Hudson Pacific Properties Reports Third Quarter 2021 Financial Results

Current Guidance

Full Year 2021

Metric

Low

High

FFO per share

$1.95

$1.99

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

3.75%

4.75%

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

12.00%

13.00%

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

$21,500

$31,500

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

$(3,750)

$(3,750)

General and administrative expenses(6)

$(69,000)

$(73,000)

Interest expense(7)

$(121,500)

$(124,500)

Interest income

$3,700

$3,800

Corporate-related depreciation and amortization

$(7,750)

$(7,850)

FFO from unconsolidated joint ventures

$7,500

$8,500

FFO attributable to non-controlling interests

$(62,500)

$(66,500)

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

153,000

154,000

1)

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

2)

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

3)

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

4)

This estimate excludes approximately $0.4 million of one-time, prior period supplemental property tax expenses related to Sunset Bronson and Sunset Gower. The estimate also excludes approximately $1.4 million of a one-time prior-period supplemental property tax reimbursement related to Sunset Las Palmas. Please see the Same-Store Analysis in the Company’s First, Second and Third Quarter 2021 Supplemental Operating and Financial Information reports for further detail regarding these expenses and reimbursements.

5)

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

6)

Includes non-cash compensation expense, which the Company estimates at $21,000 in 2021.

7)

Includes amortization of deferred financing costs and loan discounts/premiums, which the Company estimates at $10,500 in 2021. This estimate does not include costs associated with the early extinguishment of debt, which the Company estimates at $6,249 in 2021.

8)

Diluted shares represent ownership in the Company through shares of common stock, OP Units and other convertible or exchangeable instruments. The weighted average fully diluted common stock/units outstanding for 2021 includes an estimate for the dilution impact of stock grants to the Company's executives under its 2019, 2020 and 2021 long-term incentive programs. This estimate is based on the projected award potential of such programs as of the end of the most recently completed quarter, as calculated in accordance with the ASC 260, Earnings Per Share.

Consolidated Balance Sheets

In thousands, except share data

September 30, 2021

December 31, 2020

(Unaudited)

ASSETS

Investment in real estate, at cost

$

8,446,491

$

8,215,017

Accumulated depreciation and amortization

(1,285,137

)

(1,102,748

)

Investment in real estate, net

7,161,354

7,112,269

Non-real estate property, plant and equipment, net

60,318

8,444

Cash and cash equivalents

110,500

113,686

Restricted cash

109,737

35,854

Accounts receivable, net

24,730

22,105

Straight-line rent receivables, net

241,281

225,685

Deferred leasing costs and intangible assets, net

335,619

285,836

U.S. Government securities

130,103

135,115

Operating lease right-of-use assets

273,997

264,880

Prepaid expenses and other assets, net

98,693

55,469

Investment in unconsolidated real estate entities

152,516

82,105

Goodwill

105,149

8,754

TOTAL ASSETS

$

8,803,997

$

8,350,202

LIABILITIES AND EQUITY

Liabilities

Unsecured and secured debt, net

$

3,910,405

$

3,399,492

In-substance defeased debt

129,105

131,707

Joint venture partner debt

66,136

66,136

Accounts payable, accrued liabilities and other

307,091

235,860

Operating lease liabilities

280,210

270,014

Intangible liabilities, net

40,257

49,144

Security deposits and prepaid rent

79,250

92,180

Total liabilities

4,812,454

4,244,533

Redeemable preferred units of the operating partnership

9,815

9,815

Redeemable non-controlling interest in consolidated real estate entities

129,348

127,874

Equity

Hudson Pacific Properties, Inc. stockholders' equity:

Common stock, $0.01 par value, 490,000,000 authorized, 152,320,252 shares and 151,401,365 shares outstanding at September 30, 2021 and December 31, 2020, respectively

1,523

1,514

Additional paid-in capital

3,389,693

3,469,758

Accumulated other comprehensive loss

(4,448

)

(8,133

)

Accumulated deficit

—

—

Total Hudson Pacific Properties, Inc. stockholders' equity

3,386,768

3,463,139

Non-controlling interest—members in consolidated real estate entities

417,255

467,009

Non-controlling interest—units in the operating partnership

48,357

37,832

Total equity

3,852,380

3,967,980

TOTAL LIABILITIES AND EQUITY

$

8,803,997

$

8,350,202

Consolidated Statements of Operations

In thousands, except share data

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

REVENUES

Office

Rental

$

197,941

$

178,256

$

580,354

$

540,023

Service and other revenues

3,925

2,460

9,358

11,428

Total office revenues

201,866

180,716

589,712

551,451

Studio

Rental

12,768

11,724

36,472

36,767

Service and other revenues

12,998

3,845

30,169

12,904

Total studio revenues

25,766

15,569

66,641

49,671

Total revenues

227,632

196,285

656,353

601,122

OPERATING EXPENSES

Office operating expenses

71,865

66,075

207,538

194,546

Studio operating expenses

12,044

9,034

35,963

27,635

General and administrative

18,288

17,428

53,846

53,943

Depreciation and amortization

88,568

75,052

255,507

222,331

Total operating expenses

190,765

167,589

552,854

498,455

OTHER INCOME (EXPENSE)

Income (loss) from unconsolidated real estate entities

566

(105

)

1,671

69

Fee income

678

575

2,323

1,741

Interest expense

(30,825

)

(29,838

)

(91,800

)

(84,185

)

