Document


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-34789
______________________________________
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
(Exact name of registrant as specified in its charter)

Hudson Pacific Properties, Inc.

Maryland
(State or other jurisdiction of incorporation or organization)
27-1430478
(I.R.S. Employer Identification Number)
Hudson Pacific Properties, L.P.

Maryland
(State or other jurisdiction of incorporation or organization)
80-0579682
(I.R.S. Employer Identification Number)
11601 Wilshire Blvd., Ninth Floor
Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 445-5700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and
former fiscal year, if changed since last report)
______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Hudson Pacific Properties, Inc. Yes  x   No  o        Hudson Pacific Properties, L.P. Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Hudson Pacific Properties, Inc. Yes  x    No  o        Hudson Pacific Properties, L.P. Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    
Hudson Pacific Properties, Inc.

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Hudson Pacific Properties, L.P.
Large accelerated filer o   Accelerated filer o   Non-accelerated filer x   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Hudson Pacific Properties, Inc.  Yes  o    No  x    Hudson Pacific Properties, L.P. Yes  o    No  x

The number of shares of common stock of Hudson Pacific Properties, Inc. outstanding at November 1, 2016 was 119,507,748.





EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the three months ended September 30, 2016 of Hudson Pacific Properties, Inc., a Maryland corporation, and Hudson Pacific Properties, L.P., a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or “our Company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.
Hudson Pacific Properties, Inc. is a real estate investment trust, or REIT, and the sole general partner of our operating partnership. At September 30, 2016, Hudson Pacific Properties, Inc. owned approximately 81.6% of the outstanding common units of partnership interest (including unvested restricted units) in our operating partnership, or common units. The remaining approximately 18.4% of outstanding common units at September 30, 2016 were owned by certain of our executive officers and directors, certain of their affiliates, and other outside investors, including funds affiliated with The Blackstone Group L.P. (“Blackstone”) and Farallon Capital Management, LLC. As the sole general partner of our operating partnership, Hudson Pacific Properties, Inc. has the full, exclusive and complete responsibility for our operating partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of Hudson Pacific Properties, Inc. and the operating partnership into this single report results in the following benefits:
enhancing investors’ understanding of our Company and our operating partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation because a substantial portion of the disclosure applies to both our Company and our operating partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.

There are a few differences between our Company and our operating partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between our Company and our operating partnership in the context of how we operate as an interrelated, consolidated company. Hudson Pacific Properties, Inc. is a REIT, the only material assets of which are the units of partnership interest in our operating partnership. As a result, Hudson Pacific Properties, Inc. does not conduct business itself, other than acting as the sole general partner of our operating partnership, issuing equity from time to time and guaranteeing certain debt of our operating partnership. Hudson Pacific Properties, Inc. itself does not issue any indebtedness but guarantees some of the debt of our operating partnership. Our operating partnership, which is structured as a partnership with no publicly traded equity, holds substantially all of the assets of our Company and conducts substantially all of our business. Except for net proceeds from equity issuances by Hudson Pacific Properties, Inc., which are generally contributed to our operating partnership in exchange for units of partnership interest in our operating partnership, our operating partnership generates the capital required by our Company’s business through its operations, its incurrence of indebtedness or through the issuance of units of partnership interest in our operating partnership.
The presentation of non-controlling interest, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our operating partnership. The common units in our operating partnership are accounted for as partners’ capital in our operating partnership’s consolidated financial statements and, to the extent not held by our Company, as non-controlling interest in our Company’s consolidated financial statements. The differences between stockholders’ equity, partners’ capital and non-controlling interest result from the differences in the equity issued by our Company and our operating partnership.
To help investors understand the significant differences between our Company and our operating partnership, this report presents the consolidated financial statements separately for our Company and our operating partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our operating partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that Hudson Pacific Properties, Inc. and our operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act and 18 U.S.C. §1350, this report also includes separate “Item 4.




Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of Hudson Pacific Properties, Inc. and our operating partnership.




Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
FORM 10-Q
September 30, 2016
TABLE OF CONTENTS
 
 
 
Page
 
ITEM 1.
Financial Statements of Hudson Pacific Properties, Inc.
 
 
 
 
 
 
ITEM 1.
Financial Statements of Hudson Pacific Properties, L.P.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 


4



PART I—FINANCIAL INFORMATION

HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
REAL ESTATE ASSETS
 
 
 
Land
$
1,252,484

 
$
1,252,484

Building and improvements
4,256,406

 
3,887,683

Tenant improvements
335,205

 
290,122

Furniture and fixtures
4,277

 
9,586

Property under development
266,594

 
218,438

Total real estate held for investment
6,114,966

 
5,658,313

Accumulated depreciation and amortization
(380,662
)
 
(267,855
)
Investment in real estate, net
5,734,304

 
5,390,458

Cash and cash equivalents
89,354

 
53,551

Restricted cash
22,103

 
18,010

Accounts receivable, net
9,621

 
21,048

Notes receivable, net

 
28,684

Straight-line rent receivables, net
78,282

 
59,408

Deferred leasing costs and lease intangible assets, net
289,682

 
314,483

Derivative assets

 
2,061

Goodwill
8,754

 
8,754

Prepaid expenses and other assets, net
40,227

 
27,278

Investment in unconsolidated entity
28,705

 

Assets associated with real estate held for sale
62,323

 
330,300

TOTAL ASSETS
$
6,363,355

 
$
6,254,035

LIABILITIES AND EQUITY
 
 
 
Notes payable, net
$
2,407,943

 
$
2,260,716

Accounts payable and accrued liabilities
132,140

 
82,405

Lease intangible liabilities, net
77,081

 
94,446

Security deposits
25,537

 
20,342

Prepaid rent
27,150

 
38,111

Derivative liabilities
22,413

 
2,010

Liabilities associated with real estate held for sale
14,542

 
16,791

TOTAL LIABILITIES
2,706,806

 
2,514,821

6.25% series A cumulative redeemable preferred units of the operating partnership
10,177

