Market Overview

Hudson Pacific Properties Reports Second Quarter 2018 Financial Results

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804,000 Square Feet of Leases Executed with 23% GAAP and 17% Cash
Rent Growth

Hudson Pacific Properties, Inc. ("the Company," or "Hudson Pacific")
(NYSE:HPP) today announced financial results for the second quarter
ended June 30, 2018.

Second Quarter Highlights

  • Net income attributable to common stockholders of $16.2 million, or
    $0.10 per diluted share, compared to net income of $3.6 million, or
    $0.02 per diluted share, a year ago;
  • Funds From Operations ("FFO"), excluding specified items, of $71.6
    million, or $0.46 per diluted share, compared to $75.3 million, or
    $0.48 per diluted share, a year ago;
  • Executed 803,618 square feet of leases with GAAP and cash rent growth
    of 22.7% and 16.8%, respectively, including an early renewal and
    expansion with Nutanix for 292,693 square feet in North San Jose;
  • Purchased 41,496 square feet of sound stages and production offices
    adjacent to Sunset Las Palmas Studios in Hollywood for $30.0 million
    before credits, prorations and closing costs;
  • Sold 9300 Wilshire in Beverly Hills for $13.8 million before credits,
    prorations and closing costs; and
  • Declared and paid a quarterly dividend of $0.25 per share on common
    stock.

"We had a strong second quarter, particularly in terms of leasing and
building upon our foundation for long-term growth through prudent
capital recycling," said Victor Coleman, Hudson Pacific Properties'
Chairman and CEO. "Already standout West Coast market fundamentals
continued to improve. We executed leases in excess of 800,000 square
feet with 23% GAAP and 17% cash rent growth, including the early renewal
and expansion of two of our largest tenants, Nutanix and Square, Inc. We
have renewed or backfilled, or are in leases, LOIs or proposals on 76%
of our 2018 and 48% of our 2019 expirations. We are also excited to
report that we have signed a lease with Honey Science Corporation for
100% of our Fourth & Traction redevelopment, and we have very promising
activity on the remainder of our priority large-block, lease-up assets."

"Capital recycling was a highlight of our second quarter and remains at
the forefront of our agenda in the third quarter, as we continue to
position ourselves to pursue unique growth opportunities. We closed the
sale of 9300 Wilshire in Beverly Hills, and purchased properties
strategic to the continued expansion of Sunset Las Palmas Studios. We
also completed the sale of the remaining Peninsula Office Park buildings
in San Mateo. These transactions highlight our excellent execution and
success in capitalizing on favorable market conditions to sell non-core
assets, the net proceeds of which we can redeploy into higher-yielding,
superior quality opportunities."

Financial Results

The Company reported net income attributable to common stockholders of
$16.2 million, or $0.10 per diluted share, for the three months ended
June 30, 2018, compared to net income attributable to common
stockholders of $3.6 million, or $0.02 per diluted share, for the three
months ended June 30, 2017.

FFO, excluding specified items, for the three months ended June 30, 2018
totaled $71.6 million, or $0.46 per diluted share, compared to FFO,
excluding specified items, of $75.3 million, or $0.48 per diluted share,
a year ago. Specified items for the second quarter of 2018 consisted of
unrealized gains from changes in fair value on non-real estate
investments of $0.9 million, or $0.01 per diluted share, with no
specified items for the second quarter of 2017.

FFO, including specified items, for the three months ended June 30, 2018
totaled $72.5 million, or $0.46 per diluted share, compared to $75.3
million, or $0.48 per diluted share, a year ago.

Consolidated Operating Results for the Three Months Ended June 30,
2018

Total revenue during the second quarter decreased 3.0% to $175.2 million
from $180.5 million for the same quarter a year ago. Total operating
expenses decreased 8.5% to $139.4 million from $152.4 million for the
same quarter a year ago. As a result, income from operations increased
27.3% to $35.8 million from $28.1 million for the same quarter a year
ago. The primary reasons for the changes in total revenue and operating
expenses are discussed below in connection with the Company's segment
operating results.

Interest expense during the second quarter decreased 10.9% to $19.3
million from $21.7 million for the same quarter a year ago. The Company
had $2.4 billion and $2.6 billion of notes payable at June 30, 2018 and
June 30, 2017, respectively.

