Press release

Hudson Pacific Properties Reports Fourth Quarter and Full Year 2020 Financial Results

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Hudson Pacific Properties, Inc. (the “Company” or “Hudson Pacific”) (NYSE: HPP) today announced financial results for the fourth quarter 2020.

Management Comments & Industry Outlook

Victor Coleman, Hudson Pacific Properties’ Chairman and CEO, said:

“Our markets are once again reopening as COVID-19 cases decline, and the development and roll out of multiple vaccines, albeit slower than we would all like, are key milestones in getting our tenants back to the office. We saw renewed tenant interest in the fourth quarter, which resulted in our signing nearly 280,000 square feet of office leases—our best quarter for the year in terms of volume. This positive trend is extending into the first few months of 2021. Our tenants continue to pay rent, and in the fourth quarter, we collected 97% of total rents, including 98% of office and 100% of studio rents. Our storefront retail remains most challenged by the pandemic.

“We continue to strategically deploy capital. In the fourth quarter, we acquired a 668,000-square-foot Class A office tower in Seattle through a JV, and opportunistically repurchased additional shares of our stock. Even so, we still have $1.0 billion of liquidity to fund our developments and/or acquisitions, and to otherwise operate our business as needed. We are actively evaluating potential office and studio acquisitions, and we have over 1.0 million square feet of development projects fully entitled and ready to build as market conditions warrant.

“I am also extraordinarily proud that through our Better Blueprint we have strengthened our commitment to our communities during these very challenging times. In December, we launched our Vibrant Cities Arts Grant to benefit artists in Los Angeles impacted by the pandemic. Last week, we announced our five-year, $20 million pledge to address homelessness in our core markets. Now more than ever, we have both a moral and business imperative to give back and work diligently to ensure that our cities continue to thrive post-COVID and beyond.”

Consolidated Financial & Operating Results

For fourth quarter 2020 compared to fourth quarter 2019:

  • Net loss attributable to common stockholders of $8.5 million, or $0.05 per diluted share, compared to net income of $13.6 million, or $0.09 per diluted share;
  • FFO, excluding specified items, of $66.8 million, or $0.44 per diluted share, compared to $85.4 million, or $0.55 per diluted share;

    • Specified items consisting of a one-time tax reassessment management cost of $5.5 million, or $0.04 per diluted share, and a one-time net property tax savings for periods prior to the fourth quarter of 2020 of $0.7 million, or $0.00 per diluted share, compared to transaction-related expenses of $0.2 million, or $0.00 per diluted share and one-time debt extinguishment costs of $0.6 million, or $0.00 per diluted share;
    • Fourth quarter 2020 FFO, excluding specified items, includes approximately $0.02 per diluted share of uncollected cash rents and approximately $0.01 per diluted share of charges to revenue-related write-offs of straight-line rent receivables, some or all of which may ultimately be collected;
    • Fourth quarter 2020 FFO also reflects approximately $0.02 per diluted share decrease in parking revenue, some or all of which will resume with tenant reintegration;
  • FFO, including specified items, of $62.0 million, or $0.41 per diluted share, compared to $84.6 million, or $0.54 per diluted share;
  • Total revenue decreased 6.0% to $203.8 million;
  • Total operating expenses increased 3.5% to $178.9 million; and
  • Interest expense increased 4.5% to $29.6 million.

Office Segment Results

Financial & operating

For fourth quarter 2020 compared to fourth quarter 2019:

  • Total revenue decreased 4.8% to $184.5 million. Primary factors include:

    • Lower parking revenue stemming from COVID-19 impacted occupancy and higher reserves against uncollected rents for certain tenants facing COVID-19-related financial hardship, all partially offset by revenue from the acquisition of 1918 Eighth;
  • Operating expenses increased 0.2% to $67.7 million. Primary factors include:

    • A one-time supplemental property tax expense on ICON and CUE for prior periods, along with expenses associated with the aforementioned acquisition; and
  • Net operating income and cash net operating income for the 43 consolidated same-store office properties decreased 8.9% and increased 4.2%, respectively. Adjusted for the $1.6 million one-time supplemental property tax expense on ICON and CUE for prior periods, net operating income and cash net operating income for the same-store office properties would have decreased by 7.5% and increased by 5.7%, respectively.

