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, 2017
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.)
Commission File Number: 333-202799-01 (Hudson Pacific Properties, L.P.)
______________________________________
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 Website, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
    
Hudson Pacific Properties, Inc.
Large accelerated filer x
Accelerated filer o   
Non-accelerated filer o 
 
 
(Do not check if a smaller reporting company) 
Smaller reporting company o  
Emerging growth company o 
 

Hudson Pacific Properties, L.P
Large accelerated filer o
Accelerated filer o   
Non-accelerated filer x
 
 
(Do not check if a smaller reporting company) 
Smaller reporting company o  
Emerging growth company o 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Hudson Pacific Properties, Inc. o
Hudson Pacific Properties, L.P. 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, 2017 was 156,060,854.




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2017 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. As of September 30, 2017, Hudson Pacific Properties, Inc. owned approximately 99.6% of the outstanding common units of partnership interest (including unvested restricted units) in our operating partnership, or common units. The remaining approximately 0.4% of outstanding common units at September 30, 2017 were owned by certain of our executive officers and directors, certain of their affiliates and other outside investors. As of December 31, 2016, certain affiliates of Blackstone Group L.P. (“Blackstone”) and Farallon Capital Management, LLC (“the Farallon Funds”) held an ownership interest in the Company and the operating partnership. Following a common stock offering and a common unit repurchase on January 10, 2017, Blackstone and the Farallon Funds informed us that they no longer owned common stock or common units in the Company or the operating partnership. 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.
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 a 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 “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.


2




In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company 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 Part I, Item 4 “Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of Hudson Pacific Properties, Inc. and our operating partnership.

3





HUDSON PACIFIC PROPERTIES, INC. AND HUDSON PACIFIC PROPERTIES, L.P.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
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
ITEM 1.
FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, INC.

HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)


 
September 30, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Investment in real estate, at cost
$
6,558,898

 
$
6,099,293

Accumulated depreciation and amortization
(504,141
)
 
(387,181
)
Investment in real estate, net
6,054,757

 
5,712,112

Cash and cash equivalents
87,723

 
83,015

Restricted cash
25,784

 
25,177

Accounts receivable, net
5,014

 
6,833

Straight-line rent receivables, net
97,184

 
82,109

Deferred leasing costs and lease intangible assets, net
257,831

 
294,209

Prepaid expenses and other assets, net
57,360

 
79,058

Assets associated with real estate held for sale
321,437

 
396,485

TOTAL ASSETS
$
6,907,090

 
$
6,678,998

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Notes payable, net
$
2,424,358

 
$
2,473,323

Accounts payable and accrued liabilities
162,938

 
116,973

Lease intangible liabilities, net
55,335

 
73,569

Security deposits and prepaid rent
66,499

 
70,468

Derivative liabilities
819

 
1,303

Liabilities associated with real estate held for sale
224,032

 
230,435

TOTAL LIABILITIES
2,933,981

 
2,966,071

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, 155,302,800 shares and 136,492,235 shares outstanding at September 30, 2017 and December 31, 2016, respectively
1,553

 
1,364

Additional paid-in capital
3,619,940

 
3,109,394

Accumulated other comprehensive income
6,465

 
9,496

Accumulated income (deficit)
18,911

 
(16,971
)
Total Hudson Pacific Properties, Inc. stockholders’ equity
3,646,869

 
3,103,283

Non-controlling interest—members in consolidated entities
302,111

 
304,608

Non-controlling interest—units in the operating partnership
13,952

 
294,859

TOTAL EQUITY
3,962,932

 
3,702,750

TOTAL LIABILITIES AND EQUITY
$
6,907,090

 
$
6,678,998



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,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
139,157

 
$
123,919

 
$
406,275

 
$
358,193

Tenant recoveries
24,982

 
22,657

 
67,421

 
64,493

Parking and other
8,035

 
5,521

 
22,146

 
16,103

Total Office revenues
172,174

 
152,097

 
495,842

 
438,789

Media & Entertainment
 
 
 
 
 
 
 
Rental
11,012

 
7,102

 
26,802

 
19,987

Tenant recoveries
133

 
243

 
927

 
655

Other property-related revenue
6,561

 
5,005

 
14,964

 
12,784

Other
141

 
136

 
271

 
226

Total Media & Entertainment revenues
17,847

 
12,486

 
42,964

 
33,652

TOTAL REVENUES
190,021

 
164,583

 
538,806

 
472,441

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
59,102

 
53,975

 
162,524

 
150,769

Media & Entertainment operating expenses
10,588

 
6,499

 
24,842

 
18,746

General and administrative
13,013

 
12,955

 
41,329

 
38,474

Depreciation and amortization
71,158

 
67,414

 
217,340

 
201,890

TOTAL OPERATING EXPENSES
153,861

 
140,843

 
446,035

 
409,879

INCOME FROM OPERATIONS
36,160

 
23,740

 
92,771

 
62,562

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
22,461

 
19,910

 
66,086

 
54,775

Interest income
(44
)
 
(130
)
 
(90
)
 
(216
)
Unrealized loss (gain) on ineffective portion of derivative instruments
37

 
(879
)
 
82

 
1,630

Transaction-related expenses
598

 
315

 
598

 
376

Other income
(1,402
)
 
(693
)
 
(2,656
)
 
(716
)
TOTAL OTHER EXPENSES
21,650

 
18,523

 
64,020

 
55,849

 INCOME BEFORE GAINS ON SALE OF REAL ESTATE
14,510

 
5,217

 
28,751

 
6,713

Gains on sale of real estate

 

 
16,866

 
8,515

NET INCOME
14,510

 
5,217

 
45,617

 
15,228

Net income attributable to preferred units
(159
)
 
(159
)
 
(477
)
 
(477
)
Net income attributable to participating securities
(255
)
 
(196
)
 
(750
)
 
(589
)
Net income attributable to non-controlling interest in consolidated entities
(2,991
)
 
