Hudson Pacific Properties(HPP) - 2021 Q3 - Quarterly Report

EXPLANATORY NOTE This note clarifies the consolidated reporting of Hudson Pacific Properties, Inc. and its operating partnership, outlining their structure and financial distinctions - This report combines the quarterly reports on Form 10-Q for Hudson Pacific Properties, Inc. (REIT) and Hudson Pacific Properties, L.P. (operating partnership)[12] - Hudson Pacific Properties, Inc. owns approximately 98.7% of the ownership interest in the operating partnership[13] - The operating partnership holds substantially all of the Company's assets and conducts most of its business[14] - Main differences in consolidated financial statements between the Company and the operating partnership are non-controlling interest, stockholders' equity, and partners' capital[15] PART I—FINANCIAL INFORMATION ITEM 1. Financial Statements of Hudson Pacific Properties, Inc. This section presents Hudson Pacific Properties, Inc.'s unaudited consolidated financial statements, detailing its financial position, operations, and cash flows Consolidated Balance Sheets (September 30, 2021 vs. December 31, 2020) | Metric | Sep 30, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total Assets | $8.804 | $8.350 | | Total Liabilities | $4.812 | $4.245 | | Total Equity | $3.852 | $3.968 | | Investment in real estate, net | $7.161 | $7.112 | | Unsecured and secured debt, net | $3.910 | $3.399 | Consolidated Statements of Operations (Three Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Total Revenues | $227.6 | $196.3 | +$31.3 | +16.0% | | Total Operating Expenses | $190.8 | $167.6 | +$23.2 | +13.8% | | Net (Loss) Income | $(6.2) | $(1.4) | $(4.8) | +353.9% | | Net (Loss) Income Attributable to Common Stockholders | $(9.3) | $(5.4) | $(3.9) | +70.9% | | Basic EPS | $(0.06) | $(0.04) | $(0.02) | +50.0% | Consolidated Statements of Operations (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Total Revenues | $656.4 | $601.1 | +$55.2 | +9.2% | | Total Operating Expenses | $552.9 | $498.5 | +$54.4 | +10.9% | | Net Income | $12.3 | $19.6 | $(7.3) | -37.4% | | Net (Loss) Income Attributable to Common Stockholders | $(2.0) | $8.9 | $(10.9) | -122.5% | | Basic EPS | $(0.01) | $0.06 | $(0.07) | -116.7% | Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Net cash provided by operating activities | $285.5 | $247.9 | +$37.6 | +15.2% | | Net cash used in investing activities | $(560.6) | $(305.2) | $(255.4) | +83.7% | | Net cash provided by financing activities | $345.8 | $403.3 | $(57.5) | -14.3% | | Cash and cash equivalents and restricted cash—End of Period | $220.2 | $404.3 | $(184.0) | -45.5% | ITEM 1. Financial Statements of Hudson Pacific Properties, L.P. This section presents Hudson Pacific Properties, L.P.'s unaudited consolidated financial statements, detailing its financial position, operations, and cash flows, largely mirroring the Inc. entity Consolidated Balance Sheets (September 30, 2021 vs. December 31, 2020) | Metric | Sep 30, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total Assets | $8.804 | $8.350 | | Total Liabilities | $4.812 | $4.245 | | Total Capital | $3.852 | $3.968 | | Investment in real estate, net | $7.161 | $7.112 | | Unsecured and secured debt, net | $3.910 | $3.399 | Consolidated Statements of Operations (Three Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Total Revenues | $227.6 | $196.3 | +$31.3 | +16.0% | | Total Operating Expenses | $190.8 | $167.6 | +$23.2 | +13.8% | | Net (Loss) Income | $(6.2) | $(1.4) | $(4.8) | +353.9% | | Net (Loss) Income Available to Common Unitholders | $(9.4) | $(5.6) | $(3.7) | +66.2% | | Basic EPS | $(0.06) | $(0.04) | $(0.02) | +50.0% | Consolidated Statements of Operations (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Total Revenues | $656.4 | $601.1 | +$55.2 | +9.2% | | Total Operating Expenses | $552.9 | $498.5 | +$54.4 | +10.9% | | Net Income | $12.3 | $19.6 | $(7.3) | -37.4% | | Net (Loss) Income Available to Common Unitholders | $(2.0) | $8.5 | $(10.5) | -123.7% | | Basic EPS | $(0.01) | $0.05 | $(0.06) | -120.0% | Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | Change (in millions) | % Change | | :--------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Net cash provided by operating activities | $285.5 | $247.9 | +$37.6 | +15.2% | | Net cash used in investing activities | $(560.6) | $(305.2) | $(255.4) | +83.7% | | Net cash provided by financing activities | $345.8 | $403.3 | $(57.5) | -14.3% | | Cash and cash equivalents and restricted cash—End of Period | $220.2 | $404.3 | $(184.0) | -45.5% | Notes to Unaudited Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, offering crucial context and breakdowns for the primary financial figures 1. Organization - Hudson Pacific Properties, Inc. operates as a REIT, primarily owning, managing, leasing, acquiring, and developing office and studio properties through its operating partnership[52] Portfolio Summary (as of September 30, 2021) | Segment | Number of Properties | Square Feet | | :---------------------- | :------------------- | :---------- | | Consolidated