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HPP > SEC Filings for HPP > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for HUDSON PACIFIC PROPERTIES, INC.

Form 10-Q for HUDSON PACIFIC PROPERTIES, INC.


12-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements
We make statements in this quarterly report that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" 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. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
adverse economic or real estate developments in our markets;

general economic conditions;

defaults on, early terminations of or non-renewal of leases by tenants;

fluctuations in interest rates and increased operating costs;

our failure to obtain necessary outside financing;

our failure to generate sufficient cash flows to service our outstanding indebtedness;

lack or insufficient amounts of insurance;

decreased rental rates or increased vacancy rates;

difficulties in identifying properties to acquire and completing acquisitions;

our failure to successfully operate acquired properties and operations;

our failure to maintain our status as a REIT;

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

financial market fluctuations;

changes in real estate and zoning laws and increases in real property tax rates; and

other factors affecting the real estate industry generally.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the Securities and Exchange Commission.

Historical Results of Operations

This Quarterly Report on Form 10-Q for Hudson Pacific Properties, Inc. for the three months ended March 31, 2014 represents an update to the more detailed and comprehensive disclosures included in our Annual Report on form 10-K for the year ended December 31, 2013. Accordingly, you should read the following discussion in conjunction with the information included in our Annual Report on form 10-K for the year ended December 31, 2013 as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In addition, some of the statements and assumptions in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the fourth quarter and beyond. See "Forward-Looking Statements."

Overview

The following table identifies each of the properties in our portfolio acquired
through March 31, 2014 and their date of acquisition.

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Properties                               Acquisition/Completion Date   Square Feet
875 Howard Street                                          2/15/2007       286,270
Sunset Gower                                               8/17/2007       543,709
Sunset Bronson                                             1/30/2008       313,723
Technicolor Building                                        6/1/2008       114,958
First Financial                                            6/29/2010       222,423
Tierrasanta                                                6/29/2010       112,300
Del Amo Office                                             8/13/2010       113,000
9300 Wilshire Boulevard                                    8/24/2010        61,224
222 Kearny Street                                          10/8/2010       148,797
1455 Market                                               12/16/2010     1,012,012
Rincon Center                                             12/16/2010       580,850
10950 Washington                                          12/22/2010       159,024
604 Arizona                                                7/26/2011        44,260
275 Brannan                                                8/19/2011        54,673
625 Second Street                                           9/1/2011       137,018
6922 Hollywood Boulevard                                  11/22/2011       205,523
6050 Ocean Way & 1445 N. Beachwood Drive                  12/16/2011        20,761
10900 Washington                                            4/5/2012         9,919
901 Market Street                                           6/1/2012       212,319
Element LA (Olympic Bundy)                                  9/5/2012       247,545
1455 Gordon Street                                         9/21/2012         6,000
Pinnacle I(1)                                              11/8/2012       393,777
3401 Exposition                                            5/22/2013        63,376
Pinnacle II(1)                                             6/14/2013       231,864
First & King                                               7/31/2013       472,223
Met Park North                                             7/31/2013       190,748
Northview                                                  7/31/2013       182,229
1861 Bundy                                                 9/26/2013        36,492
Merrill Place                                              2/12/2014       178,887
3402 Pico Blvd                                             2/28/2014        39,136
Total                                                                    6,395,040

(1) We acquired a 98.25% joint venture interest in the Pinnacle I property on November 8, 2012. On June 14, 2013 our joint venture partner contributed its interest in Pinnacle II, which reduced our entire interest in the joint venture to 65.0%.

All amounts and percentages used in this discussion of our results of operations are calculated using the numbers presented in the financial statements contained in this report rather than the rounded numbers appearing in this discussion.

Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013

Revenue

Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries, and parking and other revenue. Total office revenues increased $9.6 million, or 26.3%, to $46.1 million for the three months ended March 31, 2014 compared


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to $36.5 million for the three months ended March 31, 2013. The period-over-period changes in the items that comprise total revenue are primarily attributable to the factors discussed below.