Leasing

  • Stabilized and in-service office portfolios were 94.5% and 93.5% leased, respectively; and
  • Executed 39 new and renewal leases totaling 279,392 square feet with GAAP and cash rent growth of 4.9% and 4.7%, respectively. Note GAAP and cash rent growth excluding the 45,180-square-foot renewal with 24 Hour Fitness and 25,053 square feet of COVID-related, short-term lease extensions (i.e. 12 months or less) are 9.9% and 9.2%, respectively.

Studio Segment Results

Financial & operating

For fourth quarter 2020 compared to fourth quarter 2019:

  • Total revenue decreased 16.1% to $19.4 million. Primary factors include:

    • A decrease in service and other revenue stemming from shelter-in-place measures disrupting production activities and stage utilization;
  • Total operating expenses decreased 24.8% to $9.9 million, primarily due to a $2.2 million one-time supplemental property tax savings on Sunset Gower Studios for prior periods; and
  • Net operating income and cash net operating income for the three same-store studio properties decreased 4.5% and 0.8%, respectively.

Leasing

  • Trailing 12-month occupancy for the three same-store studio properties was 90.2%.

Leasing Activity

Executed significant leases throughout the portfolio

  • 24 Hour Fitness renewed its 45,180-square-foot lease through February 2026 at Met Park North in Seattle.
  • CIBC World Markets Inc. renewed its 36,978-square-foot lease through July 2026 at Bentall Centre in Vancouver.
  • Rivian signed a 36,630-square-foot lease, commencing January 2021, through June 2026 at Clocktower Square in Palo Alto.
  • Frank, Rimerman & Co., LLP renewed its 24,968-square-foot lease through December 2022 at Page Mill Hill in Palo Alto.

Balance Sheet

As of the end of the fourth quarter 2020:

  • $2.8 billion of the Company’s share of unsecured and secured debt and preferred units (net of cash and cash equivalents) resulting in a leverage ratio of 42.3%.
  • Approximately $1.0 billion of total liquidity comprised of:

    • $113.7 million of unrestricted cash and cash equivalents;
    • $600.0 million of undrawn capacity under the unsecured revolving credit facility; and
    • $308.5 million of undrawn capacity under the construction loan secured by One Westside and 10850 Pico.
  • Investment grade credit rated with 66.9% unsecured and 87.8% fixed-rate debt and a weighted average maturity of 5.8 years.

Dividend

Paid common dividend

  • The Company’s Board of Directors declared a dividend on its common stock of $0.25 per share, equivalent to an annual rate of $1.00 per share.

Capital Transactions

Purchased office tower in Seattle’s Denny Triangle with CPP Investments

On December 18, Hudson Pacific and Canada Pension Plan Investment Board (“CPP Investments”) completed their acquisition of 1918 Eighth, a 668,000-square-foot Class A office building anchored by Amazon in Seattle’s Denny Triangle neighborhood for $625.0 million (before closing adjustments). Through the joint venture, CPP Investments owns a 45% interest and Hudson Pacific owns 55% and acts as general partner and as property, leasing and construction manager. In conjunction with closing the transaction, the joint venture closed a $314.3 million mortgage loan secured by the property. This loan has an initial interest rate of LIBOR plus 1.70% per annum and is interest only through the five-year term.

Repurchased 0.9 million shares of common stock

The Company repurchased 0.9 million shares of common stock at an average price of $20.41 per share using liquidity generated from recapitalization of the Hollywood Media Portfolio. In total in 2020, Hudson Pacific repurchased 3.5 million shares of common stock under the previously noted $250.0 million share repurchase plan at an average price of $23.00.

COVID-19 Update

Continued strong rent collections

During the fourth quarter, the Company collected approximately 97% of its combined contractual rents, comprised of 98% from office tenants, 100% from studio tenants and 51% from storefront retail tenants. In January, the Company collected 97% of its combined contractual rents, comprised of 98% from office tenants, 99% from studio tenants and 48% from storefront retail tenants. The Company implemented a rent relief program for the preponderance of uncollected rents, and the aforementioned collection percentages exclude rents deferred or abated in accordance with COVID-related lease amendments.