The Company had $1.9 million of gains on sale associated with the sale
of 9300 Wilshire during the second quarter of 2018, with no gains on
sale associated with dispositions during the second quarter of 2017.

Segment Operating Results for the Three Months Ended June 30, 2018

Office Properties

Total revenue at the Company's office properties decreased 5.0% to
$158.6 million from $166.9 million for the same quarter a year ago. The
decrease was primarily the result of a $3.9 million decrease in rental
revenue to $129.7 million, a $3.1 million decrease in tenant recoveries
to $22.0 million, and a $1.4 million decrease in parking and other
revenue to $6.9 million. The decrease in rental revenue, tenant
recoveries and parking and other revenue largely resulted from the Cisco
and Robert Bosch lease terminations at Campus Center and Foothill
Research Center, respectively, as well as the sales of Pinnacle I and
Pinnacle II (sold November 16, 2017), Embarcadero Place (sold January
25, 2018), 2180 Sand Hill (sold March 1, 2018) and 9300 Wilshire (sold
April 10, 2018).

Office property operating expenses decreased 2.8% to $53.9 million from
$55.5 million for the same quarter a year ago. The decrease primarily
resulted from the aforementioned lease terminations and asset sales.

Net operating income with respect to the Company's 30 same-store office
properties for the second quarter increased 1.7% on a GAAP basis and
decreased 0.2% on a cash basis.

At June 30, 2018, the Company's stabilized and in-service office
portfolio was 93.6% and 89.7% leased, respectively. During the quarter,
the Company executed 69 new and renewal leases totaling 803,618 square
feet.

Studio Properties

Total revenue at the Company's studio properties increased 21.8% to
$16.6 million from $13.6 million for the same quarter a year ago,
largely due to a $1.6 million increase in rental revenue to $10.7
million, a $0.4 million increase in tenant recoveries to $0.5 million,
and a $0.9 million increase in other property-related revenue to $5.3
million. The increase in rental, tenant recoveries and other
property-related revenue largely resulted from the acquisition of Sunset
Las Palmas Studios (purchased in May 2017), as well as higher production
activity at Sunset Bronson Studios. Total studio operating expenses
increased 21.9% to $8.5 million from $7.0 million for the same quarter a
year ago, also due to the Sunset Las Palmas Studios acquisition and
higher production activity at Sunset Bronson Studios.

As of June 30, 2018, the trailing 12-month occupancy for the Company's
same-store studio portfolio decreased to 89.6% from 89.9% for the period
ended June 30, 2017.

Balance Sheet

At June 30, 2018, the Company had total assets of $6.6 billion,
including unrestricted cash and cash equivalents of $57.5 million. At
June 30, 2018, the Company had $460.0 million of undrawn total capacity
under its unsecured revolving credit facility.

Major Leasing

Executed Significant Leases Throughout Portfolio

Cloud computing and software company Nutanix renewed its
212,600-square-foot lease at 1740 Technology and Metro Plaza in North
San Jose through May 2024, and signed two new coterminous leases for an
additional 21,379 square feet at 1740 Technology and 58,714 square feet
at Concourse in North San Jose.

Square, Inc. signed a new 104,135-square-foot lease through September
2023, coterminous with its existing lease at 1455 Market in San
Francisco. Square now leases a total of 469,056 square feet at 1455
Market.

RealSelf, Inc., the largest online marketplace for information on
cosmetic procedures and providers, renewed its lease for 49,779 square
feet through June 2024 at 83 King in Seattle, and signed a new lease for
an additional 24,901 square feet coterminous with its original lease.

QuinStreet, Inc., a performance marketing technology and service
provider, renewed its 44,556-square-foot lease through October 2023 at
Metro Center in Foster City.

Acquisitions

Purchased Properties Adjacent to Sunset Las Palmas Studio

On June 7, 2018, the Company purchased two sound stages totaling 22,823
square feet and 18,673 square feet of production office and support
space located at 6605 Eleanor Avenue and 1034 Seward Street in Hollywood
for $30.0 million before credits, prorations and closing costs. The
property is immediately adjacent to, and now forms part of, Sunset Las
Palmas Studios. The acquisition was pursuant to a sale leaseback with
the seller subject to a three-year lease for the entire property.