Office | 52 | 14,076,114 | | Consolidated Studios | 3 | 1,224,403 | | Consolidated Land | 6 | 2,504,406 | | Total Consolidated | 61 | 17,804,923 | | Unconsolidated Office | 1 | 1,495,738 | | Unconsolidated Land | 3 | 691,000 | | Total Unconsolidated | 4 | 2,186,738 | | TOTAL | 65 | 19,991,661 | 2. Summary of Significant Accounting Policies - The consolidated financial statements are prepared in accordance with GAAP applicable to interim financial information[55] - The Company consolidates entities it controls through majority ownership or voting rights, including Variable Interest Entities (VIEs) where it is the primary beneficiary[60] - As of September 30, 2021, 12 joint ventures are consolidated as VIEs, and 5 unconsolidated joint ventures are accounted for using the equity method[61][63][68] - Revenue recognition policies cover rental revenues, tenant recoveries, ancillary revenues, other revenues, sale of real estate, management fee income, and management services reimbursement income[78][79][80][81] - Acquisitions are accounted for using the acquisition method for business combinations or a cost accumulation and allocation model for asset acquisitions[83][84] 3. Business Combinations - The Company acquired 100% of the equity interests in Zio Entertainment Network, LLC (August 16, 2021) and Star Waggons, LLC (August 31, 2021)[87] - These acquisitions expand the Company's service offerings for its studio platform by adding transportation and logistics services[87] Acquisition Date Fair Value of Consideration Transferred (in millions) | Acquired Entity | Cash | Contingent Consideration | Total Consideration | | :-------------- | :--- | :----------------------- | :------------------ | | Zio | $117.2 | $22.8 | $140.0 | | Star Waggons | $92.7 | — | $92.7 | | Total | $209.9 | $22.8 | $232.7 | - Goodwill of $70.5 million for Zio and $25.9 million for Star Waggons was recognized, totaling $96.4 million, attributable to expected synergies and assembled workforce[91] Revenue and Net Income from Acquisitions (Acquisition Date to Sep 30, 2021, in millions) | Entity | Revenue | Net Income | | :----- | :------ | :--------- | | Zio | $4.2 | $1.3 | | Star Waggons | $2.8 | $1.0 | 4. Investment in Real Estate Investment in Real Estate, at cost (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Land | $1,351.9 | $1,351.9 | | Building and improvements | $6,008.1 | $5,840.8 | | Tenant improvements | $751.7 | $728.1 | | Property under development | $320.8 | $281.9 | | Total Investment in Real Estate, at cost | $8,446.5 | $8,215.0 | - No acquisitions or dispositions of real estate related to consolidated entities occurred during the nine months ended September 30, 2021[95][96] - An impairment loss of $2.8 million was recorded for the Del Amo office property due to a reduction in management's intended hold period[99] 5. Non-Real Estate Property, Plant and Equipment, net Non-Real Estate Property, Plant and Equipment, net (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--------------------------------------- | :----------- | :----------- | | Trailers | $37.2 | — | | Trucks and other vehicles | $11.4 | — | | Non-real estate property, plant and equipment, at cost | $71.6 | $17.4 | | NON-REAL ESTATE PROPERTY, PLANT AND EQUIPMENT, NET | $60.3 | $8.4 | - The significant increase in non-real estate property, plant and equipment is primarily due to the acquisition of trailers, trucks, and other equipment from the Zio and Star Waggons business combinations[100] 6. Investment in Unconsolidated Real Estate Entities - The Company owns 35% of the Sunset Waltham Cross Studios development joint venture and 50% of the Sunset Glenoaks Studios development joint venture[101][102] - The Company owns 20% of the Bentall Centre office property joint venture and has guaranteed $102.7 million of its debt[103] Combined and Condensed Balance Sheets for Unconsolidated Joint Ventures (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total Assets | $1,101.1 | $906.8 | | Total Liabilities | $551.8 | $548.6 | | Company's Capital | $148.7 | $80.8 | Combined and Condensed Statements of Operations for Unconsolidated Joint Ventures (Nine Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | | :------------- | :----- | :----- | | Total Revenues | $60.1 | $77.2 | | Net Income (Loss) | $8.3 | $0.3 | 7. Deferred Leasing Costs and Intangible Assets, net and Intangible Liabilities, net Deferred Leasing Costs and Intangible Assets, net (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--------------------------------------- | :----------- | :----------- | | Deferred leasing costs and in-place lease intangibles, net | $204.2 | $225.7 | | Below-market ground leases, net | $56.8 | $59.1 | | Customer relationships, net | $51.7 | — | | Non-competition agreements, net | $5.2 | — | | Trade name | $17.1 | — | | TOTAL DEFERRED LEASING COSTS AND INTANGIBLE ASSETS, NET | $335.6 | $285.8 | Intangible Liabilities, net (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Below-market leases, net | $39.5 | $48.3 | | Above-market