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 June 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 August 1, 2017 was 156,070,227.




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the three months ended June 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 June 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 June 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 (“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 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 SIX MONTHS ENDED JUNE 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

HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Real estate assets
 
 
 
Land
$
1,413,269

 
$
1,265,399

Building and improvements
4,765,915

 
4,502,235

Tenant improvements
403,359

 
373,778

Furniture and fixtures
7,230

 
4,276

Property under development
247,634

 
295,239

Total real estate held for investment
6,837,407

 
6,440,927

Accumulated depreciation and amortization
(506,118
)
 
(419,368
)
Investment in real estate, net
6,331,289

 
6,021,559

Cash and cash equivalents
73,242

 
83,015

Restricted cash
17,284

 
25,177

Accounts receivable, net
4,088

 
6,852

Straight-line rent receivables, net
93,093

 
87,281

Deferred leasing costs and lease intangible assets, net
282,272

 
309,962

Derivative assets
5,858

 
5,935

Goodwill
8,754

 
8,754

Prepaid expenses and other assets, net
32,777

 
27,153

Investment in unconsolidated entities
15,377

 
37,228

Assets associated with real estate held for sale

 
66,082

TOTAL ASSETS
$
6,864,034

 
$
6,678,998

LIABILITIES AND EQUITY
 
 
 
Notes payable, net
$
2,598,780

 
$
2,688,010

Accounts payable and accrued liabilities
134,237

 
120,444

Lease intangible liabilities, net
66,438

 
80,130

Security deposits
35,655

 
31,495

Prepaid rent
33,344

 
40,755

Derivative liabilities
987

 
1,303

Liabilities associated with real estate held for sale

 
3,934

TOTAL LIABILITIES
2,869,441

 
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, 155,301,850 shares and 136,492,235 shares outstanding at June 30, 2017 and December 31, 2016, respectively
1,553

 
1,364

Additional paid-in capital
3,656,009

 
3,109,394

Accumulated other comprehensive income
5,960

 
9,496

Accumulated income (deficit)
7,592

 
(16,971
)
Total Hudson Pacific Properties, Inc. stockholders’ equity
3,671,114

 
3,103,283

Non-controlling interest—members in consolidated entities
299,898

 
304,608

Non-controlling interest—units in the operating partnership
13,404

 
294,859

TOTAL EQUITY
3,984,416

 
3,702,750

TOTAL LIABILITIES AND EQUITY
$
6,864,034

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
133,602

 
$
118,047

 
$
267,118

 
$
234,274

Tenant recoveries
25,038

 
21,303

 
42,439

 
41,836

Parking and other
8,212

 
5,050

 
14,111

 
10,582

Total Office revenues
166,852

 
144,400

 
323,668

 
286,692

Media & Entertainment
 
 
 
 
 
 
 
Rental
9,105

 
6,857

 
15,790

 
12,885

Tenant recoveries
129

 
213

 
794

 
412

Other property-related revenue
4,361

 
2,810

 
8,403

 
7,779

Other
53

 
41

 
130

 
90

Total Media & Entertainment revenues
13,648

 
9,921

 
25,117

 
21,166

TOTAL REVENUES
180,500

 
154,321

 
348,785

 
307,858

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
55,468

 
49,091

 
103,422

 
96,794

Media & Entertainment operating expenses
7,003

 
6,295

 
14,254

 
12,247

General and administrative
14,506

 
13,016

 
28,316

 
25,519

Depreciation and amortization
75,415

 
66,108

 
146,182

 
134,476

TOTAL OPERATING EXPENSES
152,392

 
134,510

 
292,174

 
269,036

INCOME FROM OPERATIONS
28,108

 
19,811

 
56,611

 
38,822

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
21,695

 
17,614

 
43,625

 
34,865

Interest income
(16
)
 
(73
)
 
(46
)
 
(86
)
Unrealized loss on ineffective portion of derivative instruments
51

 
384

 
45

 
2,509

Acquisition-related expenses

 
61

 

 
61

Other income
(576
)
 
(47
)
 
(1,254
)
 
(23
)
TOTAL OTHER EXPENSES
21,154

 
17,939

 
42,370

 
37,326

 INCOME BEFORE GAINS ON SALE OF REAL ESTATE
6,954

 
1,872

 
14,241

 
1,496

Gains on sale of real estate

 
2,163

 
16,866

 
8,515

NET INCOME
6,954

 
4,035

 
31,107

 
10,011

Net income attributable to preferred units
(159
)
 