 
10,177

EQUITY
 
 
 
Hudson Pacific Properties, Inc. stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 490,000,000 authorized, 118,746,571 shares and 89,153,780 shares outstanding at September 30, 2016 and December 31, 2015, respectively
1,187

 
891

Additional paid-in capital
2,589,424

 
1,710,979

Accumulated other comprehensive loss
(13,639
)
 
(1,081
)
Accumulated deficit
(39,427
)
 
(44,955
)
Total Hudson Pacific Properties, Inc. stockholders’ equity
2,537,545

 
1,665,834

Non-controlling interest—members in consolidated entities
268,604

 
262,625

Non-controlling interest—units in the operating partnership
840,223

 
1,800,578

TOTAL EQUITY
3,646,372

 
3,729,037

TOTAL LIABILITIES AND EQUITY
$
6,363,355

 
$
6,254,035



The accompanying notes are an integral part of these consolidated financial statements.
5




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
123,919

 
$
114,693

 
$
358,193

 
$
276,321

Tenant recoveries
22,657

 
20,036

 
64,493

 
43,890

Parking and other
5,521

 
6,601

 
16,103

 
17,612

Total office revenues
152,097

 
141,330

 
438,789

 
337,823

Media & Entertainment
 
 
 
 
 
 
 
Rental
7,102

 
6,041

 
19,987

 
16,902

Tenant recoveries
243

 
212

 
655

 
705

Other property-related revenue
5,005

 
3,860

 
12,784

 
10,525

Other
136

 
113

 
226

 
244

Total Media & Entertainment revenues
12,486

 
10,226

 
33,652

 
28,376

TOTAL REVENUES
164,583

 
151,556

 
472,441

 
366,199

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
53,975

 
51,538

 
150,769

 
115,364

Media & Entertainment operating expenses
6,499

 
6,280

 
18,746

 
17,354

General and administrative
12,955

 
9,378

 
38,474

 
28,951

Depreciation and amortization
67,414

 
80,195

 
201,890

 
170,945

TOTAL OPERATING EXPENSES
140,843

 
147,391

 
409,879

 
332,614

INCOME FROM OPERATIONS
23,740

 
4,165

 
62,562

 
33,585

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
19,910

 
14,461

 
54,775

 
34,067

Interest income
(130
)
 
(17
)
 
(216
)
 
(118
)
Unrealized (gain) loss on ineffective portion of derivative instruments
(879
)
 

 
1,630

 

Acquisition-related expenses (expense reimbursements)
315

 
(83
)
 
376

 
43,442

Other (income) expense
(693
)
 
3

 
(716
)
 
2

TOTAL OTHER EXPENSES
18,523

 
14,364

 
55,849

 
77,393

 INCOME (LOSS) BEFORE GAINS ON SALE OF REAL ESTATE
5,217

 
(10,199
)
 
6,713

 
(43,808
)
Gains on sale of real estate

 
8,371

 
8,515

 
30,471

NET INCOME (LOSS)
5,217

 
(1,828
)
 
15,228

 
(13,337
)
Net income attributable to preferred stock and units
(159
)
 
(3,195
)
 
(477
)
 
(9,585
)
Net income attributable to participating securities
(196
)
 
(79
)
 
(589
)
 
(229
)
Net income attributable to non-controlling interest in consolidated real estate entities
(2,525
)
 
(1,273
)
 
(6,866
)
 
(4,668
)
Net (income) loss attributable to common units in the operating partnership
(490
)
 
2,470

 
(2,357
)
 
17,872

Net income (loss) attributable to Hudson Pacific Properties, Inc. common stockholders
$
1,847

 
$
(3,905
)
 
$
4,939

 
$
(9,947
)
Basic and diluted per share amounts:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders’ per share—basic
$
0.02

 
$
(0.04
)
 
$
0.05

 
$
(0.12
)
Net income (loss) attributable to common stockholders’ per share—diluted
$
0.02

 
$
(0.04
)
 
$
0.05

 
$
(0.12
)
Weighted average shares of common stock outstanding—basic
115,083,622

 
88,984,236

 
99,862,583

 
84,894,863

Weighted average shares of common stock outstanding—diluted
116,262,622

 
88,984,236

 
100,979,583

 
84,894,863

Dividends declared per share of common stock
$
0.200

 
$
0.125

 
$
0.600

 
$
0.375


The accompanying notes are an integral part of these consolidated financial statements.
6




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
5,217

 
$
(1,828
)
 
$
15,228

 
$
(13,337
)
Other comprehensive income (loss) cash flow hedge adjustment
3,087

 
(15,325
)
 
(20,818
)
 
(6,300
)
COMPREHENSIVE INCOME (LOSS)
8,304

 
(17,153
)
 
(5,590
)
 
(19,637
)
Comprehensive income attributable to preferred stock
(159
)
 
(3,195
)
 
(477
)
 
(9,585
)
Comprehensive income attributable to participating securities
(196
)
 
(79
)
 
(589
)
 
(229
)
Comprehensive income attributable to non-controlling interest in consolidated real estate entities
(2,525
)
 
(1,273
)
 
(6,866
)
 
(4,668
)
Comprehensive (income) loss attributable to units in the operating partnership
(1,137
)
 
8,408

 
5,903

 
20,084

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HUDSON PACIFIC PROPERTIES, INC. COMMON STOCKHOLDERS
$
4,287

 
$
(13,292
)
 
$
(7,619
)
 
$
(14,035
)

The accompanying notes are an integral part of these consolidated financial statements.
7




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands, except share data)
 
Hudson Pacific Properties, Inc. Stockholders’ Equity
 
 
 