(2,525
)
 
(9,002
)
 
(6,866
)
Net income attributable to non-controlling interest in units in the operating partnership
(41
)
 
(490
)
 
(256
)
 
(2,357
)
Net income attributable to Hudson Pacific Properties, Inc. common stockholders
$
11,064

 
$
1,847

 
$
35,132

 
$
4,939

Basic and diluted per share amounts:
 
 
 
 
 
 
 
Net income attributable to common stockholders—basic
$
0.07

 
$
0.02

 
$
0.23

 
$
0.05

Net income attributable to common stockholders—diluted
$
0.07

 
$
0.02

 
$
0.23

 
$
0.05

Weighted average shares of common stock outstanding—basic
155,302,800

 
115,083,622

 
152,874,952

 
99,862,583

Weighted average shares of common stock outstanding—diluted
156,093,736

 
116,262,622

 
153,648,888

 
100,979,583

Dividends declared per share
$
0.25

 
$
0.20

 
$
0.75

 
$
0.60


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





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


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,510

 
$
5,217

 
$
45,617

 
$
15,228

Other comprehensive income (loss): change in fair value of derivative instruments
507

 
3,087

 
611

 
(20,818
)
Comprehensive income (loss)
15,017

 
8,304

 
46,228

 
(5,590
)
Comprehensive income attributable to preferred units
(159
)
 
(159
)
 
(477
)
 
(477
)
Comprehensive income attributable to participating securities
(255
)
 
(196
)
 
(750
)
 
(589
)
Comprehensive income attributable to non-controlling interest in consolidated entities
(2,991
)
 
(2,525
)
 
(9,002
)
 
(6,866
)
Comprehensive (income) loss attributable to units in the operating partnership
(43
)
 
(1,137
)
 
(276
)
 
5,903

Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. stockholders
$
11,569

 
$
4,287

 
$
35,723

 
$
(7,619
)

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
Additional
Paid-in
Capital
Accumulated
(Deficit) Income
Accumulated
Other
Comprehensive
(Loss) Income
Non-
controlling
Interest—Units in the
Operating
Partnership
Non-controlling Interest—Members in Consolidated Entities
Total Equity
Balance at January 1, 2016
89,153,780

$
891

$
1,710,979

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

$
262,625

$
3,729,037

Contributions






33,996

33,996

Distributions






(1,303
)
(1,303
)
Proceeds from sale of common stock, net of underwriters’ discount and transaction costs
47,010,695

470

1,449,111





1,449,581

Issuance of unrestricted stock
590,520

6






6

Shares withheld to satisfy tax withholding
(262,760
)
(3
)
(8,424
)




(8,427
)
Declared dividend


(90,005
)


(27,814
)

(117,819
)
Amortization of stock-based compensation


13,609



1,045


14,654

Net income



27,984


5,848

9,290

43,122

Change in fair value of derivatives




10,577

(4,635
)

5,942

Redemption of common units in the operating partnership


34,124



(1,480,163
)

(1,446,039
)
Balance at December 31, 2016
136,492,235

1,364

3,109,394

(16,971
)
9,496

294,859

304,608

3,702,750

Contributions






3,870

3,870

Distributions






(15,369
)
(15,369
)
Proceeds from sale of common stock, net of underwriters’ discount and transaction costs
18,656,575

187

647,337





647,524

Issuance of unrestricted stock
274,251

3

(3
)





Shares withheld to satisfy tax withholding
(120,261
)
(1
)
(4,202
)




(4,203
)
Declared dividend


(117,916
)


(492
)

(118,408
)
Amortization of stock-based compensation


9,865



2,007


11,872

Net income



35,882


256

9,002

45,140

Change in fair value of derivatives




591

20


611

Redemption of common units in the operating partnership


(24,535
)

(3,622
)
(282,698
)

(310,855
)
Balance at September 30, 2017
155,302,800

$
1,553

$
3,619,940

$
18,911

$
6,465

$
13,952

$
302,111

$
3,962,932


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,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
45,617

 
$
15,228

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
217,340

 
201,890

Amortization of deferred financing costs and loan premium, net
3,558

 
3,278

Amortization of stock-based compensation
11,237

 
9,931

Straight-line rents
(15,174
)
 
(19,398
)
Straight-line rent expenses
296

 
886

Amortization of above- and below-market leases, net
(14,326
)
 
(13,804
)
Amortization of above- and below-market ground lease, net
2,088

 
1,604

Amortization of lease incentive costs
1,140

 
1,017

Other non-cash adjustments(1)
598

 
682

Gains on sale of real estate
(16,866
)
 
(8,515
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
1,649

 
12,521

Deferred leasing costs and lease intangibles
(23,270
)
 
(34,610
)
Prepaid expenses and other assets
(3,000
)
 
(5,008
)
Accounts payable and accrued liabilities
34,660

 
32,786

Security deposits and prepaid rent
(5,943
)
 
2,364

Net cash provided by operating activities
239,604

 
200,852

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(224,797
)
 
(183,286
)
Property acquisitions
(257,734
)
 
(307,919
)
Proceeds from sales of real estate
81,707

 
283,855

Contributions to unconsolidated entities
(1,071
)
 
(28,393
)
Distributions from unconsolidated entities
17,416

 

Deposit for property acquisitions

 
(13,130
)
Proceed from repayment of notes receivable

 
28,892

Net cash used in investing activities
(384,479
)
 
(219,981
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
270,000

 
957,000

Payments of notes payable
(321,892
)
 
(808,006
)
Proceeds from issuance of common stock, net
647,524

 
880,514

Payment for redemption of common units in the operating partnership
(310,855
)
 
(876,213
)
Distributions paid to common stockholders and unitholders
(118,408
)
 
(88,469
)
Distributions paid to preferred unitholders
(477
)
 
