HPP 10-K 12/31/2012
Section 1: 10-K (10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
Commission File Number 001-34789
_______________________________________
Hudson Pacific Properties, Inc.
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
27-1430478
(I.R.S. Employer Identification Number)
11601 Wilshire Blvd., Suite 1600
Los Angeles, California
(Address of principal executive offices)
90025
(Zip Code)
Registrant’s telephone number, including area code: (310) 445-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
8.375% Series B Cumulative Redeemable Preferred Stock, $.01 par
value
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
_______________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 29, 2012, the aggregate market value of Common Stock held by non-affiliates of the registrant (assuming for these purposes, but without conceding,
that all executive officers, directors and funds affiliated with Farallon Capital Management, LLC are “affiliates” of the registrant) was $591.2 million based upon the last
sales price on June 29, 2012 for the registrant’s Common Stock.
As of March 1, 2013, the number of shares of Common Stock outstanding was 56,698,156.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2013 Annual Meeting of Stockholders to be held May 17, 2013 are incorporated by reference in Part III of this
Form 10-K Report. The proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the
registrant’s fiscal year.
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
PART IV
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Item 1. Business
Company Overview
PART I
Hudson Pacific Properties, Inc. (which may be referred to in this Form 10-K as “we,” “us,” “our,” or “our company”) is a full-service, vertically integrated real
estate investment trust, or REIT, focused on owning, operating and acquiring high-quality office and media and entertainment properties in select growth markets
primarily in Northern and Southern California. Our investment strategy is focused on high barrier-to-entry, in-fill locations with favorable, long-term supply demand
characteristics. These markets include Los Angeles, Orange County, San Diego, San Francisco, Silicon Valley and the East Bay, which we refer to as our target markets.
As of December 31, 2012 our stabilized portfolio of operating properties included properties totaling approximately 5.3 million square feet strategically located in many of
our target markets.
We were formed as a Maryland corporation in 2009 to succeed the business of Hudson Capital, LLC, a
Los Angeles-based real estate investment firm founded by Victor J. Coleman, our Chief Executive Officer, and Howard S. Stern, our President. On June 29, 2010, we
completed our initial public offering. We own our interests in all of our properties and conduct substantially all of our business through our operating partnership,
Hudson Pacific Properties, L.P., a Maryland limited partnership, of which we serve as the sole general partner, and own approximately 95.2% of the outstanding common
units of partnership interest in our operating partnership, or common units. The remaining 4.8% limited partnership interest in our operating partnership is owned by
certain of our executive officers and directors, certain of their affiliates, and other outside investors, including funds affiliated with Farallon Capital Management, LLC.
Business and Growth Strategies
We focus our investment strategy on office and media and entertainment properties located in high barrier-to-entry submarkets with growth potential as well as
on underperforming properties that provide opportunities to implement a value-add strategy to increase occupancy rates and cash flow. This strategy includes active
management, aggressive leasing efforts, focused capital improvement programs, the reduction and containment of operating costs and an emphasis on tenant
satisfaction. We believe our senior management team’s experience in the California office and media and entertainment sectors positions us to improve cash flow in our
portfolio, as well as any newly acquired properties, as the recovery in the California economy and the real estate markets takes hold.
Our Competitive Position
We believe the following competitive strengths distinguish us from other real estate owners and operators and will enable us to capitalize on opportunities in
the market to successfully expand and operate our portfolio.
• Experienced Management Team with a Proven Track Record of Acquiring and Operating Assets and Managing a Public Office REIT. Our senior
management team has an average of over 20 years of experience in the commercial real estate industry, with a focus dedicated exclusively to owning, acquiring,
developing, operating, financing and selling office properties in California.
• Committed and Incentivized Management Team. Our senior management team is dedicated to our successful operation and growth, with no competing real
estate business interests outside of our company. Additionally, our senior management team owns approximately 3.1% of our common stock on a fully diluted
basis, thereby aligning management’s interests with those of our stockholders.
• California Focus with Local and Regional Expertise. We are primarily focused on acquiring and managing office properties in Northern and Southern
California, where our senior management has significant expertise and relationships. California has historically experienced strong rebounds in its real estate
market after prior recessions, as demand for commercial real estate in California is driven by its dynamic, innovative and diversified economy. California
outpaced the rate of national job creation during several cycles, including the periods following the mid-1970s recession, the late 1980s recession, and during
the late 1990s. Additionally, many of California’s leading markets are supply-constrained as a result of the scarcity of available land, high construction costs
and restrictive entitlement processes, which we believe have helped drive strong rebounds in the California real estate market after prior recessions. We believe
our experience, in-depth market knowledge and meaningful industry relationships with brokers, tenants, landlords, lenders and other market participants
enhance our ability to identify and capitalize on attractive acquisition opportunities, particularly those that arise in California.
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•
Long-Standing Relationships that Provide Access to an Extensive Pipeline of Investment and Leasing Opportunities. We have an extensive network of
long-standing relationships with real estate developers, individual and institutional real estate owners, national and regional lenders, brokers, tenants and other
participants in the California real estate market. These relationships have historically provided us with access to attractive acquisition opportunities, including
opportunities with limited or no prior marketing by sellers. We believe they will continue to provide us access to an ongoing pipeline of attractive acquisition
opportunities and additional growth capital, both of which may not be available to our competitors. Additionally, we focus on establishing strong relationships
with our tenants in order to understand their long-term business needs, which we believe enhances our ability to retain quality tenants, facilitates our leasing
efforts and maximizes cash flows from our properties.
• Growth-Oriented, Flexible and Conservative Capital Structure. We have remained well-capitalized since our initial public offering, including through our
public offering of 3,500,000 shares of our 8.375% Series B Cumulative Preferred Stock in December 2010 for total proceeds, after underwriters’ discounts, of
approximately $84.7 million (before transaction costs), our public offering of 7,992,500 shares of common stock and private placement of 3,125,000 shares in May
2011 for total proceeds, after underwriters’ discount, of approximately $156.7 million (before transaction costs), our public offering of 2,300,000 shares of our
8.375% Series B Cumulative Preferred Stock in January 2012 for total proceeds, after underwriters’ discounts, of approximately $56.1 million (before transaction
costs), our public offering of 13,225,000 shares of common stock in May 2012 for total proceeds, after underwriters’ discounts, of approximately $190.8 million
(before transaction costs) and our public offering of 9,200,000 shares of common stock in February 2012 for total proceeds, after underwriters’ discounts, of
approximately $189.9 million (before transactions costs). Available cash on hand and our unsecured credit facility provide us with a significant amount of capital
to pursue acquisitions and execute our growth strategy, while maintaining a flexible and conservative capital structure. As of the December 31, 2012 we had
$55.0 million outstanding on our unsecured credit facility of approximately $204.1 million of total availability. Based on the closing price of our common stock of
$22.72 on March 1, 2013, we had a debt-to-market capitalization ratio (counting series A preferred units as debt) of approximately 27.1%. We believe our access
to capital and flexible and conservative capital structure provide us with an advantage over many of our private and public competitors as we look to take
advantage of growth opportunities.
•
Irreplaceable Media and Entertainment Assets in a Premier California Submarket. Our Sunset Gower and Sunset Bronson media and entertainment
properties are located on Sunset Boulevard, just off of the Hollywood Freeway in the heart of Hollywood. These facilities, which are situated on approximately
15.7 and 10.6 acres, respectively, were originally built in the 1920s as the headquarters of Columbia Pictures and Warner Brothers and represent a unique and
irreplaceable assemblage of land in densely populated Los Angeles. We are the largest owner and operator of independent media and entertainment properties
in Los Angeles and possess large, modern sound stages and plentiful office space with state-of-the-art telecommunications and data network infrastructure.
Our properties are important facilities for major film and television companies and independent producers, most of which outsource a portion of their
productions to independent media and entertainment properties. We believe our media and entertainment properties are attractively located and benefit from
high barriers to entry, with a limited supply of readily developable land. In addition, there are substantial costs associated with acquiring and developing
suitable land and extensive knowledge required to develop and operate such facilities. As a result of these high barriers to entry, there is effectively no new
supply of media and entertainment space in the urban core of Los Angeles. We believe the limited supply of media and entertainment properties, coupled with
the continued demand for such properties in Los Angeles, which remains the center of the entertainment industry in the United States, will help ensure that
these assets remain critical to the industry.
We have access to and are actively pursuing a pipeline of potential acquisitions consistent with our investment strategy. We believe our significant expertise in
operating in the California office sector and extensive, long-term relationships with real estate owners, developers and lenders, coupled with our conservative capital
structure and access to capital, will allow us to capitalize on the current market opportunity.
Competition
We compete with a number of developers, owners and operators of office and commercial real estate, many of which own properties similar to ours in the same
markets in which our properties are located and some of which have greater financial resources than we do. In operating and managing our portfolio, we compete for
tenants based on a number of factors, including location, rental rates, security, flexibility and expertise to design space to meet prospective tenants’ needs and the
manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter significant competition to renew or re-let space
in light of the large number of competing properties within the markets in which we
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operate. As a result, we may be required to provide rent concessions or abatements, incur charges for tenant improvements and other inducements, including early
termination rights or below-market renewal options, or we may not be able to timely lease vacant space. In that case, our financial condition, results of operations, cash
flow and per share trading price of our securities
may be adversely affected.
We also face competition when pursuing acquisition and disposition opportunities. Our competitors may be able to pay higher property acquisition prices, may
have private access to opportunities not available to us and may otherwise be in a better position to acquire a property. Competition may also have the effect of reducing
the number of suitable acquisition opportunities available to us, increase the price required to consummate an acquisition opportunity and generally reduce the demand
for commercial office space in our markets. Likewise, competition with sellers of similar properties to locate suitable purchasers may result in us receiving lower proceeds
from a sale or in us not being able to dispose of a property at a time of our choosing due to the lack of an acceptable return.
For further discussion of the potential impact of competitive conditions on our business, see Item 1A: Risk Factors below.
Segment and Geographic Financial Information
We report our results of operations through two segments: (i) office properties and (ii) media and entertainment properties. The office properties reporting
segment includes 19 properties totaling approximately 4.5 million square feet strategically located in many of our target markets, while the media and entertainment
reporting segment includes two properties, Sunset Gower property (including 6050 and 6060 Sunset) and the Sunset Bronson property, totaling approximately 0.9 million
square feet located in the heart of Hollywood, California. For financial information about our two reportable segments, see Note 13 to our consolidated financial
statements.
All of our business is conducted in the State of California. For information about our revenues and long-lived assets and other financial information, see our
consolidated financial statements included in this report and Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations “—
Results of Operations.”
Employees
At December 31, 2012, we had 106 employees. At December 31, 2012, two of our employees were subject to collective bargaining agreements. Both of these
employees are on-site employees at the Sunset Bronson property. We believe that relations with our employees are good.
Principal Executive Offices
Our principal executive offices are located at 11601 Wilshire Blvd., Suite 1600, Los Angeles, California 90025 (telephone 310.445.5700). We believe that our
current facilities are adequate for our present operations.
Regulation
General
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety
requirements. We believe that each of the properties in our portfolio has the necessary permits and approvals to operate its business.
Americans With Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such properties are “public accommodations” as
defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such
removal is readily achievable. We have developed and undertaken continuous capital improvement programs at certain properties in the past. These capital improvement
programs will continue to progress and certain ADA upgrades will continue to be integrated into the planned improvements, specifically at the media and entertainment
properties where we are able to utilize in-house construction crews to minimize costs for required ADA related improvements. However, some of our properties may
currently be in noncompliance with the ADA. Such noncompliance could result in the incurrence of additional costs to attain compliance, the
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imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to
assess our properties and to make alterations as appropriate in this respect.
Environmental Matters
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be
liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from
such property, including costs to investigate and clean up such contamination and liability for natural resources. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be
substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets. In addition, the
presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or
property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition,
environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if
contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require substantial expenditures.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the
storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties were used in the past for commercial or industrial purposes, or
are currently used for commercial purposes, that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near
properties that have been or are used for similar commercial or industrial purposes. As a result, some of our properties have been or may be impacted by contamination
arising from the releases of such hazardous substances or petroleum products. Where we have deemed appropriate, we have taken steps to address identified
contamination or mitigate risks associated with such contamination; however, we are unable to ensure that further actions will not be necessary. As a result of the
foregoing, we could potentially incur material liabilities.
Independent environmental consultants have conducted Phase I Environmental Site Assessments at all of the properties in our portfolio using the American
Society for Testing and Materials (ASTM) Practice E 1527-05. A Phase I Environmental Site Assessment is a report prepared for real estate holdings that identifies
potential or existing environmental contamination liabilities. Site assessments are intended to discover and evaluate information regarding the environmental condition of
the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None
of the recent site assessments identified any known past or present contamination that we believe would have a material adverse effect on our business, assets or
operations. However, the assessments are limited in scope and may have failed to identify all environmental conditions or concerns. A prior owner or operator of a
property or historic operations at our properties may have created a material environmental condition that is not known to us or the independent consultants preparing
the site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or
regulations may impose material
additional environmental liability.
Environmental laws also govern the presence, maintenance and removal of asbestos- and lead-containing building materials, or ACBM, and may impose fines
and penalties for failure to comply with these requirements or expose us to third party liability (e.g., liability for personal injury associated with exposure to asbestos).
Such laws require that owners or operators of buildings containing ACBM (and employers in such buildings) properly manage and maintain the asbestos and lead,
adequately notify or train those who may come into contact with asbestos or lead, and undertake special precautions, including removal or other abatement, if asbestos
or lead would be disturbed during renovation or demolition of a building. Some of our properties contain ACBM and we could be liable for such damages, fines or
penalties.
In addition, the properties in our portfolio also are subject to various federal, state, and local environmental and health and safety requirements, such as state
and local fire requirements. Moreover, some of our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our
properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from
these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us. In addition, changes in laws could increase the potential liability for
noncompliance. We sometimes require our tenants to comply with environmental and health and safety laws and regulations and to indemnify us for any related
liabilities. But in the event of the bankruptcy or inability of any of our tenants to satisfy such obligations, we may be required to satisfy such obligations. In addition, we
may be held directly liable for any such damages or claims regardless of whether we knew of, or were responsible for, the presence
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or disposal of hazardous or toxic substances or waste and irrespective of tenant lease provisions. The costs associated with such liability could be substantial and could
have a material adverse effect on us.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered
or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation,
chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or
irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of
significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or
other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware of any material
adverse indoor air quality issues at our properties.
Available Information
Our internet address is www.hudsonpacificproperties.com. On the Investor Relations page on our Web site, we post the following filings as soon as
reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission, or SEC: our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. All such filings on our Investor Relations Web page are available to be viewed on this page free of charge. Also available on our Web
site, free of charge, are our corporate governance guidelines, the charters of the nominating and corporate governance, audit and compensation committees of our board
of directors and our code of business conduct and ethics (which applies to all directors and employees, including our principal executive officer, principal financial
officer and principal accounting officer). Information contained on or hyperlinked from our Web site is not incorporated by reference into and should not be considered
part of this Annual Report on Form 10-K or our other filings with the SEC. A copy of this Annual Report on Form 10-K is available without charge upon written request
to: Investor Relations, Hudson Pacific Properties, Inc., 11601 Wilshire Blvd., Suite 1600, Los Angeles, California 90025.
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Item 1A. Risk Factors
Forward-looking Statements
Certain written and oral statements made or incorporated by reference from time to time by us or our representatives in this Annual Report on Form 10-K, other
filings or reports filed with the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act). In particular, statements relating to our liquidity and
capital resources, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial
performance (including anticipated funds from operations (“FFO”), market conditions and demographics) are forward-looking statements. We are including this
cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-
looking statements. We caution investors that any forward-looking statements presented in this Annual Report on Form 10-K, or that management may make orally or in
writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words
“anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions that do not relate solely to
historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by
known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to
update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past
forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied
by forward-looking statements include, among others, the following:
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adverse economic or real estate developments in our markets;
general economic conditions;
defaults on, early terminations of or non-renewal of leases by tenants;
fluctuations in interest rates and increased operating costs;
our failure to obtain necessary outside financing;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
lack or insufficient amounts of insurance;
decreased rental rates or increased vacancy rates;
difficulties in identifying properties to acquire and completing acquisitions;
our failure to successfully operate acquired properties and operations;
our failure to maintain our status as a REIT;
environmental uncertainties and risks related to adverse weather conditions and natural disasters;
financial market fluctuations;
changes in real estate and zoning laws and increases in real property tax rates; and
other factors affecting the real estate industry generally.
Set forth below are some (but not all) of the factors that could adversely affect our business and financial performance. Moreover, we operate in a highly
competitive and rapidly changing environment. New risk factors emerge from time to time,
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and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Risks Related to Our Properties and Our Business
All of our properties are located in California, and we therefore are dependent on the California economy and are susceptible to adverse local regulations
and natural disasters affecting California.
All of our properties are located in California, which exposes us to greater economic risks than if we owned a more geographically dispersed portfolio. Further,
our properties are concentrated in certain submarkets, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in the
California economic and regulatory environment (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and
other taxes, costs of complying with governmental regulations or increased regulation), as well as to natural disasters that occur in our markets (such as earthquakes and
other events). For example, prior to the acquisition of our City Plaza property located in Orange County, California, the area was impacted significantly by the collapse of
the subprime mortgage market, which had a material adverse effect on property values, vacancy rates and rents in the area. Had we owned City Plaza at that time, we
would have been exposed to those adverse effects, which were more pronounced in Orange County than in other parts of the state and country. We anticipate that we
will be exposed to similar risks related to the geographic concentration of our properties in the future. In addition, the State of California continues to suffer from severe
budgetary constraints and is regarded as more litigious and more highly regulated and taxed than many other states, all of which may reduce demand for office space in
California. Any adverse developments in the economy or real estate market in California, or any decrease in demand for office space resulting from the California
regulatory or business environment, could adversely impact our financial condition, results of operations, cash flow and the per share trading price of our securities. We
cannot assure you of the growth of the California economy or of our future growth rate.
We derive a significant portion of our rental revenue from tenants in the media, entertainment, and technology industries, which makes us particularly
susceptible to demand for rental space in those industries.
The Sunset Gower, Sunset Bronson, Technicolor Building, 10950 Washington, 875 Howard, 625 Second Street, 275 Brannan and Pinnacle I properties in our
portfolio are leased to primarily media, entertainment, or technology tenants and a significant portion of our rental revenue is derived from tenants in the media,
entertainment, and technology industries. Consequently, we are susceptible to adverse developments affecting the demand by media, entertainment, and technology
tenants for office, production and support space in Southern and Northern California and, more particularly, in Hollywood and the South of Market submarket of San
Francisco, such as writer, director and actor strikes, industry slowdowns and the relocation of media, entertainment, and technology businesses to other locations.
Although our Technicolor Building property and the 10950 Washington property are principally occupied and suitable for general office purposes, portions of such
properties may require modifications prior to or at the commencement of a lease term if it were to be released to more traditional office users. Although our Sunset Gower
and Sunset Bronson properties contain both sound stages and space suitable for office use, they have historically served the media and entertainment industry and will
continue to depend on that sector for future tenancy. In addition, our media and entertainment properties tend to be subject to short-term leases of less than one year.
As a result, were there to be adverse developments affecting the demand by media and entertainment tenants for office, production and support space, it could affect the
occupancy of our media and entertainment properties more quickly than if we had longer term leases. Any adverse development in the media, entertainment, and
technology industries could adversely affect our financial condition, results of operations, cash flow and the per share trading price of our securities.
We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.
Our business strategy includes the acquisition of underperforming office properties. These activities require us to identify suitable acquisition candidates or
investment opportunities that meet our criteria and are compatible with our growth strategies. We continue to evaluate the market of available properties and may
attempt to acquire properties when strategic opportunities exist. However, we may be unable to acquire any of the properties that we may identify as potential
acquisition opportunities in the future. Our ability to acquire properties on favorable terms, or at all, may be exposed to the following significant risks:
•
potential inability to acquire a desired property because of competition from other real estate investors with significant capital, including publicly
traded REITs, private equity investors and institutional investment
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funds, which may be able to accept more risk than we can prudently manage, including risks with respect to the geographic proximity of investments
and the payment of higher acquisition prices;
• we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones
that we are subsequently unable to complete;
•
even if we enter into agreements for the acquisition of properties, these agreements are typically subject to customary conditions to closing, including
the satisfactory completion of our due diligence investigations; and
• we may be unable to finance the acquisition on favorable terms or at all.
If we are unable to finance property acquisitions or acquire properties on favorable terms, or at all, our financial condition, results of operations, cash flow and
the per share trading price of our securities could be adversely affected. In addition, failure to identify or complete acquisitions of suitable properties could slow our
growth.
Our future acquisitions may not yield the returns we expect.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be exposed to the following significant risks:
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even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;
• we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to
meet our expectations;
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our cash flow may be insufficient to meet our required principal and interest payments;
• we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
• we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations,
and as a result our results of operations and financial condition could be adversely affected;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
• we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as
liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the
properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others
indemnified by the former owners of the properties.
If we cannot operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flow and the per share trading
price of our securities could be adversely affected.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit
our ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our
operating partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax
depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable
gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases.
These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
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Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at
all.
In order to maintain our qualification as a REIT, we are required to meet various requirements under the
Internal Revenue Code of 1986, as amended, or Code, including that we distribute annually at least 90% of our net taxable income, excluding any net capital gain. In
addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital
gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash
flow. Consequently, we intend to rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Any
additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
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general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share of our common stock.
Recently, the credit markets have been subject to significant disruptions. If we cannot obtain capital from third-party sources, we may not be able to acquire or
develop properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the
cash distributions to our stockholders necessary to maintain our qualification as a REIT.
Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of
operations, cash flow, cash available for distribution, including cash available for payment of dividends on and the per share trading price of our securities.
If interest rates increase, then so will the interest costs on our unhedged variable rate debt, which could adversely affect our cash flow and our ability to pay
principal and interest on our debt and our ability to make distributions to our stockholders. Further, rising interest rates could limit our ability to refinance existing debt
when it matures. We seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that
counterparties may fail to honor their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate
changes. Failure to hedge effectively against interest rate changes may materially adversely affect our financial condition, results of operations, cash flow, cash available
for distribution, including cash available for payment of dividends on and the per share trading price of our securities. In addition, while such agreements are intended to
lessen the impact of rising interest rates on us, they also expose us to the risk that the other parties to the agreements will not perform, we could incur significant costs
associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow
hedges under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 815, Derivative and Hedging.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties
subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result
in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged
property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is
subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but
would not receive any cash proceeds.
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Our unsecured revolving credit facility restricts our ability to engage in some business activities.
Our unsecured revolving credit facility contains customary negative covenants and other financial and operating covenants that, among other things:
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restrict our ability to incur additional indebtedness;
restrict our ability to make certain investments;
restrict our ability to merge with another company;
restrict our ability to make distributions to stockholders; and
require us to maintain financial coverage ratios.
These limitations restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations, cash flow,
cash available for distributions to our stockholders, and per share trading price of our securities. In addition, failure to meet any of these covenants, including the
financial coverage ratios, could cause an event of default under and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
Furthermore, our unsecured revolving credit facility contains specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right
to declare a default if we are in default under other loans in some circumstances.
Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our financial condition,
results of operations, cash flow and per share trading price of our securities.
Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole, including dislocations in
the credit markets. These conditions may adversely affect our financial condition, results of operations, cash flow and the per share trading price of our securities as a
result of the following potential consequences, among others:
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significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market
rental rates and property values to be negatively impacted;
our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue
acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and
increase our future interest expense;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and
may reduce the availability of unsecured loans; and
one or more lenders under our unsecured revolving credit facility could refuse to fund their financing commitment to us or could fail and we may not be
able to replace the financing commitment of any such lenders on favorable terms, or at all.
In addition, the economic downturn has adversely affected, and may continue to adversely affect, the businesses of many of our tenants. As a result, we may
see increases in bankruptcies of our tenants and increased defaults by tenants, and we may experience higher vacancy rates and delays in re-leasing vacant space,
which could negatively impact our business and results of operations.
We have a limited operating history and may not be able to operate our business successfully or implement our business strategies as described in this
Annual Report on Form 10-K.
We commenced operations only upon completion of our initial public offering on June 29, 2010. Our office portfolio consists of properties located throughout
California, containing a total of approximately 4.5 million net rentable square feet. Our 901 Market, Olympic Bundy, and Pinnacle I properties have only been under our
management since they were acquired on June 1, 2012, September 5, 2012, and November 8, 2012, respectively. These properties may have characteristics or deficiencies
unknown to us that could affect such properties’ valuation or revenue potential. In addition, there can be no
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assurance that the operating performance of the properties will not decline under our management. We cannot assure you that we will be able to operate our business
successfully or implement our business strategies.
We have a limited operating history as a REIT and as a publicly-traded company and may not be able to successfully operate as a REIT or a publicly-
traded company.
We have a limited operating history as a REIT and as a publicly-traded company. We cannot assure you that the past experience of our senior management
team will be sufficient to successfully operate our company as a REIT or a publicly-traded company, including the requirements to timely meet disclosure requirements of
the SEC and comply with the Sarbanes-Oxley Act of 2002. Since our initial public offering, we have been subject to various requirements related to REITs and publicly-
traded companies, including requirements to develop and implement control systems and procedures in order to qualify and maintain our qualification as a REIT and
satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with New York Stock Exchange, or NYSE, listing standards.
Compliance with these requirements could place a significant strain on our management systems, infrastructure and other resources. Failure to operate successfully as a
public company or qualify and maintain our qualification as a REIT would have an adverse effect on our financial condition, results of operations, cash flow and the per
share trading price of our securities.
We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We compete with numerous developers, owners and operators of office properties, many of which own properties similar to ours in the same submarkets in
which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we
may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements,
tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. As a result, our financial
condition, results of operations, cash flow and the per share trading price of our securities could be adversely affected.
We depend on significant tenants, and many of our properties are single-tenant properties or are currently occupied by single tenants.
As of December 31, 2012, the ten largest tenants in our office portfolio represented approximately 50.5%
of the total annualized base rent generated by our office properties. The inability of a significant tenant to pay rent or the bankruptcy or insolvency of a significant
tenant may adversely affect the income produced by our properties. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant
based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease with us. Any claim
against such tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. As of
December 31, 2012, our largest tenant was Bank of America, which accounted for 8.3%
of our annualized base rent and therefore represented a significant credit concentration. If Bank of America were to experience a downturn in its business or a weakening
of its financial condition resulting in its failure to make timely rental payments or causing it to default under its lease, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment. Any such event described above could have an adverse effect on our financial condition, results
of operations, cash flow and the per share trading price of our securities.
Furthermore, Saatchi & Saatchi leases 100% of the Del Amo Office property under the terms of an office lease that permits Saatchi & Saatchi to terminate the
lease as to all of the leased premises prior to the stated lease expiration on December 31, 2014 and December 31, 2016, in each case upon nine months prior notice and in
exchange for payment of an early termination fee estimated to be approximately $3.8 million for 2014 and approximately $3.0 million for 2016. As of December 31, 2012, the
Saatchi & Saatchi lease comprised approximately 2.9% of our annualized office base rent. To the extent that Saatchi & Saatchi exercises its early termination right, our
financial condition, results of operations and cash flow will be adversely affected, and we can provide no assurance that we will be able to generate an equivalent
amount of net rental revenue by leasing the vacated space to new third-party tenants. Our financial condition, results of operations, cash flow and the per share trading
price of our securities could be adversely affected if any of our significant tenants were to become unable to pay their rent or become bankrupt or insolvent.
We may be unable to renew leases, lease vacant space or re-let space as leases expire.
As of December 31, 2012, approximately 10.7% of the square footage of the office properties in our portfolio was available (taking into account uncommenced
leases signed as of December 31, 2012), and an additional approximately 17.7%
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of the square footage of the office properties in our portfolio is scheduled to expire in 2013. Furthermore, substantially all of the square footage of the media and
entertainment properties in our portfolio (other than the KTLA lease of the KTLA facility at Sunset Bronson) will expire in 2013 and 2014. We cannot assure you that
leases will be renewed or that our properties will be re-let at net effective rental rates equal to or above the current average net effective rental rates or that substantial
rent abatements, tenant improvements, early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants. If the
rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-let a significant portion of our available space and space for which
leases will expire, our financial condition, results of operations, cash flow and per share trading price of our securities could be adversely affected.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract
tenants, causing our financial condition, results of operations, cash flow and per share trading price of our securities to be adversely affected.