 
 
Shares of Common
Stock
Stock
Amount
Series B Cumulative Redeemable Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss)
Income
Non-
controlling
Interests —
Units in the
Operating
Partnership
Non-controlling Interests — Members in Consolidated Entities
Total Equity
Non-
controlling
Interests —
Series A
Cumulative
Redeemable
Preferred
Units
Balance at January 1, 2015
66,797,816

$
668

$
145,000

$
1,070,833

$
(34,884
)
$
(2,443
)
$
52,851

$
42,990

$
1,275,015

$
10,177

Contributions







217,795

217,795


Distributions







(2,013
)
(2,013
)

Proceeds from sale of common stock, net of underwriters’ discount
12,650,000

127


385,462





385,589


Common stock issuance transaction costs



(4,969
)




(4,969
)

Redemption of Series B Preferred Stock


(145,000
)





(145,000
)

Issuance of common units for acquisition properties






1,814,936


1,814,936


Issuance of unrestricted stock
8,820,482

87


285,358





285,445


Issuance of restricted stock
36,223










Shares withheld to satisfy minimum tax withholding
(85,469
)


(5,128
)




(5,128
)

Declared dividend


(11,469
)
(50,244
)


(25,631
)

(87,344
)
(636
)
Amortization of stock-based compensation



8,832





8,832


Net income (loss)


11,469


(10,071
)

(21,969
)
3,853

(16,718
)
636

Cash flow hedge adjustment





1,362

1,235


2,597


Exchange of Non-controlling Interests — Common units in the operating partnership for common stock
934,728

9


20,835



(20,844
)



Balance at December 31, 2015
89,153,780

$
891

$

$
1,710,979

$
(44,955
)
$
(1,081
)
$
1,800,578

$
262,625

$
3,729,037

$
10,177

Contributions







103

103


Distributions







(990
)
(990
)

Proceeds from sale of common stock, net of underwriters’ discount and transaction costs
29,477,596

295


880,219





880,514


Issuance of unrestricted stock
186,752

2







2


Shares withheld to satisfy minimum tax withholding
(71,557
)
(1
)

(1,775
)




(1,776
)

Declared dividend



(62,553
)


(25,916
)

(88,469
)
(477
)
Amortization of stock-based compensation



9,463



768


10,231


Net income




5,528


2,357

6,866

14,751

477

Cash flow hedge adjustment





(12,558
)
(8,260
)

(20,818
)

Redemption of common units in the operating partnership



53,091



(929,304
)

(876,213
)

Balance at September 30, 2016
118,746,571

$
1,187

$

$
2,589,424

$
(39,427
)
$
(13,639
)
$
840,223

$
268,604

$
3,646,372

$
10,177


The accompanying notes are an integral part of these consolidated financial statements.
8




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
15,228

 
$
(13,337
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
201,890

 
170,945

Amortization of deferred financing costs and loan premium, net
3,278

 
2,925

Amortization of stock-based compensation
9,931

 
6,186

Straight-line rents
(19,398
)
 
(24,037
)
Straight-line rent expenses
886

 

Amortization of above- and below-market leases, net
(13,804
)
 
(15,761
)
Amortization of above- and below-market ground lease, net
1,604

 
1,092

Amortization of lease incentive costs
1,017

 
427

Bad debt (recovery) expense
(740
)
 
435

Amortization of discount and net origination fees on purchased and originated loans
(208
)
 
(312
)
Unrealized loss on ineffective portion of derivative instruments
1,630

 

Gains from sale of real estate
(8,515
)
 
(30,471
)
Change in operating assets and liabilities:
 
 
 
Restricted cash
(4,093
)
 
(1,523
)
Accounts receivable
12,521

 
(1,396
)
Deferred leasing costs and lease intangibles
(34,610
)
 
(21,974
)
Prepaid expenses and other assets
(5,008
)
 
(14,705
)
Accounts payable and accrued liabilities
32,786

 
35,811

Security deposits
14,102

 
15,256

Prepaid rent
(11,738
)
 
11,584

NET CASH PROVIDED BY OPERATING ACTIVITIES
196,759

 
121,145

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(183,286
)
 
(114,711
)
Property acquisitions
(307,919
)
 
(1,804,596
)
Contributions to unconsolidated entity
(28,393
)
 

Proceeds from repayment of notes receivable
28,892

 

Proceeds from sale of real estate
283,855

 
177,488

Deposits for property acquisitions
(13,130
)
 

NET CASH USED FOR INVESTING ACTIVITIES
(219,981
)
 
(1,741,819
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
957,000

 
1,428,616

Payments of notes payable
(808,006
)
 
(299,479
)
Proceeds from issuance of common stock, net
880,514

 
380,803

Payments for redemption of common units in the operating partnership
(876,213
)
 

Dividends paid to common stock and unitholders
(88,469
)
 
(46,737
)
Dividends paid to preferred stock and unitholders
(477
)
 
(9,585
)
Contributions from non-controlling member in consolidated real estate entities
103

 
217,795

Distributions to non-controlling member in consolidated real estate entities
(990
)
 
(1,746
)
Payments to satisfy minimum tax withholding
(1,776
)
 
(1,833
)
Payments of loan costs
(2,661
)
 
(18,245
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
59,025

 
1,649,589

Net increase in cash and cash equivalents
35,803

 
28,915

Cash and cash equivalents—beginning of period
53,551

 
17,753

Cash and cash equivalents—end of period
$
89,354

 
$
46,668


The accompanying notes are an integral part of these consolidated financial statements.
9




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands) 


 
Nine Months Ended 
 September 30,
 
2016
 
2015
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
53,474

 
$
33,828

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for investment in property
$
(10,227
)
 