(477
)
Contributions from non-controlling member in consolidated entities
3,870

 
103

Distributions to non-controlling member in consolidated entities
(15,369
)
 
(990
)
Payments to satisfy tax withholding
(4,203
)
 
(1,776
)
Payments of loan costs

 
(2,661
)
Net cash provided by financing activities
150,190

 
59,025

Net increase in cash and cash equivalents and restricted cash
5,315

 
39,896

Cash and cash equivalents and restricted cash—beginning of period
108,192

 
71,561

Cash and cash equivalents and restricted cash—end of period
$
113,507

 
$
111,457

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest including amounts capitalized
$
47,852

 
$
53,474

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for real estate investments
$
(6,740
)
 
$
(10,227
)
Reclassification of investment in unconsolidated entities for real estate investments
$
7,835

 
$

_____________ 
(1)
Represents bad debt expense/recovery, amortization of discount and net origination fees on purchased and originated loans and unrealized loss/gain on ineffective portion of derivative instruments.


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



ITEM 1.
FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, L.P.

HUDSON PACIFIC PROPERTIES, L.P
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)


 
September 30, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Investment in real estate, at cost
$
6,558,898

 
$
6,099,293

Accumulated depreciation and amortization
(504,141
)
 
(387,181
)
Investment in real estate, net
6,054,757

 
5,712,112

Cash and cash equivalents
87,723

 
83,015

Restricted cash
25,784

 
25,177

Accounts receivable, net
5,014

 
6,833

Straight-line rent receivables, net
97,184

 
82,109

Deferred leasing costs and lease intangible assets, net
257,831

 
294,209

Prepaid expenses and other assets, net
57,360

 
79,058

Assets associated with real estate held for sale
321,437

 
396,485

TOTAL ASSETS
$
6,907,090

 
$
6,678,998

 
 
 
 
LIABILITIES
 
 
 
Notes payable, net
$
2,424,358

 
$
2,473,323

Accounts payable and accrued liabilities
162,938

 
116,973

Lease intangible liabilities, net
55,335

 
73,569

Security deposits and prepaid rent
66,499

 
70,468

Derivative liabilities
819

 
1,303

Liabilities associated with real estate held for sale
224,032

 
230,435

TOTAL LIABILITIES
2,933,981

 
2,966,071

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

 
10,177

CAPITAL
 
 
 
Hudson Pacific Properties, L.P. partners’ capital:
 
 
 
Common units, 155,871,845 and 145,942,855 issued and outstanding at September 30, 2017 and December 31, 2016, respectively.
3,654,332

 
3,392,264

Accumulated other comprehensive income
6,489

 
5,878

Total Hudson Pacific Properties, L.P. partners’ capital
3,660,821

 
3,398,142

Non-controlling interest—members in consolidated entities
302,111

 
304,608

TOTAL CAPITAL
3,962,932

 
3,702,750

TOTAL LIABILITIES AND CAPITAL
$
6,907,090

 
$
6,678,998



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





HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit data)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
139,157

 
$
123,919

 
$
406,275

 
$
358,193

Tenant recoveries
24,982

 
22,657

 
67,421

 
64,493

Parking and other
8,035

 
5,521

 
22,146

 
16,103

Total Office revenues
172,174

 
152,097

 
495,842

 
438,789

Media & Entertainment
 
 
 
 
 
 
 
Rental
11,012

 
7,102

 
26,802

 
19,987

Tenant recoveries
133

 
243

 
927

 
655

Other property-related revenue
6,561

 
5,005

 
14,964

 
12,784

Other
141

 
136

 
271

 
226

Total Media & Entertainment revenues
17,847

 
12,486

 
42,964

 
33,652

TOTAL REVENUES
190,021

 
164,583

 
538,806

 
472,441

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
59,102

 
53,975

 
162,524

 
150,769

Media & Entertainment operating expenses
10,588

 
6,499

 
24,842

 
18,746

General and administrative
13,013

 
12,955

 
41,329

 
38,474

Depreciation and amortization
71,158

 
67,414

 
217,340

 
201,890

TOTAL OPERATING EXPENSES
153,861

 
140,843

 
446,035

 
409,879

INCOME FROM OPERATIONS
36,160

 
23,740

 
92,771

 
62,562

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
22,461

 
19,910

 
66,086

 
54,775

Interest income
(44
)
 
(130
)
 
(90
)
 
(216
)
Unrealized loss (gain) on ineffective portion of derivative instruments
37

 
(879
)
 
82

 
1,630

Transaction-related expenses
598

 
315

 
598

 
376

Other income
(1,402
)
 
(693
)
 
(2,656
)
 
(716
)
TOTAL OTHER EXPENSES
21,650

 
18,523

 
64,020

 
55,849

 INCOME BEFORE GAINS ON SALE OF REAL ESTATE
14,510

 
5,217

 
28,751

 
6,713

Gains on sale of real estate

 

 
16,866

 
8,515

NET INCOME
14,510

 
5,217

 
45,617

 
15,228

Net income attributable to non-controlling interest in consolidated entities
(2,991
)
 
(2,525
)
 
(9,002
)
 
(6,866
)
Net income attributable to Hudson Pacific Properties, L.P.
11,519

 
2,692

 
36,615

 
8,362

Net income attributable to preferred units
(159
)
 
(159
)
 
(477
)
 
(477
)
Net income attributable to participating securities
(255
)
 
(196
)
 
(750
)
 
(589
)
Net income available to Hudson Pacific Properties, L.P. common unitholders
$
11,105

 
$
2,337

 
$
35,388

 
$
7,296

Basic and diluted per unit amounts:
 
 
 
 
 
 
 
