Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
or
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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)
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| | |
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 outstanding at August 1, 2016 was 119,341,760.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the three months ended June 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 June 30, 2016, Hudson Pacific Properties, Inc. owned approximately 68.5% of the outstanding common units of partnership interest (including unvested restricted units) in our operating partnership, or common units. The remaining approximately 31.5% of outstanding common units at June 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:
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• | 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; |
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• | 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 |
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• | 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
June 30, 2016
TABLE OF CONTENTS
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ITEM 1. | Financial Statements of Hudson Pacific Properties, Inc. | |
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ITEM 1. | Financial Statements of Hudson Pacific Properties, L.P. | |
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ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
ITEM 5. | | |
ITEM 6. | | |
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PART I—FINANCIAL INFORMATION
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (unaudited) | | |
ASSETS | | | |
REAL ESTATE ASSETS | | | |
Land | $ | 1,252,484 |
| | $ | 1,252,484 |
|
Building and improvements | 3,937,522 |
| | 3,887,683 |
|
Tenant improvements | 305,947 |
| | 290,122 |
|
Furniture and fixtures | 4,082 |
| | 9,586 |
|
Property under development | 247,682 |
| | 218,438 |
|
Total real estate held for investment | 5,747,717 |
| | 5,658,313 |
|
Accumulated depreciation and amortization | (340,262 | ) | | (267,855 | ) |
Investment in real estate, net | 5,407,455 |
| | 5,390,458 |
|
Cash and cash equivalents | 337,400 |
| | 53,551 |
|
Restricted cash | 19,166 |
| | 18,010 |
|
Accounts receivable, net | 10,550 |
| | 21,048 |
|
Notes receivable, net | — |
| | 28,684 |
|
Straight-line rent receivables, net | 70,529 |
| | 59,408 |
|
Deferred leasing costs and lease intangible assets, net | 293,191 |
| | 314,483 |
|
Derivative assets | — |
| | 2,061 |
|
Goodwill | 8,754 |
| | 8,754 |
|
Prepaid expenses and other assets, net | 49,209 |
| | 27,278 |
|
Investment in unconsolidated entity | 28,237 |
| | — |
|
Assets associated with real estate held for sale | 52,432 |
| | 330,300 |
|
TOTAL ASSETS | $ | 6,276,923 |
| | $ | 6,254,035 |
|
LIABILITIES AND EQUITY | | | |
Notes payable, net | $ | 2,338,882 |
| | $ | 2,260,716 |
|
Accounts payable and accrued liabilities | 104,156 |
| | 82,405 |
|
Lease intangible liabilities, net | 77,841 |
| | 94,446 |
|
Security deposits | 24,148 |
| | 20,342 |
|
Prepaid rent | 30,352 |
| | 38,111 |
|
Derivative liabilities | 26,478 |
| | 2,010 |
|
Liabilities associated with real estate held for sale | 5,267 |
| | 16,791 |
|
TOTAL LIABILITIES | 2,607,124 |
| | 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, 99,385,084 shares and 89,153,780 shares outstanding at June 30, 2016 and December 31, 2015, respectively | 993 |
| | 891 |
|
Additional paid-in capital | 1,998,361 |
| | 1,710,979 |
|
Accumulated other comprehensive loss | (16,079 | ) | | (1,081 | ) |
Accumulated deficit | (41,470 | ) | | (44,955 | ) |
Total Hudson Pacific Properties, Inc. stockholders’ equity | 1,941,805 |
| | 1,665,834 |
|
Non-controlling interest—members in consolidated entities | 266,406 |
| | 262,625 |
|
Non-controlling interest—units in the operating partnership | 1,451,411 |
| | 1,800,578 |
|
TOTAL EQUITY | 3,659,622 |
| | 3,729,037 |
|
TOTAL LIABILITIES AND EQUITY | $ | 6,276,923 |
| | $ | 6,254,035 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | | | | | | | |
Office | | | | | | | |
Rental | $ | 118,047 |
| | $ | 120,052 |
| | $ | 234,274 |
| | $ | 161,628 |
|
Tenant recoveries | 21,303 |
| | 17,790 |
| | 41,836 |
| | 23,854 |
|
Parking and other | 5,050 |
| | 5,716 |
| | 10,582 |
| | 11,011 |
|
Total office revenues | 144,400 |