$
(14,825
)
Issuance of common stock in connection with property acquisition
$

 
$
87

Additional paid-in capital in connection with property acquisition
$

 
$
285,358

Non-controlling common units in the operating partnership in connection with property acquisition
$

 
$
1,814,936



The accompanying notes are an integral part of these consolidated financial statements.
10




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
REAL ESTATE ASSETS
 
 
 
Land
$
1,252,484

 
$
1,252,484

Building and improvements
4,256,406

 
3,887,683

Tenant improvements
335,205

 
290,122

Furniture and fixtures
4,277

 
9,586

Property under development
266,594

 
218,438

Total real estate held for investment
6,114,966

 
5,658,313

Accumulated depreciation and amortization
(380,662
)
 
(267,855
)
Investment in real estate, net
5,734,304

 
5,390,458

Cash and cash equivalents
89,354

 
53,551

Restricted cash
22,103

 
18,010

Accounts receivable, net
9,621

 
21,048

Notes receivable, net

 
28,684

Straight-line rent receivables, net
78,282

 
59,408

Deferred leasing costs and lease intangible assets, net
289,682

 
314,483

Derivative assets

 
2,061

Goodwill
8,754

 
8,754

Prepaid expenses and other assets, net
40,227

 
27,278

Investment in unconsolidated entity
28,705

 

Assets associated with real estate held for sale
62,323

 
330,300

TOTAL ASSETS
$
6,363,355

 
$
6,254,035

LIABILITIES
 
 
 
Notes payable, net
$
2,407,943

 
$
2,260,716

Accounts payable and accrued liabilities
132,140

 
82,405

Lease intangible liabilities, net
77,081

 
94,446

Security deposits
25,537

 
20,342

Prepaid rent
27,150

 
38,111

Derivative liabilities
22,413

 
2,010

Liabilities associated with real estate held for sale
14,542

 
16,791

TOTAL LIABILITIES
2,706,806

 
2,514,821

6.25% series A cumulative redeemable preferred units of the operating partnership
10,177

 
10,177

CAPITAL
 
 
 
Partners’ capital:
 
 
 
Common units, 145,730,290 and 145,450,095 issued and outstanding at September 30, 2016 and December 31, 2015, respectively.
3,377,768

 
3,466,412

Non-controlling interest—members in Consolidated Entities
268,604

 
262,625

TOTAL CAPITAL
3,646,372

 
3,729,037

TOTAL LIABILITIES AND CAPITAL
$
6,363,355

 
$
6,254,035



The accompanying notes are an integral part of these consolidated financial statements.
11




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except unit amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
123,919

 
$
114,693

 
$
358,193

 
$
276,321

Tenant recoveries
22,657

 
20,036

 
64,493

 
43,890

Parking and other
5,521

 
6,601

 
16,103

 
17,612

Total office revenues
152,097

 
141,330

 
438,789

 
337,823

Media & Entertainment
 
 
 
 
 
 
 
Rental
7,102

 
6,041

 
19,987

 
16,902

Tenant recoveries
243

 
212

 
655

 
705

Other property-related revenue
5,005

 
3,860

 
12,784

 
10,525

Other
136

 
113

 
226

 
244

Total Media & Entertainment revenues
12,486

 
10,226

 
33,652

 
28,376

TOTAL REVENUES
164,583

 
151,556

 
472,441

 
366,199

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
53,975

 
51,538

 
150,769

 
115,364

Media & Entertainment operating expenses
6,499

 
6,280

 
18,746

 
17,354

General and administrative
12,955

 
9,378

 
38,474

 
28,951

Depreciation and amortization
67,414

 
80,195

 
201,890

 
170,945

TOTAL OPERATING EXPENSES
140,843

 
147,391

 
409,879

 
332,614

INCOME FROM OPERATIONS
23,740

 
4,165

 
62,562

 
33,585

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
19,910

 
14,461

 
54,775

 
34,067

Interest income
(130
)
 
(17
)
 
(216
)
 
(118
)
Unrealized (gain) loss on ineffective portion of derivative instruments
(879
)
 

 
1,630

 

Acquisition-related expenses (expense reimbursements)
315

 
(83
)
 
376

 
43,442

Other (income) expense
(693
)
 
3

 
(716
)
 
2

TOTAL OTHER EXPENSES
18,523

 
14,364

 
55,849

 
77,393

 INCOME (LOSS) BEFORE GAINS ON SALE OF REAL ESTATE
5,217

 
(10,199
)
 
6,713

 
(43,808
)
Gains on sale of real estate

 
8,371

 
8,515

 
30,471

NET INCOME (LOSS)
5,217

 
(1,828
)
 
15,228

 
(13,337
)
Net income attributable to non-controlling interest in consolidated real estate entities
(2,525
)
 
(1,273
)
 
(6,866
)
 
(4,668
)
Net income (loss) attributable to Hudson Pacific Properties, L.P.
2,692

 
(3,101
)
 
8,362

 
(18,005
)
Preferred Series A and B distributions
(159
)
 
(3,195
)
 
(477
)
 
(9,585
)
Net income attributable to restricted shares
(196
)
 
(79
)
 
(589
)
 
(229
)
Net (loss) income available to common unitholders
$
2,337

 
$
(6,375
)
 
$
7,296

 
$
(27,819
)
Basic and diluted per unit amounts:
 
 
 
 
 
 
 
Net income (loss) attributable to common unitholders per unit—basic
$
0.02

 
$
(0.04
)
 
$
0.05

 
$
(0.23
)
Net income (loss) attributable to common unitholders per unit—diluted
$
0.02

 
$
(0.04
)
 
$
0.05

 
$
(0.23
)
Weighted average shares of common units outstandingbasic
145,614,312

 
145,280,551

 
145,550,685

 
123,441,945

Weighted average shares of common units outstanding—diluted
146,793,312

 
145,280,551

 
146,667,685

 
123,441,945

Dividends declared per unit
$
0.200

 
$
0.125

 
$
0.600

 
0.375


The accompanying notes are an integral part of these consolidated financial statements.
12