(159
)
 
(318
)
 
(318
)
Net income attributable to participating securities
(255
)
 
(196
)
 
(495
)
 
(393
)
Net income attributable to non-controlling interest in consolidated entities
(2,974
)
 
(2,396
)
 
(6,011
)
 
(4,341
)
Net income attributable to units in the operating partnership
(13
)
 
(445
)
 
(215
)
 
(1,867
)
Net income attributable to Hudson Pacific Properties, Inc. common stockholders
$
3,553

 
$
839

 
$
24,068

 
$
3,092

Basic and diluted per share amounts:
 
 
 
 
 
 
 
Net income attributable to common stockholders—basic
$
0.02

 
$
0.01

 
$
0.16

 
$
0.03

Net income attributable to common stockholders—diluted
$
0.02

 
$
0.01

 
$
0.16

 
$
0.03

Weighted average shares of common stock outstanding—basic
155,290,559

 
95,145,496

 
151,640,853

 
92,168,432

Weighted average shares of common stock outstanding—diluted
156,095,603

 
95,995,496

 
152,431,897

 
93,000,432

Dividends declared per share
$
0.250

 
$
0.200

 
$
0.500

 
$
0.400


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
6,954

 
$
4,035

 
$
31,107

 
$
10,011

Other comprehensive (loss) income: change in fair value of derivative instruments
(2,760
)
 
(8,430
)
 
104

 
(23,905
)
Comprehensive income (loss)
4,194

 
(4,395
)
 
31,211

 
(13,894
)
Comprehensive income attributable to preferred units
(159
)
 
(159
)
 
(318
)
 
(318
)
Comprehensive income attributable to participating securities
(255
)
 
(196
)
 
(495
)
 
(393
)
Comprehensive income attributable to non-controlling interest in consolidated entities
(2,974
)
 
(2,396
)
 
(6,011
)
 
(4,341
)
Comprehensive (income) loss attributable to units in the operating partnership
(3
)
 
2,474

 
(233
)
 
7,040

Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. stockholders
$
803

 
$
(4,672
)
 
$
24,154

 
$
(11,906
)

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






(14,591
)
(14,591
)
Proceeds from sale of common stock, net of underwriters’ discount and transaction costs
18,656,575

187

647,322





647,509

Issuance of unrestricted stock
273,301

3

(3
)





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




(4,203
)
Declared dividend


(78,835
)


(328
)

(79,163
)
Amortization of stock-based compensation


6,868



1,338


8,206

Net income



24,563


215

6,011

30,789

Change in fair value of derivatives




86

18


104

Redemption of common units in the operating partnership


(24,535
)

(3,622
)
(282,698
)

(310,855
)
Balance at June 30, 2017
155,301,850

$
1,553

$
3,656,009

$
7,592

$
5,960

$
13,404

$
299,898

$
3,984,416


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)

 
Six Months Ended June 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
31,107

 
$
10,011

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146,182

 
134,476

Amortization of deferred financing costs and loan premium, net
2,373

 
2,134

Amortization of stock-based compensation
7,788

 
6,643

Straight-line rents
(5,781
)
 
(11,281
)
Straight-line rent expenses
160

 
750

Amortization of above- and below-market leases, net
(10,405
)
 
(9,302
)
Amortization of above- and below-market ground lease, net
1,470

 
1,070

Amortization of lease incentive costs
758

 
655

Bad debt (recovery) expense
(75
)
 
512

Amortization of discount and net origination fees on purchased and originated loans

 
(208
)
Unrealized loss on ineffective portion of derivative instruments
45

 
2,509

Gains on sale of real estate
(16,866
)
 
(8,515
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
3,177

 
10,001

Deferred leasing costs and lease intangibles
(15,216
)
 
(25,725
)
Prepaid expenses and other assets
(5,873
)
 
(5,882
)
Accounts payable and accrued liabilities
6,304

 
5,619

Security deposits
3,667

 
4,214

Prepaid rent
(7,779
)
 
(8,814
)
Net cash provided by operating activities
141,036

 
108,867

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(147,476
)
 
(104,112
)
Property acquisitions
(257,734
)
 

Proceeds from sales of real estate
81,707

 
283,855

Contributions to unconsolidated entities
(1,071
)
 
