Hudson Pacific Properties Reports Third Quarter 2018 Financial Results

Business Wire 1-Nov-2018 9:00 AM

Net Income of $0.11 per Diluted Share

FFO of $0.47 per Diluted Share (Excluding Specified Items)

Signed Quarterly Record of 1.2 Million Square Feet of Office LeasesAchieved GAAP and cash rent growth of 28% and 12%, respectivelyLeased 100% of EPIC and Fourth & Traction (re)developments

Sold Remainder of San Mateo Office Park for $210 MillionSale price represents 5% GAAP premium and 14% purchase price premium

Narrowed 2018 FFO Guidance to $1.84 to $1.88 per Diluted Share (Excluding Specified Items)Increased same-store office cash NOI growth assumption to 4.5-5.5%

Hudson Pacific Properties, Inc. (the "Company" or "Hudson Pacific") (NYSE:HPP) today announced financial results for the third quarter 2018.

Management Comments & Industry Outlook

Victor Coleman, Hudson Pacific Properties' Chairman and CEO, said:

"The third quarter 2018 was our most productive quarter ever in terms of office leasing activity, capping our most successful four consecutive quarters of overall leasing. As our results demonstrate, fundamentals in West Coast innovation hubs remain among the best in the nation. We're seeing further rent growth and vacancy compression, and robust absorption driven by expanding tech and media companies. We're successfully addressing availabilities throughout our portfolio, and in the third quarter we signed nearly half-a-million square feet of leases at our priority, large block lease-up assets, including two full-building deals. In addition, we have renewed, backfilled, or are in leases, LOIs or proposals on 64% of our remaining fourth quarter 2018 and 55% of our remaining 2019 expirations.

"With third quarter's sale of Peninsula Office Park's remaining buildings, we have sold nearly half-a-billion of non-core assets this year into very strong investment markets. We are re-investing that capital into higher-potential value creation projects and properties, which will accelerate FFO growth in 2019 and beyond. This includes organic growth like EPIC, Harlow, and One Westside. It also includes disciplined external growth like the Ferry Building, which we purchased in the fourth quarter in a joint venture with Allianz Real Estate, where we expect significant upside through strategic re-leasing at market rents as well as our ability to drive more visitors and higher tenant demand."

Consolidated Financial & Operating Results

For third quarter 2018 compared to third quarter 2017:

• Net income attributable to common stockholders of $17.4 million, or $0.11 per diluted share, compared to $11.1 million, or $0.07 per diluted share;
• FFO, excluding specified items, of $73.3 million, or $0.47 per diluted share, compared to $78.9 million, or $0.50 per diluted share;
  • Specified items consisting of transaction-related expenses of $0.2 million, or $0.00 per diluted share, compared to specified items consisting of transaction-related expenses of $0.6 million, or $0.00 per diluted share;
• FFO, including specified items, of $73.1 million, or $0.46 per diluted share, compared to $78.3 million, or $0.50 per diluted share;
• Total revenue decreased 4.9% to $180.7 million;
• Total operating expenses decreased 6.2% to $144.3 million;
• Income from operations increased 0.6% to $36.4 million; and
• Interest expense decreased 10.4% to $20.1 million.

Office Segment Results

Financial & operating

For third quarter 2018 compared to third quarter 2017:

• Total revenue decreased 6.2% to $161.4 million, primarily due to a $9.2 million decrease in rental revenue to $130.0 million, a $0.4 million decrease in tenant recoveries to $24.6 million, and a $1.2 million decrease in parking and other revenue to $6.9 million. Factors include:
  • The sales of Pinnacle I and Pinnacle II (November 16, 2017), Embarcadero Place (January 25, 2018), 2180 Sand Hill (March 1, 2018), 9300 Wilshire (April 10, 2018) and Peninsula Office Park (July 27, 2018) as well as the anticipated Cisco and Robert Bosch lease terminations at Campus Center and Foothill Research Center, respectively;
• Operating expenses decreased 3.1% to $57.3 million, also due to the aforementioned asset sales and lease terminations; and
• Net operating income and cash net operating income for the 31 same-store office properties increased 3.2% and 2.5%, respectively. The cash basis comparison is muted by a $3.2 million one-time tenant improvement cost reimbursement received in 2017, which the Company excluded for purposes of both 2017 and 2018 same-store office cash net operating income growth guidance estimates. Adjusted for this one-time reimbursement, third quarter and year-to-date same-store office cash net operating income increased 7.6% and 4.3%, respectively.