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
5,217

 
$
(1,828
)
 
$
15,228

 
$
(13,337
)
Other comprehensive income (loss) cash flow hedge adjustment
3,087

 
(15,325
)
 
(20,818
)
 
(6,300
)
COMPREHENSIVE INCOME (LOSS)
8,304

 
(17,153
)
 
(5,590
)
 
(19,637
)
Comprehensive income attributable to Series A and B preferred units
(159
)
 
(3,195
)
 
(477
)
 
(9,585
)
Comprehensive income attributable to participating securities
(196
)
 
(79
)
 
(589
)
 
(229
)
Comprehensive income attributable to non-controlling interest in consolidated real estate entities
(2,525
)
 
(1,273
)
 
(6,866
)
 
(4,668
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HUDSON PACIFIC PROPERTIES, L.P. UNITHOLDERS
$
5,424

 
$
(21,700
)

$
(13,522
)
 
$
(34,119
)


The accompanying notes are an integral part of these consolidated financial statements.
13




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited, in thousands, except unit data)
 
Partners Capital
 
 
 
 
 
Preferred Units
Number of Common Units
Common Units
Total Partners Capital
Non-controlling Interests — Members in Consolidated Entities
Total Capital
Non-
controlling
Interests —
Series A
Cumulative
Redeemable
Preferred
Units
Balance at January 1, 2015
$
145,000

69,180,379

$
1,087,025

$
1,232,025

$
42,990

$
1,275,015

$
10,177

Contributions




217,795

217,795

 
Distributions




(2,013
)
(2,013
)

Proceeds from sale of common units, net of underwriters’ discount

12,650,000

385,589

385,589


385,589


Equity offering transaction costs


(4,969
)
(4,969
)

(4,969
)

Redemption of Series B Preferred Stock
(145,000
)


(145,000
)

(145,000
)

Issuance of unrestricted units

63,668,962

2,100,381

2,100,381


2,100,381


Issuance of restricted units

36,223





 
Units withheld to satisfy minimum tax withholding

(85,469
)
(5,128
)
(5,128
)

(5,128
)

Declared distributions
(11,469
)

(75,875
)
(87,344
)

(87,344
)
(636
)
Amortization of unit-based compensation


8,832

8,832


8,832


Net income
11,469


(32,040
)
(20,571
)
3,853

(16,718
)
636

Cash Flow Hedge Adjustment


2,597

2,597


2,597


Balance at December 31, 2015
$

145,450,095

$
3,466,412

$
3,466,412

$
262,625

$
3,729,037

$
10,177

Contributions




103

103


Distributions




(990
)
(990
)

Proceeds from sale of common units, net of underwriters’ discount and transaction costs

29,477,596

880,514

880,514


880,514


Issuance of unrestricted units

186,752

2

2


2


Units withheld to satisfy minimum tax withholding

(71,557
)
(1,776
)
(1,776
)

(1,776
)

Declared distributions


(88,469
)
(88,469
)

(88,469
)
(477
)
Amortization of unit-based compensation


10,231

10,231


10,231


Net income


7,885

7,885

6,866

14,751

477

Cash flow hedge adjustment


(20,818
)
(20,818
)

(20,818
)

Redemption of common units

(29,312,596
)
(876,213
)
(876,213
)

(876,213
)

Balance at September 30, 2016
$

145,730,290

$
3,377,768

$
3,377,768

$
268,604

$
3,646,372

$
10,177



The accompanying notes are an integral part of these consolidated financial statements.
14




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
15,228

 
$
(13,337
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
201,890

 
170,945

Amortization of deferred financing costs and loan premium, net
3,278

 
2,925

Amortization of unit-based compensation
9,931

 
6,186

Straight-line rents
(19,398
)
 
(24,037
)
Straight-line rent expenses
886

 

Amortization of above- and below-market leases, net
(13,804
)
 
(15,761
)
Amortization of above- and below-market ground lease, net
1,604

 
1,092

Amortization of lease incentive costs
1,017

 
427

Bad debt (recovery) expense
(740
)
 
435

Amortization of discount and net origination fees on purchased and originated loans
(208
)
 
(312
)
Unrealized loss on ineffective portion of derivative instruments
1,630

 

Gains from sale of real estate
(8,515
)
 
(30,471
)
Change in operating assets and liabilities:
 
 

Restricted cash
(4,093
)
 
(1,523
)
Accounts receivable
12,521

 
(1,396
)
Deferred leasing costs and lease intangibles
(34,610
)
 
(21,974
)
Prepaid expenses and other assets
(5,008
)
 
(14,705
)
Accounts payable and accrued liabilities
32,786

 
35,811

Security deposits
14,102

 
15,256

Prepaid rent
(11,738
)
 
11,584

NET CASH PROVIDED BY OPERATING ACTIVITIES
196,759

 
121,145

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(183,286
)
 
(114,711
)
Property acquisitions
(307,919
)
 
(1,804,596
)
Contributions to unconsolidated entity
(28,393
)
 

Proceeds from repayment of notes receivable
28,892

 

Proceeds from sale of real estate
283,855

 
177,488

Deposits for property acquisitions
(13,130
)
 

NET CASH USED FOR INVESTING ACTIVITIES
(219,981
)
 
(1,741,819
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
957,000

 
1,428,616

Payments of notes payable
(808,006
)
 
(299,479
)
Proceeds from issuance of common units, net
880,514

 
380,803

Payments for redemption of common units
(876,213
)
 

Distributions paid to common unitholders
(88,469
)
 
(46,737
)
Distributions paid to preferred unitholders
(477
)
 