ground leases, net | $0.8 | $0.8 | | TOTAL INTANGIBLE LIABILITIES, NET | $40.3 | $49.1 | - The increase in intangible assets is primarily due to newly acquired customer relationships ($52.5 million) and trade names ($17.1 million) from the Zio and Star Waggons acquisitions[89][90][108] - Amortization related to deferred leasing costs and intangibles was $11.5 million for the three months and $34.8 million for the nine months ended September 30, 2021[109] 8. Receivables - Accounts receivable increased to $24.9 million as of September 30, 2021, from $22.1 million at December 31, 2020, with a $0.2 million allowance for doubtful accounts[112] - Straight-line rent receivables increased to $241.3 million as of September 30, 2021, from $226.0 million at December 31, 2020, with a $31.0 thousand allowance for doubtful accounts[113] 9. Prepaid Expenses and Other Assets, net Prepaid Expenses and Other Assets, net (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--------------------------------------- | :----------- | :----------- | | Deposits and pre-development costs for future acquisitions | $37.9 | $28.5 | | Non-real estate investments | $24.7 | $4.1 | | Stock purchase warrant | $1.7 | — | | TOTAL PREPAID EXPENSES AND OTHER ASSETS, NET | $98.7 | $55.5 | - The Company recognized an unrealized gain of $9.9 million on its non-real estate investments for the nine months ended September 30, 2021[115] - An unrealized gain of $1.7 million was recognized on the stock purchase warrant for the nine months ended September 30, 2021[116] 10. Goodwill Goodwill (in millions) | Metric | Amount | | :-------------------------- | :------- | | Balance as of December 31, 2020 | $8.8 | | Acquisitions | $96.4 | | Balance as of September 30, 2021 | $105.1 | - The increase in goodwill is primarily due to the Zio and Star Waggons acquisitions in August 2021[117] - No goodwill impairment indicators were identified during the three and nine months ended September 30, 2021[118] 11. Debt Outstanding Indebtedness (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Unsecured debt | $2,225.0 | $1,925.0 | | Secured debt | $1,719.0 | $1,507.3 | | In-substance defeased debt | $129.1 | $131.7 | | Joint venture partner debt | $66.1 | $66.1 | | TOTAL UNSECURED AND SECURED DEBT, NET | $3,910.4 | $3,399.5 | - The Company had $300.0 million in borrowings on its unsecured revolving credit facility during the nine months ended September 30, 2021[122] - The Hollywood Media Portfolio loan was refinanced to $1.1 billion at LIBOR + 1.17% (from $900.0 million at LIBOR + 2.15%), resulting in a $6.2 million loss on extinguishment of debt[123] - The operating partnership was in compliance with its financial covenants as of September 30, 2021[130] Interest Expense (Nine Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Change | | :------------------------------------------------- | :----- | :----- | :----- | | Gross interest expense | $101.3 | $93.8 | +$7.5 | | Capitalized interest | $(17.0) | $(14.3) | $(2.8) | | Amortization of deferred financing costs and loan discounts/premiums | $7.5 | $4.6 | +$2.9 | | TOTAL INTEREST EXPENSE | $91.8 | $84.2 | +$7.6 | 12. Derivatives - The Company uses interest rate swaps and caps to hedge interest rate risk[134] - As of September 30, 2021, the Company had three interest rate swaps with aggregate notional amounts of $475.0 million (designated as cash flow hedges) and one interest rate cap with a notional amount of $1.1 billion (accounted for under mark-to-market)[134][135] Fair Value of Derivative Instruments (in millions) | Instrument | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Interest rate cap derivative asset | $0.1 | $0.0 | | Interest rate swap derivative liabilities | $(4.7) | $(10.1) | | TOTAL | $(4.6) | $(10.1) | - The Company expects $4.6 million of unrealized loss from cash flow hedges to be reclassified as an increase to interest expense in the next 12 months[139] 13. U.S. Government Securities - The Company held $130.1 million in U.S. Government securities as of September 30, 2021, down from $135.1 million at December 31, 2020[140] - These securities are investments held to maturity and are related to in-substance defeased debt[140] - The Company incurred $5.1 million of gross unrealized gains on these securities as of September 30, 2021[140] 14. Income Taxes - Hudson Pacific Properties, Inc. has elected to be taxed as a REIT, generally not subject to corporate-level income tax on distributed earnings[142] - Certain subsidiaries are treated as taxable REIT subsidiaries (TRSs) for federal income tax purposes[142] - As of September 30, 2021, the Company has not established a liability for uncertain tax positions[144] 15. Future Minimum Rents and Lease Payments Future Minimum Base Rents for Properties (as of Sep 30, 2021, in millions) | Year Ended | Total | | :---------------- | :---------- | | Remaining 2021 | $159.1 | | 2022 | $627.5 | | 2023 | $580.1 | | 2024 | $522.9 | | 2025 | $418.6 | | Thereafter | $1,779.9 | | TOTAL | $4,088.2 | - The present value of the Company's operating