| | 143,558 |
| | 286,692 |
| | 196,493 |
|
Media & Entertainment | | | | | | | |
Rental | 6,857 |
| | 5,394 |
| | 12,885 |
| | 10,861 |
|
Tenant recoveries | 213 |
| | 253 |
| | 412 |
| | 493 |
|
Other property-related revenue | 2,810 |
| | 2,556 |
| | 7,779 |
| | 6,665 |
|
Other | 41 |
| | 58 |
| | 90 |
| | 131 |
|
Total Media & Entertainment revenues | 9,921 |
| | 8,261 |
| | 21,166 |
| | 18,150 |
|
Total revenues | 154,321 |
| | 151,819 |
| | 307,858 |
| | 214,643 |
|
Operating expenses | | | | | | | |
Office operating expenses | 49,091 |
| | 46,691 |
| | 96,794 |
| | 63,826 |
|
Media & Entertainment operating expenses | 6,295 |
| | 5,069 |
| | 12,247 |
| | 11,074 |
|
General and administrative | 13,016 |
| | 10,373 |
| | 25,519 |
| | 19,573 |
|
Depreciation and amortization | 66,108 |
| | 73,592 |
| | 134,476 |
| | 90,750 |
|
Total operating expenses | 134,510 |
| | 135,725 |
| | 269,036 |
| | 185,223 |
|
Income from operations | 19,811 |
| | 16,094 |
| | 38,822 |
| | 29,420 |
|
Other expense (income) | | | | | | | |
Interest expense | 17,614 |
| | 14,113 |
| | 34,865 |
| | 19,606 |
|
Interest income | (73 | ) | | (48 | ) | | (86 | ) | | (101 | ) |
Unrealized loss on ineffective portion of derivative instruments | 384 |
| | — |
| | 2,509 |
| | — |
|
Acquisition-related expenses | 61 |
| | 37,481 |
| | 61 |
| | 43,525 |
|
Other (income) expense | (47 | ) | | 40 |
| | (23 | ) | | (1 | ) |
Total other expenses | 17,939 |
| | 51,586 |
| | 37,326 |
| | 63,029 |
|
Income (loss) before gains (loss) on sale of real estate | 1,872 |
| | (35,492 | ) | | 1,496 |
| | (33,609 | ) |
Gains (loss) on sale of real estate | 2,163 |
| | (591 | ) | | 8,515 |
| | 22,100 |
|
Net income (loss) | 4,035 |
| | (36,083 | ) | | 10,011 |
| | (11,509 | ) |
Net income attributable to preferred stock and units | (159 | ) | | (3,195 | ) | | (318 | ) | | (6,390 | ) |
Net income attributable to participating securities | (196 | ) | | (80 | ) | | (393 | ) | | (150 | ) |
Net income attributable to non-controlling interest in consolidated real estate entities | (2,396 | ) | | (1,893 | ) | | (4,341 | ) | | (3,395 | ) |
Net (income) loss attributable to common units in the operating partnership | (445 | ) | | 16,008 |
| | (1,867 | ) | | 15,412 |
|
Net income (loss) attributable to Hudson Pacific Properties, Inc. common stockholders | $ | 839 |
| | $ | (25,243 | ) | | $ | 3,092 |
| | $ | (6,032 | ) |
Basic and diluted per share amounts: | | | | | | | |
Net income attributable to common stockholders’ per share—basic | $ | 0.01 |
| | $ | (0.28 | ) | | $ | 0.03 |
| | $ | (0.07 | ) |
Net income attributable to common stockholders’ per share—diluted | $ | 0.01 |
| | $ | (0.28 | ) | | $ | 0.03 |
| | $ | (0.07 | ) |
Weighted average shares of common stock outstanding—basic | 95,145,496 |
| | 88,894,258 |
| | 92,168,432 |
| | 82,906,087 |
|
Weighted average shares of common stock outstanding—diluted | 95,995,496 |
| | 88,894,258 |
| | 93,000,432 |
| | 82,906,087 |
|
Dividends declared per share of common stock | $ | 0.200 |
| | $ | 0.125 |
| | $ | 0.400 |
| | $ | 0.250 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | 4,035 |
| | $ | (36,083 | ) | | $ | 10,011 |
| | $ | (11,509 | ) |
Other comprehensive (loss) income cash flow hedge adjustment | (8,430 | ) | | 9,650 |
| | (23,905 | ) | | 9,025 |
|
Comprehensive loss | (4,395 | ) | | (26,433 | ) | | (13,894 | ) | | (2,484 | ) |
Comprehensive income attributable to preferred stock | (159 | ) | | (3,195 | ) | | (318 | ) | | (6,390 | ) |
Comprehensive income attributable to participating securities | (196 | ) | | (80 | ) | | (393 | ) | | (150 | ) |
Comprehensive income attributable to non-controlling interest in consolidated real estate entities | (2,396 | ) | | (1,893 | ) | | (4,341 | ) | | (3,395 | ) |
Comprehensive loss attributable to units in the operating partnership | 2,474 |
| | 12,263 |
| | 7,040 |
| | 11,686 |
|
Comprehensive loss attributable to Hudson Pacific Properties, Inc. common stockholders | $ | (4,672 | ) | | $ | (19,338 | ) | | $ | (11,906 | ) | | $ | (733 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
6
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands, except share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (663 | ) | (663 | ) | — |
|
Proceeds from sale of common stock, net of underwriters’ discount | 10,117,223 |
| 101 |
| — |
| 294,108 |
| — |
| — |
| — |
