Hudson Pacific Properties Reports Second Quarter 2021 Financial Results

Current Guidance

Full Year 2021

Metric

Low

High

FFO per share

$1.90

$1.96

Growth in same-store office property cash NOI(1)(2)(3)

3.75%

4.75%

Growth in same-store studio property cash NOI(1)(2)(4)

13.00%

14.00%

GAAP non-cash revenue (straight-line rent and above/below-market rents)(5)

$20,000

$30,000

GAAP non-cash expense (straight-line rent expense and above/below-market ground rent)

$(3,750)

$(3,750)

General and administrative expenses(6)

$(68,000)

$(72,000)

Interest expense(7)

$(121,500)

$(124,500)

Interest income

$3,700

$3,800

Corporate-related depreciation and amortization

$(2,300)

$(2,400)

FFO from unconsolidated joint ventures

$7,500

$8,500

FFO attributable to non-controlling interests

$(77,000)

$(81,000)

Weighted average common stock/units outstanding—diluted(8)

153,000

154,000

(1)

Same-store for the full year 2021 is defined as the 43 office properties or three studio properties, as applicable, owned and included in the Company's stabilized portfolio as of January 1, 2020, and anticipated to still be owned and included in the stabilized portfolio through December 31, 2021.

(2)

Please see non-GAAP information below for definition of cash NOI.

(3)

This estimate excludes approximately $1.0 million of a one-time, prior-period supplemental property tax expense related to ICON and CUE. Please see the Same-Store Analysis in the Company’s Second Quarter 2021 Supplemental Operating and Financial Information report for further detail regarding this expense.

(4)

This estimate excludes approximately $0.4 million of one-time, prior period supplemental property tax expenses related to Sunset Bronson and Sunset Gower. Please see the Same-Store Analysis in the Company’s First and Second Quarter 2021 Supplemental Operating and Financial Information reports for further detail regarding these expenses..

(5)

Includes non-cash straight-line rent associated with the studio and office properties.

(6)

Includes non-cash compensation expense, which the Company estimates at $20,000 in 2021.

(7)

Includes amortization of deferred financing costs and loan discounts/premiums, which the Company estimates at $10,000 in 2021.

(8)

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 2021 includes an estimate for the dilution impact of stock grants to the Company's executives under its 2019, 2020 and 2021 long-term incentive programs. This estimate is based on the projected award potential of such programs as of the end of the most recently completed quarter, as calculated in accordance with the ASC 260, Earnings Per Share.

Consolidated Balance Sheets

In thousands, except share data

June 30, 2021

December 31, 2020

(Unaudited)

ASSETS

Investment in real estate, at cost

$

8,381,071

$

8,215,017

Accumulated depreciation and amortization

(1,224,337

)

(1,102,748

)

Investment in real estate, net

7,156,734

7,112,269

Cash and cash equivalents

110,978

113,686

Restricted cash

33,967

35,854

Accounts receivable, net

16,391

22,105

Straight-line rent receivables, net

238,799

225,685

Deferred leasing costs and lease intangible assets, net

271,201

285,836

U.S. Government securities

132,222

135,115

Operating lease right-of-use assets

268,537

264,880

Prepaid expenses and other assets, net

111,087

72,667

Investment in unconsolidated real estate entities

85,736

82,105

TOTAL ASSETS

$

8,425,652

$

8,350,202

LIABILITIES AND EQUITY

Liabilities

Unsecured and secured debt, net

$

3,491,043

$

3,399,492

In-substance defeased debt

129,971

131,707

Joint venture partner debt

66,136

66,136

Accounts payable, accrued liabilities and other

253,271

235,860

Operating lease liabilities

274,408

270,014

Lease intangible liabilities, net

43,364

49,144

Security deposits and prepaid rent

84,393

92,180

Total liabilities

4,342,586

4,244,533

Redeemable preferred units of the operating partnership

9,815

9,815

Redeemable non-controlling interest in consolidated real estate entities

127,445

127,874

Equity

Hudson Pacific Properties, Inc. stockholders' equity:

Common stock, $0.01 par value, 490,000,000 authorized, 152,319,084 shares and 151,401,365 shares outstanding at June 30, 2021 and December 31, 2020, respectively

1,523

1,514

Additional paid-in capital

3,435,156

3,469,758

Accumulated other comprehensive loss

(2,736

)

(8,133

)