lease liabilities (as lessee) was $280.2 million as of September 30, 2021[148] Future Minimum Lease Payments for Operating Leases (as of Sep 30, 2021, in millions) | Year | Lease Payments | | :---------------- | :------------- | | Remaining 2021 | $5.2 | | 2022 | $20.7 | | 2023 | $20.4 | | 2024 | $20.4 | | 2025 | $20.4 | | Thereafter | $521.2 | | Total operating lease payments | $608.4 | 16. Fair Value of Financial Instruments Fair Value Measurements (in millions, as of Sep 30, 2021) | Instrument | Level 1 | Level 2 | Level 3 | Total | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Interest rate cap derivative asset | $— | $0.1 | $— | $0.1 | | Interest rate swap derivative liabilities | $— | $(4.7) | $— | $(4.7) | | Non-real estate investments measured at fair value | $1.9 | $1.6 | $— | $3.5 | | Stock purchase warrant | $— | $1.7 | $— | $1.7 | | Earnout liability | $— | $— | $22.8 | $22.8 | | Non-real estate investments measured at NAV | $— | $— | $— | $21.2 | - The earnout liability of $22.8 million, related to the Zio acquisition, is classified as Level 3 and valued using a probability-weighted discounted cash flow model[153] - The fair values of debt are estimates based on Level 2 inputs[155] 17. Stock-based Compensation - The Company grants various stock compensation awards, including restricted stock, restricted stock units, and operating partnership performance units, under its 2010 Incentive Plan and PSU Plan[157][161] Stock Compensation (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | | Expensed stock compensation | $5.8 | $15.7 | | Capitalized stock compensation | $0.8 | $2.7 | | TOTAL STOCK COMPENSATION | $6.6 | $18.4 | 18. Earnings Per Share - Basic and diluted earnings per share for both Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. are calculated using the two-class method[165][167] Hudson Pacific Properties, Inc. - Basic and Diluted EPS (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :------------------------------------------------- | :----- | :----- | | Net (loss) income available to common stockholders | $(2.0) | $8.9 | | Basic EPS | $(0.01) | $0.06 | | Diluted EPS | $(0.01) | $0.06 | Hudson Pacific Properties, L.P. - Basic and Diluted EPS (Nine Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :------------------------------------------------- | :----- | :----- | | Net (loss) income available to common unitholders | $(2.0) | $8.5 | | Basic EPS | $(0.01) | $0.05 | | Diluted EPS | $(0.01) | $0.05 | 19. Redeemable Non-controlling Interest - Redeemable non-controlling interests include Series A preferred units of the operating partnership (392,598 units) with 6.25% preferential distributions[169][170] - Non-controlling interests in consolidated real estate entities (HPP-MAC WSP, LLC and Hudson One Ferry REIT, L.P.) are classified as temporary equity due to partner put rights[171][172] Redeemable Non-controlling Interests (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :------------------------------------------------- | :----------- | :----------- | | Redeemable preferred units of the operating partnership | $9.8 | $9.8 | | Redeemable non-controlling interest in consolidated real estate entities | $129.3 | $127.9 | 20. Equity Hudson Pacific Properties, Inc. - Accumulated Other Comprehensive Loss (in millions) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :--------------------------------------- | :----------- | :----------- | | Balance | $(8.1) | $(4.4) | | Net change in OCI | N/A | $3.7 | Hudson Pacific Properties, L.P. - Accumulated Other Comprehensive Loss (in millions) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :--------------------------------------- | :----------- | :----------- | | Balance | $(8.2) | $(4.5) | | Net change in OCI | N/A | $3.7 | - The Company's ownership interest in the operating partnership was 99.1% as of September 30, 2021[180] - During the nine months ended September 30, 2021, the Company sold 1,526,163 shares of common stock for $45.7 million under its ATM program[182] - The Company repurchased $14.7 million of its common stock under its share repurchase program during the nine months ended September 30, 2021[183] 21. Segment Reporting - The Company operates in two reportable segments: office properties and studio properties, with performance evaluated based on Net Operating Income (NOI)[187] Segment Profit (in millions) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Office segment profit | $130.0 | $114.6 | $382.2 | $356.9 | | Studio segment profit | $13.7 | $6.5 | $30.7 | $22.0 | | TOTAL SEGMENT PROFIT | $143.7 | $121.2 | $412.9 | $378.9 | 22. Related Party Transactions - The Company has employment agreements with certain executive officers[190] - The Company is party to long-term operating lease agreements with an unconsolidated joint venture for office space and facilities[191] - During the nine months ended September 30, 2021, the Company recognized $0.8 million of related rental expense from these leases[191] 23. Commitments and Contingencies - The Company has aggregate commitments of $28.0 