| — |
| 294,209 |
| — |
|
Transaction related costs | — |
| — |
| — |
| (581 | ) | — |
| — |
| — |
| — |
| (581 | ) | — |
|
Issuance of unrestricted stock | 185,638 |
| 2 |
| — |
| — |
| — |
| — |
| — |
| — |
| 2 |
| — |
|
Shares withheld to satisfy minimum tax withholding | (71,557 | ) | (1 | ) | — |
| (1,775 | ) | — |
| — |
| — |
| — |
| (1,776 | ) | — |
|
Declared dividend | — |
| — |
| — |
| (38,608 | ) | — |
| — |
| (20,511 | ) | — |
| (59,119 | ) | (318 | ) |
Amortization of stock-based compensation | — |
| — |
| — |
| 6,319 |
| — |
| — |
| 512 |
| — |
| 6,831 |
| — |
|
Net income | — |
| — |
| — |
| — |
| 3,485 |
| — |
| 1,867 |
| 4,341 |
| 9,693 |
| 318 |
|
Cash flow hedge adjustment | — |
| — |
| — |
| — |
| — |
| (14,998 | ) | (8,907 | ) | — |
| (23,905 | ) | — |
|
Redemption of common units in the operating partnership | — |
| — |
| — |
| 27,919 |
| — |
| — |
| (322,128 | ) | — |
| (294,209 | ) | — |
|
Balance at June 30, 2016 | 99,385,084 |
| $ | 993 |
| $ | — |
| $ | 1,998,361 |
| $ | (41,470 | ) | $ | (16,079 | ) | $ | 1,451,411 |
| $ | 266,406 |
| $ | 3,659,622 |
| $ | 10,177 |
|
The accompanying notes are an integral part of these consolidated financial statements.
7
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income (loss) | $ | 10,011 |
| | $ | (11,509 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 134,476 |
| | 90,750 |
|
Amortization of deferred financing costs and loan premium, net | 2,134 |
| | 1,915 |
|
Amortization of stock-based compensation | 6,643 |
| | 4,152 |
|
Straight-line rents | (11,281 | ) | | (14,789 | ) |
Straight-line rent expenses | 750 |
| | — |
|
Amortization of above- and below-market leases, net | (9,302 | ) | | (11,857 | ) |
Amortization of above- and below-market ground lease, net | 1,070 |
| | 577 |
|
Amortization of lease incentive costs | 655 |
| | 282 |
|
Bad debt expense | 512 |
| | 391 |
|
Amortization of discount and net origination fees on purchased and originated loans | (208 | ) | | (208 | ) |
Unrealized loss on ineffective portion of derivative instruments | 2,509 |
| | — |
|
Gains from sale of real estate | (8,515 | ) | | (22,100 | ) |
Change in operating assets and liabilities: | | | |
Restricted cash | (1,156 | ) | | (236 | ) |
Accounts receivable | 10,001 |
| | 3,610 |
|
Deferred leasing costs and lease intangibles | (25,725 | ) | | (13,766 | ) |
Prepaid expenses and other assets | (5,882 | ) | | (13,859 | ) |
Accounts payable and accrued liabilities | 5,619 |
| | 21,838 |
|
Security deposits | 4,214 |
| | 14,517 |
|
Prepaid rent | (8,814 | ) | | 13,843 |
|
Net cash provided by operating activities | 107,711 |
| | 63,551 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Additions to investment property | (104,112 | ) | | (69,621 | ) |
Property acquisitions | — |
| | (1,764,596 | ) |
Contributions to unconsolidated entity | (28,393 | ) | | — |
|
Proceeds from repayment of notes receivable | 28,892 |
| | — |
|
Proceeds from sale of real estate | 283,855 |
| | 87,680 |
|
Deposits for property acquisitions | (20,000 | ) | | (1,500 | ) |
Net cash provided by (used for) investing activities | 160,242 |
| | (1,748,037 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from notes payable | 677,000 |
| | 1,368,155 |
|
Payments of notes payable | (597,416 | ) | | (208,633 | ) |
Proceeds from issuance of common stock | 294,209 |
| | 385,589 |
|
Payment for redemption of common units in the operating partnership | (294,209 | ) | | — |
|
Common stock issuance transaction costs | (581 | ) | | (4,754 | ) |
Dividends paid to common stock and unitholders | (59,119 | ) | | (28,511 | ) |
Dividends paid to preferred stock and unitholders | (318 | ) | | (6,390 | ) |
Contributions from non-controlling member in consolidated real estate entities | 103 |
| | 217,795 |
|
Distributions to non-controlling member in consolidated real estate entities | (663 | ) | | (1,424 | ) |
Payments to satisfy minimum tax withholding | (1,776 | ) | | (1,834 | ) |
Payments of loan costs | (1,334 | ) | | (12,933 | ) |
Net cash provided by financing activities | 15,896 |
| | 1,707,060 |
|
Net increase in cash and cash equivalents | 283,849 |
| | 22,574 |
|
Cash and cash equivalents—beginning of period | 53,551 |
| | 17,753 |
|
Cash and cash equivalents—end of period | $ | 337,400 |
| | $ | 40,327 |
|
The accompanying notes are an integral part of these consolidated financial statements.