(28,393
)
Distributions from unconsolidated entities
14,893

 

Deposit for property acquisitions

 
(20,000
)
Proceed from repayment of notes receivable

 
28,892

Net cash (used in) provided by investing activities
(309,681
)
 
160,242

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
230,000

 
677,000

Payments of notes payable
(321,270
)
 
(597,416
)
Proceeds from issuance of common stock, net
647,509

 
293,628

Payment for redemption of common units in the operating partnership
(310,855
)
 
(294,209
)
Distributions paid to common stockholders and unitholders
(79,163
)
 
(59,119
)
Distributions paid to preferred unitholders
(318
)
 
(318
)
Contributions from non-controlling member in consolidated entities
3,870

 
103

Distributions to non-controlling member in consolidated entities
(14,591
)
 
(663
)
Payments to satisfy tax withholding
(4,203
)
 
(1,776
)
Payments of loan costs

 
(1,334
)
Net cash provided by financing activities
150,979

 
15,896

Net (decrease) increase in cash and cash equivalents and restricted cash
(17,666
)
 
285,005

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

 
71,561

Cash and cash equivalents and restricted cash—end of period
$
90,526

 
$
356,566

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest including amounts capitalized
$
42,462

 
$
38,714

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for real estate investments
$
(3,427
)
 
$
(8,866
)
Reclassification of investment in unconsolidated entities for real estate investments
$
7,835

 
$


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, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Real estate assets
 
 
 
Land
$
1,413,269

 
$
1,265,399

Building and improvements
4,765,915

 
4,502,235

Tenant improvements
403,359

 
373,778

Furniture and fixtures
7,230

 
4,276

Property under development
247,634

 
295,239

Total real estate held for investment
6,837,407

 
6,440,927

Accumulated depreciation and amortization
(506,118
)
 
(419,368
)
Investment in real estate, net
6,331,289

 
6,021,559

Cash and cash equivalents
73,242

 
83,015

Restricted cash
17,284

 
25,177

Accounts receivable, net
4,088

 
6,852

Straight-line rent receivables, net
93,093

 
87,281

Deferred leasing costs and lease intangible assets, net
282,272

 
309,962

Derivative assets
5,858

 
5,935

Goodwill
8,754

 
8,754

Prepaid expenses and other assets, net
32,777

 
27,153

Investment in unconsolidated entities
15,377

 
37,228

Assets associated with real estate held for sale

 
66,082

TOTAL ASSETS
$
6,864,034

 
$
6,678,998

LIABILITIES
 
 
 
Notes payable, net
$
2,598,780

 
$
2,688,010

Accounts payable and accrued liabilities
134,237

 
120,444

Lease intangible liabilities, net
66,438

 
80,130

Security deposits
35,655

 
31,495

Prepaid rent
33,344

 
40,755

Derivative liabilities
987

 
1,303

Liabilities associated with real estate held for sale

 
3,934

TOTAL LIABILITIES
2,869,441

 
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, 155,870,895 and 145,942,855 issued and outstanding at June 30, 2017 and December 31, 2016, respectively.
3,678,536

 
3,392,264

Accumulated other comprehensive income
5,982

 
5,878

Total Hudson Pacific Properties, L.P. partners’ capital
3,684,518

 
3,398,142

Non-controlling interest—members in consolidated entities
299,898

 
304,608

TOTAL CAPITAL
3,984,416

 
3,702,750

TOTAL LIABILITIES AND CAPITAL
$
6,864,034

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Office
 
 
 
 
 
 
 
Rental
$
133,602

 
$
118,047

 
$
267,118

 
$
234,274

Tenant recoveries
25,038

 
21,303

 
42,439

 
41,836

Parking and other
8,212

 
5,050

 
14,111

 
10,582

Total Office revenues
166,852

 
144,400

 
323,668

 
286,692

Media & Entertainment
 
 
 
 
 
 
 
Rental
9,105

 
6,857

 
15,790

 
12,885

Tenant recoveries
129

 
213

 
794

 
412

Other property-related revenue
4,361

 
2,810

 
8,403

 
7,779

Other
53

 
41

 
130

 
90

Total Media & Entertainment revenues
13,648

 
9,921

 
25,117

 
21,166

TOTAL REVENUES
180,500

 
154,321

 
348,785

 
307,858

OPERATING EXPENSES
 
 
 