million to non-real estate funds, with $13.3 million remaining to be contributed[192] - Outstanding obligations under construction agreements totaled $179.9 million as of September 30, 2021[196] - The Company had outstanding letters of credit totaling approximately $2.8 million[195] - Management believes the ultimate resolution of all legal claims will not have a material adverse effect on the Company's results of operations, financial position, or cash flows[193][194] 24. Supplemental Cash Flow Information Supplemental Cash Flow Information (Nine Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | | :------------------------------------------------- | :----- | :----- | | Cash paid for interest, net of capitalized interest | $74.4 | $65.9 | | Accounts payable and accrued liabilities for real estate investments | $136.7 | $132.8 | | Lease liabilities recorded in connection with right-of-use assets | $13.9 | $— | | Earnout liability recognized as contingent consideration for business combination | $22.8 | $— | - Restricted cash primarily consists of amounts held by lenders to fund reserves such as capital improvements, taxes, insurance, debt service, and operating expenditures[197] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's discussion and analysis of the Company's financial condition, results of operations, and liquidity for the reported periods Forward-looking Statements This section provides a cautionary statement regarding forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to vary - Statements relating to liquidity, capital resources, portfolio performance, and future financial performance are considered forward-looking statements[200] - Forward-looking statements are subject to risks, uncertainties, and assumptions that may cause actual results to vary materially from those anticipated[200] - The Company expressly disclaims any responsibility to update forward-looking statements[200] Impact of COVID-19 The COVID-19 pandemic continues to impact global and local economies, with ongoing uncertainty regarding its future effects on operations and financial condition - The COVID-19 pandemic is ongoing, and the Company continues to closely monitor its impact on all aspects of its business and geographies[204] - With increased vaccine availability, the Company has begun to see increases in physical occupancy at its properties[204] - Significant uncertainty remains regarding the timing and duration of economic recovery, disruptions in financial markets, and the pandemic's impact on rent collection, occupancy rates, and demand for office space[204][207] - The Board of Directors will continue to evaluate the dividend policy to preserve liquidity[206] Executive Summary As of September 30, 2021, the Company's portfolio comprised approximately 15.6 million square feet of office and 1.2 million square feet of studio properties - As of September 30, 2021, the Company's portfolio included approximately 15.6 million square feet of office properties, 1.2 million square feet of studio properties, and 3.2 million developable square feet of land, totaling 65 properties[208] - The in-service office portfolio was 91.2% leased (including leases not yet commenced)[209] - Same-store studio properties were 87.6% leased for the average percent leased for the 12 months ended September 30, 2021[209] Overview This section provides an overview of the Company's recent business and property activities, including acquisitions, dispositions, and development projects Business Acquisitions - The Company acquired Zio Entertainment Network, LLC and Star Waggons, LLC in August 2021 to expand transportation and logistics services for studio productions[217] Property Acquisitions - On July 29, 2021, the Company purchased the land site for the Sunset Waltham Cross Studios development through an unconsolidated joint venture (35% ownership)[218] - No property acquisitions related to consolidated entities occurred during the nine months ended September 30, 2021[219] Property Dispositions - No property dispositions occurred during the nine months ended September 30, 2021[220] Held for Sale - No properties were classified as held for sale as of September 30, 2021[221] Under Construction and Future Development Projects Under Construction and Future Development Projects (as of Sep 30, 2021) | Project Type | Location | Estimated Square Feet | Estimated Completion/Stabilization | | :--------------------------------- | :------------------- | :-------------------- | :------------------------------- | | Under Construction | One Westside | 584,000 | Q1-2022 (Completion), Q2-2023 (Stabilization) | | Future Development Pipeline | Washington 1000 | 538,164 | TBD | | Future Development Pipeline | Burrard Exchange at Bentall Centre | 450,000 | TBD | | Future Development Pipeline | Sunset Glenoaks Studios | 241,000 | Q3-2023 (Completion), Q2-2024 (Stabilization) | | Total | | 3,779,406 | | Lease Expirations This section details the Company's office portfolio lease expirations as of September 30, 2021, including square footage and annualized