common units in our operating partnership are accounted for as partners’ capital in our operating partnership’s consolidated financial statements and, to the extent not held by our Company, as a non-controlling interest in our Company’s consolidated financial statements. The differences between stockholders’ equity, partners’ capital and non-controlling interest result from the differences in the equity issued by our Company and our operating partnership.
To help investors understand the significant differences between our Company and our operating partnership, this report presents the consolidated financial statements and Note 14—Earnings Per Share separately for our Company and our operating partnership. All other sections of this report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our operating partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and our operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act and 18 U.S.C. §1350, this report also includes separate Part I, Item 4 “Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of Hudson Pacific Properties, Inc. and our operating partnership.
3
HUDSON PACIFIC PROPERTIES, INC. AND HUDSON PACIFIC PROPERTIES, L.P.
TABLE OF CONTENTS
| Page | ||||||||
| ITEM 1. | Financial Statements of Hudson Pacific Properties, Inc. | |||||||
| ITEM 1. | Financial Statements of Hudson Pacific Properties, L.P. | |||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 1. | ||||||||
| ITEM 1A. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
4
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2019 (unaudited) | December 31, 2018 | ||||||||||
| ASSETS | |||||||||||
| Investment in real estate, at cost | $ | 6,990,420 | $ | 7,059,537 | |||||||
| Accumulated depreciation and amortization | (739,334) | (695,631) | |||||||||
| Investment in real estate, net | 6,251,086 | 6,363,906 | |||||||||
| Cash and cash equivalents | 52,445 | 53,740 | |||||||||
| Restricted cash | 13,626 | 14,451 | |||||||||
| Accounts receivable, net | 17,969 | 14,004 | |||||||||
| Straight-line rent receivables, net | 159,004 | 142,369 | |||||||||
| Deferred leasing costs and lease intangible assets, net | 280,193 | 279,896 | |||||||||
| U.S. Government securities | 144,992 | 146,880 | |||||||||
| Operating lease right-of-use asset | 272,051 | — | |||||||||
| Prepaid expenses and other assets, net | 82,441 | 55,633 | |||||||||
| Assets associated with real estate held for sale | 99,821 | — | |||||||||
| TOTAL ASSETS | $ | 7,373,628 | $ | 7,070,879 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Liabilities | |||||||||||
| Unsecured and secured debt, net | $ | 2,711,632 | $ | 2,623,835 | |||||||
| In-substance defeased debt | 137,417 | 138,223 | |||||||||
| Joint venture partner debt | 66,136 | 66,136 | |||||||||
| Accounts payable, accrued liabilities and other | 208,047 | 175,300 | |||||||||
| Operating lease liability | 274,626 | — | |||||||||
| Lease intangible liabilities, net | 41,112 | 45,612 | |||||||||
| Security deposits and prepaid rent | 69,251 | 68,687 | |||||||||
| Liabilities associated with real estate held for sale | 732 | — | |||||||||
| Total liabilities | 3,508,953 | 3,117,793 | |||||||||
| Redeemable preferred units of the operating partnership | 9,815 | 9,815 | |||||||||
| Redeemable non-controlling interest in consolidated real estate entities | 114,616 | 113,141 | |||||||||
| Equity | |||||||||||
| Hudson Pacific Properties, Inc. stockholders’ equity | |||||||||||
| Common stock, $0.01 par value, 490,000,000 authorized, 154,373,581 shares and 154,371,538 shares outstanding at March 31, 2019 and December 31, 2018, respectively | 1,543 | 1,543 | |||||||||
| Additional paid-in capital | 3,485,307 | 3,524,502 | |||||||||
| Accumulated other comprehensive income | 9,674 | 17,501 | |||||||||
| Accumulated deficit | (41,189) | — | |||||||||
| Total Hudson Pacific Properties, Inc. stockholders’ equity | 3,455,335 | 3,543,546 | |||||||||
| Non-controlling interest—members in consolidated entities | 267,039 | 268,246 | |||||||||
| Non-controlling interest—units in the operating partnership | 17,870 | 18,338 | |||||||||
| Total equity | 3,740,244 | 3,830,130 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 7,373,628 | $ | 7,070,879 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share data)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| REVENUES | |||||||||||
| Office | |||||||||||
| Rental (Note 2) | $ | 170,197 | $ | 130,082 | |||||||
| Tenant recoveries (Note 2) | — | 20,904 | |||||||||
| Service revenues (Note 2) | 5,661 | 5,546 | |||||||||
| Total office revenues | 175,858 | 156,532 | |||||||||
| Studio | |||||||||||
| Rental (Note 2) | 12,394 | 10,383 | |||||||||
| Tenant recoveries (Note 2) | — | 354 | |||||||||
| Service revenues and other (Note 2) | 9,137 | 6,849 | |||||||||
| Total studio revenues | 21,531 | 17,586 | |||||||||
| Total revenues | 197,389 | 174,118 | |||||||||
| OPERATING EXPENSES | |||||||||||
| Office operating expenses | 60,815 | 53,240 | |||||||||
| Studio operating expenses | 11,109 | 9,664 | |||||||||
| General and administrative | 18,094 | 15,564 | |||||||||
| Depreciation and amortization | 68,505 | 60,553 | |||||||||
| Total operating expenses | 158,523 | 139,021 | |||||||||
| OTHER EXPENSE (INCOME) | |||||||||||
| Interest expense | 24,350 | 20,503 | |||||||||
| Interest income | (1,024) | (9) | |||||||||
| Transaction-related expenses | 128 | 118 | |||||||||
| Other expense (income) | 106 | (404) | |||||||||
| Gains on sale of real estate | — | (37,674) | |||||||||
| Impairment loss | 52,201 | — | |||||||||
| Total other expense (income) | 75,761 | (17,466) | |||||||||
| Net (loss) income | (36,895) | 52,563 | |||||||||
| Net income attributable to preferred units | (153) | (159) | |||||||||
| Net income attributable to participating securities | (308) | (327) | |||||||||
| Net income attributable to non-controlling interest in consolidated real estate entities | (2,821) | (3,323) | |||||||||
| Net loss attributable to redeemable non-controlling interest in consolidated real estate entities | 600 | — | |||||||||
| Net loss (income) attributable to non-controlling interest in the operating partnership | 185 | (177) | |||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (39,392) | $ | 48,577 | |||||||
| BASIC AND DILUTED PER SHARE AMOUNTS | |||||||||||
| Net (loss) income attributable to common stockholders—basic | $ | (0.26) | $ | 0.31 | |||||||
| Net (loss) income attributable to common stockholders—diluted | $ | (0.26) | $ | 0.31 | |||||||
| Weighted average shares of common stock outstanding—basic | 154,396,159 | 155,626,055 | |||||||||
| Weighted average shares of common stock outstanding—diluted | 154,396,159 | 156,714,822 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | |||||||
| Other comprehensive (loss) income: change in fair value of derivatives | (7,864) | 9,513 | |||||||||
| Comprehensive (loss) income | (44,759) | 62,076 | |||||||||
| Comprehensive income attributable to preferred units | (153) | (159) | |||||||||
| Comprehensive income attributable to participating securities | (308) | (391) | |||||||||
| Comprehensive income attributable to non-controlling interest in consolidated entities | (2,821) | (3,323) | |||||||||
| Comprehensive loss attributable to redeemable non-controlling interest in consolidated real estate entities | 600 | — | |||||||||
| Comprehensive loss (income) attributable to non-controlling interest in the operating partnership | 222 | (211) | |||||||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (47,219) | $ | 57,992 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share data)
| Hudson Pacific Properties, Inc. Stockholders’ Equity | Non-controlling interest | ||||||||||||||||||||||||||||
| Shares of Common Stock | Stock Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income | Units in the operating partnership | Members in Consolidated Entities | Total Equity | ||||||||||||||||||||||
| Balance, December 31, 2017 | 155,602,508 | $ | 1,556 | $ | 3,622,988 | $ | — | $ | 13,227 | $ | 14,591 | $ | 258,602 | $ | 3,910,964 | ||||||||||||||
| Cumulative adjustment related to adoption of ASU 2017-12 | — | — | — | (231) | 230 | 1 | — | — | |||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 2,691 | 2,691 | |||||||||||||||||||||
| Distributions | — | — | — | — | — | — | (1,060) | (1,060) | |||||||||||||||||||||
| Proceeds from sale of common stock, net of underwriters discount and transaction costs | — | — | (173) | — | — | — | — | (173) | |||||||||||||||||||||
| Issuance of unrestricted stock | 43,900 | — | — | — | — | — | — | — | |||||||||||||||||||||
| Shares withheld to satisfy tax withholding | (20,353) | — | (693) | — | — | — | — | (693) | |||||||||||||||||||||
| Declared dividend | — | — | — | (39,173) | — | (178) | — | (39,351) | |||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 3,551 | — | 1,019 | — | 4,570 | ||||||||||||||||||||||
| Net income | — | — | — | 48,904 | — | 177 | 3,323 | 52,404 | |||||||||||||||||||||
| Change in fair value of derivatives | — | — | — | — | 9,479 | 34 | — | 9,513 | |||||||||||||||||||||
| Balance, March 31, 2018 | 155,626,055 | $ | 1,556 | $ | 3,625,673 | $ | 9,500 | $ | 22,936 | $ | 15,644 | $ | 263,556 | $ | 3,938,865 | ||||||||||||||
| Balance at December 31, 2018 | 154,371,538 | $ | 1,543 | $ | 3,524,502 | $ | — | $ | 17,501 | $ | 18,338 | $ | 268,246 | $ | 3,830,130 | ||||||||||||||
| Cumulative adjustment related to adoption of ASC 842 | — | — | — | (2,105) | — | — | — | (2,105) | |||||||||||||||||||||
| Distributions | — | — | — | — | — | — | (4,028) | (4,028) | |||||||||||||||||||||
| Issuance of unrestricted stock | 128,923 | 1 | (1) | — | — | — | — | — | |||||||||||||||||||||
| Shares withheld to satisfy tax withholding | (126,880) | (1) | (3,667) | — | — | — | — | (3,668) | |||||||||||||||||||||
| Declared dividend | — | — | (39,241) | — | — | (1,186) | — | (40,427) | |||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 3,714 | — | — | 1,465 | — | 5,179 | |||||||||||||||||||||
| Net (loss) income | — | — | — | (39,084) | — | (185) | 2,821 | (36,448) | |||||||||||||||||||||
| Change in fair value of derivatives | — | — | — | — | (7,827) | (37) | — | (7,864) | |||||||||||||||||||||
| Redemption of common units in the operating partnership | — | — | — | — | — | (525) | — | (525) | |||||||||||||||||||||
| Balance at March 31, 2019 | 154,373,581 | $ | 1,543 | $ | 3,485,307 | $ | (41,189) | $ | 9,674 | $ | 17,870 | $ | 267,039 | $ | 3,740,244 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 68,505 | 60,553 | |||||||||
| Non-cash portion of interest expense | 1,591 | 1,658 | |||||||||
| Amortization of stock-based compensation | 5,150 | 4,338 | |||||||||
| Straight-line rents | (16,635) | (9,942) | |||||||||
| Straight-line rent expenses | 366 | 136 | |||||||||
| Amortization of above- and below-market leases, net | (4,179) | (3,811) | |||||||||
| Amortization of above- and below-market ground lease, net | 615 | 624 | |||||||||
| Amortization of lease incentive costs | 326 | 303 | |||||||||
| Other non-cash adjustments | — | 256 | |||||||||
| Impairment loss | 52,201 | — | |||||||||
| Gains on sale of real estate | — | (37,674) | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (4,263) | (1,782) | |||||||||
| Deferred leasing costs and lease intangibles | (13,675) | (6,614) | |||||||||
| Prepaid expenses and other assets | 2,771 | 3,313 | |||||||||
| Accounts payable, accrued liabilities and other | 33,004 | (33) | |||||||||
| Security deposits and prepaid rent | 564 | 559 | |||||||||
| Net cash provided by operating activities | 89,446 | 64,447 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Additions to investment in real estate | (94,615) | (103,512) | |||||||||
| Maturities of U.S. Government securities | 1,932 | — | |||||||||
| Proceeds from sale of real estate | — | 237,004 | |||||||||
| Deposits for property acquisitions | (35,584) | — | |||||||||
| Net cash (used in) provided by investing activities | (128,267) | 133,492 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from unsecured and secured debt | 430,001 | 130,000 | |||||||||
| Payments of unsecured and secured debt | (335,145) | (308,529) | |||||||||
| Payments of in-substance defeased debt | (806) | — | |||||||||
| Proceeds from issuance of common stock, net | — | (173) | |||||||||
| Repurchase of common units in the operating partnership | (525) | — | |||||||||
| Dividends paid to common stock and unit-holders | (40,427) | (39,351) | |||||||||
| Dividends paid to preferred unit-holders | (153) | (159) | |||||||||
| Contribution of redeemable non-controlling member in consolidated real estate entities | 2,075 | — | |||||||||
| Contribution of non-controlling member in consolidated real estate entities | — | 2,691 | |||||||||
| Distribution to non-controlling member in consolidated real estate entities | (4,028) | (1,060) | |||||||||
| Payments to satisfy tax withholding | (3,668) | (693) | |||||||||
| Payment of loan costs | (10,623) | (6,965) | |||||||||
| Net cash provided by (used in) financing activities | 36,701 | (224,239) | |||||||||
| Net decrease in cash and cash equivalents and restricted cash | (2,120) | (26,300) | |||||||||
| Cash and cash equivalents and restricted cash—beginning of period | 68,191 | 101,280 | |||||||||
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—END OF PERIOD | $ | 66,071 | $ | 74,980 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
9
ITEM 1. FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, L.P.
