Hudson Pacific Properties(HPP) - 2019 Q4 - Annual Report

PART I Business Hudson Pacific Properties specializes in high-quality office and studio properties across key West Coast markets, focusing on value-add opportunities and ESG principles - Portfolio Overview as of December 31, 2019 | Asset Type | Square Feet (approx.) | | :--- | :--- | | Office Properties | 14.9 million | | Studio Properties | 1.2 million | | Undeveloped Density Rights | 2.7 million | - The company's business strategy focuses on investing in Class-A office and studio properties in high-growth, innovation-centric submarkets to attract quality tenants from the technology, media, and entertainment sectors[25] - As of year-end 2019, the two largest tenants, Netflix, Inc. and Google, Inc., accounted for a significant 15.2% of the company's share of annualized base rent from office properties[26] - The company operates through two segments: (i) office properties and (ii) studio properties, with all business conducted in Northern/Southern California, the Pacific Northwest, and Western Canada[31] - Hudson Pacific emphasizes its commitment to ESG, focusing on environmental stewardship, social responsibility (including diversity and inclusion), and strong corporate governance[42][49][54] Risk Factors The company faces significant risks including geographic concentration, tenant dependency, acquisition challenges, capital reliance, and interest rate fluctuations - The company's properties are concentrated in Northern/Southern California, the Pacific Northwest, and Western Canada, making it susceptible to adverse economic conditions, local regulations, and natural disasters specific to these regions[67] - A significant portion of rental revenue comes from tenants in the technology and media/entertainment industries, exposing the company to downturns in these sectors[69] - The company depends on significant tenants like Netflix, Google, and WeWork; their financial instability or bankruptcy could adversely affect income and cash flow[92][93] - Maintaining REIT status requires distributing at least 90% of net taxable income annually, which may necessitate borrowing funds during unfavorable market conditions to meet distribution requirements[75][147] - The potential replacement of LIBOR with an alternative reference rate like SOFR after 2021 may adversely affect interest expense on the company's variable rate debt[82][83] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC as of the filing date - None[153] Properties As of December 31, 2019, the company's portfolio comprised 62 properties totaling approximately 18.8 million square feet across office, studio, and land segments - Portfolio Summary as of December 31, 2019 | Portfolio Type | Number of Properties | Total Square Feet (approx.) | | :--- | :--- | :--- | | Total Portfolio | 62 | 18.8 million | | Office | 52 | 14.9 million | | Studio | 3 | 1.2 million | | Land | 7 | 2.7 million (developable) | Office Portfolio The office portfolio, comprising 52 properties totaling 14.9 million square feet, was 95.1% leased as of December 31, 2019, with a 4.3-year weighted average lease term - Office Portfolio Key Metrics (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Total Properties | 52 | | Total Square Feet | ~14.9 million | | In-Service Portfolio Leased % | 95.1% | | Stabilized Portfolio Leased % | 96.4% | | Weighted Avg. Remaining Lease Term | 4.3 years | - Top 5 Tenant Industries by Company's Share of Annualized Base Rent | Industry | % of Total | | :--- | :--- | | Technology | 37.8% | | Media and Entertainment | 17.1% | | Business Services | 9.7% | | Legal | 8.1% | | Financial Services | 7.3% | - Office Lease Expiration Schedule (Company's Share) | Year of Expiration | % of Portfolio Square Feet | | :--- | :--- | | Vacant | 6.3% | | 2020 | 6.1% | | 2021 | 10.4% | | 2022 | 10.7% | | 2023 | 10.9% | | Thereafter | 35.2% | Studio Portfolio The studio portfolio consists of three Hollywood properties totaling 1.2 million square feet, with an average leased rate of 92.3% for same-store properties in 2019 - Studio Portfolio Summary (as of Dec 31, 2019) | Property | Square Feet | Average % Leased (12-mo) | | :--- | :--- | :--- | | Sunset Gower Studios | 531,756 | 92.8% | | Sunset Bronson Studios | 308,026 | 99.2% | | Sunset Las Palmas Studios | 384,621 | 86.6% (Blended) | | Total | 1,224,403 | ~92.3% (Same-store) | Land Portfolio The land portfolio holds an estimated 2.7 million developable square feet across key markets, representing future development opportunities - The land portfolio represents approximately 2.7 million square feet of future development potential, with the majority subject to obtaining entitlement approvals[191] 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[192] Mine Safety Disclosures This item is not applicable to the company - Not applicable[193] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the market for Hudson Pacific Properties' common stock, dividend policy, share repurchases, and a five-year stock performance comparison against key indices - Hudson Pacific Properties, Inc. common stock trades on the NYSE under the symbol 'HPP'; there is no public trading market for the operating partnership's common units[196][202] - The company has a share repurchase program authorized for up to $250.0 million, with $50.0 million repurchased cumulatively as of December 31, 2019[199] - 5-Year Cumulative Total Return Comparison (2014-2019) | Index | 12/31/14 | 12/31/19 | | :--- | :--- | :--- | | Hudson Pacific Properties, Inc. | $100.00 | $143.26 | | S&P 500 | $100.00 | $173.86 | | MSCI U.S. REIT | $100.00 | $140.48 | | SNL U.S. REIT Office | $100.00 | $121.57 | Selected Financial Data This section presents five years of selected consolidated financial data, highlighting $818.2 million in 2019 revenues, a decrease in net income to $55.8 million, and total assets growing to $7.47 billion - Selected Financial Data for Hudson Pacific Properties, Inc. (in thousands, except per share data) | Metric | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | :--- | | Total Revenues | $818,182 | $728,418 | $728,139 | | Net Income (loss) | $55,846 | $111,781 | $94,561 | | Total Assets | $7,466,568 | $7,070,879 | $6,622,070 | | Total Liabilities | $3,622,131 | $3,117,793 | $2,700,929 | | Dividends declared per common share | $1.000 | $1.000 | $1.000 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2019 financial performance, highlighting a 12.1% increase in Net Operating Income to $516.7 million, strategic transactions, and a Baa2 credit rating upgrade by Moody's Executive Summary and 2019 Highlights The company's 2019 highlights include acquiring a 20% interest in Bentall Centre, selling Campus Center for $148.4 million, and issuing $850 million in senior notes - Acquired a 20% interest in the Bentall Centre office and retail complex in Vancouver, Canada, in a joint venture with Blackstone, serving as the operating partner[228] - Sold the Campus Center office property and developable land for a total of $148.4 million, resulting in a $52.2 million impairment loss on the office property and a $47.1 million gain on the land[230] - Completed several financing activities, including issuing $500 million of 4.65% senior notes and $400 million of 3.25% senior notes, using proceeds to repay term loans and reduce borrowings on the unsecured revolving credit facility[235][237][238] Results of Operations (2019 vs. 2018) Net Operating Income increased 12.1% to $516.7 million in 2019, driven by both same-store and non-same-store growth, while net income decreased to $55.8 million due to impairment and higher expenses - Net Operating Income (NOI) Comparison (in thousands) | NOI Category | 2019 (in thousands) | 2018 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Same-store NOI | $362,000 | $332,169 | $29,831 | 9.0% | | Non-same-store NOI | $154,660 | $128,539 | $26,121 | 20.3% | | Total NOI | $516,660 | $460,708 | $55,952 | 12.1% | - Net income decreased by 50.0% to $55.8 million in 2019 from $111.8 million in 2018, primarily due to a $52.2 million impairment loss and a $22.7 million increase in interest expense[283] - General and administrative expenses increased by 17.9% to $71.9 million, partly due to the adoption of ASC 842 requiring expensing certain lease-signing costs[299] Liquidity and Capital Resources The company maintains liquidity through cash, operating cash flow, and credit facilities, with $2.85 billion in total debt, a 32.4% debt-to-market capitalization, and a Baa2 credit rating from Moody's - Liquidity and Debt Metrics (as of Dec 31, 2019) | Metric | Value (in millions) | | :--- | :--- | | Cash and Cash Equivalents | $46.2 | | Unsecured Revolver Capacity | $600.0 | | Unsecured Revolver Drawn | $75.0 | | Total Consolidated Debt | $2,855.3 | | Debt-to-Market Capitalization | 32.4% | - In October 2019, Moody's Investors Service upgraded the company's long-term corporate credit rating to Baa2 from Baa3, with a stable outlook[312] - Cash Flow Summary (in thousands) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $288,011 | $214,626 | | Net cash used in investing activities | $(316,409) | $(392,333) | | Net cash provided by financing activities | $18,465 | $144,618 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its $625.1 million variable-rate debt, with a 100 basis point LIBOR increase potentially raising annual interest expense by $6.3 million - The primary market risk is interest rate risk; a 100 basis point increase in LIBOR would increase annual interest expense by $6.3 million[328][332] - Debt Profile as of December 31, 2019 (in millions) | Debt Type | Carrying Value (in millions) | | :--- | :--- | | Variable Rate | $625.1 | | Fixed Rate | $2,220.3 | | Total Unsecured & Secured | $2,845.5 | - The company uses interest rate swaps to hedge risk on its variable-rate debt, with a total notional amount of $539.5 million hedged as of year-end 2019[331] - The company is exposed to foreign currency exchange rate risk related to its unconsolidated real estate entity operating in Canada[333] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal control over financial reporting, and Ernst & Young LLP issued an unqualified opinion - Management concluded that the disclosure controls and procedures for both Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. were effective as of December 31, 2019[338][341] - No material changes were identified in the company's internal control over financial reporting during the fourth quarter of 2019[342][343] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[350] PART III PART III Items 10 through 14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees, are incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2020 proxy statement[353][354][355] PART IV Exhibits, Financial Statement Schedules This section includes consolidated financial statements, the independent auditor's report, and detailed notes for Hudson Pacific Properties, Inc. and L.P. for the three years ended December 31, 2019 Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies, property transactions, debt structure, and compliance with covenants, including the adoption of ASC 842 on January 1, 2019 - The company adopted the new lease accounting standard, ASC 842, on January 1, 2019, using the modified retrospective approach, resulting in $269.0 million in operating lease right-of-use assets and $272.7 million in operating lease liabilities[490][409] - During 2019, the company recorded a $52.2 million impairment charge related to the Campus Center office property, which was subsequently sold[538] - As of December 31, 2019, the company was in compliance with all financial covenants related to its unsecured revolving credit facility, term loans, and note purchase agreements[586] - Future Minimum Base Rents from Non-Cancellable Leases (in thousands) | Year | Total Minimum Rent (in thousands) | | :--- | :--- | | 2020 | $585,000 | | 2021 | $581,172 | | 2022 | $544,040 | | 2023 | $506,227 | | 2024 | $436,783 | | Thereafter | $1,824,676 |