Dispositions

Sold Beverly Hills Office Property

On April 10, 2018, the Company sold 9300 Wilshire, a 61,422-square-foot
office building in Beverly Hills, for $13.8 million before credits,
prorations and closing costs.

Dividend

Paid Common Dividend

The Company's Board of Directors declared a dividend on its common stock
of $0.25 per share for the second quarter of 2018, equivalent to an
annual rate of $1.00 per share. The dividends were paid on June 29, 2018
to stockholders of record on June 19, 2018.

Activities Subsequent to June 30, 2018

Pre-Leased 100% of Fourth & Traction to Honey Science Corporation

Honey Science Corporation, which operates a coupon search web browser
add-on, leased the entirety of the Company's 131,701-square-foot Fourth
& Traction office redevelopment in the Arts District of Los Angeles
through mid-2030, with lease commencement on the first 76,152 square
feet anticipated in mid-2019, based upon landlord's completion of tenant
improvements. The remaining 45,641 and 9,908 square feet is expected to
commence mid-2020 and mid-2022, respectively.

Sold Remainder of San Francisco Peninsula Office Campus

On July 27, 2018, the Company sold the remaining six buildings
(Buildings 1-5 and 7), totaling 447,739 square feet, of Peninsula Office
Park in San Mateo for $210.0 million before credits, prorations and
closing costs. The Company sold the fully vacant 63,050-square-foot
Building 6 in January of this year for a total of $22.5 million before
prorations, credits and closing costs. The Company used the net proceeds
from this sale to repay the $140.0 million outstanding balance under its
unsecured revolving credit facility, then for general corporate purposes.

2018 Outlook

The Company is revising its full-year 2018 FFO guidance to a range of
$1.83 to $1.89 per diluted share, excluding specified items, compared to
the prior full-year 2018 FFO guidance range of $1.87 to $1.95 per
diluted share, excluding specified items. Specified items for full-year
2018 FFO guidance consist of the transaction-related expenses of $0.1
million and write-off of original issuance costs (i.e., deferred
financing costs) of $0.4 million associated with the recast of the
Company's unsecured revolving credit facility and 5- and 7-year term
loan facilities, both of which were identified as excluded items in the
Company's first quarter 2018 FFO, together with unrealized gains from
changes in fair value on non-real estate investments of $0.9 million.
This guidance also includes the impact of the Peninsula Office Park
sale, the Honey Science Corporation lease's deferred commencement at
Fourth & Traction, and the early contribution of Westside Pavilion to
the Company's joint venture with Macerich, which collectively contribute
to an $0.05 per diluted share decrease in the Company's full-year 2018
FFO estimate.

As always, the full-year 2018 FFO estimates also 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, but 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 the
actual results will not differ materially from this estimate.

Below are some of the assumptions the Company used in providing this
guidance (dollars in thousands):

            Full Year 2018
Metric           Low           High
Growth in Same-Store Office property cash NOI(1)(2)(3)           4.0%           5.0%
Growth in Same-Store Studio property cash NOI(1)(2)           10.0%           11.0%
GAAP non-cash revenue (straight-line rent and above/below-market
rents)(4)
          $41,500           $51,500
GAAP non-cash expense (above/below-market ground rent)           $(2,900)           $(2,900)
General and administrative expenses(5)           $(58,000)           $(63,000)
Interest expense, net(6)           $(81,500)           $(84,500)
FFO attributable to non-controlling interests           $(19,500)           $(23,500)
Weighted average common stock/units outstanding—diluted(7)           157,150,000           158,150,000
                   
