REIT Focus: Hudson Pacific Properties, Inc.

| About: Hudson Pacific (HPP)

Summary

HPP is an office REIT that owns 53 office properties and two media/entertainment properties containing 13.8 million rentable sq. ft. and located in So. CA, WA and No. CA.

HPP has a solid portfolio of office assets, a 3.47% dividend yield, investment grade credit rating and trades at only 14x FFO.

We like the valuation of HPP, but are not recommending the purchase of the stock due to its geographic concentration in CA and 39% of the tenancy is technology related.

This REIT Review is on Hudson Pacific Properties, Inc. (NYSE:HPP), a publicly traded REIT that owns and operates a portfolio of institutional quality office properties located in CA and WA.

Property Information

As of Q3 2015, HPP owned 53 office properties and two media and entertainment properties containing 13.8 million rentable sq. ft. and located primarily in Seattle, WA, Los Angeles, CA and the Bay Area of No. CA. Major tenants include Google (4.3% of annualized rent), Weil, Gotshal & Manges, LLP (3.8% of annualized rent) and Riot Games, Inc. (3.5% of annualized rent). Portfolio occupancy was 94.5% and average rent per sq. ft. was $37.28 for Q3 2015. The same store YoY NOI increased 3.3% for Q3 2015.

Major Events

As of Q3-15, HPP had two So. CA office projects under development at a total projected cost of $261 million with $90 million incurred to date.

In 11/15, HPP privately placed $425 million in senior guaranteed notes, the proceeds of which were used to repay its two-year floating rate loan facility and funds from operations.

In 1/16, HPP sold the Bayhill Office Center in San Bruno, CA for $215 million, excluding closing costs.

Corporate Data

HPP went public in 2010, is traded on the NYSE, is incorporated in Maryland and is located in Los Angeles, CA. HPP's debt is rated Baa3 by Moody's and BBB- by Standard and Poor's and Fitch Ratings. HPP has a market capitalization of approximately $2.08 billion. HPP owns a 61.4% controlling interest in its UpReit partnership, Hudson Pacific Properties, L.P.

Management

Victor J. Coleman, 53, CEO, President and Chairman of the Board

Mr. Coleman serves as Chief Executive Officer, President and Chairman of HPP's Board of Directors, and has been a member of the Board since HPP's initial public offering. Prior to the formation of HPP, Mr. Coleman founded and served as a managing partner of HPP's predecessor, Hudson Capital, LLC, a private real estate investment company based in Los Angeles. In 1990, Mr. Coleman co-founded and led Arden Realty as its President and Chief Operating Officer and as a director, taking that company public on the NYSE in 1996 and selling it to GE Real Estate, a division of General Electric Capital Corporation, in 2006. Mr. Coleman's previous experience as a director also includes service on the board of other public companies such as Douglas Emmett, Inc. from 2006 to 2009, and he currently serves as a trustee on the board of Kite Realty since 2012. Mr. Coleman holds a Master of Business Administration degree from Golden Gate University and a Bachelor of Arts in History from the University of California, Berkeley.

Mark T. Lammas, 48, COO and CFO

Mr. Lammas serves as HPP's Chief Operating Officer, Chief Financial Officer and Treasurer, and formerly served as Chief Financial Officer and Treasurer since HPP's initial public offering. Prior to the formation of HPP, Mr. Lammas was a consultant to HPP's predecessor, Hudson Capital, LLC, from September 2009. Before that time, Mr. Lammas was a Senior Vice President from 1998 to 2005, then Executive Vice President from 2006 to 2009 of Maguire Properties, Inc., where he principally oversaw finance and other transactional matters, since first joining that company as its General Counsel in 1998, then assuming other senior executive responsibilities after Maguire Properties went public on the NYSE in 2003. During his tenure, Mr. Lammas directed that company's major capital market transactions, including corporate and asset financings and common and preferred equity offerings, acted as its principal liaison with institutional partners, and was responsible for compliance with corporate financial covenants and the accuracy of all financial reports and public disclosures. Prior to joining Maguire Properties in 1998, Mr. Lammas was an attorney with Cox, Castle & Nicholson LLP, where he specialized in representing developers, institutional investors and pension funds in their acquisition, development, financing, investing, and entity structuring and restructuring activities.

Christopher J. Barton, 50, EVP, Development and Capital Investments

Mr. Barton serves as Executive Vice President, Development and Capital Investments, where he oversees all of HPP's redevelopment, development and capital improvement projects. Prior to taking on his current role and since HPP's initial public offering, Mr. Barton served as Executive Vice President, Operations and Development. Prior to the formation of HPP, Mr. Barton served as Vice President of Construction & Development of HPP's predecessor, Hudson Capital, LLC, where he was responsible for operations and development. Beginning in 1997 until joining Hudson Capital, LLC in November 2006, Mr. Barton served as First Vice President for Arden Realty, where he was responsible for conceptual development, land entitlements, financial analysis and construction management for all real estate developments. Before his tenure at Arden Realty, Mr. Barton was Project Manager at Beers-Skanska Construction Company where he managed large-scale construction projects in the southeast US. Mr. Barton currently serves on the Board of Directors of the Hollywood Chamber of Commerce and on the Board of Directors of Hollywood Freeway Central Park. Mr. Barton holds a Bachelor of Science degree from Purdue University and Master of Business Administration degree in both Real Estate and Finance from the University of Georgia.