(9,585
)
Contributions from non-controlling member in consolidated real estate entities
103

 
217,795

Distributions to non-controlling member in consolidated real estate entities
(990
)
 
(1,746
)
Payments to satisfy minimum tax withholding
(1,776
)
 
(1,833
)
Payments of loan costs
(2,661
)
 
(18,245
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
59,025

 
1,649,589

Net increase in cash and cash equivalents
35,803

 
28,915

Cash and cash equivalents—beginning of period
53,551

 
17,753

Cash and cash equivalents—end of period
$
89,354

 
$
46,668


The accompanying notes are an integral part of these consolidated financial statements.
15




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands) 


 
Nine Months Ended 
 September 30,
 
2016
 
2015
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
53,474

 
$
33,828

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for investment in property
$
(10,227
)
 
$
(14,825
)
Common units in the operating partnership in connection with property acquisition
$

 
$
2,100,381



The accompanying notes are an integral part of these consolidated financial statements.
16


Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage, share and unit data)




1. Organization

Hudson Pacific Properties, Inc. is a Maryland corporation formed on November 9, 2009 that did not have any meaningful operating activity until the consummation of its initial public offering and the related acquisition of its predecessor and certain other entities on June 29, 2010 (“IPO”). Since the completion of the IPO, the concurrent private placement, and the related formation transactions, Hudson Pacific Properties, Inc. has been a fully integrated, self-administered and self-managed real estate investment trust (“REIT”). Through its controlling interest in the operating partnership and its subsidiaries, Hudson Pacific Properties, Inc. owns, manages, leases, acquires and develops real estate, consisting primarily of office and media and entertainment properties. Unless otherwise indicated or unless the context requires otherwise, all references in these financial statements to the “Company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “our operating partnership” or “the operating partnership” refer to Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.

On April 1, 2015, the Company completed the acquisition of the EOP Northern California Portfolio (“EOP Acquisition”) from Blackstone Real Estate Partners V and VI (“Blackstone”). The EOP Acquisition consisted of 26 high-quality office assets totaling approximately 8.2 million square feet and two development parcels located throughout the San Francisco Peninsula, Redwood Shores, Palo Alto, Silicon Valley and North San Jose submarkets. The total consideration paid for the EOP Acquisition before certain credits, prorations, and closing costs included a cash payment of $1.75 billion and an aggregate of 63,474,791 shares of common stock of Hudson Pacific Properties, Inc. and common units in the operating partnership. 

As of September 30, 2016, the Company owned a portfolio of 52 office properties and two media and entertainment properties. These properties are located throughout Northern and Southern California and the Pacific Northwest.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of the Company and the operating partnership are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented.

The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements in the Annual Report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. for the year ended December 31, 2015 and the notes thereto.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current year presentation. Specifically in the Consolidated Balance Sheets for the prior period, certain amounts have been reclassified to held for sale. These amounts are related to Patrick Henry Drive and One Bay Plaza, which were sold in 2016, and to 12655 Jefferson, which was determined to be held for sale as of September 30, 2016.

Principles of Consolidation

The unaudited interim consolidated financial statements of Hudson Pacific Properties, Inc. include the accounts of Hudson Pacific Properties, Inc., the operating partnership and all wholly owned subsidiaries and variable interest entities (“VIEs”), of which Hudson Pacific Properties, Inc. is the primary beneficiary. The unaudited interim consolidated financial statements of the operating partnership include the accounts of the operating partnership, and all wholly owned subsidiaries and

17

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)


VIEs of which the operating partnership is the primary beneficiary. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

During the first quarter of 2016, the Company adopted ASU 2015-02, Consolidation (“Topic 810”): Amendments to the Consolidation Analysis, to amend the accounting guidance for consolidation. The standard simplifies the current guidance for consolidation and reduces the number of consolidation models through the elimination of the indefinite deferral of Statement 167. Additionally, the standard places more emphasis on risk of loss when determining a controlling financial interest. The Company consolidates all entities that the Company controls through either majority ownership or voting rights. In addition, the Company consolidates all VIEs of which the Company is considered the primary beneficiary. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. As a result of the adoption, the Company concluded that two of the Company’s joint ventures and its operating partnership met the definition of a VIE and the Company is the primary beneficiary of these VIEs. Substantially all of the assets and liabilities of the Company are related to these VIEs.

During the second quarter of 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. This joint venture met the definition of a VIE, however the Company is not the primary beneficiary and is not consolidating the joint venture.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties, its accrued liabilities, and its performance-based equity compensation awards. The Company bases its estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from these estimates.

Recently Issued Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of ASUs. The Company considers the applicability and impact of all ASUs. Recently issued ASUs not listed below are not expected to have a material impact on the Company’s consolidated financial statements, because either the ASU is not applicable or the impact is expected to be immaterial.
    
On October 27, 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. This guidance outlines how a single decision maker of a VIE should treat indirect interests held through other related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements and notes to the consolidated financial statements.    

On August 26, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance addresses eight cash flow classification issues to reduce diversity in practice, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2017, with early adoption permitted. The Company does not currently anticipate a material impact of this update on its consolidated financial statements and notes to the consolidated financial statements.
    

18

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)


On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. This guidance sets forth a new impairment model for financial instruments, the current expected credit loss (“CECL”) model, which is based on expected losses rather than incurred losses. Under the CECL model, an entity recognizes as an allowance its estimate of expected credit losses. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements and notes to the consolidated financial statements.
    
On May 10, 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This guidance clarifies certain narrow aspects of Topic 606, including assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. On April 14, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This guidance clarifies two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This guidance clarifies certain aspects of the principal-versus-agent guidance in its new revenue recognition standard related to the determination of whether an entity is a principal-versus-agent and the determination of the nature of each specified good or service. Both updates affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, and defer the effective date of ASU 2014-09 by one year. These updates are effective for annual reporting periods (including interim periods) beginning after December 15, 2017 with early adoption permitted. The Company is currently assessing the impact of these updates on its consolidated financial statements and notes to the consolidated financial statements.