(1)     Same-store is defined as the 29 office properties or two studio
properties, as applicable, owned and included in the Company's
stabilized portfolio as of January 1, 2017, and anticipated to still
be owned and included in the stabilized portfolio through December
31, 2018.
(2) Please see non-GAAP information below for definition of cash NOI.
(3) This estimate excludes approximately $4.2 million of material
one-time tenant improvement cost reimbursements received in 2017,
which were likewise excluded from prior year (2017) guidance for
purposes of same-store office property cash NOI growth estimates.
Please see the Same-Store Analysis in the Company's Fourth Quarter
2017 Supplemental Operating and Financial Information report for
further detail regarding these reimbursements.
(4) Includes non-cash straight-line rent associated with the studio
properties.
(5) Includes non-cash compensation expense, which the Company estimates
at $17,500 in 2018.
(6) Includes amortization of deferred financing costs and loan
discounts, which the Company estimates at $6,000 in 2018.
(7) Diluted shares represent ownership in the Company through shares of
common stock, OP Units and other convertible or exchangeable
instruments. The weighted average fully diluted common stock/units
outstanding for 2018 includes an estimate for dilution impact of
stock grants to the Company's executives under its 2016, 2017 and
2018 outperformance programs, as well as performance-based awards
under the Company's special one-time retention award grants. This
estimate is based on the projected award potential of such programs
as of the end of such periods, as calculated in accordance with the
Accounting Standards Codification 260, Earnings Per Share.
 

The Company does not provide a reconciliation for non-GAAP estimates on
a forward-looking basis, including the information under "2018 Outlook"
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 the Company's second
quarter 2018 results may be found in the Investor Relations 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 second quarter 2018
financial results at 11:00 a.m. PT / 2:00 p.m. ET on August 1, 2018.
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 Investor Relations 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 August 1, 2018 at 2:00 p.m. PT / 5:00 p.m. ET,
through August 8, 2018 at 8:59 p.m. PT / 11:59 p.m. ET, by dialing (844)
512-2921 and entering the passcode 13681231. International callers
should dial (412) 317-6671 and enter the same passcode.

About Hudson Pacific Properties

Hudson Pacific Properties is a vertically integrated real estate company
focused on acquiring, repositioning, developing and operating
high-quality office and state-of-the-art studio properties in select
West Coast markets. Hudson Pacific invests across the
risk-return spectrum, favoring opportunities where it can employ
leasing, capital investment and management expertise to create
additional value. Founded in 2006 as Hudson Capital, the Company went
public in 2010, electing to be taxed as a real estate investment trust.
Through the years, Hudson Pacific has strategically assembled a
portfolio in high-growth, high-barrier-to-entry submarkets throughout
Northern and Southern California and the Pacific Northwest. The Company
is a leading provider of design-forward, next-generation workspaces for
a variety of tenants, with a focus on Fortune 500 and industry-leading
growth companies, many in the technology, media and entertainment
sectors. As a long-term owner, Hudson Pacific prioritizes tenant
satisfaction and retention, providing highly customized build-outs and
working proactively to accommodate tenants' growth. Hudson Pacific
trades as a component of the Russell 2000® and the Russell 3000®
indices. 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 for the year ended December 31,
2017 filed with the Securities and Exchange Commission, or SEC, on
February 16, 2018, and other risks described in documents subsequently
filed by the Company from time to time with the SEC.

 
Hudson Pacific Properties, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

            June 30, 2018

(Unaudited)

          December 31, 2017
ASSETS
Investment in real estate, at cost $ 6,418,882 $ 6,219,361
Accumulated depreciation and amortization (601,535 ) (521,370 )
Investment in real estate, net 5,817,347 5,697,991
Cash and cash equivalents 57,515 78,922
Restricted cash 8,472 22,358
Accounts receivable, net 6,615 4,234
Straight-line rent receivables, net 124,083 106,466
Deferred leasing costs and lease intangible assets, net 236,582 239,029
Prepaid expenses and other assets, net 107,549 61,139
Assets associated with real estate held for sale 201,011   411,931  
TOTAL ASSETS $ 6,559,174   $ 6,622,070  
 
