HPP 10-K 12/31/2014
Section 1: 10-K (10-K)
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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, 2014
Commission File Number 001-34789
_______________________________________
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
(Exact name of Registrant as specified in its charter)
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
Maryland
(State or other jurisdiction of incorporation or organization)
Maryland
(State or other jurisdiction of incorporation or organization)
27-1430478
(I.R.S. Employer Identification Number)
80-0579682
(I.R.S. Employer Identification Number)
11601 Wilshire Blvd., Sixth Floor, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 445-5700
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title of Each Class
Name of Each Exchange on Which Registered
Hudson Pacific Properties, Inc.
Common Stock, $.01 par value
Hudson Pacific Properties, Inc.
8.375% Series B Cumulative Redeemable Preferred
Stock, $.01 par value
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Title of Each Class
Name of Each Exchange on Which Registered
Hudson Pacific Properties, L.P.
Common Units Representing Limited Partnership
Interests
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Hudson Pacific Properties, Inc. Yes x No o Hudson Pacific Properties, L.P. 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.
Hudson Pacific Properties, Inc. Yes o No x Hudson Pacific Properties, L.P. Yes x No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Hudson Pacific Properties, Inc. Yes x No o Hudson Pacific Properties, L.P. Yes o No x
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).
Hudson Pacific Properties, Inc. Yes x No o Hudson Pacific Properties, L.P. 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. x
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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.
Hudson Pacific Properties, Inc.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Hudson Pacific Properties, L.P.
Large accelerated filer o Accelerated filer o Non-accelerated filer x 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.)
Hudson Pacific Properties, Inc. Yes o No x Hudson Pacific Properties, L.P. Yes o No x
As of June 30, 2014, 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 $1.4 billion based upon the last sales
price on June 30, 2014 for the registrant’s Common Stock.
There is no public trading market for the common units of limited partnership interest of Hudson Pacific Properties, L.P. As a result, the aggregate market value of
the common units of limited partnership interest held by non-affiliates of Hudson Pacific Properties, L.P. cannot be determined.
As of February 25, 2015, the number of shares of common stock outstanding was 79,845,880.
Portions of the proxy statement for the registrant’s 2015 Annual Meeting of Stockholders to be held May 20, 2015 are incorporated by reference in Part III of this
Annual Report on Form 10-K. The proxy statement will be filed by the registrant with the U.S. Securities and Exchange Commission, or the SEC, not later than 120 days
after the end of the registrant’s fiscal year.
DOCUMENTS INCORPORATED BY REFERENCE
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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2014 of Hudson Pacific Properties, Inc., a Maryland corporation, and
Hudson Pacific Properties, L.P., a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,”
“us,” “our,” or “our company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless
otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” refer to Hudson Pacific Properties, L.P. together with its
consolidated subsidiaries.
Our company is a real estate investment trust, or REIT, and the sole general partner of our operating partnership. As of December 31, 2014, we owned
approximately 96.6% of the outstanding common units of partnership interest in our operating partnership, or common units. The remaining approximately 3.4% of
outstanding common units are 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. As the sole general partner of our operating partnership, our company has the full, exclusive and complete responsibility for our
operating partnership’s day-to-day management and control.
We believe combining the annual reports on Form 10-K of our company and our operating partnership into this single report results in the following benefits:
•
•
•
enhancing investors’ understanding of our company and our operating partnership by enabling investors to view the business as a whole in the same manner
as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation because a substantial portion of the disclosure applies to both
our company and our operating partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between our company and our operating partnership, which are reflected in the disclosures in this report. We believe it is important
to understand the differences between our company and our operating partnership in the context of how we operate as an interrelated, consolidated company. Our
company is a REIT, the only material assets of which are the partnership units of our operating partnership. As a result, our company does not conduct business itself,
other than acting as the sole general partner of our operating partnership, issuing equity from time to time and guaranteeing certain debt of our operating partnership.
Our company itself does not issue any indebtedness but guarantees some of the debt of our operating partnership. Our operating partnership holds substantially all the
assets of our company. Our operating partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for
net proceeds from equity issuances by our company, which are generally contributed to our operating partnership in exchange for units of partnership interest in our
operating partnership, our operating partnership generates the capital required by our company’s business through our operating partnership’s operations, our
operating partnership’s incurrence of indebtedness or through the issuance of units of partnership interest in our operating partnership.
The presentation of non-controlling interest, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial
statements of our company and those of our operating partnership. The common units in our operating partnership are accounted for as partners’ capital in our
operating partnership’s consolidated financial statements and, to the extent not held by our company, as non-controlling interest in our company’s consolidated
financial statements. The differences between stockholders’ equity, partners’ capital and non-controlling interest result from the differences in the equity issued by our
company and our operating partnership.
To help investors understand the significant differences between our company and our operating partnership, this report presents the consolidated financial
statements separately for our company and our operating partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our
company and our operating partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our company
and our operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act and 18 U.S.C. §1350, this report
also includes separate “Item 9A. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our company and our operating partnership.
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HUDSON PACIFIC PROPERTIES, INC.
HUDSON PACIFIC PROPERTIES, L.P.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PART II
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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 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.
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
PART IV
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Item 1. Business
Company Overview
PART I
We are a full-service, vertically integrated real estate company focused on owning, operating and acquiring high-quality office properties and state-of-the-art
media and entertainment properties in select growth markets primarily in Northern and Southern California and the Pacific Northwest. Our investment strategy focuses on
high barrier-to-entry, in-fill locations with favorable, long-term supply demand characteristics in select markets, including Los Angeles, Orange County, San Diego, San
Francisco, Silicon Valley and Seattle, which we refer to as our target markets. As of December 31, 2014, our portfolio included office properties, comprising an aggregate
of approximately 5.9 million square feet, and media and entertainment properties, comprising approximately 0.9 million square feet of sound-stage, office and supporting
production facilities. We also own undeveloped density rights for approximately 1.4 million square feet of future office space.
We were formed as a Maryland corporation in 2009 to succeed to the business of Hudson Capital, LLC, a Los Angeles-based real estate investment firm
founded by Victor J. Coleman, our Chief Executive Officer. 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, of which we serve as the sole general partner.
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 California and Pacific Northwest markets positions us to improve cash flow from our portfolio, as
well as any newly acquired properties.
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 primarily on owning, acquiring, developing,
operating, financing and selling office properties in California and the Pacific Northwest.
• 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, as of December 31, 2014, our senior management team owned approximately 2.3% of our
common stock on a fully diluted basis, thereby aligning management’s interests with those of our stockholders.
• California and Pacific Northwest Focus with Local and Regional Expertise. We are primarily focused on acquiring and managing office properties in
Northern and Southern California and the Pacific Northwest, where our senior management has significant expertise and relationships. Our markets are supply-
constrained as a result of the scarcity of available land, high construction costs and restrictive entitlement processes. 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 and the Pacific Northwest.
•
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 and Pacific Northwest real estate markets. 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
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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 seven
offerings (including two public offerings of our 8.375% Series B Cumulative Preferred Stock, four public offerings of our common stock and one private
placement of our common stock) and continuous offering under our At-the-Market, or ATM, program for an aggregate total proceeds, of approximately $922.2
million (before underwriters’ discounts and transaction costs) as of December 31, 2014. 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 December 31, 2014, we had total borrowing capacity of approximately $300.0 million under our unsecured revolving credit facility, $130.0 million of which had
been drawn. Based on the closing price of our common stock of $30.06 on December 31, 2014, we had a debt-to-market capitalization ratio (counting series A
preferred units as debt) of approximately 30.2%. 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.
Proposed Target Property Acquisition
Purchase agreement
On December 6, 2014, we entered into an asset purchase agreement, or the purchase agreement, by and among our company, our operating partnership, or
collectively the buyer parties, and certain affiliates of The Blackstone Group L.P., or the seller parties, pursuant to which our operating partnership and/or other
subsidiaries of our company will acquire a portfolio of 26 high-quality office assets totaling approximately 8.2 million square feet and two development parcels in the San
Francisco Peninsula and Silicon Valley, or the Target Properties, from the seller parties in exchange for a combination of cash and equity consideration.
The consideration to be delivered by the buyer parties to the seller parties for the Target Properties at the closing of the transaction, or the closing, consists of
the following cash and equity consideration (each subject to adjustment as described in the purchase agreement):
• Cash Consideration. At the closing, our operating partnership will deliver to the seller parties a payment in cash of an aggregate amount equal to $1.75 billion,
or the cash consideration.
•
Equity Consideration. At the closing, the buyer parties will deliver to the seller parties (or their designated affiliates) an aggregate amount of 63,474,791 newly-
issued shares of common stock of our company, and newly-issued common units in our operating partnership, collectively, the equity consideration. The
common stock to be issued will represent approximately 9.8% of the outstanding common stock of our company (after giving effect to the issuance of the
issued common stock), and the common units to be issued will be in an amount equal to 63,474,791, less the number of shares of common stock to be issued.
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Our issuance of the equity consideration to the seller parties, or the equity issuance, requires the affirmative vote of a majority of votes cast at a meeting of our
company’s stockholders, or the requisite stockholder approval, which meeting is currently scheduled to be held on March 5, 2015.
The buyer parties and the seller parties each make certain customary representations, warranties and covenants in the purchase agreement, including, among
others, covenants:
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•
•
•
to conduct their respective businesses in the ordinary course consistent with past practice during the period between the December 6, 2014 and the closing;
that we will convene and hold a meeting of our stockholders to consider and vote upon the equity issuance, and subject to certain exceptions, our board of
directors will recommend that our stockholders vote to approve the equity issuance;
subject to certain exceptions, we will not (i) solicit, initiate, cause or knowingly facilitate the making of any inquiry, proposal or offer that constitutes or would
reasonably be expected to lead to any “Buyer Acquisition Proposal” (as defined in the purchase agreement), (ii) engage in or otherwise participate in
discussions or negotiations with any person with respect to, or that would reasonably be expected to lead to, any Buyer Acquisition Proposal or (iii) furnish
any non-public information or afford any person access to our business, properties, assets or personnel in connection with, or for the purpose of facilitating, a
Buyer Acquisition Proposal; and
that the seller parties cause the release and discharge of certain existing liens and encumbrances on the Target Properties, and use reasonable best efforts to
obtain acceptable estoppel certificates from tenants under leases at the Target Properties and lessors underground leases to which any Target Properties are
subject.
Subject to the terms and conditions set forth in the purchase agreement, the buyer parties and the seller parties have committed to use their reasonable best
efforts to take, or cause to be taken, all actions and to assist and cooperate in doing, all things necessary, proper or advisable under applicable law or pursuant to any
contract to consummate the transaction.
The consummation of the transaction is subject to customary conditions, including (i) the receipt of the requisite stockholder approval, (ii) the approval for
listing of the issued common stock on the New York Stock Exchange, or NYSE (subject only to official notice of issuance), (iii) the absence of any law or order
prohibiting or making illegal the consummation of the transaction, (iv) the issuance of title insurance policies for the underlying land, buildings and other improvements
relating to each Target Property (subject to certain qualifications), (v) the receipt of a certain percentage of estoppel certificates from tenants under lease at the Target
Properties, (vi) the absence of a material adverse effect on us or the Target Properties, (vii) subject to certain exceptions, the accuracy of the representations and
warranties made by the buyer parties and the seller parties, respectively, and compliance by the buyer parties and the seller parties with their respective covenants and
(viii) an opinion that our company meets the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended, or the Code.
The purchase agreement may be terminated under certain circumstances by the buyer parties, including, prior to the receipt of the requisite stockholder
approval, in order to concurrently enter into a definitive agreement with respect to a “Superior Acquisition Proposal” (as defined in the purchase agreement), so long as
the buyer parties comply with certain notice and other requirements set forth in the purchase agreement. In addition, the seller parties may terminate the purchase
agreement under certain circumstances and subject to certain restrictions, including if our board of directors effects a “Change of Recommendation” (as defined in the
purchase agreement). In the foregoing specified circumstances, the buyer parties would be required to pay the seller parties a termination fee of $60 million, subject to
certain adjustments as set forth in the purchase agreement. In addition, the buyer parties would be required to pay the seller parties a termination fee of $120 million,
subject to certain adjustments as set forth in the purchase agreement, if the purchase agreement is terminated by the seller parties in circumstances when the conditions
to closing are satisfied, the seller parties have irrevocably confirmed to the buyer parties that, among other things, the seller parties are prepared to consummate the
closing, and the buyer parties fail to consummate the closing within two business days from the date the closing was required to occur pursuant to the purchase
agreement and the seller parties stood ready, willing and able to consummate the closing throughout such two business day period. The purchase agreement contains
certain other termination rights for the seller parties, and alternative termination fees and/or expense reimbursements payable by the buyer parties in connection with
those other termination rights of up to $14 million and $60 million, depending on the circumstances.
Pursuant to the purchase agreement, effective as of the closing, among other things, (i) our company, our operating partnership and the seller parties (or their
designated affiliates) will enter into a stockholders agreement, or the stockholders agreement; (ii) our company and the seller parties (or their designated affiliates) will
enter into a registration rights agreement, or the seller parties registration rights agreement; and (iii) our company will enter into a Third Amended and Restated Limited
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Partnership Agreement of our operating partnership, or Third Amended and Restated Limited Partnership Agreement, each described below.