base rent Office Lease Expirations (as of Sep 30, 2021) | Year of Lease Expiration | Square Footage of Expiring Leases | Percent of Office Portfolio Square Feet | Annualized Base Rent Per Leased Square Foot | | :----------------------- | :-------------------------------- | :-------------------------------------- | :------------------------------------------ | | Vacant | 1,578,093 | 12.4% | N/A | | 2021 | 300,074 | 2.4% | $38.43 | | 2022 | 1,769,126 | 14.0% | $49.19 | | 2023 | 1,256,924 | 9.9% | $50.62 | | 2024 | 1,752,692 | 13.8% | $52.67 | | 2025 | 1,327,198 | 10.4% | $59.34 | | Thereafter | 817,931 | 6.4% | $54.91 | | Portfolio Total/Weighted Average | 12,702,504 | 100.0% | $53.52 | Historical Tenant Improvements and Leasing Commissions This section details tenant improvement and leasing commission costs for office properties, distinguishing between new leases and renewals Tenant Improvement and Leasing Commission Costs (9 Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :------------------------------------------------- | :----- | :----- | | Renewals: | | | | Number of leases | 92 | 64 | | Square feet | 909,757 | 251,025 | | Tenant improvement costs per square foot | $8.23 | $4.19 | | Leasing commission costs per square foot | $7.56 | $5.41 | | Total costs per square foot | $15.79 | $9.60 | | New leases: | | | | Number of leases | 76 | 59 | | Square feet | 443,221 | 269,919 | | Tenant improvement costs per square foot | $67.50 | $56.26 | | Leasing commission costs per square foot | $15.85 | $10.63 | | Total costs per square foot | $83.35 | $66.89 | | TOTAL (All leases): | | | | Number of leases | 168 | 123 | | Square feet | 1,352,978 | 520,944 | | Total costs per square foot | $36.56 | $37.72 | Financings This section outlines the Company's financing activities, including borrowings on its revolving credit facility and the refinancing of a significant mortgage loan - The Company borrowed $300.0 million on its unsecured revolving credit facility during the nine months ended September 30, 2021[236] - The Hollywood Media Portfolio loan was refinanced to a $1.1 billion mortgage loan with an initial interest rate of LIBOR + 1.17% (from $900.0 million at LIBOR + 2.15%)[237] Historical Results of Operations This section provides a detailed comparison of the Company's historical results of operations, focusing on Net Operating Income (NOI) and other income/expense items Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020 Net Operating Income (NOI) Reconciliation (3 Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Dollar Change | Percent Change | | :--------------------------------- | :----- | :----- | :------------ | :------------- | | Net loss | $(6.2) | $(1.4) | $(4.8) | 353.9% | | NOI | $143.7 | $121.2 | $22.5 | 18.6% | | Same-store NOI | $123.8 | $115.0 | $8.8 | 7.7% | | Non-same-store NOI | $19.9 | $6.2 | $13.7 | 222.3% | Same-store Office Statistics (3 Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :--------------------------------- | :----- | :----- | | Ending % leased | 91.0% | 94.2% | | Average annual rental rate per square foot | $54.77 | $52.53 | Same-store Studio Statistics (3 Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :--------------------------------- | :----- | :----- | | Average % occupied for the period | 87.6% | 91.1% | - Non-same-store NOI increased by $13.7 million, primarily due to the acquisition of the 1918 Eighth property and the Zio and Star Waggons acquisitions[247] - Same-store NOI increased by $8.8 million, driven by new office leases (Clocktower Square, Rincon Center, Maxwell) and increased studio services[247] Interest Expense (3 Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Dollar Change | Percent Change | | :------------------------------------------------- | :----- | :----- | :------------ | :------------- | | Gross interest expense | $33.9 | $32.2 | $1.7 | 5.2% | | Capitalized interest | $(5.8) | $(4.5) | $(1.2) | 27.5% | | Amortization of deferred financing costs and loan discounts/premiums | $2.7 | $2.1 | $0.6 | 26.4% | | TOTAL | $30.8 | $29.8 | $1.0 | 3.3% | - Transaction-related expenses increased by 3,380.7% to $6.3 million, attributable to the Zio and Star Waggons acquisitions[254] - Depreciation and amortization expense increased by 18.0% to $88.6 million, mainly due to the 1918 Eighth acquisition, accelerated depreciation, and new assets from Zio and Star Waggons[252] Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 Net Operating Income (NOI) Reconciliation (9 Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Dollar Change | Percent Change | | :--------------------------------- | :----- | :----- | :------------ | :------------- | | Net income | $12.3 | $19.6 | $(7.3) | (37.4)% | | NOI | $412.9 | $378.9 | $33.9 | 8.9% | | Same-store NOI | $355.0 | $352.9 | $2.0 | 0.6% | | Non-same-store NOI | $57.9 | $26.0 | $31.9 | 122.6% | Same-store Office Statistics (9 Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :--------------------------------- | :----- | :----- | | Ending % leased | 91.1% | 94.1% | | Average annual