Hudson Pacific Properties(HPP) - 2018 Q4 - Annual Report

Part I Business Hudson Pacific Properties is a vertically integrated real estate company specializing in high-quality office and studio properties in key West Coast markets - As of December 31, 2018, the company's portfolio included approximately 13.9 million square feet of office properties and 1.2 million square feet of studio properties, with an additional 2.6 million square feet of undeveloped density rights[20] - The company's business strategy focuses on investing in Class-A office and studio properties in innovation-centric submarkets, emphasizing value-add opportunities through repositioning and redevelopment[22] - The top 15 office tenants account for 37.2% of total annualized office base rent, with Google, Inc. and Netflix, Inc. representing a combined 10.7%[23] - The company operates through two segments: office and studio properties, with all business conducted across Northern and Southern California and the Pacific Northwest[30] - The company aims to reduce energy, water consumption, and greenhouse gas emissions by at least 10% by 2025, compared to a 2016 baseline[46] Risk Factors The company faces diverse risks, including geographic and tenant concentration, real estate market illiquidity, and challenges in maintaining REIT status - The company's portfolio is geographically concentrated in Northern and Southern California and the Pacific Northwest, increasing susceptibility to adverse local conditions[59] - A significant portion of rental revenue is derived from technology and media/entertainment tenants, exposing the company to industry-specific downturns[60] - As a REIT, the company must distribute at least 90% of its net taxable income annually, potentially limiting internal capital for future needs and increasing reliance on external sources[66][68] - The transition from LIBOR to alternative reference rates like SOFR after 2021 may adversely affect interest expense on the company's $1.32 billion of variable rate debt[75][76] - Failure to maintain REIT status would result in significant adverse tax consequences, including federal corporate income tax and a four-year inability to re-elect REIT status[139] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments were reported[156] Properties As of December 31, 2018, the company's portfolio comprised 55 properties totaling 17.7 million square feet, primarily office and studio, with significant tenant concentration in technology and media Portfolio Summary as of December 31, 2018 | Portfolio Segment | Number of Properties | Square Feet (sq. ft.) | Percent Leased (%) | | :--- | :--- | :--- | :--- | | Office | 52 | 13,853,401 | - | | - In-Service | 47 | 12,290,504 | 93.0% | | - Redevelopment/Development | 5 | 1,562,897 | - | | Studio | 3 | 1,224,403 | 91.9% (Avg) | | Land | - | 2,639,562 | - | | Total | 55 | 17,717,366 | - | Top 5 Office Tenants by Annualized Base Rent | Tenant | % of Office Portfolio Annualized Base Rent (%) | | :--- | :--- | | Google, Inc. | 6.3% | | Netflix, Inc. | 4.4% | | Square, Inc. | 3.4% | | Riot Games, Inc. | 3.0% | | Uber Technologies, Inc. | 3.0% | Office Portfolio Industry Diversification by Annualized Base Rent | Industry | % of Total (%) | | :--- | :--- | | Technology | 39.4% | | Media and Entertainment | 14.4% | | Legal | 8.9% | | Business Services | 8.8% | | Financial Services | 7.7% | | Other | 20.8% | - Approximately 9.0% of the office portfolio's square footage, representing 10.2% of annualized base rent, is scheduled to expire in 2019[183] Legal Proceedings The company is not currently involved in any material legal proceedings expected to adversely affect its operations - The company is not currently involved in any material legal proceedings[197] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[198] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with a $250.0 million share repurchase program, and its five-year cumulative return outperformed the S&P 500 - The board authorized a $250.0 million share repurchase program, with 1,639,260 shares repurchased in November 2018 at an average price of $30.48[204][205] - There is no established public trading market for the operating partnership's common units[209] 5-Year Cumulative Total Return Comparison (2013-2018) | Index | 12/31/13 | 12/31/18 | Cumulative Return (%) | | :--- | :--- | :--- | :--- | | Hudson Pacific Properties, Inc. | $100.00 | $150.57 | 50.57% | | S&P 500 | $100.00 | $150.33 | 50.33% | | MSCI US REIT | $100.00 | $145.55 | 45.55% | | SNL U.S. REIT Office | $100.00 | $119.86 | 19.86% | Selected Financial Data In 2018, total office revenues slightly decreased to $652.5 million, while studio revenues increased to $75.9 million, and net income rose to $111.8 million Selected Financial Data (in thousands) | Metric | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :--- | :--- | :--- | :--- | | Statements of Operations Data | | | | | Total office revenues | $652,517 | $667,110 | $593,236 | | Total studio revenues | $75,901 | $61,029 | $46,403 | | Net income (loss) | $111,781 | $94,561 | $43,758 | | Per Share Data | | | | | Net income (loss) attributable to common stockholders—diluted | $0.63 | $0.44 | $0.25 | | Dividends declared per common share | $1.000 | $1.000 | $0.800 | | Balance Sheet Data (End of Period) | | | | | Total assets | $7,070,879 | $6,622,070 | $6,678,998 | | Unsecured and secured debt, net | $2,623,835 | $2,421,380 | $2,688,010 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, the company executed strategic acquisitions and dispositions, resulting in a 2.9% decrease in Net Operating Income to $460.7 million and $292.9 million in Funds from Operations - During 2018, the company acquired 916,701 square feet of properties for $521.0 million and disposed of 815,226 square feet of office properties for $464.8 million, realizing $43.3 million in gains[235][239] Net Operating Income (NOI) Reconciliation (in thousands) | | Year Ended Dec 31, 2018 ($ thousands) | Year Ended Dec 31, 2017 ($ thousands) | $ Change (thousands) | % Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $111,781 | $94,561 | $17,220 | 18.2% | | Adjustments | 348,927 | 380,071 | (31,144) | (8.2)% | | NOI | $460,708 | $474,632 | ($13,924) | (2.9)% | | Same-store NOI | $294,441 | $289,087 | $5,354 | 1.9% | | Non-same-store NOI | $166,267 | $185,545 | ($19,278) | (10.4)% | - The 2.9% decrease in total NOI was primarily due to a $25.6 million decline in non-same-store office NOI from property sales and redevelopments, partially offset by increases in same-store office and total studio NOI[295] Funds From Operations (FFO) Reconciliation (in thousands) | | 2018 ($ thousands) | 2017 ($ thousands) | | :--- | :--- | :--- | | Net income | $111,781 | $94,561 | | Adjustments | 181,142 | 211,495 | | FFO to Common Stockholders and Unitholders | $292,923 | $306,056 | - As of December 31, 2018, the company held $53.7 million in cash and cash equivalents, with $200.0 million remaining borrowing capacity under its $600.0 million unsecured revolving credit facility[343][346] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with $1.32 billion in variable-rate debt partially hedged by interest rate swaps - The company's main market risk stems from interest rate fluctuations, which it manages using derivative instruments like interest rate swaps[364] Debt Profile as of December 31, 2018 (in thousands) | Debt Type | Carrying Value ($ thousands) | | :--- | :--- | | Variable rate | $1,319,501 | | - Effectively fixed via swaps | $839,500 | | Fixed rate | $1,320,232 | | Total Unsecured and Secured Debt | $2,639,733 | - A 100 basis point (1.0%) increase in the one-month LIBOR would increase annual interest expense by approximately $4.8 million[369] Financial Statements and Supplementary Data This section refers to the consolidated financial statements listed in Part IV, Item 15(a) of the report - This item refers to the consolidated financial statements listed in Part IV, Item 15(a) of the Form 10-K[370] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - This item is not applicable[371] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes during the fourth quarter - Management concluded that disclosure controls and procedures for both Hudson Pacific Properties, Inc. and its operating partnership were effective as of the report period end[375][378] - No material changes occurred in internal control over financial reporting during the fourth quarter of 2018[379][380] - Management assessed the company's internal control over financial reporting as effective based on the COSO 2013 framework, a conclusion audited and confirmed by Ernst & Young LLP[383][388] Other Information This item is not applicable to the company - This item is not applicable[389] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[392] Executive Compensation Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[393] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[394] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[395] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[396] Part IV Exhibits, Financial Statement Schedules This section lists consolidated financial statements and a comprehensive array of exhibits filed with the Form 10-K - This section includes consolidated financial statements for both Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P., along with Schedule III - Real Estate and Accumulated Depreciation[399] - A detailed list of exhibits is provided, including corporate governance documents, debt agreements, material contracts, and executive compensation plans[400] Form 10-K Summary This item is not applicable to the company - This item is not applicable[406]