Net income attributable to common unitholders—basic
$
0.07

 
$
0.02

 
$
0.23

 
$
0.05

Net income attributable to common unitholders—diluted
$
0.07

 
$
0.02

 
$
0.23

 
$
0.05

Weighted average shares of common units outstanding—basic
155,871,845

 
145,614,312

 
153,736,796

 
145,550,685

Weighted average shares of common units outstanding—diluted
156,662,781

 
146,793,312

 
154,510,732

 
146,667,685

Dividends declared per unit
$
0.25

 
$
0.20

 
$
0.75

 
$
0.60


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





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


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,510

 
$
5,217

 
$
45,617

 
$
15,228

Other comprehensive income (loss): change in fair value of derivative instruments
507

 
3,087

 
611

 
(20,818
)
Comprehensive income (loss)
15,017

 
8,304

 
46,228

 
(5,590
)
Comprehensive income attributable to preferred units
(159
)
 
(159
)
 
(477
)
 
(477
)
Comprehensive income attributable to participating securities
(255
)
 
(196
)
 
(750
)
 
(589
)
Comprehensive income attributable to non-controlling interest in consolidated entities
(2,991
)
 
(2,525
)
 
(9,002
)
 
(6,866
)
Comprehensive income (loss) attributable to Hudson Pacific Properties, L.P. partners’ capital
$
11,612

 
$
5,424

 
$
35,999

 
$
(13,522
)


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





HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit data)

 
Hudson Pacific Properties, L.P. Partners’ Capital
 
 
 
Number of Common Units
Common Units
Accumulated Other Comprehensive (Loss) Income
Non-controlling Interest—Members in Consolidated Entities
Total Capital
Balance at January 1, 2016
145,450,095

$
3,466,476

$
(64
)
$
262,625

$
3,729,037

Contributions



33,996

33,996

Distributions



(1,303
)
(1,303
)
Proceeds from sale of common units, net of underwriters’ discount and transaction costs
47,010,695

1,449,581



1,449,581

Issuance of unrestricted units
590,520

6



6

Units withheld to satisfy tax withholding
(262,760
)
(8,427
)


(8,427
)
Declared distributions

(117,819
)


(117,819
)
Amortization of unit-based compensation

14,654



14,654

Net income

33,832


9,290

43,122

Change in fair value of derivative instruments


5,942


5,942

Redemption of common units
(46,845,695
)
(1,446,039
)


(1,446,039
)
Balance at December 31, 2016
145,942,855

3,392,264

5,878

304,608

3,702,750

Contributions



3,870

3,870

Distributions



(15,369
)
(15,369
)
Proceeds from sale of common units, net of underwriters’ discount and transaction costs
18,656,575

647,524



647,524

Issuance of unrestricted units
274,251





Units withheld to satisfy tax withholding
(120,261
)
(4,203
)


(4,203
)
Declared distributions

(118,408
)


(118,408
)
Amortization of unit-based compensation

11,872



11,872

Net income

36,138


9,002

45,140

Change in fair value of derivative instruments


611


611

Redemption of common units
(8,881,575
)
(310,855
)


(310,855
)
Balance at September 30, 2017
155,871,845

$
3,654,332

$
6,489

$
302,111

$
3,962,932



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





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


 
Nine Months Ended September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
45,617

 
$
15,228

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
217,340

 
201,890

Amortization of deferred financing costs and loan premium, net
3,558

 
3,278

Amortization of unit-based compensation
11,237

 
9,931

Straight-line rents
(15,174
)
 
(19,398
)
Straight-line rent expenses
296

 
886

Amortization of above- and below-market leases, net
(14,326
)
 
(13,804
)
Amortization of above- and below-market ground lease, net
2,088

 
1,604

Amortization of lease incentive costs
1,140

 
1,017

Other non-cash adjustments(1)
598

 
682

Gains on sale of real estate
(16,866
)
 
(8,515
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
1,649

 
12,521

Deferred leasing costs and lease intangibles
(23,270
)
 
(34,610
)
Prepaid expenses and other assets
(3,000
)
 
(5,008
)
Accounts payable and accrued liabilities
34,660

 
32,786

Security deposits and prepaid rent
(5,943
)
 
2,364

Net cash provided by operating activities
239,604

 
200,852

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(224,797
)
 
(183,286
)
Property acquisitions
(257,734
)
 
(307,919
)
Proceeds from sales of real estate
81,707

 
283,855

Contributions to unconsolidated entities
(1,071
)
 
(28,393
)
Distributions from unconsolidated entities
17,416

 

Deposit for property acquisitions

 
(13,130
)
Proceed from repayment of notes receivable

 
28,892

Net cash used in investing activities
(384,479
)
 
(219,981
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
270,000

 
957,000

Payments of notes payable
(321,892
)
 
(808,006
)
Proceeds from issuance of common units, net
647,524

 
880,514

Payment for redemption of common units
(310,855
)
 
(876,213
)
Distributions paid to common unitholders
(118,408
)
 
(88,469
)
Distributions paid to preferred unitholders
(477
)
 
(477
)
Contributions from non-controlling member in consolidated entities
3,870

 
103

Distributions to non-controlling member in consolidated entities
(15,369
)
 
(990
)
Payments to satisfy tax withholding
(4,203
)
 
(1,776
)
Payments of loan costs

 
(2,661
)
Net cash provided by financing activities
150,190

 
59,025

Net increase in cash and cash equivalents and restricted cash
5,315

 
39,896

Cash and cash equivalents and restricted cash—beginning of period
108,192

 
71,561

Cash and cash equivalents and restricted cash—end of period
$
113,507

 
$
111,457

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest including amounts capitalized
$
47,852

 
$
53,474

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for real estate investments
$
(6,740
)
 
$
(10,227
)
Reclassification of investment in unconsolidated entities for real estate investments
$
7,835

 
$

_____________ 
(1)
Represents bad debt expense/recovery, amortization of discount and net origination fees on purchased and originated loans and unrealized loss/gain on ineffective portion of derivative instruments.


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


Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Unaudited 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 as 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 “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 Northern California region. 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.
 