On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, and forfeitures. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2016 with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements and notes to the consolidated financial statements.

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance provides a new measurement alternative for equity investments that don’t have readily determinable fair values and don’t qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of this update on its consolidated financial statements and notes to the consolidated financial statements.

3. Investment in Real Estate

Acquisitions

The Company’s acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in the Company’s Consolidated Statements of Operations from the date of acquisition.

When we acquire properties that are considered business combinations, assets acquired and liabilities assumed are fair valued. Assets acquired and liabilities assumed include, but are not limited to, land, building and improvements, intangible assets related to above-and below-market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. The initial assignment of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price assignment are made within the measurement period, which typically does not exceed one year, within the Consolidated Balance Sheet.

We assess fair value based on level 2 and level 3 inputs within the fair value hierarchy, which includes estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.

19

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)



The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant. The fair value of acquired “above- and below-” market leases are based on the estimated cash flow projections utilizing discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, we include estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related costs. Acquisition-related expenses associated with business combinations are expensed in the period incurred.
    
On July 1, 2016, the Company completed the acquisition of a 500,475-square-foot Class A tower located at 11601 Wilshire Boulevard in West Los Angeles, California for cash consideration of $311.0 million (before credits, prorations, and closing costs). Owned by an affiliate of Blackstone, the building has served as the Company’s corporate office since its IPO. The acquisition of this property provides the Company with an opportunity to create value through enhanced operations, the lease-up of vacant space, and re-leasing of space at market rents above those currently in-place.

Included in the Company’s consolidated financial statements for the three months ended September 30, 2016 were revenues and net loss from the 11601 Wilshire Boulevard property totaling $5.4 million and $1.8 million, respectively. The amounts were the same for the nine months ended September 30, 2016.

The Company is in the process of evaluating the terms of certain contracts associated with the property which affect the identification and valuation of assets acquired and liabilities assumed. The following table represents our aggregate preliminary purchase price accounting:
 
11601 Wilshire Boulevard
Investment in real estate, net
$
300,430

Above-market leases(1)
167

Deferred leasing costs and in-place intangibles(2)
13,884

Below-market leases(3)
(6,562
)
Net asset and liabilities assumed
$
307,919

________________
(1)
Represents weighted-average amortization period of 6.2 years.
(2)
Represents weighted-average amortization period of 5.6 years.
(3)
Represents weighted-average amortization period of 7.3 years.

The table below shows the pro forma financial information for the nine months ended September 30, 2016 and 2015 as if the 11601 Wilshire Boulevard property had been acquired as of January 1, 2015
 
Nine months ended September 30,
 
2016
 
2015
Total revenues
$
483,193

 
$
382,327

Net income (loss)
11,608

 
(18,767
)

During 2015, the Company acquired 26 office properties totaling approximately 8.2 million square feet and two development parcels throughout Northern California. In addition, the Company also acquired 4th and Traction and 405 Mateo, both located in Los Angeles, California.


20

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)


Dispositions

The following table summarizes the properties sold during the nine months ended September 30, 2016 and September 30, 2015. These properties were non-strategic assets to the Company’s portfolio:
Property
 
Date of Disposition
 
Number of Buildings
 
Square Feet
 
Sales Price(1) (in millions)
Bayhill Office Center
 
January 14, 2016
 
4
 
554,328

 
$
215.0

Patrick Henry Drive
 
April 7, 2016
 
1
 
70,520

 
19.0

One Bay Plaza
 
June 1, 2016
 
1
 
195,739

 
53.4

Total dispositions for the nine months ended September 30, 2016
 
 
 
6
 
820,587

 
$
287.4

First Financial
 
March 6, 2015
 
1
 
223,679

 
$
89.0

Bay Park Plaza
 
September 29, 2015
 
1
 
260,183

 
90.0

Total dispositions for the nine months ended September 30, 2015(2)
 
 
 
2
 
483,862

 
$
179.0

_________________ 
(1)
Represents gross sales price before certain credits, prorations and closing costs.
(2)
Excludes the disposition of 45% interest in 1455 Market Street office property on January 7, 2015.

The dispositions of these properties resulted in a gain of $8.5 million for the nine months ended September 30, 2016, and a gain of $8.4 million and $30.5 million for the three and nine months ended September 30, 2015, respectively. There were no disposition during the three months ended September 30, 2016.
    
The Company has not presented the operating results in net income (loss) from discontinued operations for these dispositions because they do not represent a strategic shift in the Company’s business. In addition, the Company reclassified the assets and liabilities related to these dispositions to assets and liabilities associated with real estate held for sale as of December 31, 2015.

Held for Sale

On April 25, 2016, the Company entered into an agreement to sell its 12655 Jefferson property for $80.0 million (before certain credits, prorations and closing costs). The Company determined that 12655 Jefferson met the criteria to be classified as held for sale and reclassified the balances related to such property within the Consolidated Balance Sheet as of September 30, 2016 and December 31, 2015.

The following table summarizes the components of assets and liabilities associated with real estate held for sale as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Investment in real estate, net
$
58,915

 
$
313,344

Straight-line rent receivables, net
292

 
2,016

Deferred leasing costs and lease intangible assets, net
2,774

 
14,415

Other
342

 
525

Assets associated with real estate held for sale
$
62,323

 
$
330,300

 
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
3,634

 
$
3,831

Other
10,908

 
12,960

Liabilities associated with real estate held for sale
$
14,542

 
$
16,791

    

21

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)


Cost Capitalization

The Company recognized the following capitalized costs during the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Capitalized personnel costs
$
2,351

 
$
2,227

 
$
6,989

 
$
5,063

Capitalized interest
2,960

 
1,279

 
8,414

 
4,561


Impairment of Long-Lived Assets

No impairment indicators have been noted and the Company recorded no impairment charges for the three and nine months ended September 30, 2016 and 2015.