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
March 31, 2019 (unaudited) | December 31, 2018 | ||||||||||
| ASSETS | |||||||||||
| Investment in real estate, at cost | $ | 6,990,420 | $ | 7,059,537 | |||||||
| Accumulated depreciation and amortization | (739,334) | (695,631) | |||||||||
| Investment in real estate, net | 6,251,086 | 6,363,906 | |||||||||
| Cash and cash equivalents | 52,445 | 53,740 | |||||||||
| Restricted cash | 13,626 | 14,451 | |||||||||
| Accounts receivable, net | 17,969 | 14,004 | |||||||||
| Straight-line rent receivables, net | 159,004 | 142,369 | |||||||||
| Deferred leasing costs and lease intangible assets, net | 280,193 | 279,896 | |||||||||
| U.S. Government securities | 144,992 | 146,880 | |||||||||
| Operating lease right-of-use asset | 272,051 | — | |||||||||
| Prepaid expenses and other assets, net | 82,441 | 55,633 | |||||||||
| Assets associated with real estate held for sale | 99,821 | — | |||||||||
| TOTAL ASSETS | $ | 7,373,628 | $ | 7,070,879 | |||||||
| LIABILITIES AND CAPITAL | |||||||||||
| Liabilities | |||||||||||
| Unsecured and secured debt, net | $ | 2,711,632 | $ | 2,623,835 | |||||||
| In-substance defeased debt | 137,417 | 138,223 | |||||||||
| Joint venture partner debt | 66,136 | 66,136 | |||||||||
| Accounts payable, accrued liabilities and other | 208,047 | 175,300 | |||||||||
| Operating lease liability | 274,626 | — | |||||||||
| Lease intangible liabilities, net | 41,112 | 45,612 | |||||||||
| Security deposits and prepaid rent | 69,251 | 68,687 | |||||||||
| Liabilities associated with real estate held for sale | 732 | — | |||||||||
| Total liabilities | 3,508,953 | 3,117,793 | |||||||||
| Redeemable preferred units of the operating partnership | 9,815 | 9,815 | |||||||||
| Redeemable non-controlling interest in consolidated real estate entities | 114,616 | 113,141 | |||||||||
| Capital | |||||||||||
| Hudson Pacific Properties, L.P. partners’ capital | |||||||||||
| Common units, 155,094,354 and 154,940,583 issued and outstanding at March 31, 2019 and December 31, 2018, respectively. | 3,463,504 | 3,544,319 | |||||||||
| Accumulated other comprehensive income | 9,701 | 17,565 | |||||||||
| Total Hudson Pacific Properties, L.P. partners’ capital | 3,473,205 | 3,561,884 | |||||||||
| Non-controlling interest—members in consolidated entities | 267,039 | 268,246 | |||||||||
| Total capital | 3,740,244 | 3,830,130 | |||||||||
| TOTAL LIABILITIES AND CAPITAL | $ | 7,373,628 | $ | 7,070,879 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
10
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit data)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| REVENUES | |||||||||||
| Office | |||||||||||
| Rental (Note 2) | $ | 170,197 | $ | 130,082 | |||||||
| Tenant recoveries (Note 2) | — | 20,904 | |||||||||
| Service revenues (Note 2) | 5,661 | 5,546 | |||||||||
| Total office revenues | 175,858 | 156,532 | |||||||||
| Studio | |||||||||||
| Rental (Note 2) | 12,394 | 10,383 | |||||||||
| Tenant recoveries (Note 2) | — | 354 | |||||||||
| Service revenues and other (Note 2) | 9,137 | 6,849 | |||||||||
| Total studio revenues | 21,531 | 17,586 | |||||||||
| Total revenues | 197,389 | 174,118 | |||||||||
| OPERATING EXPENSES | |||||||||||
| Office operating expenses | 60,815 | 53,240 | |||||||||
| Studio operating expenses | 11,109 | 9,664 | |||||||||
| General and administrative | 18,094 | 15,564 | |||||||||
| Depreciation and amortization | 68,505 | 60,553 | |||||||||
| Total operating expenses | 158,523 | 139,021 | |||||||||
| OTHER EXPENSE (INCOME) | |||||||||||
| Interest expense | 24,350 | 20,503 | |||||||||
| Interest income | (1,024) | (9) | |||||||||
| Transaction-related expenses | 128 | 118 | |||||||||
| Other expense (income) | 106 | (404) | |||||||||
| Gains on sale of real estate | — | (37,674) | |||||||||
| Impairment loss | 52,201 | — | |||||||||
| Total other expense (income) | 75,761 | (17,466) | |||||||||
| Net (loss) income | (36,895) | 52,563 | |||||||||
| Net income attributable to non-controlling interest in consolidated real estate entities | (2,821) | (3,323) | |||||||||
| Net loss attributable to redeemable non-controlling interest in consolidated real estate entities | 600 | — | |||||||||
| Net (loss) income attributable to Hudson Pacific Properties, L.P. | (39,116) | 49,240 | |||||||||
| Net income attributable to preferred units | (153) | (159) | |||||||||
| Net income attributable to participating securities | (308) | (327) | |||||||||
| NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS | $ | (39,577) | $ | 48,754 | |||||||
| BASIC AND DILUTED PER UNIT AMOUNTS | |||||||||||
| Net (loss) income attributable to common unitholders—basic | $ | (0.26) | $ | 0.31 | |||||||
| Net (loss) income attributable to common unitholders—diluted | $ | (0.26) | $ | 0.31 | |||||||
| Weighted average shares of common units outstanding—basic | 155,120,144 | 156,195,100 | |||||||||
| Weighted average shares of common units outstanding—diluted | 155,120,144 | 157,283,867 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
11
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | |||||||
| Other comprehensive (loss) income: change in fair value of derivatives | (7,864) | 9,513 | |||||||||
| Comprehensive (loss) income | (44,759) | 62,076 | |||||||||
| Comprehensive income attributable to preferred units | (153) | (159) | |||||||||
| Comprehensive income attributable to participating securities | (308) | (391) | |||||||||
| Comprehensive income attributable to non-controlling interest in consolidated entities | (2,821) | (3,323) | |||||||||
| Comprehensive loss attributable to redeemable non-controlling interest in consolidated real estate entities | 600 | — | |||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARTNERS’ CAPITAL | $ | (47,441) | $ | 58,203 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
12
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit data)
Hudson Pacific Properties, L.P. Partners’ Capital | ||||||||||||||||||||
Number of Common Units | Common Units | Accumulated Other Comprehensive Income | Total Partners’ Capital | Non-controlling Interest—Members in Consolidated Entities | Total Capital | |||||||||||||||
| Balance at December 31, 2017 | 156,171,553 | $ | 3,639,086 | $ | 13,276 | $ | 3,652,362 | $ | 258,602 | $ | 3,910,964 | |||||||||
| Cumulative adjustment related to adoption of ASU 2017-12 | — | (231) | 231 | — | — | — | ||||||||||||||
| Contributions | — | — | — | — | 2,691 | 2,691 | ||||||||||||||
| Distributions | — | — | — | — | (1,060) | (1,060) | ||||||||||||||
| Proceeds from sale of common units, net of underwriters’ discount and transaction costs | — | (173) | — | (173) | — | (173) | ||||||||||||||
| Issuance of unrestricted units | 43,900 | — | — | — | — | — | ||||||||||||||
| Units withheld to satisfy tax withholding | (20,353) | (693) | — | (693) | — | (693) | ||||||||||||||
| Declared distributions | — | (39,351) | — | (39,351) | — | (39,351) | ||||||||||||||
| Amortization of unit-based compensation | — | 4,570 | — | 4,570 | — | 4,570 | ||||||||||||||
| Net income | — | 49,081 | — | 49,081 | 3,323 | 52,404 | ||||||||||||||
| Change in fair value of derivatives | — | — | 9,513 | 9,513 | — | 9,513 | ||||||||||||||
| Balance at March 31, 2018 | 156,195,100 | $ | 3,652,289 | $ | 23,020 | $ | 3,675,309 | $ | 263,556 | $ | 3,938,865 | |||||||||
| Balance at December 31, 2018 | 154,940,583 | 3,544,319 | 17,565 | 3,561,884 | 268,246 | 3,830,130 | ||||||||||||||
| Cumulative adjustment related to adoption of ASC 842 | — | (2,105) | — | (2,105) | — | (2,105) | ||||||||||||||
| Distributions | — | — | — | — | (4,028) | (4,028) | ||||||||||||||
| Issuance of unrestricted units | 298,727 | — | — | — | — | — | ||||||||||||||
| Units withheld to satisfy tax withholding | (126,880) | (3,668) | — | (3,668) | — | (3,668) | ||||||||||||||
| Declared distributions | — | (40,427) | — | (40,427) | — | (40,427) | ||||||||||||||
| Amortization of unit-based compensation | — | 5,179 | — | 5,179 | — | 5,179 | ||||||||||||||
| Net (loss) income | — | (39,269) | — | (39,269) | 2,821 | (36,448) | ||||||||||||||
| Change in fair value of derivatives | — | — | (7,864) | (7,864) | — | (7,864) | ||||||||||||||
| Redemption of common units | (18,076) | (525) | — | (525) | — | (525) | ||||||||||||||
| Balance at March 31, 2019 | 155,094,354 | $ | 3,463,504 | $ | 9,701 | $ | 3,473,205 | $ | 267,039 | $ | 3,740,244 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
13
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 68,505 | 60,553 | |||||||||
| Non-cash portion of interest expense | 1,591 | 1,658 | |||||||||
| Amortization of unit-based compensation | 5,150 | 4,338 | |||||||||
| Straight-line rents | (16,635) | (9,942) | |||||||||
| Straight-line rent expenses | 366 | 136 | |||||||||
| Amortization of above- and below-market leases, net | (4,179) | (3,811) | |||||||||
| Amortization of above- and below-market ground lease, net | 615 | 624 | |||||||||
| Amortization of lease incentive costs | 326 | 303 | |||||||||
| Other non-cash adjustments | — | 256 | |||||||||
| Impairment loss | 52,201 | — | |||||||||
| Gains on sale of real estate | — | (37,674) | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (4,263) | (1,782) | |||||||||
| Deferred leasing costs and lease intangibles | (13,675) | (6,614) | |||||||||
| Prepaid expenses and other assets | 2,771 | 3,313 | |||||||||
| Accounts payable and accrued liabilities and other | 33,004 | (33) | |||||||||
| Security deposits and prepaid rent | 564 | 559 | |||||||||
| Net cash provided by operating activities | 89,446 | 64,447 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Additions to investment in real estate | (94,615) | (103,512) | |||||||||
| Maturities of U.S. Government securities | 1,932 | — | |||||||||
| Proceeds from sale of real estate | — | 237,004 | |||||||||
| Deposits for property acquisitions | (35,584) | — | |||||||||
| Net cash (used in) provided by investing activities | (128,267) | 133,492 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from unsecured and secured debt | 430,001 | 130,000 | |||||||||
| Payments of unsecured and secured debt | (335,145) | (308,529) | |||||||||
| Payments of in-substance defeased debt | (806) | — | |||||||||
| Proceeds from issuance of common units, net | — | (173) | |||||||||
| Repurchase of common units in the operating partnership | (525) | — | |||||||||
| Dividends paid to common stock and unit-holders | (40,427) | (39,351) | |||||||||
| Dividends paid to preferred unit-holders | (153) | (159) | |||||||||
| Contribution of redeemable non-controlling member in consolidated real estate entities | 2,075 | — | |||||||||
| Contribution of non-controlling member in consolidated real estate entities | — | 2,691 | |||||||||
| Distribution to non-controlling member in consolidated real estate entities | (4,028) | (1,060) | |||||||||
| Payments to satisfy tax withholding | (3,668) | (693) | |||||||||
| Payment of loan costs | (10,623) | (6,965) | |||||||||
| Net cash provided by (used in) financing activities | 36,701 | (224,239) | |||||||||
| Net decrease in cash and cash equivalents and restricted cash | (2,120) | (26,300) | |||||||||
| Cash and cash equivalents and restricted cash—beginning of period | 68,191 | 101,280 | |||||||||
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—END OF PERIOD | $ | 66,071 | $ | 74,980 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
14
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
1. Organization
Hudson Pacific Properties, Inc. is a Maryland corporation formed on November 9, 2009 as a fully integrated, self-administered and self-managed real estate investment trust (“REIT”). Through its controlling interest in the operating partnership and its subsidiaries, Hudson Pacific Properties, Inc. owns, manages, leases, acquires and develops real estate, consisting primarily of office and studio properties. Unless otherwise indicated or unless the context requires otherwise, all references in these financial statements to “the Company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.
The Company’s portfolio consists of properties located throughout Northern and Southern California and the Pacific Northwest. The following table summarizes the Company’s portfolio as of March 31, 2019:
| Segments | Number of Properties | Square Feet (unaudited) | ||||||||||||
| Office | 52 | 13,866,793 | ||||||||||||
| Studio | 3 | 1,224,403 | ||||||||||||
TOTAL(1) | 55 | 15,091,196 | ||||||||||||
_________________
1.Includes redevelopment, development and held for sale properties.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company and the operating partnership are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. References to number of properties and square-feet are not covered by the auditor’s review procedures.
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements in the 2018 Annual Report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. and the notes thereto.
Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of the Company, the operating partnership and all wholly owned and controlled subsidiaries. The consolidated financial statements of the operating partnership include the accounts of the operating partnership and all wholly owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
Under the consolidation guidance, the Company first evaluates an entity using the variable interest model, then the voting model. The Company ultimately consolidates all entities that the Company controls through either majority ownership or voting rights, including all variable interest entities (“VIEs”) of which the Company is considered the primary beneficiary. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. In addition, the Company continually evaluates each legal entity that is not wholly owned for reconsideration based on changing circumstances.
VIEs are defined as entities in which equity investors do not have:
15
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
•the characteristics of a controlling financial interest;
•sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties; and/or
•the entity is structured with non-substantive voting rights.
The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with both the power to direct the activities that most significantly affect the VIE’s economic performance and the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. As of March 31, 2019, the Company has determined its operating partnership and five joint ventures met the definition of a VIE. Four of the joint ventures are consolidated entities and one joint venture is an unconsolidated entity.
Consolidated Entities
As of March 31, 2019, the operating partnership has determined that four of its joint ventures met the definition of a VIE and are consolidated:
| Entity | Property | Ownership Interest | ||||||||||||
| Hudson 1455 Market, L.P. | 1455 Market | 55.0 | % | |||||||||||
| Hudson 1099 Stewart, L.P. | Hill7 | 55.0 | % | |||||||||||
| HPP-MAC WSP, LLC | One Westside and 10850 Pico | 75.0 | % | |||||||||||
| Hudson One Ferry REIT, L.P. | Ferry Building | 55.0 | % | |||||||||||
As of March 31, 2019 and December 31, 2018, the Company has determined that its operating partnership met the definition of a VIE and is consolidated.
Substantially all of the assets and liabilities of the Company are related to these VIEs.
Unconsolidated Entity
As of March 31, 2019, the Company has determined it is not the primary beneficiary of one joint venture. Due to its significant influence over the unconsolidated entity, the Company accounts for it using the equity method of accounting. Under the equity method, the Company initially records the investment at cost and subsequently adjusts for equity in earnings or losses and cash contributions and distributions. The Company’s share of net income or loss from the entity is included within other income on the Consolidated Statements of Operations. The Company’s net equity investment of the unconsolidated entity of $86 thousand and $86 thousand as of March 31, 2019 and December 31, 2018, respectively, is reflected within prepaid expenses and other assets on the Consolidated Balance Sheets, which represents the Company’s maximum exposure for loss.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties, determining the incremental borrowing rate used in the present value calculations of its new or modified operating lessee agreements, its accrued liabilities and its performance-based equity compensation awards. The Company bases its estimates on historical experience, current market conditions and various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from these estimates.
Lease Accounting
In February 2016, the FASB issued guidance codified in ASC 842, Leases (“ASC 842”), which amends the guidance in former ASC 840, Leases (“ASC 840”). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). The new standard increases transparency and
16
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating leases. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective transition approach that must be applied for leases that exist or are entered into after January 1, 2019.
ASC 842 requires companies to identify lease and non-lease components of a lease agreement. Lease components relate to the right to use the leased asset whereas non-lease components relate to payments for goods or services that are transferred separately from the right to use the underlying asset.
ASC 842 provides transition practical expedients that must be elected together that allow entities to not (i) reassess whether any expired or existing contracts are considered or contain leases; (ii) reassess the lease classification for any expired or existing leases; and (iii) reassess initial direct costs for any existing leases that are in effect as of the date of adoption. Additionally, the guidance allows an entity to elect a practical expedient to not assess whether an existing or expired land easement that was not previously accounted for as a lease under ASC 840 is considered in a lease under ASC 842. For lessors, the guidance provides for a practical expedient, by class of underlying asset, to elect a combined single lease component presentation if (i) the timing and pattern of the transfer of the combined single lease component is the same, and (ii) the related lease component, if accounted for separately, would be classified as an operating lease.
The Company elected the practical expedients above. The lessor practical expedient to combine lease and non-lease components was elected only for the Company’s leases related to the office properties. For the Company’s studio properties, the timing and pattern of the transfer of the lease components and non-lease components for studio properties are not the same and therefore the Company could not elect this practical expedient for the Company’s studio properties. The standalone selling price related to the studio non-lease components is readily available and does not require estimates.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company’s operating lease agreements relate to ground lease assets and are reflected in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date, or the date of the ASC 842 adoption, in determining the present value of lease payments. The weighted average incremental borrowing rate used to calculate the ROU assets and liabilities was 5.7%. ROU assets also include any lease payments made and exclude lease incentives. Many of the Company’s lessee agreements include options to extend the lease, which we do not include in its minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term. The weighted average remaining lease term, as of March 31, 2019, was 33 years.
Lessor Accounting
As a lessor, the Company’s recognition of revenue remained consistent with previous guidance, apart from the narrower definition of initial direct costs that can be capitalized. With the election of the lessor practical expedient, the presentation of revenues on the Consolidated Statement of Operations has changed to reflect a single lease component which combines rental, tenant recoveries, and other tenant-related revenues for the office portfolio. For the Company’s rentals at the studio properties, total lease consideration is allocated to lease and non-lease components on a relative standalone basis. The recognition of revenues related to lease components is governed by ASC 842, while revenue related to non-lease components is be subject to ASC 606.
The new standard defines initial direct costs as only the incremental costs of signing a lease. Internal direct compensation costs and external legal fees related to the execution of successful lease agreements that no longer meet the definition of initial direct costs under ASC 842 will be accounted for as office operating expense or studio operating expense in the Company’s Consolidated Statements of Operations. Additionally, the Company may elect the practical expedients only for leases that have commenced before the effective date of the adoption of ASC 842. As a result of the adoption, the Company recognized $1.8
17
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
million as a cumulative adjustment to accumulated deficit for costs associated with leases that have not commenced as of January 1, 2019, that were previously capitalized and no longer meet the definition of initial direct costs in accordance with ASC 842. The Company recognized $0.3 million as cumulative adjustments to accumulated deficit related to other transition adjustments.
Revenue Recognition
The Company has compiled an inventory of its sources of revenues and has identified the following material revenue streams: (i) rental revenues (ii) tenant recoveries and other tenant-related revenues (iii) ancillary revenues (iv) guest parking revenues and (v) sale of real estate.
Revenue Stream | Components | Financial Statement Location(1) | ||||||||||||
| Rental revenues | Office rentals, stage rentals and storage rentals | Office and studio segments: rental | ||||||||||||
| Tenant recoveries and other tenant-related revenues | Reimbursement of real estate taxes, insurance, repairs and maintenance, other operating expenses and must take parking revenues | Office segment: rental Studio segment: rental and service revenue and other | ||||||||||||
| Ancillary revenues | Revenues derived from tenants’ use of lighting, equipment rental, power, HVAC and telecommunications (i.e., telephone and internet) | Studio segment: service revenue and other | ||||||||||||
Guest parking revenues | Parking revenue that is not associated with lease agreements | Office segment: service revenue Studio segment: service revenue and other | ||||||||||||
| Sale of real estate | Gains on sales derived from cash consideration less cost basis | Gains on sale of real estate | ||||||||||||
_________________
1.The financial statement locations stated above are as of March 31, 2019 after the adoption of ASC 842 and do not reflect the locations as of December 31, 2018.
The Company’s 2018 rental revenues are accounted for under ASC 840. The Company continues to recognize rental revenue from tenants on a straight-line basis over the lease term when collectability is probable and the tenant has taken possession of or controls the physical use of the leased asset.
The Company recognizes tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Company is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.
Other tenant-related revenues includes parking stipulated in lease agreements as must-take parking rentals. These revenues are recognized over the term of the lease.
Ancillary revenues and guest parking revenues have been accounted for under ASC 606 since the Company adopted this standard on January 1, 2018. These revenues have single performance obligations and are recognized at the point in time when services are rendered.