Including rents deferred or abated in accordance with COVID-related lease amendments, the Company collected 97% of its fourth quarter combined contractual rents, comprised of 99% from office tenants, 102% from studio tenants and 43% from storefront retail tenants. The Company collected 96% of its January combined contractual rents, comprised of 98% from office tenants, 100% from studio tenants and 44% from storefront retail tenants.

Provided community support through the Vibrant Cities Arts Grant

In association with One Westside, the Company and joint venture partner, Macerich, fast-tracked more than $650,000 to COVID-19 impacted artists in Los Angeles through the Vibrant Cities Arts Grant. Consistent with the joint venture structure, Hudson Pacific funded the majority of the grant, which helped individual artists and artist groups recoup lost funds from canceled programs and support ongoing artistic endeavors. Special consideration was given to female and LGBTQ+ artists and artists of color as well as those presenting work on social justice, civil rights, the physical environment and other contemporary social issues.

Activities Subsequent to Fourth Quarter 2020

Pledged $20 million to address homelessness

Hudson Pacific pledged $20 million over the next five years to increase affordable housing and support individuals and families experiencing homelessness. The comprehensive program will include both impact investments and philanthropic donations in the Company’s core markets of Los Angeles, Silicon Valley, San Francisco, Seattle and Vancouver. As part of this commitment, Hudson Pacific is investing $3 million with SDS Capital Group’s Supportive Housing Fund, which in turn invests in the development of permanent, supportive housing across Los Angeles and the San Francisco Bay Area.

Repurchased 0.6 million shares of common stock

The Company repurchased 0.6 million shares of common stock at an average price of $23.32 per share using liquidity generated from recapitalization of the Hollywood Media Portfolio.

FFO Guidance

The Company is providing first quarter 2021 guidance in the range of $0.45 to $0.47 per diluted share excluding specified items. There are no specified items in connection with this guidance.

The FFO estimates reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in this press release and in earlier announcements. It otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital markets activity or similar matters. There can be no assurance that actual results will not differ materially from this estimate.

The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis, including the information under “FFO Guidance” above, where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing and/or amount of various items that would impact net income attributable to common stockholders per diluted share, which is the most directly comparable forward-looking GAAP financial measure. This includes, for example, acquisition costs and other non-core items that have not yet occurred, are out of the Company’s control and/or cannot be reasonably predicted. For the same reasons, the Company is unable to address the probable significance of the unavailable information. Forward-looking non-GAAP financial measures provided without the most directly comparable GAAP financial measures may vary materially from the corresponding GAAP financial measures.

Supplemental Information

Supplemental financial information regarding Hudson Pacific’s fourth quarter 2020 results may be found on the Investors section of the Company’s website at HudsonPacificProperties.com. This supplemental information provides additional detail on items such as property occupancy, financial performance by property and debt maturity schedules.

Conference Call

The Company will hold a conference call to discuss fourth quarter 2020 financial results at 11:00 a.m. PT / 2:00 p.m. ET on February 18, 2021. Please dial (877) 407-0784 to access the call. International callers should dial (201) 689-8560. A live, listen-only webcast can be accessed via the Investors section of the Company’s website at HudsonPacificProperties.com, where a replay of the call will be available. A replay will also be available beginning February 18, 2021 at 2:00 p.m. PT / 5:00 p.m. ET, through March 4, 2021 at 8:59 p.m. PT / 11:59 p.m. ET, by dialing (844) 512-2921 and entering the passcode 13715463. International callers should dial (412) 317-6671 and enter the same passcode.

About Hudson Pacific

Hudson Pacific is a real estate investment trust with a portfolio of office and studio properties totaling over 19 million square feet, including land for development. Focused on premier West Coast epicenters of innovation, media and technology, its anchor tenants include Fortune 500 and leading growth companies such as Netflix, Google, Square, Uber, NFL Enterprises and more. Hudson Pacific is publicly traded on the NYSE under the symbol HPP, and listed as a component of the S&P MidCap 400 Index. For more information visit HudsonPacificProperties.com.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events, or trends and that do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond the Company’s control that may cause actual results to differ significantly from those expressed in any forward-looking statement. All forward-looking statements reflect the Company’s good faith beliefs, assumptions and expectations, but they are not guarantees of future performance. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, and other risks described in documents subsequently filed by the Company from time to time with the SEC.