Voting Agreement Between the Seller Parties and Farallon Funds
Concurrently with the execution of the purchase agreement, on December 6, 2014, Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P. and
Farallon Capital Institutional Partners III, L.P., or collectively the Farallon Funds, entered into a voting agreement, or the voting agreement, with the seller parties,
pursuant to which each of the Farallon Funds has agreed that, until the termination of the voting agreement, it will vote in favor of the transaction and against any
potential competing transaction or any action that could reasonably be expected to adversely affect the transaction. Each of the Farallon Funds further agreed that until
the earlier of the termination of the voting agreement and April 1, 2015, it will not transfer any shares of our common stock or common units in our operating partnership
or any interests therein, subject to certain exceptions. In addition, until the termination of the voting agreement the Farallon Funds have agreed not to solicit competing
transactions. The voting agreement will terminate upon, among other things, the closing of the transactions contemplated by the purchase agreement, the termination of
the purchase agreement in accordance with its terms, a change in our board of director’s recommendations with respect to the approval of equity issuance and 11:59 p.m.
New York time on July 3, 2015.
The Stockholders Agreement
The stockholders agreement will set forth various arrangements and restrictions with respect to governance of our company and certain rights of the seller
parties (or their designated affiliates), or the sponsor stockholders, with respect to the equity consideration.
Pursuant to the terms of the stockholders agreement, at closing, our board of directors will expand from nine to 12 directors and will elect three nominees
designated by the sponsor stockholders to our board of directors. Subject to certain exceptions, our board of directors will continue to include the sponsor
stockholders’ nominees in its slate of directors, will continue to recommend such nominees, and will otherwise use its reasonable best efforts to solicit the vote of our
stockholders to elect to our board of directors the slate of nominees which includes those nominated by the sponsor stockholders. The sponsor stockholders will have
the right to designate three director nominees to our board of directors for so long as the sponsor stockholders continue to beneficially own, in the aggregate, greater
than 50% of the equity consideration. If the sponsor stockholders beneficial ownership of equity consideration decreases, then the number of director nominees that the
sponsor stockholders will have the right to designate will be reduced (i) to two, if the sponsor stockholders beneficially own greater than or equal 30% but less than or
equal to 50% of the equity consideration and (ii) to one, if the sponsor stockholders beneficially own greater than or equal to 15% but less than 30% of the equity
consideration. The board of director nomination rights of the sponsor stockholders will terminate at such time as the sponsor stockholders beneficially own less than
15% of the equity consideration or upon written notice of waiver or termination of such rights by the sponsor stockholders. So long as the sponsor stockholders retain
the right to designate at least one nominee to our board of directors, our company will not be permitted to increase the total number of directors comprising our board of
directors to more than 12 persons.
For so long as the sponsor stockholders have the right to designate at least two director nominees, subject to the satisfaction of applicable NYSE independence
requirements, the sponsor stockholders will also be entitled to appoint one such nominee then serving on our board of directors to serve on each committee of our board
of directors (other than certain specified committees).
The stockholders agreement will also include: (i) standstill provisions, which will, until such time as the sponsor stockholders beneficially own less than 10% of
the total number of issued and outstanding common equity of our company on a fully-diluted basis, restrict the sponsor stockholders and Blackstone Real Estate
Advisors L.P. from, among other things, acquiring additional equity or debt securities (other than non-recourse debt and certain other debt) of our company and its
subsidiaries without our company’s prior written consent; and (ii) transfer restriction provisions, which will restrict the sponsor stockholders from transferring any
equity consideration (including shares of common stock of our company that have been exchanged by the sponsor stockholders for common units in our operating
partnership) (collectively, the “covered securities”) until November 1, 2015, at which time such transfer restrictions will cease to be applicable to 50% of the covered
securities. The transfer restrictions applicable to the remaining 50% of the covered securities will cease to be applicable on March 1, 2016 (or, if earlier, 30 days following
written notice of waiver or termination by the sponsor stockholders of their board nomination rights described above). If, prior to November 1, 2015 the sponsor
stockholders provide written notice waiving and terminating their board nomination rights described above, the transfer restrictions applicable to all the covered
securities will cease to be applicable on November 1, 2015 and, if such written notice of waiver and termination is provided after November 1, 2015, then the transfer
restrictions will cease to be applicable 30 days following such written notice.
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In addition, pursuant to the stockholders agreement, during the 24 months following the closing, our company is required to obtain the prior written consent of
the seller parties prior to issuances of any common equity securities in excess of 15% of the common equity securities at closing taking into account the equity issuance
(subject to certain exceptions). Further, under the terms of the stockholders agreement, our company (in its capacity as the general partner of our operating partnership)
will waive the minimum holding period required with respect to future redemptions of the issued common units pursuant to the Third Amended and Restated Limited
Partnership Agreement and will grant certain additional rights to the seller parties (or their designated affiliates) in connection with such redemptions.
The Registration Rights Agreement
The seller parties registration rights agreement will provide for customary registration rights with respect to the equity consideration, including the following:
•
Shelf Registration. Our company will prepare and file not later than August 1, 2015 a resale shelf registration statement covering the sponsor stockholders’
shares of common stock of our company and shares issuable upon redemption of common units in our operating partnership, and our company is required to
use its reasonable best efforts to cause such resale shelf registration statement to become effective prior to the termination of the transfer restrictions under the
stockholders agreement (as described above).
• Demand Registrations. Beginning November 1, 2015 (or earlier if transfer restrictions under the stockholders agreement are terminated earlier), the sponsor
stockholders may cause our company to register their shares, or a demand registration, if the foregoing resale shelf registration statement is not effective or if
our company is not eligible to file a shelf registration statement.
• Qualified Offerings. Any registered offerings requested by the sponsor stockholders that are to an underwriter on a firm commitment basis for reoffering and
•
resale to the public, in an offering that is a “bought deal” with one or more investment banks or in a block trade with a broker-dealer will be: (i) no more frequent
than once in any 120-day period, (ii) subject to underwriter lock-ups from prior offerings then in effect, and (iii) subject to a minimum offering size of $50 million.
Piggy-Back Rights. Beginning November 1, 2015 (or earlier if transfer restrictions under the stockholders agreement are terminated earlier), the sponsor
stockholder will be permitted to, among other things, participate in offerings for our company’s account. If underwriters advise that the success of the proposed
offering would be significantly and adversely affected by the inclusion of all securities in an offering for our company’s own account, then the securities
proposed to be included by the sponsor stockholders are cut back first.
Third Amended and Restated Limited Partnership Agreement
The Third Amended and Restated Limited Partnership Agreement will give effect to the rights of certain limited partners of our operating partnership, including
the sponsor stockholders. Pursuant to the Third Amended and Restated Limited Partnership Agreement, prior to the date on which the sponsor stockholders own less
than 9.8% of the equity consideration, our company (as general partner) may not consummate certain transactions, or a stockholder vote transaction, with respect to
which the holders of shares our company’s common stock are entitled to vote, unless the stockholder vote transaction is also approved by the common limited partners
of our operating partnership on a “pass through” basis, which generally affords the common limited partners a vote as though the common limited partners held shares
of our company’s common stock and voted together with the stockholders of our company with respect to such stockholder vote transactions.
Bridge Facility Commitment Letter
Contemporaneously with the execution of the purchase agreement, our company obtained a debt financing commitment for the transactions contemplated by
the purchase agreement, the aggregate proceeds of which will be used by our company to pay a portion or all of the cash consideration to consummate the transaction
and to pay related fees and expenses.
Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman
Sachs Bank USA, or collectively the bridge facility commitment parties, have committed to provide a 364-day bridge term loan of $1.75 billion, or the bridge loan, to our
operating partnership on the terms and conditions set forth in a commitment letter, or the bridge commitment letter, and fee letter, each dated December 6, 2014. Wells
Fargo Bank, National Association, Bank of America, N.A., and Goldman Sachs Bank USA have committed to fund the principal amount of the bridge loan as follows:
Wells Fargo Bank, National Association, 50%; Goldman Sachs Bank USA, 25%; Bank of America, N.A., 25%.
The obligation of the bridge facility commitment parties to provide financing under the bridge commitment letter are subject to certain conditions, including,
without limitation, (i) the negotiation, execution and delivery of definitive loan
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documentation for the bridge loan consistent with the bridge commitment letter and otherwise reasonably satisfactory to the bridge facility commitment parties, (ii) a
condition that there has not been a “Target Property Material Adverse Effect” (as defined in the bridge commitment letter), (iii) the consummation of the transaction in
accordance with the purchase agreement (without giving effect to any amendments to the purchase agreement or any waivers thereof that are materially adverse to the
bridge facility commitment parties unless consented to by the bridge facility commitment parties) concurrently with the funding of the bridge loan, (iv) the payment of
applicable costs, fees and expenses, and (v) the delivery of certain customary closing documents (including, among other things, opinions from legal counsel). The
principal amount of the bridge loan may be reduced in connection with certain equity and debt issuances by us and/or our operating partnership, as well as in
connection with certain asset sales.
The bridge commitment letter terminates on July 4, 2015.
For more information regarding this transaction and the risks and uncertainties associated therewith, see “Item 1A. Risk Factors,” “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and Note [15] to our consolidated financial statements.
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 competing properties within the markets in which we 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 and cash flows 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 acquisition opportunities not available to us and may otherwise be in a better position to acquire a property. Competition may also 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.”
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 26 properties totaling approximately 5.9 million square feet strategically located in many of our target markets, while the media and entertainment
reporting segment includes two properties, the 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 California and the Pacific Northwest. 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, 2014, we had 151 employees. At December 31, 2014, 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.
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Principal Executive Offices
Our principal executive offices are located at 11601 Wilshire Blvd., Sixth Floor, Los Angeles, California 90025 and our telephone number is (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 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 release 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 asbestos or lead surveys.
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
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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-containing building materials, or ACBM, or lead-based paint, or LBP, 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 LBP (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/or LBP 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 waste 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 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 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 Exchange Act. All such filings are available to be
viewed on our Investor Relations Web page free of charge. Also available on our Investor Relations Web page, 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., Sixth Floor, 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, as amended, or the Securities Act, as amended, 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, or 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 target 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 or maintain an investment grade rating;
our failure to generate sufficient cash flows to service our outstanding indebtedness and maintain dividend payments;
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;
risks related to acquisitions generally, including the disruption of management’s attention from ongoing business operations and the impact on customers,
tenants, lenders, operating results and business;
•
the inability to successfully integrate acquired properties, realize the anticipated benefits of acquisitions or capitalize on value creation opportunities;
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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, 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
Our properties are located in California and the Pacific Northwest, and we are susceptible to adverse economic conditions, local regulations and natural
disasters affecting those markets.
Our properties are located in California and the Pacific Northwest, which exposes us to greater economic risks than if we owned a more geographically dispersed
portfolio. Further, our properties are concentrated in certain submarkets, including Los Angeles, Orange County, San Diego, San Francisco, Silicon Valley, the East Bay,
and Seattle, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in the economic and regulatory environments of
California and the Pacific Northwest (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, wind,
landslides, droughts, fires and other events). 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 the Pacific Northwest, 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 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.
Our Sunset Gower, Sunset Bronson, Technicolor Building, 1455 Market, Rincon, 10950 Washington, 875 Howard, 625 Second Street, 275 Brannan, Pinnacle I,
Pinnacle II and Element LA properties 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, the Pacific Northwest 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 these properties were to
be re-leased 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:
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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 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
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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.
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 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.
The credit markets can experience 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.
In the United States, market and economic conditions continue to be challenging with stricter regulations and modest growth. While recent economic data
reflects moderate economic growth in the United States, there continues to be concern regarding the stability of the economy and credit markets generally. Volatility in
the U.S. and international capital markets and concern over a return to recessionary conditions in global economies, and the California economy in particular, 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.
We have a limited operating history with respect to some of our properties and may not be able to operate them successfully.
Our Merrill Place, 3402 Pico and 12655 Jefferson properties have only been under our management since they were acquired on February 12, 2014, February 28,
2014, and October 17, 2014, 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 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 these properties successfully.
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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, 2014, the 15 largest tenants in our office portfolio represented approximately 57.0%
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, 2014, our two largest tenants were Square and Salesforce.com, which together accounted for 13.4% of our annualized base rent and therefore represented a
significant credit concentration. If Square and Salesforce.com were to experience a downturn or a weakening of financial condition resulting in a failure to make timely
rental payments or causing a lease default, 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 by December 31, 2016, upon nine months prior notice and in exchange for payment of an early termination fee estimated to be
approximately $3.0 million for 2016. As of December 31, 2014, the Saatchi & Saatchi lease comprised approximately 2.0% 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, 2014, approximately 13.6% of the square footage of the office properties in our portfolio was available (taking into account uncommenced
leases signed as of December 31, 2014), and an additional approximately 5.4% of the square footage of the office properties in our portfolio is scheduled to expire in 2015
(including leases scheduled to expire as of, but including, December 31, 2014). 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 2015 and 2016. 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
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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 or the Pacific
Northwest 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., 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.