To the extent adverse economic conditions continue in the real estate market and demand for office space remains low, we expect that, upon expiration of leases
at our properties, we will be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other
improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose
leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is
otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which could
cause an adverse effect to our financial condition, results of operations, cash flow and the per share trading price of our securities.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll-down from time to time.
As a result of various factors, including competitive pricing pressure in our submarkets, adverse conditions in the Northern or Southern California real estate
markets, a general economic downturn and the desirability of our properties compared to other properties in our submarkets, we may be unable to realize the asking rents
across the properties in our portfolio. In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from
property to property and among different leased spaces within a single property. If we are unable to obtain rental rates that are on average comparable to our asking
rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as
compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases.
Some of our properties are subject to ground leases, the termination or expiration of which could cause us to lose our interest in, and the right to receive
rental income from, such properties.
The 9300 Wilshire Boulevard property, 0.59 acres of the Sunset Gower property and a portion representing 64% of the building area of the 222 Kearny Street
property (excluding the 180 Sutter building) are subject to ground leases. If any of these ground leases are terminated following a default or expire without being
extended, we may lose our interest in the related property and may no longer have the right to receive any of the rental income from such property, which would
adversely affect our financial condition, results of operations, cash flow and the per share trading price of our securities.
The ground sublease for the Del Amo Office property is subject and subordinate to a ground lease, the termination of which could result in a termination of
the ground sublease.
The property on which the Del Amo Office building is located is subleased by Del Amo Fashion Center Operating Company, L.L.C., a Delaware limited liability
company, or Del Amo, through a long-term ground sublease. The ground sublease is subject and subordinate to the terms of a ground lease between the fee owner of
the Del Amo Office property and the sub-landlord under the ground sublease. The fee owner has not granted to the subtenant under the ground sublease any rights of
non-disturbance. Accordingly, a termination of the ground lease for any reason, including a rejection thereof by the ground tenant under the ground lease in a
bankruptcy proceeding, could result in a termination of the ground sublease. In the event of a termination of the ground sublease, we may lose our interest in the Del
Amo Office building and may no longer have the right to receive any of the rental income from the Del Amo Office building. In addition, our lack of any non-disturbance
rights from the fee owner may impair our ability to obtain financing for the Del Amo Office building.
Our success depends on key personnel whose continued service is not guaranteed.
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Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel who have extensive market
knowledge and relationships and exercise substantial influence over our operational, financing, acquisition and disposition activity. Many of our other senior executives
have extensive experience and strong reputations in the real estate industry, which aid us in identifying opportunities, having opportunities brought to us, and
negotiating with tenants and build-to-suit prospects. The loss of services of one or more members of our senior management team, or our inability to attract and retain
highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners,
existing and prospective tenants and industry personnel, which could adversely affect our financial condition, results of operations, cash flow and the per share trading
price of our securities.
Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance.
We carry commercial property (including earthquake), liability and terrorism coverage on all the properties in our portfolio under a blanket insurance policy, in
addition to other coverages, such as trademark and pollution coverage, that may be appropriate for certain of our properties. We have selected policy specifications and
insured limits that we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. However, we do not carry
insurance for losses such as loss from riots or war because such coverage is not available or is not available at commercially reasonable rates. Some of our policies, like
those covering losses due to terrorism or earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be
sufficient to cover losses, which could affect certain of our properties that are located in areas particularly susceptible to natural disasters. All of the properties we
currently own are located in California, an area especially susceptible to earthquakes. In addition, we may discontinue earthquake, terrorism or other insurance on some
or all of our properties in the future if the cost of premiums for any such policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. As a
result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters. If we or one or more of our tenants experiences a
loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those
properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were
irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future as the costs associated with property and
casualty renewals may be higher than anticipated. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to
rebuild such property to its existing specifications. Further reconstruction or improvement of such a property would likely require significant upgrades to meet zoning
and building code requirements.
Future terrorist activity or engagement in war by the U.S. may have an adverse effect on our financial condition and operating results.
Terrorist attacks in the U.S. and other acts of terrorism or war may result in declining economic activity, which could harm the demand for and the value of our
properties. A decrease in demand could make it difficult for us to renew or re-lease our properties at these sites at lease rates equal to or above historical rates. Terrorist
activities also could directly impact the value of our properties through damage, destruction, or loss, and the availability of insurance for these acts may be less, and cost
more, which could adversely affect our financial condition. To the extent that our tenants are impacted by future attacks, their businesses similarly could be adversely
affected, including their ability to continue to honor their existing leases.
Terrorist attacks and engagement in war by the U.S. also may adversely affect the markets in which our securities trade and may cause further erosion of
business and consumer confidence and spending and may result in increased volatility in national and international financial markets and economies. Any one of these
events may cause decline in the demand for our office and media and entertainment leased space, delay the time in which our new or renovated properties reach
stabilized occupancy, increase our operating expenses, such as those attributable to increased physical security for our properties, and limit our access to capital or
increase our cost of raising capital.
We may become subject to litigation, which could have an adverse effect on our financial condition, results of operations, cash flow and the per share
trading price of our securities.
In the future we may become subject to litigation, including claims relating to our operations, offerings, and otherwise in the ordinary course of business. Some
of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We
generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these
types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the
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fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition,
results of operations, cash flow and per share trading price of our securities. Certain litigation or the resolution of certain litigation may affect the availability or cost of
some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or
adversely impact our ability to attract officers and directors.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and
disputes between us and our co-venturers.
As described more fully in Item 7 below, on November 8, 2012, a wholly-owned subsidiary of the Company, Hudson JW, LLC, a Delaware limited liability
company (“HJW”), entered into a joint venture, P1 Hudson MC Partners, LLC, a Delaware limited liability company (the “Pinnacle JV”), with Media Center Partners, LLC,
a California limited liability company (“MCP”), to acquire The Pinnacle, a two-building (Pinnacle I and Pinnacle II), 625,640 square foot, office property located in
Burbank, California. In addition to our Pinnacle JV, we may continue to co-invest in the future with third parties through partnerships, joint ventures or other entities,
acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would
not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint
ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-
venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or
goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives, and they may have
competing interests in our markets that could create conflict of interest issues. Such investments may also have the potential risk of impasses on decisions, such as a
sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. In addition, prior consent of our joint venture
partners may be required for a sale or transfer to a third party of our interests in the joint venture, which would restrict our ability to dispose of our interest in the joint
venture. If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that
could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. Disputes between us and partners or co-
venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our
business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to
additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our joint ventures may be subject to debt
and, in the current volatile credit market, the refinancing of such debt may require equity capital calls.
If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a
public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing
monitoring of internal controls we may discover material weaknesses or significant deficiencies in our internal controls. As a result of weaknesses that may be identified
in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover
weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful. Any failure to maintain
effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our
reporting obligations, which could affect our ability to remain listed with the NYSE. Ineffective internal and disclosure controls could also cause investors to lose
confidence in our reported financial information, which would likely have a negative effect on the per share trading price of our securities.
Risks Related to the Real Estate Industry
Our performance and value are subject to risks associated with real estate assets and the real estate industry.
Our ability to pay expected dividends to our stockholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on
debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may
decrease cash available for distribution and the value of our properties. These events include many of the risks set forth above under “—Risks Related to Our Properties
and Our Business,” as well as the following:
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local oversupply or reduction in demand for office or media and entertainment-related space;
adverse changes in financial conditions of buyers, sellers and tenants of properties;
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements,
early termination rights or below-market renewal options, and the need to periodically repair, renovate and re-let space;
increased operating costs, including insurance premiums, utilities, real estate taxes and state and local taxes;
civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes and floods, which may result in uninsured or underinsured
losses;
decreases in the underlying value of our real estate; and
changing submarket demographics.
In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the public perception that any of these
events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial
condition, results of operations, cash flow and per share trading price of our securities.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm
our financial condition.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in
our portfolio in response to changing economic, financial and investment conditions is limited. Return of capital and realization of gains, if any, from an investment
generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or
refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, our ability to dispose of one or
more properties within a specific time period is subject to certain limitations imposed by our tax protection agreements, as well as weakness in or even the lack of an
established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions,
such as the current economic downturn, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax
laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause
us to forgo or defer sales of properties that otherwise would be in our best interest.
Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our
financial condition, results of operations, cash flow and per share trading price of our securities.
We could incur significant costs related to government regulation and litigation over environmental matters.
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be
liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from
such property, including costs to investigate, clean up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be
substantial and the cost of any required remediation, removal, fines or other costs could exceed the value of the property and/or our aggregate assets. In addition, the
presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or
property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition,
environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if
contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require substantial expenditures. Some of our properties have been or may be impacted by contamination arising from current or
prior uses of the property, or adjacent properties, for commercial or industrial purposes. Such
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contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. As a result, we could potentially incur
material liability for these issues, which could adversely impact our financial condition, results of operations, cash flow and the per share trading price of our securities.
Environmental laws also govern the presence, maintenance and removal of ACBM and may impose fines and penalties for failure to comply with these
requirements or expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos). Such laws require that owners or operators of
buildings containing ACBM (and employers in such buildings) properly manage and maintain the asbestos and lead, adequately notify or train those who may come into
contact with asbestos or lead, and undertake special precautions, including removal or other abatement, if asbestos or lead would be disturbed during renovation or
demolition of a building. Some of our properties contain ACBM and we could be liable for such damages, fines or penalties.
In addition, the properties in our portfolio also are subject to various federal, state and local environmental and health and safety requirements, such as state
and local fire requirements. Moreover, some of our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our
properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from
these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us. In addition, changes in laws could increase the potential liability for
noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which
could in turn have an adverse effect on us.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make distributions to our stockholders or
that such costs or other remedial measures will not have an adverse effect on our financial condition, results of operations, cash flow and the per share trading price of
our securities. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected
properties.
Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and
costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered
or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation,
chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or
irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of
significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or
other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to have occurred.
We may incur significant costs complying with various federal, state and local laws, regulations and covenants that are applicable to our properties.
The properties in our portfolio are subject to various covenants and federal, state and local laws and regulatory requirements, including permitting and licensing
requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict
our use of our properties and may require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from local
officials of community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any
of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic or hazardous material abatement requirements. There can be no
assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional
regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by our ability to obtain permits, licenses and
zoning relief. Our failure to obtain such permits, licenses and zoning relief or to comply with applicable laws could have an adverse effect on our financial condition,
results of operations, cash flow and per share trading price of our securities.
In addition, federal and state laws and regulations, including laws such as the ADA impose further restrictions on our properties and operations. Under the
ADA, all public accommodations must meet federal requirements related to access and
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use by disabled persons. Some of our properties may currently be in non-compliance with the ADA. If one or more of the properties in our portfolio is not in compliance
with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the property into compliance and we might incur governmental
fines or the award of damages to private litigants. In addition, we do not know whether existing requirements will change or whether future requirements will require us to
make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flow and per share trading price of our
securities.
We are exposed to risks associated with property development.
We may engage in development and redevelopment activities with respect to certain of our properties. To the extent that we do so, we will be subject to certain
risks, including the availability and pricing of financing on favorable terms or at all; construction and/or lease-up delays; cost overruns, including construction costs
that exceed our original estimates; contractor and subcontractor disputes, strikes, labor disputes or supply disruptions; failure to achieve expected occupancy and/or
rent levels within the projected time frame, if at all; and delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other
governmental permits, and changes in zoning and land use laws. These risks could result in substantial unanticipated delays or expenses and, under certain
circumstances, could prevent completion of development activities once undertaken, any of which could have an adverse effect on our financial condition, results of
operations, cash flow and per share trading price of our securities.
Risks Related to Our Organizational Structure
As of December 31, 2012, the Farallon Funds owned an approximate 28.2% beneficial interest in our company on a fully diluted basis and have the ability
to exercise significant influence on our company.
As of December 31, 2012, investment funds affiliated with Farallon Capital Management, L.L.C., or Farallon, which we refer to as the Farallon Funds, owned an
approximate 28.2% beneficial interest in our company on a fully diluted basis. Consequently, the Farallon Funds may be able to significantly influence the outcome of
matters submitted for stockholder action, including the election of our board of directors and approval of significant corporate transactions, including business
combinations, consolidations and mergers. In addition, one member of our board of directors is a managing member of Farallon. As a result, the Farallon Funds have
substantial influence on us and could exercise their influence in a manner that conflicts with the interests of other stockholders.
The series A preferred units that were issued to some contributors in connection with our initial public
offering in exchange for the contribution of their properties have certain preferences, which could limit our ability to pay dividends or other distributions to the
holders of our securities or engage in certain business combinations, recapitalizations or other fundamental changes.
In exchange for the contribution of properties to our portfolio in connection with our initial public offering, some contributors received series A preferred units
in our operating partnership, which units have an aggregate liquidation preference of approximately $12.5 million and have a preference as to distributions and upon
liquidation that could limit our ability to pay dividends on our series B preferred stock and our common stock. The series A preferred units are senior to any other class
of securities our operating partnership may issue in the future without the consent of the holders of the series A preferred units. As a result, we will be unable to issue
partnership units in our operating partnership senior to the series A preferred units without the consent of the holders of series A preferred units. Any preferred stock in
our company that we issue will be subordinate to the series A preferred units. In addition, we may only engage in a fundamental change, including a recapitalization, a
merger and a sale of all or substantially all of our assets, as a result of which our common stock ceases to be publicly traded or common units cease to be exchangeable
(at our option) for publicly-traded shares of our stock, without the consent of holders of series A preferred units if following such transaction we will maintain certain
leverage ratios and equity requirements, and pay certain minimum tax distributions to holders of our outstanding series A preferred units. Alternatively, we may redeem
all or any portion of the then outstanding series A preferred units for cash (at a price per unit equal to the redemption price). If we choose to redeem the outstanding
series A preferred units in connection with a fundamental change, this could reduce the amount of cash available for distribution to holders of our series B preferred
stock and our common stock. In addition, these provisions could increase the cost of any such fundamental change transaction, which may discourage a merger,
combination or change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.
Our common stock is ranked junior to our series B preferred stock.
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Our common stock is ranked junior to our series B preferred stock. Our outstanding series B preferred stock also has or will have a preference upon our
dissolution, liquidation or winding up in respect of assets available for distribution to our stockholders. Holders of our common stock are not entitled to preemptive
rights or other protections against dilution. In the future, we may attempt to increase our capital resources by making additional offerings of equity securities, including
classes or series of additional preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond
our control, we cannot predict or estimate the amount, timing or nature of our future offering. Thus, our stockholders bear the risk of our future offerings reducing the per
share trading price of our common stock and diluting their interest in us.
Conflicts of interest exist or could arise in the future between the interests of our stockholders and the interests of holders of units in our operating
partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating
partnership or any partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with their
management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating
partnership and its limited partners under Maryland law and the partnership agreement of our operating partnership in connection with the management of our operating
partnership. Our fiduciary duties and obligations as general partner to our operating partnership and its partners may come into conflict with the duties of our directors
and officers to our company.
Additionally, the partnership agreement provides that we and our directors and officers will not be liable or accountable to our operating partnership for losses
sustained, liabilities incurred or benefits not derived if we, or such director or officer acted in good faith. The partnership agreement also provides that we will not be
liable to the operating partnership or any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by the operating partnership or
any limited partner, except for liability for our intentional harm or gross negligence. Moreover, the partnership agreement provides that our operating partnership is
required to indemnify us and our directors, officers and employees, officers and employees of the operating partnership and our designees from and against any and all
claims that relate to the operations of our operating partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and
either was committed in bad faith or was the result of active and deliberate dishonesty, (2) for any transaction for which the indemnified party received an improper
personal benefit, in money, property or services or otherwise, in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal
proceeding, if the indemnified person had reasonable cause to believe that the act or omission was unlawful. No reported decision of a Maryland appellate court has
interpreted provisions similar to the provisions of the partnership agreement of our operating partnership that modify and reduce our fiduciary duties or obligations as
the general partner or reduce or eliminate our liability for money damages to the operating partnership and its partners, and we have not obtained an opinion of counsel
as to the enforceability of the provisions set forth in the partnership agreement that purport to modify or reduce the fiduciary duties that would be in effect were it not for
the partnership agreement.
We may pursue less vigorous enforcement of terms of the contribution and other agreements with members of our senior management and our affiliates
because of our dependence on them and conflicts of interest.
Each of Victor J. Coleman, Howard S. Stern and affiliates of the Farallon Funds are parties to contribution agreements with us pursuant to which we have
acquired interests in our properties and assets. In addition, Messrs. Coleman and Stern are parties to employment agreements with us. We may choose not to enforce, or
to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with members of our senior management and
the Farallon Funds, with possible negative impact on stockholders.
Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a
change of control transaction, even if such a change in control may be in your interest, and as a result may depress the market price of our securities.
Our charter contains certain ownership limits. Our charter contains various provisions that are intended to preserve our qualification as a REIT and, subject to
certain exceptions, authorize our directors to take such actions as are necessary or appropriate to preserve our qualification as a REIT. For example, our charter prohibits
the actual, beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares
of each of our common stock and series B preferred stock, and more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock. Our
board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied.
In connection with our initial public offering and the offering of our series B preferred stock, our board of directors granted to the Farallon Funds and certain
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of their affiliates, which we refer to collectively as the Farallon excepted holders, and to certain other persons, exemptions from the ownership limits, subject to various
conditions and limitations. The restrictions on ownership and transfer of our stock may:
•
•
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or
series B preferred stock or that our stockholders otherwise believe to be in their best interests; or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by
the acquirer of the benefits of owning the additional shares.
We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval. Subject to
the rights of holders of series B preferred stock to approve the classification or issuance of any class or series of stock ranking senior to the series B preferred stock, our
board of directors has the power under our charter to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any
class or series that we are authorized to issue, to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or
reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the terms of such newly classified or
reclassified shares. Although our board of directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending
on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our securities or that our stockholders
otherwise believe to be in their best interest.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other
change of control transactions that our stockholders otherwise believe to be in their best interest. Certain provisions of the Maryland General Corporation Law, or
MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could
be in the best interest of our stockholders, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested
stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an
affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting
stock at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the
stockholder becomes an interested stockholder, and thereafter impose fair price and/or supermajority and stockholder voting requirements on these
combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled
by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights
except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
As permitted by the MGCL, we have elected, by resolution of our board of directors, to exempt from the business combination provisions of the MGCL, any
business combination that is first approved by our disinterested directors and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the
control share provisions of the MGCL. However, our board of directors may by resolution elect to repeal the exemption from the business combination provisions of the
MGCL and may by amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or
bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may
have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of
us under circumstances that otherwise could be in the best interest of our stockholders. Our charter contains a provision whereby we have elected to be subject to the
provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.
Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us. Provisions in the
partnership agreement of our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes of our control. These provisions could
discourage third parties from making proposals
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involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions
include, among others:
•
•
•
•
•
redemption rights of qualifying parties;
transfer restrictions on units;
our ability, as general partner, in some cases, to amend the partnership agreement and to cause the operating partnership to issue units with terms that
could delay, defer or prevent a merger or other change of control of us or our operating partnership without the consent of the limited partners;
the right of the limited partners to consent to transfers of the general partnership interest and mergers or other transactions involving us under
specified circumstances; and
restrictions on debt levels and equity requirements pursuant to the terms of our series A preferred units, as well as required distributions to holders of
series A preferred units of our operating partnership, following certain changes of control of us.
Our charter, bylaws, the partnership agreement of our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a
transaction or a change of control that our stockholders otherwise believe to be in their best interest.
Our board of directors may change our investment and financing policies without stockholder approval and we may become more highly leveraged, which
may increase our risk of default under our debt obligations.
Our investment and financing policies are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies.
Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or
eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged which could result in
an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the
manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real
estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could adversely affect our financial condition, results of operations,
cash flow and per share trading price of our securities.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Our charter eliminates the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
In addition, our charter authorizes us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in
those and certain other capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our
directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of
our company, your ability to recover damages from such director or officer will be limited.
Tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.
In connection with our formation transactions for our IPO, we entered into tax protection agreements with certain third-party contributors that provide that if we
dispose of any interest with respect to the First Financial or Tierrasanta properties in a taxable transaction during the period from the closing of our initial public offering
on June 29, 2010 through certain specified dates ranging until 2027, we will indemnify the third-party contributors for certain tax liabilities payable as a result of the sale
(as well as tax liabilities payable as a result of the reimbursement payment). Certain contributors’ rights under the tax protection agreements with respect to these
properties will, however, expire at various times (depending on the rights of such partner) during the period beginning in 2017 and prior to the expiration, in 2027, of the
maximum period for
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indemnification. The First Financial and Tierrasanta properties represented approximately 7.2% of our office portfolio’s annualized base rent as of December 31, 2012. We
have no present intention to sell or otherwise dispose of the properties or interest therein in taxable transactions during the restriction period. If we were to trigger the tax
protection provisions under these agreements, we would be required to pay damages in the amount of certain taxes payable by these contributors (plus additional
damages in the amount of the taxes incurred as a result of such payment). In addition, although it may otherwise be in our stockholders’ best interest that we sell one of
these properties, it may be economically prohibitive for us to do so because of these obligations.
Our tax protection agreements may require our operating partnership to maintain certain debt levels that otherwise would not be required to operate our
business.
Our tax protection agreements provide that during the period from the closing of our initial public offering on June 29, 2010, through certain specified dates
ranging from 2017 to 2027, our operating partnership will offer certain holders of units who continue to hold the units received in respect of the formation transactions
the opportunity to guarantee debt. If we fail to make such opportunities available, we will be required to indemnify such holders for certain tax liabilities resulting from
our failure to make such opportunities available to them (and any tax liabilities payable as a result of the indemnity payment). We agreed to these provisions in order to
assist certain contributors in deferring the recognition of taxable gain as a result of and after the formation transactions. These obligations may require us to maintain
more or different indebtedness than we would otherwise require for our business.
We are a holding company with no direct operations and, as such, we rely on funds received from our operating partnership to pay liabilities, and the
interests of our stockholders are structurally subordinated to all liabilities and obligations of our operating partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through our operating partnership. We do not have, apart from an interest in our
operating partnership, any independent operations. As a result, we rely on distributions from our operating partnership to pay any dividends we might declare on our
common stock and on shares of our series B preferred stock. We also rely on distributions from our operating partnership to meet our obligations, including any tax
liability on taxable income allocated to us from our operating partnership. In addition, because we are a holding company, claims of our equity holders will be structurally
subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries and subordinate
to the rights of holders of series A preferred units. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating
partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our operating partnership’s and its subsidiaries’
liabilities and obligations have been paid in full.
Risks Related to Our Status as a REIT
Failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.
We have elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. We believe that we have
operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in
such manner. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT, and the statements in this
Annual Report are not binding on the IRS or any court. Therefore, we cannot assure you that we have qualified as a REIT, or that we will remain qualified as such in the
future. If we lose our REIT status, we will face serious tax consequences that would substantially reduce the funds available for distribution to you for each of the years
involved because:
• we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at
regular corporate rates;
• we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
•
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year
during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to
stockholders. In addition, if we fail to qualify as a REIT, we would not be required to make
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distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital,
and could materially and adversely affect the value of our securities.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative
interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code, or the Treasury Regulations,
is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our
control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the
ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from
qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our net taxable income,
excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect our investors, our
ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income
or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our taxable REIT subsidiaries will be subject to tax as regular
corporations in the jurisdictions they operate.
Our ownership of taxable REIT subsidiaries is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or
deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s length terms.
We currently own an interest in one taxable REIT subsidiary and may acquire securities in additional taxable REIT subsidiaries in the future. A taxable REIT
subsidiary is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a
taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such
other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may
generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to
federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT
that are not conducted on an arm’s length basis. A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset tests applicable to
REITs. Not more than 25% of our total assets may be represented by securities, including securities of taxable REIT subsidiaries, other than those securities includable in
the 75% asset test. We anticipate that the aggregate value of the stock and securities of any taxable REIT subsidiaries and other nonqualifying assets that we own will
be less than 25% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In
addition, we intend to structure our transactions with any taxable REIT subsidiaries that we own to ensure that they are entered into on arm’s length terms to avoid
incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation or to avoid application of the
100% excise tax discussed above.
To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding net capital gains, and we will
be subject to regular corporate income taxes to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our
capital gain net income and 100% of our undistributed income from prior years. In order to maintain our REIT status and avoid the payment of income and excise taxes,
we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These
borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes,
or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on
favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our
current debt levels, the market price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital
on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could
adversely affect our financial condition, results of operations, cash flow, cash available for distributions to our stockholders, and per share trading price of our securities.
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Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income
and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income
tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not
have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (i) sell assets in adverse market
conditions; (ii) borrow on unfavorable terms; or (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of
debt. Accordingly, satisfying the REIT requirements could have an adverse effect on our business results, profitability and ability to execute our business plan.
Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be
unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited
transactions.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates.
Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not
adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends,
investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our securities.
The power of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders and
unitholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines
that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our
taxable income and would no longer be required to distribute most of our taxable income to our stockholders and accordingly, distributions Hudson Pacific Properties,
L.P. makes to its unitholders could be similarly reduced.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S.
Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes
in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and
negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2012, our portfolio consisted of 21 wholly-owned properties and one joint venture property, located in eight California submarkets,
containing a total of approximately 5.3 million square feet, which we refer to as our portfolio. The following table presents an overview of our portfolio, based on
information as of December 31, 2012. Rental data presented in the table below for office properties reflects annualized base rent on leases in place as of December 31,
2012 and does not reflect actual cash rents historically received because such data does not reflect abatements or tenant reimbursements for real estate taxes, insurance,
common area or other operating expenses. Rental data presented in the table below for media and entertainment properties reflects actual cash base rents, excluding
tenant reimbursements, received during the 12 months ended December 31, 2012. Leases at our media and entertainment properties are typically short-term leases of
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one year or less, and other than the KTLA lease at our Sunset Bronson property, substantially all of the current in-place leases at our media and entertainment properties
will expire in 2013 and 2014.
The following table sets forth certain information relating to each of the office and media and entertainment properties owned as of December 31, 2012.
Annualized
Base Rent/
Annual Base
Rent(3)
Annualized
Base Rent/
Annual Base
Rent Per
Leased
Square Foot(4)
Square
Feet(1)
Percent
Leased(2)
580,850
1,021,969
286,270
148,797
136,906
54,673
212,319
222,423
114,958
113,000
61,224
159,024
44,260
205,523
9,919
241,427
393,777
333,922
112,300
4,453,541
566,137
313,723
78.4 % $
87.9
99.0
96.2
95.0
—
84.4
81.9
100.0
100.0
84.0
100.0
43.9
92.2
100.0
22.4
91.7
84.4
81.1
83.5 % $
17,195,607
12,860,847
6,846,737
5,115,845
5,206,116
—
4,235,527
6,254,030
4,395,488
3,069,070
2,126,760
4,743,411
781,287
7,792,577
331,017
1,297,200
14,664,791
6,741,457
1,353,740
105,011,505
71.2 % $
78.1
12,293,287
10,333,830
$
$
$
879,860
73.7 % $
22,627,117
$
37.75
14.32
24.16
35.75
40.02
—
23.65
34.35
38.24
27.16
41.34
29.83
40.20
41.13
33.37
24.02
40.60
23.91
14.86
28.25
30.49
42.16
34.90
Property
OFFICE PROPERTIES
Rincon Center
1455 Market Street
875 Howard Street
222 Kearny Street
625 Second Street
275 Brannan Street
901 Market Street
First Financial
Technicolor Building
Del Amo Office Building
9300 Wilshire
10950 Washington
604 Arizona
6922 Hollywood
10900 Washington
Olympic Bundy
Pinnacle I
City Plaza
Tierrasanta
City
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
Encino (LA)
Hollywood (LA)
Torrance (LA)
Beverly Hills
Culver City
Santa Monica
Hollywood (LA)
Culver City
Los Angeles
Burbank
Orange
San Diego
Year
Built/
Renovated
1985
1977
Various
Various
1905
1906
1912
1986
2008
1986
1965/2001
Various
1950
1965
1973
Various
2002
1969/1999
1985
Total/Weighted Average Office Properties:
MEDIA & ENTERTAINMENT PROPERTIES
Hollywood (LA)
Hollywood (LA)
Various
Various
Sunset Gower
Sunset Bronson
Total/Weighted Average Media &
Entertainment Properties:
LAND
Sunset Bronson—Lot A
Sunset Bronson—Redevelopment
Sunset Gower— Redevelopment
City Plaza
Olympic Bundy
Total Land Assets:
Hollywood (LA)
Hollywood (LA)
Hollywood (LA)
Orange
West Los Angeles
N/A
N/A
N/A
N/A
N/A
273,913
389,740
423,396
360,000
500,000
1,947,049
Portfolio Total:
(1) Square footage for office properties and media and entertainment properties has been determined by management based upon estimated leasable square feet, which may be less or more
than the Building Owners and Managers Association, or BOMA, rentable area. Square footage may change over time due to remeasurement, releasing, acquisition, or development. On
September 21, 2012, we acquired an office property located at 1455 Gordon Street totaling 6,000 square feet, which was added to the Sunset Gower property. This acquisition is
reflected in the square footage for Sunset Gower on a weighted average basis. As of December 31, 2012, the square footage for media and entertainment properties totaled 884,196
square feet, including this acquisition. Square footage for land assets represents management’s estimate of developable square feet, the majority of which remains subject to entitlement
approvals that have not yet been obtained.