Consolidated Balance Sheets

In thousands, except share data

 

December 31, 2020

 

December 31, 2019

ASSETS

 

 

 

Investment in real estate, at cost

$

8,215,017

 

 

 

$

7,269,128

 

 

Accumulated depreciation and amortization

(1,102,748

)

 

 

(898,279

)

 

Investment in real estate, net

7,112,269

 

 

 

6,370,849

 

 

Cash and cash equivalents

113,686

 

 

 

46,224

 

 

Restricted cash

35,854

 

 

 

12,034

 

 

Accounts receivable, net

22,105

 

 

 

13,007

 

 

Straight-line rent receivables, net

225,685

 

 

 

195,328

 

 

Deferred leasing costs and lease intangible assets, net

285,836

 

 

 

285,448

 

 

U.S. Government securities

135,115

 

 

 

140,749

 

 

Operating lease right-of-use asset

264,880

 

 

 

269,029

 

 

Prepaid expenses and other assets, net

72,667

 

 

 

68,974

 

 

Investment in unconsolidated real estate entities

82,105

 

 

 

64,926

 

 

TOTAL ASSETS

$

8,350,202

 

 

 

$

7,466,568

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

Liabilities

 

 

 

Unsecured and secured debt, net

$

3,399,492

 

 

 

$

2,817,910

 

 

In-substance defeased debt

131,707

 

 

 

135,030

 

 

Joint venture partner debt

66,136

 

 

 

66,136

 

 

Accounts payable, accrued liabilities and other

235,860

 

 

 

212,673

 

 

Operating lease liability

270,014

 

 

 

272,701

 

 

Lease intangible liabilities, net

49,144

 

 

 

31,493

 

 

Security deposits and prepaid rent

92,180

 

 

 

86,188

 

 

Total liabilities

4,244,533

 

 

 

3,622,131

 

 

 

 

 

 

Redeemable preferred units of the operating partnership

9,815

 

 

 

9,815

 

 

Redeemable non-controlling interest in consolidated real estate entities

127,874

 

 

 

125,260

 

 

 

 

 

 

Equity

 

 

 

Hudson Pacific Properties, Inc. stockholders’ equity:

 

 

 

Common stock, $0.01 par value, 490,000,000 authorized, 151,401,365 shares and 154,691,052 shares outstanding at December 31, 2020 and 2019, respectively

1,514

 

 

 

1,546

 

 

Additional paid-in capital

3,469,758

 

 

 

3,415,808

 

 

Accumulated other comprehensive loss

(8,133

)

 

 

(561

)

 

Total Hudson Pacific Properties, Inc. stockholders’ equity

3,463,139

 

 

 

3,416,793

 

 

Non-controlling interest—members in consolidated real estate entities

467,009

 

 

 

269,487

 

 

Non-controlling interest—units in the operating partnership

37,832

 

 

 

23,082

 

 

Total equity

3,967,980

 

 

 

3,709,362

 

 

TOTAL LIABILITIES AND EQUITY

$

8,350,202

 

 

 

$

7,466,568

 

 

 

 

 

 

Consolidated Statements of Operations

In thousands, except share data

Three Months Ended December 31,

Year Ended December 31,

2020

 

2019

 

2020

 

2019

 

REVENUES

 

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

Rental

$

181,263

 

 

 

$

186,914

 

 

 

$

721,286

 

 

 

$

708,564

 

 

Service and other revenues

3,205

 

 

 

6,832

 

 

 

14,633

 

 

 

25,171

 

 

Total office revenues

184,468

 

 

 

193,746

 

 

 

735,919

 

 

 

733,735

 

 

Studio

 

 

 

 

 

 

 

Rental

11,989

 

 

 

13,339

 

 

 

48,756

 

 

 

51,340

 

 

Service and other revenues

7,386

 

 

 

9,765

 

 

 

20,290

 

 

 

33,107

 

 

Total studio revenues

19,375

 

 

 

23,104

 

 

 

69,046

 

 

 

84,447

 

 

Total revenues

203,843

 

 

 

216,850

 

 

 

804,965

 

 

 

818,182

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

Office operating expenses

67,653

 

 

 

67,529

 

 

 

262,199

 

 

 

256,209

 

 

Studio operating expenses

9,945

 

 

 

13,225

 

 

 

37,580

 

 

 

45,313

 

 

General and administrative

23,939

 

 

 

17,848

 