 
 
 
 
Office operating expenses
55,468

 
49,091

 
103,422

 
96,794

Media & Entertainment operating expenses
7,003

 
6,295

 
14,254

 
12,247

General and administrative
14,506

 
13,016

 
28,316

 
25,519

Depreciation and amortization
75,415

 
66,108

 
146,182

 
134,476

TOTAL OPERATING EXPENSES
152,392

 
134,510

 
292,174

 
269,036

INCOME FROM OPERATIONS
28,108

 
19,811

 
56,611

 
38,822

OTHER EXPENSE (INCOME)
 
 
 
 
 
 
 
Interest expense
21,695

 
17,614

 
43,625

 
34,865

Interest income
(16
)
 
(73
)
 
(46
)
 
(86
)
Unrealized loss on ineffective portion of derivative instruments
51

 
384

 
45

 
2,509

Acquisition-related expenses

 
61

 

 
61

Other income
(576
)
 
(47
)
 
(1,254
)
 
(23
)
TOTAL OTHER EXPENSES
21,154

 
17,939

 
42,370

 
37,326

 INCOME BEFORE GAINS ON SALE OF REAL ESTATE
6,954

 
1,872

 
14,241

 
1,496

Gains on sale of real estate

 
2,163

 
16,866

 
8,515

NET INCOME
6,954

 
4,035

 
31,107

 
10,011

Net income attributable to non-controlling interest in consolidated entities
(2,974
)
 
(2,396
)
 
(6,011
)
 
(4,341
)
Net income attributable to Hudson Pacific Properties, L.P.
3,980

 
1,639

 
25,096

 
5,670

Net income attributable to preferred units
(159
)
 
(159
)
 
(318
)
 
(318
)
Net income attributable to participating securities
(255
)
 
(196
)
 
(495
)
 
(393
)
Net income available to Hudson Pacific Properties, L.P. common unitholders
$
3,566

 
$
1,284

 
$
24,283

 
$
4,959

Basic and diluted per unit amounts:
 
 
 
 
 
 
 
Net income attributable to common unitholders—basic
$
0.02

 
$
0.01

 
$
0.16

 
$
0.03

Net income attributable to common unitholders—diluted
$
0.02

 
$
0.01

 
$
0.16

 
$
0.03

Weighted average shares of common units outstanding—basic
155,859,604

 
145,549,363

 
152,647,055

 
145,518,523

Weighted average shares of common units outstanding—diluted
156,664,648

 
146,399,363

 
153,438,100

 
146,350,523

Dividends declared per unit
$
0.250

 
$
0.200

 
$
0.500

 
$
0.400


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
6,954

 
$
4,035

 
$
31,107

 
$
10,011

Other comprehensive (loss) income: change in fair value of derivative instruments
(2,760
)
 
(8,430
)
 
104

 
(23,905
)
Comprehensive income (loss)
4,194

 
(4,395
)
 
31,211

 
(13,894
)
Comprehensive income attributable to preferred units
(159
)
 
(159
)
 
(318
)
 
(318
)
Comprehensive income attributable to participating securities
(255
)
 
(196
)
 
(495
)
 
(393
)
Comprehensive income attributable to non-controlling interest in consolidated entities
(2,974
)
 
(2,396
)
 
(6,011
)
 
(4,341
)
Comprehensive income (loss) attributable to Hudson Pacific Properties, L.P. partners’ capital
$
806

 
$
(7,146
)
 
$
24,387

 
$
(18,946
)


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



(14,591
)
(14,591
)
Proceeds from sale of common units, net of underwriters’ discount and transaction costs
18,656,575

647,509



647,509

Issuance of unrestricted units
273,301





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


(4,203
)
Declared distributions

(79,163
)


(79,163
)
Amortization of unit-based compensation

8,206



8,206

Net income

24,778


6,011

30,789

Change in fair value of derivative instruments


104


104

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


(310,855
)
Balance at June 30, 2017
155,870,895

$
3,678,536

$
5,982

$
299,898

$
3,984,416



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,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
31,107

 
$
10,011

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146,182

 
134,476

Amortization of deferred financing costs and loan premium, net
2,373

 
2,134

Amortization of unit-based compensation
7,788

 
6,643

Straight-line rents
(5,781
)
 