Ownership

Top Institutional Holders:

Shares

%

Vanguard Group Inc.

11,287,948

12.61

Invesco Ltd.

9,690,736

10.83

Blackstone Group L.P.

8,626,311

9.64

Bank of New York Mellon Corporation

5,862,131

6.55

Lasalle Investment Management Securities LP

3,770,685

4.21

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Ownership Breakdown

% of Shares Held by All Insider and 5% Owners

2%

% of Shares Held by Institutional & Mutual Fund Owners

103%

Number of Institutions Holding Shares

194

Click to enlarge

All amounts above per Yahoo Finance

Financial Analysis and Valuation

Select financial data for HPP as of the Q3 2015 10Q and supplemental information

(in millions where applicable):

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Financial Data

Amounts

Real Estate Assets, Gross

$5,909

Total Assets

$6,254

Property Debt (at various fixed and floating rates)

$2,088

Common Stockholders' Equity

$1,824

Revenue

$366

Net Income

($9)

Net Income Per Share

($.12)

Cash Flow from Operations

$121

Unsecured/Secured Credit Facility ($400 million with $105 million used)

$295

Market Capitalization

$2,080

Property Debt to:

Gross Real Estate Assets

35%

Market Capitalization

100%

Enterprise Value

50%

Dividend and Yield ($.80/sh.)

3.47%

Click to enlarge

Valuation Methodology

Q3 2015 Revenue Annualized

$604

Less: Q3 2015 Operating Expenses Annualized (excluding depreciation, amortization, interest expense and less G&A expenses)

268

Annualized Net Operating Income 2015

$336

Projected Inflation Rate at 3.5%

x1.035

Projected Forward NOI for Next Year

$348

Projected Average Cap Rate

7%

Projected Value of Real Estate Assets

$4,971

Add: Net Operating Working Capital (at book value)

319

Property Under Development (at book value)

174

Total Projected Asset Value of Company

$5,464

Less: Total Debt Per Above

2,088

Series B Preferred Stock (at liquidation value)

145

Projected Net Asset Value of the Company

$3,231

Common Shares Outstanding-145.4M Shares (89M common shares plus 56M partnership units and .4M preferred units)

Projected NAV Per Share

$22

Market Price Per Share on 2/15/16

$23

Premium (Discount) to NAV

4%

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Financial Metrics

The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2010 through Q3 2015 are shown in the table below:

(millions except per share amounts)

2010

2011

2012

2013

2014

Q3 2015

Q3 2015 2015

Gross Real Estate Assets

$864

$1,060

$1,420

$2,035

$2,171

$5,909

Property Debt

$342

$399

$582

$931

$918

$2,088

Revenues

$60

$142

$160

$205

$253

$366

Net Income

($3)

($10)

($17)

($14)

$9

($9)

Funds from Operations (FFO)

NA

$66

$35

$39

$58

$71

$106

Return on Invested Capital (1)

.8%

3.1%

2.9%

2.1%

3%

NA

Dividends Paid Per Share

$.1921

$.50

$.50

$.50

$.50

$.575(2)

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(1) This is the ratio of cash provided by operations divided by stockholder's equity plus property debt, less cash and measures the return the REIT is earning on its invested capital.

(2) Dividend is currently $.20 per quarter.

The total return of HPP year to date and through five years is shown in the chart below per NAREIT:

HPP Total Return

YTD (12/15)

1-Yr

3-yr

5-Yr

-4.55%

-4.55%

12.46%

16.24%

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As shown above, our net asset value per share for HPP is $22/sh., compared to a market price of $23/sh. Current average cap rates for office properties per our industry experience and CBRE's Cap Rate Survey are in the 5% to 8% range, depending on the location, occupancy, quality and tenancy of the property. We have used an average cap rate of 7% due to HPP's portfolio being primarily well-located Class A/B office properties on the West Coast.

Valuation Analysis

HPP's strengths, concerns and recommendation are as follows:

Strengths:

  • Solid portfolio of Class A/B office assets.
  • Investment grade credit rating.
  • Attractive stock price at $23/sh. and 14X FFO.
  • Dividend of $.50/sh. per year since 2011 has been increased 60% to $.80/sh. per year.

Concerns:

  • Low return on invested capital (CFFO divided by book value of debt and stockholders' equity less cash).
  • Portfolio is not diversified geographically with the majority of the portfolio located in No. and So. CA, which increases portfolio risk.
  • Public shareholders only own 61.4% of the net assets of HPP. The other 38.6% is owned by management insiders and third parties that have sold properties to HPP.
  • 39.7% of annualized rent is from technology-related companies.

Recommendations:

HPP is a solid office REIT with an attractive portfolio of Class A/B office properties and our recommendation is as follows:

  • Although we like the valuation of HPP, we are not recommending the purchase of the stock due to the geographic risk and high portion of space rented to technology-based companies.

A five-year price chart of HPP is shown below.

Disclosure: I am/we are long VARIOUS REITS IN AN ETF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.