Leasing

• Stabilized and in-service office portfolio was 94.6% and 91.4% leased, respectively; and
• Executed 55 new and renewal leases totaling 1,199,578 square feet with GAAP and cash rent growth of 28.4% and 12.0% respectively. Excluding the impact of the early Netflix renewal at ICON and CUE, GAAP and cash rents grew by 31.2% and 27.5%, respectively.

Studio Segment Results

Financial & operating

For third quarter 2018 compared to third quarter 2017:

• Total revenue increased 7.9% to $19.3 million, largely due to a $0.7 million increase in rental revenue to $11.7 million, a $0.2 million increase in tenant recoveries to $0.3 million, and a $0.4 million increase in other property-related revenue to $7.0 million. Factors include:
  • The acquisition of 6605 Eleanor Avenue and 1034 Seward Street (June 7, 2018), higher rental revenue as Sunset Gower Studios relating to the Company's studio leases with Netflix, and increased production at Sunset Las Palmas and Sunset Gower Studios;
• Total operating expenses decreased 0.7% to $10.5 million, primarily due to lower lighting expense at Sunset Bronson Studios; and
• Net operating income and cash net operating income for the three same-store studio properties increased by 12.6% and decreased by 3.0%, respectively. The cash basis comparison is muted by a $0.7 million one-time tenant improvement cost reimbursement received in 2017. Adjusted for this one-time reimbursement, third quarter and year-to-date same-store studio cash net operating income increased 6.4% and 11.9%, respectively.

Leasing

• Trailing 12-month occupancy for the same-store studio portfolio was 88.9%.

Leasing Activity

Record quarterly leasing activity across portfolio

• Netflix leased all 302,102 square feet of the EPIC office development in Hollywood through mid-2031. Netflix is expected to occupy the building in phases beginning in early 2020.
• Netflix also signed a coterminous lease extension for all 325,757 square feet of office space at ICON and all 91,953 square feet of office space at CUE, both located at Sunset Bronson Studios across the street from EPIC.
• Honey Science Corporation leased all 131,701 square feet at the Fourth & Traction office redevelopment in the Los Angeles Arts District through May 2030. Honey will occupy the building in phases beginning in mid-2019 upon landlord's completion of tenant improvements.
• Nutanix leased another 72,637 square feet at Concourse in North San Jose through May 2024, coterminous with its existing 58,714-square-foot lease in the building, and its 233,979 square feet of leases at 1740 Technology and Metro Plaza also in North San Jose.
• Poshmark leased 50,327 square feet through May 2024 at Towers at Shore Center in Redwood City.

Acquisitions

One Westside/10850 Pico (formerly Westside Pavilion) contributed to joint venture

On August 31, 2018, Macerich contributed Westside Pavilion for $190.0 million, before prorations, credits and closing costs, into the 75/25% Hudson Pacific/Macerich joint venture, of which the Company serves as managing member. The joint venture defeased an existing $139.0 million loan in connection with the contribution by purchasing U.S. Government securities. Planning and entitlements are underway to convert the mall into an approximately 500,000-square-foot creative office campus called One Westside, while maintaining 95,987 square feet of adjacent entertainment and retail space at 10850 Pico. Estimated total project costs, inclusive of the asset value at contribution, are in the range of $425.0-475.0 million, with construction completion expected in mid-2021.

Dispositions

Sold remainder of Peninsula Office Park

On July 27, 2018, the Company sold Peninsula Office Park's remaining six buildings totaling 447,739 square feet in San Mateo for $210.0 million before credits, prorations and closing costs. The sale price represents a 5% premium to the Company's GAAP basis and a 14% premium to the Company's allocated purchase price. In January of this year, the Company sold a fully vacant, 63,050-square-foot building that was part of the Peninsula Office Park campus for $22.5 million before prorations, credits and closing costs. Net proceeds from this latest sale were used to repay $140 million outstanding under the Company's unsecured revolving credit facility, and then for general corporate purposes.

Balance Sheet

As of the end of the third quarter 2018:

• $2.4 billion of total debt equivalent to a leverage ratio of 31.9% (includes preferred units).
• Approximately $794.5 million of total liquidity comprised of:
  • $52.5 million of unrestricted cash and cash equivalents;
  • $490.0 million of undrawn total capacity under the unsecured revolving credit facility; and
  • $252.0 million of excess capacity on the Sunset Bronson/Gower construction loan.

Dividend

Paid common dividend

• The Company's Board of Directors declared a dividend on its common stock of $0.25 per share, equivalent to an annual rate of $1.00 per share.
• The dividends were paid on September 28, 2018 to stockholders of record on September 18, 2018.