The Company’s portfolio consists of properties located throughout Northern and Southern California and the Pacific Northwest. The following table summarizes the Company’s portfolio as of September 30, 2017:
 
Number of Properties
 
Square Feet (unaudited)
Office properties:
 
 
 
Northern California(1)
29

 
9,600,289

Southern California(2)
16

 
2,817,509

Pacific Northwest(3)
8

 
1,496,620

Total Office properties
53

 
13,914,418

Media & Entertainment properties:
 
 
 
Southern California(2)
3

 
1,249,927

Total Media & Entertainment properties
3

 
1,249,927

Total(4)
56

 
15,164,345

_________________
(1)
Includes the Foster City, Milpitas, North San Jose, Palo Alto, Redwood Shores, San Francisco, San Mateo and Santa Clara submarkets.
(2)
Includes the Burbank, Downtown Los Angeles, Hollywood, Torrance and West Los Angeles submarkets.
(3)
Includes the Lynnwood, Pioneer Square and South Lake Union submarkets.
(4)
Includes redevelopment, development and held for sale office properties.

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 the Securities and Exchange Commission (“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, 2017. The interim consolidated financial statements should be read in conjunction with the

15



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


consolidated financial statements in the 2016 Annual Report on Form 10-K of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. and the notes thereto.

Certain amounts in the consolidated financial statements for the prior period have been reclassified to conform to the current period presentation. Included in the reclassified amounts are properties held for sale. These amounts relate to 3402 Pico Boulevard, which was sold on March 21, 2017, and Pinnacle I and Pinnacle II, which are expected to be sold during the fourth quarter of 2017.

Principles of Consolidation

The unaudited interim consolidated financial statements of the Company include the accounts of the Company, the operating partnership and all wholly owned subsidiaries and variable interest entities (“VIEs”), of which the Company 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 VIEs, of which the operating partnership is the primary beneficiary. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
    
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 of September 30, 2017, the Company has determined that four joint ventures and our operating partnership met the definition of a VIE. Three of the joint ventures are consolidated entities and one joint venture is a non-consolidated entity.

Consolidated Entities

As of September 30, 2017, the operating partnership has determined that three of its joint ventures met the definition of a VIE and are consolidated:
Property
 
Ownership interest

Pinnacle I(1)
 
65.0
%
Pinnacle II(1)
 
65.0
%
1455 Market Street
 
55.0
%
Hill7
 
55.0
%
_____________ 
(1)
A single joint venture owns both Pinnacle I and Pinnacle II. The Company entered into an agreement on September 14, 2017 to sell its ownership interest in Pinnacle I and Pinnacle II. The sale is expected to close in the fourth quarter of 2017.

As of September 30, 2017, the Company has determined that our operating partnership met the definition of a VIE and is consolidated. Substantially all of the assets and liabilities of the Company are related to these VIEs.

Non-consolidated Entities

On June 15, 2017, the Company purchased the remaining interest in land at its 11601 Wilshire property. Refer to Note 3 for details. As a result of the purchase, the Company is no longer accounting for the interest in land as a non-consolidated entity.

As of September 30, 2017, the Company has determined it is not the primary beneficiary of one joint venture that meets the definition of a VIE. Due to its significant influence over the non-consolidated entity, the Company accounts for it using the equity method of accounting. 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. The Company’s net equity investment is reflected within prepaid expenses and other assets on the Consolidated Balance Sheets which represents the

16



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


Company’s maximum exposure for loss. The Company’s share of net income or loss from the entity is included within other income on the Consolidated Statements of Operations. The Company owns 21% of the non-consolidated entity.

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 Accounting Standards Update (“ASU”). The following ASUs were adopted by the Company in 2017:
Standard
 
Description
 
Effect on the Financial Statements or Other Significant Matters
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
This guidance removes step two from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
 
The Company early adopted this guidance during the second quarter of 2017 and applied it prospectively. The adoption did not have an impact on the Company’s consolidated financial statements.
ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
 
The guidance in this ASU is based on two SEC staff announcements made at the September 2016 and November 2016 EITF meetings. In the September meeting, the SEC announced that a registrant should disclose the potential material effects of the ASUs related to revenues, leases and credit losses on financial instruments. As a result of the November meeting, the ASU conforms Accounting Standards Codification (“ASC”) 323 to the guidance issued in ASU 2014-01 related to investments in qualified affordable housing projects.
 
The Company adopted this guidance during the first quarter of 2017 and applied it prospectively. With the adoption, the Company provided updates on its implementation of the ASUs related to revenue, leases and credit losses on financial instruments. Please refer to sections below for updates on the implementation of revenue and lease ASUs. The ASU related to credit losses on financial instruments could have a material impact on trade receivables and the Company is currently assessing the impact of this ASU on its consolidated financial statements and notes to the consolidated financial statements.
ASU 2016-19, Technical Corrections and Improvements
 
The technical corrections make minor change to certain aspects of the FASB ASC, including changes to resolve differences between current and pre-Codification guidance, updates to wording, references to avoid misapplication and textual simplifications to increase the Codification’s utility and understandability and minor amendments to guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.
 
The Company adopted this guidance during the first quarter of 2017 and applied it prospectively. The adoption did not have a material impact on the Company’s consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
 
This guidance requires entities to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. 
 
The Company early adopted this guidance during the second quarter of 2017 and applied it retrospectively. Pursuant to the adoption, the Company revised the Consolidated Statement of Cash Flows and disclosed the reconciliation to the related captions in the Consolidated Balance Sheets in Note 19.

17



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


Standard
 
Description
 
Effect on the Financial Statements or Other Significant Matters
ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
 
This guidance outlines how a single decisionmaker 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.
 