(11,281
)
Straight-line rent expenses
160

 
750

Amortization of above- and below-market leases, net
(10,405
)
 
(9,302
)
Amortization of above- and below-market ground lease, net
1,470

 
1,070

Amortization of lease incentive costs
758

 
655

Bad debt (recovery) expense
(75
)
 
512

Amortization of discount and net origination fees on purchased and originated loans

 
(208
)
Unrealized loss on ineffective portion of derivative instruments
45

 
2,509

Gains on sale of real estate
(16,866
)
 
(8,515
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
3,177

 
10,001

Deferred leasing costs and lease intangibles
(15,216
)
 
(25,725
)
Prepaid expenses and other assets
(5,873
)
 
(5,882
)
Accounts payable and accrued liabilities
6,304

 
5,619

Security deposits
3,667

 
4,214

Prepaid rent
(7,779
)
 
(8,814
)
Net cash provided by operating activities
141,036

 
108,867

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(147,476
)
 
(104,112
)
Property acquisitions
(257,734
)
 

Proceeds from sales of real estate
81,707

 
283,855

Contributions to unconsolidated entities
(1,071
)
 
(28,393
)
Distributions from unconsolidated entities
14,893

 

Deposit for property acquisitions

 
(20,000
)
Proceed from repayment of notes receivable

 
28,892

Net cash (used in) provided by investing activities
(309,681
)
 
160,242

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
230,000

 
677,000

Payments of notes payable
(321,270
)
 
(597,416
)
Proceeds from issuance of common units, net
647,509

 
293,628

Payment for redemption of common units
(310,855
)
 
(294,209
)
Distributions paid to common unitholders
(79,163
)
 
(59,119
)
Distributions paid to preferred unitholders
(318
)
 
(318
)
Contributions from non-controlling member in consolidated entities
3,870

 
103

Distributions to non-controlling member in consolidated entities
(14,591
)
 
(663
)
Payments to satisfy tax withholding
(4,203
)
 
(1,776
)
Payments of loan costs

 
(1,334
)
Net cash provided by financing activities
150,979

 
15,896

Net (decrease) increase in cash and cash equivalents and restricted cash
(17,666
)
 
285,005

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

 
71,561

Cash and cash equivalents and restricted cash—end of period
$
90,526

 
$
356,566

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest including amounts capitalized
$
42,462

 
$
38,714

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for real estate investments
$
(3,427
)
 
$
(8,866
)
Reclassification of investment in unconsolidated entities for real estate investments
$
7,835

 
$


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 our portfolio as of June 30, 2017:
 
Number of Properties
 
Square Feet (unaudited)
Office properties:
 
 
 
Northern California(1)
29

 
9,595,286

Southern California(2)
16

 
2,817,509

Pacific Northwest(3)
7

 
1,490,613

Total Office properties
52

 
13,903,408

Media & Entertainment properties:
 
 
 
Southern California(2)
3

 
1,256,577

Total Media & Entertainment properties
3

 
1,256,577

Total
55

 
15,159,985

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

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, 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. Specifically, in the Consolidated Balance Sheets for the prior period, certain amounts have been reclassified to held for sale. These amounts relate to 3402 Pico Boulevard, which was sold on March 21, 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. Four of the Company’s joint ventures and its operating partnership meet the definition of a VIE. The Company is the primary beneficiary of and consolidates three of the joint ventures and the operating partnership. Refer to Note 16 for details. Substantially all of the assets and liabilities of the Company are related to these VIEs. As of June 30, 2017, the Company is not consolidating one of its joint ventures, of which it is not the primary beneficiary. As of December 31, 2016, the Company was not consolidating one of its joint ventures, of which it is not the primary beneficiary, and an interest in land. Due to its significant influence over non-consolidated entities, the Company accounts for them using the equity method of accounting. Refer to Note 7 for details.

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.

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)


Standard
 
Description
 
Effect on the Financial Statements or Other Significant Matters
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.
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.


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 2016-07, 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. 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 formed an implementation team, completed training of the new standards with the implementation team and begun review and documentation. Additionally, the Company has developed a project plan and is in the process of refining the project plan. The Company has 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 one revenue stream integral to the Company’s leasing revenues will be accounted for under ASC 606, effective with the adoption of ASC 842 on January 1, 2019. The Company plans on adopting ASC 606 on January 1, 2018 using the modified retrospective approach.
    