rental rate per square foot | $54.59 | $52.39 | Same-store Studio Statistics (9 Months Ended Sep 30, 2021 vs. 2020) | Metric | 2021 | 2020 | | :--------------------------------- | :----- | :----- | | Average % occupied for the period | 87.6% | 91.1% | - Non-same-store NOI increased by $31.9 million, primarily from the 1918 Eighth acquisition and the Zio and Star Waggons acquisitions[266] - Same-store NOI increased by $2.0 million, driven by a $4.7 million increase in studio NOI (due to increased lighting and grip services) partially offset by a $2.7 million decrease in office NOI[266] Interest Expense (9 Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Dollar Change | Percent Change | | :------------------------------------------------- | :----- | :----- | :------------ | :------------- | | Gross interest expense | $101.3 | $93.8 | $7.5 | 8.0% | | Capitalized interest | $(17.0) | $(14.3) | $(2.8) | 19.5% | | Amortization of deferred financing costs and loan discounts/premiums | $7.5 | $4.6 | $2.9 | 63.1% | | TOTAL | $91.8 | $84.2 | +$7.6 | 9.0% | - Transaction-related expenses increased by 1,573.6% to $7.4 million, primarily due to the Zio and Star Waggons acquisitions[273] - Depreciation and amortization expense increased by 14.9% to $255.5 million, mainly due to the 1918 Eighth acquisition, accelerated depreciation, and new assets from Zio and Star Waggons[272] Liquidity and Capital Resources This section details the Company's liquidity sources and uses, including cash, credit facilities, and debt, along with its capital structure Liquidity Sources - Cash and cash equivalents were approximately $110.5 million at September 30, 2021[281] - The Company sold $65.8 million of common stock through its ATM program (total capacity $125.0 million) through September 30, 2021[283] - As of September 30, 2021, $300.0 million had been drawn on the $600.0 million unsecured revolving credit facility[284] - As of September 30, 2021, $220.2 million had been drawn on the $414.6 million construction loan secured by One Westside and 10850 Pico properties[284] Ratio of Debt to Total Market Capitalization (as of Sep 30, 2021, in millions) | Metric | Amount | | :--------------------------------------- | :----------- | | Total consolidated debt | $3,953.8 | | Common equity capitalization | $4,091.4 | | Total consolidated debt/total consolidated market capitalization | 49.1% | Outstanding Indebtedness Outstanding Indebtedness (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Unsecured debt | $2,225.0 | $1,925.0 | | Secured debt | $1,719.0 | $1,507.3 | | In-substance defeased debt | $129.1 | $131.7 | | Joint venture partner debt | $66.1 | $66.1 | - The operating partnership was in compliance with its financial covenants as of September 30, 2021[288] Liquidity Uses - The Company is required to pay up to $35.0 million in additional contingent consideration for the Zio acquisition ($15.0 million in 2022 and $20.0 million in 2024)[289] - Outstanding obligations under construction agreements totaled $179.9 million as of September 30, 2021[196] Cash Flows Cash Flow Activity (9 Months Ended Sep 30, 2021 vs. 2020, in millions) | Metric | 2021 | 2020 | Dollar Change | Percent Change | | :--------------------------------- | :----- | :----- | :------------ | :------------- | | Net cash provided by operating activities | $285.5 | $247.9 | $37.6 | 15.2% | | Net cash used in investing activities | $(560.6) | $(305.2) | $(255.4) | 83.7% | | Net cash provided by financing activities | $345.8 | $403.3 | $(57.5) | (14.3)% | - Net cash used in investing activities increased by $255.4 million, primarily due to the Zio and Star Waggons acquisitions ($209.9 million cash consideration) and a $72.1 million increase in contributions to unconsolidated real estate entities[293][294] - Net cash provided by financing activities decreased by $57.5 million, mainly due to a $347.7 million decrease in contributions from non-controlling members and an $87.3 million decrease in proceeds from unsecured and secured debt[295] Off-Balance Sheet Arrangements The Company's off-balance sheet arrangements primarily relate to its investment in an unconsolidated joint venture with significant mortgage indebtedness - The unconsolidated Bentall Centre joint venture has mortgage indebtedness of approximately $513.6 million[296] - The Company's proportionate share of this debt is approximately $102.7 million[296] Critical Accounting Policies This section highlights critical accounting policies requiring significant management estimates and judgments, which could materially affect reported financial results - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses[297] - Key estimates include acquiring, developing, and assessing carrying values of real estate properties, fair value measurement of contingent consideration, and incremental borrowing rates for leases[297] - Actual results could materially differ from these estimates[297] Non-GAAP Supplemental Financial Measure: Funds From Operations This section presents Funds From Operations (FFO) as a key