The following table summarizes the Company’s revenue streams that are accounted for under ASC 606:
| March 31, 2019 | March 31, 2018 | |||||||||||||
| Ancillary revenues | $ | 8,086 | $ | 5,320 | ||||||||||
| Guest parking revenues | $ | 6,447 | $ | 5,413 | ||||||||||
Studio related tenant recoveries(1) | $ | 275 | N/A | |||||||||||
_________________
1.Studio related tenant recoveries are accounted for under ASC 606 effective January 1, 2019.
18
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The following table summarizes the Company’s receivables that are accounted for under ASC 606:
| March 31, 2019 | December 31, 2018 | |||||||||||||
| Ancillary revenues | $ | 5,836 | $ | 3,752 | ||||||||||
| Guest parking revenues | $ | 1,393 | $ | 959 | ||||||||||
| Studio related tenant recoveries | $ | — | N/A | |||||||||||
_________________
1.Studio related tenant recoveries are accounted for under ASC 606 effective January 1, 2019.
Sale of real estate has been accounted for under ASC 610, Other Income, since the Company adopted this standard on January 1, 2018. As a result of the adoption, there was no change in respect to the timing and pattern of revenue recognition. This standard requires the Company to apply certain recognition and measurement principles in accordance with ASC 606 when it recognizes nonfinancial assets and in-substance nonfinancial assets, and the counterparty is not a customer. This is the case for the Company’s sales of real estate, and as a result the Company is required to evaluate the sales of real estate based on transfer of control. If a real estate sale contract includes ongoing involvement by the seller with the sold property, the seller must evaluate each promised good or service under the contract to determine whether it represents a performance obligation, constitutes a guarantee or prevents the transfer of control. The timing and pattern of revenue recognition might change as it relates to gains of sale of real estate if the sale includes continued involvement that represents a separate performance obligation.
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of Accounting Standards Update (“ASU”). The following ASUs were adopted by the Company in 2019:
Standard | Description | Effect on the Financial Statements or Other Significant Matters | ||||||||||||
ASU 2016-02, Leases (Topic 842) ASU 2019-01, Leases (Topic 842): Codification Improvements ASU 2018-11, Leases (Topic 842): Targeted Improvements ASU 2018-10, Codification Improvements to Topic 842, Leases ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 | Issued on February 5, 2016, ASU 2016-02 amends the accounting guidance for leases and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). | The Company adopted ASC 842 during the first quarter of 2019 using the modified retrospective transition method with a cumulative adjustment to accumulated deficit. Refer to Lease Accounting section above for details. | ||||||||||||
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. | The Company adopted this guidance during the first quarter of 2019 using the prospective approach. The adoption did not have an impact on the Consolidated Financial Statements since LIBOR is still in use, however, this is expected to have an impact in later periods once SOFR is adopted. | ||||||||||||
| ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. | The Company adopted this guidance during the first quarter of 2019 on a prospective basis. The adoption did not have an impact on the Consolidated Financial Statements. | ||||||||||||
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
Other Recently Issued ASUs
The Company considers the applicability and impact of all ASUs. The following table lists the recently issued ASUs that have not been disclosed in the Company’s 2018 Annual Report on Form 10-K and have not been adopted by the Company. The list excludes those ASUs that are not expected to have a material impact on the Company’s consolidated financial statements.
| Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |||||||||||||||||
| ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments | The FASB amended its standards on credit losses, hedging, and recognizing and measuring financial instruments to clarify them and address implementation issues. | Effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. | The Company is currently evaluating the impact of this update. | |||||||||||||||||
3. Investment in Real Estate
The following table summarizes the Company’s investment in real estate, at cost as of:
| March 31, 2019 | December 31, 2018 | ||||||||||
| Land | $ | 1,313,411 | $ | 1,372,872 | |||||||
| Building and improvements | 4,941,701 | 4,991,770 | |||||||||
| Tenant improvements | 547,427 | 510,217 | |||||||||
| Furniture and fixtures | 9,451 | 9,320 | |||||||||
| Property under development | 178,430 | 175,358 | |||||||||
INVESTMENT IN REAL ESTATE, AT COST(1) | $ | 6,990,420 | $ | 7,059,537 | |||||||
_____________
1.Excludes balances related to properties that have been classified as held for sale.
Acquisitions
The Company had no acquisitions during the three months ended March 31, 2019. On March 26, 2019, the Company entered into an agreement to purchase, through a joint venture with Blackstone Property Partners (“Blackstone”), the 1.45 million-square-foot Bentall Centre property located in Vancouver, Canada. The acquisition is expected to close during the second quarter of 2019.
Dispositions
The Company had no dispositions during the three months ended March 31, 2019.
Held for Sale
The Company had one property, Campus Center, classified as held for sale as of March 31, 2019. The Campus Center property, which includes the office property and developable land, is being sold to two separate, unrelated buyers for a combined amount of approximately $150 million (before certain credits, prorations and closing costs). Both sales are expected to close during the second quarter of 2019. The Company did not have any properties classified as held for sale as of December 31, 2018.
The following table summarizes the components of assets and liabilities associated with real estate held for sale as of:
20
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
| March 31, 2019 | |||||
| ASSETS | |||||
| Investment in real estate, net | $ | 99,703 | |||
| Deferred leasing costs and lease intangible assets, net | 14 | ||||
| Prepaid expenses and other assets, net | 104 | ||||
| ASSETS ASSOCIATED WITH REAL ESTATE HELD FOR SALE | $ | 99,821 | |||
| LIABILITIES | |||||
| Accounts payable, accrued liabilities and other | $ | 732 | |||
| LIABILITIES ASSOCIATED WITH REAL ESTATE HELD FOR SALE | $ | 732 | |||
Impairment of Long-Lived Assets
The Company assesses the carrying value of real estate assets and related intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with GAAP. Impairment losses are recorded on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company recognizes impairment losses to the extent the carrying amount exceeds the fair value, based on Level 1 or Level 2 inputs, less estimated costs to sell. The Company recorded $52.2 million of impairment charges related to the Campus Center office property that was held for sale as March 31, 2019. The Company’s estimated fair value was based on the sale price. The Company did not recognize impairment losses during the three months ended March 31, 2018.
4. Deferred Leasing Costs and Lease Intangibles, net
The following summarizes the Company’s deferred leasing costs and lease intangibles as of:
| March 31, 2019 | December 31, 2018 | ||||||||||
| Deferred leasing costs and in-place lease intangibles | $ | 340,634 | $ | 336,535 | |||||||
| Accumulated amortization | (126,298) | (123,432) | |||||||||
| Deferred leasing costs and in-place lease intangibles, net | 214,336 | 213,103 | |||||||||
| Below-market ground leases | 72,916 | 72,916 | |||||||||
| Accumulated amortization | (9,558) | (8,932) | |||||||||
| Below-market ground leases, net | 63,358 | 63,984 | |||||||||
| Above-market leases | 8,370 | 8,425 | |||||||||
| Accumulated amortization | (5,871) | (5,616) | |||||||||
| Above-market leases, net | 2,499 | 2,809 | |||||||||
DEFERRED LEASING COSTS AND LEASE INTANGIBLE ASSETS, NET(1) | $ | 280,193 | $ | 279,896 | |||||||
| Below-market leases | $ | 92,623 | $ | 101,736 | |||||||
| Accumulated amortization | (52,419) | (57,043) | |||||||||
| Below-market leases, net | 40,204 | 44,693 | |||||||||
| Above-market ground leases | 1,095 | 1,095 | |||||||||
| Accumulated amortization | (187) | (176) | |||||||||
| Above-market ground leases, net | 908 | 919 | |||||||||
LEASE INTANGIBLE LIABILITIES, NET(1) | $ | 41,112 | $ | 45,612 | |||||||
_____________
1.Excludes balances related to properties that have been classified as held for sale.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The Company recognized the following amortization related to deferred leasing costs and lease intangibles:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
Deferred leasing costs and in-place lease intangibles(1) | $ | (11,882) | $ | (11,696) | |||||||
Below-market ground leases(2) | $ | (626) | $ | (635) | |||||||
Above-market leases(3) | $ | (310) | $ | (474) | |||||||
Below-market leases(3) | $ | 4,489 | $ | 4,285 | |||||||
Above-market ground leases(2) | $ | 11 | $ | 11 | |||||||
__________________
1.Amortization is recorded in depreciation and amortization expenses and office rental revenues in the Consolidated Statements of Operations.
2.Amortization is recorded in office operating expenses in the Consolidated Statements of Operations.
3.Amortization is recorded in rental revenues in the Consolidated Statements of Operations.
5. Receivables
The Company’s accounting policy and methodology used to estimate the allowance for doubtful accounts related to service revenues are discussed in the Company’s 2018 Annual Report on Form 10-K.
The Company's accounting policy and methodology used to assess collectibility related to rental revenues changed on January 1, 2019 when the Company adopted ASC 842. The guidance requires the Company to assess, at lease commencement and subsequently, collectibility from its tenants of future lease payments. If the Company determines collectibility is not probable, it recognizes an adjustment to lower income from rentals, whereas previously the Company recognized bad debt expense.
Accounts Receivable
As of March 31, 2019, accounts receivable was $18.3 million and there was an allowance for doubtful accounts of $362 thousand. As of December 31, 2018, accounts receivable was $16.5 million and there was an allowance for doubtful accounts of $2.5 million.
Straight-Line Rent Receivable
As of March 31, 2019, straight-line rent receivable was $159.0 million and there was no allowance for doubtful accounts. As of December 31, 2018, straight-line rent receivables was $142.4 million and there was no allowance for doubtful accounts.
6. Prepaid Expenses and Other Assets, net
The following table summarizes the Company’s prepaid expenses and other assets, net as of:
| March 31, 2019 | December 31, 2018 | ||||||||||
| Derivative assets | $ | 10,463 | $ | 16,687 | |||||||
| Goodwill | 8,754 | 8,754 | |||||||||
| Non-real estate investments | 3,138 | 2,713 | |||||||||
| Investment in unconsolidated joint venture | 86 | 86 | |||||||||
Other(1) | 60,000 | 27,393 | |||||||||
PREPAID EXPENSES AND OTHER ASSETS, NET(2) | $ | 82,441 | $ | 55,633 | |||||||
_____________
1.Includes deposits of $35.6 million for future acquisitions as of March 31, 2019 and no deposits for future acquisitions at December 31, 2018.
2.Excludes balances related to properties that have been classified as held for sale.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
Goodwill
No goodwill impairment indicators have been identified during the three months ended March 31, 2019.
Non-Real Estate Investments
The Company holds investments in privately traded companies. The investments require accounting under the equity method unless the interest in the entity is deemed to be so insubstantial such that the Company has virtually no influence over the entity’s operating and financial policies.
The Company holds investments in entities that do not report NAV. The Company marks the these investments to fair value based on Level 2 inputs, whenever fair value is readily available or observable. Changes in fair value are included in the unrealized gain on non-real estate investment line item on the Consolidated Statements of Operations. In the first quarter of 2019 and 2018, there was no gain or loss recognized due to observable changes in fair value. For one of the investments, the Company is committed to funding up to $20.0 million in a real estate technology venture capital fund. During the first quarter of 2019, the Company has contributed $425 thousand to this fund with $19.6 million remaining to be contributed.
Investment in Unconsolidated Joint Venture
As of March 31, 2019, the Company has determined it is not the primary beneficiary of one joint venture. Due to its significant influence over the unconsolidated entity, the Company accounts for it using the equity method of accounting.
On June 16, 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. The Company owns 21% of the unconsolidated entity. On July 10, 2018, the Company received a return of capital related to its share of the repayment of the notes receivable.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
7. Debt
The following table sets forth information with respect to the Company’s outstanding indebtedness:
| March 31, 2019 | December 31, 2018 | Interest Rate(1) | Contractual Maturity Date | |||||||||||||||||||||||
| UNSECURED AND SECURED DEBT | ||||||||||||||||||||||||||
| Unsecured debt | ||||||||||||||||||||||||||
Unsecured revolving credit facility(2)(3) | $ | 220,000 | $ | 400,000 | LIBOR + 1.05% to 1.50% | 3/13/2022 | (4) | |||||||||||||||||||
Term loan A(2)(5) | 300,000 | 300,000 | LIBOR + 1.20% to 1.70% | 4/1/2020 | (6) | |||||||||||||||||||||
Term loan B(2)(7) | 350,000 | 350,000 | LIBOR + 1.20% to 1.70% | 4/1/2022 | ||||||||||||||||||||||
Term loan D(2)(8) | 125,000 | 125,000 | LIBOR + 1.20% to 1.70% | 11/17/2022 | ||||||||||||||||||||||
| Series A notes | 110,000 | 110,000 | 4.34% | 1/2/2023 | ||||||||||||||||||||||
| Series E notes | 50,000 | 50,000 | 3.66% | 9/15/2023 | ||||||||||||||||||||||
| Series B notes | 259,000 | 259,000 | 4.69% | 12/16/2025 | ||||||||||||||||||||||
| Series D notes | 150,000 | 150,000 | 3.98% | 7/6/2026 | ||||||||||||||||||||||
| 3.95% Registered senior notes | 400,000 | 400,000 | 3.95% | 11/1/2027 | ||||||||||||||||||||||
| Series C notes | 56,000 | 56,000 | 4.79% | 12/16/2027 | ||||||||||||||||||||||
4.65% Registered senior notes(9) | 350,000 | — | 4.65% | 4/1/2029 | ||||||||||||||||||||||
| Term loan C | — | 75,000 | LIBOR + 1.30% to 2.20% | N/A | ||||||||||||||||||||||
| Total unsecured debt | 2,370,000 | 2,275,000 | ||||||||||||||||||||||||
| Secured debt | ||||||||||||||||||||||||||
Met Park North(10) | 64,500 | 64,500 | LIBOR + 1.55% | 8/1/2020 | ||||||||||||||||||||||
10950 Washington(11) | 26,736 | 26,880 | 5.32% | 3/11/2022 | ||||||||||||||||||||||
Sunset Bronson Studios/ICON/CUE(12) | 5,001 | — | LIBOR + 1.35% | 3/1/2024 | ||||||||||||||||||||||
| Element LA | 168,000 | 168,000 | 4.59% | 11/6/2025 | ||||||||||||||||||||||
Hill7(13) | 101,000 | 101,000 | 3.38% | 11/6/2028 | ||||||||||||||||||||||
| Sunset Gower Studios/Sunset Bronson Studios | — | 5,001 | LIBOR + 2.25% | N/A | ||||||||||||||||||||||
| Total secured debt | 365,237 | 365,381 | ||||||||||||||||||||||||
| Total unsecured and secured debt | 2,735,237 | 2,640,381 | ||||||||||||||||||||||||
Unamortized deferred financing costs and loan discounts(14) | (23,605) | (16,546) | ||||||||||||||||||||||||
| TOTAL UNSECURED AND SECURED DEBT, NET | $ | 2,711,632 | $ | 2,623,835 | ||||||||||||||||||||||
IN-SUBSTANCE DEFEASED DEBT(15) | $ | 137,417 | $ | 138,223 | 4.47% | 10/1/2022 | ||||||||||||||||||||
JOINT VENTURE PARTNER DEBT(16) | $ | 66,136 | $ | 66,136 | 4.50% | 10/9/2028 | ||||||||||||||||||||
_________________
1.Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed. Interest rates are as of March 31, 2019, which may be different than the interest rates as of December 31, 2018 for corresponding indebtedness.
2.The Company has an option to make an irrevocable election to change the interest rate depending on the Company’s credit rating or a specified base rate plus an applicable margin. As of March 31, 2019, no such election had been made.
3.The Company has a total capacity of $600.0 million under its unsecured revolving credit facility.
4.The maturity date may be extended once for an additional one-year term.
5.The interest rate on the outstanding balance of the term loan was effectively fixed at 2.65% to 3.06% per annum through the use of two interest rate swaps. See Note 8 for details.
6.The maturity date may be extended twice, each time for an additional one-year term.
7.The interest rate on the outstanding balance of the term loan was effectively fixed at 2.96% to 3.46% per annum through the use of two interest rate swaps. See Note 8 for details.
8.The interest rate on the outstanding balance of the term loan was effectively fixed at 2.63% to 3.13% per annum through the use of an interest rate swap. See Note 8 for details.
9.On February 27, 2019, the Company completed an underwritten public offering of $350.0 million of senior notes, which were issued at 98.663% of par.
10.Interest on the full loan amount has been effectively fixed at 3.71% per annum through the use of an interest rate swap. See Note 8 for details.
11.Monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule with a balloon payment at maturity.
12.The Company has a total capacity of $235.0 million under the Sunset Bronson Studios/ICON/CUE revolving credit facility. This loan is secured by the Company’s Sunset Bronson Studios, ICON and CUE properties.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
13.The Company owns 55% of the ownership interest in the consolidated joint venture that owns the Hill7 property. The full amount of the loan is shown. This loan bears interest only at 3.38% until November 6, 2026, at which time the interest rate will increase and monthly debt service will include principal payments with a balloon payment at maturity.
14.Excludes deferred financing costs related to establishing the Company’s unsecured revolving credit facility and Sunset Bronson Studios/ICON/CUE revolving credit facility, which are reflected in prepaid and other assets, net line item in the Consolidated Balance Sheets. See Note 6 for details.
