Hudson Pacific Properties Reports First Quarter 2019 Financial Results

Business Wire 2-May-2019 9:00 AM

Net Loss of $0.26 per Diluted ShareFFO of $0.49 per Diluted Share (Excluding Specified Items)

Signed Over 1.0 Million Square Feet of LeasesAchieved GAAP and cash rent growth of 32.9% and 25.4%, respectivelyLeased 100% of office space at One Westside and Maxwell redevelopments

Formed JV to Enter Vancouver, Canada Office MarketUnder contract to purchase and reposition 1.45 million-square-foot complex

Refinanced Existing Debt to Extend Maturities, Reduce RatesIssued $350 million of 10-year notes at 4.65%Recast Sunset Gower/Sunset Bronson loan

Increased 2019 FFO Guidance to $1.96 to $2.04 per Diluted Share (Excluding Specified Items)Increased office and studio same-store cash NOI growth assumption midpoints to 3.5% and 5.0%, respectively

Hudson Pacific Properties, Inc. (the "Company" or "Hudson Pacific") (NYSE:HPP) today announced financial results for the first quarter 2019.

Management Comments & Industry Outlook

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

"Hudson Pacific Properties' leasing momentum continued through the first quarter of 2019, as tech and media companies continue to quickly absorb office and studio space within our portfolio to accommodate their growth. We signed another one million square feet of leases across our markets. We completed a landmark, nearly 600,000-square-foot lease with Google for all of our One Westside redevelopment in West Los Angeles, and WeWork leased the entire office portion of our Maxwell redevelopment in the Los Angeles Arts District. As a result, our one-million-square-foot-plus pipeline of value creation projects is now 90% pre-leased. We have also renewed or backfilled, or are in leases, LOIs, or proposals, on 65% of our remaining 2019 expirations, which are 17% below market.

"This quarter, we also announced our anticipated entrée into the Vancouver office market via a joint venture with Blackstone Property Partners. Bentall Centre, in terms of its ownership structure, scale, scope, and value creation potential, exemplifies our skill and creative ability to access exceptional new avenues for growth."

Consolidated Financial & Operating Results

For first quarter 2019 compared to first quarter 2018:

• Net loss attributable to common stockholders of $39.4 million, or $0.26 per diluted share, compared to net income attributable to common stockholders of $48.6 million, or $0.31 per diluted share;
  • Net loss includes $52.2 million of impairment loss associated with the pending second quarter sale of the Campus Center office campus in Milpitas, anticipated to be largely offset by a gain on sale from the anticipated second quarter sale of the adjacent Campus Center land and development rights;
• FFO, excluding specified items, of $76.7 million, or $0.49 per diluted share, compared to $70.0 million, or $0.45 per diluted share;
  • Specified items in 2019 consisting of transaction-related expenses of $0.1 million, or $0.00 per diluted share, and one-time debt extinguishment costs of $0.1 million, or $0.00 per diluted share, compared to specified items in 2018 consisting of transaction-related expenses of $0.1 million, or $0.00 per diluted share, and one-time debt extinguishment costs of $0.4 million, or $0.00 per diluted share;
• FFO, including specified items, of $76.4 million, or $0.49 per diluted share, compared to $69.5 million, or $0.44 per diluted share;
• Total revenue increased 13.4% to $197.4 million;
• Total operating expenses increased 14.0% to $158.5 million; and
• Interest expense increased 18.8% to $24.4 million.

Office Segment Results

Financial & operating

For first quarter 2019 compared to first quarter 2018:

• Total revenue increased 12.3% to $175.9 million. Primary factors include:
  • Acquisitions of One Westside/10850 Pico (August 31, 2018) and the Ferry Building (October 9, 2018) and higher occupancy and rental rates across the portfolio, offset by the sales of Embarcadero Place (January 25, 2018), 2180 Sand Hill (March 1, 2018), 9300 Wilshire (April 10, 2018) and Peninsula Office Park (July 27, 2018);
• Operating expenses increased 14.2% to $60.8 million, primarily due to the aforementioned asset acquisitions, partially offset by the aforementioned sales; and
• Net operating income and cash net operating income for the 31 same-store office properties increased 7.2% and 2.3%, respectively.

Leasing

• Stabilized and in-service office portfolio was 95.2% and 92.9% leased, respectively; and
• Executed 45 new and renewal leases totaling 1,044,136 square feet with GAAP and cash rent growth of 32.9% and 25.4%, respectively.

Studio Segment Results

Financial & operating

For first quarter 2019 compared to first quarter 2018:

• Total revenue increased 22.4% to $21.5 million. Primary factors include:
  • Higher occupancy and production activity at Sunset Las Palmas Studios, higher rental rates across all three studios, as well as the acquisitions of 6605 Eleanor Avenue and 1034 Seward Street (June 7, 2018) and 6660 Santa Monica Boulevard (October 23, 2018);
• Total operating expenses increased 15.0% to $11.1 million, primarily due to increased staffing for security, janitorial, and other services across all studio properties; and
• Net operating income and cash net operating income for the same-store studio properties increased by 25.3% and 23.8%, respectively.

Leasing

• Trailing 12-month occupancy for the same-store studio properties was 92.4%.

Leasing Activity

Executed significant leases throughout the portfolio

• Google signed a 14-year lease commencing in 2022 for all 584,000 square feet of the Company's One Westside redevelopment, formerly part of Westside Pavilion shopping mall in West Los Angeles.
• WeWork leased all 94,826 square feet of office space through July 2031 at the Company's Maxwell redevelopment in the Los Angeles Arts District, with 55,864 square feet commencing February 2019 and 38,962 square feet commencing May 2019.
• WeWork leased 66,056 square feet at 1455 Market in San Francisco through October 2031.
• Poshmark leased an additional 25,549 square feet at Towers at Shore Center in Redwood City through May 2024, coterminous with its existing 50,327-square-foot lease.
• Applied Underwriters extended its 23,244-square-foot lease through February 2025 at Metro Center in Foster City.
• REL Falls leased 23,180 square feet through October 2029 at Metro Center in Foster City.