LIABILITIES AND EQUITY
Notes payable, net $ 2,361,749 $ 2,421,380
Accounts payable and accrued liabilities 151,697 162,081
Lease intangible liabilities, net 41,729 49,540
Security deposits and prepaid rent 64,582 62,760
Derivative liabilities 265
Liabilities associated with real estate held for sale 3,554   4,903  
TOTAL LIABILITIES 2,623,311 2,700,929
Redeemable non-controlling interest 9,815 10,177
EQUITY
Hudson Pacific Properties, Inc. stockholders' equity:
Common stock, $0.01 par value, 490,000,000 authorized, 155,647,733
shares and 155,602,508 shares outstanding at June 30, 2018 and
December 31, 2017, respectively
1,556 1,556
Additional paid-in capital 3,615,833 3,622,988
Accumulated other comprehensive income 26,407   13,227  
Total Hudson Pacific Properties, Inc. stockholders' equity 3,643,796 3,637,771
Non-controlling interest—members in consolidated entities 265,695 258,602
Non-controlling interest—units in the operating partnership 16,557   14,591  
TOTAL EQUITY 3,926,048   3,910,964  
TOTAL LIABILITIES AND EQUITY $ 6,559,174   $ 6,622,070  
 
 
           

Hudson Pacific Properties, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except share data)

 
Three Months Ended
June 30,
Six Months Ended
June 30,
2018       2017 2018       2017
REVENUES  
Office
Rental $ 129,732 $ 133,602 $ 259,814 $ 267,118
Tenant recoveries 21,960 25,038 42,864 42,439
Parking and other 6,858   8,212   12,404   14,111  
Total Office revenues 158,550 166,852 315,082 323,668
Studio
Rental 10,708 9,105 21,091 15,790
Tenant recoveries 500 129 854 794
Other property-related revenue 5,301 4,361 11,736 8,403
Other 110   53   524   130  
Total Studio revenues 16,619   13,648   34,205   25,117  
TOTAL REVENUES 175,169 180,500 349,287 348,785
OPERATING EXPENSES
Office operating expenses 53,940 55,468 107,180 103,422
Studio operating expenses 8,539 7,003 18,203 14,254
General and administrative 16,203 14,506 31,767 28,316
Depreciation and amortization 60,706   75,415   121,259   146,182  
TOTAL OPERATING EXPENSES 139,388   152,392   278,409   292,174  
INCOME FROM OPERATIONS 35,781 28,108 70,878 56,611
OTHER EXPENSE (INCOME)
Interest expense 19,331 21,695 39,834 43,625
Interest income (66 ) (16 ) (75 ) (46 )
Unrealized loss on ineffective portion of derivatives 51 45
Unrealized gain on non-real estate investment (928 ) (928 )
Transaction-related expenses 118
Other income (319 ) (576 ) (723 ) (1,254 )
TOTAL OTHER EXPENSES 18,018   21,154   38,226   42,370  
INCOME BEFORE GAINS ON SALE OF REAL ESTATE 17,763 6,954 32,652 14,241
Gains on sale of real estate 1,928     39,602   16,866  
NET INCOME 19,691 6,954 72,254 31,107
Net income attributable to preferred units (153 ) (159 ) (312 ) (318 )
Net income attributable to participating securities (110 ) (255 ) (437 ) (495 )
Net income attributable to non-controlling interest in consolidated
entities
(3,167 ) (2,974 ) (6,490 ) (6,011 )
Net income attributable to non-controlling interest in the operating
partnership
(59 ) (13 ) (236 ) (215 )
Net income attributable to Hudson Pacific Properties, Inc. common
stockholders
$ 16,202   $ 3,553   $ 64,779   $ 24,068  
Basic and diluted per share amounts:
Net income attributable to common stockholders—basic $ 0.10   $ 0.02   $ 0.42   $ 0.16  
Net income attributable to common stockholders—diluted $ 0.10   $ 0.02   $ 0.41   $ 0.16  
Weighted average shares of common stock outstanding—basic 155,636,636   155,290,559   155,631,375   151,640,853  
Weighted average shares of common stock outstanding—diluted 156,590,227   156,095,603   156,563,966   152,431,897  
Dividends declared per share $ 0.25   $ 0.25   $ 0.50   $ 0.50  
 
 
           

Hudson Pacific Properties, Inc.