supplemental non-GAAP measure for REIT operating performance, calculated per NAREIT guidelines - FFO is calculated in accordance with the White Paper issued by NAREIT, excluding gains/losses from sales of depreciable real estate and impairment write-downs, plus real estate-related depreciation and amortization[299] - FFO is considered a useful supplemental measure of operating performance for investors and analysts to compare operating results between periods and to other REITs[300] FFO to Common Stockholders and Unitholders (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net (loss) income | $(6.2) | $(1.4) | $12.3 | $19.6 | | FFO TO COMMON STOCKHOLDERS AND UNITHOLDERS | $69.1 | $63.2 | $214.7 | $221.6 | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, including foreign currency exchange rate risk and the impact of LIBOR discontinuance - The Company has exposure to foreign currency exchange rate risk related to its unconsolidated real estate entities operating in Canada and the United Kingdom[306] - Gains or losses resulting from the translation of foreign currencies are classified in accumulated other comprehensive loss and are excluded from net income[306] - There have been no material changes for the nine months ended September 30, 2021, to the market risk information provided in the 2020 Annual Report on Form 10-K[305] ITEM 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes in internal control over financial reporting Disclosure Controls and Procedures (Hudson Pacific Properties, Inc.) - The Chief Executive Officer and Chief Financial Officer concluded that Hudson Pacific Properties, Inc.'s disclosure controls and procedures were effective as of September 30, 2021[309] Disclosure Controls and Procedures (Hudson Pacific Properties, L.P.) - The Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. concluded that Hudson Pacific Properties, L.P.'s disclosure controls and procedures were effective as of September 30, 2021[312] Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, Inc.) - No changes occurred during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, Hudson Pacific Properties, Inc.'s internal control over financial reporting[313] Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, L.P.) - No changes occurred during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, Hudson Pacific Properties, L.P.'s internal control over financial reporting[314] PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various lawsuits and legal proceedings, none of which are expected to have a material adverse effect on its financial position or operations - The Company is a party to various lawsuits, claims, and other legal proceedings arising out of the ordinary course of business[317] - Management believes 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[317] ITEM 1A. RISK FACTORS This section highlights the risk related to the discontinuing of LIBOR, which could impact the Company's interest payments and financial condition - The discontinuing of USD LIBOR after June 30, 2023, poses a risk to the Company[318] - Uncertainty about future changes to LIBOR or its unavailability could impact interest payments, the value of LIBOR-tied instruments, and interest rates on current or future indebtedness[318][319] - Any adverse effects could impact the Company's financial condition, results of operations, cash flows, or the market price of its common stock[320] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered sales of equity securities, including partnership units and common stock issued for restricted stock awards - During the third quarter of 2021, the operating partnership issued partnership units in private placements[322] - The Company issued an aggregate of 1,168 shares of common stock in connection with the vesting of restricted stock awards during the third quarter of 2021[322] ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[325] ITEM 4. Mine Safety Disclosures No mine safety disclosures were reported for the period - No mine safety disclosures were reported[326] ITEM 5. Other Information No other information was reported for the period - No other information was reported[327] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL financial information - The exhibits include Articles of Amendment and Restatement, Bylaws, Agreement of Limited Partnership, and Certificate of Limited Partnership[329] - Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed for both Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.[329] - Financial information formatted in iXBRL (Inline eXtensible Business Reporting Language) is included as Exhibit 101[329] SIGNATURES The report is signed by the Chief Executive Officer and Chief Financial Officer for both Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. - The report is signed by Victor J. Coleman, Chief Executive Officer, and Harout K. Diramerian, Chief Financial Officer, for Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.[335][336][340][341] - The signing date for both entities is October 29, 2021[335][336][340][341]