Acquisitions

Formed joint venture to purchase and renovate Bentall Centre in Vancouver, Canada

On March 26, 2019, the Company formed a joint venture with an affiliate of Blackstone Property Partners to acquire and renovate the 1.45 million-square-foot Bentall Centre office and retail complex in Downtown Vancouver. Hudson Pacific will own 20% of the joint venture and serve as the Operating Partner responsible for day-to-day operations and development. Blackstone will own 80% and serve as the Managing Partner. Bentall Centre contains four Class A office towers totaling 1.3 million square feet, and 140,000 square feet of amenity-oriented, at-grade and concourse-level retail space, and affords the ability to build by-right a fifth office tower. The transaction is expected to close in the second quarter of this year.

Dispositions

Placed Milpitas office campus and land under contract to sell

The Company entered into a contract to sell Campus Center's 471,580-square-foot office campus (deposit non-refundable), and a separate contract to sell the adjacent land and 946,350 square feet of development rights (deposit refundable), for a combined amount of approximately $150.0 million before credits, prorations and closing costs, with both transactions expected to close late in the second quarter of this year.

Financings

Issued $350.0 million of public debt

On February 27, 2019, the Company's operating partnership, Hudson Pacific Properties, L.P. (the "Operating Partnership"), completed a public offering of $350.0 million aggregate principal amount of 4.65% senior notes due April 2029. The notes are senior unsecured obligations of the Operating Partnership and fully and unconditionally guaranteed by the Company. The Operating Partnership used a portion of net proceeds to repay all $75.0 million of its five-year term loan due November 2020, and to repay $255.0 million of outstanding borrowings under its revolving credit facility, with the remainder used for other general corporate purposes.

Recast Sunset Gower and Sunset Bronson Studios loan

On March 1, 2019, the Company recast its loan secured by Sunset Gower and Sunset Bronson Studios scheduled to mature March 4, 2019 into a five-year, fully revolving $235.0 million loan, now scheduled to mature March 1, 2024. In addition to converting the loan into a fully revolving facility, other significant changes include a 90-basis-point interest rate reduction to LIBOR plus 1.35%, and removing Sunset Gower as collateral, leaving Sunset Bronson, and by extension ICON and CUE, as collateral.

Balance Sheet

As of the end of the first quarter 2019:

• $2.7 billion of total unsecured and secured debt and preferred units equivalent to a leverage ratio of 33.7%.
• Approximately $667.4 million of total liquidity comprised of:
  • $52.4 million of unrestricted cash and cash equivalents;
  • $380.0 million of undrawn total capacity under the unsecured revolving credit facility; and
  • $230.0 million of excess capacity on the Sunset Bronson Studios/ICON/CUE revolving facility.

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 March 28, 2019 to stockholders of record on March 18, 2019.

2019 Outlook

The Company is increasing its full-year 2019 FFO guidance from its previously announced range of $1.95 to $2.03 per diluted share, excluding specified items, to a revised range of $1.96 to $2.04 per diluted share, excluding specified items.

The full-year 2019 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 and in earlier announcements. The estimates also assume the successful disposition before the end of this second quarter of Campus Center, including the adjacent land held for development, for a combined amount of approximately $150.0 million before credits, prorations and closing costs, with proceeds expected to be applied toward repayment of the Company's revolving credit facility or other unsecured indebtedness. 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 and share data in thousands):

1. Same-store is defined as the 31 office properties or three studio properties, as applicable, owned and included in the Company's stabilized portfolio as of January 1, 2018, and anticipated to still be owned and included in the stabilized portfolio through December 31, 2019.
2. Please see non-GAAP information below for definition of cash NOI.
3. Includes non-cash straight-line rent associated with the studio and office properties.
4. Includes non-cash compensation expense, which the Company estimates at $20,500 in 2019.
5. Includes approximately $5.4 million related to the adoption of Accounting Standards Codification ("ASC") 842, Leases, on January 1, 2019, under which lessors will only capitalize incremental direct leasing costs. As a result, the Company will no longer capitalize certain legal costs and internal leasing compensation and instead will expense these costs as incurred.
6. Includes amortization of deferred financing costs and loan discounts, which the Company estimates at $6,250 in 2019.
7. Diluted shares represent ownership in the Company through shares of common stock, OP Units and other convertible or exchangeable instruments. The weighted average fully diluted common stock/units outstanding for 2019 includes an estimate for the dilution impact of stock grants to the Company's executives under its 2017, 2018 and 2019 outperformance programs, as well as performance-based awards under the Company's special one-time retention award grants. This estimate is based on the projected award potential of such programs as of the end of such periods, as calculated in accordance with the ASC 260, Earnings Per Share.

The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis, including the information under "2019 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 first quarter 2019 results may be found on the Investors 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 first quarter 2019 financial results at 11:00 a.m. PT / 2:00 p.m. ET on May 2, 2019. 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 Investors 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 May 2, 2019 at 2:00 p.m. PT / 5:00 p.m. ET, through May 16, 2019 at 8:59 p.m. PT / 11:59 p.m. ET, by dialing (844) 512-2921 and entering the passcode 13689535. International callers should dial (412) 317-6671 and enter the same passcode.

About Hudson Pacific Properties

Hudson Pacific Properties is a real estate investment trust that owns and operates more than 17 million square feet of 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 filed with the Securities and Exchange Commission, or SEC, and other risks described in documents subsequently filed by the Company from time to time with the SEC.

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