8
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of amounts capitalized | $ | 38,714 |
| | $ | 32,107 |
|
NON-CASH INVESTING ACTIVITIES: | | | |
Accounts payable and accrued liabilities for investment in property | $ | (8,866 | ) | | $ | (15,770 | ) |
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.
9
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (unaudited) | | |
ASSETS | | | |
REAL ESTATE ASSETS | | | |
Land | $ | 1,252,484 |
| | $ | 1,252,484 |
|
Building and improvements | 3,937,522 |
| | 3,887,683 |
|
Tenant improvements | 305,947 |
| | 290,122 |
|
Furniture and fixtures | 4,082 |
| | 9,586 |
|
Property under development | 247,682 |
| | 218,438 |
|
Total real estate held for investment | 5,747,717 |
| | 5,658,313 |
|
Accumulated depreciation and amortization | (340,262 | ) | | (267,855 | ) |
Investment in real estate, net | 5,407,455 |
| | 5,390,458 |
|
Cash and cash equivalents | 337,400 |
| | 53,551 |
|
Restricted cash | 19,166 |
| | 18,010 |
|
Accounts receivable, net | 10,550 |
| | 21,048 |
|
Notes receivable, net | — |
| | 28,684 |
|
Straight-line rent receivables, net | 70,529 |
| | 59,408 |
|
Deferred leasing costs and lease intangible assets, net | 293,191 |
| | 314,483 |
|
Derivative assets | — |
| | 2,061 |
|
Goodwill | 8,754 |
| | 8,754 |
|
Prepaid expenses and other assets, net | 49,209 |
| | 27,278 |
|
Investment in unconsolidated entity | 28,237 |
| | — |
|
Assets associated with real estate held for sale | 52,432 |
| | 330,300 |
|
TOTAL ASSETS | $ | 6,276,923 |
| | $ | 6,254,035 |
|
LIABILITIES | | | |
Notes payable, net | $ | 2,338,882 |
| | $ | 2,260,716 |
|
Accounts payable and accrued liabilities | 104,156 |
| | 82,405 |
|
Lease intangible liabilities, net | 77,841 |
| | 94,446 |
|
Security deposits | 24,148 |
| | 20,342 |
|
Prepaid rent | 30,352 |
| | 38,111 |
|
Derivative liabilities | 26,478 |
| | 2,010 |
|
Liabilities associated with real estate held for sale | 5,267 |
| | 16,791 |
|
TOTAL LIABILITIES | 2,607,124 |
| | 2,514,821 |
|
6.25% series A cumulative redeemable preferred units of the operating partnership | 10,177 |
| | 10,177 |
|
CAPITAL | | | |
Partners’ capital: | | | |
Common units, 145,564,176 and 145,450,095 issued and outstanding at June 30, 2016 and December 31, 2015, respectively. | 3,393,216 |
| | 3,466,412 |
|
Non-controlling interest—members in Consolidated Entities | 266,406 |
| | 262,625 |
|
TOTAL CAPITAL | 3,659,622 |
| | 3,729,037 |
|
TOTAL LIABILITIES AND CAPITAL | $ | 6,276,923 |
| | $ | 6,254,035 |
|
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 amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | | | | | | | |
Office | | | | | | | |
Rental | $ | 118,047 |
| | $ | 120,052 |
| | $ | 234,274 |
| | $ | 161,628 |
|
Tenant recoveries | 21,303 |
| | 17,790 |
| | 41,836 |
| | 23,854 |
|
Parking and other | 5,050 |
| | 5,716 |
| | 10,582 |
| | 11,011 |
|
Total office revenues | 144,400 |
| | 143,558 |
| | 286,692 |
| | 196,493 |
|
Media & Entertainment | | | | | | | |
Rental | 6,857 |
| | 5,394 |
| | 12,885 |
| | 10,861 |
|
Tenant recoveries | 213 |
| | 253 |
| | 412 |