Office Rental Revenue. Office rental revenue includes rental revenues from our office properties and percentage rent on retail space contained within those properties. Total office rental revenue increased $9.2 million, or 34.4%, to $36.0 million for the three months ended March 31, 2014 compared to $26.8 million for the three months ended March 31, 2013. The increase in rental revenue was primarily the result of the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014. During the three months ended March 31, 2014, the Company renewed four office leases encompassing approximately 21,642 rentable square feet. The weighted average initial stabilized cash rents for those renewed leases were 17.8% above the expiring cash rents for the same space and the weighted average initial straight-line rents on those renewed leases were 25.5% above the expiring straight-line rents for the same space.

Office Tenant Recoveries. Office tenant recoveries remained relatively flat for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. An increase in tenant recoveries associated with the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014, which was offset by a decrease in tenant recoveries stemming from the early terminations of the lease with Bank of America at our 1455 Market Street property.

Office Parking and Other Revenue. Office parking and other revenue increased $0.6 million, or 14.1%, to $4.5 million for the three months ended March 31, 2014 compared to $3.9 million for the three months ended March 31, 2013. The increase in parking and other revenue was primarily the result of the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014.

Total Media & Entertainment Revenue. Total media and entertainment revenue consists of rental revenue, tenant recoveries, other property-related revenue and other revenue. Total media and entertainment revenues decreased $1.4 million, or 12.6%, to $9.5 million for the three months ended March 31, 2014 compared to $10.9 million for the three months ended March 31, 2013. The period-over-period changes in the items that comprise total revenue are primarily attributable to the factors discussed below.

Media & Entertainment Rental Revenue. Media and entertainment rental revenue includes rental revenues from our media and entertainment properties and percentage rent on retail space contained within those properties. Total media and entertainment rental revenue remained relatively flat for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Media & Entertainment Tenant Recoveries. Tenant recoveries remained relatively flat for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Media & Entertainment Other Property-Related Revenue. Other property-related revenue is derived from tenants' rental of lighting and other equipment, parking, power, HVAC and telecommunications (telephone and Internet). Total other property-related revenue decreased $0.9 million, or 19.1%, to $3.6 million for the three months ended March 31, 2014 compared to $4.5 million for the three months ended March 31, 2013. The decrease was primarily the result of lower production activity at the Sunset Gower media and entertainment property compared to the same quarter a year ago.

Media & Entertainment Other Revenue. Other revenue includes service-related revenue, including the rental of certain sound recording equipment at our media and entertainment properties. Total other revenue remained relatively flat for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Operating Expenses

Total Operating Expenses. Total operating expenses consist of property operating expenses, as well as property- and corporate-level general and administrative expenses, other property-related expenses, management fees and depreciation and amortization. Total operating expenses increased by $2.1 million, or 5.0%, to $44.4 million for the three months ended March 31, 2014 compared to $42.3 million for the three months ended March 31, 2013. This increase in total operating expenses reflects the factors discussed below.

Office Operating Expenses. Office operating expenses increased $2.7 million, or 20.1%, to $15.9 million for the three months ended March 31, 2014 compared to $13.3 million for the three months ended March 31, 2013. The increase in


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operating expenses was primarily the result of the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014.

Media & Entertainment Operating Expenses. Media and entertainment operating expenses increased $0.4 million, or 7.8%, to $6.0 million for the three months ended March 31, 2014 compared to $5.6 million for the three months ended March 31, 2013. The increase in operating expenses largely reflects a $0.8 million property tax reimbursement received during the three months ended March 31, 2013 as a result of the completion of a property tax reassessment of the Company's Sunset Gower media and entertainment property. If this tax reimbursement is disregarded, then operating expenses would have decreased as a result of lower production activity at the Sunset Gower media and entertainment property compared to the same quarter a year ago.

General and Administrative Expenses. General and administrative expenses includes wages and salaries for corporate-level employees, accounting, legal and other professional services, office supplies, entertainment, travel, and automobile expenses, telecommunications and computer-related expenses, and other miscellaneous items. General and administrative expenses increased $0.8 million, or 15.8%, to $5.8 million for the three months ended March 31, 2014 compared to $5.0 million for the three months ended March 31, 2013. The increase in general and administrative expenses was primarily due to the adoption of the 2014 Outperformance Program, the costs associated with a one-year consulting arrangement with a former executive, and increased staffing to meet operational needs stemming from growth through the acquisitions of office properties.