 

 

77,882

 

 

 

71,947

 

 

Depreciation and amortization

77,351

 

 

 

74,196

 

 

 

299,682

 

 

 

282,088

 

 

Total operating expenses

178,888

 

 

 

172,798

 

 

 

677,343

 

 

 

655,557

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Income (loss) from unconsolidated real estate entities

667

 

 

 

(402

)

 

 

736

 

 

 

(747

)

 

Fee income

1,074

 

 

 

528

 

 

 

2,815

 

 

 

1,459

 

 

Interest expense

(29,638

)

 

 

(28,353

)

 

 

(116,477

)

 

 

(105,845

)

 

Interest income

960

 

 

 

1,010

 

 

 

4,089

 

 

 

4,044

 

 

Transaction-related expenses

 

 

 

(208

)

 

 

(440

)

 

 

(667

)

 

Unrealized loss on non-real estate investments

(128

)

 

 

 

 

 

(2,463

)

 

 

 

 

Gains on sale of real estate

 

 

 

 

 

 

 

 

 

47,100

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

(52,201

)

 

Other (expense) income

(1,058

)

 

 

336

 

 

 

548

 

 

 

78

 

 

Total other expense

(28,123

)

 

 

(27,089

)

 

 

(111,192

)

 

 

(106,779

)

 

Net (loss) income

(3,168

)

 

 

16,963

 

 

 

16,430

 

 

 

55,846

 

 

Net income attributable to preferred units

(153

)

 

 

(153

)

 

 

(612

)

 

 

(612

)

 

Net income attributable to participating securities

(720

)

 

 

(62

)

 

 

(1,041

)

 

 

(692

)

 

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

(6,378

)

 

 

(3,554

)

 

 

(18,955

)

 

 

(13,352

)

 

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

1,864

 

 

 

489

 

 

 

4,571

 

 

 

1,994

 

 

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

79

 

 

 

(107

)

 

 

(10

)

 

 

(459

)

 

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(8,476

)

 

 

$

13,576

 

 

 

$

383

 

 

 

$

42,725

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED PER SHARE AMOUNTS

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders—basic

$

(0.05

)

 

 

$

0.09

 

 

 

$

0.00

 

 

 

$

0.28

 

 

Net (loss) income attributable to common stockholders—diluted

$

(0.05

)

 

 

$

0.09

 

 

 

$

0.00

 

 

 

$

0.28

 

 

Weighted average shares of common stock outstanding—basic

151,585,520

 

 

 

154,422,114

 

 

 

153,126,027

 

 

 

154,404,427

 

 

Weighted average shares of common stock outstanding—diluted

151,585,520

 

 

 

156,722,998

 

 

 

153,169,025

 

 

 

156,602,408

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

Unaudited, in thousands, except per share data

 

Three Months Ended

December 31,

 

Twelve Months Ended

December 31,

 

2020

 

 

2019

 

 

2020

 

 

2019

 

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

 

 

 

 

 

 

 

Net (loss) income

$

(3,168

)

 

 

$

16,963

 

 

 

$

16,430

 

 

 

$

55,846

 

 

Adjustments:

 

 

 

 

 

 

 

Depreciation and amortization—Consolidated

77,351

 

 

 

74,196

 

 

 

299,682

 

 

 

282,088

 

 

Depreciation and amortization—Corporate-related

(566

)

 

 

(557

)

 

 

(2,286

)

 

 

(2,153

)

 

Depreciation and amortization—Company’s share from unconsolidated real estate entity

1,424

 

 

 

1,650

 

 

 

5,605

 

 

 

3,964

 

 

Gains on sale of real estate

 

 

 

 

 

 

 

 

 

(47,100

)

 

Impairment loss

 

 

 

 

 

 

 

 

 

52,201

 

 

Unrealized loss on non-real estate investment

128

 

 

 

 

 

 

2,463

 

 

 

 

 

FFO attributable to non-controlling interests

(13,025

)

 

 

(7,544

)

 

 

(37,644

)

 

 

(28,576

)

 

FFO attributable to preferred units

(153

)

 

 

(153

)

 

 

(612

)

 

 

(612

)

 

FFO to common stockholders and unitholders

61,991

 

 

 

84,555

 

 

 

283,638

 

 

 

315,658

 

 