Update on ASC 842, Leases (“ASC 842”), implementation

On February 25, 2016, the FASB issued ASU 2016-02 to amend the accounting guidance for leases. Under this guidance, lessor can capitalize only those costs that are defined as initial direct costs. The Company anticipates that indirect leasing costs will be expensed as incurred. For lessee accounting, this guidance requires all lessees to record a lease liability at lease inception, with a corresponding right-of-use asset, except for short-term leases. ASC 842 also provides practical expedients 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. It is required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the consolidated financial statements.

The Company has formed an implementation team, completed training of the new standards with the implementation team and begun review and documentation. As a lessor, the Company will expense indirect leasing costs as incurred under the new guidance. During the three and six months ended June 30, 2017, the Company capitalized $1.7 million and $3.2 million of indirect leasing costs, respectively. The Company continues to evaluate the amounts 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. As of June 30, 2017, the future undiscounted minimum lease payments under the Company’s ground leases totaled $458.2 million. The Company plans on adopting the standard on January 1, 2019 and expects to adopt using the practical expedience elections.


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)


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 2017-09, 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. It is required to apply this guidance 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.
    
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.

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 was vacant. The fair value of acquired “above- and below-” market leases are based on the estimated cash flow projections utilizing discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended 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.


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)


The following table summarizes the information on the acquisitions completed during the six months ended June 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 purchase 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 re-measured and allocated to land and building.
(4)
This parcel is adjacent to the Sunset Las Palmas Studios property.

The Company evaluated 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. These acquisitions did not meet the definition of a business and were therefore accounted for as asset acquisitions.

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 six months ended June 30, 2017:
 
Sunset Las Palmas Studios(1)
 
11601 Wilshire land
 
6666 Santa Monica
 
Total
Investment in real estate, net
$
202,723

 
$
50,034

 
$
3,091

 
$
255,848

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

 

 
145

 
1,886

Total asset 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 six months ended June 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
 
February 14, 2017
 
148,797

 
$
51.8

3402 Pico Boulevard
 
March 21, 2017
 
50,687

 
35.0

Total dispositions
 
 
 
199,484

 
$
86.8

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


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)


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

The Company had two properties classified as held for sale as of December 31, 2016. Both properties were disposed of during the first quarter of 2017. The Company had no properties classified as held for sale as of June 30, 2017.

Impairment of Long-Lived Assets

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

4. Deferred Leasing Costs and Lease Intangibles, net

The following summarizes the Company’s deferred leasing costs and lease intangibles as of:
 
June 30, 2017
 
December 31, 2016
Above-market leases
$
21,881

 
$
23,430

Accumulated amortization
(14,706
)
 
(12,989
)
Above-market leases, net
7,175

 
10,441

Deferred leasing costs and in-place lease intangibles
371,813

 
378,540

Accumulated amortization
(161,756
)
 
(145,551
)
Deferred leasing costs and in-place lease intangibles, net
210,057

 
232,989

Below-market ground leases
71,210

 
71,423

Accumulated amortization
(6,170
)
 
(4,891
)
Below-market ground leases, net
65,040

 
66,532

Deferred leasing costs and lease intangible assets, net
$
282,272

 
$
309,962

 
 
 
 
Below-market leases
$
134,472

 
$
141,676

Accumulated amortization
(69,018
)
 
(62,552
)
Below-market leases, net
65,454

 
79,124

Above-market ground leases
1,095

 
1,095

Accumulated amortization
(111
)
 
(89
)
Above-market ground leases, net
984

 
1,006

Lease intangible liabilities, net
$
66,438

 
$
80,130


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 Company recognized the following amortization related to deferred leasing costs and lease intangibles:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Above-market leases(1)
$
1,911

 
$
3,695

 
$
3,267

 
$
7,414

Below-market leases(1)
6,584

 
8,146

 
13,672

 
16,716

Deferred leasing costs and in-place lease intangibles(2)
20,644

 
22,098

 
40,437

 
44,666

Above-market ground leases(3)
11

 
11

 
22


22

Below-market ground leases(3)
844

 
546

 
1,492


1,092

__________________ 
(1)
Amortization is recorded in revenues in the Consolidated Statements of Operations.
(2)
Amortization is recorded in depreciation and amortization expense and office rental revenues 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 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:
 
June 30, 2017
 
December 31, 2016
Accounts receivable
$
5,857

 
$
8,697

Allowance for doubtful accounts
(1,769
)
 