Depreciation and Amortization. Depreciation and amortization expense decreased $1.8 million, or 9.6%, to $16.7 million for the three months ended March 31, 2014 compared to $18.4 million for the three months ended March 31, 2013. The decrease was primarily the result of the acceleration of depreciation and amortization associated with the early terminations of the lease with Bank of America at our 1455 Market Street property in the three months ended March 31, 2013, partially offset by depreciation and amortization related to the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014.

Other Expense (Income)

Interest Expense. Interest expense increased $0.9 million, or 16.7%, to $6.5 million for the three months ended March 31, 2014 compared to $5.6 million for the three months ended March 31, 2013. At March 31, 2014, the Company had $827.4 million of notes payable compared to $530.0 million at March 31, 2013. The increase was primarily due to interest expense on the increase in indebtedness associated with our 275 Brannan property, the indebtedness associated with the Pinnacle II building acquired on June 14, 2013, the indebtedness associated with the acquisition of the Seattle Portfolio, the indebtedness associated with the redevelopments of our Element LA and 3401 Exposition properties, and amounts outstanding under our unsecured revolving credit facility.

Acquisition-related expenses. Acquisition-related expenses remained relatively flat for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Net Income

Net income for the three months ended March 31, 2014 was $4.5 million compared to $0.3 million for the three months ended March 31, 2013. The increase was primarily due to higher office operating revenues resulting from the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013, our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014, all partially offset by lower media and entertainment operating revenues, higher office and media and entertainment operating expenses, higher general and administrative expenses, and higher interest expense, all as described above.

Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources We had approximately $29.1 million of cash and cash equivalents at March 31, 2014. In addition, the lead arrangers for our unsecured revolving credit facility have secured commitments that will allow borrowings of up to $250.0 million to the extent our unencumbered pool properties support such borrowings. As of March 31, 2014, we had $250.0 million of total capacity under our unsecured revolving credit facility, of which $40.0 million had been drawn. We also have an at-the-market,


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or ATM, equity offering program that allows us to sell up to $125.0 million of shares of our common stock, $14.5 million of which has been sold as of March 31, 2014.
We intend to use the unsecured revolving credit facility and ATM program, among other things, to finance the acquisition of other properties, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.
Based on the closing price of our common stock of $23.07 as of March 31, 2014, our ratio of debt to total market capitalization was approximately 32.3% (counting series A preferred units as debt) as of March 31, 2014. Our total market capitalization is defined as the sum of the market value of our outstanding common stock (which may decrease, thereby increasing our debt to total capitalization ratio), including restricted stock that we may issue to certain of our directors and executive officers, plus the aggregate value of common units not owned by us, plus the liquidation preference of outstanding series A preferred units and series B preferred stock, plus the book value of our total consolidated indebtedness.
Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and dividend payments to our stockholders required to maintain our REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through cash on hand, net cash provided by operations, reserves established from existing cash and, if necessary, by drawing upon our unsecured revolving credit facility. Our long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using our unsecured credit facility pending permanent financing.
We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about the Company. Cash Flows
Comparison of three months ended March 31, 2014 to three months ended March 31, 2013 is as follows:

                                                  Three Months Ended March 31,
                                 2014              2013          Dollar Change      Percentage Change
                                                        ($ in thousands)
Net cash provided by
operating activities       $       19,401     $      15,105     $        4,296              28.4  %
Net cash used in investing
activities                       (100,679 )         (19,542 )          (81,137 )           415.2  %
Net cash provided by
financing activities               79,985           127,095            (47,110 )           (37.1 )%

Cash and cash equivalents were $29.1 million and $30.4 million at March 31, 2014 and December 31, 2013, respectively.

Operating Activities
Net cash provided by operating activities increased by $4.3 million to $19.4 million for the three months ended March 31, 2014 compared to $15.1 million for the three months ended March 31, 2013. The increase was primarily attributable to an increase in cash NOI, as defined, from our office properties, primarily from the acquisitions of the Pinnacle II on June 14, 2013, respectively, and the acquisition of the Seattle portfolio on July 31, 2013. In addition, the increase was also attributable to decrease in accounts receivable, an increase in prepaid rent and decrease in deferred leasing costs associated with leases signed at 1455 Market, Rincon and 275 Brannan partially offset by a decrease accounts payable, compared to the three months ended March 31, 2013.