Interest income

934

1,056

2,868

3,129

Management services reimbursement income—unconsolidated real estate entities

253

—

879

—

Management services expense—unconsolidated real estate entities

(253

)

—

(879

)

—

Transaction-related expenses

(6,300

)

(181

)

(7,364

)

(440

)

Unrealized gain (loss) on non-real estate investments

827

513

11,620

(2,335

)

Impairment loss

(2,762

)

—

(2,762

)

—

Loss on extinguishment of debt

(6,249

)

(2,654

)

(6,249

)

(2,654

)

Other income (expense)

82

576

(1,547

)

1,606

Total other expense

(43,049

)

(30,058

)

(91,240

)

(83,069

)

Net (loss) income

(6,182

)

(1,362

)

12,259

19,598

Net income attributable to preferred units

(153

)

(153

)

(459

)

(459

)

Net income attributable to participating securities

(276

)

(109

)

(830

)

(321

)

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

(3,585

)

(5,170

)

(15,764

)

(12,577

)

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

816

1,304

2,780

2,707

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

85

54

16

(89

)

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(9,295

)

$

(5,436

)

$

(1,998

)

$

8,859

BASIC AND DILUTED PER SHARE AMOUNTS

Net (loss) income attributable to common stockholders—basic

$

(0.06

)

$

(0.04

)

$

(0.01

)

$

0.06

Net (loss) income attributable to common stockholders—diluted

$

(0.06

)

$

(0.04

)

$

(0.01

)

$

0.06

Weighted average shares of common stock outstanding—basic

152,320,252

153,196,007

151,443,305

153,643,278

Weighted average shares of common stock outstanding—diluted

152,320,252

153,196,007

151,443,305

156,030,815

Funds From Operations

Unaudited, in thousands, except per share data

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

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

Net (loss) income

$

(6,182

)

$

(1,362

)

$

12,259

$

19,598

Adjustments:

Depreciation and amortization—Consolidated

88,568

75,052

255,507

222,331

Depreciation and amortization—Non-real estate assets

(2,221

)

(581

)

(3,388

)

(1,720

)

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

1,462

1,445

4,523

4,181

Impairment loss

2,762

—

2,762

—

Unrealized (gain) loss on non-real estate investments

(827

)

(513

)

(11,620

)

2,335

Tax impact of unrealized gain on non-real estate investment

—

—

1,876

—

FFO attributable to non-controlling interests

(14,288

)

(10,725

)

(46,731

)

(24,619

)

FFO attributable to preferred units

(153

)

(153

)

(459

)

(459

)

FFO to common stockholders and unitholders

69,121

63,163

214,729

221,647

Specified items impacting FFO:

Transaction-related expenses

6,300

181

7,364

440

One-time straight line rent reserve

—

—

—

2,620

One-time prior period net property tax adjustment

(1,346

)

—

26

—

One-time debt extinguishment cost—Company's share

3,187

2,654

3,187

2,654

FFO (excluding specified items) to common stockholders and unitholders

$

77,262

$

65,998

$

225,306

$

227,361

Weighted average common stock/units outstanding—diluted

154,027

154,774

153,379

155,422

FFO per common stock/unit—diluted

$

0.45

$

0.41

$

1.40

$

1.43

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

$

0.50

$

0.43

$

1.47

$

1.46

1.

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

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

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

Net Operating Income

Unaudited, in thousands

Three Months Ended September 30,

2021

2020

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

Net loss

$

(6,182

)

$

(1,362

)

Adjustments:

(Income) loss from unconsolidated real estate entities

(566

)

105

Fee income

(678

)

(575

)

Interest expense

30,825

29,838

Interest income

(934

)

(1,056

)

Management services reimbursement income—unconsolidated real estate entities

(253

)

—

Management services expense—unconsolidated real estate entities

253

—

Transaction-related expenses

6,300

181

Unrealized gain on non-real estate investments

(827

)

(513

)

Impairment loss

2,762

—

Loss on extinguishment of debt

6,249

2,654

Other income

(82

)

(576

)

General and administrative

18,288

17,428

Depreciation and amortization

88,568

75,052

NOI

$

143,723

$

121,176

NET OPERATING INCOME BREAKDOWN

Same-store office cash revenues

174,540

161,484

Straight-line rent

683

5,788

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

2,106

2,414

Amortization of lease incentive costs

(444

)

(440

)

Same-store office revenues

176,885

169,246

Same-store studios cash revenues

18,070

15,323

Straight-line rent

690

255

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

—

(6

)

Amortization of lease incentive costs

(9

)

(3

)

Same-store studio revenues

18,751

15,569

Same-store revenues

195,636

184,815

Same-store office cash expenses

61,944

59,827

Straight-line rent

325

366

Non-cash portion of interest expense

11

4

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

586

586

Same-store office expenses

62,866

60,783

Same-store studio cash expenses

8,879

9,004

Non-cash portion of interest expense

80

30

Same-store studio expenses

8,959

9,034

Same-store expenses

71,825

69,817

Same-store net operating income

123,811

114,998

Non-same-store net operating income

19,912

6,178

NET OPERATING INCOME

$

143,723

$

121,176

SAME-STORE OFFICE NOI INCREASE

5.1

%

SAME-STORE OFFICE CASH NOI INCREASE

10.8

%

SAME-STORE STUDIO NOI INCREASE

49.8

%

SAME-STORE STUDIO CASH NOI INCREASE

45.5

%

1.

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