| | 493 |
|
Other property-related revenue | 2,810 |
| | 2,556 |
| | 7,779 |
| | 6,665 |
|
Other | 41 |
| | 58 |
| | 90 |
| | 131 |
|
Total Media & Entertainment revenues | 9,921 |
| | 8,261 |
| | 21,166 |
| | 18,150 |
|
Total revenues | 154,321 |
| | 151,819 |
| | 307,858 |
| | 214,643 |
|
Operating expenses | | | | | | | |
Office operating expenses | 49,091 |
| | 46,691 |
| | 96,794 |
| | 63,826 |
|
Media & Entertainment operating expenses | 6,295 |
| | 5,069 |
| | 12,247 |
| | 11,074 |
|
General and administrative | 13,016 |
| | 10,373 |
| | 25,519 |
| | 19,573 |
|
Depreciation and amortization | 66,108 |
| | 73,592 |
| | 134,476 |
| | 90,750 |
|
Total operating expenses | 134,510 |
| | 135,725 |
| | 269,036 |
| | 185,223 |
|
Income from operations | 19,811 |
| | 16,094 |
| | 38,822 |
| | 29,420 |
|
Other expense (income) | | | | | | | |
Interest expense | 17,614 |
| | 14,113 |
| | 34,865 |
| | 19,606 |
|
Interest income | (73 | ) | | (48 | ) | | (86 | ) | | (101 | ) |
Unrealized loss on ineffective portion of derivative instruments | 384 |
| | — |
| | 2,509 |
| | — |
|
Acquisition-related expenses | 61 |
| | 37,481 |
| | 61 |
| | 43,525 |
|
Other (income) expense | (47 | ) | | 40 |
| | (23 | ) | | (1 | ) |
Total other expenses | 17,939 |
| | 51,586 |
| | 37,326 |
| | 63,029 |
|
Income (loss) before gains (loss) on sale of real estate | 1,872 |
| | (35,492 | ) | | 1,496 |
| | (33,609 | ) |
Gains (loss) on sale of real estate | 2,163 |
| | (591 | ) | | 8,515 |
| | 22,100 |
|
Net income (loss) | 4,035 |
| | (36,083 | ) | | 10,011 |
| | (11,509 | ) |
Net income attributable to non-controlling interest in consolidated real estate entities | (2,396 | ) | | (1,893 | ) | | (4,341 | ) | | (3,395 | ) |
Net income (loss) attributable to Hudson Pacific Properties, L.P. | 1,639 |
| | (37,976 | ) | | 5,670 |
| | (14,904 | ) |
Preferred distributions—Series A units | (159 | ) | | (159 | ) | | (318 | ) | | (318 | ) |
Preferred distributions—Series B units | — |
| | (3,036 | ) | | — |
| | (6,072 | ) |
Total preferred distributions | (159 | ) | | (3,195 | ) | | (318 | ) | | (6,390 | ) |
Net income attributable to participating securities | (196 | ) | | (80 | ) | | (393 | ) | | (150 | ) |
Net income (loss) available to common unitholders | $ | 1,284 |
| | $ | (41,251 | ) | | $ | 4,959 |
| | $ | (21,444 | ) |
Basic and diluted per unit amounts: | | | | | | | |
Net income (loss) attributable to common unitholders per unit—basic | $ | 0.01 |
| | $ | (0.28 | ) | | $ | 0.03 |
| | $ | (0.19 | ) |
Net income (loss) attributable to common unitholders per unit—diluted | $ | 0.01 |
| | $ | (0.28 | ) | | $ | 0.03 |
| | $ | (0.19 | ) |
Weighted average shares of common units outstanding—basic | 145,549,363 |
| | 145,264,166 |
| | 145,518,523 |
| | 112,582,252 |
|
Weighted average shares of common units outstanding—diluted | 146,399,363 |
| | 145,264,166 |
| | 146,350,523 |
| | 112,582,252 |
|
Dividends declared per unit | $ | 0.200 |
| | $ | 0.125 |
| | $ | 0.400 |
| | 0.250 |
|
The accompanying notes are an integral part of these consolidated financial statements.