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Investing Activities
Net cash used in investing activities increased $81.1 million to $100.7 million for the three months ended March 31, 2014 compared to $19.5 million for three months ended March 31, 2013. The increase was primarily attributable to the increase in acquisition activities during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 and an increase in tenant improvement-related expenditures at some of our office properties.

Financing Activities
Net cash provided by financing activities decreased $47.1 million to $80.0 million for the three months ended March 31, 2014 compared to $127.1 million for the three months ended March 31, 2013. The decrease was due to an increase in repayment of debt and an increase in dividends paid to common stock and unit holder as compared to the three months ended March 31, 2013. In addition, we issued common equity securities generating total proceeds, after underwriters' discounts, of approximately $197.5 million (before transaction costs) in 2014 compared to equity securities generating total proceeds, after underwriters' discounts, of approximately $189.9 million (before transaction costs) in 2013

Indebtedness

Our indebtedness creates the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on or other amounts in respect of our indebtedness and other obligations. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.

As of March 31, 2014, we had outstanding notes payable of $822.7 million (before loan premium), of which $387.6 million, or 47.1%, was variable rate debt. $156.5 million of the variable rate debt is subject to the interest rate contracts described in footnotes 7 and 9 in the table below.

The following table sets forth information as of March 31, 2014 with respect to our outstanding indebtedness (in thousands).

                                                 Outstanding
                                      March 31,                                                     Maturity
Debt                                     2014         December 31, 2013       Interest Rate(1)        Date
Unsecured Revolving Credit Facility  $   40,000     $           155,000     LIBOR+1.55% to 2.20%     8/3/2016
Mortgage loan secured by 3401
Exposition Boulevard(2)                  13,233                  13,233         LIBOR+3.80%          6/9/2014
Mortgage loan secured by 6922
Hollywood Boulevard(3)                   40,151                  40,396            5.58%             1/1/2015
Mortgage loan secured by 275 Brannan     15,000                  15,000         LIBOR+2.00%         10/5/2015
Mortgage loan secured by Pinnacle
II(4)                                    88,248                  88,540            6.313%            9/6/2016
Mortgage loan secured by 901
Market(5)                                49,600                  49,600         LIBOR+2.25%        10/31/2016
Mortgage loan secured by Element
LA(6)                                    13,287                     566         LIBOR+1.95%         11/1/2017
Mortgage loan secured by Sunset
Gower/Sunset Bronson(7)                  97,000                  97,000         LIBOR+2.25%         2/11/2018
Mortgage loan secured by Rincon
Center(8)                               105,544                 105,853            5.134%            5/1/2018
Mortgage loan secured by First &
King(9)                                  95,000                  95,000         LIBOR+1.60%         8/31/2018
Mortgage loan secured by Met Park
North(10)                                64,500                  64,500         LIBOR+1.55%          8/1/2020
Mortgage loan secured by First
Financial(8)                             42,933                  43,000            4.58%             2/1/2022
Mortgage loan secured by 10950
Washington(11)                           29,188              29,299.693            5.316%           3/11/2022
Mortgage loan secured by Pinnacle
I(12)                                   129,000                 129,000            3.954%           11/7/2022
Subtotal                             $  822,684     $           925,988
Unamortized loan premium, net(13)         4,754                   5,320
Total                                $  827,438     $           931,308


__________________


(1) Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed, excluding the amortization of loan fees and costs.

(2) This loan was assumed on May 22, 2013 in connection with the closing of our acquisition of the 3401 Exposition Boulevard property.


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(3) This loan was assumed on November 22, 2011 in connection with the closing of our acquisition of the 6922 Hollywood Boulevard property. This loan is amortizing based on a 30-year amortization schedule.

(4) This loan was assumed on June 14, 2013 in connection with the contribution of the Pinnacle II building to the Company's joint venture with M. David Paul & Associates/Worthe Real Estate Group. This loan bore interest only for the . . .

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