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 (most are covered under a blanket
insurance policy while a few are under individual policies), 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
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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 and the Pacific Northwest, areas
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 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, we entered into a joint venture with M. David Paul & Associates/Worthe Real Estate Group, or
MDP/Worthe, to acquire The Pinnacle, a two-building (Pinnacle I and Pinnacle II), 625,640 square-foot office property located in Burbank, California. On January 7, 2015,
we entered into a joint venture with Canada Pension Plan Investment Board (CPPIB), through which CPPIB purchased a 45% interest in our 1455 Market Street office
property. In addition to our joint ventures with MDP/Worthe and CPPIB, we may co-invest in the future with other 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. These
investments 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
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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.
Risk Factors Related to the Acquisition of the Target Properties
The issuance of shares of our common stock in the transaction or upon exchange of common units received in the transaction will have a dilutive effect on
our common stock and will reduce your percentage interest in our earnings, voting power and market value.
The equity consideration consists of up to an aggregate of 63,474,791 shares of our common stock and common units (subject to adjustment as described
below). The number of shares of our common stock to be issued to the seller parties upon completion of the transaction will be equal to approximately 9.8% of the then
total issued and outstanding shares of our common stock and the remainder of the equity consideration will consist of common units. The issuance of shares of our
common stock in the transaction will have a dilutive effect on our common stock and will reduce the relative percentage interests of current common stockholders in our
earnings, voting power and market value.
Additionally, part of the equity consideration will be paid in common units, which may have a dilutive effect on our common stock. Holders of common units
have the right to require the redemption of part or all of their outstanding common units for cash, or, at our election, shares of our common stock, based upon the fair
market value of an equivalent number of shares of our common stock at the time of the redemption, subject to certain restrictions on ownership and transfer of our
common stock. If the seller parties exercise their redemption rights and part or all of their outstanding common units are exchanged for shares of our common stock, such
exchange will have a dilutive effect on our common stock and reduce the relative percentage interests of existing common stockholders in our earnings, voting power
and market value.
The public resale by the seller parties of common stock issued in the transaction or issuable upon exchange of common units received in the transaction, or
the perception that such resales could occur, could adversely affect the per share trading price of our common stock following completion of the transaction.
None of the shares of common stock or common units that will be issued to the seller parties upon completion of the transaction will initially be registered under
the Securities Act, and such securities will only be able to be resold pursuant to an effective registration statement or an applicable exemption from registration under
federal and state securities laws. Upon the completion of the transaction, the seller parties will enter into the stockholders agreement with us and our operating
partnership, pursuant to which they will agree generally to not to transfer or sell any shares of common stock or common units
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to be issued in connection with the transaction prior to November 1, 2015. The restrictions on transfer and sale contained in the stockholders agreement will terminate
with respect to 50% of the securities to be issued to the seller parties on November 1, 2015 and with respect to the remaining 50% of such securities on March 1, 2016. In
the event that the seller parties elect to terminate their right to designate nominees for election as directors to our board of directors (i) prior to November 1, 2015, the
restriction on transfer and sale contained in the stockholders agreement will terminate on November 1, 2015 with respect to all securities issued to the seller parties in
connection with the transaction, or (ii) after November 1, 2015 but before March 1, 2016, any remaining restrictions on transfer or sale will terminate on the earlier of
March 1, 2016 or thirty days following the seller parties’ election.
Upon the completion of the transaction, we will enter into the registration rights agreement with the seller parties or their designated affiliates receiving the
equity consideration, pursuant to which we will agree to register for resale all of the shares of common stock to be issued to the seller parties or such designated
affiliates and any shares of common stock issuable upon the exchange of common units issued in the transaction. In addition, if we propose to register the offer and sale
of our common stock under the Securities Act, in connection with the public offering of such common stock, the seller parties will be entitled to certain “piggyback”
registration rights allowing them to include their shares in such registration, subject to certain marketing and other limitations.
If all or a substantial portion of the shares of our common stock issued in the transaction or shares of common stock issuable upon exchange of common units
issued in the transaction are resold into the public markets or if there is a perception that such resales could occur, the per share trading price of our common stock could
be adversely affected, and our ability to raise additional capital through the sale of our equity securities in the future may be adversely affected.
If the transaction does not occur, we may incur payment obligations to the seller parties.
If the purchase agreement is terminated because our stockholders do not approve the equity issuance, we will be obligated to pay the seller parties up to $14
million in expense reimbursement. If the purchase agreement is terminated under certain other circumstances, we will be obligated to pay the seller parties a termination
fee of up to $120 million, net of certain expense reimbursements.
Failure to complete the transaction in a timely manner could negatively affect our ability to achieve the benefits associated with the transaction and could
negatively affect our share price and future business and financial results.
The transaction is currently expected to close during the first half of 2015, assuming that all of the conditions in the purchase agreement are satisfied or waived.
The purchase agreement provides that either the buyer parties or the seller parties may terminate the purchase agreement if the closing of the transaction has not
occurred by 11:59 p.m. New York time on July 3, 2015. Certain events outside our control may delay or prevent the consummation of the transaction. Delays in
consummating the transaction or the failure to consummate the transaction at all may result in our incurring significant additional costs in connection with such delay or
termination of the purchase agreement and/or failing to achieve the anticipated benefits associated with the transaction. We cannot assure you that the conditions to the
completion of the transaction will be satisfied or waived or that any adverse effect, event, development or change will not occur, and we cannot provide any assurances
as to whether or when the transaction will be completed.
To complete the transaction, our stockholders must approve the equity issuance. In addition, the purchase agreement contains additional closing conditions,
which may not be satisfied or waived. Delays in consummating the transaction or the failure to consummate the transaction at all could negatively affect our future
business and financial results, and, in that event, the market price of our common stock may decline significantly, particularly to the extent that the current market price
reflects a market assumption that the transaction will be consummated. If the transaction is not consummated for any reason, our ongoing business could be adversely
affected, and we will be subject to several risks, including:
•
the payment by us of certain costs, including termination fees and expense reimbursements ranging from $14 million to $120 million under
certain circumstances as well as costs relating to the transaction, such as legal, accounting, financial advisory, filing, printing and mailing fees; and
•
the diversion of management focus and resources from operational matters and other strategic opportunities while working to consummate
the transaction.
If the transaction is not consummated, we will not achieve the expected benefits thereof and will be subject to the risks described above, any of which could
affect our share price and future business and financial results.
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The pendency of the transaction could adversely affect our business and operations and those of the Target Properties.
In connection with the pending transaction, some current or prospective tenants, lenders, joint venture partners or vendors of ours or the seller parties may
delay or defer decisions, which could negatively impact the revenues, earnings, cash flows and expenses of ours and of the Target Properties, regardless of whether the
transaction is completed. In addition, under the purchase agreement, both the buyer parties and the seller parties are subject to certain restrictions on the conduct of
their respective businesses prior to completing the transaction. These restrictions may prevent the parties from pursuing certain strategic transactions, undertaking
certain significant capital projects, undertaking certain significant financing transactions and otherwise pursuing other actions that are not in the ordinary course of
business, even if such actions would prove beneficial.
We will incur significant non-recurring costs in connection with the transaction.
We expect to incur a number of non-recurring costs associated with transferring and integrating the Target Properties into our business, including any planned
renovation, development or lease-up of such properties. Under the terms of the purchase agreement we are obligated to pay all expenses incurred in connection with the
transaction at closing (subject to certain exceptions). The majority of non-recurring expenses relating to the transaction are comprised of transaction costs, costs of
transferring the Target Properties and costs related to formulating integration plans. We expect that approximately $50.6 million will be incurred to complete the
transaction although additional unanticipated costs may be incurred in the integration of the Target Properties into our business. As of December 31, 2014, we have
incurred $12.4 million in non-recurring costs in connection with the transaction which does not include any fees for which we will need to reimburse the seller parties or
others at the closing of the transaction.
There can be no assurance that we will be able to obtain financing for the funds necessary to pay the cash portion of the transaction consideration on
acceptable terms, in a timely manner, or at all.
Our obligation under the purchase agreement to consummate the transaction is not conditioned on us obtaining any financing for the transaction. In
connection with the transaction, we have obtained commitments for up to $1.75 billion under a 364-day senior unsecured bridge loan facility to finance the cash portion
of the transaction consideration, subject to certain conditions. We are also pursuing a number of financing options, and anticipate that the funds needed to complete the
transaction will be derived from a combination of (i) our available cash on hand and/or that of our operating partnership,(ii) proceeds from the sale of equity interests in,
or assets of, certain wholly or partially owned subsidiaries, (iii) the issuance and sale of our common and/or preferred stock and/or limited partnership interests in our
operating partnership and (iv) debt financing, which may include, without limitation, some combination of the following: (a) a senior unsecured bridge loan facility,
(b) the issuance of senior unsecured notes or other debt securities, (c) borrowings under our operating partnership’s existing corporate credit facility and/or an upsizing
thereof, including pursuant to the incremental feature thereof, (d) secured asset level financing and/or (e) other commercial or institutional bank loans.
There can be no assurance that we will satisfy the conditions needed to enter into the committed 364-day senior unsecured bridge loan facility, or that we will
be able to obtain alternative financing on acceptable terms, in a timely manner or at all. If we utilize the committed 364-day senior unsecured bridge loan facility, we would
need to refinance such indebtedness within one year and there can be no assurance that we would be able to do so on acceptable terms, in a timely manner or at all,
particularly since we would only utilize our committed 364-day senior unsecured bridge facility if alternative financing on better terms was not available to us. Our
committed 364-day senior unsecured bridge facility contains provisions that are not favorable to us, including a duration fee that is payable every 90 days after the
funding of the bridge and that steps up over time as well as mandatory prepayment requirements for, among other things, debt and equity issuances and asset sales. If
we are unable to obtain the funds necessary to pay the cash portion of the transaction consideration, we may not be able to complete the transaction and may be
required to pay the seller parties a termination fee of up to $120 million.
The equity consideration will not be adjusted in the event of any change in our stock price.
The equity consideration consists of an aggregate of up to 63,474,791 shares of our common stock and common units, subject to reduction as set forth in the
purchase agreement. The number of shares of our common stock to be delivered to the seller parties upon completion of the transaction will be equal to approximately
9.8% of the total issued and outstanding shares of our common stock, and the remainder of the equity consideration will consist of common units. The aggregate number
of shares of common stock and common units will not be adjusted for changes in the market price of our common stock. Changes in the market price of our common
stock, which may result from a variety of factors (many of which are beyond our control), will affect the value of the transaction consideration that the seller parties will
receive upon consummation of the transaction. As a result, prior to the consummation of the transaction, you will not know the exact value of the shares of common
stock and the common units that the seller parties will receive upon the consummation of the transaction.
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Certain of the Target Properties are subject to ground leases, pursuant to which the lessors have consent rights that if not granted may prevent us from
acquiring such properties.
Certain of the Target Properties are subject to ground leases with unaffiliated third party ground lessors, pursuant to which such lessors have consent rights
that, if not granted or waived, may prevent us from acquiring such properties. There can be no assurance that the seller parties will be able to obtain the consents
required to consummate the transfer of such properties to us pursuant to the purchase agreement. In the event that we are unable to acquire the properties that are
subject to ground leases due to a failure to obtain ground lessor consent, the total consideration to be paid in the transaction will be adjusted; however, such reduction
in consideration may not be commensurate with the lost actual or anticipated benefits of acquiring such properties. In addition, if we are unable to acquire one or more of
the Target Properties for the reasons described above, we may not realize the operating efficiencies that may otherwise be achieved and the overall size, geographic
footprint, tenant mix and other attributes of the portfolio of properties to be acquired in the transaction may not be as we anticipated.
The Target Properties may be subject to environmental liabilities, for which we may become responsible.
Certain of the Target Properties that are ground-leased from Stanford University have been subject to environmental investigation and remediation for many
years, including soil removal, groundwater remediation and monitoring. These activities are ongoing at certain sites and will continue into the foreseeable future. At
other sites, only monitoring is required. At present, these activities do not interfere with the leasing and operation of the properties, but could do so if agency
requirements or remediation requirements change. Also, these activities could cause additional expense if the properties are redeveloped or renovated by us. The parties
responsible for remediation are typically former tenants that engaged in electronic manufacturing and caused the release of chlorinated compounds and other
contaminants. If the responsible parties become unable to meet these remediation obligations, it is possible that we could become responsible for them.
Screening for vapor intrusion is underway on several of the Target Properties. These screenings are monitored by either the San Francisco Regional Water
Quality Control Board or the Department of Toxic Substances Control and are the responsibility of prior tenants. If the responsible parties are unable to meet any
required remediation obligations, it is possible that we could become responsible for them. Also, we could be the subject of claims associated with indoor air exposure.
Further, certain of the Target Properties have known asbestos-containing materials. We could incur abatement costs associated with testing for and remediating any
asbestos issues and could be subject of claims associated with exposure to asbestos.
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.
Risks Following the Transaction
The sponsor stockholders may exercise significant influence over us.