7,280,450
(2) Percent leased for office properties is calculated as (i) square footage under commenced leases as of December 31, 2012, divided by (ii) total square feet, expressed as a percentage.
Percent leased for media and entertainment properties is the average percent leased for the 12 months ended December 31, 2012. As a result of the short-term nature of the leases into
which we enter at our media and entertainment properties, and because
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entertainment industry tenants generally do not shoot on weekends due to higher costs, we believe stabilized occupancy rates at our media and entertainment properties are lower than
those rates achievable at our traditional office assets, where tenants enter into longer-term lease arrangements.
(3) We present rent data for office properties on an annualized basis, and for media and entertainment properties on an annual basis. Annualized base rent for office properties is calculated
by multiplying (i) base rental payments (defined as cash base rents (before abatements)) as of December 31, 2012, by (ii) 12. Annual base rent for media and entertainment properties
reflects actual base rent for the 12 months ended December 31, 2012, excluding tenant reimbursements.
(4) Annualized base rent per leased square foot for the office properties is calculated as (i) annualized base rent divided by (ii) square footage under lease as of December 31, 2012. Annual
base rent per leased square foot for the media and entertainment properties is calculated as (i) actual base rent for the 12 months ended December 31, 2012, excluding tenant
reimbursements, divided by (ii) average square feet under lease for the 12 months ended December 31, 2012.
Office Portfolio
Our portfolio consists of 19 office properties comprising an aggregate of approximately 4.5 million square feet. As of December 31, 2012, our stabilized office
properties were approximately 93.5% leased (giving effect to leases signed but not commenced as of that date). All of our office properties are located in prime California
submarkets. As of December 31, 2012, the weighted average remaining lease term for our office portfolio was 49 months.
Tenant Diversification of Office Portfolio
Our office portfolio is currently leased to a variety of companies. The following table sets forth information regarding the ten largest tenants in our office
portfolio based on annualized base rent as of December 31, 2012.
Tenant
Bank of America(3)
Warner Music Group
AIG
AT&T(4)
GSA(5)
Fox Interactive Media, Inc.
Property
1455 Market
Pinnacle I
Rincon Center
Rincon Center
Various
625 Second Street
Technicolor Creative Services USA, Inc.
Technicolor Building
Clear Channel
NFL Enterprises
Pinnacle I
10950 Washington
Lease
Expiration(1)
Various
12/31/2019
7/31/2017
8/31/2013
Various
3/31/2017
5/31/2020
9/30/2016
3/31/2015
Saatchi & Saatchi North America, Inc.
Del Amo Office Building
12/31/2019
Total
Total
Leased
Square
Feet
776,812
195,166
142,655
155,964
138,712
104,897
114,958
107,715
115,084
113,000
1,964,963
Percentage
of Office
Portfolio
Square
Feet
Annualized
Base Rent (2)
Percentage
of Office
Portfolio
Annualized
Base Rent
17.4 % $
4.4
3.2
3.5
3.1
2.4
2.6
2.4
2.6
2.5
44.1 % $
8,720,944
7,803,146
6,134,165
5,850,333
4,517,197
4,489,382
4,395,488
4,392,142
3,648,749
3,069,070
53,020,616
8.3 %
7.4
5.8
5.6
4.3
4.3
4.2
4.2
3.5
2.9
50.5 %
(1) GSA and Saatchi & Saatchi North America, Inc. leases are subject to early termination prior to expiration at the option of the tenant.
(2) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) as of December 31, 2012, by (ii) 12. Annualized base rent
does not reflect tenant reimbursements.
(3) We have completed leases at our 1455 Market property with the Metro Transit Authority (“ MTA”) for 38,894 square feet and with Square, Inc. for 327,432 square feet which backfill
certain space currently leased to Bank of America. The following summarizes Bank of America’s early termination rights by square footage as of December 31, 2012, subject to the
pending lease commencements with MTA and Square, Inc.: (1) 25,474 square feet at December 31, 2012; (2) 95,656 square feet at January 31, 2013, 92,740 square feet of which was
delivered to Square, Inc. in February, 2013 for lease commencement in February, 2013; (3) 56,521 square feet at June 30, 2013, 38,894 square feet of which is scheduled to be delivered
to MTA at or around June 30, 2013, subject to satisfaction of certain conditions associated with the lease to MTA, and another 15,741 square feet of which is scheduled to be delivered
to Square Inc. in July, 2013 for lease commencement in July, 2013; (4) 152,373 square feet at December 31, 2013, 129,886 square feet of which is scheduled to be delivered to Square,
Inc. in January, 2014 for lease commencement in January, 2014; (5) 217,914 square feet at December 31, 2015; and (6) 228,874 square feet at December 31, 2017. In sum, the leases
with MTA and Square, Inc. backfill a combined 277,261 square feet of the 776,812 square feet leased to Bank of America as of December 31, 2012. In addition to the 238,367 square
feet under the lease with Square, Inc. which backfills space under the Bank of America lease, the lease with Square, Inc. also includes 89,065 square feet of net absorption, scheduled for
commencement in March, 2013.
(4) We have completed leases at our Rincon Center property with salesforce.com for 235,733 square feet which backfills 148,375 square feet currently leased to AT&T. The following
summarizes the scheduled commencement by square footage of the lease with salesforce.com: (1) 93,028 square feet commencing on November 1, 2013, 71,931 square feet of which
backfills space currently occupied by AT&T; (2) 59,689 square feet commencing May 1, 2014, 37,230 square feet of which backfills space currently occupied by AT&T; (3) 76,004
square feet commencing August 1, 2014, 39,214 square feet of which backfills space currently occupied by AT&T and 27,604 square feet currently occupied to other tenants; (4) 2,868
square feet commencing August 1, 2015, 2,851 square feet of which backfills space currently occupied by other tenants; and (5) 4,144 square feet commencing May 1, 2017, all of
which backfills space currently occupied by other tenants. In addition to the 182,974 square feet under the lease with salesforce.com which backfills space under the lease with AT&T
and other tenants, the lease with salesforce.com also includes 13,021 square feet of
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additional square footage due to BOMA adjustments and 39,738 square feet of net absorption, scheduled for commencement, as follows: 18,062 square feet in November, 2013; 18,075
square feet in May, 2014; and 3,601 square feet in August, 2014.
(5) GSA expirations by property and square footage: (1) 89,995 square feet at 1455 Market Street expiring on February 19, 2017; (2) 5,906 square feet at 901 Market Street expiring on
April 30, 2017; and (3) 42,811 square feet at 901 Market Street expiring on July 31, 2021.
Lease Distribution of Office Portfolio
The following table sets forth information relating to the distribution of leases in our office portfolio, based on net rentable square feet under lease as of
December 31, 2012.
Square Feet Under Lease
2,500 or less
2,501-10,000
10,001-20,000
20,001-40,000
40,001-100,000
Greater than 100,000
Building management use
Uncommenced leases
Office Portfolio Total:
_____________
Number
of
Leases
Percentage
of All
Leases
Total Leased
Square Feet
Percentage
of Office
Portfolio
Leased
Square Feet
78
69
20
19
11
11
8
9
225
34.7 %
30.7
8.9
8.4
4.9
4.9
3.5
4.0
100.0 %
98,686
363,995
297,392
549,351
747,550
1,638,681
21,425
259,384
3,976,464
2.5 % $
9.2
7.5
13.8
18.8
41.2
0.5
6.5
100.0 % $
Percentage
of Office
Portfolio
Annualized
Base Rent
3.1 %
11.3
8.4
12.9
15.3
40.8
—
8.2
100.0 %
Annualized
Base Rent(1)
3,527,473
12,980,530
9,560,301
14,796,730
17,451,271
46,695,200
—
9,391,766
114,403,271
(1) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)), including under uncommenced leases as of December 31,
2012 by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
Lease Expirations of Office Portfolio
The following table sets forth a summary schedule of the lease expirations for leases in place as of December 31, 2012 plus available space, for each of the ten
full calendar years beginning January 1, 2012 at the properties in our office portfolio. Unless otherwise stated in the footnotes, the information set forth in the table
assumes that tenants exercise no renewal options.
Year of Lease Expiration
Available
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Thereafter
Building management use
Signed leases not commenced
Office Portfolio Total/Weighted Average:
____________
Square
Footage
of
Expiring
Leases (1)
Percentage
of Office
Portfolio
Square Feet
477,077
58,089
789,518
149,109
404,090
338,399
768,018
272,208
558,446
238,735
42,811
76,232
21,425
259,384
4,453,541
10.7 % $
1.3
17.7
3.4
9.1
7.6
17.2
6.1
12.5
5.4
1.0
1.7
0.5
5.8
100.0 % $
Percentage
of Office
Portfolio
Annualized
Base Rent
— % $
0.3
17.2
4.4
7.1
9.8
19.9
6.0
16.3
7.7
0.9
2.2
—
8.2 %
100.0 % $
Annualized
Base Rent
Per Leased
Square Foot
—
6.65
24.87
34.06
20.1
33.24
29.58
25.19
33.29
36.82
24.64
33.22
—
36.21
28.77
Annualized
Base Rent (2)
—
386,049
19,633,620
5,078,656
8,120,591
11,248,475
22,717,744
6,856,905
18,591,470
8,791,014
1,054,723
2,532,260
—
9,391,766
114,403,273
(1) Assumes Bank of America exercises the early termination rights set forth in footnote (3) on page 27 of this Form 10-K.
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(2) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)), including under uncommenced leases as of December 31,
2012, by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
Media and Entertainment Portfolio
Our portfolio of operating properties includes two properties that we consider to be media and entertainment properties, encompassing an aggregate of
884,196 square feet. We define our media and entertainment properties as those properties in our portfolio that are primarily used for the physical production of media
content, such as television programs, feature films, commercials, music videos and photographs. These properties generally also feature a traditional office component
that is leased to production companies and content providers. For the 12 months ended December 31, 2012, our media and entertainment properties were approximately
73.7% leased. Our media and entertainment properties are located in prime Southern California submarkets.
Leasing Characteristics of Media and Entertainment Properties
The duration of typical lease terms for tenants of media and entertainment properties tends to be shorter than those of traditional office properties. Generally,
terms of the media and entertainment leases are one year or less, as tenants are never certain as to whether their productions will continue to be carried by networks or
cable channels. However, historically, many entertainment tenants have exercised renewal options such that their actual tenancy is extended for multiple years. As an
example, productions such as Judge Judy, Judge Joe Brown and Let’s Make a Deal have been tenants at Sunset Bronson Studios for between three and 15 years. At
Sunset Gower Studios, NBC’s Heroes was a tenant for four years prior to its cancellation and Showtime’s Dexter has been a tenant for six years. Additionally,
occupancy levels for sound stage space and office and support space tend to run in parallel, as a majority of stage users also require office and support space. In
addition, we require tenants at our media and entertainment properties to use our facilities for items such as lighting, equipment rental, parking, power, HVAC and
telecommunications (telephone and internet). As a result, our other property-related revenues tend to track overall occupancy of our media and entertainment properties.
As a result of the short-term nature of the leases into which we enter at our media and entertainment properties, and because entertainment industry tenants generally do
not shoot on weekends due to higher costs, we believe stabilized occupancy rates at our media and entertainment properties are lower than those rates achievable at our
traditional office assets, where tenants enter into longer-term lease arrangements.
Description of Our Media and Entertainment Properties
Sunset Gower, Hollywood, California
Sunset Gower is a 15.7-acre media and entertainment property located in the heart of Hollywood, four blocks west of the Hollywood (101) Freeway. The
property encompasses almost an entire city block, bordered by Sunset Boulevard to the north, Gower Street to the west, Gordon Street to the east and Fountain Avenue
to the south. The property, a fixture in the Los Angeles-based entertainment industry since it was built in the 1920s, served as Columbia Pictures’ headquarters through
1972 and is now one of the largest independent media and entertainment properties in the United States. Sunset Gower provides a fully-integrated environment for its
media and entertainment-focused tenants within which they can access creative and technical talent for film and television production as well as post-production. Sunset
Gower typically serves as home to single-camera television and motion picture production tenants. The property comprises 394,910 square feet of office and support
space, along with 12 sound stage facilities totaling 175,560 square feet. In addition, there are 1,450 parking spaces situated in both surface and structured parking lots.
Included in the total office square footage are two buildings, known as 6050 Sunset, 1455 Beachwood, and 1455 Gordon, that were acquired on December 16, 2011 and
September 21, 2012, and that comprise approximately 26,761 square feet. The 1455 Beachwood and 1455 Gordon buildings are being renovated. For the year ended
December 31, 2012, Sunset Gower was approximately 71.2% leased.
An approximately 0.59-acre portion of the site is subject to ground leases, expiring March 31, 2060, by and between Sunset Gower Entertainment Properties,
LLC (lessee) and the Chadwick 1994 Family Trust and Richard S. Chadwick (collectively “lessor”); the remaining portion of the Sunset Gower property is owned by
Sunset Gower Entertainment Properties in fee, with the exception of 6050 Sunset, 1455 Beachwood, and 1455 Gordon, which are owned by SGS Ancillary Parcels, LLC.
In addition to Sunset Gower’s existing facilities, the current zoning designation for Sunset Gower, M1-1—Limited Industrial, City of Los Angeles, permits a
floor area ratio, or FAR, of 1.5x, which implies a maximum allowable density of 1,022,933 square feet, or an incremental 423,436 square feet above the existing 599,497 floor
area ratio, including the Technicolor Building. However, as of December 31, 2012, we had no immediate plans to develop additional facilities on the property.
Sunset Gower Primary Tenants
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The following table summarizes information regarding the primary tenants of Sunset Gower for the year ended December 31, 2012:
Principal
Nature of
Business
Lease
Expiration
Renewal
Options
Total
Leased
Square
Feet(1)
Percentage
of
Property
Square
Feet
Annual Base
Rent Per
Leased
Square
Foot(3)
Percentage
of
Property
Annual
Base Rent
Annual
Base Rent(2)
Television/Entertainment 12/31/2013(4)
—
64,065
64,065
11.3 % $
11.3 % $
2,136,839 $
2,136,839 $
33.35
33.28
17.4 %
17.4 %
Tenant
Blind Decker
Productions (Dexter)
Total/Weighted Average:
_____________
(1) Reflects average square feet under lease to such tenant for the year ended December 31, 2012.
(2) Annual base rent reflects actual base rent for the year ended December 31, 2012, excluding tenant reimbursements.
(3) Annual base rent per leased square foot is calculated as actual rent for the year ended December 31, 2012, excluding tenant reimbursements, divided by average square feet under lease
for the year ended December 31, 2012.
(4) Blind Decker Productions is obligated to maintain their lease if Dexter is renewed for another season. The Sixth Amendment to Lease, dated December 28, 2009, extended the term
through December 31, 2013. The tenant has a termination option, which it may exercise by giving 90 days’ notice and by paying the equivalent of seven months of rent.
Sunset Gower Percent Leased and Base Rent
The following table sets forth the percentage leased, annual base rent per leased square foot and annual net effective base rent per leased square foot for
Sunset Gower as of the dates indicated below:
Date
December 31, 2012
December 31, 2011
December 31, 2010
December 31, 2009
December 31, 2008
_____________
Percent Leased(1)
Annual Base
Rent Per
Leased
Square Foot(2)
Annual Net
Effective Base Rent
Per Leased
Square Foot(3)
71.2 % $
66.6
70.9
68.2
74.2
$
30.49
30.88
30.27
29.83
27.94
30.61
30.98
30.27
29.83
27.94
(1) Percent leased is the average percent leased for the year that ended on the dates indicated above. As a result of the short-term nature of the leases into which we enter at our media and
entertainment properties, and because entertainment industry tenants generally do not shoot on weekends due to higher costs, we believe stabilized occupancy rates at our media and
entertainment properties are lower than those rates achievable at our traditional office assets, where tenants enter into longer-term lease arrangements.
(2) Annual base rent per leased square foot is calculated as actual base rent, excluding tenant reimbursements, for the year that ended on the dates indicated above divided by average square
feet under lease for the year that ended on the dates indicated above.
(3) Annual net effective base rent per leased square foot represents (i) actual base rent, excluding tenant reimbursements, for the year that ended on the dates indicated above, calculated on
a straight-line basis to amortize free rent periods and abatements, but without regard to tenant improvement allowances and leasing commissions, divided by (ii) the average square feet
under lease for the year that ended on the dates indicated above.
On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A. secured by our Sunset Gower and Sunset Bronson
media and entertainment campuses.
Sunset Bronson, Hollywood, California
Sunset Bronson is a 10.6 acre media and entertainment property located in the heart of Hollywood, one block west of the Hollywood (101) Freeway and in
close proximity to the Sunset Gower property. The property encompasses a full city block, bordered by Sunset Boulevard to the north, Bronson Avenue to the west, Van
Ness Avenue to the east and Fernwood Avenue to the south. The property, which was built in phases from 1924 through 1981, formerly served as Warner Brothers
Studios’ headquarters and has been continuously operated as a media and entertainment property since the 1920s. The property includes a Historical-Cultural
Monument designation for the Site of the Filming of the First Talking Film (The Jazz Singer) that is specific to the building structure that fronts Sunset Boulevard. Similar
to nearby Sunset Gower, Sunset Bronson is a multi-use property with a full complement of production, post-production and support facilities that enable its media and
entertainment focused tenants to conduct their business in a collaborative and efficient setting. In contrast to Sunset Gower, which typically serves single-camera
television and motion picture productions, Sunset Bronson caters to multi-camera television productions, such as game shows, talk shows or courtroom shows that
record in video and require a control room to manage and edit the productions’ multiple cameras. Excluding the KTLA portion of the property, which is described below,
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Sunset Bronson consists of approximately 86,108 square feet of office and support space and nine sound stage facilities with approximately 137,109 square feet, along
with 455 parking spaces. The property has three digital control rooms, one of which has high-definition technology, which allow tenants to edit productions filmed with
high-definition cameras. For the year ended December 31, 2012, Sunset Bronson was approximately 78.1% leased.
Sunset Bronson also includes the KTLA facility, which is a multi-use office, broadcasting and production facility located on the Sunset Bronson property
described above. The KTLA facility is 100% leased by KTLA Channel 5, one of the largest independent television stations in Los Angeles and has served as KTLA’s
only broadcast facility and its primary office and production location for over 50 years. In connection with the acquisition of the Sunset Bronson property, KTLA, Inc., a
subsidiary of Tribune Company, entered into a five-year lease for approximately 90,506 square feet, which includes 83,531 square feet of office and support space and
6,975 square feet encompassing two sound stages. At the time of the closing of the acquisition of the Sunset Bronson property, our predecessor received a prepayment
of $16.3 million from KTLA in prepayment of its rents for the initial five-year term of its lease. On December 8, 2008, Tribune Company and several of its affiliates,
including KTLA, Inc., filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. On June 25, 2009, KTLA assumed its lease for the
KTLA facility and cured all outstanding pre-petition amounts due us.
We entered into an amendment to the KTLA lease that extends the lease term through January 31, 2016. Net rents will be approximately $2,707,940 from
February 1, 2013 through January 31, 2014, $2,789,178 from February 1, 2014 through January 31, 2015 and $2,872,853 from February 1, 2015 through January 31, 2016.
In addition to Sunset Bronson’s existing facilities, the current zoning designation for Sunset Bronson, M1-1—Limited Industrial, City of Los Angeles, permits
a FAR of 1.5x, which implies a maximum allowable density of 689,565 square feet or an incremental 391,836 square feet above the existing 297,729 total FAR, including the
KTLA portion of the property.
Sunset Bronson Primary Tenants
The following table summarizes information regarding the primary tenants of Sunset Bronson as of December 31, 2012:
Tenant
KTLA
3 Doors
Productions
Principal
Nature of
Business
Television/
Entertainment
Television/
Entertainment
Lease
Expiration
Renewal
Options
1/31/2016
6/6/2013
—
—
Total/Weighted
Average:
______________
Total
Leased
Square
Feet(1)
Percentage of
Property
Square
Feet
Annual
Base Rent (2)
Annual
Base Rent
Per Leased
Square
Foot(3)
Percentage of
Property
Annual
Base
Rent
90,506
37,817
128,323
28.8 % $
3,256,498
$
12.1
1,405,624
40.9 % $
4,662,122
$
35.98
37.17
36.33
(1) Reflects average square feet under lease to such tenant for the year ended December 31, 2012.
(2) Annual base rent reflects actual base rent for the year ended December 31, 2012, excluding tenant reimbursements. As of February 1, 2013, annualized base rent for KTLA will be
$2,707,940, subject to annual increases of three percent and abatements of $676,985, $697,294, and $718,213 for 2013, 2014 and 2015, respectively.
(3) Annual base rent per leased square foot is calculated as actual base rent for the year ended December 31, 2012, excluding tenant reimbursements, divided by average square feet under
lease for the year ended December 31, 2012.
Sunset Bronson Percent Leased and Base Rent
The following table sets forth the percentage leased, annual base rent per leased square foot and annual net effective base rent per leased square foot for the
Sunset Bronson property as of the dates indicated below:
Date
December 31, 2012
December 31, 2011
December 31, 2010
December 31, 2009
_________________
Percent
Leased(1)
Annual Base
Rent
Per Leased
Square Foot(2)
Annual Net
Effective Base
Rent Per
Leased Square Foot(3)
78.1% $
76.3
75.5
68.5
$
42.16
40.77
40.18
40.12
40.02
38.58
37.97
38.70
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(1) Percent leased is the average percent leased for the year that ended on the dates indicated above. As a result of the short-term nature of the leases into which we enter at our media and
entertainment properties, and because entertainment industry tenants generally do not shoot on weekends due to higher costs, we believe stabilized occupancy rates at our media and
entertainment properties are lower than those rates achievable at our traditional office assets, where tenants enter into longer-term lease arrangements.
(2) Annual base rent per leased square foot is calculated as actual base rent, excluding tenant reimbursements, for the year that ended on the dates indicated above divided by average square
feet under lease for the year that ended on the dates indicated above.
(3) Annual net effective base rent per leased square foot represents (i) actual base rent, excluding tenant reimbursements, for the year that ended on the dates indicated above, calculated on
a straight-line basis to amortize free rent periods and abatements, but without regard to tenant improvement allowances and leasing commissions, divided by (ii) the average square feet
under lease for the year that ended on the dates indicated above.
On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A. secured by our Sunset Gower and Sunset Bronson
media and entertainment campuses.
Sunset Bronson Lot A
In connection with our purchase of Sunset Bronson in 2008, we acquired a 67,381 square foot undeveloped lot located on the northwest corner of Sunset
Boulevard and Bronson Avenue. The lot is located two blocks west of the I-101 Freeway, between the Sunset Gower and Sunset Bronson properties. The site is
currently used as a surface parking lot and can be developed to include up to 60,855 square feet of retail and office space based on current zoning, with the opportunity
to add additional developable square footage through certain municipal land entitlement approvals. We estimate that with further entitlements, we could increase the
developable square footage to approximately 273,913 square feet. While we are holding this property for its development potential, we do not currently have any plans
for its development.
Item 3. Legal Proceedings
From time to time, we are a party to various lawsuits, claims and other legal proceedings arising out of, or incident to, our ordinary course of business. We are not
currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or that, individually or in the aggregate, would be expected to have a
material adverse effect on our business, financial condition or results of operations if determined adversely to us.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Overview
As of March 1, 2013, we had approximately 56,698,156 shares of common stock outstanding, including unvested restricted stock grants. Our common stock has
traded on the NYSE under the symbol “HPP” since June 24, 2010. The applicable high and low prices of our common stock from January 1, 2012 through December 31,
2012, as reported by the NYSE, are set forth below for the periods indicated.
Distributions
We intend to make distributions each taxable year (not including a return of capital for federal income tax purposes) equal to at least 90% of our taxable income.
We intend to pay regular quarterly dividend distributions to our stockholders. Dividends will be made to those stockholders who are stockholders as of the dividend
record dates. Dividend amounts depend on our available cash flows, financial condition and capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as our board of directors deem relevant.
Quarterly dividend distributions paid on all outstanding classes of common stock to our stockholders during the year ended 2012 are presented below:
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Fiscal year 2012
First quarter
Second quarter
Third quarter
Fourth quarter
$
High
Low
Close
$
16.13
17.44
19.54
21.10
$
13.45
14.77
16.97
18.07
$
15.13
17.41
18.50
21.06
Per Share Common
Stock Dividends
Declared
0.125
0.125
0.125
0.125
The closing share price for our common stock on March 1, 2013, as reported by the New York Stock Exchange, was $22.72. As of March 1, 2013, there were 32
stockholders of record of our common stock.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Equity Compensation Plan Information
Our equity compensation plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report on
Form 10-K.
Stock Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided
in Item 201 of Regulation S-K , or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as
soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The following graph shows our cumulative total stockholder return for the period beginning with the initial listing of our common stock on the New York Stock
Exchange on June 24, 2010 and ending on December 31, 2012. The graph assumes a $100 investment in each of the indices on June 24, 2010 and the reinvestment of all
dividends. The graph also shows the cumulative total returns of the Standard & Poor’s 500 Stock Index, or S&P Index, and an industry peer group. Our stock price
performance shown in the following graph is not indicative of future stock price performance.
33
Table of Contents
Index
Hudson Pacific Properties, Inc.
S&P 500
SNL US RE <$500M Implied Cap
SNL US RE $500M-$1B Impli Cap
Item 6. Selected Financial Data
06/23/10
100.00
100.00
100.00
100.00
06/30/10
101.47
94.42
96.11
95.24
Period
Ending
12/31/10
89.63
116.38
113.29
120.66
06/30/11
94.06
123.40
109.12
130.87
12/31/11
87.40
118.84
101.81
116.14
06/30/12
109.17
130.12
121.93
135.91
12/31/12
133.75
137.86
133.50
157.45
The following tables set forth, on a historical basis, selected financial and operating data. The financial information has been derived from our consolidated
balance sheets and statements of operations. The following data should be read in conjunction with our financial statements and notes thereto and Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations included below in this Form 10-K.