11
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | 4,035 |
| | $ | (36,083 | ) | | $ | 10,011 |
| | $ | (11,509 | ) |
Other comprehensive (loss) income cash flow hedge adjustment | (8,430 | ) | | 9,650 |
| | (23,905 | ) | | 9,025 |
|
Comprehensive loss | (4,395 | ) | | (26,433 | ) | | (13,894 | ) | | (2,484 | ) |
Comprehensive income attributable to Series A preferred units | (159 | ) | | (159 | ) | | (318 | ) | | (318 | ) |
Comprehensive income attributable to Series B preferred units | — |
| | (3,036 | ) | | — |
| | (6,072 | ) |
Comprehensive income attributable to participating securities | (196 | ) | | (80 | ) | | (393 | ) | | (150 | ) |
Comprehensive income attributable to non-controlling interest in consolidated real estate entities | (2,396 | ) | | (1,893 | ) | | (4,341 | ) | | (3,395 | ) |
Comprehensive loss attributable to Hudson Pacific Properties, L.P. unitholders | $ | (7,146 | ) |
| $ | (31,601 | ) |
| $ | (18,946 | ) |
| $ | (12,419 | ) |
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)
|
| | | | | | | | | | | | | | | | | | | | |
| 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 | — |
|
| — |
| — |
| (663 | ) | (663 | ) | — |
|
Proceeds from sale of common units, net of underwriters’ discount | — |
| 10,117,223 |
| 294,209 |
| 294,209 |
| — |
| 294,209 |
| — |
|
Transaction related costs | — |
| — |
| (581 | ) | (581 | ) | — |
| (581 | ) | — |
|
Issuance of unrestricted units | — |
| 185,638 |
| 2 |
| 2 |
| — |
| 2 |
| — |
|
Units withheld to satisfy minimum tax withholding | — |
| (71,557 | ) | (1,776 | ) | (1,776 | ) | — |
| (1,776 | ) | — |
|
Declared distributions | — |
| — |
| (59,119 | ) | (59,119 | ) | — |
| (59,119 | ) | (318 | ) |
Amortization of unit-based compensation | — |
| — |
| 6,831 |
| 6,831 |
| — |
| 6,831 |
| — |
|
Net income | — |
| — |
| 5,352 |
| 5,352 |
| 4,341 |
| 9,693 |
| 318 |
|
Cash flow hedge adjustment | — |
| — |
| (23,905 | ) | (23,905 | ) | — |
| (23,905 | ) | — |
|
Redemption of common units | $ | — |
| (10,117,223 | ) | $ | (294,209 | ) | $ | (294,209 | ) | $ | — |
| $ | (294,209 | ) | $ | — |
|
Balance at June 30, 2016 | $ | — |
| 145,564,176 |
| $ | 3,393,216 |
| $ | 3,393,216 |
| $ | 266,406 |
| $ | 3,659,622 |
| $ | 10,177 |
|
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)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income (loss) | $ | 10,011 |
| | $ | (11,509 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 134,476 |
| | 90,750 |
|
Amortization of deferred financing costs and loan premium, net | 2,134 |
| | 1,915 |
|
Amortization of stock-based compensation | 6,643 |
| | 4,152 |
|
Straight-line rents | (11,281 | ) | | (14,789 | ) |
Straight-line rent expenses | 750 |
| | — |
|
Amortization of above- and below-market leases, net | (9,302 | ) | | (11,857 | ) |
Amortization of above- and below-market ground lease, net | 1,070 |
| | 577 |
|
Amortization of lease incentive costs | 655 |
| | 282 |
|
Bad debt expense | 512 |
| | 391 |
|
Amortization of discount and net origination fees on purchased and originated loans | (208 | ) | | (208 | ) |
Unrealized loss on ineffective portion of derivative instruments | 2,509 |
| | — |
|
Gains from sale of real estate | (8,515 | ) | | (22,100 | ) |
Change in operating assets and liabilities: | | | — |
|
Restricted cash | (1,156 | ) | | (236 | ) |
Accounts receivable | 10,001 |
| | 3,610 |
|
Deferred leasing costs and lease intangibles | (25,725 | ) | | (13,766 | ) |
Prepaid expenses and other assets | (5,882 | ) | | (13,859 | ) |
Accounts payable and accrued liabilities | 5,619 |
| | 21,838 |
|
Security deposits | 4,214 |
| | 14,517 |
|
Prepaid rent | (8,814 | ) | | 13,843 |
|
Net cash provided by operating activities | 107,711 |
| | 63,551 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Additions to investment property | (104,112 | ) | | (69,621 | ) |
Property acquisitions | — |
| | (1,764,596 | ) |
Contributions to unconsolidated entity | (28,393 | ) | | — |
|
Proceeds from repayment of notes receivable | 28,892 |
| | — |
|
Proceeds from sale of real estate | 283,855 |
| | 87,680 |
|
Deposits for property acquisitions | (20,000 | ) | | (1,500 | ) |
Net cash provided by (used for) investing activities | 160,242 |
| | (1,748,037 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from notes payable | 677,000 |
| | 1,368,155 |
|
Payments of notes payable | (597,416 | ) | | (208,633 | ) |
Proceeds from issuance of common units | 294,209 |
| | 385,589 |
|
Payment for redemption of common units | (294,209 | ) | | — |
|
Common units issuance transaction costs | (581 | ) | | (4,754 | ) |
Distributions paid to common unitholders | (59,119 | ) | | (28,511 | ) |
Distributions paid to preferred unitholders | (318 | ) | | (6,390 | ) |
Contributions from non-controlling member in consolidated real estate entities | 103 |
| | 217,795 |
|
Distributions to non-controlling member in consolidated real estate entities | (663 | ) | | (1,424 | ) |
Payments to satisfy minimum tax withholding | (1,776 | ) | | (1,834 | ) |
Payments of loan costs | (1,334 | ) | | (12,933 | ) |
Net cash provided by financing activities | 15,896 |
| | 1,707,060 |
|