15.The Company owns 75% of the ownership interest in the joint venture that owns the One Westside and 10850 Pico properties. The full amount of the loan is shown. Monthly debt service includes annual debt amortization payments based on a 10-year amortization schedule with a balloon payment at maturity.
16.This amount relates to debt attributable to Allianz U.S. Private REIT LP (“Allianz”), the Company’s partner in the joint venture that owns the Ferry Building property. The maturity date may be extended twice for an additional two-year term each.
Current Year Activity
During the three months ended March 31, 2019, the outstanding borrowings on the unsecured revolving credit facility decreased by $180.0 million, net of draws. The Company uses the unsecured revolving credit facility to finance the acquisition of other properties, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.
On February 27, 2019, the operating partnership completed an underwritten public offering of $350.0 million in senior notes due April 1, 2029. The notes are fully and unconditionally guaranteed by the Company. The net proceeds from the offering, after deducting the underwriting discount, were approximately $343.0 million and were used to repay outstanding borrowings under its unsecured revolving credit facility and $75.0 million of its -year term loan due November 17, 2020.
On March 1, 2019, the Company entered into a loan agreement to borrow up to $235.0 million on a revolving basis, maturing on March 1, 2024. The Company drew $5.0 million to pay down the Sunset Gower Studios/Sunset Bronson Studios construction loan that matured on March 4, 2019. The unused fee rate related to Sunset Bronson Studios/ICON/CUE is 0.20%.
Indebtedness
The Company presents its financial statements on a consolidated basis. Notwithstanding such presentation, except to the extent expressly indicated, the Company’s separate property-owning subsidiaries are not obligors of or under the debt of their respective affiliates and each property-owning subsidiary’s separate liabilities do not constitute obligations of its respective affiliates.
Loan agreements include events of default that the Company believes are usual for loans and transactions of this type. As of the date of this filing, there have been no events of default associated with the Company’s loans.
The following table provides information regarding the Company’s minimum future principal payments due on the Company’s debt (before the impact of extension options, if applicable) as of March 31, 2019:
Year | Unsecured and Secured Debt | In-substance Defeased Debt | Joint Venture Partner Debt | |||||||||||||||||
| Remaining 2019 | $ | 424 | $ | 2,387 | $ | — | ||||||||||||||
| 2020 | 365,095 | 3,323 | — | |||||||||||||||||
| 2021 | 632 | 3,494 | — | |||||||||||||||||
| 2022 | 720,085 | 128,213 | — | |||||||||||||||||
| 2023 | 160,000 | — | — | |||||||||||||||||
| Thereafter | 1,489,001 | — | 66,136 | |||||||||||||||||
TOTAL | $ | 2,735,237 | $ | 137,417 | $ | 66,136 | ||||||||||||||
25
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
Unsecured Debt
Registered Senior Notes
On February 27, 2019, the operating partnership completed an underwritten public offering of $350.0 million in senior notes due April 1, 2029. The notes were issued at 98.663% of par, with a coupon of 4.65% and an effective interest rate of 4.82%. The notes are fully and unconditionally guaranteed by the Company.
On October 2, 2017, the operating partnership completed an underwritten public offering of $400.0 million in senior notes due November 1, 2027. The notes were issued at 99.815% of par, with a coupon of 3.95% and an effective interest rate of 3.97%. The notes are fully and unconditionally guaranteed by the Company.
Term Loan and Credit Facility
On March 13, 2018, the operating partnership entered into a third amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with various financial institutions. The Amended and Restated Credit Agreement amends and restates and replaces (i) the operating partnership’s existing second amended and restated credit agreement, entered into on March 31, 2015, which governed its $400.0 million unsecured revolving credit facility, $300.0 million unsecured 5-year term loan facility and $350.0 million unsecured 7-year term loan facility, and (ii) the operating partnership’s Term Loan Credit Agreement, entered into on November 17, 2015, which governed its $75.0 million unsecured 5-year term loan facility and $125.0 million unsecured 7-year term loan facility.
The Amended and Restated Credit Agreement provides for (i) the increase of the operating partnership’s unsecured revolving credit facility to $600.0 million and the extension of the term to March 13, 2022 and (ii) term loans in amount and tenor equal to the term loans outstanding under the previous agreements ($300.0 million term loan A maturing April 1, 2020, $350.0 million term loan B maturing April 1, 2022, $75.0 million term loan C maturing November 17, 2020 and $125.0 million term loan D maturing November 17, 2022). The $75.0 million term loan was repaid with proceeds from the Company’s 4.65% registered senior notes.
The following table summarizes the balance and key terms of the unsecured revolving credit facility as of:
| March 31, 2019 | December 31, 2018 | ||||||||||
| Outstanding borrowings | $ | 220,000 | $ | 400,000 | |||||||
Remaining borrowing capacity | 380,000 | 200,000 | |||||||||
TOTAL BORROWING CAPACITY | $ | 600,000 | $ | 600,000 | |||||||
Interest rate(1)(2) | LIBOR + 1.05% to 1.50% | ||||||||||
Annual facility fee rate(1) | 0.15% or 0.30% | ||||||||||
Contractual maturity date(3) | 3/13/2022 | ||||||||||
_________________
1.The rate is based on the operating partnership’s leverage ratio. The Company has the option to make an irrevocable election to change the interest rate depending on the Company’s credit rating. As of March 31, 2019, no such election had been made.
2.The Company has the option to make an irrevocable election to change the interest rate depending on the Company’s specified base rate plus an applicable margin. As of March 31, 2019, no such election had been made.
3.The maturity date may be extended once for an additional one-year term.
Debt Covenants
The operating partnership’s ability to borrow under its unsecured loan arrangements remains subject to ongoing compliance with financial and other covenants as defined in the respective agreements. Certain financial covenant ratios are subject to change in the occurrence of material acquisitions as defined in the respective agreements. Other covenants include certain limitations on dividend payouts and distributions, limits on certain types of investments outside of the operating partnership’s primary business and other customary affirmative and negative covenants.
The following table summarizes existing covenants and their covenant levels related to the unsecured revolving credit facility, term loans, and note purchase agreements, when considering the most restrictive terms:
26
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
Covenant Ratio | Covenant Level | |||||||
| Total liabilities to total asset value | ≤ 60% | |||||||
| Unsecured indebtedness to unencumbered asset value | ≤ 60% | |||||||
| Adjusted EBITDA to fixed charges | ≥ 1.5x | |||||||
| Secured indebtedness to total asset value | ≤ 45% | |||||||
| Unencumbered NOI to unsecured interest expense | ≥ 2.0x | |||||||
The following table summarizes existing covenants and their covenant levels related to the registered senior notes:
Covenant Ratio | Covenant Level | |||||||
| Debt to total assets | ≤ 60% | |||||||
| Total unencumbered assets to unsecured debt | ≥ 150% | |||||||
| Consolidated income available for debt service to annual debt service charge | ≥ 1.5x | |||||||
| Secured debt to total assets | ≤ 45% | |||||||
The operating partnership was in compliance with its financial covenants as of March 31, 2019.
Repayment Guarantees
Registered Senior Notes
The Company has fully and unconditionally guaranteed the operating partnership’s 3.95% registered senior notes and 4.65% registered senior notes.
Other Loans
Although the rest of the operating partnership’s loans are secured and non-recourse, the operating partnership provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.
Interest Expense
The following table represents a reconciliation from gross interest expense to the interest expense line item in the Consolidated Statements of Operations:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
Gross interest expense(1) | $ | 27,465 | $ | 22,431 | |||||||
| Capitalized interest | (4,706) | (3,586) | |||||||||
| Amortization of deferred financing costs and loan discounts | 1,591 | 1,658 | |||||||||
INTEREST EXPENSE | $ | 24,350 | $ | 20,503 | |||||||
_________________
1.Includes interest on the Company’s debt and hedging activities and extinguishment costs related to paydowns in the term loans.
8. Derivatives
The Company enters into derivatives in order to hedge interest rate risk. The Company had six interest rate swaps with aggregate notional amounts of $839.5 million as of March 31, 2019 and December 31, 2018. These derivatives were designated as effective cash flow hedges for accounting purposes.
27
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The Company has agreements with its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
The Company’s derivatives are classified as Level 2 and their fair values are derived from estimated values obtained from observable market data for similar instruments.
The fair market value of derivatives is presented on a gross basis on the Consolidated Balance Sheets. The following table summarizes the Company’s derivative instruments as of March 31, 2019 and December 31, 2018:
Interest Rate Range(1) | Fair Value Asset | |||||||||||||||||||||||||||||||||||||||||||||||||
| Underlying Debt Instrument | Number of Hedges | Notional Amount | Effective Date | Maturity Date | Low | High | March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||
| Met Park North | 1 | $ | 64,500 | August 2013 | August 2020 | 3.71% | 3.71% | $ | 141 | $ | 350 | |||||||||||||||||||||||||||||||||||||||
Term loan A(2) | 2 | 300,000 | July 2016 | April 2020 | 2.65% | 3.06% | 2,813 | 4,038 | ||||||||||||||||||||||||||||||||||||||||||
Term loan B(2) | 2 | 350,000 | April 2015 | April 2022 | 2.96% | 3.46% | 4,264 | 7,543 | ||||||||||||||||||||||||||||||||||||||||||
Term loan D(2) | 1 | 125,000 | June 2016 | November 2022 | 2.63% | 3.13% | 3,245 | 4,756 | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL | 6 | $ | 839,500 | $ | 10,463 | $ | 16,687 | |||||||||||||||||||||||||||||||||||||||||||
_____________
1.The rate is based on the fixed rate from the swap and the spread based on the operating partnership’s leverage ratio.
2.Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed. Interest rates are as of March 31, 2019, which may be different than the interest rates in prior periods for corresponding indebtedness.
In January 2019, the Company entered into a forward interest rate swap designated hedge. In February 2019, it was terminated, which resulted in a cash payment of approximately $1.6 million that was recorded in accumulated other comprehensive (loss) income on the Consolidated Balance Sheets and will be recognized over the life of the 4.65% registered senior notes entered into in February 2019 as an adjustment to interest expense. The cash payment is included in the payment of loan costs paid line item of the Consolidated Statements of Cash Flows.
On January 1, 2018, the Company early adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). As a result of the adoption, the Company is no longer recognizing unrealized gains or losses related to ineffective portions of its derivatives. In 2018, the Company recognized a $231 thousand cumulative-effect adjustment to other comprehensive income, with a corresponding adjustment to the opening balance of retained earnings (accumulated deficit).
The Company reclassifies into earnings in the same period during which the hedged forecasted transaction affects earnings. As of March 31, 2019, the Company expects $6.5 million of unrealized gain included in accumulated other comprehensive income will be reclassified as a reduction to interest expense in the next 12 months.
9. U.S. Government Securities
The Company has U.S. Government securities of $145.0 million and $146.9 million as of March 31, 2019 and December 31, 2018. The One Westside and 10850 Pico properties acquisition in 2018 included the assumption of debt which was, in-substance, defeased through the purchase of U.S. Government-backed securities. The securities are investments held to maturity and are carried at amortized cost on the Consolidated Balance Sheets. As of March 31, 2019, the Company had $2.9 million of gross unrealized gains and no gross unrealized losses.
The following table summarizes the carrying value and fair value of the Company’s securities by the contractual maturity date March 31, 2019:
| Carrying Value | Fair Value | ||||||||||
| Due in 1 year | $ | 4,274 | $ | 4,281 | |||||||
| Due in 1 year through 5 years | 140,718 | 143,632 | |||||||||
| TOTAL | $ | 144,992 | $ | 147,913 | |||||||
28
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
10. Income Taxes
Hudson Pacific Properties, Inc. has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2010. Provided it continues to qualify for taxation as a REIT, Hudson Pacific Properties, Inc. is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders. The Company has elected, together with one of its subsidiaries, to treat such subsidiary as a taxable REIT subsidiary (“TRS”) for federal income tax purposes.
The Company’s property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the entities that own the 1455 Market, Hill7 and Ferry Building properties, REITs) for federal income tax purposes. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements for the activities of these entities.
The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of March 31, 2019, the Company has not established a liability for uncertain tax positions.
The Company and its TRS file income tax returns with the U.S. federal government and various state and local jurisdictions. The Company and its TRS are no longer subject to tax examinations by tax authorities for years prior to 2014. The Company has assessed its tax positions for all open years, which include 2014 to 2017, and concluded that there are no material uncertainties to be recognized.
11. Future Minimum Rents and Lease Payments
The following table summarizes the future minimum base rents (excluding tenant reimbursements for operating expenses and termination fees related to tenants exercising early termination options) for properties as of March 31, 2019:
| Year Ended | Non-Cancellable | Subject to Early Termination Options | Total (1) | ||||||||||||||
| Remaining 2019 | $ | 410,310 | $ | 2,728 | $ | 413,038 | |||||||||||
| 2020 | 530,493 | 14,245 | 544,738 | ||||||||||||||
| 2021 | 496,431 | 34,147 | 530,578 | ||||||||||||||
| 2022 | 453,315 | 39,098 | 492,413 | ||||||||||||||
| 2023 | 421,940 | 37,598 | 459,538 | ||||||||||||||
| Thereafter | 2,052,986 | 86,069 | 2,139,055 | ||||||||||||||
| TOTAL | $ | 4,365,475 | $ | 213,885 | $ | 4,579,360 | |||||||||||
_____________
3.Excludes rents under leases at the Company’s studio properties with terms of one year or less.
29
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The following table summarizes the Company’s ground lease terms related to properties that are held subject to long-term non-cancellable ground lease obligations as of March 31, 2019:
| Property | Expiration Date | Notes | ||||||||||||
| 3400 Hillview | 10/31/2040 | The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent until October 31, 2017 is the lesser of 10% of Fair Market Value (“FMV”) of the land or $1.0 million grown at 75% of the cumulative increases in consumer price index (“CPI”) from October 1989. Thereafter, minimum annual rent, which resets annually, is the lesser of 10% of FMV of the land or the minimum annual rent as calculated as of November 1, 2017 plus 75% of subsequent cumulative CPI changes. The minimum annual rent cannot be less than a set amount. Percentage annual rent is gross income multiplied by 24.125%. | ||||||||||||
| Clocktower Square | 9/26/2056 | The ground rent is minimum annual rent (adjusted every 10 years) plus 25% of adjusted gross income (“AGI”). Minimum rent adjustments adds 60% of the average annual participation rent payable over five years. Annual participation is the excess of 25% of AGI over the minimum annual rent for a given lease year. | ||||||||||||
| Del Amo | 6/30/2049 | Rent under the ground sublease is $1.00 per year, with the sublessee being responsible for all impositions, insurance premiums, operating charges, maintenance charges, construction costs and other charges, costs and expenses that arise or may be contemplated under any provisions of the ground sublease. | ||||||||||||
| Ferry Building | Various | The land on which the building is situated is subject to a ground lease agreement that expires on April 1, 2067. The minimum annual rent (adjusted every 5 years) is the prior year’s minimum annual rent plus cumulative increase in CPI with a floor of 10% and a cap of 20%. Additionally, the parking lot is subject to a separate ground lease agreement that expires on April 1, 2023. The minimum annual rent adjusts each year for changes in CPI with a floor of 2% and a cap of 4%. The parking lot is subject to automatic renewals for 10-year periods at market. | ||||||||||||
| Foothill Research Center | 6/30/2039 | The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent, which resets annually, is the lesser of 10% of FMV of the land or the previous year’s minimum annual rent plus 75% of CPI increase. The minimum annual rent cannot be less than a set amount. Percentage annual rent is gross income multiplied by 24.125%. | ||||||||||||
| 3176 Porter | 7/31/2040 | The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent, which resets annually, is the lesser of 10% of FMV of the land or the previous year’s minimum annual rent plus 75% of CPI increase. Percentage annual rent is Lockheed’s base rent multiplied by 24.125%. The minimum annual rent cannot be less than a set amount. | ||||||||||||
| Metro Center | 4/29/2054 | Every 10 years rent adjusts to 7.233% of FMV of the land (since 2008) and adjusts to reflect the change in CPI from the preceding FMV adjustment date (since 2013). The CPI adjustment has a floor of the previous minimum rent. The Company has an option to extend the ground lease for four additional periods of 11 years each. | ||||||||||||
| Page Mill Center | 11/30/2041 | The ground rent is minimum annual rent (adjusted on January 1, 2019 and January 1, 2029) plus 25% of AGI, less minimum annual rent. Minimum rent adjustments adds 60% of the average annual participation rent payable over five years. Annual participation is the excess of 25% of AGI over the minimum annual rent for a given lease year. | ||||||||||||
| Page Mill Hill | 11/17/2049 | The ground rent is minimum annual rent (adjusted every 10 years) plus 60% of the average of the percentage annual rent for the previous 7 lease years. Minimum rent adjustments add 60% of the average annual percentage rent for the previous 7 years. | ||||||||||||
| Palo Alto Square | 11/30/2045 | The ground rent is minimum annual rent (adjusted every 10 years starting January 1, 2022) plus 25% of AGI less minimum annual rent. The minimum annual rent adjustments add 50% of the average annual percentage rent from the previous 5 years. | ||||||||||||
| Sunset Gower Studios | 3/31/2060 | Every 7 years rent adjusts to 7.5% of FMV of the land. | ||||||||||||
| Techmart | 5/31/2053 | Rent subject to a 10% increase every 5 years. The Company has an option to extend the ground lease for two additional periods of 10 years each. This extension option was not included in the calculation of the right of use asset and lease liability. | ||||||||||||
Contingent rental expense is recorded in the period in which the contingent event becomes probable. The following table summarizes rental expense for ground leases as follows:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Contingent rental expense | $ | 2,514 | $ | 3,095 | |||||||
| Minimum rental expense | $ | 4,603 | $ | 3,337 | |||||||
30
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The following table provides information regarding the Company’s future minimum lease payments for its ground leases (before the impact of extension options, if applicable) as of March 31, 2019:
Year | Lease Payments(1) | |||||||
| Remaining 2019 | $ | 13,808 | ||||||
| 2020 | 18,411 | |||||||
| 2021 | 18,411 | |||||||
| 2022 | 18,411 | |||||||
| 2023 | 18,489 | |||||||
| Thereafter | 501,924 | |||||||
TOTAL | $ | 589,454 | ||||||
_________________
1.In situations where ground lease obligation adjustments are based on third-party appraisals of fair market land value, CPI adjustments and/or percentage of gross income that exceeds the minimum annual rent, the future minimum lease amounts above include the lease rental obligations in effect as of March 31, 2019.