34
Table of Contents
HUDSON PACIFIC PROPERTIES
(in thousands, except share, per share, square footage and occupancy data)
Year Ended December 31,
Consolidated
Historical Combined
2012
2011
2010
2009
2008
Statements of Operations Data:
Revenues
Office
Rental
Tenant recoveries
Parking and other
Total office revenues
Media & entertainment
Rental
Tenant recoveries
Other property-related revenue
Other
Total media & entertainment revenues
Total revenues
Operating expenses
Office operating expenses
Media & entertainment operating expenses
General and administrative
Depreciation and amortization
Total operating expenses
Income from operations
Other expense (income)
Interest expense
Interest income
Unrealized (gain) loss on interest rate contracts
Sale of Lot
Acquisition-related expenses
Other expenses
Total other expenses
Net loss
Less: Net income attributable to preferred stock and units
Less: Net income attributable to restricted shares
Less: Net (income) loss attributable to non-controlling interest in consolidated real
estate entities
Add: Net loss attributable to common units in the Operating Partnership
$
$
$
$
$
93,945
22,157
9,921
126,023
$
$
75,343
22,102
7,763
105,208
$
$
22,247
3,115
1,141
26,503
$
$
11,046
2,024
252
13,322
$
$
23,598
1,598
14,733
204
40,133
$
$
21,617
1,539
13,638
187
36,981
$
$
20,931
1,571
11,397
238
34,137
$
$
19,916
1,792
9,427
64
31,199
$
$
8,235
1,504
41
9,780
22,075
1,544
13,509
92
37,220
166,156
$
142,189
$
60,640
$
44,521
$
47,000
53,577
24,340
16,497
57,024
151,438
$
$
44,740
22,446
13,038
44,660
124,884
$
$
10,212
19,815
4,493
15,912
50,432
$
$
6,242
19,545
—
10,908
36,695
$
$
3,003
23,881
—
9,693
36,577
14,718
17,305
$
10,208
$
7,826
$
10,423
$
19,071
$
17,480
$
8,831
$
8,792
$
(306 )
(73 )
—
—
1,051
(92 )
19,724
$
—
—
1,693
443
19,543
$
(59 )
(347 )
(19 )
(400 )
—
4,273
192
12,890
$
—
—
97
8,470
$
12,029
(48 )
835
208
—
21
13,045
(5,006 ) $
(12,924 )
(295 )
(2,238 ) $
(8,108 )
(231 )
(2,682 ) $
(817 )
(50 )
21
1,014
(803 )
946
(119 )
418
(644 ) $
(2,622 )
—
—
29
—
—
—
81
—
$
$
Net loss attributable to Hudson Pacific Properties, Inc. shareholders’ / controlling members’
equity
$
(17,190 ) $
(10,434 ) $
(3,250 ) $
(615 ) $
(2,541 )
Per-Share Data:
Net loss attributable to shareholders’ per share—basic and diluted
Weighted average shares of common stock outstanding—basic and diluted
Dividends declared per common share
$
$
(0.41 ) $
(0.35 )
41,640,691
0.500
29,392,920
0.500
$
$
—
—
0.1921
—
—
—
—
—
—
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Balance Sheet Data:
Investment in real estate, net
Total assets
Notes payable
Total liabilities
6.25% Series A cumulative redeemable preferred units of the Operating Partnership
Redeemable non-controlling interest in consolidated real estate entity
Series B cumulative redeemable preferred stock
Members’ / stockholders’ equity
Non-controlling partnership / members’ interest
Total equity
Total liabilities and equity
Other Data
Cash flows provided by (used in)
Operating activities
Investing activities
Financing activities
2012
2011
2010
2009
2008
$
$
1,390,771
1,559,690
582,085
649,993
12,475
—
145,000
695,213
57,009
897,222
1,559,690
$
$
1,007,175
1,152,791
399,871
451,647
12,475
—
87,500
537,813
63,356
688,669
1,152,791
$
$
837,622
1,004,565
342,060
390,232
12,475
40,328
87,500
408,346
65,684
561,530
964,237
$
$
412,085
448,234
189,518
221,646
—
—
—
223,240
3,348
226,588
448,234
$
$
409,192
446,037
185,594
224,306
—
—
—
218,449
3,282
221,731
446,037
42,821
(423,470)
32,082
(130,604)
7,619
(242,156)
4,538
(15,457)
385,848
63,352
279,718
8,800
20,049
(178,526)
163,794
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this report. Statements contained in this Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations that
are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Some of the information presented is forward-looking in nature, including information concerning projected future occupancy rates,
rental rate increases, property development timing and investment amounts. Although the information is based on our current expectations, actual results could vary
from expectations stated in this report. Numerous factors will affect our actual results, some of which are beyond our control. These include the breadth and duration of
the current economic recession and its impact on our tenants, the strength of commercial and industrial real estate markets, market conditions affecting tenants,
competitive market conditions, interest rate levels, volatility in our stock price and capital market conditions. You are cautioned not to place undue reliance on this
information, which speaks only as of the date of this report. We assume no obligation to update publicly any forward-looking information, whether as a result of new
information, future events, or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to
disclose material information. For a discussion of important risks related to our business, and related to investing in our securities, including risks that could cause actual
results and events to differ materially from results and events referred to in the forward-looking information, see Item 1A: Risk Factors and the discussion under the
captions “—Forward-looking Statements” above and “—Liquidity and Capital Resources” below. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this report might not occur.
Executive Summary
Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at December 31, 2012 our consolidated office portfolio
consisted of approximately 4.5 million square feet, and our media and entertainment portfolio consisted of 0.9 million square feet. As of December 31, 2012, our
consolidated stabilized office portfolio was 93.5% leased (including leases not yet commenced). Our media and entertainment properties were 73.7% leased for the trailing
12-month period ended December 31, 2012.
Current Year Acquisitions, Repositionings and Financings.
Acquisitions.
On April 5, 2012, we acquired 10900 Washington Boulevard in Culver City, for a total gross purchase price of $2.6 million (before closing costs and prorations).
10900 Washington Boulevard is an approximately 9,919-square-foot office project immediately adjacent to our 10950 Washington Boulevard property.
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On June 1, 2012, we acquired 901 Market Street property in San Francisco, for a total gross purchase price of $90.0 million (before closing costs and prorations).
901 Market is an approximately 212,319 square foot historic landmark building consisting of approximately 122,319 square feet of office space and approximately 90,000
square feet of retail space.
On September 5, 2012, we acquired the Olympic Bundy Media Campus located at 1901, 1925, and 1933 South Bundy Drive and 12333 West Olympic Boulevard in
Los Angeles, for a total gross purchase price of $89.0 million (before closing costs and prorations). The Olympic Bundy Media Campus is comprised of 11.55 acres, with
four existing buildings totaling approximately 241,427 square feet. The site also benefits from zoning that could potentially support up to an additional 500,000 square
feet of future improvements.
On November 8, 2012, a wholly-owned subsidiary of the Company, Hudson JW, LLC, a Delaware limited liability company (“HJW”), entered into a joint venture,
P1 Hudson MC Partners, LLC, a Delaware limited liability company (the “Pinnacle JV”), with Media Center Partners, LLC, a California limited liability company (“MCP”),
to acquire The Pinnacle, a two-building (Pinnacle I and Pinnacle II), 625,640 square foot, office property located in Burbank, California. Pinnacle I is a 393,776 square foot
building that, immediately prior to the transactions described below, was held in a joint venture between MCP and an unrelated entity (the “Prior P1 Majority Owner”), in
which MCP held approximately 5% of the ownership interests. Pinnacle II is a 231,864 square foot building owned by an affiliate of MCP, Media Center Development,
LLC, a Delaware limited liability company (“MCD”). The Pinnacle I building was purchased by the Pinnacle JV for a total gross purchase price of $212.5 million (before
closing costs and prorations). In order to effectuate that purchase, HJW contributed approximately $83.9 million to the Pinnacle JV and the Pinnacle JV obtained a $129.0
million ten-year project loan. The new project loan bears interest at a fixed annual rate of 3.954% and matures on November 7, 2022.
MCD is expected to contribute the Pinnacle II to the Pinnacle JV building upon the satisfaction of certain closing conditions, including lender approval of the
assumption of an existing $89.2 million project loan. The existing project loan bears interest at a fixed annual rate of 6.313% and matures on September 6, 2016. While no
assurances can be made with respect to the timing or success of satisfying the conditions to the contribution of Pinnacle II to the Pinnacle JV, the Company anticipates
the satisfaction of those conditions to be completed before the end of the first quarter of 2013. Other than for purposes of funding closing costs and prorations, HJW
will not be required to make a capital contribution in connection with the contribution of the Pinnacle II building to the Pinnacle JV, but HJW’s ownership interest in the
Pinnacle JV will be adjusted to reflect the contribution by MCD of Pinnacle II such that upon its contribution the combined ownership interest of MCP and MCD in
Pinnacle JV shall become approximately 35%, with the remaining approximately 65% percent owned by HJW. Upon completion of the transaction, the joint venture will
own both buildings for a combined purchase price of $342.5 million, subject to $218.2 million of project-level financing.
Dispositions. We did not dispose of any properties in 2012.
Repositionings. We generally select a property for repositioning at the time we purchase it. We often strategically purchase properties with large vacancies or
expected near-term lease roll-over and use our knowledge of the property and submarket to determine the optimal use and tenant mix. A repositioning can consist of a
range of improvements to a property, and may involve a complete structural renovation of a building to significantly upgrade the character of the property, or it may
involve targeted remodeling of common areas and tenant spaces to make the property more attractive to certain identified tenants. Because each repositioning effort is
unique and determined based on the property, tenants and overall trends in the general market and specific submarket, the results are varying degrees of depressed
rental revenue and occupancy levels for the affected property, which impacts our results and, accordingly, comparisons of our performance from period to period. The
repositioning process generally occurs over the course of months or even years. Although usually associated with newly-acquired properties, repositioning efforts can
also occur at properties we already own; repositioning properties discussed in the context of this paragraph exclude acquisition properties where the plan for
improvement is implemented as part of the acquisition. During 2012, we acquired 901 Market and the Olympic Bundy Media Campus for purposes of repositioning.
Financings.
On January 19, 2012 we closed a 10-year term loan totaling $43.0 million with PNC Bank, National Association, secured by our First Financial Plaza property. The
loan bears interest at a fixed annual rate of 4.58% and will mature on February 1, 2022.
On February 11, 2012, we closed a 10-year term loan totaling $30.0 million with Cantor Commercial Real Estate Lending, L.P., secured by our 10950 Washington
property. The loan bears interest at a fixed annual rate of 5.316% and will mature on March 11, 2022.
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On August 3, 2012, we replaced our $200.0 million secured revolving credit facility with a $250.0 million unsecured revolving credit facility with a group of
lenders for which Wells Fargo Bank, N.A. acts as administrative agent and its affiliate acts as joint lead arranger, Bank of America, N.A. acts as joint lead arranger and,
together with Barclays Capital Inc., acts as joint syndication agent, and Keybank, N.A., acts as documentation agent. Our Operating Partnership is the borrower under
our new unsecured revolving credit facility. A more detailed description of our unsecured revolving credit facility appears in the accompanying consolidated financial
statements.
On October 9, 2012, we closed a three-year loan with Wells Fargo Bank, N.A., secured by the Company’s 275 Brannan property. Upon full disbursement, the
loan will total $15.0 million. The loan bears interest at LIBOR plus 200 basis points and will mature on October 5, 2015, provided that the Company may extend such
maturity for one additional year subject to satisfaction of certain conditions. Proceeds from the loan are expected to be used to fund base building, tenant improvement,
and leasing commission costs associated with the renovation and lease-up of this property.
On October 30, 2012, we closed a four-year loan with Wells Fargo Bank, N.A., secured by the Company’s 901 Market Street property, $49.6 million which was
funded at closing, with an additional $11.9 million available to fund base building, tenant improvement, and leasing commission costs associated with the renovation and
lease-up of this property. Upon full disbursement, the loan will total $61.5 million. The loan bears interest at LIBOR plus 225 basis points, until such time as the property
achieves a trailing six month 9.0% debt yield, at which time interest would be reduced to LIBOR plus 200 basis points. The loan will mature on October 31, 2016, provided
that the Company may extend such maturity for one additional year subject to satisfaction of certain conditions.
On November 8, 2012, in connection with the acquisition of Pinnacle I, we closed a $129.0 million ten-year project loan to finance a portion of the purchase price.
The loan bears interest only for the first five years at an interest rate of 3.954%. Beginning with the payment due December 6, 2017, monthly debt service will include
principal payments based on a 30-year amortization schedule. The loan will mature on November 7, 2022.
Basis of Presentation
The accompanying consolidated financial statements are the consolidated financial statements of Hudson Pacific Properties, Inc. and our subsidiaries,
including our operating partnership. The results of the properties described under “—Acquisitions” above are included in our consolidated results as of the date of their
respective acquisition. Similarly, the financings described under “—Financings” above are included in our consolidated results on the date that the asset as to which a
loan has been assumed was acquired or as of the date of the applicable loan draw in the case of draws under our unsecured credit facility. All significant intercompany
balances and transactions have been eliminated in our consolidated financial statements.
For periods prior to 2010, we have reclassified certain other property-related revenue and tenant recoveries relating to our media and entertainment properties
that had been included as an offset to corresponding operating expenses, such that our media and entertainment rental revenue, other property-related revenue, and
tenant recoveries, and our media and entertainment operating expenses reflect the gross revenue and gross expenses, as applicable, without regard to such offset. In
addition, for periods prior to 2011, we have reclassified office related parking revenue from tenant recoveries to parking and other. These reclassifications conform the
periods prior to 2011 with the current period presentation.
The accompanying financial statements have been prepared pursuant to the rules and regulations of the SEC, and they include, in our opinion, all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein.
Factors That May Influence Our Operating Results
Business and Strategy
We focus our investment strategy on office properties located in submarkets with growth potential as well as on underperforming properties or portfolios that
provide opportunities to implement a value-add strategy to increase occupancy rates and cash flow. Additionally, we intend to acquire properties or portfolios that are
distressed due to near-term debt maturities or underperforming properties where we believe better management, focused leasing efforts and/or capital improvements
would improve the property’s operating performance and value. Our strategy also includes active management, aggressive leasing efforts, focused capital improvement
programs, the reduction and containment of operating costs and an emphasis on tenant satisfaction, which we believe will minimize turnover costs and improve
occupancy.
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From the acquisition of our first property in February 2007 through December 2012, we have acquired or developed properties totaling an aggregate of
approximately 5.3 million square feet. We intend to pursue acquisitions of additional properties as a key part of our growth strategy, often including properties that may
have substantial vacancy, which enables us to increase cash flow through lease-up. We expect to continue to acquire properties subject to existing mortgage financing
and other indebtedness or to incur indebtedness in connection with acquiring or refinancing these properties. Debt service on such indebtedness will have a priority
over any dividends with respect to our common or series B preferred stock and our common and series A preferred units.
Rental Revenue
The amount of net rental revenue generated by the properties in our portfolio depends principally on our ability to maintain the occupancy rates of currently
leased space and to lease currently available space and space that becomes available from lease terminations. As of December 31, 2012, the percent leased for our
stabilized office properties was approximately 93.5% (or 88.3%, excluding leases signed but not commenced as of that date), and the percent leased for the media and
entertainment properties (based on 12-month trailing average) was approximately 73.7%. The amount of rental revenue generated by us also depends on our ability to
maintain or increase rental rates at our properties. We believe that the average rental rates for our office properties are generally below the current average quoted market
rate. We believe the average rental rates for our media and entertainment properties are generally equal to current average quoted market rates. Negative trends in one or
more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our submarkets or
downturns in our tenants’ industries that impair our ability to renew or re-let space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant
bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on
our ability to acquire additional properties that meet our investment criteria.
Conditions in Our Markets
The properties in our portfolio are all located in California submarkets. Positive or negative changes in economic or other conditions in California, including the
state budgetary shortfall, employment rates, natural hazards and other factors, may impact our overall performance.
Operating Expenses
Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over
tenants’ base years are generally passed on to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net lease properties.
Certain of our properties have been reassessed for property tax purposes as a result of our initial public offering or their subsequent acquisition and other reassessments
remain pending. In the case of completed reassessments, the amount of property taxes we pay reflects the valuations established with the county assessors for the
relevant locations of each property as of the initial public offering or their subsequent acquisition. With respect to pending reassessments, we similarly expect the
amount of property taxes we pay to reflect the valuations established with such county assessors.
Taxable REIT Subsidiary
As part of the formation transactions, we formed Hudson Pacific Services, Inc., or our services company, a Maryland corporation that is wholly owned by our
operating partnership. We have elected, together with our services company, to treat our services company as a taxable REIT subsidiary for federal income tax purposes,
and we may form additional taxable REIT subsidiaries in the future. Our services company generally may provide both customary and non-customary services to our
tenants and engage in other activities that we may not engage in directly without adversely affecting our qualification as a REIT. Our services company and its wholly
owned subsidiaries provide a number of services to certain tenants at our media and entertainment properties and, from time to time, one or more taxable REIT
subsidiaries may provide services to our tenants at these and other properties. In addition, our operating partnership has contributed some or all of its interests in certain
wholly owned subsidiaries or their assets to our services company. We currently lease space to wholly owned subsidiaries of our services company at our media and
entertainment properties and may, from time to time, enter into additional leases with one or more taxable REIT subsidiaries. Any income earned by our taxable REIT
subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is distributed to us as a
dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income test. Because a taxable REIT subsidiary is subject to federal
income tax, and state and local income tax (where applicable), as a regular C corporation, the income earned by our taxable REIT subsidiaries generally will be subject to
an additional level of tax as compared to the income earned by our other subsidiaries.
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Critical Accounting Policies
Our discussion and analysis of the historical financial condition and results of operations of Hudson Pacific Properties, Inc. are based upon our financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements in
conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of revenues and expenses in the reporting period. Actual amounts may differ from these estimates and
assumptions. We have provided a summary of our significant accounting policies in the notes to our financial statements included elsewhere in this Annual Report on
Form 10-K. We have summarized below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our
financial conditions and results of operations. We evaluate these estimates on an ongoing basis, based upon information currently available and on various
assumptions that we believe are reasonable as of the date hereof. Other companies in similar businesses may use different estimation policies and methodologies, which
may impact the comparability of our results of operations and financial conditions to those of other companies.
Investment in Real Estate Properties
The properties in our portfolio are carried at cost, less accumulated depreciation and amortization. We account for the cost of an acquisition, including the
assumption of liabilities, to the acquired tangible assets and identifiable intangibles based on their estimated fair values in accordance with GAAP. We assess fair value
based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. 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. Acquisition-related expenses are expensed in the period incurred.
Impairment of Long-Lived Assets
We assess the carrying value of real estate assets and related intangibles whenever events or changes in circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable in accordance with GAAP. Impairment losses are recorded on real estate assets held for investment when indicators of
impairment are present and the future undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We recognize
impairment losses to the extent the carrying amount exceeds the fair value of the properties. Properties held for sale are recorded at the lower of cost or estimated fair
value less cost to sell. We did not record any impairment charges related to our real estate assets and related intangibles during the years ended December 31, 2012 and
2011.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due for monthly rents and other charges. We maintain an allowance for doubtful accounts, including an allowance for
straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We
monitor the liquidity and creditworthiness of our tenants and operators on an ongoing basis. This evaluation considers industry and economic conditions, property
performance, credit enhancements and other factors. For straight-line rent amounts, our assessment is based on amounts estimated to be recoverable over the term of the
lease. At December 31, 2012, management believed that the collectability of straight-line rent balances are reasonably assured; however, a $8 allowance was established
against straight-line rent receivables. We evaluate the collectability of accounts receivable based on a combination of factors. The allowance for doubtful accounts is
based on specific identification of uncollectible accounts and our historical collection experience. We recognize an allowance for doubtful accounts based on the length
of time the receivables are past due, the current business environment and our historical experience. Historical experience has been within management’s expectations.
Revenue Recognition
We recognize rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken
possession or controls the physical use of the leased asset. For assets acquired subject to leases, we recognize revenue upon acquisition of the asset, provided the
tenant has taken possession or controls the physical use of the leased asset. If the lease provides for tenant improvements, we determine whether the tenant
improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken
physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of
the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term.
Tenant improvement ownership is determined based on various factors including, but not limited to:
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• whether the lease stipulates how and on which items a tenant improvement allowance may be spent;
• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
• whether the tenant improvements are unique to the tenant or general-purpose in nature; and
• whether the tenant improvements are expected to have any residual value at the end of the lease.
Certain leases provide for additional rents contingent upon a percentage of the tenant’s revenue in excess of specified base amounts or other thresholds.
Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. Such revenue is
recognized only after the contingency has been removed (when the related thresholds are achieved), which may result in the recognition of rental revenue in periods
subsequent to when such payments are received.
Other property-related revenue is revenue that is derived from the tenants’ use of lighting, equipment rental, parking, power, HVAC and telecommunications
(telephone and internet). Other property-related revenue is recognized when these items are provided.
Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in
the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as we are generally the primary obligor with respect to
purchasing goods and services from third-party suppliers, and we have discretion in selecting the supplier and bear the associated credit risk.
We recognize gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the full
accrual method when (i) the collectability of the sales price is reasonably assured, (ii) we are not obligated to perform significant activities after the sale, (iii) the initial
investment from the buyer is sufficient and (iv) other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until
the requirements for gain recognition have been met.
Stock-Based Compensation
ASC Topic 718, Compensation—Stock Compensation (referred to as ASC Topic 718 and formerly known as FASB 123R), requires us to recognize an expense
for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, restricted stock units and performance units under our equity incentive
award plans are accounted for under ASC Topic 718. Our compensation committee will regularly consider the accounting implications of significant compensation
decisions, especially in connection with decisions that relate to our equity incentive award plans and programs.
Income Taxes
Our taxable income prior to the completion of our initial public offering is reportable by the members of the limited liability companies that comprise our
predecessor. Our property-owning subsidiaries are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no
provision has been made for federal income taxes in the accompanying consolidated financial statements for the activities of these entities.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our taxable year ended December
31, 2010. We believe that we have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and
we intend to continue operating in such manner. To qualify as a REIT, we are required to distribute at least 90% of our net taxable income to our stockholders, excluding
net capital gains, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and
diversity of stock ownership. Provided that we continue to qualify for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings
distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the
Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. Unless entitled to relief
under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our
qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary. Certain activities that we may undertake, such as non-customary services for our
tenants and holding assets that we cannot hold directly, will be conducted by a taxable REIT subsidiary. A taxable REIT subsidiary is subject to federal and, where
applicable, state income taxes on its net income.
We are subject to the statutory requirements of the state in which we conduct business.
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Results of Operations
The following table identifies each of the properties in our portfolio acquired through December 31, 2012 and their date of acquisition.
Properties
875 Howard Street
Sunset Gower
Sunset Bronson
Technicolor Building
City Plaza
First Financial
Tierrasanta
Del Amo Office
9300 Wilshire Boulevard
222 Kearny Street
1455 Market
Rincon Center(1)
10950 Washington
604 Arizona
275 Brannan
625 Second Street
6922 Hollywood Boulevard
6050 Ocean Way & 1455 N. Beachwood Drive
10900 Washington
901 Market Street
Olympic Bundy
1455 Gordon Street
Pinnacle I(2)
Total
Acquisition/Completion
Date
Square Feet
2/15/2007
8/17/2007
1/30/2008
6/1/2008
8/26/2008
6/29/2010
6/29/2010
8/13/2010
8/24/2010
10/8/2010
12/16/2010
12/16/2010
12/22/2010
7/26/2011
8/19/2011
9/1/2011
11/22/2011
12/16/2011
4/5/2012
6/1/2012
9/5/2012
9/21/2012
11/8/2012
286,270
544,602
313,723
114,958
333,922
222,423
112,300
113,000
61,224
148,797
1,021,969
580,850
158,873
44,260
54,673
136,906
205,523
20,761
9,919
212,319
241,427
6,000
393,776
5,338,475
(1) We acquired a 51% joint venture interest in the Rincon Center property on December 16, 2010. On April 29, 2011 we acquired the remaining 49% interest in the Rincon Center
property for approximately $38.7 million (before closing costs and prorations).
(2) We acquired a 98.25% joint venture interest in Pinnacle I property on November 8, 2012.
All amounts and percentages used in this discussion of our results of operations are calculated using the numbers presented in the financial statements
contained in this report rather than the rounded numbers appearing in this discussion.
Comparison of the year ended December 31, 2012 to the year ended December 31, 2011
Revenue
Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries, and parking and other revenue. Total office revenues increased $20.8
million, or 19.8%, to $126.0 million for the twelve months ended December 31, 2012 compared to $105.2 million for the twelve months ended December 31, 2011. The
period-over-period changes in the items that comprise total revenue are attributable primarily to the factors discussed below.
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Office Rental Revenue. Office rental revenue includes rental revenues from our office properties and percentage rent on retail space contained within those
properties. Total office rental revenue increased $18.6 million, or 24.7%, to $93.9 million for the twelve months ended December 31, 2012 compared to $75.3 million for the
twelve months ended December 31, 2011. The increase in rental revenue largely reflects a full year of operating results from office properties acquired in the
second half of 2011 and the impact of office properties acquired in the second, third, and fourth quarters of 2012.
Office Tenant Recoveries. Office tenant recoveries remained relatively flat for the twelve months ended December 31, 2012 compared to the twelve months
ended December 31, 2011.
Office Parking and Other Revenue. Office parking and other revenue increased $2.2 million, or 27.8%, to $9.9 million for the twelve months ended December 31,
2012 compared to $7.8 million for the twelve months ended December 31, 2011. The increase in parking and other revenue largely reflects a full year of operating
results from office properties acquired in the second half of 2011 and the impact of office properties acquired in the second, third, and fourth quarters of
2012.
Total Media & Entertainment Revenue. Total media and entertainment revenue consists of rental revenue, tenant recoveries, other property-related revenue
and other revenue. Total media and entertainment revenues increased $3.2 million, or 8.5%, to $40.1 million for the twelve months ended December 31, 2012 compared to
$37.0 million for the twelve months ended December 31, 2011. The items that contributed to the period-over-period total revenue results are discussed below.
Media & Entertainment Rental Revenue. Media and entertainment rental revenue includes rental revenues from our media and entertainment properties,
percentage rent on retail space contained within those properties, and lease termination income. Total media and entertainment rental revenue increased $2.0 million, or
9.2%, to $23.6 million for the twelve months ended December 31, 2012 compared to $21.6 million for the twelve months ended December 31, 2011. The increase in rental
revenue was primarily due to higher rents and occupancy compared to the same period a year ago.
Media & Entertainment Tenant Recoveries. Tenant recoveries remained relatively flat for the twelve months ended December 31, 2012 compared to the twelve
months ended December 31, 2011.
Media & Entertainment Other Property-Related Revenue. Other property-related revenue is revenue that is derived from the tenants’ rental of lighting and
other equipment, parking, power, HVAC and telecommunications (telephone and internet). Total other property-related revenue increased $1.1 million, or 8.0%, to $14.7
million for the twelve months ended December 31, 2012 compared to $13.6 million for the twelve months ended December 31, 2011. The increase in other property-related
revenue was primarily due to higher production activity and occupancy at our media and entertainment properties compared to the same period a year ago.
Operating Expenses
Total Operating Expenses. Total operating expenses consist of property operating expenses, as well as property- and corporate-level general and
administrative expenses, other property related expenses, management fees and depreciation and amortization. Total operating expenses increased by $26.6 million, or
21.3%, to $151.4 million for the twelve months ended December 31, 2012 compared to $124.9 million for the twelve months ended December 31, 2011. This increase in total
operating expenses reflects the factors discussed below.
Office Operating Expenses. Office operating expenses increased $8.8 million, or 19.8%, to $53.6 million for the twelve months ended December 31, 2012
compared to $44.7 million for the twelve months ended December 31, 2011. The increase in operating expenses largely reflects a full year of operating results from
office properties acquired in the second half of 2011 and the impact of office properties acquired in the second, third, and fourth quarters of 2012.
Media & Entertainment Operating Expenses. Media and entertainment operating expenses increased $1.9 million, or 8.4%, to $24.3 million for the twelve
months ended December 31, 2012 compared to $22.4 million for the twelve months ended December 31, 2011. The increase was primarily due to higher production activity
and occupancy at our media and entertainment properties compared to the same period a year ago.
General and Administrative Expenses. General and administrative expenses includes wages and salaries for corporate-level employees, accounting, legal and
other professional services, office supplies, entertainment, travel, and automobile expenses, telecommunications and computer-related expenses, and other miscellaneous
items. General and administrative expenses increased $3.5 million, or 26.5%, to $16.5 million for the twelve months ended December 31, 2012 compared to
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$13.0 million for the twelve months ended December 31, 2011. The increase in general and administrative expenses was primarily due to the adoption of the 2012
Outperformance Program and increased staffing to meet operational needs arising from the acquisitions of office properties.
Depreciation and Amortization. Depreciation and amortization expense increased $12.4 million, or 27.7%, to $57.0 million for the twelve months ended
December 31, 2012 compared to $44.7 million for the twelve months ended December 31, 2011. The increase was primarily due to the depreciation associated with a full
year of operating results from office properties acquired in the second half of 2011 and the impact of office properties acquired in the second, third, and
fourth quarters of 2012.
Other Expense (Income)
Interest Expense. Interest expense increased $1.6 million or 9.1% to $19.1 million for the twelve months ended December 31, 2012 compared to $17.5 million for
the twelve months ended December 31, 2011. At December 31, 2012, we had $582.1 million of notes payable, compared to $399.9 million at December 31, 2011. The
increase in interest expense was primarily due to the increase in indebtedness associated with the financing activity throughout 2012 on our First Financial, 10950
Washington, 901 Market, and Pinnacle I properties, as described above, and the full year impact of financings assumed in connection with properties acquired in the
second half of 2011.