The Company adopted this guidance during the first quarter of 2017 and applied it retrospectively. The adoption did not have a material impact on the Company’s consolidated financial statements and did not change the consolidation conclusion.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
 
This ASU clarifies how certain transactions should be classified in the statement of cash flows, including debt prepayment costs, contingent consideration payments made after a business combination and distributions received from equity method investments. The ASU provides two approaches to determine the classification of cash distributions received from equity method investments: (i) the “cumulative earnings” approach, under which distributions up to the amount of cumulative equity in earnings recognized will be classified as cash inflows from operating activities, and those in excess of that amount will be classified as cash inflows from investing activities and (ii) the “nature of the distribution” approach, under which distributions will be classified based on the nature of the underlying activity that generated cash distributions. The guidance requires a Company to elect either the “cumulative earnings” approach or the “nature of the distribution” approach at the time of adoption.
 
The Company early adopted this guidance during the second quarter of 2017 and applied it retrospectively. Pursuant to the adoption, the Company elected the “nature of the distribution” approach related to the distributions received from its equity method investments. The adoption did not have an impact on the Company’s Consolidated Statements of Cash Flows.
ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting
 
The guidance eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for use of the equity method. The guidance also requires an investor that has an available-for-sale security that subsequently qualifies for the equity method to recognize in net income the unrealized holding gains or losses in accumulated other comprehensive income related to that security when it begins applying the equity method. It is required to apply this guidance prospectively.
 
The Company adopted this guidance during the first quarter of 2017 and applied it prospectively. The adoption did not have a material impact on the Company’s consolidated financial statements.
ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
 
The guidance states that the novation of a derivative contract (e.g., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require de-designation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. Either a prospective or a modified retrospective approach can be applied.
 
The Company adopted this guidance during the first quarter of 2017 and applied it prospectively. The adoption did not have a material impact on the Company’s consolidated financial statements.
    
Update on ASC 606, Revenue from Contracts with Customers (“ASC 606”), implementation

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This guidance outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and specifically notes that lease contracts with customers are a scope exception. The FASB has subsequently issued other ASUs to amend and provide further guidance related to ASC 606. These ASUs are effective for annual reporting periods (including interim periods) beginning after December 15, 2017. Either the full retrospective basis (to the beginning of its contracts) or modified retrospective method (from the beginning of the latest fiscal year of adoption) is permitted.

The Company has compiled an inventory of sources of revenues and have preliminarily identified three revenue streams. Two of these revenue streams will be accounted for under ASC 606 when it becomes effective on January 1, 2018. The remaining revenue stream, which is integral to the Company’s leasing revenues, will be accounted for under ASC 606, effective with the adoption of ASC 842, Leases (“ASC 842”), on January 1, 2019. The Company is in the process of evaluating the impact on its consolidated financial statements but expects that the recognition of revenues will not be impacted by this standard. The Company plans to adopt ASC 606 on January 1, 2018 using the modified retrospective approach.
    

18



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


Update on ASC 842 implementation

On February 25, 2016, the FASB issued ASU 2016-02 to amend the accounting guidance for leases and sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). 

ASC 842 provides practical expedience that allow entities to not (i) reassess whether any expired or existing contracts are or contain leases; (ii) reassess the lease classification for any expired or existing leases; (iii) reassess initial direct costs for any existing leases. This ASU is effective for annual reporting periods (including interim periods) beginning after December 15, 2018. A modified retrospective approach must be applied for leases that exist or are entered into after the beginning of the earliest comparative period presented in the consolidated financial statements.

The Company plans to adopt the standard on January 1, 2019 and expects to adopt using the practical expedience elections.

Lessor Accounting
    
The Company recognized rental revenues and tenant recoveries of $175.3 million and $501.4 million for the three and nine months ended September 30, 2017. This ASU requires companies to identify lease and non-lease components of a lease agreement. Lease components relate to the right to use the leased asset and non-lease components relate to payments for goods or services that are transferred separately from the right to use the underlying asset. Total lease consideration is allocated to lease and non-lease components on a relative standalone basis. The recognition of revenues related to lease components will be governed by ASC 842 while revenue related to non-lease components will be subject to ASC 606.

Under current accounting standards, the Company recognizes rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset. Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred. The reimbursements are recognized and presented gross, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear the associated credit risk.

The Company has not completed its analysis of this ASU but expects that lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance. The Company expects that tenant recoveries will be separated into lease and non-lease components.

The ASU also requires lessors to capitalize only those costs that are defined as initial direct costs. Under the current accounting standards, the Company capitalizes initial direct and indirect leasing costs. During the three and nine months ended September 30, 2017, the Company capitalized $1.8 million and $5.0 million of indirect leasing costs, respectively. Under this new ASU, these costs will be expensed as incurred.

Lessee Accounting

As of September 30, 2017, the future undiscounted minimum lease payments under the Company’s ground leases totaled $456.3 million. This guidance requires lessees to record a lease liability at lease inception, with a corresponding right-of-use asset, except for short-term leases. The Company continues to evaluate the amount of right-of-use asset and lease liability that will need to be recorded with respect to its ground leases where it is the lessee.





19



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


Other recently issued ASUs

The Company considers the applicability and impact of all ASUs. The following table lists the recently issued ASUs that have not been disclosed in the Company’s 2016 Annual Report on Form 10-K and have not been adopted by the Company. The list excludes those ASUs that are not expected to have a material impact on the Company’s consolidated financial statements.
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
 
The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Therefore, a cumulative effect adjustment related to elimination of ineffectiveness measurement is required to be recorded to the opening balance of retained earnings as of the beginning of the fiscal year of adoption for cash flow hedge. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This guidance must be applied using a modified retrospective approach.
 
Effective for annual reporting periods (including interim periods) beginning after December 15, 2018
 
The Company is currently evaluating the impact of this standard on its consolidated financial statements and notes to the consolidated financial statements. The Company expects that the adoption would impact derivative instruments that have portions of ineffectiveness. The Company plans to early adopt this guidance during the first quarter in 2018 and apply it using the modified retrospective approach.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
 
The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This guidance must be applied prospectively.
 