On March 26, 2019, the Company entered into a joint venture with Blackstone to purchase the Bentall Centre property located in Vancouver, Canada. The land on which the Bentall Centre is located is subject to long-term non-cancellable ground lease agreements. The future minimum lease payments are excluded from the table above. See Note 3 for details.
12. Fair Value of Financial Instruments
The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available that require inputs that are both significant to the fair value measurement and unobservable.
31
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The Company’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following as of:
| March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
Derivative assets(1) | $ | — | $ | 10,463 | $ | — | $ | 10,463 | $ | — | $ | 16,687 | $ | — | $ | 16,687 | ||||||||||||||||||||||||||||||||||
Non-real estate investments(1) | $ | — | $ | 3,138 | $ | — | $ | 3,138 | $ | — | $ | 2,713 | $ | — | $ | 2,713 | ||||||||||||||||||||||||||||||||||
___________
1.Included in the prepaid expenses and other assets, net line item on the Consolidated Balance Sheets.
Other Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities are reasonable estimates of fair value, using Level 1 inputs, because of the short-term nature of these instruments. Fair value for investment in U.S. Government securities are estimates based on Level 1 inputs. Fair values for debt are estimated based on rates currently prevailing for similar instruments of similar maturities using Level 2 inputs.
The table below represents the carrying value and fair value of the Company’s investment in securities and debt as of:
| March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| U.S. Government securities | $ | 144,992 | $ | 147,913 | $ | 146,880 | $ | 147,686 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Unsecured debt(1)(2) | $ | 2,364,728 | $ | 2,354,445 | $ | 2,274,352 | $ | 2,227,265 | |||||||||||||||
Secured debt(1) | $ | 365,237 | $ | 357,572 | $ | 365,381 | $ | 354,109 | |||||||||||||||
| In-substance defeased debt | $ | 137,417 | $ | 136,287 | $ | 138,223 | $ | 135,894 | |||||||||||||||
| Joint venture partner debt | $ | 66,136 | $ | 68,259 | $ | 66,136 | $ | 66,136 | |||||||||||||||
_________________
1.Amounts represent debt excluding net deferred financing costs.
2.The 3.95% registered senior notes and the 4.65% registered senior notes were issued at a discount. The discount, net of amortization, was $5.3 million and $0.6 million at March 31, 2019 and December 31, 2018, respectively, and is included within unsecured debt.
13. Stock-Based Compensation
The Company has various stock compensation arrangements, which are more fully described in the 2018 Annual Report on Form 10-K. Under the 2010 Incentive Plan, as amended (the “2010 Plan”), the Company’s board of directors (the “Board”) has the ability to grant, among other things, restricted stock, restricted stock units, operating partnership performance units and performance-based awards.
The Board awards restricted shares to non-employee Board members on an annual basis as part of such Board members’ annual compensation and to newly elected non-employee Board members in accordance with the Non-Employee Director Compensation Program. The time-based awards are generally issued in the second quarter, in conjunction with the director’s election to the Board, and the individual share awards vest in equal annual installments over the applicable service vesting period, which is three years.
The Board awards time-based restricted shares or time-based operating partnership performance units to certain employees on an annual basis as part of the employees’ annual compensation. These time-based awards are generally issued in the fourth quarter and vest in equal annual installments over the applicable service vesting period, which is generally three years. Additionally, certain awards are subject to a mandatory holding period upon vesting if the grantee is a named executive officer.
In December 2015, the compensation committee of the Board (the “Compensation Committee”) awarded a one-time special retention award to certain executives. The grants consist of time-based awards and performance-based awards. The time-based awards vest in equal 25% installments over a four-year period, subject to the participant’s continued employment. The performance-based awards vest over a four-year period, subject to the achievement of applicable performance goals and the participant’s continued employment.
32
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The Compensation Committee annually adopts a Hudson Pacific Properties, Inc. Outperformance Program (“OPP Plan”) under the 2010 Plan. With respect to OPP Plan awards granted through 2016, to the extent an award is earned following the completion of a three-year performance period, 50% of the earned award will vest in full at the end of the three-year performance period and 50% of the earned award will vest in equal annual installments over the two years thereafter, subject to the participant’s continued employment. OPP Plan awards are settled in common stock and, in the case of certain executives, in operating partnership performance units. Commencing with the 2017 OPP Plan, the two-year post-performance vesting period was replaced with a two-year mandatory holding period upon vesting. In February 2019, the Compensation Committee adopted the 2019 OPP Plan. The 2019 OPP Plan is substantially similar to the 2018 OPP Plan except for (i) the performance period beginning on January 1, 2019 and ending on December 31, 2021 and (ii) the maximum bonus pool is $28.0 million.
The per unit fair value of the grants from the 2019 OPP Plan was estimated on the date of grant using the following assumptions in the Monte Carlo valuation:
| Assumption | |||||
| Expected price volatility for the Company | 22.00% | ||||
| Expected price volatility for the particular REIT index | 18.00% | ||||
| Risk-free rate | 2.57% | ||||
| Dividend yield | 3.00% | ||||
The following table presents the classification and amount recognized for stock-based compensation related to the Company’s awards:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
Expensed stock compensation(1) | $ | 5,150 | $ | 4,338 | |||||||
Capitalized stock compensation(2) | 29 | 232 | |||||||||
TOTAL STOCK COMPENSATION(3) | $ | 5,179 | $ | 4,570 | |||||||
_________________
1.Amounts are recorded in general and administrative expenses in the Consolidated Statements of Operations.
2.Amounts are recorded in deferred leasing costs and lease intangible assets, net and investment in real estate, at cost in the Consolidated Balance Sheets.
3.Amounts are recorded in additional paid-in capital and non-controlling interest—units in the operating partnership in the Consolidated Balance Sheets.
14. Earnings Per Share
Hudson Pacific Properties, Inc.
The Company calculates basic earnings per share by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. The Company calculates diluted earnings per share by dividing the diluted net income (loss) available to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the period using the treasury stock method or the if-converted method, whichever is more dilutive. Unvested time-based restricted stock awards, unvested time-based performance unit awards and unvested restricted stock units (“RSUs”) that contain nonforfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method.
33
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted earnings per share for net (loss) income available to common stockholders:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Numerator: | |||||||||||
| Basic and diluted net (loss) income available to common stockholders | $ | (39,392) | $ | 48,577 | |||||||
| Denominator: | |||||||||||
| Basic weighted average common shares outstanding | 154,396,159 | 155,626,055 | |||||||||
Effect of dilutive instruments(1) | — | 1,088,767 | |||||||||
| DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 154,396,159 | 156,714,822 | |||||||||
| Basic (loss) earnings per common share | $ | (0.26) | $ | 0.31 | |||||||
| Diluted (loss) earnings per common share | $ | (0.26) | $ | 0.31 | |||||||
________________
1.The Company includes unvested awards and convertible common and participating units as contingently issuable shares in the computation of diluted earnings per share once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted earnings per share calculation.
Hudson Pacific Properties, L.P.
The Company calculates basic earnings per share by dividing the net income (loss) available to common unitholders for the period by the weighted average number of common units outstanding during the period. The Company calculates diluted earnings per share by dividing the diluted net income (loss) available to common unitholders for the period by the weighted average number of common units and dilutive instruments outstanding during the period using the treasury stock method or the if-converted method, whichever is more dilutive. Unvested time-based restricted stock awards, unvested time-based performance unit awards and unvested RSUs that contain nonforfeitable rights to dividends are participating securities and are included in the computation of earnings per unit pursuant to the two-class method.
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted earnings per unit for net (loss) income available to common unitholders:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Numerator: | |||||||||||
| Basic and diluted net (loss) income available to common unitholders | $ | (39,577) | $ | 48,754 | |||||||
| Denominator: | |||||||||||
| Basic weighted average common units outstanding | 155,120,144 | 156,195,100 | |||||||||
Effect of dilutive instruments(1) | — | 1,088,767 | |||||||||
| DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING | 155,120,144 | 157,283,867 | |||||||||
| Basic (loss) earnings per common unit | $ | (0.26) | $ | 0.31 | |||||||
| Diluted (loss) earnings per common unit | $ | (0.26) | $ | 0.31 | |||||||
________________
1.The operating partnership includes unvested awards as contingently issuable units in the computation of diluted earnings per unit once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted earnings per unit calculation.
34
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
15. Redeemable Non-Controlling Interest
Redeemable Preferred Units of the Operating Partnership
As of March 31, 2019 and December 31, 2018, there were 392,598 series A preferred units of partnership interest in the operating partnership, or series A preferred units, issued and outstanding, which are not owned by the Company. On April 16, 2018, 14,468 series A preferred units of partnership interest were redeemed for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends to, but not including, the date of redemption.
These series A preferred units are entitled to preferential distributions at a rate of 6.25% per annum on the liquidation preference of $25.00 per unit and became convertible at the option of the holder into common units or redeemable into cash or, at the Company’s election, exchangeable for registered shares of common stock.
Redeemable Non-Controlling Interest in Consolidated Real Estate Entities
On March 1, 2018, the Company entered into a joint venture agreement with Macerich WSP, LLC (“Macerich”) to form HPP-MAC WSP, LLC (“HPP-MAC JV”). On August 31, 2018, Macerich contributed Westside Pavilion to the HPP-MAC JV. The Company has a 75% interest in the joint venture that owns the One Westside and 10850 Pico properties. The Company has a put right, after a specified time, to sell its interest at fair market value. Macerich has a put right, after a specified time, to sell its interest at fair market value, which is a redemption right that is not solely within the control of the Company. The put right is not currently redeemable. Therefore, the non-controlling interest related to this joint venture is included as temporary equity. Once the redemption is probable, the carrying amount will be marked to market with the change in value reflected in additional paid-in capital.
On October 9, 2018, the Company entered into a joint venture with Allianz to purchase the Ferry Building property. The Company has a 55% interest in the joint venture that owns the Ferry Building property. The Company has a put right, if certain events occur, to sell its interest at fair market value. Allianz has a put right, if certain events occur, to sell its interest at fair market value, which is a redemption right that is not solely within the control of the Company. The put right is not currently redeemable. Therefore, the non-controlling interest related to this joint venture is included as temporary equity. Once the redemption is probable, the carrying amount will be marked to market with the change in value reflected in additional paid-in capital.
The following table reconciles the beginning and ending balances of redeemable non-controlling interests:
| Series A Redeemable Preferred Units | Consolidated Entities | |||||||||||||
| Balance at December 31, 2018 | $ | 9,815 | $ | 113,141 | ||||||||||
| Contributions | — | 2,075 | ||||||||||||
| Declared dividend | (153) | — | ||||||||||||
| Net income (loss) | 153 | (600) | ||||||||||||
| BALANCE AT MARCH 31, 2019 | $ | 9,815 | $ | 114,616 | ||||||||||
35
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
16. Equity
The table below presents the effect of the Company’s derivatives on accumulated other comprehensive income (“OCI”):
Hudson Pacific Properties, Inc. Stockholders’ Equity | Non-controlling interests | Total Equity | ||||||||||||||||||
| Balance at December 31, 2018 | $ | 17,501 | $ | 64 | $ | 17,565 | ||||||||||||||
| Unrealized loss recognized in OCI due to change in fair value | (5,926) | (28) | (5,954) | |||||||||||||||||
Gain reclassified from OCI into income (as interest expense)(1) | (1,901) | (9) | (1,910) | |||||||||||||||||
| Net change in OCI | (7,827) | (37) | (7,864) | |||||||||||||||||
| BALANCE AT MARCH 31, 2019 | $ | 9,674 | $ | 27 | $ | 9,701 | ||||||||||||||
_____________
1.The gains and losses on the Company’s derivatives are reported in the interest expense line item on the Consolidated Statements of Operations. Interest expense was $24.4 million for the three months ended March 31, 2019.
Non-Controlling Interests
Common Units in the Operating Partnership
Common units of the operating partnership and shares of common stock of the Company have essentially the same economic characteristics, as they share equally in the total net income or loss distributions of the operating partnership. Investors who own common units have the right to cause the operating partnership to repurchase any or all of their common units for cash equal to the then-current market value of one share of common stock or, at the Company’s election, issue shares of the Company’s common stock in exchange for common units on a one-for-one basis.
Performance Units in the Operating Partnership
Performance units are partnership interests in the operating partnership. Each performance unit awarded will be deemed equivalent to an award of one share of common stock under the 2010 Plan, reducing the availability for other equity awards on a one-for-one basis. Under the terms of the performance units, the operating partnership will revalue its assets for tax purposes upon the occurrence of certain specified events and any increase in valuation from the time of grant until such event will be allocated first to the holders of performance units to equalize the capital accounts of such holders with the capital accounts of common unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with common unitholders, performance units are convertible into common units in the operating partnership on a one-for-one basis.
Current Year Activity
The following table summarizes the ownership interest in the operating partnership, excluding unvested restricted units and unvested restricted performance units as of:
| March 31, 2019 | December 31, 2018 | ||||||||||
Company-owned common units in the operating partnership | 154,373,581 | 154,371,538 | |||||||||
Company’s ownership interest percentage | 99.5 | % | 99.6 | % | |||||||
Non-controlling units in the operating partnership(1) | 720,773 | 569,045 | |||||||||
Non-controlling ownership interest percentage(1) | 0.5 | % | 0.4 | % | |||||||
_________________
1.Represents units held by certain of the Company’s executive officers, directors and outside investors. As of March 31, 2019, this amount represents both common units and performance units of 550,969 and 169,804, respectively.
On January 17, 2019, a common unitholder requested the operating partnership repurchase 18,076 common units and the Company elected, in accordance with the limited partnership agreement of the operating partnership, to settle in cash to satisfy the redemption. On March 11, 2019, 169,804 performance units were granted and vested related to the completion of the 2016 OPP performance period.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
Common Stock Activity
The Company has not completed any common stock offerings in 2019.
The Company’s at-the-market, or ATM, program permits sales of up to $125.0 million of common stock. The Company did not utilize the ATM program during the three months ended March 31, 2019. A cumulative total of $20.1 million has been sold as of March 31, 2019.
Share Repurchase Program
There have been no repurchases in 2019. On March 8, 2018, the Board increased the amount authorized under its share repurchase program to a total of $250.0 million. A cumulative total of $50.0 million has been repurchased as of March 31, 2019. The Company may make repurchases under the program at any time in its discretion, subject to market conditions, applicable legal requirements and other factors.
Dividends
The Board declared dividends on a quarterly basis and the Company paid the dividends during the quarters in which the dividends were declared. The following table summarizes dividends declared and paid for the periods presented:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
Common stock(1) | $ | 0.25 | $ | 0.25 | |||||||
Common units(1) | $ | 0.25 | $ | 0.25 | |||||||
Series A preferred units(1) | $ | 0.3906 | $ | 0.3906 | |||||||
| Performance units | $ | 0.25 | $ | 0.25 | |||||||
_________________
1.The first quarter of 2019 dividends were paid on March 28, 2019 to shareholders and unitholders of record on March 18, 2019.
Taxability of Dividends
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and the basis of depreciable assets and estimated useful lives used to compute depreciation.