Acquisition-related expenses. Acquisition-related expenses decreased $0.6 million, or 37.9%, to $1.1 million for the twelve months ended December 31, 2012
compared to $1.7 million for the twelve months ended December 31, 2011. The decrease in acquisition-related expenses was primarily due to higher expenses associated
with loans assumptions in connection properties acquired in the second half of 2011.
Net Loss
Net loss for the twelve months ended December 31, 2012 was $5.0 million compared to net loss of $2.2 million for the twelve months ended December 31, 2011.
The increase in net loss was primarily due to higher operating expenses, higher general and administrative expenses, higher depreciation and amortization expenses,
partially offset by higher revenues as a result of a full year of operating results from office properties acquired in the second half of 2011 and the impact of
office properties acquired in the second, third, and fourth quarters of 2012, all as described above.
Comparison of the year ended December 31, 2011 to the year ended December 31, 2010
Revenue
Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries and other revenue. Total office revenues increased $78.7 million, or
297.0%, to $105.2 million for the year ended December 31, 2011 compared to $26.5 million for the year ended December 31, 2010. The period over period changes in the
items that comprise total revenue are attributable primarily to the factors discussed below.
Office Rental Revenue. Office rental revenue includes rental revenues from our office properties and percentage rent on retail space contained within those
properties. Total office rental revenue increased $53.1 million, or 238.7%, to $75.3 million for the year ended December 31, 2011 compared to $22.2 million for the year
ended December 31, 2010. The increase in rental revenue from a year ago was primarily the result of rental revenue from office properties acquired during the third and
fourth quarters of 2010 and 2011.
Office Tenant Recoveries. Office tenant recoveries increased $19.0 million, or 609.5%, to $22.1 million for the year ended December 31, 2011 compared to $3.1
million for the year ended December 31, 2010. The increase in tenant recoveries was primarily the result of recoveries from office properties acquired during the third and
fourth quarters of 2010 and 2011.
Office Parking and Other Revenue. Parking and other revenue increased $6.6 million, or 580.4%, to $7.8 million for the year ended December 31, 2011 compared
to $1.1 million for the year ended December 31, 2010. The increase in parking and other revenue was primarily the result of the parking revenues from offices acquired
during the third and fourth quarters of 2010 and 2011 and the early lease termination revenue from a single floor tenant at our City Plaza project.
Total Media & Entertainment Revenue. Total media and entertainment revenue consists of rental revenue, tenant recoveries, other property-related revenue
and other revenue. Total media and entertainment revenues increased $2.8 million, or
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8.3%, to $37.0 million for the year ended December 31, 2011 compared to $34.1 million for the year ended December 31, 2010. The period over period changes in the items
that comprise total media and entertainment revenue are primarily attributable to the factors discussed below.
Media & Entertainment Rental Revenue. Media and entertainment rental revenue includes rental revenues from our media and entertainment properties and
percentage rent on retail space contained within those properties. Total media and entertainment rental revenue increased $0.7 million, or 3.3%, to $21.6 million for the
year ended December 31, 2011 as compared to $20.9 million for the year ended December 31, 2010. The increase in rental revenue was primarily due to improved rental
rates at our media and entertainment properties and improved occupancy at our Sunset Bronson property, partially offset by lower occupancy at our Sunset Gower
property.
Media & Entertainment Tenant Recoveries. Tenant recoveries remained relatively flat at $1.5 million for the year ended December 31, 2011 as compared to $1.6
million for the year ended December 31, 2010.
Media & Entertainment Other Property-Related Revenue. Other property-related revenue is revenue that is derived from the tenants’ rental of lighting and
other equipment, parking, power, HVAC and telecommunications (telephone and internet services). Total other property-related revenue increased $2.2 million, or 19.7%,
to $13.6 million for the year ended December 31, 2011 compared to $11.4 million for the year ended December 31, 2010. The increase in other property-related revenue was
primarily due to an increase in lighting equipment rental revenue, parking revenue and telecom revenue relating to higher production activity associated with improved
tenant concentration at our media and entertainment properties.
Operating Expenses
Total Operating Expenses. Total operating expenses consist of property operating expenses, as well as property-level general and administrative expenses,
other property-related expenses, management fees and depreciation and amortization. Total operating expenses increased $74.5 million, or 147.6%, to $124.9 million for
the year ended December 31, 2011 compared to $50.4 million for the year ended December 31, 2010. Changes in total operating expenses are primarily attributable to the
factors discussed below.
Office Operating Expenses. Office operating expenses increased $34.5 million, or 338.1%, to $44.7 million for the year ended December 31, 2011 compared to
$10.2 million for the year ended December 31, 2010. The increase in office operating expenses was primarily due to the acquisitions of office properties during the third
and fourth quarters of 2010 and 2011, which was partially offset by certain property tax reassessment savings, mostly associated with our City Plaza property.
Media & Entertainment Operating Expenses. Media and entertainment operating expenses increased $2.6 million, or 13.3%, to $22.4 million for the year ended
December 31, 2011 compared to $19.8 million for the year ended December 31, 2010. The increase in operating expenses was due to an increase in other property-related
expenses, primarily lighting and other equipment rental expenses, resulting from higher production activity at our media and entertainment properties. The operating
expenses for the year ended December 31, 2010 also reflects $1.1 million of property tax reassessment savings that did not recur in 2011.
General and Administrative Expenses. General and administrative expenses includes wages and salaries for corporate-level employees, accounting, legal and
other professional services, office supplies, entertainment, travel, and automobile expenses, telecommunications and computer-related expenses, and other miscellaneous
items. Since the IPO, 2010 private placement and formation transactions did not occur until June 29, 2010, the year ended December 31, 2010 only includes general and
administrative expenses for corporate-level operations beginning June 29, 2010 and thereafter. We incurred $13.0 million of general and administration expenses for our
corporate-level operations for the year ended December 31, 2011 compared to $4.5 million of expenses for our corporate-level operations over the period commencing on
June 29, 2010 and ending December 31, 2010.
Depreciation and Amortization. Depreciation expense increased $28.7 million, or 180.7%, to $44.7 million for year ended December 31, 2011 compared to $15.9
million for the year ended December 31, 2010. The increase was primarily due to the depreciation associated with the acquisitions of office properties acquired during the
third and fourth quarters of 2010 and 2011.
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Other Expense (Income)
Interest Expense. Interest expense increased $8.6 million, or 97.9%, to $17.5 million for the year ended December 31, 2011 compared to $8.8 million for the year
ended December 31, 2010. The increase was primarily due to the increased indebtedness associated with the acquisitions of office properties during the third and fourth
quarters of 2010 and 2011.
Unrealized Gain on Interest Rate Contracts. Unrealized gain on interest rate contracts decreased by $0.3 million for the year ended December 31, 2011 as
compared to the year ended December 31, 2010 as a result of the expiration of an interest rate contract that was not accounted for as an effective cash flow hedge.
Acquisition-Related Expenses. Acquisition-related expenses decreased $2.6 million, or 60.4%, to $1.7 million for year ended December 31, 2011 compared to $4.3
million for the year ended December 31, 2010. The decrease was a result of lower acquisition activity for the year ended December 31, 2011 compared to the acquisition
activity during 2010 that included our IPO and the related formation transactions.
Net Loss
Net loss for the year ended December 31, 2011 was $2.2 million compared to net loss of $2.7 million for the year ended December 31, 2010. The decrease in net
loss was primarily due to higher office and media and entertainment revenues and lower acquisition-related expenses, partially offset by higher operating expenses,
higher general and administrative expenses, higher depreciation and amortization expenses, and higher interest expenses, all as described above.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $18.9 million of cash and cash equivalents at December 31, 2012. In addition, the lead arrangers for our unsecured revolving credit facility
have secured commitments that will allow borrowings of up to $250.0 million. As of December 31, 2012, we had total borrowing capacity of approximately $204.1 million
on our unsecured credit facility, of which $55.0 million had been drawn. Subsequent to December 31, 2012, we drew an additional $5.0 million on our unsecured credit
facility for a total outstanding balance of $60.0 million.
On February 12, 2013, we closed the public offering of 9,200,000 shares of our common stock. We used $60.0 million of proceeds from that stock offering to fully
pay down the $60.0 million outstanding balance on our unsecured credit facility. As a result, as of the filing of this report we have capacity of approximately $204.1
million on our unsecured credit facility, none of which has been drawn. We intend to use the unsecured revolving credit facility, among other things, to finance the
acquisition of other properties, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.
Based on the closing price of our common stock of $22.72 as of March 1, 2013, our ratio of debt to total market capitalization was approximately 27.1% (counting
series A preferred units as debt). Our total market capitalization is defined as the sum of the market value of our outstanding common stock (which may decrease, thereby
increasing our debt to total capitalization ratio), including restricted stock that we may issue to certain of our directors and executive officers, plus the aggregate value of
common units not owned by us, plus the liquidation preference of outstanding series A preferred units, plus the liquidation preference of outstanding series B preferred
stock, plus the book value of our total consolidated indebtedness.
Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited
partners and dividend payments to our stockholders required to maintain our REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our
short-term liquidity requirements through net cash provided by operations, reserves established from existing cash and by drawing upon our unsecured revolving credit
facility.
Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital
improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance
of equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using our unsecured revolving credit facility pending
permanent financing.
We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the
issuance of additional equity. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of
factors, including our degree of leverage, the
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value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number
of factors as well, including general market conditions for REITs and market perceptions about our company.
Consolidated Indebtedness
Senior Unsecured Revolving Credit Facility
On August 3, 2012, we replaced our $200.0 million secured revolving credit facility with a $250.0 million unsecured revolving credit facility with a group of
lenders for which Wells Fargo Bank, N.A. acts as administrative agent and its affiliate acts as joint lead arranger, Bank of America, N.A. acts as joint lead arranger and,
together with Barclays Capital Inc., acts as joint syndication agent, and Keybank, N.A., acts as documentation agent. Our Operating Partnership is the borrower under
our new unsecured revolving credit facility. The facility is required to be guaranteed by us and all of our subsidiaries that own unencumbered properties. The unsecured
revolving credit facility includes an accordion feature that allows us to increase the availability by $150.0 million, to $400.0 million, under specified circumstances and
subject to receiving commitments from lenders.
Our unsecured revolving credit facility bears interest at a rate per annum equal to LIBOR plus 155 basis points to 220 basis points, depending on our leverage
ratio. If the Company obtains a credit rating for its senior unsecured long term indebtedness, it may make an irrevocable election to change the interest rate for the
unsecured revolving credit facility to a rate per annum equal to LIBOR plus 100 basis points to 185 basis points, depending on the credit rating. Our unsecured revolving
credit facility is subject to a facility fee in an amount equal to our unused commitments multiplied by a rate per annum equal to 25 basis points to 35 basis points,
depending on our usage of the unsecured revolving credit facility, or, if we make the credit rating election, in an amount equal to the aggregate amount of our
commitments multiplied by a rate per annum equal to 15 basis points to 45 basis points, depending upon the credit rating. The amount available for us to borrow under
the unsecured revolving credit facility is subject to compliance with certain covenants, including the following financial covenants:
•
•
•
•
•
•
a maximum leverage ratio (defined as consolidated total indebtedness plus our pro rata share of indebtedness of unconsolidated affiliates to total asset value) of
0.60:1.00;
a minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) plus our pro rata
share of EBITDA of unconsolidated affiliates to fixed charges) of 1.50:1.00;
a maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness plus our pro rata share of secured indebtedness of
unconsolidated affiliates to total asset value) of 0.60:1:00 through and including August 3, 2014 and 0.55:1:00 thereafter;
a maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness plus our pro rata share of unsecured indebtedness of
unconsolidated affiliates to total unencumbered asset value) of 0.60:1:00;
a minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties plus our pro rata share of net
operating income from unencumbered properties to unsecured interest expense) of 1.60:1.00; and
a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the unsecured revolving credit facility but including
unsecured lines of credit to total asset value) of 0.15:1.00.
In addition to these covenants, our unsecured revolving credit facility also includes certain limitations on dividend payouts and distributions, limits on certain
types of investments outside of our primary business, and other customary affirmative and negative covenants. Our ability to borrow under the unsecured revolving
credit facility is subject to continued compliance with these covenants.
As of December 31, 2012, we were in compliance with our unsecured revolving credit facility’s financial covenants. As of December 31, 2012, we had
approximately $204.1 million of total capacity under our unsecured revolving credit facility, of which $55.0 million had been drawn.
Outstanding Indebtedness
The following table sets forth information as of December 31, 2012 with respect to our outstanding indebtedness.
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Debt
Unsecured Revolving Credit Facility
Mortgage loan secured by 625 Second Street(2)
Mortgage loan secured by 6922 Hollywood Boulevard(3)
Mortgage loan secured by 275 Brannan (4)
Mortgage loan secured by Sunset Gower/Sunset Bronson(5)
Mortgage loan secured by 901 Market (6)
Mortgage loan secured by Rincon Center
Mortgage loan secured by First Financial(7)
Mortgage loan secured by 10950 Washington
Mortgage loan secured by Pinnacle I(8)
Subtotal
Unamortized loan premium, net(9)
Total
Outstanding
December 31, 2012
Interest Rate (1)
Maturity Date
$
$
$
55,000
33,700
41,243
138
92,000
49,600
107,492
43,000
29,711
129,000
580,884
1,201
582,085
LIBOR+1.55% to 2.20%
5.85%
5.58%
LIBOR+2.00%
LIBOR+3.50%
LIBOR+2.25%
5.134%
4.58%
5.316%
3.954%
8/3/2016
2/1/2014
1/1/2015
10/5/2015
2/11/2016
10/31/2016
5/1/2018
2/1/2022
3/11/2022
11/7/2022
__________________
(1) Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed, excluding the amortization of loan fees and costs.
(2) This loan was assumed on September 1, 2011 in connection with the closing of our acquisition of 625 Second Street property.
(3) This loan was assumed on November 22, 2011 in connection with the closing of our acquisition of the 6922 Hollywood Boulevard property.
(4) On October 5, 2012, we obtained a loan for our 275 Brannan property pursuant to which we have the ability to draw up to $15,000 for budgeted base building, tenant improvements, and
other costs associated with the renovation and lease-up of that property.
(5) On March 16, 2011, we purchased an interest rate cap in order to cap one-month LIBOR at 3.715% with respect to $50.0 million of the loan through its maturity on February 11, 2016. On
January 11, 2012 we purchased an interest rate cap in order to cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan through its maturity on February 11, 2016.
Beginning with the payment due February 1, 2014, monthly debt service will include principal payments based on a 30-year amortization schedule, for total annual debt amortization of
$1,410.
(6) On October 29, 2012, we obtained a loan for our 901 Market property pursuant to which we borrowed $49,600 upon closing, with the ability to draw up to an additional $11,900 for
budgeted base building, tenant improvements, and other costs associated with the renovation and lease-up of that property.
(7) The loan bears interest only for the first two years. Beginning with the payment due March 1, 2014, monthly debt service will include principal payments based on a 30-year amortization
schedule, for total annual debt service of $2,639.
(8) The loan bears interest only for the first five years. Beginning with the payment due December 6, 2017, monthly debt service will include principal payments based on a 30-year
amortization schedule, for total annual debt service of $7,349.
(9) Represents unamortized amount of the non-cash mark-to-market adjustment on debt associated with 625 Second Street and 6922 Hollywood Boulevard.
Contractual Obligations
The following table provides information with respect to our commitments at December 31, 2012, including any guaranteed or minimum commitments under
contractual obligations. The table does not reflect available debt extensions.
Contractual Obligation
Principal payments on mortgage loans(1)
Interest payments(1)(2)
Operating leases
Tenant-related commitments
Ground leases(3)
Total:
Payments Due by Period
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
$
580,884
137,695
225
68,293
59,327
846,424
$
$
107,731
25,143
193
68,293
1,417
202,777
$
$
174,767
59,028
32
—
4,251
238,078
$
$
109,147
32,577
—
—
4,251
145,975
$
$
189,239
20,947
—
—
49,408
259,594
(1) As of December 31, 2012, we had drawn approximately $55.0 million under our unsecured revolving credit facility. Subsequent to December 31, 2012, we fully repaid the outstanding
balance of our unsecured revolving credit facility.
(2) Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed.
(3) Reflects current annual base rents of $367,125, $1, $975,000 and $75,000 under the Sunset Gower, Del Amo Office, 222 Kearny Street and 9300 Wilshire ground leases, expiring
March 31, 2060, June 30, 2049, June 14, 2054 and August 14, 2032, respectively. Assumes Sunset Gower and 222 Kearny ground rent is fixed at the current rent, although such ground
rent is subject to periodic adjustments.
Off Balance Sheet Arrangements
At December 31, 2012, we did not have any off-balance sheet arrangements.
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Cash Flows
Cash Flows
Comparison of twelve months ended December 31, 2012 to twelve months ended December 31, 2011 is as follows:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Twelve Months Ended December 31,
2012
2011
Dollar Change
Percentage Change
42,821
(423,470 )
385,848
($ in thousands)
32,082
(130,604 )
63,352
10,739
(292,866 )
322,496
33.5 %
224.2 %
509.1 %
Cash and cash equivalents were $18.9 million and $13.7 million at December 31, 2012 and December 31, 2011, respectively.
Operating Activities
Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates achieved on our leases, the
collectability of rent and recoveries from our tenants and the level of operating expenses and other general and administrative costs. Net cash provided by operating
activities increased by $10.7 million to $42.8 million for the twelve months ended December 31, 2012 compared to $32.1 million for the twelve months ended December 31,
2011. The increase was primarily due to an increase in cash NOI, as defined, from our office properties, primarily from the acquisitions of office properties in the third and
fourth quarters of 2011 and the second, third and fourth quarter of 2012, and an increase in prepaid rent, all of which were partially offset by an increase in general and
administrative expenses, compared to the twelve months ended December 31, 2011. The increase in office properties cash NOI for the twelve months ended December 31,
2012 would have been higher if the prior year early lease termination payment from a tenant at our City Plaza property was disregarded.
Investing Activities
Our net cash used in investing activities is generally used to fund property acquisitions, development and redevelopment projects and recurring and non-
recurring capital expenditures. Net cash used in investing activities increased $292.9 million to $423.5 million for the twelve months ended December 31, 2012 compared to
$130.6 million for twelve months ended December 31, 2011. The increase was primarily due to the acquisition of 901 Market in June 2012, the acquisition of Olympic and
Bundy in September 2012 and the acquisition of Pinnacle I in November 2012.
Financing Activities
Our net cash used in financing activities is generally impacted by our borrowings, capital activities net of dividends and distributions paid to common
stockholders and noncontrolling interests. Net cash provided by financing activities increased $322.5 million to $385.8 million for the twelve months ended December 31,
2012 compared to $63.4 million for the twelve months ended December 31, 2011. The increase was due to higher net proceeds from the issuance of common stock, the
issuance of our series B preferred stock, and lower repayment of indebtedness, as compared to the prior year. In addition, we paid off the Rincon center minority interest
in 2011, with no comparable activity in 2012. The interest in net cash provided by financing activities for the twelve months ended December 31, 2012 was partially offset
by lower new financings (See Liquidity and Capital Resources above), and increased distributions, compared to the twelve months ended December 31, 2011.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk we face is interest rate risk. Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent
market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. As more fully described below, we use derivative
financial instruments to manage, or hedge, interest rate risks related to our borrowings. We only enter into contracts with major financial institutions based on their credit
rating and other factors.
On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A., secured by our Sunset Gower and Sunset Bronson
media and entertainment properties. The loan bears interest at a rate equal to one-month LIBOR plus 3.50%. $37.0 million of the loan was subject to an interest rate
contract which swapped one-month LIBOR to a
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fixed rate of 0.75% through April 30, 2011. On March 16, 2011, we purchased an interest rate cap in order to cap one-month LIBOR at 3.715% with respect to $50.0 million
of the loan through its maturity on February 11, 2016. On January 11, 2012 we purchased an interest rate cap in order to cap one-month LIBOR at 2.00% with respect to
$42.0 million of the loan through its maturity on February 11, 2016.
On October 9, 2012, we closed a three-year loan with Wells Fargo Bank, N.A., secured by the Company’s 275 Brannan property. Upon full disbursement, the
loan will total $15.0 million. The loan bears interest at LIBOR plus 200 basis points and will mature on October 5, 2015, provided that the Company may extend such
maturity for one additional year subject to satisfaction of certain conditions. There is currently no hedge associated with this loan.
On October 30, 2012, we closed a four-year loan with Wells Fargo Bank, N.A., secured by the Company’s 901 Market Street property, $49.6 million which was
funded at closing, with an additional $11.9 million available to fund base building, tenant improvement, and leasing commission costs associated with the renovation and
lease-up of this property. Upon full disbursement, the loan will total $61.5 million. The loan bears interest at LIBOR plus 2.25%, until such time as the property achieves a
trailing six month 9.0% debt yield, at which time interest would be reduced to LIBOR plus 2.00%. The loan will mature on October 31, 2016, provided that the Company
may extend such maturity for one additional year subject to satisfaction of certain conditions. There is currently no hedge associated with this loan.
As of December 31, 2012, we had drawn a total of $55.0 million under our unsecured credit facility, which facility is not subject to an interest rate hedge.
Therefore, with respect to the combined $92.0 million loan on our Sunset Gower and Sunset Bronson media and entertainment properties, the $49.6 million on our 901
Market Street property, the $0.1 million on our 275 Brannan Street property, and $55.0 million outstanding balance on our unsecured facility as of December 31, 2012, if
one-month LIBOR as of December 31, 2012 was to increase by 100 basis points, or 1.0%, the resulting increase in interest expense would impact our future earnings and
cash flows by $2.0 million.
Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the
effect of any change in overall economic activity that could occur. Further, in the event of a change in overall economic activity of that magnitude, we may take actions
to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses
assume no changes in our financial structure.
As of December 31, 2012, our total outstanding debt was approximately $580.9 million (before unamortized loan premium), which was comprised of a $104.7
million of outstanding debt not mitigated by interest rate contracts, $92.0 million of variable rate secured mortgage loans subject to the interest rate agreements described
above, and $384.1 million (before unamortized loan premium) of fixed rate secured mortgage loans. As of December 31, 2012, the fair value of our fixed rate secured
mortgage loans, including the indebtedness on the Sunset Bronson property, was approximately $390.3 million.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements included in this Annual Report on Form 10-K are listed in Part IV, Item 15(a) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or
the 1934 Act) that are designed to ensure that information required to be disclosed in our reports under the 1934 Act is processed, recorded, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the 1934 Act, we carried out an evaluation, under the supervision and with the participation of management including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period
covered by this report.
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Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were
effective in providing a reasonable level of assurance that information we are required to disclose in reports that we file under the 1934 Act is processed, recorded,
summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes that occurred during the fourth quarter of the year covered by this report in our internal control over financial reporting identified
in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Accounting Firm
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial
statements for external reporting purposes in accordance with United States generally accepted accounting principles. Our management, including the undersigned Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In conducting its
assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated
Framework. Based on this assessment, management concluded that, as of December 31, 2012, our internal control over financial reporting was effective based on those
criteria.
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal
controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 2012, has been audited by Ernst & Young LLP, the independent registered
public accounting firm that audited the consolidated financial statements included in this annual report, as stated in their report appearing on page F-2, which expresses
an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2012.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled
to be held in May 2013. We intend to disclose any amendment to, or waiver from, our code of ethics within four business days following the date of the amendment or
waiver.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled
to be held in May 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled
to be held in May 2013.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled
to be held in May 2013.
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Table of Contents
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled
to be held in May 2013.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) and (2) Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K:
PART IV
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011, and 2010
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2012, 2011, and 2010
Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011, and 2010
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011, and 2010
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-10
F-31
All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements and notes thereto.
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(3) Exhibits
Exhibit
Number
Description
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
(9)
Articles of Amendment and Restatement of Hudson Pacific Properties, Inc.(2)
Amended and Restated Bylaws of Hudson Pacific Properties, Inc.(2)
Form of Articles Supplementary of Hudson Pacific Properties, Inc.(9)
Form of Certificate of Common Stock of Hudson Pacific Properties, Inc.(5)
Form of Certificate of Series B Preferred Stock of Hudson Pacific Properties, Inc.
Form of Second Amended and Restated Agreement of Limited Partnership of Hudson Pacific Properties, L.P.(9)
Registration Rights Agreement among Hudson Pacific Properties, Inc. and the persons named therein.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Victor J. Coleman.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Howard S. Stern.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Mark T. Lammas.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Christopher Barton.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Dale Shimoda.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Theodore R. Antenucci.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Mark Burnett.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Richard B. Fried.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Jonathan M. Glaser.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Mark D. Linehan.(8)
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Robert M. Moran, Jr.(8)
Indemnification Agreement, dated June 29, 1010, by and between Hudson Pacific Properties, Inc. and Barry A. Porter.(8)
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan.(5) *
Restricted Stock Award Grant Notice and Restricted Stock Award Agreement.(5) *
Hudson Pacific Properties, Inc. Director Stock Plan.(9) *
Employment Agreement, dated as of April 22, 2010, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Victor J. Coleman.(2) *
Employment Agreement, dated as of April 22, 2010, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Howard S. Stern.(2) *
Employment Agreement, dated as of May 14, 2010, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Mark T. Lammas.(4) *
Employment Agreement, dated as of April 22, 2010, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Christopher Barton.