Effective for annual reporting periods (including interim periods) beginning after December 15, 2017
 
The Company does not currently expect a material impact of this ASU on its consolidated financial statements and notes to the consolidated financial statements. The Company plans to adopt this guidance during the first quarter in 2018.
ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
The guidance updates the definition of an in substance nonfinancial asset and clarifies the scope of ASC 610-20 on the sale or transfer of nonfinancial assets to noncustomers, including partial sales. It also clarifies the derecognition guidance for nonfinancial assets to conform with the new revenue recognition standard. Either a full or modified retrospective approach can be applied.
 
Effective for annual reporting periods (including interim periods) beginning after December 15, 2017
 
The Company currently expects that the adoption of this ASU could have a material impact on its consolidated financial statements; however, such impact will not be known until the Company disposes of any of its investments in real estate properties, which would all be sales of nonfinancial assets. The Company plans to adopt this guidance during the first quarter in 2018 and apply it using the modified retrospective approach.
    

20



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


3. Investment in Real Estate

Real estate held for investment

The following table summarizes the Company’s investment in real estate, at cost as of:
 
September 30, 2017
 
December 31, 2016
Land
$
1,369,320

 
$
1,221,450

Building and improvements
4,526,416

 
4,217,232

Tenant improvements
389,284

 
361,108

Furniture and fixtures
8,217

 
4,264

Property under development
265,661

 
295,239

Investment in real estate, at cost(1)
$
6,558,898

 
$
6,099,293

_____________ 
(1)
Excludes balances related to properties that have been classified as held for sale.

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.

The Company evaluates each acquisition to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination in accordance with ASC 805, Business Combinations. An integrated set of assets and activities would fail to qualify as a business if either (i) substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction). An acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable and experienced in performing the process, (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the process is considered unique or scarce.

The Company assesses fair value based on Level 2 and Level 3 inputs within the fair value framework, which includes estimated cash flow projections that utilize appropriate discount, capitalization rates, renewal probability and available market information, which includes market rental rate and market rent growth rates. 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.

The fair value of tangible assets of an acquired property considers the value of the property as if it were 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 below-market term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s 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, the Company includes 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, the Company considers leasing commissions and legal and other related costs.


21



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


The following table summarizes the information on the acquisitions completed during the nine months ended September 30, 2017:
Property
 
Submarket
 
Segment
 
Date of Acquisition
 
Square Feet (unaudited)
 
Purchase Price(1) (in millions)
Sunset Las Palmas Studios(2)
 
Hollywood
 
Media and Entertainment
 
5/1/2017
 
369,000

 
$
200.0

11601 Wilshire land(3)
 
West Los Angeles
 
Office
 
6/15/2017
 
N/A

 
50.0

6666 Santa Monica(4)
 
Hollywood
 
Media and Entertainment
 
6/29/2017
 
4,150

 
3.2

Total acquisitions
 
 
 
 
 
 
 
373,150

 
$
253.2

_____________ 
(1)
Represents purchase price before certain credits, prorations and closing costs.
(2)
The property consists of stages, production office and support space on 15 acres near Sunset Gower Studios and Sunset Bronson Studios. The purchase price above does not include equipment purchased by the Company for $2.8 million, which was transacted separately from the studio acquisition. In April 2017, the Company drew $150.0 million under the unsecured revolving credit facility to fund the acquisition.
(3)
On July 1, 2016 the Company purchased a partial interest in land held as a tenancy in common in conjunction with its acquisition of the 11601 Wilshire property. The land interest held as a tenancy in common was accounted for as an equity method investment. On June 15, 2017, the Company purchased the remaining interest, which was fair valued and allocated to land and building.
(4)
This parcel is adjacent to the Sunset Las Palmas Studios property.

The Company’s acquisitions did not meet the definition of a business and were therefore accounted for as asset acquisitions. In accordance with asset acquisitions, the purchase price includes capitalized acquisition costs. The following table represents the Company’s final aggregate purchase price accounting, as of the respective acquisition dates, for each of the Company’s acquisitions completed in the nine months ended September 30, 2017:
 
Sunset Las Palmas Studios(1)
 
11601 Wilshire land
 
6666 Santa Monica
 
Total
Investment in real estate
$
202,723

 
$
50,034

 
$
3,091

 
$
255,848

Deferred leasing costs and in-place lease intangibles(2)
1,741

 

 
145

 
1,886

Total assets assumed
$
204,464

 
$
50,034

 
$
3,236

 
$
257,734

_____________ 
(1)
The purchase price allocation includes equipment purchased by the Company of $2.8 million.
(2)
Represents weighted-average amortization period of 1.21 years.

Dispositions

The following table summarizes the properties sold during the nine months ended September 30, 2017. These properties were non-strategic assets to the Company’s portfolio:
Property
 
Date of Disposition
 
Square Feet (unaudited)
 
Sales Price(1) 
(in millions)
222 Kearny Street
 
2/14/2017
 
148,797

 
$
51.8

3402 Pico Boulevard
 
3/21/2017
 
50,687

 
35.0

Total dispositions
 
 
 
199,484

 
$
86.8

_________________ 
(1)
Represents gross sales price before certain credits, prorations and closing costs.

The dispositions of these properties resulted in a $16.9 million gain for the nine months ended September 30, 2017. This amount is included in gains on sale of real estate in the Consolidated Statements of Operations. There were no dispositions during the three months ended September 30, 2017.
    
Held for Sale

The Company had four properties classified as held for sale as of December 31, 2016. Two properties were disposed of during the first quarter of 2017. The Company entered into an agreement on September 14, 2017 to sell its ownership interest in the consolidated joint venture that owns Pinnacle I and Pinnacle II to certain affiliates of Blackstone for $350.0 million, before credits, prorations and closing costs, including the assumption of $216.0 million of secured notes payable. The sale of Pinnacle I and Pinnacle II is expected to close in the fourth quarter of 2017.