17. Segment Reporting
The Company’s reporting segments are based on the Company’s method of internal reporting, which classifies its operations into two reporting segments: (i) office properties and (ii) studio properties. The Company evaluates performance based upon net operating income of the combined properties in each segment. General and administrative expenses and interest expense are not included in segment profit as its internal reporting addresses these items on a corporate level. Asset information by segment is not reported because the Company does not use this measure to assess performance or make decisions to allocate resources, therefore, depreciation and amortization expense is not allocated among segments.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
The table below presents the operating activity of the Company’s reportable segments:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Office segment | |||||||||||
| Office revenues | $ | 175,858 | $ | 156,532 | |||||||
| Office expenses | (60,815) | (53,240) | |||||||||
| Office segment profit | 115,043 | 103,292 | |||||||||
| Studio segment | |||||||||||
| Studio revenues | 21,531 | 17,586 | |||||||||
| Studio expenses | (11,109) | (9,664) | |||||||||
| Studio segment profit | 10,422 | 7,922 | |||||||||
| TOTAL SEGMENT PROFIT | $ | 125,465 | $ | 111,214 | |||||||
| Segment revenues | $ | 197,389 | $ | 174,118 | |||||||
| Segment expenses | (71,924) | (62,904) | |||||||||
| TOTAL SEGMENT PROFIT | $ | 125,465 | $ | 111,214 | |||||||
The table below is a reconciliation of the total profit from all segments to net (loss) income:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Total profit from all segments | $ | 125,465 | $ | 111,214 | |||||||
| General and administrative | (18,094) | (15,564) | |||||||||
| Depreciation and amortization | (68,505) | (60,553) | |||||||||
| Interest expense | (24,350) | (20,503) | |||||||||
| Interest income | 1,024 | 9 | |||||||||
| Transaction-related expenses | (128) | (118) | |||||||||
| Other (loss) income | (106) | 404 | |||||||||
| Gains on sale of real estate | — | 37,674 | |||||||||
| Impairment loss | (52,201) | — | |||||||||
| NET (LOSS) INCOME | $ | (36,895) | $ | 52,563 | |||||||
18. Related Party Transactions
Employment Agreements
The Company has entered into employment agreements with certain executive officers, effective January 1, 2016, that provide for various severance and change in control benefits and other terms and conditions of employment.
Ferry Building Acquisition from an Affiliate of Blackstone
On October 9, 2018, the Company entered into a joint venture with Allianz to purchase the Ferry Building from certain affiliates of Blackstone for $291.0 million before prorations, credits and closing costs. At the time of the transaction, Michael Nash, a senior managing director of an affiliate of Blackstone, was a director of the Board. Mr. Nash resigned from the Board on March 14, 2019.
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Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)
19. Commitments and Contingencies
Legal
From time to time, the Company is party to various lawsuits, claims and other legal proceedings arising out of, or incident to, the ordinary course of business. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. As of March 31, 2019, the risk of material loss from such legal actions impacting the Company’s financial condition or results from operations has been assessed as remote.
Letters of Credit
As of March 31, 2019, the Company has outstanding letters of credit totaling approximately $2.6 million under the unsecured revolving credit facility. The letters of credit are primarily related to utility company security deposit requirements.
20. Supplemental Cash Flow Information
Supplemental cash flow information is included as follows:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Cash paid for interest, net of capitalized interest | $ | 13,543 | $ | 12,915 | |||||||
| Non-cash investing and financing activities | |||||||||||
| Accounts payable and accrued liabilities for real estate investments | (813) | 20,462 | |||||||||
Restricted cash primarily consists of amounts held by lenders to fund reserves such as capital improvements, taxes, insurance, debt service and operating expenditures. The following table provides a reconciliation of cash and cash equivalents and restricted cash at the beginning and end of the periods presented:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Beginning of period: | |||||||||||
| Cash and cash equivalents | $ | 53,740 | $ | 78,922 | |||||||
| Restricted cash | 14,451 | 22,358 | |||||||||
| TOTAL | $ | 68,191 | $ | 101,280 | |||||||
| End of period: | |||||||||||
| Cash and cash equivalents | $ | 52,445 | $ | 64,080 | |||||||
| Restricted cash | 13,626 | 10,900 | |||||||||
| TOTAL | $ | 66,071 | $ | 74,980 | |||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and the related notes, see Part I, Item 1 “Financial Statements of Hudson Pacific Properties, Inc.”, “Financial Statements of Hudson Pacific Properties, L.P.” and “Notes to Unaudited Consolidated Financial Statements.” Statements in this Item 2 contain forward-looking statements. For a discussion of forward-looking statements, important risks related to our business, and related to investing in our securities, including risks that could cause actual results and events to differ materially from results and events refer to the forward-looking statements section in this Item 2.
Forward-looking Statements
Certain written and oral statements made or incorporated by reference from time to time by us or our representatives in this Quarterly Report on Form 10-Q, other filings or reports filed with the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, as amended, and Section 21E of the Exchange Act). In particular, statements relating to our liquidity and capital resources, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including anticipated funds from operations, or FFO, market conditions and demographics) are forward-looking statements. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements. We caution investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or that management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the SEC.
Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
•adverse economic or real estate developments in our target markets;
•general economic conditions;
•defaults on, early terminations of or non-renewal of leases by tenants;
•fluctuations in interest rates and increased operating costs;
•our failure to obtain necessary outside financing or maintain an investment grade rating;
•our failure to generate sufficient cash flows to service our outstanding indebtedness and maintain dividend payments;
•lack or insufficient amounts of insurance;
•decreased rental rates or increased vacancy rates;
•difficulties in identifying properties to acquire and completing acquisitions;
•our failure to successfully operate acquired properties and operations;
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•our failure to maintain our status as a REIT;
•environmental uncertainties and risks related to adverse weather conditions and natural disasters;
•financial market fluctuations;
•risks related to acquisitions generally, including the diversion of management’s attention from ongoing business operations and the impact on customers, tenants, lenders, operating results and business;
•the inability to successfully integrate acquired properties, realize the anticipated benefits of acquisitions or capitalize on value creation opportunities;
•the impact of changes in the tax laws as a result of recent federal tax reform legislation and uncertainty as to how some of those changes may be applied;
•changes in real estate and zoning laws and increases in real property tax rates; and
•other factors affecting the real estate industry generally.
Additionally, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Executive Summary
Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at March 31, 2019, our consolidated office portfolio consisted of approximately 13.9 million square feet of in-service, redevelopment, development and held for sale properties. Additionally, as of March 31, 2019, our studio and land portfolio consisted of 1.2 million and 2.6 million, respectively, square feet of in-service. Our portfolio consists of 55 properties located in Northern and Southern California and the Pacific Northwest.
As of March 31, 2019, our consolidated in-service office portfolio was 92.9% leased (including leases not yet commenced). Our same-store studio properties were 92.4% leased for the average percent leased for the 12 months ended March 31, 2019.
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The following table summarizes our portfolio as of March 31, 2019:
| In-Service Portfolio | Number of Buildings | Rentable Square Feet(1) | Percent Occupied(2) | Percent Leased(3) | Annualized Base Rent per Square Foot(4) | |||||||||||||||||||||||||||
| Office | ||||||||||||||||||||||||||||||||
Same-store(5) | 31 | 7,842,466 | 94.1 | % | 94.9 | % | $ | 48.61 | ||||||||||||||||||||||||
Stabilized non-same store(6) | 9 | 2,590,210 | 95.4 | % | 96.2 | % | $ | 51.94 | ||||||||||||||||||||||||
| Total stabilized | 40 | 10,432,676 | 94.4 | % | 95.2 | % | $ | 49.45 | ||||||||||||||||||||||||
Lease-up(6)(7) | 7 | 1,871,220 | 69.9 | % | 80.4 | % | $ | 49.78 | ||||||||||||||||||||||||
| Total in-service | 47 | 12,303,896 | 90.7 | % | 92.9 | % | $ | 49.49 | ||||||||||||||||||||||||
Redevelopment(6) | 2 | 683,090 | ||||||||||||||||||||||||||||||
Development(6) | 2 | 408,227 | ||||||||||||||||||||||||||||||
Held for sale(6) | 1 | 471,580 | ||||||||||||||||||||||||||||||
| Total office | 52 | 13,866,793 | ||||||||||||||||||||||||||||||
| Studio | ||||||||||||||||||||||||||||||||
Same-store(8) | 3 | 1,171,707 | 92.4 | % | $ | 38.89 | ||||||||||||||||||||||||||
Non-same-store(6) | — | 52,696 | (9) | 100.0 | % | $ | 40.70 | |||||||||||||||||||||||||
| Total studio | 3 | 1,224,403 | ||||||||||||||||||||||||||||||
| Land | — | 2,639,562 | (10) | |||||||||||||||||||||||||||||
| TOTAL | 55 | 17,730,758 | ||||||||||||||||||||||||||||||
____________
1.Determined by management based upon estimated leasable square feet, which may be less or more than the Building Owners and Managers Association (“BOMA”) rentable area. Square footage may change over time due to re-measurement or re-leasing.
2.Calculated as (i) square footage under commenced leases as of March 31, 2019, divided by (ii) total square feet, expressed as a percentage.
3.Calculated as (i) square footage under commenced and uncommenced leases as of March 31, 2019, divided by (ii) total square feet, expressed as a percentage.
4.Calculated as (i) annualized base rent divided by (ii) square footage under commenced leases as of March 31, 2019. Annualized base rent does not reflect tenant reimbursements.
5.Includes office properties owned and included in our stabilized portfolio as of January 1, 2018 and still owned and included in the stabilized portfolio as of March 31, 2019.
6.Included in our non-same-store property group.
7.Includes office properties that have not yet reached 92.0% occupancy since the date they were acquired or placed under redevelopment or development as of March 31, 2019.
8.Includes studio properties owned and included in our portfolio as of January 1, 2018 and still owned and included in our portfolio as of March 31, 2019.
9.This includes 41,496 square feet located at our 6605 Eleanor Avenue and 1034 Seward Street properties and 11,200 square feet located at our 6660 Santa Monica Boulevard property, included as part of Sunset Las Palmas Studios, that have not met the same-store studio threshold.
10.This includes 946,350 square feet of developable land adjacent to our Campus Center office property that was classified as held for sale as of March 31, 2019. The sale is expected to close during the second quarter of 2019.
Current Quarter Highlights
Acquisitions
We had no acquisitions during the three months ended March 31, 2019. On March 26, 2019, we entered into an agreement to purchase, through a joint venture with Blackstone Property Partners, the 1.45 million-square-foot Bentall Centre property located in Vancouver, Canada. The acquisition is expected to close during the second quarter of 2019.
Dispositions
We had no dispositions during the three months ended March 31, 2019.
Redevelopment/Development
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The following table summarizes the properties currently under redevelopment and development as well as future developments as of March 31, 2019:
| Location | Submarket | Estimated Square Feet(1) | Estimated Completion Date | Estimated Stabilization Date | ||||||||||||||||||||||
| Redevelopment: | ||||||||||||||||||||||||||
| Maxwell | Downtown Los Angeles | 99,090 | Q1-2019 | Q4-2019 | ||||||||||||||||||||||
| One Westside | West Los Angeles | 584,000 | TBD | TBD | ||||||||||||||||||||||
| Total redevelopment | 683,090 | |||||||||||||||||||||||||
| Development: | ||||||||||||||||||||||||||
| EPIC | Hollywood | 302,102 | Q4-2019 | Q3-2021 | ||||||||||||||||||||||
| Harlow | Hollywood | 106,125 | Q1-2020 | Q3-2021 | ||||||||||||||||||||||
| Total development | 408,227 | |||||||||||||||||||||||||
| TOTAL REDEVELOPMENT AND DEVELOPMENT | 1,091,317 | |||||||||||||||||||||||||
| Future Development: | ||||||||||||||||||||||||||
| Element LA—Development | West Los Angeles | 500,000 | TBD | TBD | ||||||||||||||||||||||
| Sunset Bronson Studios Lot D—Development | Hollywood | 19,816 | TBD | TBD | ||||||||||||||||||||||
| Sunset Gower Studios—Development | Hollywood | 423,396 | TBD | TBD | ||||||||||||||||||||||
| Sunset Las Palmas Studios—Development | Hollywood | 400,000 | TBD | TBD | ||||||||||||||||||||||
| Cloud10 | North San Jose | 350,000 | TBD | TBD | ||||||||||||||||||||||
| TOTAL FUTURE DEVELOPMENT | 1,693,212 | |||||||||||||||||||||||||
_____________
1.Determined by management based upon estimated leasable square feet, which may be less or more than the BOMA rentable area. Square footage may change over time due to re-measurement or re-leasing.
Held for Sale
As of March 31, 2019, we had one property that met the criteria to be classified as held for sale. The property was identified as a non-strategic asset to our portfolio. We entered into an agreement on March 28, 2019 to sell our Campus Center property, which includes the office property and developable land, to two separate, unrelated buyers for a combined amount of approximately $150 million (before certain credits, prorations and closing costs). We recorded $52.2 million of impairment charges related to the Campus Center office property that was held for sale as of March 31, 2019. Both sales are expected to close during the second quarter of 2019.
Lease Expirations
The following table summarizes the lease expirations for leases in place as of March 31, 2019 plus available space, for each of the nine full calendar years beginning January 1, 2019 at the properties in our office portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that tenants exercise no renewal options.
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| Year of Lease Expiration | Expiring Leases | Square Footage of Expiring Leases | Percentage of Office Portfolio Square Feet | Annualized Base Rent(1) | Percentage of Office Portfolio Annualized Base Rent | Annualized Base Rent Per Leased Square Foot(2) | ||||||||||||||||||||||||||||||||
| Vacant | N/A | 1,446,701 | 10.5 | % | N/A | N/A | N/A | |||||||||||||||||||||||||||||||
2019(3) | 128 | 894,971 | 6.5 | $ | 43,808,363 | 7.1 | % | $ | 48.95 | |||||||||||||||||||||||||||||
| 2020 | 145 | 938,298 | 6.8 | 47,353,172 | 7.6 | 50.47 | ||||||||||||||||||||||||||||||||
| 2021 | 130 | 1,244,058 | 9.0 | 56,442,039 | 9.0 | 45.37 | ||||||||||||||||||||||||||||||||
| 2022 | 117 | 1,183,158 | 8.6 | 55,768,863 | 8.9 | 47.14 | ||||||||||||||||||||||||||||||||
| 2023 | 82 | 1,526,551 | 11.0 | 67,981,672 | 10.9 | 44.53 | ||||||||||||||||||||||||||||||||
| 2024 | 88 | 1,455,604 | 10.5 | 72,366,297 | 11.6 | 49.72 | ||||||||||||||||||||||||||||||||
| 2025 | 30 | 1,081,971 | 7.8 | 56,296,162 | 9.0 | 52.03 | ||||||||||||||||||||||||||||||||
| 2026 | 17 | 326,691 | 2.4 | 17,688,631 | 2.8 | 54.14 | ||||||||||||||||||||||||||||||||
| 2027 | 15 | 405,078 | 2.9 | 21,596,067 | 3.5 | 53.31 | ||||||||||||||||||||||||||||||||
| 2028 | 17 | 555,792 | 4.0 | 34,527,781 | 5.5 | 62.12 | ||||||||||||||||||||||||||||||||
| Thereafter | 26 | 1,408,629 | 10.2 | 78,675,514 | 12.6 | 55.85 | ||||||||||||||||||||||||||||||||
| Building management use | 21 | 146,361 | 1.1 | — | — | — | ||||||||||||||||||||||||||||||||
Signed leases not commenced(4) | 23 | 1,205,757 | 8.7 | 71,611,797 | 11.5 | 59.39 | ||||||||||||||||||||||||||||||||
TOTAL/WEIGHTED AVERAGE(5) | 839 | 13,819,620 | 100.0 | % | $ | 624,116,358 | 100.0 | % | $ | 50.44 | ||||||||||||||||||||||||||||
_____________
1.Rent data for our office properties is presented on an annualized basis without regard to cancellation options. Annualized base rent for office properties is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) as of March 31, 2019, by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
2.Annualized base rent per square foot for all lease expiration years is calculated as (i) base rental payments (defined as cash base rents (before abatements)) under commenced leases, divided by (ii) square footage under commenced leases as of March 31, 2019.
3.Excludes 22,553-square-foot management office occupied by Hudson Pacific Properties, Inc. The management office is being reflected under building management use in the table above.
4.Annualized base rent per leased square foot and annualized base rent per square foot at expiration for signed leases not commenced reflects uncommenced leases for space not occupied as of March 31, 2019 and is calculated as (i) base rental payments (defined as cash base rents (before abatements)) under uncommenced leases for vacant space as of March 31, 2019, divided by (ii) square footage under uncommenced leases as of March 31, 2019.
5.Total expiring square footage does not include 47,173 square feet of month-to-month leases.
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Historical Tenant Improvements and Leasing Commissions
The following table summarizes historical information regarding tenant improvement and leasing commission costs for tenants at our office properties:
| Three Months Ended March 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
Renewals(1) | ||||||||||||||
| Number of leases | 16 | 19 | ||||||||||||
| Square feet | 97,123 | 302,401 | ||||||||||||
Tenant improvement costs per square foot(2)(3) | $ | 8.26 | $ | 44.31 | ||||||||||
Leasing commission costs per square foot(2) | 7.92 | 14.12 | ||||||||||||
Total tenant improvement and leasing commission costs(2) | $ | 16.18 | $ | 58.43 | ||||||||||
New leases(4) | ||||||||||||||
| Number of leases | 29 | 36 | ||||||||||||
| Square feet | 947,013 | 253,855 | ||||||||||||
Tenant improvement costs per square foot(2)(3) | $ | 92.57 | $ | 46.95 | ||||||||||
Leasing commission costs per square foot(2) | 33.58 | 14.53 | ||||||||||||
Total tenant improvement and leasing commission costs(2) | $ | 126.15 | $ | 61.48 | ||||||||||
| TOTAL | ||||||||||||||
| Number of leases | 45 | 55 | ||||||||||||
| Square feet | 1,044,136 | 556,256 | ||||||||||||
Tenant improvement costs per square foot(2)(3) | $ | 84.73 | $ | 45.52 | ||||||||||
Leasing commission costs per square foot(2) | 31.19 | 14.30 | ||||||||||||
TOTAL TENANT IMPROVEMENT AND LEASING COMMISSION COSTS(2) | $ | 115.92 | $ | 59.82 | ||||||||||
_____________
1.Excludes retained tenants that have relocated or expanded into new space within our portfolio.