(2) *
Employment Agreement, dated as of April 22, 2010, by and among Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. and Dale Shimoda.(2) *
Contribution Agreement by and among Victor J. Coleman, Howard S. Stern, Hudson Pacific Properties, L.P. and Hudson Pacific Properties, Inc., dated as of
February 15, 2010.(1)
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10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
Contribution Agreement by and among SGS investors, LLC, HFOP Investors, LLC, Soma Square Investors, LLC, Hudson Pacific Properties, L.P. and
Hudson Pacific Properties, Inc., dated as of February 15, 2010.(1)
Contribution Agreement by and among TMG-Flynn SOMA, LLC, Hudson Pacific Properties, L.P. and Hudson Pacific Properties, Inc., dated as of February
15, 2010.(1)
Contribution Agreement by and among Glenborough Fund XIV, L.P., Glenborough Acquisition, LLC, Hudson Pacific Properties, L.P. and Hudson Pacific
Properties, Inc. dated as of February 15, 2010.(1)
Representation, Warranty and Indemnity Agreement by and among Hudson Pacific Properties, Inc. Hudson Pacific Properties, L.P., and the persons
named therein as nominees of the Farallon Funds, dated as of February 15, 2010.(1)
Representation, Warranty and Indemnity Agreement by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and the persons
named therein as nominees of TMG-Flynn SOMA, LLC, dated as of February 15, 2010.(1)
Representation, Warranty and Indemnity Agreement by and among Hudson Pacific Properties, Inc. Hudson Pacific Properties, L.P., and the persons
named therein as nominees of Glenborough Fund XIV, L.P. dated as of February 15, 2010.(1)
Subscription Agreement by and among Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., Farallon Capital Institution Partners III,
L.P., Victor J. Coleman and Hudson Pacific Properties, Inc. dated as of February 15, 2010.(2)
Tax Protection Agreement between Hudson Pacific Properties, L.P. and the persons named therein, dated June 29, 2010.(7)
Agreement of Purchase and Sale and Joint Escrow Instructions between Del Amo Fashion Center Operating Company and Hudson Capital, LLC dated as
of May 18, 2010.(4)
Credit Agreement among Hudson Pacific Properties, Inc., Hudson Pacific Properties L.P., Barclays Capital and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (as successor in interest to Banc of America Securities LLC), as Joint Lead Arrangers, Bank of America, N.A., as Syndication Agent, and
Barclays Bank PLC, as Administrative Agent, and the other lenders party thereto, dated June 29, 2010.(7)
First Modification Agreement between Sunset Bronson Entertainment Properties, LLC and Wells Fargo Bank, N.A. dated as of June 29, 2010.(5)
Amended and Restated First Modification Agreement between Sunset Bronson Entertainment Properties, LLC and Wells Fargo Bank, N.A. dated as of
June 20, 2010.(7)
Loan Agreement among Sunset Bronson Entertainment Properties, L.L.C., as Borrower, Wachovia Bank, National Association, as Administrative Agent,
Wachovia Capital Markets, LLC, as Lead Arranger and Sole Bookrunner, and lenders party thereto, dated as of May 12, 2008.(6)
Conditional Consent Agreement between GLB Encino, LLC, as Borrower, and SunAmerica Life Insurance Company, as Lender, dated as of June 10, 2010.(6)
Amended and Restated Deed of Trust, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents between GLB
Encino, LLC, as Trustor, SunAmerica Life Insurance Company, as Beneficiary, and First American Title Insurance Company, as Trustee, dated as of
January 26, 2007.(6)
Amended and Restated Promissory Note by GLB Encino, as Maker, to SunAmerica Life Insurance Company, as Holder, dated as of January 26, 2007.(6)
Approval Letter from Wells Fargo, as Master Servicer, and CWCapital Asset Management, LLC, as Special Servicer to Hudson Capital LLC, dated as of
June 8, 2010.(6)
Loan and Security Agreement between Glenborough Tierrasanta, LLC, as Borrower, and German American Capital Corporation, as Lender, dated as of
November 28, 2006.(6)
Note by Glenborough Tierrasanta, LLC, as Borrower, in favor of German American Capital Corporation, as Lender, dated as of November 28, 2006.(6)
Reaffirmation, Consent to Transfer and Substitution of Indemnitor, by and among Glenborough Tierrasanta, LLC, Morgan Stanley Real Estate Fund V U.S.,
L.P., MSP Real Estate Fund V, L.P. Morgan Stanley Real Estate Investors, V U.S., L.P., Morgan Stanley Real Estate Fund V Special U.S., L.P., MSP Co-
Investment Partnership V, L.P., MSP Co-Investment Partnership V, L.P., Glenborough Fund XIV, L.P., Hudson Pacific Properties, L.P., and US Bank
National Association, dated June 29, 2010.(7)
Purchase and Sale Agreement, dated September 15, 2010, by and between ECI Washington LLC and Hudson Pacific Properties, L.P.(9)
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10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
12.1
22.1
23.1
31.1
31.2
32
99.1
First Amendment to Purchase and Sale Agreement, dated October 1, 2010, by and between ECI Washington LLC and Hudson Pacific Properties, L.P.(9)
Term Loan Agreement by and between Sunset Bronson Entertainment Properties, LLC and Sunset Gower Entertainment Properties, LLC, as Borrowers, and
Wells Fargo Bank, National Association, as Lender, dated February 11, 2011.(10)
Contract for Sale dated as of December 15, 2010 by and between Hudson 1455 Market, LLC and Bank of America, National Association.(12)
Contribution Agreement by and between BCSP IV U.S. Investments, L.P. and Hudson Pacific Properties, L.P., dated as of December 15, 2010.(13)
Limited Liability Company Agreement of Rincon Center JV LLC by and between Rincon Center Equity LLC and Hudson Rincon, LLC, dated as of
December 16, 2010.(13)
First Amendment to Credit Agreement among Hudson Pacific Properties, Inc., Hudson Pacific Properties L.P., Barclays Capital and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (as successor in interest to Banc of America Securities LLC), as Joint Lead Arrangers, Bank of America, N.A., as Syndication
Agent, and Barclays Bank PLC, as Administrative Agent, and the other lenders party thereto, dated December 10, 2010.(13)
Second Amendment to Credit Agreement among Hudson Pacific Properties, Inc., Hudson Pacific Properties L.P., Barclays Capital and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (as successor in interest to Banc of America Securities LLC), as Joint Lead Arrangers, Bank of America, N.A., as
Syndication Agent, and Barclays Bank PLC, as Administrative Agent, and the other lenders party thereto, dated April 4, 2011.(14)
First Amendment to Registration Rights Agreement by and among Hudson Pacific Properties, Inc., Farallon Capital Partners, L.P., Farallon Capital
Institutional Partners, L.P. and Farallon Capital Institutional Partners III, L.P., dated May 3, 2011. (11)
Subscription Amendment by and among Hudson Pacific Properties, Inc., Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P. and
Farallon Capital Institutional Partners III, L.P., dated April 26, 2011.(15)
Loan Agreement by and between Hudson Rincon Center, LLC, as Borrower, and JPMorgan Chase Bank, National Association, as Lender, dated April 29,
2011.(11)
Indemnification Agreement, dated October 1, 2011, by and between Hudson Pacific Properties, Inc. and Patrick Whitesell. (16)
2012 Outperformance Award Agreement.(17)*
Credit Agreement by and among Hudson Pacific Properties, L.P. and Wells Fargo Bank, National Association, as Administrative Agent, Wells Fargo
Securities, LLC, and Merrill Lynch, Pierce, Fenner and Smith Incorporated, as Lead Arrangers and Joint Bookrunners, Bank of America, N.A., and Barclays
Bank PLC, as Syndication Agents, and Keybank National Association, as Documentation Agent, dated August 3, 2012.
Limited Liability Company Agreement of Hudson MC Partners, LLC, dated as of November 8, 2012.(21)
Acquisition and Contribution Agreement between Media Center Development, LLC and P2 Hudson Partners, LLC for Pinnacle 2 Property Located at 3300
West Olive Avenue, Burbank, California.(21)
Loan Agreement dated as of November 8, 2012 between P1 Hudson MC Partners, LLC, as Borrower and Jefferies Loancore LLC, as Lender.(21)
First Amendment to Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan.(19)
2013 Outperformance Award Agreement.(20)
Hudson Pacific Properties, Inc. Revised Non-Employee Director Compensation Program.
Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 2012, 2011, 2010, 2009 and 2008.
List of Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certificate of Correction.(18)
55
Table of Contents
101
The following financial information from Hudson Pacific Properties, Inc.’s Quarterly Report on Form 10-K for the year ended December 31, 2012, formatted
in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated
Statements of Comprehensive Loss, (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated
Financial Statements **
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on April 9, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on May 12, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on June 3, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on June 11, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on June 14, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on June 22, 2010.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on July 1,
2010.
Previously filed with the Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on
November 22, 2010.
Previously filed with the Registration Statement on Form S-11/A filed by the Registrant with the Securities and Exchange Commission
on December 6, 2010.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on February
15, 2011.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on May 4,
2011.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on
December 21, 2010.
Previously filed with the Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on
April 14, 2011.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on April 5,
2011.
(15) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
(16) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
(17)
(18)
(19)
(20)
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January
6, 2012.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January
23, 2012.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on June 12,
2012.
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January
7, 2013.
(21) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
*
**
Denotes a management contract or compensatory plan or arrangement.
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes
of Section 18 of the Securities and Exchange Act of 1934 , as amended, and otherwise are not subject to liability under those sections.
56
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
March 14, 2013
HUDSON PACIFIC PROPERTIES, INC.
/s/ VICTOR J. COLEMAN
VICTOR J. COLEMAN
Chief Executive Officer (principal executive officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Victor J. Coleman, Howard
S. Stern and Mark T. Lammas, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our
capacities as officers and directors to enable Hudson Pacific Properties, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission in connection therewith, hereby ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/S/ VICTOR J. COLEMAN
Victor J. Coleman
/S/ MARK T. LAMMAS
Mark T. Lammas
/S/ HOWARD S. STERN
Howard S. Stern
/S/ HAROUT K. DIRAMERIAN
Harout K. Diramerian
/S/ RICHARD B. FRIED
Richard B. Fried
/S/ THEODORE R. ANTENUCCI
Theodore R. Antenucci
/S/ JONATHAN M. GLASER
Jonathan M. Glaser
/S/ MARK D. LINEHAN
Mark D. Linehan
/S/ ROBERT M. MORAN, JR.
Robert M. Moran, Jr.
/S/ BARRY A. PORTER
Barry A. Porter
/S/ PATRICK WHITESELL
Patrick Whitesell
Title
Chief Executive Officer and
Chairman of the Board of Directors (Principal Executive Officer)
Chief Financial Officer (Principal
Financial Officer)
President and Director
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
57
Date
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
March 14, 2013
Table of Contents
Report of Management on Internal Control over Financial Reporting
The management of Hudson Pacific Properties, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial
statements for external reporting purposes in accordance with United States generally accepted accounting principles. Our management, including the undersigned Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In conducting its
assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated
Framework. Based on this assessment, management concluded that, as of December 31, 2012, our internal control over financial reporting was effective based on those
criteria.
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal
controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 2012, has been audited by Ernst & Young LLP, the independent registered
public accounting firm that audited the consolidated financial statements included in this annual report, as stated in their report appearing on page F-2, which expresses
an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2012.
/S/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
/S/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
F-1
Table of Contents
To the Board of Directors and Stockholders of
Hudson Pacific Properties, Inc.
Report of Independent Registered Public Accounting Firm
We have audited Hudson Pacific Properties, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hudson Pacific Properties, Inc.’s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Hudson Pacific Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Hudson Pacific Properties, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows
for each of the three years in the period ended December 31, 2012, and our report dated March 14, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 14, 2013
F-2
Table of Contents
The Board of Directors and Stockholders of
Hudson Pacific Properties, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Hudson Pacific Properties, Inc. (the “Company”), as of December 31, 2012 and 2011, and
the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the three years in the period ended December 31, 2012. Our
audits also included the financial statement schedule listed in the Index at Iem 15(a). These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hudson Pacific Properties,
Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012 in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hudson Pacific Properties, Inc.’s
internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 14, 2013
F-3
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Table of Contents
ASSETS
REAL ESTATE ASSETS
Land
Building and improvements
Tenant improvements
Furniture and fixtures
Property under development
Total real estate held for investment
Accumulated depreciation and amortization
Investment in real estate, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Notes receivable
Straight-line rent receivables
Deferred leasing costs and lease intangibles, net
Deferred finance costs, net
Interest rate contracts
Goodwill
Prepaid expenses and other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Notes payable
Accounts payable and accrued liabilities
Below-market leases
Security deposits
Prepaid rent
TOTAL LIABILITIES
6.25% series A cumulative redeemable preferred units of the Operating Partnership
EQUITY
Hudson Pacific Properties, Inc. stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 authorized; 8.375% series B cumulative redeemable preferred stock, $25.00 liquidation
preference, 5,800,000 shares and 3,500,000 shares outstanding at December 31, 2012 and 2011, respectively
Common Stock, $0.01 par value, 490,000,000 authorized, 47,496,732 shares and 33,840,854 shares outstanding at December 31,
2012 and 2011, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total Hudson Pacific Properties, Inc. stockholders’ equity
Non-controlling interest - members in consolidated entities
Non-controlling common units in the Operating Partnership
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
December 31,
2012
December 31,
2011
$
$
$
$
$
493,211
867,268
79,966
11,548
23,962
1,475,955
(85,184 )
1,390,771
18,904
14,322
12,442
4,000
14,165
83,498
8,175
71
8,754
4,588
1,559,690
582,085
18,833
31,560
5,997
11,518
649,993
12,475
$
$
145,000
475
726,605
(1,287 )
(30,580 )
840,213
1,460
55,549
897,222
1,559,690
$
368,608
601,812
69,021
11,536
9,527
1,060,504
(53,329 )
1,007,175
13,705
9,521
8,963
—
10,801
84,131
5,079
164
8,754
4,498
1,152,791
399,871
12,469
22,861
5,651
10,795
451,647
12,475
87,500
338
552,043
(883 )
(13,685 )
625,313
—
63,356
688,669
1,152,791
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Revenues
Office
Rental
Tenant recoveries
Parking and other
Total office revenues
Media & entertainment
Rental
Tenant recoveries
Other property-related revenue
Other
Total media & entertainment revenues
Total revenues
Operating expenses
Office operating expenses
Media & entertainment operating expenses
General and administrative
Depreciation and amortization
Total operating expenses
Income from operations
Other expense (income)
Interest expense
Interest income
Unrealized gain on interest rate contracts
Acquisition-related expenses
Other (income) expenses
Net loss
Net income attributable to preferred stock and units
Net income attributable to restricted shares
Net loss (income) attributable to non-controlling interest in consolidated real estate entities
Net loss attributable to common units in the Operating Partnership
Net loss attributable to Hudson Pacific Properties, Inc. common shareholders
Net loss attributable to common shareholders’ per share — basic and diluted
Weighted average shares of common stock outstanding — basic and diluted
Dividends declared per common share
Twelve Months Ended December 31,
2011
2010
2012
$
$
$
$
$
93,945
22,157
9,921
126,023
23,598
1,598
14,733
204
40,133
166,156
53,577
24,340
16,497
57,024
151,438
14,718
$
75,343
22,102
7,763
105,208
21,617
1,539
13,638
187
36,981
142,189
44,740
22,446
13,038
44,660
124,884
17,305
19,071
(306 )
—
1,051
(92 )
19,724
(5,006 )
(12,924 )
(295 )
21
1,014
(17,190 ) $
17,480
(73 )
—
1,693
443
19,543
(2,238 )
(8,108 )
(231 )
(803 )
946
(10,434 ) $
22,247
3,115
1,141
26,503
20,931
1,571
11,397
238
34,137
60,640
10,212
19,815
4,493
15,912
50,432
10,208
8,831
(59 )
(347 )
4,273
192
12,890
(2,682 )
(817 )
(50 )
(119 )
418
(3,250 )
(0.41 ) $
(0.35 )
41,640,691
29,392,920
0.5000
$
0.5000
$
0.1921
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
Net loss
Other comprehensive loss: cash flow hedge adjustment
Comprehensive loss
Comprehensive income attributable to preferred stock and units
Comprehensive income attributable to restricted shares
Comprehensive (income) loss attributable to non-controlling interest in consolidated real estate entities
Comprehensive loss attributable to common units in the Operating Partnership
Comprehensive loss attributable to Hudson Pacific Properties, Inc. shareholders
Twelve Months Ended December 31,
2012
2011
2010
$
(5,006 ) $
(429 )
(2,238 ) $
(967 )
(5,435 )
(12,924 )
(295 )
21
1,039
(17,594 )
(3,205 )
(8,108 )
(231 )
(803 )
1,024
(11,323 )
(2,682 )
7
(2,675 )
(817 )
(50 )
(119 )
417
(3,244 )
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
Hudson Pacific Properties, Inc. Stockholders’ Equity
Common
Shares
Stock
Amount
Series B
Cumulative
Redeemable
Preferred Stock
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Deficit)
Income
Members’ Real
Estate Equity
Non-
controlling
Interests —
Common units
in the
Operating
Partnership
Non-controlling
Interest - Members
in Consolidated
Entities
Total Equity
Balance, January 1, 2010
— $
— $
— $
— $
— $
— $
— $
3,348 $
223,240 $
4,122
(1,703 )
Contributions
Distributions
Proceeds from sale of common
stock, net of underwriters
discount
Proceeds from private placement
Issuance of restricted stock
Shares repurchased
Issuance of Series B Cumulative
Redeemable Preferred Stock
Issuance of Common units for
acquisition of properties
Transaction related costs
Declared Dividend
Amortization of stock based
compensation
Acquisition of non-controlling
member’ s interest
Net income (loss)
Cash Flow Hedge Adjustment
Exchange of Members' equity for
common stock and units
Balance, December 31, 2010
Contributions
Distributions
Proceeds from sale of common
stock, net of underwriters'
discount
Proceed from private placement
Common stock issuance
transaction costs
Series B stock issuance
transaction costs
Issuance of restricted stock
Forfeiture of restricted stock
Shares repurchased
Declared Dividend
Amortization of stock based
compensation
Net income (loss)
Cash Flow Hedge Adjustment
14,720,000
1,176,471
490,442
147
12
4
87,500
(427 )
427
6,050,037
22,436,950
61
224 $
87,500 $
7,992,500
3,125,000
80
31
316,092
(7,535 )
(22,153 )
4
(1 )
(7,328 )
7,328
232,574
19,988
(4 )
(1 )
(11,241 )
(4,271 )
765
173,788
411,598 $
—
(432 )
110,928
45,657
(2,061 )
(600 )
(4 )
(303 )
(15,400 )
2,660
12,019
(502 )
(418 )
1
(828 )
(29 )
54,584
65,684 $
(2,491 )
— $
(3,482 )
6
283
(225,942 )
(3,482 ) $
6 $
— $
Balance, December 31, 2011
33,840,854 $
338 $
87,500 $
552,043 $
(13,685 ) $
F-7
(10,203 )
(1,304 )
(946 )
(78 )
63,356 $
— $
(889 )
(883 ) $
— $
226,588
4,122
(1,703 )
232,721
20,000
—
(1 )
87,500
12,019
(11,241 )
(5,200 )
765
(828 )
(3,219 )
7
—
561,530
—
(432 )
111,008
45,688
(2,061 )
(600 )
—
—
(304 )
(24,032 )
2,660
(3,821 )
(967 )
688,669
Table of Contents
Proceeds from sale of common
stock, net of underwriters’
discount
Contributions
Common stock issuance
transaction costs
Issuance of Series B Cumulative
Redeemable Preferred Stock
Series B stock issuance
transaction costs
Issuance of unrestricted stock
Issuance of restricted stock
Forfeiture of restricted stock
Shares repurchased
Declared Dividend
Amortization of stock based
compensation
Net income (loss)
Cash Flow Hedge Adjustment
Exchange of Non-controlling
Interests — Common units in the
Operating Partnership for
common stock
Balance, December 31, 2012
Hudson Pacific Properties, Inc. Stockholders’ Equity
Common
Shares
Stock
Amount
Series B
Cumulative
Redeemable
Preferred Stock
Additional
Paid in
Capital
Accumulated
Deficit
13,225,000
132
190,666
Accumulated
Other
Comprehensive
(Deficit)
Income
Members’ Real
Estate Equity
Non-
controlling
Interests —
Common units
in the
Operating
Partnership
Non-controlling
Interest - Members
in Consolidated
Entities
Total Equity
7,094
268,060
(1,474)
(71,180)
2
(727)
(1,870)
(2)
(1,385)
(21,972)
4,314
57,500
(12,144)
12,144
(16,895)
(404)
228,378
47,496,732 $
3
475 $
145,000 $
5,538
726,605 $
(30,580) $
(1,287) $
— $
The accompanying notes are an integral part of these consolidated financial statements.
F-8
1,481
(1,227)
(1,014)
(25)
(5,541)
55,549 $
(21)
1,460 $
190,798
1,481
(727)
57,500
(1,870)
—
—
(1,385)
(35,343)
4,314
(5,786)
(429)
—
897,222
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs and loan premium, net
Amortization of stock based compensation
Straight-line rent receivables
Amortization of above-market leases
Amortization of below-market leases
Amortization of lease incentive costs
Bad debt expense
Amortization of ground lease
Unrealized gain on interest rate contract
Change in operating assets and liabilities:
Restricted cash
Accounts receivable
Deferred leasing costs and lease intangibles
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Security deposits
Prepaid rent
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to investment property
Property acquisitions
Acquisition of notes receivable
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable
Payments of notes payable
Proceeds from issuance of common stock
Proceeds from private placement of common stock
Common stock issuance transaction costs
Proceeds from issuance of Series B cumulative redeemable preferred stock
Series B stock issuance transaction costs
Dividends paid to common stock and unit holders
Dividends paid to preferred stock and unit holders
Contributions by members
Distribution to members
Acquisition of non-controlling interest in consolidated real estate entity
Repurchase of vested restricted stock
Payment of loan costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
Supplemental disclosure of cash flow information
Cash paid for interest, net of amounts capitalized
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for investment in property
Accounts payable and accrued liabilities for distributions to members
Contribution of non-controlling member in consolidated real estate entity
Twelve Months Ended December 31,
2012
2011
2010
$
(5,006) $
(2,238) $
(2,682)
57,024
1,126
4,212
(3,365)
3,757
(7,321)
91
724
247
—
(4,801)
(4,203)
(5,496)
323
4,554
232
723
42,821
(27,150)
(392,320)
(4,000)
(423,470)
326,738
(143,761)
190,798
—
(727)
57,500
(1,870)
(23,199)
(12,924)
—
—
—
(1,385)
(5,322)
385,848
5,199
13,705
18,904
$
44,660
1,014
2,660
(4,098)
3,312
(3,961)
407
946
266
—
(5,400)
(5,431)
(4,188)
(361)
3,659
599
236
32,082
(16,385)
(114,219)
—
(130,604)
365,500
(384,958)
111,008
45,688
(2,061)
—
(600)
(16,704)
(8,108)
—
(432)
(41,131)
—
(4,850)
63,352
(35,170)
48,875
13,705
$
15,912
1,328
765
(3,768)
1,119
(1,186)
135
36
63
(347)
1,571
(3,817)
(1,309)
(137)
626
907
(1,597)
7,619
(11,629)
(230,527)
—
(242,156)
116,385
(157,786)
232,720
20,000
—
87,500
(11,241)
(4,773)
(816)
4,122
(1,703)
(828)
—
(3,862)
279,718
45,181
3,694
48,875
18,586
$
16,644
$
7,870
(751) $
—
1,481
$
$
1,701
$
3,477
359
$
—
$
—
—
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
1. Organization
Notes to Consolidated Financial Statements
(In thousands, except square footage and share data)
Hudson Pacific Properties, Inc. (which is referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on
November 9, 2009 that did not have any meaningful operating activity until the consummation of our initial public offering and the related acquisition of our predecessor
and certain other entities on June 29, 2010 (“IPO”). Concurrently with the closing of our IPO, we combined with our predecessor and Howard Street Associates, LLC and
acquired certain other entities.
We have determined that one of the entities comprising our predecessor, SGS Realty II, LLC, was the acquirer for accounting purposes in our formation
transactions that occurred in connection with our IPO. In addition, we have concluded that any interests contributed by the controlling member of the other entities
comprising our predecessor and Howard Street Associates, LLC in connection with our IPO was a transaction between entities under common control. As a result, the
contribution of interests in each of these entities has been recorded at historical cost.
Since the completion of the IPO, the concurrent private placement, and the related formation transactions that occurred on June 29, 2010, we have been a fully
integrated, self-administered, and self-managed real estate investment trust (“REIT”). Through our controlling interest in Hudson Pacific Properties, L.P. (our “Operating
Partnership”) and its subsidiaries, we own, manage, lease, acquire and develop real estate, consisting primarily of office and media and entertainment properties. As of
December 31, 2012, we owned a portfolio of 19 office properties and two media and entertainment properties. All of these properties are located in California. The results
of operations for properties acquired after our IPO are included in our consolidated statements of operations from the date of each such acquisition.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
The effect of all significant intercompany balances and transactions has been eliminated.
Any reference to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s
audits of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
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 on-going 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.
Investment in Real Estate Properties
The properties are carried at cost less accumulated depreciation and amortization. The Company assigns the cost of an acquisition, including the assumption of
liabilities, to the acquired tangible assets and identifiable intangible assets and liabilities based on their estimated fair values in accordance with GAAP. The Company
assesses fair value based on estimated cash flow projections that utilize discount and/or capitalization rates and available market information. 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.
Acquisition-related expenses associated with acquisition of operating properties are expensed in the period incurred.
The Company records acquired “above and below” market leases at fair value using 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
F-10
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
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 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, legal and other related costs.
The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs
directly related and essential to the acquisition, development or construction of a real estate project. Indirect development costs, including salaries and benefits, office
rent, and associated costs for those individuals directly responsible for and who spend all of their time on development activities are also capitalized and allocated to the
projects to which they relate. Interest is capitalized on the construction in progress at a rate equal to the Company’s weighted average cost of our debt. Construction
and development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as
substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year after cessation of major construction
activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred.
Costs previously capitalized related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as
incurred.
The Company computes depreciation using the straight-line method over the estimated useful lives of a range of 39 years for building and improvements, 15
years for land improvements, five or seven years for furniture and fixtures and equipment, and over the shorter of asset life or life of the lease for tenant improvements.
Above- and below-market lease intangibles are amortized to revenue over the remaining non-cancellable lease terms and bargain renewal periods, if applicable. Other in-
place lease intangibles are amortized to expense over the remaining non-cancellable lease term. Depreciation is discontinued when a property is identified as held for sale.
Impairment of Long-Lived Assets
The Company assesses the carrying value of real estate assets and related intangibles whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable in accordance with GAAP. Impairment losses are recorded on real estate assets held for investment when
indicators of impairment are present and the future undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The
Company recognizes impairment losses to the extent the carrying amount exceeds the fair value of the properties. Properties held for sale are recorded at the lower of cost
or estimated fair value less cost to sell. The Company did not record any impairment charges related to its real estate assets and related intangibles during the twelve
months ended December 31, 2012 and 2011. There were no properties held for sale at December 31, 2012 or 2011.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets acquired and liabilities assumed in
business combinations. Our goodwill balance as of December 31, 2012 is $8,754. We do not amortize this asset but instead analyze it on an annual basis for impairment.
No impairment indicators have been noted during the twelve months ended December 31, 2012 and 2011.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks plus all short-term investments with a maturity of three months or less when purchased.
The Company maintains some of its cash in bank deposit accounts that, at times, may exceed the federally insured limit. No losses have been experienced
related to such accounts.
Restricted Cash
Restricted cash consists of amounts held by lenders to provide for future real estate taxes and insurance expenditures, repairs and capital improvements
reserves, general and other reserves and security deposits.
F-11
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due for monthly rents and other charges. The Company maintains an allowance for doubtful accounts for estimated
losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and
creditworthiness of its tenants and operators on an ongoing basis. This evaluation considers industry and economic conditions, property performance, credit
enhancements and other factors. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease.
At December 31, 2012 and 2011 respectively, the Company has reserved $8 and $0 of straight-line receivables. The Company evaluates the collectability of accounts
receivable based on a combination of factors. The allowance for doubtful accounts is based on specific identification of uncollectible accounts and the Company’s
historical collection experience. The Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due, the current
business environment and the Company’s historical experience. Historical experience has been within management’s expectations. The Company recognized $724, $946
and $36 of bad debt expense for the twelve months ended December 31, 2012, 2011 and 2010, respectively.
Accounts receivable is net of allowance for uncollectible tenant receivables of $1,598 and $1,435 as of December 31, 2012 and 2011, respectively.
Notes Receivable
Notes receivable consist of a loan we acquired on August 14, 2012 from Jeffries LoanCore LLC in the amount of $4.0 million. The borrower under the loan is WIP
3401 Expo BLVD Mezz, LLC (“WEBM”), which is the sole member of WIP 3401 Expo BLVD, LLC (“WEB”), the owner of a property located at 3401 Exposition Blvd. in
Santa Monica, California. The property is an approximately 55,000 square foot office and industrial building currently being renovated for creative office uses. The loan is
secured by, among other things, WEBM’s membership interest in WEB, bears interest at the rate of LIBOR plus 1300 basis points (subject to a 100 basis points floor on
LIBOR), and is scheduled to mature on June 9, 2014, subject to three one-year extension options. The interest recognized on this loan is included in interest income in the
accompanying consolidated statements of operations. The carrying value of the loan approximates fair value as it was negotiated based upon fair value of loans with
similar characteristics. The loan generated income of $222 for the twelve months ended December 31, 2012.
Revenue Recognition
The Company recognizes rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has
taken possession or controls the physical use of the leased asset. If the lease provides for tenant improvements, the Company determines whether the tenant
improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not
considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When
the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of
revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
• whether the lease stipulates how and on what a tenant improvement allowance may be spent;
• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
• whether the tenant improvements are unique to the tenant or general-purpose in nature; and
• whether the tenant improvements are expected to have any residual value at the end of the lease.
Certain leases provide for additional rents contingent upon a percentage of the tenant’s revenue in excess of specified base amounts or other thresholds. Such
revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. Such revenue is recognized
only after the contingency has been removed (when the related thresholds are achieved), which may result in the recognition of rental revenue in periods subsequent to
when such payments are received.
F-12
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Other property-related revenue is revenue that is derived from the tenants’ use of lighting, equipment rental, parking, power, HVAC and telecommunications
(phone and internet). Other property-related revenue is recognized when these items are provided.
Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in
the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Company is generally the primary obligor with respect to
purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.
The Company recognizes gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the
full accrual method when (i) the collectability of the sales price is reasonably assured, (ii) the Company is not obligated to perform significant activities after the sale, (iii)
the initial investment from the buyer is sufficient and (iv) other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in
part until the requirements for gain recognition have been met.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the respective loan.
Derivative Financial Instruments
The Company manages interest rate risk associated with borrowings by entering into interest rate derivative contracts. The Company recognizes all derivatives
on the consolidated balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value and the changes in fair value are reflected as income or expense.
If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income, which is a component of equity. The ineffective portion of a
derivative’s change in fair value is immediately recognized in earnings.
The Company held two interest rate contracts as of December 31, 2012, which have been accounted for as cash flow hedges as more fully described in note 7
below. The Company held one interest rate contract at December 31, 2011, which has been accounted for as a cash flow hedge as more fully described in note 7 below.