Net increase in cash and cash equivalents | 283,849 |
| | 22,574 |
|
Cash and cash equivalents—beginning of period | 53,551 |
| | 17,753 |
|
Cash and cash equivalents—end of period | $ | 337,400 |
| | $ | 40,327 |
|
The accompanying notes are an integral part of these consolidated financial statements.
14
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of amounts capitalized | $ | 38,714 |
| | $ | 32,107 |
|
NON-CASH INVESTING ACTIVITIES: | | | |
Accounts payable and accrued liabilities for investment in property | $ | (8,866 | ) | | $ | (15,770 | ) |
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.
15
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 June 30, 2016, the Company owned a portfolio of 51 office properties and two media and entertainment properties. These properties are located in 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.
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 June 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 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
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)
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 is the primary beneficiary of these VIEs. Substantially all of the assets and liabilities of the Company are related to these VIEs. The Company entered into a joint venture during the second quarter of 2016. 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 Financial Accounting Standards Board (“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 June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. This guidance sets forth a new impairment model for financial instruments, 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
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)
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 March 15, 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This guidance eliminates the retroactive adoption requirement when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, with early adoption permitted. The implementation of this update is not expected to have a material effect on the Company’s consolidated financial statements and notes to the consolidated financial statements.
On March 14, 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, with early adoption permitted. The implementation of this update is not expected to have a material effect on the Company’s consolidated financial statements and notes to the consolidated financial statements.
On March 14, 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This guidance clarifies the accounting treatment when there is a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815. This update is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, with early adoption permitted. The implementation of this update is not expected to have a material effect on the Company’s 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.
On July 1, 2016, the Company purchased the 11601 Wilshire Boulevard office property in West Los Angeles, California. See Note 20—Subsequent Events for details.
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.
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 six months ended June 30, 2016 and June 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 six months ended June 30, 2016 | | | | 6 | | 820,587 | | $287.4 |
First Financial | | March 6, 2015 | | 1 | | 223,679 | | $89.0 |
Total dispositions for the six months ended June 30, 2015(2) | | | | 1 | | 223,679 | | $89.0 |
_________________
| |
(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 $2.2 million and $8.5 million for the three and six months ended June 30, 2016, respectively, and a loss of $0.6 million and a gain of $22.1 million for the three and six months ended June 30, 2015, respectively.
The Company has not presented the operating results in net income (loss) from discontinued operations for these disposals 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 June 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 June 30, 2016 and December 31, 2015:
|
| | | | | | | | |
| | June 30, 2016 | | December 31, 2015 |
ASSETS | | | | |
Investment in real estate, net | | 48,996 |
| | 313,344 |
|
Straight-line rent receivables, net | | 4 |
| | 2,016 |
|
Deferred leasing costs and lease intangible assets, net | | 2,676 |
| | 14,415 |
|
Other | | 756 |
| | 525 |
|
Assets associated with real estate held for sale | | $ | 52,432 |
| | $ | 330,300 |
|
| | | | |
LIABILITIES | | | | |
Accounts payable and accrued liabilities | | $ | 3,136 |
| | $ | 3,831 |
|
Other | | 2,131 |
| | 12,960 |
|
Liabilities associated with real estate held for sale | | $ | 5,267 |
| | $ | 16,791 |
|
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
Capitalized personnel costs were $2.3 million and $4.6 million for the three and six months ended June 30, 2016, respectively, and $1.9 million and $2.8 million for the three and six months ended June 30, 2015, respectively. Capitalized interest was $2.9 million and $5.5 million for the three and six months ended June 30, 2016, respectively, and $0.9 million and $3.0 million for for the three and six months ended June 30, 2015, respectively.