22



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



The following table summarizes the components of assets and liabilities associated with real estate held for sale as of:
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Investment in real estate, net
 
$
302,992

 
$
371,422

Accounts receivable, net
 
11

 
357

Straight-line rent receivables, net
 
5,220

 
5,949

Deferred leasing costs and lease intangible assets, net
 
13,204

 
17,798

Prepaid expenses and other assets, net
 
10

 
959

Assets associated with real estate held for sale
 
$
321,437

 
$
396,485

 
 
 
 
 
LIABILITIES
 
 
 
 
Notes payable, net
 
$
214,818

 
$
214,687

Accounts payable and accrued liabilities
 
3,229

 
6,517

Lease intangible liabilities, net
 
5,316

 
6,588

Security deposits and prepaid rent
 
669

 
2,643

Liabilities associated with real estate held for sale
 
$
224,032

 
$
230,435


Impairment of Long-Lived Assets

No impairment indicators have been noted and the Company recorded no impairment charges for the nine months ended September 30, 2017.


23



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


4. Deferred Leasing Costs and Lease Intangibles, net

The following summarizes the Company’s deferred leasing costs and lease intangibles as of:
 
September 30, 2017
 
December 31, 2016
Above-market leases
$
19,622

 
$
23,430

Accumulated amortization
(14,299
)
 
(12,989
)
Above-market leases, net
5,323

 
10,441

Deferred leasing costs and in-place lease intangibles
316,695

 
350,747

Accumulated amortization
(128,598
)
 
(133,511
)
Deferred leasing costs and in-place lease intangibles, net
188,097

 
217,236

Below-market ground leases
71,210

 
71,423

Accumulated amortization
(6,799
)
 
(4,891
)
Below-market ground leases, net
64,411

 
66,532

Deferred leasing costs and lease intangible assets, net(1)
$
257,831

 
$
294,209

 
 
 
 
Below-market leases
$
111,443

 
$
128,817

Accumulated amortization
(57,081
)
 
(56,254
)
Below-market leases, net
54,362

 
72,563

Above-market ground leases
1,095

 
1,095

Accumulated amortization
(122
)
 
(89
)
Above-market ground leases, net
973

 
1,006

Lease intangible liabilities, net(1)
$
55,335

 
$
73,569

_____________ 
(1)
Excludes balances related to properties that have been classified as held for sale.
    
The Company recognized the following amortization related to deferred leasing costs and lease intangibles:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Above-market leases(1)
$
1,855

 
$
2,809

 
$
5,122

 
$
10,223

Below-market leases(1)
5,776

 
7,311

 
19,448

 
24,027

Deferred leasing costs and in-place lease intangibles(2)
17,376

 
20,742

 
57,813

 
65,408

Above-market ground leases(3)
11

 
11

 
33


33

Below-market ground leases(3)
629

 
545

 
2,121


1,637

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


24



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


5. Accounts Receivable, net

The Company’s accounting policy and methodology used to estimate the allowance for doubtful accounts is discussed in the Company’s 2016 Annual Report on Form 10-K. The following table summarizes the Company’s accounts receivable, net of allowance for doubtful accounts as of:
 
September 30, 2017
 
December 31, 2016
Accounts receivable
$
6,643

 
$
8,660

Allowance for doubtful accounts
(1,629
)
 
(1,827
)
Accounts receivable, net(1)
$
5,014

 
$
6,833

_____________ 
(1)
Excludes balances related to properties that have been classified as held for sale.

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 Company’s 2016 Annual Report on Form 10-K. The following table represents the Company’s straight-line rent receivables, net of allowance for doubtful accounts as of:
 
September 30, 2017
 
December 31, 2016
Straight-line rent receivables
$
97,191

 
$
82,245

Allowance for doubtful accounts
(7
)
 
(136
)
Straight-line rent receivables, net(1)
$
97,184

 
$
82,109

_____________ 
(1)
Excludes balances related to properties that have been classified as held for sale.

7. Prepaid Expenses and Other Assets, net    

The following table summarizes the Company’s prepaid expenses and other assets, net as of:
 
September 30, 2017
 
December 31, 2016
Investment in unconsolidated entities
$
14,093

 
$
37,228

Goodwill
8,754

 
8,754

Derivative assets
6,250

 
5,935

Other
28,263

 
27,141

Prepaid expenses and other assets, net
$
57,360

 
$
79,058

_____________ 
(1)
Excludes balances related to properties that have been classified as held for sale.

No goodwill impairment indicators have been noted during the nine months ended September 30, 2017.


25



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


8. Notes Payable, net
    
The following table sets forth information with respect to the amounts included in notes payable, net as of:
 
September 30, 2017
 
December 31, 2016
 
Interest Rate(1)
 
Contractual Maturity Date
 
UNSECURED NOTES PAYABLE
 
 
 
 
 
 
 
 
Unsecured Revolving Credit Facility(2)
$
250,000

 
$
300,000

 
LIBOR + 1.15% to 1.85%
 
4/1/2019
(3) 
5-Year Term Loan due April 2020(2)(4)
450,000

 
450,000

 
LIBOR + 1.30% to 2.20%
 
4/1/2020
 
5-Year Term Loan due November 2020(2)
175,000

 
175,000

 
LIBOR + 1.30% to 2.20%
 
11/17/2020
 
7-Year Term Loan due April 2022(2)(5)
350,000

 
350,000

 
LIBOR + 1.60% to 2.55%
 
4/1/2022
 
7-Year Term Loan due November 2022(2)(6)
125,000

 
125,000

 
LIBOR + 1.60% to 2.55%
 
11/17/2022
 
Series A Notes
110,000

 
110,000

 
4.34%
 
1/2/2023
 
Series E Notes
50,000

 
50,000

 
3.66%
 
9/15/2023
 
Series B Notes
259,000

 
259,000

 
4.69%
 
12/16/2025
 
Series D Notes
150,000

 
150,000