Stock-Based Compensation
Accounting Standard Codification, or ASC, Topic 718, Compensation—Stock Compensation (referred to as ASC Topic 718 and formerly known as FASB
123R), requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, restricted stock units and
performance units under our equity incentive award plans are accounted for under ASC Topic 718. Our compensation committee will regularly consider the accounting
implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs.
Income Taxes
Our taxable income prior to the completion of our IPO is reportable by the members of the limited liability companies that comprise our predecessor. Our
property-owning subsidiaries are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made
for federal income taxes in the accompanying consolidated financial statements for the activities of these entities.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year. To qualify
as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code
relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are
generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail
to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject
to federal income tax at regular corporate rates, including any applicable alternative minimum tax.
F-13
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
We have elected, together with one of our subsidiaries, to treat such subsidiary as a taxable REIT subsidiary (“TRS”) for federal income tax purposes. Certain
activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is
subject to federal and state income taxes.
The Company is subject to the statutory requirements of the state in which it conducts business.
The Company periodically evaluates its tax positions to evaluate whether it is more likely than not that such positions would be sustained upon examination by
a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of December 31, 2012, the Company has not established a
liability for uncertain tax positions.
Fair Value of Assets and Liabilities
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to
measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate and long-lived assets). Fair value is
defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three
categories:
•
•
•
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-
derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and
unobservable.
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or
Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might
not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price
quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company
determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the
Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by
assigning weights to the various valuation sources.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
The Company considers the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on
current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously
were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is
a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or
quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for
the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new
issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal-to-
principal market).
The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before
the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions,
(ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near
F-14
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is
an outlier when compared with other recent transactions for the same or similar assets or liabilities.
The Company’s interest rate contract agreements are classified as Level 2 and their fair value is derived from estimated values obtained from observable market
data for similar instruments.
As of December 31, 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
Interest Rate Caps
Number of Instruments
2
Notional Amount
$92.0 million
Non-designated Hedges
For the twelve months ended December 31, 2012 and 2011, all of the Company’s derivatives were designated as cash flow hedges.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31,
2012 and December 31, 2011.
Asset Derivatives
Liability Derivative
Fair Value as of
Fair Value as of
Balance Sheet
Location
December 31,
2012
December 31,
2011
Balance Sheet
Location
December 31,
2012
December 31,
2011
Derivatives designated as hedging instruments:
Interest rate products
Interest rate
contracts
Total
$
$
71
$
71
$
164
164
Interest rate
contracts
—
—
—
—
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of the Company’s derivative financial instruments on the Statement of Operations for the twelve months ended
December 31, 2012 and 2011.
Beginning Balance of OCI related to interest rate contracts
Unrealized Loss Recognized in OCI Due to Change in Fair Value of interest rate contracts
Loss Reclassified from OCI into Income (as Interest Expense)
Net Change in OCI
Ending Balance of Accumulated OCI Related to Derivatives
Credit-risk-related Contingent Features
As of December 31, 2012, the Company did not have any derivatives that were in a net liability position.
F-15
Twelve Months Ended
December 31,
2012
2011
1,036
457
(28)
429
1,465
69
1,041
(74)
967
1,036
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Recently Issued Accounting Literature
Changes to GAAP are established by the FASB in the form of ASUs. We consider the applicability and impact of all ASUs. Recently issued ASUs not listed
below are not expected to have a material impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact
is expected to be immaterial.
In June 2011, the FASB issued Accounting Standard Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.
This ASU requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in
a single continuous statement of comprehensive income, or in two separate but consecutive statements. This ASU eliminates the option to present the components of
other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011, which for the Company means the first quarter of 2012. The Company adopted this guidance in the first quarter of 2012 and it did not
have an effect on its financial position or results of operations as it only affected presentation.
3. Investment in Real Estate
A summary of the activity of our investment in real estate is as follows:
Year ended December 31,
2012
Year ended December 31,
2011
Year ended December 31,
2010
Investment in real estate
Beginning balance
Acquisitions
Improvements, capitalized costs
Disposal
Cost of property sold
Ending Balance
Accumulated depreciation
Beginning balance
Additions
Deletions
Ending Balance
$
$
$
$
$
1,060,504
390,370
27,901
(2,820)
—
1,475,955
$
(53,329) $
(34,675)
2,820
(85,184) $
$
864,735
181,926
14,354
(511)
—
1,060,504
$
(27,113) $
(26,727)
511
(53,329) $
428,414
421,262
15,059
—
—
864,735
(16,329)
(10,784)
—
(27,113)
During 2011, we acquired the 604 Arizona property, the 275 Brannan property, the 625 Second Street property, the 6922 Hollywood Boulevard property, and the
6050 Ocean Way/1455 N. Beachwood property. The results of operations for each of these acquisitions are included in our consolidated statements of operations from
the date of acquisition. The following table represents our purchase price accounting for these acquisitions:
F-16
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Date of Acquisition
Consideration paid
Cash consideration
Debt Assumed
Total consideration
Allocation of consideration paid
Investment in real estate, net
Above-market leases
Leases in-place
Other lease intangibles
Fair market unfavorable debt value
Below-market leases
Other (liabilities) asset assumed, net
604 Arizona
275 Brannan
625 Second Street
6922 Hollywood
Boulevard
6050 Ocean
Way/1455 N.
Beachwood
July 26, 2011
August 19, 2011
September 1,
2011
November 22, 2011 December 12, 2011
Total
$
$
21,373
—
21,373
$
$
12,370
—
12,370
$
$
20,366
—
1,121
117
—
(104)
(127)
12,250
—
—
—
—
—
120
12,370
$
23,419
33,700
57,119
$
$
53,394
465
2,799
1,286
(490)
(1,054)
719
57,119
$
50,555
42,247
92,802
$
$
88,999
2,571
4,767
2,028
(1,600)
(4,265)
302
92,802
$
6,502
—
6,502
$
$
114,219
75,947
190,166
6,916
—
—
—
—
(416)
2
6,502
$
181,925
3,036
8,687
3,431
(2,090)
(5,839)
1,016
190,166
Total consideration paid
$
21,373
$
In addition, on April 29, 2011 we acquired the remaining 49% interest in the Rincon Center property for approximately $38.7 million (before closing costs and
prorations).
During 2012, we acquired the 10900 Washington property, the 901 Market Street property, the Olympic Bundy property, the 1455 Gordon Street property and
Pinnacle I property. The results of operations for each of these acquisitions are included in our consolidated statements of operations from the date of acquisition. The
following table represents our purchase price accounting for each of these acquisitions:
Date of Acquisition
Consideration paid
Cash consideration
Debt Assumed
Non-controlling interest in consolidated real
estate entity
Total consideration
Allocation of consideration paid
Investment in real estate, net
Above-market leases
Leases in-place
Other lease intangibles
Fair market unfavorable debt value
Below-market leases
Other (liabilities) asset assumed, net
Total consideration paid
$
$
$
10900
Washington
901 Market
Olympic Bundy
1455 Gordon
Street
April 5, 2012
June 1, 2012
September 5,
2012
September 21,
2012
Pinnacle I
November 8,
2012
Total
2,605
—
—
2,605
2,600
—
—
—
—
—
5
2,605
$
$
$
$
90,871
—
—
90,871
$
97,187
—
2,968
548
—
(10,249)
417
90,871
$
$
88,436
—
—
88,436
$
88,024
—
1,325
46
—
(666)
(293)
2,385
—
—
2,385
$
$
$
208,023
—
1,481
209,504
$
2,384
—
96
22
—
(27)
(90)
200,175
167
11,710
3,456
—
(5,076)
(928)
88,436
$
2,385
$
209,504
$
392,320
—
1,481
393,801
390,370
167
16,099
4,072
—
(16,018)
(889)
393,801
The table below shows the pro forma financial information for the twelve months ended December 31, 2012 and 2011 as if the 2012 and 2011 properties had been
acquired as of January 1, 2011.
F-17
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Table of Contents
Total revenues
Net loss
4. Lease Intangibles
The following summarizes our deferred leasing cost and lease intangibles as of:
Above-market leases
Lease in-place
Below-market ground leases
Other lease intangibles
Lease commissions
Deferred leasing costs
Accumulated amortization
Deferred leasing costs and lease intangibles, net
Below-market leases
Accumulated accretion
Below-market leases, net
$
$
$
Twelve Months Ended December
31,
2012
2011
$
$
185,311
$
(5,676) $
186,512
(1,165)
December 31,
2012
December 31,
2011
$
18,221
68,477
7,513
32,664
629
11,632
139,136
(55,638)
83,498
$
46,042
(14,482)
31,560
18,748
53,876
7,513
29,245
642
7,988
118,012
(33,881)
84,131
30,418
(7,557)
22,861
During the years ended December 31, 2012, 2011 and 2010, the Company recognized $19,822, $17,671, and $4,932, respectively, of amortization expense related to lease
costs and in-place leases, and amortized $3,757, $3,312, and $1,119, respectively, of above-market leases against rental revenue. As of December 31, 2012, the weighted-
average amortization period for lease intangibles is 6.93 years.
As of December 31, 2012, the estimated aggregate amortization of deferred leasing costs and lease intangible assets, net for each of the next five years and
thereafter are as follows:
Year ended
2013
2014
2015
2016
2017
Thereafter
Deferred leasing costs
and lease intangibles,
net
$
$
22,710
14,888
12,839
10,069
7,029
15,963
83,498
During the years ended December 31, 2012, 2011 and 2010, the Company amortized $7,321, $3,961, and $1,186, respectively of below-market leases in rental
revenue. As of December 31, 2012, the weighted-average amortization period for below-market leases is 7.27 years.
As of December 31, 2012 the estimated amortization of below-market leases, net for each of the next five years and thereafter are as follows:
F-18
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Table of Contents
Year ended
2013
2014
2015
2016
2017
Thereafter
5. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following as of:
Prepaid insurance
Prepaid property taxes
Corporate furniture, fixtures and equipment, net of accumulated depreciation of $499 and $467 respectively
Trade name, net of accumulated amortization of $548 and $446, respectively
Other
Below Market Lease
$
$
7,268
4,066
3,735
3,501
3,149
9,841
31,560
December 31, 2012
2,809
48
167
473
1,091
4,588
December 31, 2011
2,259
69
182
575
1,413
4,498
Trade name is being amortized over a 10-year period from the date of acquisition of our Sunset Gower property on August 17, 2007.
6. Notes Payable
Senior Unsecured Revolving Credit Facility
On August 3, 2012, we replaced our $200.0 million secured revolving credit facility with a $250.0 million unsecured revolving credit facility with a group of
lenders for which Wells Fargo Bank, N.A., acts as administrative agent and its affiliate acts as joint lead arranger, Bank of America, N.A., acts as joint lead arranger and,
together with Barclays Capital Inc., acts as joint syndication agent, and Keybank, N.A., acts as documentation agent. Our Operating Partnership is the borrower under
our new unsecured revolving credit facility. The unsecured revolving credit facility is required to be guaranteed by us and all of our subsidiaries that own unencumbered
properties. The unsecured revolving credit facility includes an accordion feature that allows us to increase the availability by $150.0 million, to $400.0 million, under
specified circumstances and subject to receiving commitments from lenders.
Our unsecured revolving credit facility bears interest at a rate per annum equal to LIBOR plus 155 basis points to 220 basis points, depending on our leverage
ratio. If the Company obtains a credit rating for its senior unsecured long-term indebtedness, it may make an irrevocable election to change the interest rate for the
unsecured revolving credit facility to a rate per annum equal to LIBOR plus 100 basis points to 185 basis points, depending on the credit rating. Our unsecured revolving
credit facility is subject to a facility fee in an amount equal to our unused commitments multiplied by a rate per annum equal to 25 to 35 basis points, depending on our
usage of the unsecured revolving credit facility, or, if we make the credit rating election, in an amount equal to the aggregate amount of our commitments multiplied by a
rate per annum equal to 15 to 45 basis points, depending upon the credit rating. The amount available for us to borrow under the unsecured revolving credit facility is
subject to compliance with certain covenants, including the following financial covenants:
•
•
a maximum leverage ratio (defined as consolidated total indebtedness plus our pro rata share of indebtedness of unconsolidated affiliates to total asset value) of
0.60:1.00;
a minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) plus our pro rata
share of EBITDA of unconsolidated affiliates to fixed charges) of 1.50:1.00;
F-19
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
•
•
•
•
a maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness plus our pro rata share of secured indebtedness of
unconsolidated affiliates to total asset value) of 0.60:1:00 through and including August 3, 2014 and 0.55:1:00 thereafter;
a maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness plus our pro rata share of unsecured indebtedness of
unconsolidated affiliates to total unencumbered asset value) of 0.60:1:00;
a minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties plus our pro rata share of net
operating income from unencumbered properties to unsecured interest expense) of 1.60:1.00; and
a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the unsecured revolving credit facility but including
unsecured lines of credit to total asset value) of 0.15:1.00.
In addition to these covenants, the unsecured revolving credit facility also includes certain limitations on dividend payouts and distributions, limits on certain
types of investments outside of our primary business, and other customary affirmative and negative covenants. Our ability to borrow under the unsecured revolving
credit facility is subject to continued compliance with these covenants.
As of December 31, 2012, we were in compliance with our unsecured revolving credit facility’s financial covenants. As of December 31, 2012, we had
approximately $204.1 million of total capacity under our unsecured revolving credit facility, of which $55.0 million had been drawn. Subsequent to December 31, 2012, we
drew an additional $5.0 million on our unsecured credit facility for a total outstanding balance of $60.0 million, which was then paid off as a result of the February 2013
Common Stock Offering (see FN 15 for more information).
The following table sets forth information as of December 31, 2012 with respect to our outstanding indebtedness.
Debt
Unsecured Revolving Credit Facility
Mortgage loan secured by 625 Second Street(2)
Mortgage loan secured by 6922 Hollywood Boulevard(3)
Mortgage loan secured by 275 Brannan(4)
Mortgage loan secured by Sunset Gower/Sunset Bronson(5)
Mortgage loan secured by 901 Market(6)
Mortgage loan secured by Rincon Center
Mortgage loan secured by First Financial(7)
Mortgage loan secured by 10950 Washington
Mortgage loan secured by Pinnacle I(8)
Subtotal
Unamortized loan premium, net(9)
Total
Outstanding
December 31,
2012
December 31,
2011
$
$
$
55,000
33,700
41,243
138
92,000
49,600
107,492
43,000
29,711
129,000
580,884
1,201
582,085
$
$
$
121,000
33,700
42,174
—
92,000
—
109,032
—
—
—
397,906
1,965
399,871
Interest Rate (1)
Maturity Date
LIBOR+1.55% to 2.20%
5.85%
5.58%
LIBOR+2.00%
LIBOR+3.50%
LIBOR+2.25%
5.134%
4.58%
5.316%
3.954%
8/3/2016
2/1/2014
1/1/2015
10/5/2015
2/11/2016
10/31/2016
5/1/2018
2/1/2022
3/11/2022
11/7/2022
__________________
(1) Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed, excluding the amortization of loan fees and costs.
(2) This loan was assumed on September 1, 2011 in connection with the closing of our acquisition of 625 Second Street property.
(3) This loan was assumed on November 22, 2011 in connection with the closing of our acquisition of the 6922 Hollywood Boulevard property.
(4) On October 5, 2012, we obtained a loan for our 275 Brannan property pursuant to which we have the ability to draw up to $15,000 for budgeted base building, tenant improvements, and
other costs associated with the renovation and lease-up of that property.
(5) On March 16, 2011, we purchased an interest rate cap in order to cap one-month LIBOR at 3.715% with respect to $50.0 million of the loan through its maturity on February 11, 2016. On
January 11, 2012 we purchased an interest rate cap in order to cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan through its maturity on February 11, 2016.
Beginning with the payment due February 1, 2014, monthly debt service will include principal payments based on a 30-year amortization schedule, for total annual debt amortization of
$1,410.
(6) On October 29, 2012, we obtained a loan for our 901 Market property pursuant to which we borrowed $49,600 upon closing, with the ability to draw up to an additional $11,900 for
budgeted base building, tenant improvements, and other costs associated with the renovation and lease-up of that property.
(7) The loan bears interest only for the first two years. Beginning with the payment due March 1, 2014, monthly debt service will include principal payments based on a 30-year amortization
schedule, for total annual debt service of $2,639.
(8) The loan bears interest only for the first five years. Beginning with the payment due December 6, 2017, monthly debt service will include principal payments based on a 30-year
amortization schedule, for total annual debt service of $7,349.
(9) Represents unamortized amount of the non-cash mark-to-market adjustment on debt associated with 625 Second Street and 6922 Hollywood Boulevard.
F-20
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
The Company presents its financial statements on a consolidated basis. Notwithstanding such presentation, except to the extent expressly indicated, such as in
the case of the project financing for our Sunset Gower and Sunset Bronson properties, our separate property owning subsidiaries are not obligors of or under the debt of
their respective affiliates and each property owning subsidiary’s separate liabilities do not constitute obligations of its respective affiliates.
The minimum future annual principal payments due on our secured and unsecured notes payable at December 31, 2012, excluding the non-cash loan premium
amortization, were as follows (in thousands):
Year ended
2013
2014
2015
2016
2017
Thereafter
Total
7. Interest Rate Contracts
Principal Payments
$
$
107,731
38,787
43,498
92,481
3,456
294,931
580,884
On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A., secured by our Sunset Gower and Sunset Bronson
media and entertainment campuses. The loan bears interest at a rate equal to one-month LIBOR plus 3.50%. On March 16, 2011, we purchased an interest rate cap in
order to cap one-month LIBOR at 3.715% on $50.0 million of the loan through its maturity on February 11, 2016. On January 11, 2012, we purchased an interest rate cap in
order to cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan through its maturity on February 11, 2016. We designated both of these interest rate cap
contracts as a cash flow hedges for accounting purposes.
The combined fair market value of the interest rate caps at December 31, 2012 and December 31, 2011 was $71 and $164, respectively.
8. Future Minimum Base Rents and Lease Payments Future Minimum Rents
Our properties are leased to tenants under operating leases with initial term expiration dates ranging from 2012 to 2020. Approximate future combined minimum
rentals (excluding tenant reimbursements for operating expenses and without regard to cancellation options) for properties at December 31, 2012 are as follows for the
years/periods ended December 31. The table does not include rents under leases at our media and entertainment properties with terms of one year or less.
Year ended
2013
2014
2015
2016
2017
Thereafter
Total future minimum rents
Future Minimum Base
Rents
$
$
104,126
100,547
94,944
89,453
71,413
146,675
607,158
Future Minimum Lease Payments
In conjunction with the acquisition of the Sunset Gower property, our subsidiary, SGS Realty II, LLC, assumed a ground lease agreement (expiring March 31,
2060) for a portion of the land with an unrelated party. The rental rate is subject to
F-21
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
adjustment in March 2011 and every seven years thereafter. As a result of the March 2011 rent adjustment, monthly rent increased to $31, whereas the monthly rent
totaled $14 at the time of acquisition.
In conjunction with the acquisition of the Del Amo Office building, our subsidiary, Hudson Del Amo Office, LLC, assumed a ground sublease (expiring June 30,
2049) with an unrelated party. Rent under the ground sublease is $1.00 per year, with the sublessee being responsible for all impositions, insurance premiums, operating
charges, maintenance charges, construction costs and other charges, costs and expenses that arise or may be contemplated under any provisions of the ground
sublease.
In conjunction with the acquisition of the 9300 Wilshire Boulevard building, our subsidiary, Hudson 9300 Wilshire, LLC, assumed a ground lease (expiring
August 14, 2032) with an unrelated party. Minimum rent under the ground lease is $75 per year (additional rent under this lease of 6% of gross rentals less minimum rent,
as defined in such lease, is not included in this amount).
In conjunction with the acquisition of the 222 Kearny Street building, our subsidiary, Hudson 222 Kearny, LLC, assumed a ground lease (expiring June 14, 2054)
with an unrelated party. Minimum rent under the ground lease is the greater of $975 per year or 20.0% of the first $8,000 of the tenant’s “Operating Income” during any
“Lease Year,” as such terms are defined in the ground lease. The chart below reflects the $975 per year lease payment.
The following table provides information regarding our future minimum lease payments at December 31, 2012 under these lease agreements.
Year ended
2013
2014
2015
2016
2017
Thereafter
Total future minimum rents
9. Fair Value of Financial Instruments
Future Minimum
Lease Payments
$
$
1,417
1,417
1,417
1,417
1,417
52,242
59,327
The carrying values of cash and cash equivalents, restricted cash, receivables, payables, and accrued liabilities are reasonable estimates of fair value because of
the short-term maturities of these instruments. Fair values for notes payable are estimates based on rates currently prevailing for similar instruments of similar maturities
using Level 2 instruments. The estimated fair values of interest-rate contract/cap arrangements were derived from estimated values based on observable market data for
similar instruments.
Notes payable
Derivative assets, disclosed as “Interest rate contracts”
$
$
582,085
71
$
588,191
71
$
399,871
164
404,144
164
December 31, 2012
December 31, 2011
Carrying
Value
Fair Value
Carrying
Value
Fair Value
10. Equity
Non-controlling Interests
Common units in the Operating Partnership
Common units in the operating partnership consisted of 2,382,563 common units of partnership interests, or common units, not owned by us. Common units and
shares of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss distributions of our operating
partnership. Investors who own common units have the right to cause our operating partnership to redeem any or all of their common units for cash equal to the then-
current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis. In February
F-22
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
2012, one of our common unit holders required us to redeem 155,878 common units, and in December 2012, one of our common unit holders required us to redeem 72,500
common units. In both cases we elected to issue shares of our common stock to satisfy the redemption and our outstanding common units decreased from 2,610,941
common units outstanding to the current 2,382,563 common units outstanding, with a corresponding increase to our outstanding common stock as of the date of such
redemptions, as reflected in the table below.
Redeemable non-controlling interest in consolidated real estate entity
Redeemable non-controlling interest in consolidated real estate entity relates to a joint venture relationship with an affiliate of Beacon Capital Partners
(“Beacon”), an unrelated third party, in the Rincon Center property. We acquired a 51% interest in a 585,000 square foot commercial space owned by Beacon as
described in note 3. We had a call right and Beacon had a put right that, if exercised, obligated us to make an additional investment to acquire the remaining 49% interest
in the Rincon Center joint venture in the second quarter of 2011. On February 24, 2011, we exercised the call right and completed the acquisition of Beacon’s 49% interest
on April 29, 2011 for a purchase price of $38.7 million (before closing costs and prorations).
Non-controlling interest — members in consolidated entities
Non-controlling interest — members in consolidated entities refers to our joint venture partner, Media Center Partners, LLC, a California limited liability
company (“MCP”), as to which we have entered into a joint venture, P1 Hudson MC Partners, LLC, a Delaware limited liability company (the “Pinnacle JV”), to acquire
The Pinnacle, a two-building (Pinnacle I and Pinnacle II), 625,640 square foot, office property located in Burbank, California. As if December 31, 2012 we acquired a
98.25% interest in the Pinnacle JV, which owned the 393,776 square foot building located in Burbank, California.
6.25% series A cumulative redeemable preferred units of the Operating Partnership
Our Operating Partnership has issued 499,014 of its 6.25% series A cumulative redeemable preferred units, or series A preferred units, that are not owned by us.
These series A preferred units are entitled to preferential distributions at a rate of 6.25% per annum on the liquidation preference of $25.00 per unit and are convertible at
the option of the holder into common units or redeemable into cash or, at our option, exchangeable for registered shares of common stock, in each case after June 29,
2013.
8.375% Series B Cumulative Redeemable Preferred Stock
We have issued 5,800,000 shares of our 8.375% series B cumulative redeemable preferred stock, $0.01 par value per share, or series B preferred stock. In
December 2010, we completed the public offering of 3,500,000 share of our series B preferred stock (including 300,000 shares of series B preferred stock issued and sold
pursuant to the exercise of the underwriters’ over-allotment option in part). Total proceeds from the offering, after deducting underwriting discount, were approximately
$83.9 million (before transaction costs). On January 23, 2012, we completed the public offering of 2,300,000 of our series B cumulative preferred stock (including 300,000
shares of series B preferred stock issued and sold pursuant to the exercise of the underwriters’ over-allotment option in full). Total proceeds from the offering, after
deducting underwriting discount, were approximately $57.5 million (before transaction costs).
Dividends on our series B preferred stock are cumulative from the date of original issue and payable quarterly on or about the last calendar day of each March,
June, September and December, at the rate of 8.375% per annum of its $25.00 per share liquidation preference (equivalent to $2.0938 per share per annum). If following a
change of control of the Company, either our series B preferred stock (or any preferred stock of the surviving entity that is issued in exchange for our series B preferred
stock) or the common stock of the surviving entity, as applicable, is not listed on the New York Stock Exchange, or NYSE, or quoted on the NASDAQ Stock Market, or
NASDAQ (or listed or quoted on a successor exchange or quotation system), holders of our series B preferred stock will be entitled to receive cumulative cash dividends
from, and including, the first date on which both the change of control occurred and either our series B preferred stock (or any preferred stock of the surviving entity that
is issued in exchange for our series B preferred stock) or the common stock of the surviving entity, as applicable, is not so listed or quoted, at the increased rate of
12.375% per annum per share of the liquidation preference of our series B preferred stock (equivalent to $3.09375 per annum per share) for as long as either our series B
preferred stock (or any preferred stock of the surviving entity that is issued in exchange for our series B preferred stock) or the common stock of the surviving entity, as
applicable, is not so listed or quoted. Except in instances relating to preservation of our qualification as a REIT or in connection with a change of control of the
Company, our series B preferred stock is not redeemable prior to
F-23
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
December 10, 2015. On and after December 10, 2015, we may redeem our series B preferred stock in whole, at any time, or in part, from time to time, for cash at a
redemption price of $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. If at any time following a change of control
either our series B preferred stock (or any preferred stock of the surviving entity that is issued in exchange for our series B preferred stock) or the common stock of the
surviving entity, as applicable, is not listed on the NYSE or quoted on NASDAQ (or listed or quoted on a successor exchange or quotation system), we will have the
option to redeem our series B preferred stock, in whole but not in part, within 90 days after the first date on which both the change of control has occurred and either our
series B preferred stock (or any preferred stock of the surviving entity that is issued in exchange for our series B preferred stock) or the common stock of the surviving
entity, as applicable, is not so listed or quoted, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to, but not including, the redemption date. Our
series B preferred stock has no maturity date and will remain outstanding indefinitely unless redeemed by us, and it is not subject to any sinking fund or mandatory
redemption and is not convertible into any of our other securities.
May 2011 Secondary Common Stock Offering and Private Placement
On May 3, 2011, we completed the public offering of 6,950,000 shares of common stock and the exercise of the underwriters’ over-allotment option to purchase
an additional 1,042,500 shares of our common stock at the public offering price of $14.62 per share. We also completed the private placement of 3,125,000 shares to
investment funds affiliated with Farallon Capital Management, L.L.C., at the same price.
Total proceeds from the public offering and the concurrent private placement, after underwriters’ discount, were approximately $156.7 million (before transaction
costs). Of the total, approximately $96.5 million was from the public offering of common stock, approximately $14.5 million was from the exercise of the over-allotment
option and approximately $45.7 million was from the private placement investment.
May 2012 Common Stock Offering
On May 18, 2012, we completed the public offering of 13,225,000 shares of common stock and the exercise of the underwriters’ over-allotment option to
purchase an additional 1,725,000 shares of our common stock at the public offering price of $15.00 per share. Funds affiliated with Farallon Capital Management, L.L.C.
acquired 2,000,000 of the shares of common stock offered in this offering.
Total proceeds from the public offering, after underwriters’ discount, were approximately $190.8 million (before transaction costs).
Exchange of Common Units for Common Stock
In February 2012, Glenborough Fund XIV, L.P. redeemed 155,878 common units of our Operating Partnership for common stock of our REIT.
In December 2012, Howard S. Stern redeemed 72,500 common units of our Operating Partnership for common stock of our REIT.
The table below represents the net income attributable to common stockholders and transfers from non-controlling interest (in thousands) for the twelve
months ended:
Net loss attributable to Hudson Pacific Properties, Inc.
Transfers from the non-controlling interests:
Increase in common stockholders additional paid-in capital for exchange of operating partnership units
Change from net income (loss) attributable to common stockholders and transfer from
non-controlling interests
F-24
December 31,
2012
2011
$
(4,751 ) $
(2,875 )
5,538
—
$
787
$
(2,875 )
Table of Contents
Dividends
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
During the fourth quarter for 2012, we declared dividends on our common stock and non-controlling common partnership interests of $0.125 per share and unit.