Upon completion of the transaction, the sponsor stockholders are expected to beneficially own 9.8% of our outstanding common stock and an approximate
43.6% interest in our company on a fully diluted basis (including common units). Consequently, the sponsor stockholders may be able to significantly influence the
outcome of matters submitted for stockholder action, including approval of significant corporate transactions, such as amendments to our governing documents,
business combinations, consolidations and mergers. In addition, concurrently with the completion of the transaction, the partnership agreement of our operating
partnership will be amended to, among other things, provide that holders of common units will be entitled to vote to approve the consummation of certain change of
control and other transactions that are required to be approved by our stockholders. The right of the holders of common units to vote to approve any such transactions
will remain in effect for so long as the sponsor stockholders own at least 9.8% of the aggregate number of shares of common stock and common units that the sponsor
stockholders receive as the equity consideration in the transaction.
Further, under the purchase agreement, we have agreed to increase the size of our board of directors from nine to twelve members, and if the transaction is
consummated, entities controlled by the sponsor stockholders will have the right to designate three of our director nominees for so long as those entities beneficially
own more than 50% of the total number of shares of common stock and common units to be acquired as the equity consideration in the transaction. This right to
designate director nominees (i) will be reduced to two directors on the first date on which those entities beneficially own greater than or equal to 30% but less than or
equal to 50% of the total number of shares of common stock and common units to be acquired as the equity consideration in the transaction, (ii) will be reduced to one
director on the first date on which those entities
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beneficially own greater than or equal to 15% but less than 30% of the total number of shares of common stock and common units to be acquired as the equity
consideration in the transaction, and (iii) will cease altogether on the date on which those entities beneficially own less than 15% of the total number of shares of
common stock and common units to be acquired as the equity consideration in the transaction. For so long as those entities have the right to designate at least two
director nominees, the sponsor stockholders will also be entitled to appoint one such nominee then serving on the board of directors to serve on each committee of the
board of directors (other than certain specified committees). As a result, the sponsor stockholders will have substantial influence on us and could exercise its influence
in a manner that conflicts with the interests of other stockholders. The presence of a significant stockholder and the addition to the board of directors the sponsor
stockholders' nominees may also have the effect of making it more difficult for a third party to acquire us or for our board of directors to discourage a third party form
seeking to acquire us.
In connection with the transaction, we will incur significant additional indebtedness in order to finance the acquisition of the Target Properties, which
could adversely affect us, including by decreasing our business flexibility and increasing our interest expense.
Our consolidated indebtedness as of December 31, 2014 was approximately $957.5 million (before loan premium) including debt related to our first financial
property. After giving effect to the transaction and the anticipated incurrence of indebtedness in connection therewith (and assuming the transaction were to be
consummated on December 31, 2014), our indebtedness would be approximately $2.8 billion (before loan premium), assuming we finance the entire cash consideration
(before closing costs, prorations, and credits) with indebtedness. We will have substantially increased indebtedness following completion of the transaction, which
could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. We
will also incur various costs and expenses associated with the financing of the transaction. The amount of cash required to pay interest on our increased indebtedness
levels following completion of the transaction and thus the demands on our cash resources will be greater than the amount of cash flows required to service our
indebtedness prior to the transaction. The increased levels of indebtedness following completion of the transaction could (i) reduce access to capital, (ii) increase
borrowing costs generally or for any additional indebtedness, (iii) reduce funds available for working capital, capital expenditures, acquisitions and other general
corporate purposes, (iv) create competitive disadvantages for us relative to other companies with lower debt levels, (v) reduce the amount of cash available to pay
dividends on our common stock and (vi) increase our vulnerability to general adverse economic and industry conditions. If we do not achieve the expected benefits and
cost savings from the transaction, then our ability to service our indebtedness may be adversely impacted.
Certain of the indebtedness that may be incurred in connection with the transaction could bear interest at variable interest rates. If interest rates increase, such
variable rate debt would create higher debt service requirements, which could adversely affect our cash flows, our ability to pay principal and interest on our debt, our
cost of refinancing our debt when it becomes due and our ability to make or sustain distributions to stockholders. Additionally, if we choose to hedge our interest rate
risk, we cannot guarantee that the hedge will be effective or that the hedging counterparty will meet its obligations to us.
Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or other general corporate
requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market
conditions and other factors beyond our control. We cannot assure you that we will be able to obtain additional financing on terms acceptable to us or at all.
Our future results will suffer if we do not effectively integrate the Target Properties and any retained employees following the transaction.
Following the transaction, we may be unable to integrate successfully the Target Properties and any retained employees and realize the anticipated benefits of
the transaction or do so within the anticipated timeframe. The integration process could distract management, disrupt our ongoing business or result in inconsistencies
in our operations, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with our tenants,
lenders, joint venture partners, vendors and employees or to achieve all or any of the anticipated benefits of the transaction.
The market price of our common stock may decline as a result of the transaction.
The market price of our common stock may decline as a result of the transaction if we do not achieve the perceived benefits of the transaction as rapidly or to
the extent anticipated by financial or industry analysts, or the effect of the transaction on our financial results is not consistent with the expectations of financial or
industry analysts. The transaction is expected to be accretive to funds from operations per share, or FFO per share, in 2015. The extent and duration of any accretion will
depend
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on several factors, including the amount of transaction-related expenses that are charged against our earnings. If expenses charged against earnings are higher than we
expected, the amount of accretion in 2015 could be less than currently anticipated and the transaction may not turn out to be accretive (or may be less accretive than
currently anticipated). In such event, the price of our common stock could decline.
In addition, if the transaction is consummated, we will own and operate a significantly larger portfolio than at present, with a different mix of properties,
geographic concentration, risks and liabilities. Current holders of our common stock may not wish to continue to invest in us if the transaction is consummated or for
other reasons may wish to dispose of some or all of their investment. If, following the consummation of the transaction, there is selling pressure on our common stock
that exceeds demand at the market price, the price of our common stock could decline.
The agreements that will govern the indebtedness to be incurred or assumed in connection with the transaction are expected to contain various covenants
imposing restrictions on us and certain of our subsidiaries that may affect our ability to operate our businesses.
The agreements that will govern the indebtedness to be incurred or assumed in connection with the transaction are expected to contain various affirmative and
negative covenants that may, subject to certain significant exceptions, restrict our ability and that of certain of our subsidiaries to, among other things, have liens on
property, incur additional indebtedness, make loans, advances or other investments, make non-ordinary course asset sales, and/or merge or consolidate with any other
person or sell or convey certain of our assets to any one person. In addition, some of the agreements that govern the debt financing are expected to contain financial
covenants that will require us to maintain certain financial ratios. Our ability to comply with these provisions may be affected by events beyond our control. Failure to
comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations.
We cannot assure you that we will be able to continue paying dividends at the current rate.
We intend to make distributions each taxable year (not including a return of capital for United States federal income tax purposes) equal to at least 90% of our
taxable income and intend to pay regular quarterly dividends to our stockholders. However, holders of our common stock may not receive the same quarterly dividends
following the transaction for various reasons, including the following:
•
as a result of the transaction and the issuance of the common stock and common units in connection with the transaction, the total amount of cash
required for us to pay dividends at our current rate will increase; and
• we may not have enough cash to pay such distributions due to changes in our cash requirements, indebtedness, interest costs, capital spending
plans, cash flows or financial position.
The risks associated with implementing our long-term business plan and strategy following the transaction may be different from the risks related to our
business with respect to our existing property portfolio.
Our ability to execute our long-term business plan and strategy following the acquisition of the Target Properties may be different from the execution risks
related to our business solely with respect to our existing real property portfolio. Such risks may include unforeseen delays or an inability to renew leases, lease vacant
spaces or re-let spaces as leases expire. In addition, we may be required to make rent or other concessions and/or incur significant capital expenditures to improve both
our existing properties as well as the Target Properties in order to retain and attract tenants, causing our financial condition, results of operation, cash flow and trading
price of our common stock to be adversely affected.
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:
•
local oversupply or reduction in demand for office or media and entertainment-related space;
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•
•
•
•
•
•
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 contamination may arise from spills of petroleum or hazardous substances
or releases from tanks used to store such materials.
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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 LBP 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 or lead). Such laws require that owners or
operators of buildings containing ACBM and LBP (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/or LBP 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 use by disabled persons. Some of our properties may currently be in non-
compliance with the ADA. If one or more of the
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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, 2014, the Farallon Funds owned an approximate 15.2% 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, 2014, investment funds affiliated with Farallon Capital Management, L.L.C., or Farallon, which we refer to as the Farallon Funds, owned an
approximate 15.2% 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 $10.2 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.
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
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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 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, Mr. Coleman is party to an employment agreement 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 a member 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 past offerings of our common stock and the offering of our series B preferred stock, our board of directors granted to the Farallon Funds and certain
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. In connection with the acquisition of the
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Target Properties, our board of directors has also agreed to grant to certain affiliates of The Blackstone Group L.P. 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
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unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals 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 certain 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
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Table of Contents
period beginning in 2017 and prior to the expiration, in 2027, of the maximum period for indemnification. If we were to trigger the tax protection provisions under these
agreements, we would be required to pay damages, if any, 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, if any, 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, 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. 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 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.
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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 and requirements regarding the composition of our assets and our gross income. Also, we must make distributions to stockholders aggregating
annually at least 90% of our net taxable income, excluding net capital gains. We own and may acquire direct or indirect interests in one or more entities that have elected
or will elect to be taxed as REITs under the Code (each, a “Subsidiary REIT”). A Subsidiary REIT is subject to the various REIT qualification requirements and other
limitations described herein that are applicable to us. If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to federal
income tax, (ii) shares in such Subsidiary REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs, and (iii) it is possible that we
would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. 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.
If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other
adverse consequences.
We believe that our operating partnership is properly treated as a partnership for federal income tax purposes. As a partnership, our operating partnership is not
subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, its share of our
operating partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our operating partnership or any other subsidiary
partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in
treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we would fail to meet
the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating
partnership or any subsidiary partnerships to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which could reduce
significantly the amount of cash available for debt service and for distribution to its partners, including us.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for federal
income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of
property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that
would be characterized as held for sale to customers in the ordinary course of our business, such characterization is a factual determination and we cannot assure you
that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors, which, if met, would prevent
any such sales from being treated as prohibited transactions.
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
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Table of Contents
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.
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
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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, 2014, our portfolio consisted of 28 properties (26 wholly-owned properties and two properties owned by a joint venture), located in eight
California submarkets and Seattle, Washington, containing a total of approximately 6.8 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, 2014. Rental data presented in the table below for office properties reflects annualized base rent on
leases in place as of December 31, 2014 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, 2014. Leases at our media and
entertainment properties are typically short-term leases of 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 2015 and 2016.
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Table of Contents
The following table sets forth certain information relating to each of the office and media and entertainment properties owned as of December 31, 2014.
Property
OFFICE PROPERTIES
First & King
Met Park North
Northview
Merrill Place
Rincon Center
1455 Market Street
875 Howard Street
222 Kearny Street
625 Second Street
275 Brannan Street
901 Market Street
Technicolor Building
Del Amo Office Building
9300 Wilshire
10950 Washington
604 Arizona
6922 Hollywood
10900 Washington
Element LA
Pinnacle I
Pinnacle II
3401 Exposition
3402 Pico
12655 Jefferson(5)
Icon(6)
City
Seattle
Seattle
Seattle
Seattle
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
Hollywood (LA)
Torrance (LA)
Beverly Hills
Culver City
Santa Monica
Hollywood (LA)
Culver City
Los Angeles
Burbank
Burbank
Santa Monica
Los Angeles
Los Angeles
Hollywood (LA)
Year
Built/
Renovated
1904/2009
2000
1991
Various
1985
1977
Various
Various
1905
1906
1912
2008
1986
1965/2001
Various
1950
1965
1973
Various
2002
2005
1961
1950
1985
2016
Total/Weighted Average Office Properties:
MEDIA & ENTERTAINMENT PROPERTIES
Sunset Gower
Sunset Bronson
Hollywood (LA)
Hollywood (LA)
Various
Various
Total/Weighted Average Media & Entertainment Properties:
Subtotal - Operating Properties
HELD-FOR-SALE
First Financial
Encino (LA)
1986
Total/Weighted Average Held-For-Sale Properties:
Total Office, M&E and Held-for-Sale Properties:
LAND
Merrill Place
Sunset Bronson—Lot A
Sunset Gower— Redevelopment
Element LA
3402 Pico
Total Land Assets:
Portfolio Total:
Seattle
Hollywood (LA)
Hollywood (LA)
West Los Angeles
West Los Angeles
N/A
N/A
N/A
N/A
N/A
37
Annualized
Base Rent/
Annual Base
Rent(3)
Annualized
Base Rent/
Annual Base
Rent Per
Leased
Square Foot(4)
Square
Feet(1)
Percent
Leased(2)
96.6% $
95.4
84.5
70.7
90.7
99.4
99.4
92.2
73.8
100.0
100.0
100.0
100.0
95.3
100.0
100.0
92.2
100.0
100.0
97.4
99.2
100.0
—
—
—
92.8% $
10,213,811
4,835,979
3,027,250
3,407,501
21,784,049
25,777,928
7,404,370
4,829,812
4,707,950
2,984,599
7,771,318
4,549,302
3,069,070
2,439,729
5,376,405
1,867,878
8,300,620
456,657
—
15,947,196
8,789,091
2,547,715
—
—
—
150,088,230
69.1% $
76.2
71.6% $
12,907,268
8,918,814
21,826,082
$
$
$
$
93.2% $
93.2% $
7,197,502
7,197,502
$
$
22.60
26.58
19.94
24.96
41.62
27.29
26.03
38.35
46.22
54.59
46.92
39.57
27.16
41.81
33.81
42.20
43.81
46.04
—
41.60
38.21
40.20
—
—
—
33.44
32.72
37.61
34.56
34.53
34.53
472,223
190,748
182,009
193,153
580,850
1,025,833
286,270
148,797
138,080
54,673
206,199
114,958
113,000
61,224
159,024
44,260
205,523
9,919
284,037
393,777
231,864
63,376
39,136
88,215
413,000
5,700,148
570,470
299,098
869,568
6,569,716
223,679
223,679
6,793,395
140,000
273,913
423,396
500,000
110,000
1,447,309
8,240,704
Table of Contents
(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 re-measurement, re-leasing, acquisition, or development. On
September 21, 2012, we acquired an office property located at 1455 Gordon Street totaling approximately 6,000 square feet, which was added to the Sunset Gower property. As of
December 31, 2014, the square footage for media and entertainment properties totaled 869,568 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.