Funds From Operations

(Unaudited, in thousands, except per share data)

 

Three Months Ended

June 30,

Six Months Ended

June 30,

2018       2017 2018       2017
Reconciliation of net income to Funds From Operations ("FFO")(1):
Net income $ 19,691 $ 6,954 $ 72,254 $ 31,107
Adjustments:
Depreciation and amortization of real estate assets 60,217 74,939 120,286 145,233
Gains on sale of real estate (1,928 ) (39,602 ) (16,866 )
FFO attributable to non-controlling interests (5,316 ) (6,445 ) (10,647 ) (11,952 )
Net income attributable to preferred units (153 ) (159 ) (312 ) (318 )
FFO to common stockholders and unitholders 72,511 75,289 141,979 147,204
Specified items impacting FFO:
Transaction-related expenses 118
One-time debt extinguishment costs 421

Unrealized gains on non-real estate investment(2)

(928 )     (928 )    
FFO (excluding specified items) to common stockholders and
unitholders
$ 71,583   $ 75,289   $ 141,590   $ 147,204  
 
Weighted average common stock/units outstanding—diluted 157,159 156,665 157,133 153,443
FFO per common stock/unit—diluted $ 0.46 $ 0.48 $ 0.90 $ 0.96
FFO (excluding specified items) per common stock/unit—diluted $ 0.46 $ 0.48 $ 0.90 $ 0.96
 
(1)     We calculate FFO in accordance with the White Paper on FFO approved
by the Board of Governors of the National Association of Real Estate
Investment Trusts. The White Paper defines FFO as net income or loss
calculated in accordance with generally accepted accounting
principles in the United States ("GAAP"), excluding extraordinary
items, as defined by GAAP, 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) and after adjustment for
unconsolidated partnerships and joint ventures. The calculation of
FFO includes the amortization of deferred revenue related to
tenant-funded tenant improvements and excludes the depreciation of
the related tenant improvement assets. We believe that FFO is a
useful supplemental measure of our 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 our
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, our 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, we believe that
FFO along with the required GAAP presentations provides a more
complete measurement of our performance relative to our 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. We use FFO per share to calculate
annual cash bonuses for certain employees.
 
FFO should not be viewed as an alternative measure of our 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 our
properties, which are significant economic costs and could
materially impact our results from operations.
 
(2) We adopted ASU 2016-01 on January 1, 2018, at which point we elected
the measurement alternative. This standard requires us to mark the
investment in shares to fair value whenever fair value is readily
available or observable. During the second quarter of 2018, we
recognized a $0.9 million unrealized gain.
 
 
           

Hudson Pacific Properties, Inc.

Net Operating Income

(Unaudited, in thousands)

 

Three Months Ended

June 30,

Six Months Ended

June 30,

2018       2017 2018       2017
Reconciliation of net income to Net Operating Income ("NOI")(1):
Net income $ 19,691 $ 6,954 $ 72,254 $ 31,107
Adjustments:
Interest expense 19,331 21,695 39,834 43,625
Interest income (66 ) (16 ) (75 ) (46 )
Unrealized loss on ineffective portion of derivatives 51 45
Unrealized gain on non-real estate investment(2) (928 ) (928 )
Transaction-related expenses 118
Other income (319 ) (576 ) (723 ) (1,254 )
Gain on sale of real estate (1,928 )   (39,602 ) (16,866 )
Income from operations 35,781 28,108 70,878 56,611
Adjustments:
General and administrative 16,203 14,506 31,767 28,316
Depreciation and amortization 60,706   75,415   121,259   146,182  
NOI $ 112,690   $ 118,029   $ 223,904   $ 231,109  
 
(1)     We evaluate performance based upon property NOI from continuing
operations. NOI is not a measure of operating results or cash flows
from operating activities as measured by GAAP and should not be
considered an alternative to income from continuing operations, as
an indication of our performance, or as an alternative to cash flows
as a measure of liquidity, or our ability to make distributions. All
companies may not calculate NOI in the same manner. We consider 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 our
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. We
calculate 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. We
define 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 on a GAAP
basis, adjusted to exclude the effect of straight-line rent and
other non-cash adjustments required by GAAP. We believe that 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.
 
(2) We adopted ASU 2016-01 on January 1, 2018, at which point we elected
the measurement alternative. This standard requires us to mark the
investment in shares to fair value whenever fair value is readily
available or observable. During the second quarter of 2018, we
recognized a $0.9 million unrealized gain.
 

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