We also declared dividends on our series A preferred partnership interests of $0.3906 per unit. In addition, we declared dividends on our series B preferred shares of
$0.5234 per share. The fourth quarter dividends were declared on December 10, 2012 to holders of record on December 20, 2012.
Taxability of Dividends
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the
differences for federal income tax purposes in the treatment of loss on extinguishment of debt, revenue recognition, and compensation expense and in the basis of
depreciable assets and estimated useful lives used to compute depreciation.
The Company’s dividends related to its common stock (CUSIP #444097109) and described above under “Dividends,” will be classified for United States federal
income tax purposes as follows (unaudited):
Record Date
Payment Date
Distributions per Share
Total
Non-qualified
Qualified
Return of Capital
3/30/2012
6/21/2012
9/20/2012
12/20/2012
4/2/2012 $
7/2/2012 $
10/1/2012 $
12/31/2012 $
Total
$
0.12500 $
0.12500 $
0.12500 $
0.12500 $
0.50000 $
100%
0.05973 $
0.05973 $
0.05973 $
0.05973 $
0.23892 $
47.7821%
0.05851 $
0.05851 $
0.05851 $
0.05851 $
0.23404 $
0.00122 $
0.00122 $
0.00122 $
0.00122 $
0.00488 $
0.06527
0.06527
0.06527
0.06527
0.26108
52.2179%
Ordinary Dividends
The Company’s dividends related to its 8.375% Series B Cumulative Preferred Stock (CUSIP #444097208) and described above under “Dividends,” will be
classified for United States federal income tax purposes as follows (unaudited):
Record Date
Payment Date
Distributions per Share
Total
Non-qualified
Qualified
3/30/2012
6/21/2012
9/20/2012
12/20/2012
Total
4/2/2012 $
7/2/2012 $
10/1/2012 $
12/31/2012 $
$
0.52344 $
0.52344 $
0.52344 $
0.52344 $
2.09376 $
0.52344 $
0.52344 $
0.52344 $
0.52344 $
2.09376 $
0.51272 $
0.51272 $
0.51272 $
0.51272 $
2.05088 $
0.01072
0.01072
0.01072
0.01072
0.04288
Ordinary Dividends
Stock-Based Compensation
The Board of Directors awards restricted shares to non-employee board members on an annual basis as part of such board members’ annual compensation and
to newly elected non-employee board members in accordance with our Board of Directors compensation program. The share-based awards are generally issued in the
second quarter, and the individual share awards vest in equal annual installments over the applicable service vesting period, which will be three years.
In addition, the Board of Directors awards restricted shares to employees on an annual basis as part of the employees’ annual compensation. The share-based
awards are generally issued in the fourth quarter, and the individual share awards vest in equal annual installments over the applicable service vesting period, which will
be three years.
The following table summarizes the restricted share activity for the twelve months ended December 31, 2012 and status of all unvested restricted share awards,
to our non-employee board members and employees at December 31, 2012:
F-25
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
Non-vested Shares
Outstanding at January 1, 2011
Granted
Vested
Canceled
Outstanding at December 31, 2012
Granted
Vested
Canceled
Outstanding at December 31, 2012
Twelve Months Ended December 31,
2012
2011
Weighted-Average
Grant-Date
Fair Value
16.11
13.72
16.10
17.00
14.93
20.33
15.19
13.57
17.12
Shares
490,442 $
307,282 $
(161,523) $
(7,535) $
628,666 $
268,060
(263,249)
(1,474)
632,003 $
Non-Vested shares
issued
Weighted average
grant - dated fair value
Vested Shares
Total Vest-Date fair
value (in thousands)
268,060
307,282
(1)
$
20.33
13.72
16.11
(263,249) $
(161,523)
—
5,102
2,359
—
2010
__________________
(1) Amount includes 1,653 shares canceled during twelve months ended December 31, 2011.
490,442
We recognize the total compensation expense for time-vested shares on a straight-line basis over the vesting period based on the fair value of the award on the
date of grant.
Hudson Pacific Properties, Inc. 2012 Outperformance Program
On January 1, 2012, the Compensation Committee of our Board of Directors adopted the Hudson Pacific Properties, Inc. 2012 Outperformance Program, or the
2012 Outperformance Program. Participants in the 2012 Outperformance Program may earn, in the aggregate, up to $10.0 million of stock-settled awards based on our
total shareholder return (“TSR”) for the three-year period beginning January 1, 2012 and ending December 31, 2014. Under the 2012 Outperformance Program,
participants will be entitled to share in a performance pool with a value, subject to the $10.0 million cap, equal to the sum of: (i) 4% of the amount by which our TSR
during the performance period exceeds 9% simple annual TSR (the “absolute TSR component”), plus (ii) 4% of the amount by which our TSR during the performance
period exceeds that of the SNL Equity REIT Index (determined on a percentage basis that is then multiplied by the sum of (A) our market capitalization on that date, plus
(B) the aggregate per share dividend over the performance period through such date) (the “relative TSR component”), except that the relative TSR component will be
reduced on a linear basis from 100% to zero percent for absolute TSR ranging from 7% to zero percent simple annual TSR over the performance period. In addition, the
relative TSR component may be a negative value equal to 4% of the amount by which we underperform the SNL Equity REIT Index by more than 3% per year during the
performance period (if any). If we attain pro-rated TSR performance goals during 2012 and/or 2013 that yield hypothetical bonus pools of up to $2 million for 2012
performance and/or up to $4 million for combined 2012/2013 performance, stock awards issued under the final bonus pool at the end of the performance period will cover
a number of shares in the aggregate at least equal to the number of shares that would have been subject to stock awards issued at the end of 2012 or 2013 (whichever is
greater) based on our TSR performance and common stock price for such prior years (subject to reduction to comply with the $10.0 million bonus pool limitation). At the
end of the three-year performance period, participants who remain employed with us will be paid their percentage interest in the bonus pool as stock awards based on
the value of our common stock at the end of the performance period. Half of each such participant’s bonus pool interest will be paid in fully vested shares of our
common stock and the other half will be paid in restricted stock units (“RSUs”) that vest in equal annual installments over the two years immediately following the
performance period (based on continued employment) and which carry tandem dividend equivalent rights. However, if the performance period is terminated prior to
December 31, 2014 in
F-26
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
connection with a change in control, 2012 Outperformance Program awards will be paid entirely in fully vested shares of our common stock immediately prior to the
change in control. In addition to these share/RSU payments, each 2012 Outperformance Program award entitles its holder to a cash payment equal to the aggregate
dividends that would have been paid during the performance period on the total number of shares and RSUs ultimately issued or granted in respect of such 2012
Outperformance Program award, had such shares and RSUs been outstanding throughout the performance period.
If a participant’s employment is terminated without “cause,” for “good reason” or due to the participant’s death or disability during the performance period
(referred to as qualifying terminations), the participant will be paid his or her 2012 Outperformance Program award at the end of the performance period entirely in fully
vested shares (except for the performance period dividend equivalent, which will be paid in cash at the end of the performance period). Any such payment will be pro-
rated in the case of a termination without “cause” or for “good reason” by reference to the participant’s period of employment during the performance period. If we
experience a change in control or a participant experiences a qualifying termination of employment, in either case, after December 31, 2014, any unvested RSUs that
remain outstanding will accelerate and vest in full upon such event.
The total fair value of the 2012 Outperformance Program (approximately $3.49 million, subject to adjustment for forfeitures) will be amortized through the final
vesting period under a graded vesting expense recognition schedule.
For the twelve months ended December 31, 2012, 2011 and 2010, $4,314, $2,660 and $765 of non-cash compensation expense for all stock compensation was
recognized as additional paid-in capital, of which $4,212, $2,660 and $765 was included in general and administrative expenses, with the remaining $102 of 2012 stock
compensation capitalized to tenant improvement and deferred leasing costs and lease intangibles, net.
11. Related Party Transactions
Effective July 31, 2012, we consented to the assignment of a lease with a tenant of our 222 Kearny Street property to its subtenant, FJM Investments, LLC. The
lease comprises approximately 3,707 square feet of the property’s space and has a remaining term through May 31, 2014. The annual rental obligation under the lease for
calendar year 2012 is $125, the base rent component of which is subject to three percent annual increases. FJM Investments, LLC was co-founded by and is co-owned by
one of our independent directors, Robert M. Moran, Jr.
12. Commitments and Contingencies
Legal
From time to time, the Company is party to various lawsuits, claims and other legal proceedings arising out of, or incident to, our ordinary course of business.
Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the
Company’s results of operations, financial position or cash flows. As of December 31, 2012, the risk of material loss from such legal actions impacting the Company’s
financial condition or results from operations has been assessed as remote.
Concentrations
All of the Company’s Properties are located in California, which exposes the Company to greater economic risks than if it owned a more geographically
dispersed portfolio. Further, for the twelve months ended December 31, 2012 and 2011, approximately 24% and 26%, respectively, of the Company’s revenues were
derived from tenants in the media and entertainment industry, which makes the Company susceptible to demand for rental space in such industry. Consequently, the
Company is subject to the risks associated with an investment in real estate with a concentration of tenants in that industry.
As of December 31, 2012 Bank of America leases approximately 832,549 square feet of our 1455 Market property for various lease terms ranging between one
and seven years. For the twelve months ended December 31, 2012 and 2011, the Bank of America Lease accounted for approximately 6% and 9%, respectively, of our
total revenue.
13. Segment Reporting
The Company’s reporting segments are based on the Company’s method of internal reporting which classifies its operations into two reporting segments: (i)
office properties, and (ii) media and entertainment properties. The Company evaluates performance based upon property net operating income from continuing
operations (“NOI”) of the combined properties in each segment. NOI is not a measure of operating results or cash flows from operating activities as measured by
F-27
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
GAAP, is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not
calculate NOI in the same manner. The Company considers NOI to be an appropriate supplemental financial measure to net income because it helps both investors and
management to understand the core operations of the Company’s properties. The Company 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 and
property-level general and administrative expenses). NOI excludes corporate general and administrative expenses, depreciation and amortization, impairments, gain/loss
on sale of real estate, interest expense, acquisition-related expenses and other non-operating items.
Summary information for the reportable segments for the twelve months ended December 31, 2012 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
Media and
Entertainment
Properties
$
$
126,023
53,577
72,446
$
$
40,133
24,340
15,793
$
$
Summary information for the reportable segments for the twelve months ended December 31, 2011 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
Media and
Entertainment
Properties
$
$
105,208
44,740
60,468
$
$
36,981
22,446
14,535
$
$
Summary information for the reportable segments for the twelve months ended December 31, 2010 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
Media and
Entertainment
Properties
$
$
26,503
10,212
16,291
$
$
34,137
19,815
14,322
$
$
Total
166,156
77,917
88,239
Total
142,189
67,186
75,003
Total
60,640
30,027
30,613
The following is reconciliation from NOI to reported net income, the most direct comparable financial measure calculated and presented in accordance with
GAAP:
Net operating income
General and administrative
Depreciation and amortization
Interest expense
Interest income
Unrealized gain on interest rate collar
Acquisition-related expenses
Other income (expense)
Net loss
December 31,
2012
December 31,
2011
December 31,
2010
$
$
$
88,239
(16,497)
(57,024)
(19,071)
306
—
(1,051)
92
(5,006) $
$
75,003
(13,038)
(44,660)
(17,480)
73
—
(1,693)
(443)
(2,238) $
30,613
(4,493)
(15,912)
(8,831)
59
347
(4,273)
(192)
(2,682)
There were no inter-segment sales or transfers during either of the twelve months ended December 31, 2012, 2011 and 2010.
F-28
Table of Contents
Notes to Consolidated Financial Statements—(Continued)
(In thousands, except square footage and share data)
14. Quarterly Financial Information (unaudited)
Three months ended
December 31, 2012
June 30, 2012
September 30, 2012
42,066
$
$
March 31, 2012
$
Total revenues
Net (loss) income
Less: Net income attributable to preferred stock and units
Less: Net income attributable to restricted shares
Less: Net (income) loss attributable to non-controlling interest in consolidated real
estate entities
Add: Net loss attributable to common units in the Operating Partnership
Net loss attributable to Hudson Pacific Properties, Inc. shareholders’
Net loss attributable to common shareholders’ per share - basic and diluted
$
$
$
Total revenues
Net (loss) income
Less: Net income attributable to preferred stock and units
Less: Net income attributable to restricted shares
Less: Net (income) loss attributable to non-controlling interest in consolidated real
estate entities
Add: Net loss attributable to common units in the Operating Partnership
Net loss attributable to Hudson Pacific Properties, Inc. shareholders’
Net loss attributable to common shareholders’ per share - basic and diluted
$
$
$
45,244
(2,971)
(3,231)
(69)
21
310
(5,940) $
(0.13) $
37,061
(1,318)
(2,027)
(54)
—
248
(3,151) $
(0.10) $
(274)
(3,231)
(69)
—
179
(3,395) $
(0.07) $
40,615
(2,229)
(3,231)
(79)
—
322
(5,217) $
(0.13) $
(803)
(2,027)
(53)
—
211
(2,672) $
(0.08)
(210)
(2,027)
(62)
10
188
(2,101) $
(0.07)
Weighted average shares of common stock outstanding - basic and diluted
46,690,196
46,668,862
39,772,030
33,320,450
Three months ended
December 31, 2011
September 30, 2011
36,917
$
June 30, 2011
$
33,407
March 31, 2011
$
Weighted average shares of common stock outstanding - basic and diluted
33,150,491
33,146,334
29,161,139
21,949,118
Three months ended
Total revenues
Net (loss) income
Less: Net income attributable to preferred stock and units
Less: Net income attributable to restricted shares
Less: Net (income) loss attributable to non-controlling interest in consolidated real
estate entities
Add: Net loss attributable to common units in the Operating Partnership
Net loss attributable to Hudson Pacific Properties, Inc. shareholders’ / controlling
members’ equity
Net loss attributable to common shareholders’ per share - basic and diluted
$
$
December 31, 2010
$
21,090
September 30, 2010
17,505
$
27
(195)
(25)
$
(531)
(622)
(25)
11,087
(2,847)
(4)
—
June 30, 2010
March 31, 2010
$
(148)
141
(1,185) $
(0.05) $
—
21
(172) $
(0.01)
32
256
(2,563) $
(3)
—
666
Weighted average shares of common stock outstanding - basic and diluted
21,946,508
21,946,508
15. Subsequent Events
F-29
38,231
468
(3,231)
(78)
—
203
(2,638)
(0.08)
34,804
93
(2,027)
(62)
(813)
299
(2,510)
(0.11)
10,982
669
—
—
Table of Contents
February 2013 Common Stock Offering
On February 12, 2013, we completed the public offering of 8,000,000 shares of common stock and the exercise of the underwriters’ over-allotment option to
purchase an additional 1,200,000 shares of our common stock at the public offering price of $21.50 per share. Total proceeds from the public offering, after underwriters’
discount, were approximately $189.9 million (before transaction costs).
Hudson Pacific Properties, Inc. 2013 Outperformance Program
On January 1, 2013, the Compensation Committee of our Board of Directors adopted the Hudson Pacific Properties, Inc. 2013 Outperformance Program, or the
2013 Outperformance Program. Participants in the 2013 Outperformance Program may earn, in the aggregate, up to $11.0 million of stock-settled awards based on our total
shareholder return (“TSR”) for the three-year period beginning January 1, 2013 and ending December 31, 2015. Under the 2013 Outperformance Program, participants will
be entitled to share in a performance pool with a value, subject to the $11.0 million cap, equal to the sum of: (i) 4% of the amount by which our TSR during the
performance period exceeds 9% simple annual TSR (the “absolute TSR component”), plus (ii) 4% of the amount by which our TSR during the performance period
exceeds that of the SNL Equity REIT Index (determined on a percentage basis that is then multiplied by the sum of (A) our market capitalization on that date, plus (B) the
aggregate per share dividend over the performance period through such date) (the “relative TSR component”), except that the relative TSR component will be reduced
on a linear basis from 100% to zero percent for absolute TSR ranging from 7% to zero percent simple annual TSR over the performance period. In addition, the relative
TSR component may be a negative value equal to 4% of the amount by which we underperform the SNL Equity REIT Index by more than 3% per year during the
performance period (if any). If we attain pro-rated TSR performance goals during 2013 and/or 2014 that yield hypothetical bonus pools of up to $2 million for 2013
performance and/or up to $4 million for combined 2013/2014 performance, stock awards issued under the final bonus pool at the end of the performance period will cover
a number of shares in the aggregate at least equal to the number of shares that would have been subject to stock awards issued at the end of 2013 or 2014 (whichever is
greater) based on our TSR performance and common stock price for such prior years (subject to reduction to comply with the $11.0 million bonus pool limitation). At the
end of the three-year performance period, participants who remain employed with us will be paid their percentage interest in the bonus pool as stock awards based on
the value of our common stock at the end of the performance period. Half of each such participant’s bonus pool interest will be paid in fully vested shares of our
common stock and the other half will be paid in restricted stock units (“RSUs”) that vest in equal annual installments over the two years immediately following the
performance period (based on continued employment) and which carry tandem dividend equivalent rights. However, if the performance period is terminated prior to
December 31, 2015 in connection with a change in control, 2013 Outperformance Program awards will be paid entirely in fully vested shares of our common stock
immediately prior to the change in control. In addition to these share/RSU payments, each 2013 Outperformance Program award entitles its holder to a cash payment
equal to the aggregate dividends that would have been paid during the performance period on the total number of shares and RSUs ultimately issued or granted in
respect of such 2013 Outperformance Program award, had such shares and RSUs been outstanding throughout the performance period.
If a participant’s employment is terminated without “cause,” for “good reason” or due to the participant’s death or disability during the performance period
(referred to as qualifying terminations), the participant will be paid his or her 2013 Outperformance Program award at the end of the performance period entirely in fully
vested shares (except for the performance period dividend equivalent, which will be paid in cash at the end of the performance period). Any such payment will be pro-
rated in the case of a termination without “cause” or for “good reason” by reference to the participant’s period of employment during the performance period. If we
experience a change in control or a participant experiences a qualifying termination of employment, in either case, after December 31, 2015, any unvested RSUs that
remain outstanding will accelerate and vest in full upon such event.
The total fair value of the 2013 Outperformance Program (approximately $4.14 million, subject to adjustment for forfeitures) will be amortized through the final
vesting period under a graded vesting expense recognition schedule.
F-30
Schedule III
Consolidated Real Estate and Accumulated Depreciation
(In thousands)
Initial Costs
Cost Capitalized
subsequent to Acquisition
Gross Carrying Amount at
December 31, 2012
Encumbrances
at December,
31 2012
Building &
Land
Improvements Improvements
Carrying
Costs
Building &
All
Land
Improvements Total
Accumulated
Depreciation
at December
31, 2012
Year
Built /
Renovated
Year
Acquired
$
—
$ 14,939 $
34,135
$
6,217
$
—
$ 14,939 $
40,352
$
55,291 $
(4,881) 1969/1999
—
6,598
27,187
26,994
3,088
6,598
57,269
63,867
(10,120)
2008
—
43,000
—
—
—
—
107,492
—
29,711
—
138
33,700
41,243
—
49,600
—
129,000
18,058
8,115
3,056
—
—
7,563
58,250
41,226
17,979
5,620
4,187
10,744
16,608
1,400
17,882
75,449
28,518
41,046
52,137
9,670
18,000
10,718
23,793
110,656
34,990
25,110
14,745
8,063
42,650
72,392
1,200
79,305
12,575
171,657
14,175
4,403
515
289
270
1,274
2,594
7,556
366
845
3,911
90
1,731
116
633
2,160
—
1,180
—
—
—
—
—
—
—
—
—
859
—
—
—
—
722
—
18,058
8,115
3,056
—
—
7,563
58,250
41,226
17,979
5,620
4,187
10,744
16,608
1,400
17,882
75,449
28,518
56,401
56,540
10,185
18,289
10,988
25,067
113,250
42,546
25,476
15,590
12,833
42,740
74,123
1,316
79,938
15,457
171,657
74,459
64,655
13,241
18,289
10,988
32,630
171,500
83,772
43,455
21,210
17,020
53,484
90,731
2,716
97,820
90,906
200,175
(9,392) Various
(4,465)
(1,048)
(1,410)
1986
1985
1986
(745) 1965/2001
(2,051) Various
(9,476)
(10,201)
1977
(2,012) Various
1985
(725)
—
(2,005)
(3,007)
(24)
1950
1906
1905
1965
1,973
(1,594) 1912/1985
(99)
(1,308)
1949
2002
2008
2007
2007
2010
2010
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
Table of Contents
Property name
Office
City Plaza(1)
Technicolor Building
(1)
875 Howard Street
Property(1)
First Financial
Tierrasanta(1)
Del Amo
9300 Wilshire
222 Kearny(1)
Rincon Center
1455 Market(1)
10950 Washington
604 Arizona(1)
275 Brannan Street
625 Second Street
6922 Hollywood
10900 Washington
901 Market Street
Olympic Bundy
Pinnacle I
Media &
Entertainment
Sunset Gower(2)
Sunset Bronson(2)
92,000
—
525,884
79,321
77,698
$493,211 $
64,697
32,374
887,100
$
8,120
7,455
89,714
70
—
$ 5,919
79,321
77,698
$493,211 $
72,887
39,829
982,733
152,208
117,527
$1,475,944 $
(11,245) Various
(9,376) Various
(85,184)
2007, 2011,
2012
2008
Total
______________________________
(1)
$
On August 3, 2012, we replaced our $200.0 million secured revolving credit facility with a $250.0 million unsecured revolving credit facility with a group of lenders for which Wells
Fargo Bank, N.A. acts as administrative agent and its affiliate acts as joint lead arranger, Bank of America, N.A. acts as joint lead arranger and, together with Barclays Capital, acts as
joint syndication agent, and Keybank, N.A., acts as documentation agent. These properties are secured under this line of credit which as of December 31, 2012 has an outstanding
balance of $55,000.
On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A., secured by our Sunset Gower and Sunset Bronson media and entertainment
properties.
(2)
(Back To Top)
F-31
Section 2: EX-10.63 (REVISED NON-EMPLOYEE DIRECTOR COMPENSATION)
Exhibit 10.63
Hudson Pacific Properties, Inc.
Revised Non-Employee Director Compensation Program
Cash Compensation
Board Service
Annual Retainer:
Committee Service
Audit Committee:
Chair Annual Retainer:
Committee Member (Non-Chair) Retainer:
Compensation Committee:
Chair Annual Retainer:
$60,000
$15,000
$7,500
$10,000
Committee Member (Non-Chair) Retainer:
Nominating and Corporate Governance Committee:
Chair Annual Retainer:
Committee Member (Non-Chair) Retainer:
Directors may be permitted to elect to receive vested shares of common stock on a current or deferred basis in lieu of Board Annual Retainer cash
compensation in accordance with the terms and conditions of an applicable Director stock plan (if and when implemented by the Company) and, in the
case of deferred shares, in accordance with Internal Revenue Code Section 409A.
$7,500
$4,000
$5,000
Board Service and Committee Service Annual Retainers will be paid or granted (as applicable) quarterly in arrears promptly following the end of the
applicable calendar quarter, but in no event more than thirty days after the end of such quarter.
Equity Compensation
Initial IPO Restricted Stock Grant:
Annual Restricted Stock Grant:
One-time grant of restricted stock with a value of $100,000
granted on the date of the closing of the Corporation's initial
public offering (the “IPO Grant”) to non-employee directors
serving in such capacity as of the closing of the initial public
offering. The IPO Grant will vest in equal one-third
installments on the first, second and third anniversaries of
the closing of the Corporation's initial public offering, subject
to continued service.
Annual restricted stock grants with a value of $75,000
granted on the date of each annual shareholder meeting (the
“Annual Grant”). Each Annual Grant will vest in equal one-
third installments on the first, second and third anniversaries
of the date of grant, subject to continued service.
(Back To Top)
Section 3: EX-12.1 (COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES & PREFERRED DIVIDEND)
Exhibit 12.1
HUDSON PACIFIC PROPERTIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS
(Unaudited; in thousands, except ratios)
Earnings Available for Fixed Charges
and Preferred Dividends:
Net loss
Plus fixed charges:
Interest expense (including amortization of loan fees)
Capitalized interest and loan fees
Estimate of interest within rental expense
Fixed Charges
Plus:
Amortization of capitalized interest
Less:
Capitalized interest and loan fees
Earnings
Combined Fixed Charges and
Consolidated
Historical Combined
For the year ended December 31,
2012
2011
2010
2009
2008
(5,006)
(2,238)
(2,682)
(644)
(2,622)
19,071
1,461
153
20,685
17,480
189
124
17,793
8,831
165
46
9,042
8,774
544
16
9,334
12,029
1,054
16
13,099
73
73
73
55
55
(1,461)
14,291
$
(189)
15,439
$
$
(165)
6,268
$
(544)
8,201
$
(1,054)
9,478
Preferred Dividends:
Fixed charges (from above)
Preferred dividends
Combined fixed charges and
preferred dividends:
Ratio of earnings to combined fixed charges and preferred dividends
Deficiency
(Back To Top)
20,685
12,924
17,793
8,108
9,042
817
9,334
—
13,099
—
33,609
$
25,901
$
9,859
$
9,334
$
13,099
0.43
0.60
0.64
0.88
19,341
$
10,462
$
3,591
$
1,133
$
0.72
3,621
$
$
Section 4: EX-21 (SUBSIDIARIES OF HUDSON PACIFIC PROPERTIES, INC.)
Subsidiaries of Hudson Pacific Properties, Inc.
Name
HCTD, LLC
HFOP City Plaza, LLC
Howard Street Associates, LLC
Hudson 10950 Washington, LLC
Hudson 1455 Market, LLC
Hudson 222 Kearny, LLC
Hudson 6040 Sunset, LLC (f/k/a SGS Holdings, LLC)
Hudson 9300 Wilshire, LLC
Hudson Capital, LLC
Hudson Del Amo Office, LLC
Hudson Media and Entertainment Management, LLC
Hudson OP Management, LLC
Hudson Pacific Properties, L.P.
Hudson Pacific Services, Inc.
Hudson Tierrasanta LLC (f/k/a Glenborough Tierrasanta, LLC)
Sunset Bronson Entertainment Properties, LLC
Sunset Bronson Services, LLC
Sunset Gower Services, LLC
Sunset Gower Entertainment Properties, LLC
Sunset Studios Holdings, LLC
Hudson 625 Second, LLC
Rincon Center Commercial, LLC
Hudson Rincon Center, LLC
Hudson 275 Brannan, LLC
Hudson 604 Arizona, LLC
Hudson 6922 Hollywood, LLC
SGS Ancillary Parcels, LLC (f/k/a Hudson 6050 Sunset, LLC)
Hudson First Financial Plaza, LLC
Combined/Hudson 9300 Culver LLC
Hudson 9300 Culver, LLC
Hudson 10900 Washington, LLC
Hudson Element LA, LLC (f/k/a Hudson Lab4, LLC)
Hudson 901 Market, LLC
Hudson Centinela Mezzanine, LLC
Hudson JW, LLC
Hudson MC Partners, LLC
P1 Hudson MC Partners, LLC
P2 Hudson MC Partners, LLC
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Jurisdiction of Formation
/ Incorporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
Delaware
Delaware
Delaware
Maryland
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Section 5: EX-31.1 (CEO CERTIFICATION)
I, Victor J. Coleman, certify that:
1)
I have reviewed this annual report on Form 10-K of Hudson Pacific Properties, Inc.;
CERTIFICATION
Exhibit 31.1
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant' s internal control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date:
March 14, 2013
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
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Section 6: EX-31.2 (CFO CERTIFICATION)
Exhibit 31.2
I, Mark T. Lammas, certify that:
1)
I have reviewed this annual report on Form 10-K of Hudson Pacific Properties, Inc.;
CERTIFICATION
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
d)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant' s internal control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date:
March 14, 2013
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
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Section 7: EX-32 (CERTIFICATION)
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32
The undersigned, Victor J. Coleman, Chief Executive Officer, and Mark T. Lammas, Chief Financial Officer of Hudson Pacific Properties, Inc. (the “Company”),
hereby certify as of the date hereof, solely for the purposes of 18 U.S.C. §1350, that:
(i) the Annual Report on Form 10-K for the period ended December 31, 2012, of the Company (the “Report”) fully complies with the requirements of Section 13(a)
and 15(d), as applicable, of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and
for the periods indicated.
Date:
March 14, 2013
Date:
March 14, 2013
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure
document.
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