Impairment of Long-Lived Assets
No impairment indicators have been noted and the Company recorded no impairment charges for the three and six months ended June 30, 2016 and 2015.
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)
4. Deferred Leasing Costs and Lease Intangibles, net
The following summarizes the Company’s deferred leasing costs and lease intangibles as of:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Above-market leases | $ | 38,252 |
| | $ | 38,465 |
|
Accumulated amortization | (24,416 | ) | | (17,206 | ) |
Above-market leases, net | 13,836 |
| | 21,259 |
|
| | | |
Deferred leasing costs and in-place lease intangibles | 353,698 |
| | 347,531 |
|
Accumulated amortization | (130,072 | ) | | (111,128 | ) |
Deferred leasing costs and in-place lease intangibles, net | 223,626 |
| | 236,403 |
|
| | | |
Below-market ground leases | 59,578 |
| | 59,578 |
|
Accumulated amortization | (3,849 | ) | | (2,757 | ) |
Below-market ground leases, net | 55,729 |
| | 56,821 |
|
| | | |
Deferred leasing costs and lease intangible assets, net | $ | 293,191 |
| | $ | 314,483 |
|
| | | |
Below-market leases | $ | 130,880 |
| | $ | 138,852 |
|
Accumulated amortization | (54,067 | ) | | (45,455 | ) |
Below-market leases, net | 76,813 |
| | 93,397 |
|
| | | |
Above-market ground leases | 1,095 |
| | 1,095 |
|
Accumulated amortization | (67 | ) | | (46 | ) |
Above-market ground leases, net | 1,028 |
| | 1,049 |
|
| | | |
Lease intangible liabilities, net | $ | 77,841 |
| | $ | 94,446 |
|
The Company recognized the following amortization related to deferred leasing costs and lease intangibles:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Above-market lease(1) | $ | 3,695 |
| | $ | 3,892 |
| | $ | 7,414 |
| | $ | 4,262 |
|
Below-market lease(1) | 8,146 |
| | 14,305 |
| | 16,716 |
| | 16,119 |
|
Deferred leasing costs and in-place lease intangibles(2) | 22,098 |
| | 31,516 |
| | 44,666 |
| | 35,746 |
|
Above-market ground lease(3) | 11 |
| | 17 |
| | 22 |
| | 17 |
|
Below-market ground lease(3) | 546 |
| | 532 |
| | 1,092 |
| | 594 |
|
__________________
| |
(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. |
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:
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)
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Accounts receivable | $ | 12,017 |
| | $ | 22,060 |
|
Allowance for doubtful accounts | (1,467 | ) | | (1,012 | ) |
Accounts receivable, net | $ | 10,550 |
| | $ | 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: |
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Straight-line rent receivables | $ | 70,565 |
| | $ | 60,378 |
|
Allowance for doubtful accounts | (36 | ) | | (970 | ) |
Straight-line rent receivables, net | $ | 70,529 |
| | $ | 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 as of June 30, 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, CA. 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 expense (income) on the Consolidated Statements of Operations.
9. Goodwill
The Company’s goodwill balance as of June 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 six months ended June 30, 2016 and 2015.
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:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Notes payable | $ | 2,358,029 |
| | $ | 2,278,445 |
|
Less: unamortized loan premium and deferred financing costs, net(1) | (19,147 | ) | | (17,729 | ) |
Notes payable, net | $ | 2,338,882 |
| | $ | 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 $1.8 million and $4.1 million as of June 30, 2016 and December 31, 2015, respectively. |
The following table sets forth information as of June 30, 2016 and December 31, 2015 with respect to the Company’s outstanding indebtedness, excluding net deferred financing costs related to unsecured revolving credit facility and undrawn term loans. |
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 | | | | |
| Principal Amount | | Deferred Financing Costs, net | | Principal Amount | | Unamortized Loan Premium and Deferred Financing Costs, net | | Interest Rate(1) | | Contractual Maturity Date | |
Unsecured Loans | | | | | | | | | | | | |
Unsecured Revolving Credit Facility(2) | $ | 250,000 |
| | $ | — |
| | $ | 230,000 | |