2.Assumes all tenant improvement and leasing commissions are paid in the calendar year in which the lease is executed, which may be different than the year in which they were actually paid.
3.Tenant improvement costs are based on negotiated tenant improvement allowances set forth in leases, or, for any lease in which a tenant improvement allowance was not specified, the aggregate cost originally budgeted at the time the lease commenced.
4.Includes retained tenants that have relocated or expanded into new space within our portfolio.
Financings
During the three months ended March 31, 2019, the outstanding borrowings on the unsecured revolving credit facility decreased by $180.0 million, net of draws. We use the unsecured revolving credit facility to finance the acquisition of other properties, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.
On February 27, 2019, our operating partnership completed an underwritten public offering of $350.0 million in senior notes due April 1, 2029 that are fully and unconditionally guaranteed by Hudson Pacific Properties, Inc. The net proceeds from the offering, after deducting the underwriting discount, were approximately $343.0 million and were used to repay outstanding borrowings under our unsecured revolving credit facility and $75.0 million of its five-year term loan due November 17, 2020.
On March 1, 2019, we entered into a loan agreement to borrow up to $235.0 million on a revolving basis, maturing on March 1, 2024. We drew $5.0 million to pay down the Sunset Gower Studios/Sunset Bronson Studios construction loan that matured on March 4, 2019. The unused fee rate related to Sunset Bronson Studios/ICON/CUE is 0.20%.
45
Historical Results of Operations
This Quarterly Report on Form 10-Q of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. represents an update to the more detailed and comprehensive disclosures included in the 2018 Annual Report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. Accordingly, you should read the following discussion in conjunction with the information included in our 2018 Annual Report on Form 10-K, as well as the unaudited financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In addition, some of the statements and assumptions in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the quarter and beyond. See “Forward-looking Statements.”
All amounts and percentages used in this discussion of our results of operations are calculated using the numbers presented in the financial statements contained in Part I, Item 1 of this Quarterly Report rather than the rounded numbers appearing in this discussion. The dollar amounts included in the tables in this discussion of our results of operations are presented in thousands.
Comparison of the Three Months Ended March 31, 2019 to the Three Months Ended March 31, 2018
Net Operating Income
We evaluate performance based upon property net operating income (“NOI”). NOI is not a measure of operating results or cash flows from operating activities or cash flows as measured by GAAP and should not be considered an alternative to net income, as an indication of our performance, or as an alternative to cash flows as a measure of liquidity, or our ability to make distributions. All companies may not calculate NOI in the same manner. We consider NOI to be a useful performance measure to investors and management because when compared across periods, NOI reflects the revenues and expenses directly associated with owning and operating our properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective not immediately apparent from net income. We calculate NOI as net income (loss) excluding corporate general and administrative expenses, depreciation and amortization, impairments, gains/losses on sales of real estate, interest expense, transaction-related expenses and other non-operating items. We define NOI as operating revenues (including rental revenues, other property-related revenue, tenant recoveries and other operating revenues), less property-level operating expenses (which includes external management fees, if any, and property-level general and administrative expenses). NOI on a cash basis is NOI adjusted to exclude the effect of straight-line rent and other non-cash adjustments required by GAAP. We believe that NOI on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.
Management further analyzes NOI by evaluating the performance from the following property groups:
•Same-store properties, which includes all of the properties owned and included in our stabilized portfolio as of January 1, 2018 and still owned and included in the stabilized portfolio as of March 31, 2019; and
•Non-same-store properties include:
•Stabilized non-same-store properties
•Lease-up properties
•Development properties
•Redevelopment properties
•Held for sale properties
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The following table reconciles net (loss) income to NOI:
| Three Months Ended March 31, | Dollar Change | Percent Change | |||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | $ | (89,458) | (170.2) | % | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Interest expense | 24,350 | 20,503 | 3,847 | 18.8 | |||||||||||||||||||
| Interest income | (1,024) | (9) | (1,015) | 11,277.8 | |||||||||||||||||||
| Transaction-related expenses | 128 | 118 | 10 | 8.5 | |||||||||||||||||||
| Other expense (income) | 106 | (404) | 510 | (126.2) | |||||||||||||||||||
| Gains on sale of real estate | — | (37,674) | 37,674 | (100.0) | |||||||||||||||||||
| Impairment loss | 52,201 | — | 52,201 | 100.0 | |||||||||||||||||||
| General and administrative | 18,094 | 15,564 | 2,530 | 16.3 | |||||||||||||||||||
| Depreciation and amortization | 68,505 | 60,553 | 7,952 | 13.1 | |||||||||||||||||||
| NOI | $ | 125,465 | $ | 111,214 | $ | 14,251 | 12.8 | % | |||||||||||||||
| Same-store NOI | $ | 89,061 | $ | 81,707 | $ | 7,354 | 9.0 | % | |||||||||||||||
| Non-same-store NOI | 36,404 | 29,507 | 6,897 | 23.4 | |||||||||||||||||||
| NOI | $ | 125,465 | $ | 111,214 | $ | 14,251 | 12.8 | % | |||||||||||||||
Rental Components
We adopted ASC 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition method of the standard at the beginning of the period of adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. As we elected the practical expedient in ASC 842, which allows us to avoid separating lease and non-lease rental income, all office rental income earned pursuant to tenant leases in 2019 is reflected as one line, “Rental,” in the 2019 Consolidated Statement of Operations and as a result we do not disclose tenant recoveries as a separate GAAP revenue measure. However, we believe that tenant recoveries are useful to investors as a supplemental measure of our ability to recover operating expenses, property taxes, insurance and other expenses. For our studio leases, we did not elect the lessor practical expedient to combine lease and non-lease components. Therefore, studio rentals includes property tax and insurance recoveries and all other recoveries are included in service revenues and other. The following table presents our revenues in accordance with GAAP:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Revenues | |||||||||||
| Office | |||||||||||
| Rental | $ | 170,197 | $ | 130,082 | |||||||
| Tenant recoveries | — | 20,904 | |||||||||
| Service revenues | 5,661 | 5,546 | |||||||||
| Total office revenues | 175,858 | 156,532 | |||||||||
| Studio | |||||||||||
| Rental | 12,394 | 10,383 | |||||||||
| Tenant recoveries | — | 354 | |||||||||
| Service revenues and other | 9,137 | 6,849 | |||||||||
| Total studio revenues | 21,531 | 17,586 | |||||||||
| TOTAL REVENUES | $ | 197,389 | $ | 174,118 | |||||||
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We evaluate rental and tenant recoveries separately. Tenant recoveries are not a measure of revenues as allowed by GAAP and should not be considered an alternative to our GAAP measures included in our Consolidated Statement of Operations. The following table reports the breakdown of the 2019 rental income based on the 2018 presentation:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Revenues | |||||||||||
| Office | |||||||||||
| Rental | $ | 145,460 | $ | 130,082 | |||||||
| Tenant recoveries | 24,737 | 20,904 | |||||||||
| Service revenues | 5,661 | 5,546 | |||||||||
| Total office revenues | 175,858 | 156,532 | |||||||||
| Studio | |||||||||||
| Rental | 11,930 | 10,383 | |||||||||
| Tenant recoveries | 464 | 354 | |||||||||
| Service revenues and other | 9,137 | 6,849 | |||||||||
| Total studio revenues | 21,531 | 17,586 | |||||||||
| TOTAL REVENUES | $ | 197,389 | $ | 174,118 | |||||||
The following table summarizes certain statistics of our same-store office and studio properties:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Same-store office | |||||||||||
| Number of properties | 31 | 31 | |||||||||
| Rentable square feet | 7,842,466 | 7,842,466 | |||||||||
| Ending % leased | 94.9 | % | 94.3 | % | |||||||
| Ending % occupied | 94.1 | % | 93.2 | % | |||||||
| Average % occupied for the period | 93.0 | % | 92.8 | % | |||||||
| Average annual rental rate per square foot | $ | 48.61 | $ | 45.77 | |||||||
| Same-store studio | |||||||||||
| Number of properties | 3 | 3 | |||||||||
| Rentable square feet | 1,171,707 | 1,171,707 | |||||||||
Average % occupied for the period(1) | 92.4 | % | N/A | ||||||||
_____________
1.Percent occupied for same-store studio is the average percent occupied for the 12-months ended March 31, 2019. Trailing 12-month occupancy for March 31, 2018 is not applicable as the Sunset Las Palmas Studio property was acquired in May 2017.
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The following table gives further detail on our NOI:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Office | |||||||||||||||||||||||||||||||||||
| Rental | $ | 93,020 | $ | 52,440 | $ | 145,460 | $ | 86,675 | $ | 43,407 | $ | 130,082 | |||||||||||||||||||||||
| Tenant recoveries | 17,344 | 7,393 | 24,737 | 16,445 | 4,459 | 20,904 | |||||||||||||||||||||||||||||
| Service revenues | 4,166 | 1,495 | 5,661 | 4,104 | 1,442 | 5,546 | |||||||||||||||||||||||||||||
| Total office revenues | 114,530 | 61,328 | 175,858 | 107,224 | 49,308 | 156,532 | |||||||||||||||||||||||||||||
| Studio | |||||||||||||||||||||||||||||||||||
| Rental | 11,417 | 513 | 11,930 | 10,383 | — | 10,383 | |||||||||||||||||||||||||||||
| Tenant recoveries | 146 | 318 | 464 | 354 | — | 354 | |||||||||||||||||||||||||||||
| Service revenues and other | 9,348 | (211) | 9,137 | 6,849 | — | 6,849 | |||||||||||||||||||||||||||||
| Total studio revenues | 20,911 | 620 | 21,531 | 17,586 | — | 17,586 | |||||||||||||||||||||||||||||
| Total revenues | 135,441 | 61,948 | 197,389 | 124,810 | 49,308 | 174,118 | |||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Office operating expenses | 35,397 | 25,418 | 60,815 | 33,439 | 19,801 | 53,240 | |||||||||||||||||||||||||||||
| Studio operating expenses | 10,983 | 126 | 11,109 | 9,664 | — | 9,664 | |||||||||||||||||||||||||||||
| Total operating expenses | 46,380 | 25,544 | 71,924 | 43,103 | 19,801 | 62,904 | |||||||||||||||||||||||||||||
| Office NOI | 79,133 | 35,910 | 115,043 | 73,785 | 29,507 | 103,292 | |||||||||||||||||||||||||||||
| Studio NOI | 9,928 | 494 | 10,422 | 7,922 | — | 7,922 | |||||||||||||||||||||||||||||
| NOI | $ | 89,061 | $ | 36,404 | $ | 125,465 | $ | 81,707 | $ | 29,507 | $ | 111,214 | |||||||||||||||||||||||
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The following table gives further detail on our change in NOI:
| Three Months Ended March 31, 2019 as compared to Three Months Ended March 31, 2018 | |||||||||||||||||||||||||||||||||||
| Same-Store | Non-Same-Store | Total | |||||||||||||||||||||||||||||||||
| Dollar Change | Percent Change | Dollar Change | Percent Change | Dollar Change | Percent Change | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Office | |||||||||||||||||||||||||||||||||||
| Rental | $ | 6,345 | 7.3 | % | $ | 9,033 | 20.8 | % | $ | 15,378 | 11.8 | % | |||||||||||||||||||||||
| Tenant recoveries | 899 | 5.5 | 2,934 | 65.8 | 3,833 | 18.3 | |||||||||||||||||||||||||||||
| Service revenues | 62 | 1.5 | 53 | 3.7 | 115 | 2.1 | |||||||||||||||||||||||||||||
| Total office revenues | 7,306 | 6.8 | 12,020 | 24.4 | 19,326 | 12.3 | |||||||||||||||||||||||||||||
| Studio | |||||||||||||||||||||||||||||||||||
| Rental | 1,034 | 10.0 | 513 | 100.0 | 1,547 | 14.9 | |||||||||||||||||||||||||||||
| Tenant recoveries | (208) | (58.8) | 318 | 100.0 | 110 | 31.1 | |||||||||||||||||||||||||||||
| Service revenues and other | 2,499 | 36.5 | (211) | (100.0) | 2,288 | 33.4 | |||||||||||||||||||||||||||||
| Total studio revenues | 3,325 | 18.9 | 620 | 100.0 | 3,945 | 22.4 | |||||||||||||||||||||||||||||
| Total revenues | 10,631 | 8.5 | 12,640 | 25.6 | 23,271 | 13.4 | |||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Office operating expenses | 1,958 | 5.9 | 5,617 | 28.4 | 7,575 | 14.2 | |||||||||||||||||||||||||||||
| Studio operating expenses | 1,319 | 13.6 | 126 | 100.0 | 1,445 | 15.0 | |||||||||||||||||||||||||||||
| Total operating expenses | 3,277 | 7.6 | 5,743 | 29.0 | 9,020 | 14.3 | |||||||||||||||||||||||||||||
| Office NOI | 5,348 | 7.2 | 6,403 | 21.7 | 11,751 | 11.4 | |||||||||||||||||||||||||||||
| Studio NOI | 2,006 | 25.3 | 494 | 100.0 | 2,500 | 31.6 | |||||||||||||||||||||||||||||
| NOI | $ | 7,354 | 9.0 | % | $ | 6,897 | 23.4 | % | $ | 14,251 | 12.8 | % | |||||||||||||||||||||||
NOI increased $14.3 million, or 12.8%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, primarily resulting from:
•$7.4 million increase in NOI from our same-store properties driven by:
•An increase in office NOI of $5.3 million primarily due to:
•$6.3 million increase in rental revenues primarily relating to Salesforce.com subleasing to Twilio Inc. at our Rincon Center property and leases signed at our 1455 Market (Square, Inc. and WeWork Companies Inc.), Clocktower (Baker McKenzie) and Concourse (Nutanix, Inc. and Vital Connect, Inc.) properties at a higher rate than expiring leases;
•$0.9 million increase in tenant recoveries primarily relating to the commercial rents tax in San Francisco effective in 2019;
•$0.1 million increase in service revenues primarily relating to parking at our ICON property; partially offset by
•$2.0 million increase in operating expenses primarily relating to the commercial rents tax in San Francisco effective in 2019 and overall increased occupancy.
•An increase in studio NOI of $2.0 million primarily due to:
•$2.5 million increase in service revenues and other primarily relating to lighting and grip revenues; partially offset by
•$1.3 million increase in operating expenses relating to increase in production activity at our Studios.
•Rental revenues and tenant recoveries of $11.4 million and $0.1 million, respectively, for the three months ended March 31, 2019 remained relatively flat as compared to $10.4 million and $0.4 million, respectively, for the three months ended March 31, 2018.
•$6.9 million increase in NOI from our non-same-store properties driven by:
•Overall increase in office NOI of $6.4 million primarily due to:
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•Our acquisition of 10850 Pico (August 2018) and Ferry Building (October 2018) properties, partially offset by the sale of our Embarcadero Place (January 2018), 2180 Sand Hill (March 2018), 9300 Wilshire (April 2018) and Peninsula Office Park (July 2018) properties; in addition to
•$9.0 million increase in rental revenues primarily relating to our acquisition of 10850 Pico (August 2018) and Ferry Building (October 2018) properties, leases signed at our Gateway (Lumenis, Inc. and Santa Clara Valley Transportation Authority), Palo Alto Square (Orbital Insight, Inc) and Metro Plaza (Nutanix, Inc.) properties at a higher rate than expiring leases, higher occupancy due to lease-up of our 450 Alaskan (Nestle USA, Inc. and Regus) property and CUE (Netflix, Inc.);
•$2.9 million increase in tenant recoveries primarily relating to our acquisition of Ferry Building (October 2018); and
•Service revenues of $1.5 million for the three months ended March 31, 2019 remained relatively flat as compared to $1.4 million for the three months ended March 31, 2018; partially offset by
•$5.6 million increase in operating expenses primarily relating to our acquisition of Ferry Building (October 2018); and
•the sale of our Embarcadero Place (January 2018), 2180 Sand Hill (March 2018), 9300 Wilshire (April 2018) and Peninsula Office Park (July 2018) properties.
•An increase in studio NOI of $0.5 million resulting from our acquisition of 6605 Eleanor Avenue (June 2018), 1034 Seward Street (June 2018) and 6660 Santa Monica (October 2018) properties.
Other Expenses (Income)
Interest Expense
The following table represents a reconciliation from the gross interest expense to the amount on the interest expense line item in the Consolidated Statements of Operations:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2019 | 2018 | Dollar Change | Percent Change | ||||||||||||||||||||
| Gross interest expense | $ | 27,465 | $ | 22,431 | $ | 5,034 | 22.4 | % | |||||||||||||||
| Capitalized interest | (4,706) | (3,586) | (1,120) | 31.2 | |||||||||||||||||||
| Amortization of deferred financing costs/loan discounts | 1,591 | 1,658 | (67) | (4.0) | |||||||||||||||||||
| TOTAL | $ | 24,350 | $ | 20,503 | $ | 3,847 | 18.8 | % | |||||||||||||||
Gross interest expense increased by $5.0 million, or 22.4%, to $27.5 million for the quarter ended March 31, 2019 compared to $22.4 million for the quarter ended March 31, 2018. The increase is primarily driven by assumed debt associated with One Westside and 10850 Pico (August 2018) properties and joint venture partner debt related to our Ferry Building (October 2018) property and our 4.65% registered senior notes (February 2019) at higher interest rate than debt repaid with the proceeds.