4. Deferred Leasing Costs and Lease Intangibles, net

The following summarizes the Company’s deferred leasing costs and lease intangibles as of:
 
September 30, 2016
 
December 31, 2015
Above-market leases
$
23,197

 
$
38,465

Accumulated amortization
(12,004
)
 
(17,206
)
Above-market leases, net
11,193

 
21,259

Deferred leasing costs and in-place lease intangibles
361,416

 
347,531

Accumulated amortization
(138,111
)
 
(111,128
)
Deferred leasing costs and in-place lease intangibles, net
223,305

 
236,403

Below-market ground leases
59,578

 
59,578

Accumulated amortization
(4,394
)
 
(2,757
)
Below-market ground leases, net
55,184

 
56,821

Deferred leasing costs and lease intangible assets, net
$
289,682

 
$
314,483

 
 
 
 
Below-market leases
$
134,445

 
$
138,852

Accumulated amortization
(58,381
)
 
(45,455
)
Below-market leases, net
76,064

 
93,397

Above-market ground leases
1,095

 
1,095

Accumulated amortization
(78
)
 
(46
)
Above-market ground leases, net
1,017

 
1,049

Lease intangible liabilities, net
$
77,081

 
$
94,446


The Company recognized the following amortization related to deferred leasing costs and lease intangibles:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Above-market lease(1)
$
2,809

 
$
4,489

 
$
10,223

 
$
8,751

Below-market lease(1)
7,311

 
8,393

 
24,027

 
24,512

Deferred leasing costs and in-place lease intangibles(2)
20,742

 
29,312

 
65,408

 
65,058

Above-market ground lease(3)
11

 
18

 
33

 
35

Below-market ground lease(3)
545

 
533

 
1,637

 
1,127

__________________ 
(1)
Amortization is recorded in office rental income in the Consolidated Statements of Operations.
(2)
Amortization is recorded in depreciation and amortization expense and office rental income in the Consolidated Statements of Operations.
(3)
Amortization is recorded in office operating expenses in the Consolidated Statements of Operations.

22

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)



5. Accounts Receivable, net

The Company’s accounting policy and methodology used to estimate the allowance for doubtful accounts is discussed in the annual report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L. P. for the year ended December 31, 2015. The following table summarizes the Company’s accounts receivable, net of allowance for doubtful accounts as of:
 
September 30, 2016
 
December 31, 2015
Accounts receivable
$
11,466

 
$
22,060

Allowance for doubtful accounts
(1,845
)
 
(1,012
)
Accounts receivable, net
$
9,621

 
$
21,048


6. Straight-line Rent Receivables, net
 
The Company’s accounting policy and methodology used to estimate the allowance for doubtful accounts is discussed in the annual report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L. P. for the year ended December 31, 2015. The following table represents the Company’s straight-line rent receivables, net of allowance for doubtful accounts as of:
 
September 30, 2016
 
December 31, 2015
Straight-line rent receivables
$
78,358

 
$
60,378

Allowance for doubtful accounts
(76
)
 
(970
)
Straight-line rent receivables, net
$
78,282

 
$
59,408


7. Notes Receivable, net

On August 19, 2014, the Company entered into a loan participation agreement for a loan with a maximum principal of $140.0 million. The Company’s share was 23.77%, or $33.3 million. The note receivable is secured by a real estate property, bears interest at 11.0% and was to mature on August 22, 2016. Interest is payable monthly with the principal due at maturity. The Company received a $0.4 million commitment fee as a result of this transaction. The balance as of December 31, 2015, net of the accretion of commitment fee, was $28.7 million. The notes receivable under the loan participation agreement were fully repaid during the second quarter of 2016.

8. Investment in Unconsolidated Entity    
    
Investment in unconsolidated real estate in which the Company has the ability to exercise significant influence (but not control) is accounted for under the equity method of investment. Under the equity method, the Company initially records the investment at cost, and subsequently adjusts for equity in earnings or losses and cash contributions and distributions.

On June 16, 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. The Company holds a 21.4% interest in the joint venture. The assets of the joint venture are comprised of the notes receivable, which represents the maximum exposure for loss for the Company. The joint venture meets the criteria of a VIE and the Company accounts for this investment under the equity method of accounting since the Company is not the primary beneficiary. Under the equity method of accounting, the Company’s net equity investment is reflected within investment in unconsolidated entity on the Consolidated Balance Sheets, and the Company’s share of net income or loss from the joint venture is included within other (income) expense on the Consolidated Statements of Operations.

9. Goodwill

The Company’s goodwill balance as of September 30, 2016 and December 31, 2015 was $8.8 million. The Company does not amortize this asset but instead analyzes it on an annual basis for impairment. No impairment indicators have been noted during the three and nine months ended September 30, 2016 and 2015.


23

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)


10. Notes Payable

The following table summarizes the balances of the Company’s indebtedness as of:
 
September 30, 2016
 
December 31, 2015
Notes payable
$
2,427,440

 
$
2,278,445

Less: unamortized loan premium and deferred financing costs, net(1)
(19,497
)
 
(17,729
)
Notes payable, net
$
2,407,943

 
$
2,260,716

________________
(1)
Deferred financing costs exclude debt issuance costs, net, related to establishing the Company’s unsecured revolving credit facility and undrawn term loans. The amounts included in prepaid expenses and other assets, net was $1.7 million and $4.1 million as of September 30, 2016 and December 31, 2015, respectively.


24

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share amounts)