(2) Percent leased for office properties is calculated as (i) square footage under commenced and uncommenced leases as of December 31, 2014, 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, 2014. 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.
(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)) under commenced leases as of December 31, 2014 by (ii) 12. Annual base rent for media and
entertainment properties reflects actual base rent for the 12 months ended December 31, 2014, 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 commenced lease as of December 31,
2014. 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, 2014, excluding
tenant reimbursements, divided by (ii) average square feet under lease for the 12 months ended December 31, 2014.
(5) Tenant signed a termination agreement and the building is vacant. As such, this asset is now treated as a redevelopment property and annualized base rent of $30.24 received from
vacated tenant is being capitalized.
(6) We are recognizing this as a development property anticipated to be completed by 2016.
Office Portfolio
Our office portfolio consists of 26 office properties comprising an aggregate of approximately 5.9 million square feet. As of December 31, 2014, our stabilized
office properties were approximately 94.6% leased (giving effect to leases signed but not commenced as of that date). All of our office properties are located in California
and the Pacific Northwest. As of December 31, 2014, the weighted average remaining lease term for our stabilized office portfolio was 6.4 years.
Tenant Diversification of Office Portfolio
Our office portfolio is currently leased to a variety of companies. The following table sets forth information regarding the 15 largest tenants in our office
portfolio based on annualized base rent as of December 31, 2014.
Tenant
Square
Salesforce.com(2)
Warner Bros. Entertainment
Warner Music Group
EMC Corporation(3)
AIG
Uber Technologies, Inc.(4)
GSA(5)
NFL Enterprises(6)
Clear Channel
Technicolor Creative Services USA, Inc.
Amazon
Capital One
Fox Interactive Media, Inc.(7)
Property
1455 Market Street
Rincon Center
Pinnacle II
Pinnacle I
Various
Rincon Center
Various
1455 Market Street
Various
Pinnacle I
Technicolor Building
Met Park North
First & King
625 Second Street
Saatchi & Saatchi North America, Inc.
Del Amo Office Building
Total
Lease
Expiration(1)
9/27/2023
Various
12/31/2021
12/31/2019
Various
7/31/2017
Various
Various
6/30/2019
9/30/2016
5/31/2020
11/30/2023
2/28/2019
Various
12/31/2019
Total
Leased
Square
Feet
333,216
234,699
230,000
195,166
294,756
132,600
145,774
172,517
137,305
109,323
114,958
139,824
133,148
69,746
113,000
2,556,032
Percentage
of Office
Portfolio
Square
Feet
6.0% $
4.3
4.2
3.5
5.3
2.4
2.6
3.1
2.5
2.0
2.1
2.5
2.4
1.3
2.1
46.3% $
Percentage
of Office
Portfolio
Annualized
Base Rent
6.7%
6.7
5.6
5.1
4.6
3.8
3.5
3.5
3.2
2.9
2.9
2.4
2.1
2.0
2.0
57.0%
Annualized
Base Rent (2)
10,571,764
10,488,009
8,789,091
8,038,801
7,254,744
5,967,000
5,458,402
5,452,819
4,983,416
4,569,640
4,549,302
3,772,659
3,367,424
3,205,814
3,069,070
89,537,955
_____________
(1) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) under commenced leases as of December 31, 2014, by (ii) 12.
Annualized base rent does not reflect tenant reimbursements.
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Table of Contents
(2) Salesforce.com is expected to take possession of an additional: (1) 2,868 square feet during the third quarter of 2015; and (2) 4,144 square feet during the second quarter of 2017.
Expirations by square footage: (1) 83,016 square feet expiring on July 31, 2025; (2) 59,689 square feet expiring on April 30, 2027; (3) 93,028 square feet expiring on October, 31, 2028;
and (4) 5,978 square feet of MTM storage space.
(3) EMC expirations by property and square footage: (1) 66,510 square feet at 875 Howard Street expiring on June 30, 2019; (2) 185,292 square feet at First & King expiring on October 18,
2021; and (3) 42,954 square feet at First & King expiring on December 31, 2023.
(4) Uber is expected to take possession of an additional 74,689 square feet during the first quarter of 2015.
(5) GSA expirations by property and square footage: (1) 22,390 square feet at 1455 Market expiring on December 31, 2014; (2) 71,729 square feet at 1455 Market Street expiring on February
19, 2017; (3) 5,906 square feet at 901 Market Street expiring on April 30, 2017; (4) 28,993 square feet at Northview expiring on April 4, 2020; and (5) 43,499 square feet at 901 Market
Street expiring on July 31, 2021.
(6) NFL Enterprises expiration by property and square footage: (1) 127,386 square feet at 10950 Washington expiring on June 30, 2019 and (2) 9,919 square feet at 10900 Washington
expiring on June 30, 2019.
(7) Fox Interactive Media, Inc. expirations by square footage: (1) 35,151 square feet early terminating on March 31, 2015 and (2) 34,595 square feet expiring on March 31, 2017.
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, 2014.
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
71
70
20
24
17
14
9
10
235
30.2%
29.8
8.5
10.2
7.2
6.0
3.8
4.3
100.0%
87,129
372,265
289,688
714,389
1,019,866
2,190,201
23,358
420,372
5,117,268
1.7% $
7.3
5.7
14.0
19.9
42.8
0.4
8.2
100.0% $
Percentage
of Office
Portfolio
Annualized
Base Rent
1.8%
8.0
5.7
13.3
21.2
38.3
—
11.7
100.0%
Annualized
Base Rent (1)
3,304,743
14,178,079
10,176,111
23,659,750
37,726,939
68,240,110
—
20,891,485
178,177,217
(1) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)), including uncommenced leases, as of December 31, 2014 (ii)
by 12. Annualized base rent does not reflect tenant reimbursements.
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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, 2014 plus available space, for each of the ten
full calendar years beginning January 1, 2014 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
Number of
Expiring
Leases
Square
Footage
of
Expiring
Leases (1)
Percentage
of Office
Portfolio
Square Feet
Annualized
Base Rent (2)
Percentage
of Office
Portfolio
Annualized
Base Rent
Annualized
Base Rent
Per Leased
Square Foot
Vacant
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Thereafter
Building management use
Signed leases not commenced
Office Portfolio Total/Weighted Average:
____________
4
42
34
33
29
24
10
14
4
12
10
9
10
235
$
806,559
61,586
321,510
375,680
567,454
315,205
741,200
394,338
708,102
18,906
634,297
535,260
23,358
420,372
5,923,827
13.6%
1.0
5.4
6.4
9.6
5.3
12.5
6.7
12.0
0.3
10.7
9.0
0.4
7.1
100.0% $
2,470,358
8,136,184
12,387,858
18,467,065
9,333,215
26,370,326
14,671,229
21,933,729
633,208
19,729,036
23,153,522
—
20,891,485
178,177,215
1.4
4.6
6.9
10.4
5.2
14.8
8.2
12.3
0.4
11.1
13.0
—
11.7
100.0% $
40.11
25.31
32.97
32.54
29.61
35.58
37.2
30.98
33.49
31.10
43.26
—
49.7
34.82
(1) Assumes Bank of America exercises the early termination rights. The following summarizes Bank of America’s early termination rights by square footage as of December 31, 2014: (1)
114,322 square feet at December 31, 2015 and (2) 137,809 square feet at December 31, 2017.
(2) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)), including uncommenced leases, as of December 31, 2014, by
(ii) 12. Annualized base rent does not reflect tenant reimbursements.
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Historical Office Tenant Improvements and Leasing Commissions
The following table sets forth certain historical information regarding tenant improvement and leasing commission costs for tenants at the properties in our total
office portfolio:
Renewals (1)
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
New leases (4)
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
Total
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
______________________________________________________
Year Ended December 31,
2014
2013
2012
22
233,332
0.70
2.82
3.52
$
$
29
398,402
43.26
13.21
56.47
51
631,734
27.54
9.38
36.92
$
$
$
$
$
$
$
$
$
$
$
32
232,967
2.86
5.42
8.28
$
$
28
716,178
52.52
22.87
75.39
$
$
25
197,980
4.77
3.13
7.90
38
956,926
42.99
14.57
57.56
60
949,145
40.33
18.59
58.92
$
$
$
63
1,154,906
36.44
12.61
49.05
(1) Includes retained tenants that have relocated or expanded into new space within our portfolio.
(2) Assumes all tenant improvement and leasing commissions are paid in the calendar year in which the lease is executed, which may be different than the year in which they were
actually paid.
(3) Tenant improvement costs are based on negotiated tenant improvement allowances set forth in leases, or, for any lease in which a tenant improvement allowance was not
specified, the aggregate cost originally budgeted, at the time the lease commenced.
(4) Excludes retained tenants that have relocated or expanded into new space within our portfolio.
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Historical Office Leasing Activity
The following table sets forth certain historical information regarding leasing activity for our total office portfolio:
Vacant space available at the beginning of period
Expirations as of the last day of the prior period
Adjustment for remeasured square footage on new leases
Properties acquired vacant space
Properties placed in-service
Properties disposed vacant space
Leases expiring or terminated during the period
Total Space Available for Lease
Leases with new tenants
Lease renewals
Leases signed (uncommenced) at the end of the period
Total Space Leased
Vacant Space Available for Lease at the End of the Period
Media and Entertainment Portfolio
Total Square Feet
Year Ended December 31,
2014
2013
2012
311,164
208,299
491
183,972
477,077
58,089
4,408
184,122
413,000
(8,900)
—
(19,408)
241,494
1,349,520
359,077
47,549
136,335
542,961
806,559
624,382
1,328,670
334,842
69,694
612,970
1,017,506
311,164
321,387
5,781
1,966
253,203
—
—
406,753
989,090
136,687
145,840
229,486
512,013
477,077
Our portfolio of operating properties includes two properties that we consider to be media and entertainment properties, encompassing an aggregate of
869,568 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, 2014, our media and entertainment properties were approximately
71.6% 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 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 was a tenant for six years prior to the show ending.
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.
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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 three buildings, known as 6050 Sunset and 1455 Beachwood (acquired on December 16, 2011) and 1455 Gordon (acquired
on September 21, 2012), that comprise approximately 26,761 square feet. The 1455 Beachwood and 1455 Gordon buildings are currently being renovated. For the year
ended December 31, 2014, Sunset Gower was approximately 69.1% 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 and the Chadwick 1994 Family Trust and Richard S. Chadwick. The remaining portion of the Sunset Gower property is owned by Sunset Gower Entertainment
Properties in fee.
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, 2014, we had no immediate plans to develop additional facilities on the property.
Sunset Gower Primary Tenants
The following table summarizes information regarding the primary tenants of Sunset Gower for the year ended December 31, 2014:
Principal
Nature of
Business
Television/Entertainment
Lease
Expiration
5/31/2015
Television/Entertainment
5/31/2015
Television/Entertainment
9/30/2014
Renewal
Options
—
—
—
Tenant
FTP Productions (Scandal)
ABC (How to Get Away
with Murder)
Farnsworth Entertainment
(Newsroom)
Total/Weighted Average:
_____________
Total
Leased
Square
Feet(1)
98,307
66,227
54,872
219,406
Percentage
of
Property
Square
Feet
Annual Base
Rent Per
Leased
Square
Foot(3)
Percentage
of
Property
Annual
Base Rent
Annual
Base Rent(2)
17.2 % $
3,413,906 $
11.6
1,436,504
9.6
38.5 % $
1,356,503
6,206,913 $
34.73
36.35
32.96
34.68
26.5 %
11.1
10.5
48.1 %
(1) Reflects average square feet under lease to such tenant for the year ended December 31, 2014.
(2) Annual base rent reflects actual base rent for the year ended December 31, 2014, excluding tenant reimbursements.
(3) Annual base rent per leased square foot is calculated as actual rent for the year ended December 31, 2014, excluding tenant reimbursements, divided by average square feet under lease
for the year ended December 31, 2014.
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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, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
_____________
Percent Leased(1)
Annual Base
Rent Per
Leased
Square Foot(2)
Annual Net
Effective Base Rent
Per Leased
Square Foot(3)
69.1% $
65.3
71.2
66.6
70.9
$
32.72
32.92
30.49
30.88
30.27
32.59
33.01
30.61
30.98
30.27
(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.