Total Hudson Pacific Properties, Inc. stockholders' equity

3,433,943

3,463,139

Non-controlling interest—members in consolidated real estate entities

467,476

467,009

Non-controlling interest—units in the operating partnership

44,387

37,832

Total equity

3,945,806

3,967,980

TOTAL LIABILITIES AND EQUITY

$

8,425,652

$

8,350,202

Consolidated Statements of Operations

In thousands, except share data

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

REVENUES

Office

Rental

$

192,552

$

180,654

$

382,413

$

361,767

Service and other revenues

3,151

3,654

5,433

8,968

Total office revenues

195,703

184,308

387,846

370,735

Studio

Rental

11,551

12,128

23,704

25,043

Service and other revenues

8,348

2,174

17,171

9,059

Total studio revenues

19,899

14,302

40,875

34,102

Total revenues

215,602

198,610

428,721

404,837

OPERATING EXPENSES

Office operating expenses

69,111

64,611

135,673

128,471

Studio operating expenses

12,466

7,951

23,919

18,601

General and administrative

17,109

17,897

35,558

36,515

Depreciation and amortization

84,178

73,516

166,939

147,279

Total operating expenses

182,864

163,975

362,089

330,866

OTHER INCOME (EXPENSE)

Income from unconsolidated real estate entities

470

410

1,105

174

Fee income

797

556

1,645

1,166

Interest expense

(30,689

)

(27,930

)

(60,975

)

(54,347

)

Interest income

937

1,048

1,934

2,073

Management services reimbursement income—unconsolidated real estate entities

626

—

626

—

Management services expense—unconsolidated real estate entities

(626

)

—

(626

)

—

Transaction-related expenses

(1,064

)

(157

)

(1,064

)

(259

)

Unrealized gain (loss) on non-real estate investments

5,018

(2,267

)

10,793

(2,848

)

Other (expense) income

(1,177

)

716

(1,629

)

1,030

Total other expense

(25,708

)

(27,624

)

(48,191

)

(53,011

)

Net income

7,030

7,011

18,441

20,960

Net income attributable to preferred units

(153

)

(153

)

(306

)

(306

)

Net income attributable to participating securities

(276

)

(10

)

(554

)

(39

)

Net income attributable to non-controlling interest in consolidated real estate entities

(5,549

)

(3,890

)

(12,179

)

(7,407

)

Net loss attributable to redeemable non-controlling interest in consolidated real estate entities

1,282

770

1,964

1,403

Net income attributable to non-controlling interest in the operating partnership

(19

)

(37

)

(69

)

(143

)

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

2,315

$

3,691

$

7,297

$

14,468

BASIC AND DILUTED PER SHARE AMOUNTS

Net income attributable to common stockholders—basic

$

0.02

$

0.02

$

0.05

$

0.09

Net income attributable to common stockholders—diluted

$

0.02

$

0.02

$

0.05

$

0.09

Weighted average shares of common stock outstanding—basic

151,169,612

153,306,976

150,997,564

153,869,789

Weighted average shares of common stock outstanding—diluted

152,683,463

155,621,513

151,302,845

156,515,326

Funds From Operations

Unaudited, in thousands, except per share data

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS (“FFO”)(1):

Net income

$

7,030

$

7,011

$

18,441

$

20,960

Adjustments:

Depreciation and amortization—Consolidated

84,178

73,516

166,939

147,279

Depreciation and amortization—Corporate-related

(590

)

(574

)

(1,167

)

(1,139

)

Depreciation and amortization—Company's share from unconsolidated real estate entities

1,550

1,355

3,061

2,736

Unrealized (gain) loss on non-real estate investments

(5,018

)

2,267

(10,793

)

2,848

Tax impact of unrealized gain on non-real estate investment

1,876

—

1,876

—

FFO attributable to non-controlling interests

(15,839

)

(6,801

)

(32,462

)

(13,894

)

FFO attributable to preferred units

(153

)

(153

)

(306

)

(306

)

FFO to common stockholders and unitholders

73,034

76,621

145,589

158,484

Specified items impacting FFO:

Transaction-related expenses

1,064

157

1,064

259

One-time straight line rent reserve

—

—

—

2,620

One-time prior period net property tax adjustment

335

—

1,372

—

FFO (excluding specified items) to common stockholders and unitholders

$

74,433

$

76,778

$

148,025

$

161,363

Weighted average common stock/units outstanding—diluted

152,683

155,013

152,675

155,908

FFO per common stock/unit—diluted

$

0.48

$

0.49

$

0.95

$

1.02

FFO (excluding specified items) per common stock/unit—diluted

$

0.49

$

0.50

$

0.97

$

1.03

1.