Specified items impacting FFO:

 

 

 

 

 

 

 

Transaction-related expenses

 

 

 

208

 

 

 

440

 

 

 

667

 

 

One-time tax reassessment management cost

5,500

 

 

 

 

 

 

5,500

 

 

 

 

 

One-time straight line rent reserve

 

 

 

 

 

 

2,620

 

 

 

 

 

One-time prior period property tax adjustment

(702

)

 

 

 

 

 

(937

)

 

 

 

 

One-time debt extinguishment cost

 

 

 

601

 

 

 

2,654

 

 

 

744

 

 

FFO (excluding specified items) to common stockholders and unitholders

$

66,789

 

 

 

$

85,364

 

 

 

$

293,915

 

 

 

$

317,069

 

 

 

 

 

 

 

 

 

 

Weighted average common stock/units outstanding—diluted

152,576

 

 

 

156,229

 

 

 

154,084

 

 

 

156,113

 

 

FFO per common stock/unit—diluted

$

0.41

 

 

 

$

0.54

 

 

 

$

1.84

 

 

 

$

2.02

 

 

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

$

0.44

 

 

 

$

0.55

 

 

 

$

1.91

 

 

 

$

2.03

 

 

 

 

 

 

 

 

 

 

1.

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

 

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

 

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

Net Operating Income

Unaudited, in thousands

 

Three Months Ended December 31,

 

2020

 

 

2019

 

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

 

 

 

Net (loss) income

$

(3,168

)

 

 

$

16,963

 

 

Adjustments:

 

 

 

(Income) loss from unconsolidated real estate entities

(667

)

 

 

402

 

 

Fee income

(1,074

)

 

 

(528

)

 

Interest expense

29,638

 

 

 

28,353

 

 

Interest income

(960

)

 

 

(1,010

)

 

Transaction-related expenses

 

 

 

208

 

 

Unrealized loss on non-real estate investments

128

 

 

 

 

 

Other expense (income)

1,058

 

 

 

(336

)

 

General and administrative

23,939

 

 

 

17,848

 

 

Depreciation and amortization

77,351

 

 

 

74,196

 

 

NOI

$

126,245

 

 

 

$

136,096

 

 

 

 

 

 

NET OPERATING INCOME BREAKDOWN

 

 

 

Same-store office cash revenues

166,219

 

 

 

161,703

 

 

Straight-line rent

(1,375

)

 

 

12,506

 

 

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

1,928

 

 

 

2,765

 

 

Amortization of lease incentive costs

(439

)

 

 

(470

)

 

Same-store office revenues

166,333

 

 

 

176,504

 

 

 

 

 

 

Same-store studios cash revenues

19,539

 

 

 

22,923

 

 

Straight-line rent

(154

)

 

 

190

 

 

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

6

 

 

 

 

 

Amortization of lease incentive costs

(16

)

 

 

(9

)

 

Same-store studio revenues

19,375

 

 

 

23,104

 

 

 

 

 

 

Same-store revenues

185,708

 

 

 

199,608

 

 

 

 

 

 

Same-Store Office cash expenses

58,687

 

 

 

58,469

 

 

Straight-line rent

366

 

 

 

366

 

 

Non-cash portion of interest expense

4

 

 

 

 

 

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

586

 

 

 

586

 

 

Same-store office expenses

59,643

 

 

 

59,421

 

 

 

 

 

 

Same-store studio cash expenses

9,916

 

 

 

13,225

 

 

Non-cash portion of interest expense

29

 

 

 

 

 

Same-store studio expenses

9,945

 

 

 

13,225

 

 

 

 

 

 

Same-store expenses

69,588

 

 

 

72,646

 

 

 

 

 

 

Same-store net operating income

116,120

 

 

 

126,962

 

 

Non-same-store net operating income

10,125

 

 

 

9,134

 

 

NET OPERATING INCOME

$

126,245

 

 

 

$

136,096

 

 

 

 

 

 

SAME-STORE OFFICE NOI DECREASE

(8.9

)

%

 

 

SAME-STORE OFFICE CASH NOI INCREASE

4.2

 

%

 

 

SAME-STORE STUDIO NOI DECREASE

(4.5

)

%

 

 

SAME-STORE STUDIO CASH NOI DECREASE

(0.8

)

%

 

 

1.

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