(1,845
)
Accounts receivable, net
$
4,088

 
$
6,852


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:

 
June 30, 2017
 
December 31, 2016
Straight-line rent receivables
$
93,210

 
$
87,417

Allowance for doubtful accounts
(117
)
 
(136
)
Straight-line rent receivables, net
$
93,093

 
$
87,281


7. Investment in Unconsolidated Entities    
    
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. The Company’s net equity investment is reflected within investment in unconsolidated entities on the Consolidated Balance Sheets and the Company’s share of net income or loss from the entity is included within other income on the Consolidated Statements of Operations.

On June 16, 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. The Company holds a 21% interest in the joint venture. The assets of the joint venture consist of the notes receivable. The Company’s investment in this joint venture was $15.4 million and $29.4 million as of June 30, 2017 and December 31, 2016, respectively, which represents the maximum exposure for loss for the Company. On June 13, 2017, the

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)


Company received a return of capital of $14.9 million. 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.

On July 1, 2016, the Company entered into an agreement with an unaffiliated third party related to the land on which its 11601 Wilshire property is located. The Company holds a 28% interest in the land held as a tenancy in common. The agreement does not meet the definition of a VIE and the Company accounts for its interest in the land held as a tenancy in common under the equity method of accounting. The Company’s interest in the land was $7.8 million as of December 31, 2016. On June 15, 2017, the Company purchased the remaining interest for $50.0 million. See Note 3 for details. As a result of this transaction, $7.8 million is included within land on the consolidated balance sheets.

8. Goodwill

The Company’s goodwill balance as of June 30, 2017 and December 31, 2016 was $8.8 million. The Company does not amortize this asset but instead analyzes it on a quarterly basis for impairment. No impairment indicators have been noted during the six months ended June 30, 2017.

9. Notes Payable, net

The following table summarizes the balances of the Company’s indebtedness as of:
 
June 30, 2017
 
December 31, 2016
Notes payable
$
2,616,568

 
$
2,707,839

Deferred financing costs, net(1)
(17,788
)
 
(19,829
)
Notes payable, net
$
2,598,780

 
$
2,688,010

________________
(1)
Excludes deferred financing costs related to establishing the Company’s unsecured revolving credit facility of $1.2 million and $1.5 million as of June 30, 2017 and December 31, 2016, respectively, which are included in prepaid expenses and other assets, net in the Consolidated Balance Sheets. 


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)


The following table sets forth information with respect to the amounts included in notes payable, net as of:
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
Principal Amount
 
Deferred Financing Costs, net
 
Principal Amount
 
Deferred Financing Costs, net
 
Interest Rate(1)
 
Contractual Maturity Date
 
UNSECURED LOANS
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Revolving Credit Facility(2)
$
210,000

 
$

 
$
300,000

 
$

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

 
(2,972
)
 
450,000

 
(3,513
)
 
LIBOR+ 1.30% to 2.20%
 
4/1/2020
 
5-Year Term Loan due November 2020(2)
175,000

 
(650
)
 
175,000

 
(745
)
 
LIBOR +1.30% to 2.20%
 
11/17/2020
 
7-Year Term Loan due April 2022(2)(5)
350,000

 
(2,049
)
 
350,000

 
(2,265
)
 
LIBOR+ 1.60% to 2.55%
 
4/1/2022
 
7-Year Term Loan due November 2022(2)(6)
125,000

 
(852
)
 
125,000

 
(931
)
 
LIBOR +1.60% to 2.55%
 
11/17/2022
 
Series A Notes
110,000

 
(852
)
 
110,000

 
(930
)
 
4.34%
 
1/2/2023
 
Series E Notes
50,000

 
(277
)
 
50,000

 
(300
)
 
3.66%
 
9/15/2023
 
Series B Notes
259,000

 
(2,144
)
 
259,000

 
(2,271
)
 
4.69%
 
12/16/2025
 
Series D Notes
150,000

 
(851
)
 
150,000

 
(898
)
 
3.98%
 
7/6/2026
 
Series C Notes
56,000

 
(515
)
 
56,000

 
(539
)
 
4.79%
 
12/16/2027
 
TOTAL UNSECURED LOANS
1,935,000


(11,162
)
 
2,025,000

 
(12,392
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MORTGAGE LOANS