Capitalized interest increased $1.1 million, or 31.2%, to $4.7 million for the quarter ended March 31, 2019 compared to $3.6 million for the quarter ended March 31, 2018. The increase was primarily driven by our One Westside redevelopment property and our EPIC and Harlow development properties, partially offset by recently completed redevelopment and development properties.
Gains on Sale of Real Estate
We generated no gains on sale of real estate for three months ended March 31, 2019 compared to $37.7 million during the three months ended March 31, 2018, which resulted from the sale of our Embarcadero Place (January 2018), 2600 Campus Drive (January 2018) and 2180 Sand Hill (March 2018) properties.
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General and Administrative Expenses
General and administrative expenses include wages and salaries for corporate-level employees, accounting, legal and other professional services, office supplies, entertainment, travel and automobile expenses, telecommunications and computer-related expenses and other miscellaneous items. General and administrative expenses increased $2.5 million, or 16.3%, to $18.1 million for the three months ended March 31, 2019 compared to $15.6 million for the three months ended March 31, 2018. The change was primarily attributable to adoption of the 2019 Hudson Pacific Properties, Inc. Outperformance Program and an increase in staffing to meet operational needs. Additionally, we adopted ASC 842 on January 1, 2019, which resulted in more payroll being expensed rather than capitalized to deferred leasing costs.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $8.0 million, or 13.1%, to $68.5 million for the three months ended March 31, 2019 compared to $60.6 million for the three months ended March 31, 2018. The increase was primarily related to our acquisition of the Ferry Building (October 2018) and recently completed redevelopment properties. The increase was partially offset by the sale of our Embarcadero Place (January 2018), 2180 Sand Hill (March 2018), 9300 Wilshire (April 2018) and Peninsula Office Park (July 2018) properties.
Impairment Loss
We recorded $52.2 million of impairment charges related to our Campus Center office property that was held for sale as March 31, 2019. Our estimated fair value was based on the sale price. We did not recognize impairment losses during the three months ended March 31, 2018.
Liquidity and Capital Resources
We have remained capitalized since our initial public offering through public offerings, private placements and continuous offerings under our ATM program. We currently expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital, strategic acquisitions, capital expenditures, tenant improvements, leasing costs, dividends and distributions, share repurchases and repayments of outstanding debt financing will include:
•Cash on hand, cash reserves and net cash provided by operations;
•Proceeds from additional equity securities;
•Our ATM program;
•Borrowings under the operating partnership’s unsecured revolving credit facility and Sunset Bronson Studios/ICON/CUE revolving credit facility; and
•Proceeds from additional secured, unsecured debt financings or offerings.
Liquidity Sources
We had $52.4 million of cash and cash equivalents at March 31, 2019. Our principal source of operating cash flow is related to leasing and operating the properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend and distribution requirements.
Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.
We have an ATM program that allows us to sell up to $125.0 million of common stock, $20.1 million of which has been sold through March 31, 2019. Any future sales will depend on several factors, including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
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As of March 31, 2019, we had total borrowing capacity of $600.0 million under our unsecured revolving credit facility, $220.0 million of which had been drawn. As of March 31, 2019, we had total borrowing capacity of $235.0 million secured by our Sunset Bronson Studios/ICON/CUE properties, $5.0 million of which had been drawn.
Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.
The following table sets forth our ratio of debt to total market capitalization (counting series A preferred units as debt) as of March 31, 2019.
| March 31, 2019 | ||||||||
Debt(1) | $ | 2,735,237 | ||||||
Series A preferred units | 9,815 | |||||||
Common equity capitalization(2) | 5,406,531 | |||||||
| TOTAL MARKET CAPITALIZATION | 8,151,583 | |||||||
| Series A preferred units & debt/total market capitalization | 33.7 | % | ||||||
_____________
1.Excludes in-substance defeased debt, joint venture partner debt and unamortized deferred financing costs and loan discounts.
2.Common equity capitalization represents the shares of common stock (including unvested restricted shares), OP units outstanding, restricted performance units and dilutive shares multiplied by the closing price of our stock, as reported by the NYSE, as of March 31, 2019.
Outstanding Indebtedness
The following table sets forth information as of March 31, 2019 and December 31, 2018 with respect to our outstanding indebtedness (excluding unamortized deferred financing costs and loan discounts):
| March 31, 2019 | December 31, 2018 | ||||||||||
| Unsecured debt | $ | 2,370,000 | $ | 2,275,000 | |||||||
| Secured debt | $ | 365,237 | $ | 365,381 | |||||||
| In-substance defeased debt | $ | 137,417 | $ | 138,223 | |||||||
| Joint venture partner debt | $ | 66,136 | $ | 66,136 | |||||||
The operating partnership was in compliance with its financial covenants as of March 31, 2019.
Liquidity Uses
Contractual Obligations
During the three months ended March 31, 2019, there were no material changes outside the ordinary course of business in the information regarding specified contractual obligations contained in our 2018 Annual Report on Form 10-K. See Part I, Item 1 “Note 7 to our Consolidated Financial Statements—Debt,” for information regarding our minimum future principal payments due on our outstanding debt. See Part I, Item 1 “Note 11 to our Consolidated Financial Statements—Future Minimum Rents and Lease Payments” for information regarding our future minimum ground lease payments.
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Cash Flows
A comparison of our cash flow activity is as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2019 | 2018 | Dollar Change | Percent Change | ||||||||||||||||||||
Net cash provided by operating activities | $ | 89,446 | $ | 64,447 | $ | 24,999 | 38.8 | % | |||||||||||||||
| Net cash (used in) provided by investing activities | $ | (128,267) | $ | 133,492 | $ | (261,759) | (196.1) | % | |||||||||||||||
| Net cash provided by (used in) financing activities | $ | 36,701 | $ | (224,239) | $ | 260,940 | (116.4) | % | |||||||||||||||
Cash and cash equivalents and restricted cash were $66.1 million and $68.2 million at March 31, 2019 and December 31, 2018, respectively.
Operating Activities
Net cash provided by operating activities increased by $25.0 million, or 38.8%, to $89.4 million for the three months ended March 31, 2019 compared to $64.4 million for the three months ended March 31, 2018. The change resulted primarily from an increase in cash rents from our office and studio properties related to our 10850 Pico and Ferry Building acquisitions in 2019 and lease-up related to our CUE (Netflix, Inc.) and 450 Alaskan (Nestle USA, Inc. and Regus) properties, partially offset by higher general and administrative expenses, interest expense and lower cash rents due to the sale of our Embarcadero Place (January 2018), 2180 Sand Hill (March 2018), 9300 Wilshire (April 2018) and Peninsula Office Park (July 2018) properties.
Investing Activities
Net cash used in investing activities increased by $261.8 million, or 196.1%, to $128.3 million for the three months ended March 31, 2019 compared to net cash provided by investing activities of $133.5 million for the three months ended March 31, 2018. The increase resulted primarily from no sales of real estate properties in 2019 compared to $237.0 million of proceeds from sales in 2018. In addition, cash used for deposits for future real estate acquisitions increased in 2019. The increase was offset by lower cash used for additions to investment in real estate.
Financing Activities
Net cash provided by financing activities increased by $260.9 million, or 116.4%, to $36.7 million for the three months ended March 31, 2019 compared to net cash used in financing activities of $224.2 million for the three months ended March 31, 2018. The change resulted primarily from an increase in proceeds from debt, partially offset by increase in paydowns of debt.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements in conformity with GAAP requires us to make estimates of certain items and judgments as to certain future events, for example with respect to the assignment of the purchase price of an acquired property among land, buildings, improvements, equipment and any related intangible assets and liabilities, or the effect of a property tax reassessment of our properties. These determinations, even though inherently subjective and prone to change, affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals and those differences—positive or negative—could be material. Some of our accruals are subject to adjustment, as we believe appropriate based on revised estimates and reconciliation to the actual results when available.
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Effective January 1, 2019, we adopted ASC 842 which resulted in changes to our critical accounting policy relating to lease accounting. Refer to Part I, Item 1 “Note 2 to our Consolidated Financial Statements—Summary of Significant Accounting Policies,” for information regarding our updated policies as a result of the adoption of ASC 842.
Non-GAAP Supplemental Financial Measure: Funds From Operations
We calculate FFO in accordance with the White Paper issued in December 2018 on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding gains and losses from sales of depreciable real estate, gains and losses from sale of certain real estate assets and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. The calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. In the December 2018 White Paper, NAREIT, provided an option to include value changes in mark-to-market equity securities in the calculation of FFO. We elected this option, retroactively during the fourth quarter of 2018. We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide. We use FFO per share to calculate annual cash bonuses for certain employees.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from
operations.
The following table presents a reconciliation of net (loss) income to FFO:
| Three Months Ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net (loss) income | $ | (36,895) | $ | 52,563 | |||||||
| Adjustments: | |||||||||||
| Depreciation and amortization | 68,505 | 60,553 | |||||||||
| Corporate-related depreciation and amortization | (523) | (484) | |||||||||
| Gains on sale of real estate | — | (37,674) | |||||||||
| Impairment loss | 52,201 | — | |||||||||
| FFO attributable to non-controlling interests | (6,738) | (5,331) | |||||||||
| FFO attributable to preferred units | (153) | (159) | |||||||||
| FFO TO COMMON STOCKHOLDERS AND UNITHOLDERS | $ | 76,397 | $ | 69,468 | |||||||
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market risk is disclosed in Part II, Item 7A, of our 2018 Annual Report on Form 10-K and is incorporated herein by reference. There have been no material changes for the three months ended March 31, 2019 to the information provided in Part II, Item 7A, of our 2018 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures (Hudson Pacific Properties, Inc.)
Hudson Pacific Properties, Inc. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in Hudson Pacific Properties, Inc.’s reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, Hudson Pacific Properties, Inc. carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, that Hudson Pacific Properties, Inc.’s disclosure controls and procedures were effective in providing a reasonable level of assurance that information Hudson Pacific Properties, Inc. is required to disclose in reports that Hudson Pacific Properties, Inc. files under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Disclosure Controls and Procedures (Hudson Pacific Properties, L.P.)
Hudson Pacific Properties, L.P. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in Hudson Pacific Properties, L.P.’s reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, Hudson Pacific Properties, L.P. carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.), of the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period covered by this report.
Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.) concluded, as of that time, that Hudson Pacific Properties, L.P.’s disclosure controls and procedures were effective in providing a reasonable level of assurance that information Hudson Pacific Properties, L.P. is required to disclose in reports that Hudson Pacific Properties, L.P. files under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.), as appropriate, to allow for timely decisions regarding required disclosure.
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Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, Inc.)
There have been no changes that occurred during the first quarter of the year covered by this report in Hudson Pacific Properties, Inc.’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, L.P.)
There have been no changes that occurred during the first quarter of the year covered by this report in Hudson Pacific Properties, L.P.’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to various lawsuits, claims and other legal proceedings arising out of, or incident to, our ordinary course of business. We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or that, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition, results of operations or cash flows if determined adversely to us.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors included in the section entitled “Risk Factors” in our 2018 Annual Report on Form 10-K. Please review the Risk Factors set forth in our 2018 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities:
During the first quarter of 2019, our operating partnership issued partnership units in private placements in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, in the amounts and for the consideration set forth below:
During the first quarter of 2019, the Company issued an aggregate of 128,923 shares of its common stock in connection with restricted stock awards for no cash consideration, out of which 126,880 shares of common stock were forfeited to the Company in connection with restricted stock awards for a net issuance of 2,043 shares of common stock. For each share of common stock issued by the Company in connection with such an award, our operating partnership issued a restricted common unit to the Company as provided in our operating partnership’s partnership agreement. During the first quarter of 2019, our operating partnership issued an aggregate of 128,923 common units to the Company. Additionally, during the first quarter of 2019 our operating partnership issued 169,804 operating partnership performance units pursuant to the 2016 OPP Plan.
All other issuances of unregistered equity securities of our operating partnership during the first quarter of 2019 have previously been disclosed in filings with the SEC. For all issuances of units to the Company, our operating partnership relied on the Company’s status as a publicly traded NYSE-listed company with over $7.37 billion in total consolidated assets and as our operating partnership’s majority owner and sole general partner as the basis for the exemption under Section 4(a)(2) of the Securities Act.
(b) Use of Proceeds from Registered Securities: None
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
During the three months ended March 31, 2019, certain employees surrendered common shares owned by them to satisfy their statutory federal income tax obligation associated with the vesting of restricted common shares of beneficial interest issued under our 2010 Incentive Award Plan.
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The following table summarizes all of the repurchases of the Company equity securities during the first quarter of 2019:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share(1) | Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs | Maximum Number (or Dollar Value) That May Yet Be Purchased Under The Plans or Programs(2) | ||||||||||||||||||||||
| January 1 - January 31, 2019 | 98,620 | $ | 27.95 | N/A | N/A | |||||||||||||||||||||
| February 1 - February 28, 2019 | — | — | N/A | N/A | ||||||||||||||||||||||
| March 1 - March 31, 2019 | 28,260 | 28.33 | N/A | N/A | ||||||||||||||||||||||
TOTAL | 126,880 | $ | 28.04 | — | $ | 200,000,000 | ||||||||||||||||||||
_____________
1.The price paid per share is based on the closing price of our common stock, as reported by the NYSE, as of the date of the determination of the statutory federal tax income.
2.On January 20, 2016, our board of directors authorized a share repurchase program to buy up to $100.0 million of the outstanding common stock of Hudson Pacific Properties, Inc., which our board of directors increased to a total of $250.0 million on March 8, 2018. The program does not have a termination date, and repurchases may be discontinued at any time.
The following table summarizes all of the repurchases of operating partnership equity securities during the first quarter of 2019:
| Period | Total Number of Units Purchased | Average Price Paid Per Unit(1) | Total Number of Units Purchased As Part of Publicly Announced Plans or Programs | Maximum Number (or Dollar Value) That May Yet Be Purchased Under The Plans or Programs(2) | ||||||||||||||||||||||
| January 1 - January 31, 2019 | 98,620 | $ | 27.95 | N/A | N/A | |||||||||||||||||||||
| February 1 - February 28, 2019 | — | — | N/A | N/A | ||||||||||||||||||||||
| March 1 - March 31, 2019 | 28,260 | 28.33 | N/A | N/A | ||||||||||||||||||||||
TOTAL | 126,880 | $ | 28.04 | — | $ | 200,000,000 | ||||||||||||||||||||
_____________
1.The price paid per unit is based on the closing price of our common stock, as reported by the NYSE, as of the date of the determination of the statutory federal tax income.
2.On January 20, 2016, our board of directors authorized a share repurchase program to buy up to $100.0 million of the outstanding common stock of Hudson Pacific Properties, Inc., which our board of directors increased to a total of $250.0 million on March 8, 2018. The program does not have a termination date, and repurchases may be discontinued at any time. For each share of common stock repurchased pursuant to the program, the operating partnership redeems one common unit from Hudson Pacific Properties, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit No. | Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| 3.1 | S-11/A | 333-164916 | 3.1 | May 12, 2010 | ||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-34789 | 3.1 | January 12, 2015 | ||||||||||||||||||||||||||||
| 3.3 | 10-K | 001-34789 | 10.1 | February 26, 2016 | ||||||||||||||||||||||||||||
| 3.4 | 10-Q | 001-34789 | 3.4 | November 4, 2016 | ||||||||||||||||||||||||||||
| 10.1 | 8-K | 001-34789 | 4 | 4.2 | February 27, 2019 | |||||||||||||||||||||||||||
| 10.2 | ||||||||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||
| 31.3 | ||||||||||||||||||||||||||||||||
| 31.4 | ||||||||||||||||||||||||||||||||
| 32.1 | ||||||||||||||||||||||||||||||||
| 32.2 | ||||||||||||||||||||||||||||||||
| 101 | The following financial information from Hudson Pacific Properties, Inc.’s and Hudson Pacific Properties, L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) Consolidated Statements of Equity (unaudited), (v) Consolidated Statements of Capital (unaudited), (vi) Consolidated Statements of Cash Flows (unaudited) and (vii) Notes to Unaudited Consolidated Financial Statements** | |||||||||||||||||||||||||||||||
____________
| * | Denotes a management contract or compensatory plan or arrangement. | |||||||||||||||||||||||||||||||
| ** | Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. | |||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HUDSON PACIFIC PROPERTIES, INC. | |||||||||||
| Date: | May 6, 2019 | /S/ VICTOR J. COLEMAN | |||||||||
Victor J. Coleman Chief Executive Officer (Principal Executive Officer) | |||||||||||
| HUDSON PACIFIC PROPERTIES, INC. | |||||||||||
| Date: | May 6, 2019 | /S/ MARK T. LAMMAS | |||||||||
Mark T. Lammas Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HUDSON PACIFIC PROPERTIES, L.P. | |||||||||||
| Date: | May 6, 2019 | /S/ VICTOR J. COLEMAN | |||||||||
Victor J. Coleman Chief Executive Officer (Principal Executive Officer) | |||||||||||
| HUDSON PACIFIC PROPERTIES, L.P. | |||||||||||
| Date: | May 6, 2019 | /S/ MARK T. LAMMAS | |||||||||
Mark T. Lammas Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
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