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,
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, 2014, Sunset Bronson was approximately 76.2% 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 were approximately $2,707,940 for the period
February 1, 2013 through January 31, 2014. Net rents are expected to be $2,789,178 for the period February 1, 2014 through January 31, 2015 and $2,872,853 for the period
February 1, 2015 through January 31, 2016.
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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, 2014:
Tenant
KTLA
Principal
Nature of
Business
Television/
Entertainment
Lease
Expiration
Renewal
Options
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
1/31/2016
—
90,506
29.1% $
2,085,113 $
23.04
3 Doors Productions (Let's
Make a Deal)
Television/Entertainment
12/31/2014
—
CBS Studios (Judge Judy)
Television/Entertainment
4/30/2016
—
Total/Weighted Average:
______________
51,596
19,916
162,018
16.6
6.4
52.1% $
1,928,708
1,028,170
5,041,991 $
37.38
51.62
31.12
(1) Reflects average square feet under lease to such tenant for the year ended December 31, 2014.
(2) Annual base rent reflects actual base rent for the year ended December 31, 2014, excluding tenant reimbursements. As of February 1, 2015, annualized base rent for KTLA will be
$2,872,853, subject to an abatements of $718,213.
(3) Annual base rent per leased square foot is calculated as actual base rent for the year ended December 31, 2014, excluding tenant reimbursements, divided by average square feet under
lease for the year ended December 31, 2014.
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, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
_________________
Percent
Leased(1)
Annual Base
Rent
Per Leased
Square Foot(2)
Annual Net
Effective Base
Rent Per
Leased Square Foot(3)
76.2% $
78.1
78.1
76.3
75.5
$
37.61
35.63
42.16
40.77
40.18
40.34
38.31
40.02
38.58
37.97
(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
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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
Following the December 8, 2014 announcement that our company and operating partnership had entered into the asset purchase agreement with the sponsor
stockholders, a punitive class action lawsuit was filed on January 22, 2015 in the Superior Court of the State of California, County of San Francisco, captioned
Fundamental Partners, v. Hudson Pacific Properties, Inc. et al., Case No. CGC-15-543775. The complaint names as defendants, among other parties, our company and
the members of our board of directors, and alleges, among other claims, that our directors breached their fiduciary duties by “effectively” selling control to the sponsor
stockholders and by failing to disclose purportedly material information to stockholders in connection with the purchase agreement. The complaint seeks, among other
things, an order enjoining or rescinding the purchase agreement and an award of attorneys’ fees and other costs. We believe the complaint has no merit and intend to
vigorously defend against plaintiff’s allegations.
In addition, 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, results of operations or cash flows if determined adversely to us.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Overview
As of February 25, 2015, we had approximately 79,845,880 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 quarterly high, low and closing prices of our common stock from January 1, 2013 through
December 31, 2014, as reported by the NYSE, are set forth below for the periods indicated.
As of February 25, 2015, our operating partnership had 81,684,736 common operating partnership units outstanding, that were not owned by us. There is no
active trading market for our operating partnership units.
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. Currently, we pay distributions to our stockholders each March, June, September and
December. Dividends are made to those stockholders who are stockholders as of the dividend record date. Dividends are paid at the discretion of our board of directors
and 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.
On December 31, 2014, the reported closing sale price per share of our common stock on the NYSE was $30.06. The following table shows our dividends
declared, and the high, low and closing sales prices for our common stock as reported by the NYSE for the periods indicated:
Fiscal year 2014
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2013
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
Close
Per Share of Common
Stock Dividends
Declared
$
$
23.61
25.96
27.19
30.61
21.78
21.37
19.70
22.15
$
19.13
22.13
24.33
24.45
21.64
20.80
19.39
21.80
$
23.07
25.34
24.66
30.06
21.75
21.28
19.45
21.87
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.125
The closing share price for our common stock on February 25, 2015, as reported by the NYSE, was $31.11. As of February 25, 2015, there were 38 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.
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Market for Hudson Pacific Properties, L.P., Common Capital, Related Unitholder Matters and Issuer Purchases of Units
There is no established public trading market for our operating partnership’s common units. As of the date this report was filed, there were 38 holders of record
of common units (including through our general partnership interest).
The following table reports the distributions per common unit declared during the years ended December 31, 2014 and 2013, respectively.
Fiscal year 2014
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2013
First quarter
Second quarter
Third quarter
Fourth quarter
$
Per Common
Unit Distributions
Declared
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.125
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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 NYSE on June
24, 2010 and ending on December 31, 2014. 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.
Index
Hudson Pacific Properties, Inc.
S&P 500
SNL US RE $1B-$2B Imp Cap
06/23/10
100.00
100.00
100.00
12/31/10
89.63
116.38
122.55
12/31/11
87.40
118.84
116.85
12/31/12
133.75
137.86
153.00
12/31/13
142.15
182.51
179.17
12/31/14
199.24
207.49
209.16
Period Ending
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Item 6. Selected Financial Data
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 report.
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HUDSON PACIFIC PROPERTIES Inc. And Hudson Pacific Properties, L.P.
(in thousands, except share, per share, square footage and occupancy data)
Year Ended December 31,
Consolidated
Combined
2014
2013
2012
2011
2010
156,806
34,509
22,471
213,786
$
$
124,839
25,870
14,732
165,441
$
$
88,459
22,029
9,840
120,328
$
$
69,145
21,954
5,643
96,742
$
$
22,138
1,128
15,751
612
39,629
$
$
23,003
1,807
15,072
235
40,117
$
$
23,598
1,598
14,733
204
40,133
$
$
21,617
1,539
13,638
187
36,981
$
$
15,485
2,883
999
19,367
20,931
1,571
11,397
238
34,137
253,415
$
205,558
$
160,461
$
133,723
$
53,504
78,372
25,897
28,253
72,216
204,738
$
$
63,434
24,149
19,952
70,063
177,598
$
$
50,599
24,340
16,497
54,758
146,194
$
$
42,312
22,446
13,038
41,983
119,779
$
$
7,034
19,815
4,493
13,226
44,568
48,677
$
27,960
$
14,267
$
13,944
$
8,936
25,932
$
25,470
$
19,071
$
17,480
$
(30 )
(272 )
(306 )
(73 )
—
4,641
—
1,446
(14 )
(99 )
$
$
30,529
18,148
5,538
23,686
$
(164 ) $
—
(164 ) $
$
23,522
$
$
26,545
1,415
—
1,415
1,571
(5,580 )
(4,009 ) $
(2,594 ) $
$
$
—
1,051
(92 )
$
19,724
(5,457 ) $
—
(5,457 ) $
$
451
—
$
451
(5,006 ) $
—
1,693
443
$
19,543
(5,599 ) $
—
(5,599 ) $
$
3,361
—
$
3,361
(2,238 ) $
8,831
(59 )
(347 )
4,273
192
12,890
(3,954 )
—
(3,954 )
1,272
—
1,272
(2,682 )
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 on interest rate contracts
Acquisition-related expenses
Other (income) expenses
Total other expenses
Income (loss) from continuing operations before gain on sale of real estate
Gain on sale of real estate
Income (loss) from continuing operations
(Loss) income from discontinued operations
Impairment loss from discontinued operations
Net (loss) income from discontinued operations
Net income (loss)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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HUDSON PACIFIC PROPERTIES Inc. And Hudson Pacific Properties, L.P.
(in thousands, except share, per share, square footage and occupancy data)
Year Ended December 31,
Consolidated
Combined
2014
2013
2012
2011
2010
Per-Share Data:
Net income (loss) from continuing operations attributable to common stockholders
and unitholders
Net (loss) income from discontinued operations
Net income (loss) attributable to stockholders’ and unitholders per share—basic and
diluted
Weighted average shares of common stock outstanding—basic
Weighted average shares of common stock outstanding—diluted
Dividends declared per common share
$
$
$
$
0.15
—
(0.20 ) $
(0.07 )
(0.42 ) $
(0.46 ) $
0.01
0.11
0.15
$
(0.27 ) $
(0.41 ) $
(0.35 ) $
—
—
—
65,792,447
66,509,447
0.50
55,182,647
55,182,647
0.50
$
$
41,640,691
41,640,691
0.50
29,392,920
29,392,920
0.50
$
$
$
—
—
0.1921
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
2014
2013
2012
2011
2010
$
$ 2,036,638
2,340,885
918,059
1,055,693
10,177
—
145,000
$ 1,844,614
2,131,276
888,308
1,017,935
10,475
—
145,000
$ 1,340,361
1,559,692
582,085
649,995
12,475
—
145,000
$
957,810
1,152,791
399,871
451,647
12,475
—
87,500
787,872
1,004,565
342,060
390,232
12,475
40,328
87,500
Other Data
Cash flows provided by (used in)
Operating activities
Investing activities
Financing activities
$
$
$
63,168
$
(246,361 ) $
$
170,590
41,547
$
(424,042 ) $
$
393,947
42,821
$
(423,470 ) $
$
385,848
32,082
$
(130,604 ) $
$
63,352
7,619
(242,156 )
279,718
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.
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Executive Summary
Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at December 31, 2014 our consolidated office portfolio
consisted of approximately 5.9 million square feet, and our media and entertainment portfolio consisted of 0.9 million square feet. As of December 31, 2014, our
consolidated stabilized office portfolio was 94.6% leased (including leases not yet commenced). Our media and entertainment properties were 71.6% leased for the trailing
12-month period ended December 31, 2014.
Current Year Acquisitions, Dispositions, Repositionings and Financings
Acquisitions
EOP Northern California Portfolio
On December 6, 2014, the Company entered into a definitive asset purchase agreement to acquire via an exclusive, direct transaction, the EOP Northern
California Portfolio from Blackstone Real Estate Partners V and VI ("Blackstone"). The EOP Northern California Portfolio consists of 26 high-quality office assets totaling
approximately 8.2 million square feet and two development parcels located throughout the San Francisco Peninsula, Redwood Shores, Palo Alto Silicon Valley and San
Jose Airport submarkets. Despite a strong, diversified tenancy, including blue-chip technology companies like Google, Cisco and Qualcomm, the EOP Northern
California Portfolio's below market rents and occupancy, as well as significant near-term lease roll, afford ample opportunity for substantial embedded net operating
income growth. The Company will fund the acquisition with $1.75 billion in cash and approximately 63.5 million common shares and operating partnership units issued to
Blackstone, which upon closing will own approximately 43.6% of the Company's common equity on a fully diluted basis and serve of the Company's Board of Directors.
The Company has obtained $1.75 billion of committed bridge financing, but is pursuing alternatives to fund the transaction’s cash needs, including existing asset sales
and joint ventures and new secured or unsecured financing potentially coinciding with pursuit of an investment grade credit rating. The Company expects the
transaction to close in late first quarter or early second quarter subject to customary closing conditions, including its stockholders' vote of approval on March 5, 2015.
The Company expects to use proceeds from the 1455 Market Street joint venture transaction and its pending disposition of the First Financial property, together
with proceeds (after repayment of our revolving credit facility) from the recent equity offering to partially fund the cash consideration component of the EOP Northern
California Portfolio acquisition. To fund the remaining cash consideration and closing costs for the EOP Northern California Portfolio acquisition, the Company is
pursuing various financing sources, including a combination of five, seven, and ten-year unsecured and/or secured indebtedness for total proceeds of approximately
$1.30 billion.
Merrill Place
On February 12, 2014, we acquired an office and retail property known as Merrill Place located in downtown Seattle’s Pioneer Square submarket, directly
adjacent to the Company’s First & King property for a gross purchase price of approximately $57.7 million (before closing costs and prorations).
3402 Pico Boulevard
On February 28, 2014, we acquired an office building known as 3402 Pico Boulevard in Santa Monica, California for $18.5 million (before closing costs and
prorations).
12655 Jefferson Acquisition
On October 17, 2014, the Company acquired a 93,952 square-foot office property located in the Playa Vista submarket of Los Angeles, California in an off-market
transaction for $38.0 million (before certain credits, closing costs, and prorations). The purchase price was paid from borrowings under the Company’s unsecured
revolving credit facility. Built in 1985, the property also includes a garage with 279 parking stalls. The building is currently vacant and conceptual designs and plans have
been completed for a creative office conversion. Playa Vista is a leading submarket for creative office tenants, including Facebook, Google/YouTube, Microsoft and
Sony.
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Dispositions
Tierrasanta Disposition
On July 16, 2014 the Company sold its Tierrasanta property for $19.5 million (before certain credits, prorations, and closing costs) and therefore, reclassified its
assets and liabilities to held for sale as of December 31, 2013.
Held for Sale
First Financial
On December 29, 2014, the Company entered into a purchase and sale agreement to sell its First Financial office property for $89.0 million (before certain credits,
prorations, and closing costs). As a result, we have reclassified its assets and liabilities to held for sale as of December 31, 2014 and 2013. The transaction is subject to
assumption of an existing loan with a balance of $42.4 million as of December 31, 2014, and is expected to close in the first quarter of 2015.
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 2013, we acquired 3401 Exposition Blvd. and 1861 Bundy Drive for purposes of repositioning.