Activities Subsequent to Third Quarter 2018

Further expanded top 15 tenant

• Nutanix signed an additional lease for 80,489 square feet at Metro Plaza in North San Jose through May 2024.

Formed joint venture and purchased San Francisco Ferry Building

On October 9, 2018, a joint venture owned 55% by Hudson Pacific and 45% by Allianz Real Estate purchased a leasehold in the land and improvements of the iconic Ferry Building in San Francisco for $291.0 million before credits, prorations and closing costs. The Company serves as managing member of the joint venture and earns a management fee. The fully leased Ferry Building consists of 192,532 square feet of office and 75,486 square feet of retail. Office tenants include top-tier companies, such as SS&C Technologies, Meltwater, Meritage Group and Niantic. Retail contains a world-renowned public food market, with popular restaurants and retailers such as The Slanted Door and Blue Bottle Coffee. The joint venture intends to further enhance and drive revenue at the property by re-leasing space at market rents, introducing new amenities, activities and events, and capturing additional foot traffic associated with the Ferry Terminal expansion. This was an all-cash transaction and 49 years remain on the ground lease.

Acquired parcel strategic to Sunset Las Palmas Studios expansion

On October 23, 2018, the Company purchased an 11,200-square-foot office building at 6660 Santa Monica Boulevard in Hollywood adjacent to, and now part of, Sunset Las Palmas Studios for $10.0 million before credits, prorations and closings costs.

2018 Outlook

The Company is narrowing its full-year 2018 FFO guidance to a range of $1.84 to $1.88 per diluted share, excluding specified items, maintaining the $1.86 midpoint last provided on October 10, 2018 in connection with the Ferry Building acquisition announcement.

Specified items for full-year 2018 FFO guidance consist of $0.3 million of transaction-related expenses, a $0.4 million write-off of original issuance costs (i.e., deferred financing costs) associated with the Company's recast of its unsecured revolving credit facility and 5- and 7-year term loan facilities, and $0.9 million of unrealized gains from changes in fair value on non-real estate investments.

The full-year 2018 FFO estimates reflect management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in this press release. It otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital markets activity or similar matters. There can be no assurance that the actual results will not differ materially from this estimate.

Below are some of the assumptions the Company used in providing this guidance (dollars in thousands):

The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis, including the information under "2018 Outlook" above, where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing and/or amount of various items that would impact net income attributable to common stockholders per diluted share, which is the most directly comparable forward-looking GAAP financial measure. This includes, for example, acquisition costs and other non-core items that have not yet occurred, are out of the Company's control and/or cannot be reasonably predicted. For the same reasons, the Company is unable to address the probable significance of the unavailable information. Forward-looking non-GAAP financial measures provided without the most directly comparable GAAP financial measures may vary materially from the corresponding GAAP financial measures.

Supplemental Information

Supplemental financial information regarding Hudson Pacific's third quarter 2018 results may be found in the Investor Relations section of the Company's website at HudsonPacificProperties.com. This supplemental information provides additional detail on items such as property occupancy, financial performance by property, and debt maturity schedules.

Conference Call

The Company will hold a conference call to discuss third quarter 2018 financial results at 11:00 a.m. PT / 2:00 p.m. ET on November 1, 2018. Please dial (877) 407-0784 to access the call. International callers should dial (201) 689-8560. A live, listen-only webcast can be accessed via the Investor Relations section of the Company's website at HudsonPacificProperties.com, where a replay of the call will be available. A replay will also be available beginning November 1, 2018 at 2:00 p.m. PT / 5:00 p.m. ET, through November 8, 2018 at 8:59 p.m. PT / 11:59 p.m. ET, by dialing (844) 512-2921 and entering the passcode 13683762. International callers should dial (412) 317-6671 and enter the same passcode.

About Hudson Pacific Properties

Hudson Pacific Properties is a visionary real estate investment trust that owns and operates more than 17 million square feet of marquee office and studio properties. Focused on premier West Coast epicenters of innovation, media and technology, its anchor tenants include Fortune 500 and leading growth companies such as Netflix, Google, Square, Uber, NFL Enterprises and more. Hudson Pacific is publicly traded on the NYSE under the symbol HPP, and listed as a component of the Russell 2000® and the Russell 3000® indices. For more information visit HudsonPacificProperties.com.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events, or trends and that do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond the Company's control that may cause actual results to differ significantly from those expressed in any forward-looking statement. All forward-looking statements reflect the Company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company's future results to differ materially from any forward-looking statements, see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission, or SEC, on February 16, 2018, and other risks described in documents subsequently filed by the Company from time to time with the SEC.

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