Hudson Pacific calculates FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income or loss calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), adjusting for consolidated and unconsolidated joint ventures. The calculation of FFO includes amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. Hudson Pacific believes that FFO is a useful supplemental measure of its operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of the Company's activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, the Company's FFO may not be comparable to all other REITs.

Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, Hudson Pacific believes that FFO along with the required GAAP presentations provides a more complete measurement of the Company's performance relative to its competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide. Hudson Pacific uses FFO per share to calculate annual cash bonuses for certain employees.

However, FFO should not be viewed as an alternative measure of Hudson Pacific's operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company's properties, which are significant economic costs and could materially impact the Company's results from operations.

Net Operating Income

Unaudited, in thousands

Three Months Ended June 30,

2021

2020

RECONCILIATION OF NET INCOME TO NET OPERATING INCOME (“NOI”)(1):

Net income

$

7,030

$

7,011

Adjustments:

Income from unconsolidated real estate entities

(470

)

(410

)

Fee income

(797

)

(556

)

Interest expense

30,689

27,930

Interest income

(937

)

(1,048

)

Management services reimbursement income—unconsolidated real estate entities

(626

)

—

Management services expense—unconsolidated real estate entities

626

—

Transaction-related expenses

1,064

157

Unrealized (gain) loss on non-real estate investments

(5,018

)

2,267

Other expense (income)

1,177

(716

)

General and administrative

17,109

17,897

Depreciation and amortization

84,178

73,516

NOI

$

134,025

$

126,048

NET OPERATING INCOME BREAKDOWN

Same-store office cash revenues

161,616

155,781

Straight-line rent

4,489

11,090

Amortization of above-market and below-market leases, net

1,751

2,295

Amortization of lease incentive costs

(443

)

(466

)

Same-store office revenues

167,413

168,700

Same-store studios cash revenues

19,741

13,637

Straight-line rent

167

674

Amortization of lease incentive costs

(9

)

(9

)

Same-store studio revenues

19,899

14,302

Same-store revenues

187,312

183,002

Same-store office cash expenses

58,316

57,265

Straight-line rent

325

366

Non-cash portion of interest expense

10

—

Amortization of above-market and below-market ground leases, net

586

586

Same-store office expenses

59,237

58,217

Same-store studio cash expenses

12,387

7,951

Non-cash portion of interest expense

79

—

Same-store studio expenses

12,466

7,951

Same-store expenses

71,703

66,168

Same-store net operating income

115,609

116,834

Non-same-store net operating income

18,416

9,214

NET OPERATING INCOME

$

134,025

$

126,048

SAME-STORE OFFICE NOI DECREASE

(2.1

)%

SAME-STORE OFFICE CASH NOI INCREASE

4.9

%

SAME-STORE STUDIO NOI INCREASE

17.0

%

SAME-STORE STUDIO CASH NOI INCREASE

29.3

%

1.

Hudson Pacific evaluates performance based upon property NOI from continuing operations. NOI is not a measure of operating results or cash flows from operating activities or cash flows as measured by GAAP and should not be considered an alternative to income from continuing operations, as an indication of the Company's performance, or as an alternative to cash flows as a measure of liquidity, or the Company's ability to make distributions. All companies may not calculate NOI in the same manner. Hudson Pacific considers NOI to be a useful performance measure to investors and management because when compared across periods, NOI reflects the revenues and expenses directly associated with owning and operating the Company's properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective not immediately apparent from income from continuing operations. Hudson Pacific calculates NOI as net income (loss) excluding corporate general and administrative expenses, depreciation and amortization, impairments, gains/losses on sales of real estate, interest expense, transaction-related expenses and other non-operating items. Hudson Pacific defines NOI as operating revenues (including rental revenues, other property-related revenue, tenant recoveries and other operating revenues), less property-level operating expenses (which includes external management fees, if any, and property-level general and administrative expenses). NOI on a cash basis is NOI adjusted to exclude the effect of straight-line rent and other non-cash adjustments required by GAAP. Hudson Pacific believes NOI on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.