Financings
Senior Unsecured Credit Facility
Effective September 23, 2014, the Company amended and restated its $250.0 million unsecured revolving credit facility to, among other things, increase the
unsecured revolving credit facility to $300.0 million, extend the term of that facility, and add a five-year, $150.0 million unsecured term loan facility. The $150.0 million
unsecured term loan facility was fully drawn by the Company on the closing date to repay a $95.0 million loan secured by the Company's 505 First Street and 83 King
properties, with the remaining $55.0 million used to repay amounts outstanding under the Company's prior unsecured revolving facility.
6922 Hollywood Mortgage Loan Payoff
On October 2, 2014, the Company fully repaid the $39.7 million loan secured by its 6922 Hollywood Boulevard property in Hollywood, California. The loan was
scheduled to mature on January 1, 2015.
Element LA
On November 24, 2014, the Company amended its construction loan for the Element LA property to, among other things, increase availability from $65.5 million
to $102.4 million to fund budgeted site-work, tenant improvement, and leasing commission costs associated with the property’s Riot Games lease.
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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.
From the acquisition of our first property in February 2007 through December 2014, we have acquired or developed properties totaling an aggregate of
approximately 8.2 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, 2014, the percent leased for our
stabilized office properties was approximately 94.6% (or 92.6%, 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 71.6%. 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 and Pacific Northwest submarkets. Positive or negative changes in economic or other conditions in
California or Pacific Northwest, including state budgetary shortfalls, 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
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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.
Critical Accounting Policies
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 U.S. generally accepted
accounting principles (“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.
We record 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 contractual amounts to be paid pursuant to each in-place lease and (ii) our 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 our 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, we include 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, we consider leasing commissions, legal and other related costs.
We capitalize 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 their time on development activities are also capitalized and allocated to the projects to
which they relate. Capitalized personnel costs were approximately $3.1 million and $1.9 million for the years ended December 31, 2014 and 2013, respectively. Interest is
capitalized on the construction in progress at a rate equal to our weighted average cost of debt. Capitalized interest was approximately $6.9 million and $4.6 million for the
years ended December 31, 2014 and 2013, respectively. Construction and development costs are capitalized while substantial activities are ongoing to prepare an asset
for its intended use. We consider 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 they are incurred. Costs previously capitalized related to abandoned acquisitions or developments are charged to
earnings. Expenditures for repairs and maintenance are expensed as they are incurred.
We compute depreciation using the straight-line method over the estimated useful lives 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.
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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 recorded $5.6 million of impairment charges related to a property that we sold during the year ended December 31, 2013 with no comparable
charge for the year ended December 31, 2014. There was one property held for sale at December 31, 2014 and no properties held for sale at December 31, 2013.
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 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 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, our assessment is based on amounts estimated to be recoverable over the term of the lease. As of December 31, 2014 and 2013,
respectively, we reserved $0.6 million and $0.3 million of straight-line 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 our expectations. We recognized $(0.1) million, $1.0 million and $0.7 million of bad debt expense for the years ended December 31, 2014, 2013
and 2012, respectively.
The following summarizes our accounts receivable net of allowance for doubtful accounts as of:
December 31, 2014
December 31, 2013
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
Notes Receivable
$
$
$
17,287
(1,040)
16,247
$
9,898
(1,036)
8,862
On August 19, 2014, the Company entered into a loan participation agreement for a loan with a maximum principal of $140.0 million. The Company’s share was
23.77%, or $33.3 million. The note receivable is secured by a real estate property, has a balance of $28.5 million as of December 31, 2014, bears interest at 11.0% and
matures on August 18, 2016. The Company received a $0.4 million commitment fee as a result of this transaction. The balance as of December 31, 2014, net of the
commitment fee, was $28.3 million and was classified as a Note Receivable on the Consolidated Balance Sheets.
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 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:
• 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.
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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 property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the entity that
owns the 1455 Market Street property, a REIT) for federal 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 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, together with one of our subsidiaries, to treat such subsidiary as a taxable REIT subsidiary for federal income tax purposes. 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 states in which we conduct business. The Company periodically evaluates its tax positions to determine
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, 2014, the Company has not established a liability for uncertain tax positions.
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Results of Operations
The following table identifies each of the properties in our portfolio acquired through December 31, 2014 and their date of acquisition.
Properties
875 Howard Street
Sunset Gower
Sunset Bronson
Technicolor Building
First Financial
Del Amo Office
9300 Wilshire Boulevard
222 Kearny Street
1455 Market
Rincon Center
10950 Washington
604 Arizona
275 Brannan
625 Second Street
6922 Hollywood Boulevard
6050 Ocean Way & 1455 N. Beachwood Drive
10900 Washington
901 Market Street
Element LA
1455 Gordon Street
Pinnacle I(1)
3401 Exposition
Pinnacle II(1)
First & King
Met Park North
Northview
1861 Bundy
Merrill Place
3402 Pico
12655 Jefferson
Icon
Acquisition/Completion
Date
Square Feet
2/15/2007
8/17/2007
1/30/2008
6/1/2008
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
5/22/2013
6/14/2013
7/31/2013
7/31/2013
7/31/2013
9/26/2013
2/12/2014
2/28/2014
10/17/2014
2016(2)
286,270
543,709
299,098
114,958
223,679
113,000
61,224
148,797
1,025,833
580,850
159,024
44,260
54,673
138,080
205,523
20,761
9,919
206,199
247,545
6,000
393,777
63,376
231,864
472,223
190,748
182,009
36,492
193,153
39,136
88,215
413,000
6,793,395
Total
(1) These properties are owned by our joint venture with MDP/Worthe. As of December 31, 2012, we owned a 98.25% interest in the joint venture, which owned Pinnacle I as of that date. On
June 14, 2013, MDP/Worthe contributed its interest in Pinnacle II to the joint venture, which reduced our interest in the joint venture to 65.0%.
(2) We estimate this development will be completed in 2016.
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.
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Table of Contents
Comparison of the year ended December 31, 2014 to the year ended December 31, 2013
Net Operating Income
We evaluate performance based upon property net operating income (“NOI”) from continuing operations. NOI is not a measure of operating results or cash
flows from operating activities as measured by GAAP and should not be considered an alternative to income from continuing operations, as an indication of our
performance, or as an alternative to cash flows as a measure of liquidity, or our ability to make distributions. All companies may not calculate NOI in the same manner.
We consider NOI to be a useful performance measure to investors and management, because when compared across periods, NOI reflects the revenues and expenses
directly associated with owning and operating the Company’s properties and the impact to operations from trends in occupancy rates, rental rates, and operating costs,
providing a perspective not immediately apparent from income from continuing operations. We define NOI as operating revenues (including rental revenues, other
property-related revenue, tenant recoveries and other operating revenues), less property-level operating expenses (which includes external management fees, if any, and
property-level general and administrative expenses). NOI 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. NOI on a cash basis is NOI on a GAAP basis, adjusted to exclude the
effect of straight-line rent and other non-cash adjustments required by GAAP. We believe that NOI on a cash basis is helpful to investors as an additional measure of
operating performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.
Management further evaluates NOI by evaluating the performance from the following property groups:
•
included in the stabilized portfolio as of December 31, 2014;
Same-Store Properties - which includes all of the properties owned and included in our stabilized portfolio as of January 1, 2013 and still owned and
Non-same store properties which includes one operating office property we acquired during the year ended December 31, 2014; one development
•
project (Icon); three redevelopment properties (Element LA, 3402 Pico and 12655 Jefferson); one lease-up property (901 Market Street), one property held-for-
sale (First Financial) as of December 31, 2014 and other properties not owned or in operation from January 1, 2013 through December 31, 2014.
The following tables summarize the Net Operating Income from continuing operations, as defined, for our total portfolio for the years ended December 31, 2014 and 2013:
Reconciliation to net income
Same-store net operating income
Non-same store net operating income
General and administrative
Depreciation and amortization
Income from operations
Interest expense
Interest income
Acquisition-related expenses
Other income
Gain on sale of real estate
Impairment loss from discontinued operations
Net (loss) income from discontinued operations
Net income (loss)
Same-store office statistics
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
Year Ended December 31
2014
2013
Dollar
Change
Percentage
Change
$
$
$
$
98,036
51,110
(28,253)
(72,216)
48,677
(25,932)
30
(4,641)
14
5,538
—
(164)
$
23,522
$
93,890
24,085
(19,952)
(70,063)
27,960
(25,470)
272
(1,446)
99
—
(5,580)
1,571
(2,594)
$
4,146
27,025
(8,301)
(2,153)
$
20,717
(462)
(242)
(3,195)
(85)
5,538
5,580
(1,735)
4.4 %
112.2 %
41.6 %
3.1 %
74.1 %
1.8 %
(89.0)%
221.0 %
(85.9)%
100.0 %
(100.0)%
(110.4)%
$
26,116
(1,006.8)%
13
3,281,515
13
3,266,632
95.8%
93.0%
92.2%
$
34.89
$
95.0%
88.3%
88.6%
$
32.06
0.8 %
5.3 %
4.1 %
8.8 %
2.83
60
Table of Contents
Operating 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
Total operating expenses
Office Net Operating Income
Media & entertainment Net Operating Income
Net Operating Income
Operating 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
Total operating expenses
Office Net Operating Income
Media & entertainment Net Operating Income
Net Operating Income
Year Ended December 31,
2014
2013
Same-Store
Non Same-Store
Total
Same Store
Non Same-Store
Total
$
$
$
$
$
$
$
$
$
102,388 $
24,225
14,883
141,496 $
54,418 $
10,284
7,588
72,290 $
156,806
34,509
22,471
213,786
22,138 $
1,128
15,751
612
39,629 $
— $
—
—
—
— $
22,138
1,128
15,751
612
39,629
$
$
$
$
94,489 $
21,867
11,707
128,063 $
30,350 $
4,003
3,025
37,378 $
124,839
25,870
14,732
165,441
23,003 $
1,807
15,072
235
40,117 $
— $
—
—
—
— $
23,003
1,807
15,072
235
40,117
181,125 $
72,290 $
253,415
$
168,180 $
37,378 $
205,558
57,192 $
25,897
83,089 $
84,304 $
13,732
98,036 $
21,180 $
—
21,180 $
51,110 $
—
51,110 $
78,372
25,897
104,269
135,414
13,732
149,146
$
$
$
$
50,141 $
24,149
74,290 $
77,922 $
15,968
93,890 $
13,293 $
—
13,293 $
24,085 $
—
24,085 $
63,434
24,149
87,583
102,007
15,968
117,975
Year Ended December 31, 2014 as compared to the Year Ended December 31, 2013
Same-Store
Non Same-Store
Total
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
$
$
$
$
$
$
$
$
$
7,899
2,357
3,177
13,433
(865)
(679)
679
377
(488)
8.4 % $
10.8
27.1
10.5 % $
24,068
6,282
4,561
34,911
79.3% $
157.0
150.7
93.4% $
31,967
8,639
7,739
48,345
(3.8)% $
(37.6)
4.5
160.4
(1.2)% $
—
—
—
—
—
—% $
—
—
—
—% $
(865)
(679)
679
377
(488)
25.6 %
33.4
52.5
29.2 %
(3.8)%
(37.6)
4.5
160.4
(1.2)%
12,945
7.7 % $
34,911
93.4% $
47,857
23.3 %
7,051
1,748
8,799
6,382
(2,236)
4,146
14.1 % $
7.2
11.8 % $
8.2 % $
(14.0)%
4.4 % $
7,886
—
7,886
27,025
—
27,025
59.3% $
—
59.3% $
112.2% $
—%
112.2% $
14,937
1,748
16,685
33,408
(2,236)
31,172
23.5 %
7.2
19.1 %
32.8 %
(14.0)%
26.4 %
Net Operating Income increased $31.2 million, or 26.4%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily
resulting from:
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Table of Contents
A $27.0 million or 112.2% increase in net operating income from our non-same store properties primarily as a result of the acquisition of the Pinnacle II property
and the Seattle portfolio in 2013 and the Merrill Place property in 2014.
A $6.4 million or 8.2% increase in net operating income from our same-store properties primarily as a result of the lease up in our 1455 Market and Rincon
properties.
A $2.2 million or 14.0% decrease in net operating income from our same-store media and entertainment properties are a result of the Company’s decision to take
certain buildings and stages off-line to facilitate its ICON development and other longer-term plans for the Sunset Bronson property, partially offset by higher rental
revenue and tenant recoveries generated by strong occupancy and heightened production activity at the Sunset Gower property.
The year-over-year changes in the items that comprise same store net operating income are primarily attributable to the factors discussed below.
Same-Store Office:
Office rental revenue increased $7.9 million or 8.4% to $102.4 million for the year ended December 31, 2014 compared to $94.5 million for the year ended
December 31, 2013. The increase is primarily due to rental income relating to new leases signed at our 1455 Market and Rincon Center properties at higher rents than
expiring leases partially offset by lower rental income from our 625 second street property as a result of an early termination from Fox Interactive Media, Inc. at our 625
Second Street property.
Office tenant recoveries increased by $2.4 million or 10.8% to $24.2 million for the year ended December 31, 2014 compared to $21.9 million for the year ended
December 31, 2013. The increase is primarily due to a $3.3 million of one-time property tax recovery resulting from the reassessment of the 1455 Market Street and Rincon
Center properties, and to a lesser extent other assets within the San Francisco portfolio, for all applicable periods prior to this year partially offset by lower recoveries at
our 1455 Market property due to a change from a triple net recovery structure from Bank of America to a modified gross recovery structure for Uber and Square tenants.
Office parking and other revenue increased by $3.2 million or 27.1% to $14.9 million for the year ended December 31, 2014 compared to $11.7 million for the year
ended December 31, 2013. The increase is primarily due to a one time termination fee at our 625 Second Street (Fox interactive) and 222 Kearny (The Children's Place)
properties recognized in 2014 offset by a decrease in termination fees at our 1455 Market property recognized in 2013.
Office operating expenses increased by $7.1 million or 14.1% to $57.2 million for the year ended December 31, 2014 compared to $50.1 million for the year ended
December 31, 2013. The increase is primarily due to a one time property tax expense resulting from the resulting from the reassessment of the 1455 Market Street and
Rincon Center properties, and to a lesser extent other assets within the San Francisco portfolio, for all applicable periods prior to this year.
Same-Store Media & entertainment:
Media and entertainment rental revenue decreased by $0.9 million or 3.8% to $22.1 million for the year ended December 31, 2014 compared to $23.0 million for the
year ended December 31, 2013. The decrease is primarily due to the Company’s decision to take certain buildings and stages off-line to facilitate its ICON development
and other longer-term plans for the Sunset Bronson property, partially offset by higher rental revenue generated by strong occupancy at the Sunset Gower property.
Media and entertainment tenant recoveries decreased by $0.7 million or 37.6% to $1.1 million for the year ended December 31, 2014 compared to $1.8 million for
the year ended December 31, 2013. The decrease is primarily due to the Company’s decision to take certain buildings and sages off-line to facilitate its ICON
development and other longer-term plans for the Sunset Bronson property, partially offset by higher tenant recoveries generated by strong occupancy at the Sunset
Gower property.
Media and entertainment other property-related revenue increased by $0.7 million or 4.5% to $15.8 million for the year ended December 31, 2014 compared to
$15.1 million for the year ended December 31, 2013. The increase is primarily due to heightened production activity at the Sunset Gower property for the year ended
December 31, 2014 as compared to the year ended December 31, 2013.
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Table of Contents
Media and entertainment other revenue increased by $0.4 million or 160.4% to $0.6 million for the year ended December 31, 2014 compared to $0.2 million for the
year ended December 31, 2013. The increase is primarily due to increase in operating income from our United Recording studio operations.
Media and entertainment operating expenses increased $1.7 million, or 7.2%, to $25.9 million for the year ended December 31, 2014 compared to $24.1 million for
the year ended December 31, 2013. Operating expenses for the year ended December 31, 2013 reflect a property tax reimbursement resulting from the reassessment of the
Sunset Gower media and entertainment property of $0.8 million, with no comparable activity for the year ended December 31, 2014. The remaining difference relates
additional lighting expense incurred in connection with the heightened production activity at the Sunset Gower property for the year ended December 31, 2014 as
compared to the year ended December 31, 2013.
Other Expense (Income)
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 $8.3 million, or 41.6%, to $28.3 million for the year ended December 31, 2014 compared to $20.0 million for the year ended December 31, 2013. The
increase in general and administrative expenses was primarily attributable to the adoption of the 2014 Outperformance Program, the costs associated with a one-year
consulting arrangement with a former executive, and increased staffing to meet operational needs stemming from growth through the acquisition of office properties.
Depreciation and amortization expense increased $2.2 million, or 3.1%, to $72.2 million for the year ended December 31, 2014 compared to $70.1 million for the
year ended December 31, 2013. The increase was primarily related to the acquisition of the Pinnacle II building by our joint venture with MDP/Worthe on June 14, 2013,
our acquisition of the Seattle portfolio on July 31, 2013, and our acquisition of the Merrill Place property on February 12, 2014.
Interest expense increased $0.5 million, or 1.8%, to $25.9 million for the year ended December 31, 2014 compared to $25.5 million for the year ended December 31,
2013. At December 31, 2014, we had $960.5 million of notes payable, compared to $931.3 million at December 31, 2013. The increase was primarily attributable to interest
expense for a full year on the indebtedness associated with our 275 Brannan property, the indebtedness associated with the Pinnacle II building acquired on June 14,
2013, the indebtedness associated with the acquisition of the Seattle Portfolio, the indebtedness associated with the redevelopments of our Element LA property, and
amounts outstanding under our unsecured revolving credit facility, all partially offset by interest savings related to our repayment of indebtedness associated with our
625 Second Street property on November 1, 2013, and our repayment of indebtedness associated with our 6922 Hollywood property on October 1, 2014 and additional
capitalized interest related to our redevelopment properties as compared to the same period last year.
Acquisition-related expenses increased $3.2 million, or 221.0%, to $4.6 million for the year ended December 31, 2014 compared to $1.4 million for the year ended
December 31, 2013 as a result of acquisition costs related to the upcoming purchase of the EOP Northern California portfolio compared to by the acquisition costs related
to the purchase of the Seattle portfolio in 2013.
Gain on sale of real estate. On July 16, 2014, the Company completed the sale of its Tierrasanta property for $19.5 million (before certain credits, prorations, and
closing costs). Accordingly, the Company recognized $5.5 million of gain on sale of real estate relates the current year with no comparable activity in the same period a
year ago.
Net (loss) income from discontinued operations. During the year ended December 31, 2013, the Company sold its City Plaza property in Orange, California, for
approximately $56.0 million (before certain credits, prorations and closing costs). Accordingly, the City Plaza property was reclassified as held for sale and its financial
results are accounted for as discontinued operations for each of the periods presented. The Company also recognized $5.6 million of impairment loss in the year ended
December 31, 2013, with no comparable activity in the current year.
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Table of Contents
Comparison of the year ended December 31, 2013 to the year ended December 31, 2012
Reconciliation to net income
Same-store net operating income
Non-same store net operating income
General and administrative
Depreciation and amortization
Income from operations
Interest expense
Interest income
Acquisition-related expenses
Other income
Gain on sale of real estate
Impairment loss from discontinued operations
Net (loss) income from discontinued operations
Net income (loss)
Same-store office statistics
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
Year Ended December 31
2013
2012
Dollar
Change
Percentage
Change
$
$
$
$
$
87,187
30,788
(19,952)
(70,063)
27,960
(25,470)
272
(1,446)
99
(5,580)
1,571
(2,594)
$
$
$
79,178
6,344
(16,497)
(54,758)
14,267
(19,071)
306
(1,051)
92
—
—
451
(5,006)
$
8,009
24,444
(3,455)
(15,305)
13,693
(6,399)
(34)
(395)
7
—
(5,580)
1,120
2,412
13
3,197,547
13
3,197,547
95.5%
88.7%
89.7%
$
30.39
$
94.0%
88.5%
90.6%
$
27.46
2.93
10.1 %
385.3 %
20.9 %
28.0 %
96.0 %
33.6 %
(11.1)%
37.6 %
7.6 %
— %
(100.0)%
248.3 %
(48.2)%
1.6 %
0.2 %
(1.0)%
10.7 %
The following tables summarize the Net Operating Income from continuing operations, as defined, for our total portfolio for the years ended December 31, 2013 and 2012:
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Table of Contents
Operating 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
Total operating expenses
Office Net Operating Income
Media & entertainment Net Operating Income
Net Operating Income
Operating 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
Total operating expenses
Office Net Operating Income
Media & entertainment Net Operating Income
Net Operating Income
Year Ended December 31,
2013
2012
Same-Store
Non Same-Store
Total
Same Store
Non Same-Store
Total
$
$
$
$
$
$
$
$
$
87,476 $
20,251
10,793
118,520 $
37,363 $
5,619
3,939
46,921 $
124,839
25,870
14,732
165,441
22,579 $
1,777
14,573
184
39,113 $
424 $
30
499
51
1,004 $
23,003
1,807
15,072
235
40,117
$
$
$
$
81,517 $
20,762
8,950
111,229 $
6,942 $
1,267
890
9,099 $
88,459
22,029
9,840
120,328
22,985 $
1,592
14,733
204
39,514 $
613 $
6
—
—
619 $
23,598
1,598
14,733
204
40,133
157,633 $
47,925 $
205,558
$
150,743 $
9,718 $
160,461
47,529 $
22,917
70,446 $
70,991 $
16,196
87,187 $
15,905 $
1,232
17,137 $
63,434
24,149
87,583
31,016 $
(228)
30,788 $
102,007
15,968
117,975
$
$
$
$
47,360 $
24,205
71,565 $
63,869 $
15,309
79,178 $
3,239 $
135
3,374 $
5,860 $
484
6,344 $
50,599
24,340
74,939
69,729
15,793
85,522
Year Ended December 31, 2013 as compared to the Year Ended December 31, 2012
Same-Store
Non Same-Store
Total
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
$
$
$
$
$
$
$
5,959
(511)
1,843
7,291
(406)
185
(160)
(20)
(401)
7.3 % $
(2.5)%
20.6 %
6.6 % $
(1.8)% $
11.6 %
(1.1)%
(9.8)%
(1.0)% $
30,421
4,352
3,049
37,822
(189)
24
499
51
385
438.2 % $
343.5 %
342.6 %
415.7 % $
36,380
3,841
4,892
45,113
(30.8)% $
400.0 %
— %
— %
62.2 % $
(595)
209
339
31
(16)
41.1 %
17.4 %
49.7 %
37.5 %
(2.5)%
13.1 %
2.3 %
15.2 %
— %
6,890
4.6 % $
38,207
393.2 % $
45,097
28.1 %
0.4 %
(5.3)%
(1.6)% $
11.2 %
5.8 %
10.1 % $
12,666
1,097
13,763
25,156
(712)
24,444
391.0 %
812.6 %
407.9 % $
429.3 %
(147.1)%
385.3 % $
12,835
(191)
12,644
32,278
175
32,453
25.4 %
(0.8)%
16.9 %
46.3 %
1.1 %
37.9 %
169
(1,288)
(1,119)
7,122
887
8,009
65
Table of Contents
Net Operating Income increased $32.5 million, or 37.9%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily
resulting from:
A $24.4 million or 385.3% increase in net operating income from our non-same store properties was the result of operating results from the 901 Market property
acquired on June 1, 2012, and the Pinnacle I and Pinnacle II buildings our joint venture with MDP/Worthe acquired on November 8, 2012 and June 14, 2013, respectively,
and our acquisition of the Seattle Portfolio on July 31, 2013.
A $7.1 million or 11.2% increase in net operating income from our same-store properties primarily as a result of the lease up in our 1455 Market, 875 Howard
Street, and 604 Arizona Properties. In addition, an increase in rental income at our 10950 Washington Property as a result of signing a lease with NFL networks for rates
higher than expiring rent partially offset by a decrease in net operating income at our Rincon property as a result of a temporary decline in occupancy.
A $0.9 million or 5.8% increase in net operating income from our same store media and entertainment properties primarily as a result of a property tax
reimbursement resulting from the reassessment of the Sunset Gower media and entertainment property of $0.8 million, with no comparable activity in the same period a
year ago.
The year-over-year changes in the items that comprise same store net operating income are primarily attributable to the factors discussed below.
Same-Store Office:
Office rental revenue increased $6.0 million or 7.3% to $87.5 million for the year ended December 31, 2013 compared to $81.5 million for the year ended
December 31, 2012. The increase is primarily due to rental income relating to new leases signed at our 1455 Market Street and First Financial properties at higher rents
than expiring leases.
Office tenant recoveries decreased by $0.5 million or 2.5% to $20.3 million for the year ended December 31, 2013 compared to $20.8 million for the year ended
December 31, 2012. The decrease is primarily due to a decrease of tenant recoveries at our 1455 Market Street property as a result of a change in the tenant type of
tenancy from triple net leases to modified service gross leases.
Office parking and other increased by $1.8 million or 20.6% to $10.8 million for the year ended December 31, 2013 compared to $9.0 million for the year ended
December 31, 2012. The increase is primarily due to an early lease termination payments from Bank of America relating to the Company’s 1455 Market Street property of
$1.6 million (after the write-off of non-cash items), with no comparable activity for the same period a year ago.
Office operating expenses remained relatively flat or the year ended December 31, 2013 compared to year ended December 31, 2012.
Same-Store Media & entertainment:
Media and entertainment rental revenue decreased by $0.4 million or 1.8% to $22.6 million for the year ended December 31, 2013 compared to $23.0 million for the
year ended December 31, 2012. The decrease is primarily due to lower occupancy compared to the same period a year ago.
Media and entertainment tenant recoveries increased by $0.2 million or 11.6% to $1.8 million for the year ended December 31, 2013 compared to $1.6 million for
the year ended December 31, 2012. The increase in tenant recoveries was primarily due to higher equipment rental reimbursements at our Sunset Bronson property
compared to the same period a year ago.
Media and entertainment other property-related revenue remained relatively flat for the year ended December 31, 2013 compared to year ended December 31,
2012.
Media and entertainment other revenue remained relatively flat for the year ended December 31, 2013 compared to year ended December 31, 2012.
Media and entertainment operating expenses decreased $1.3 million, or 5.3%, to $22.9 million for the year ended December 31, 2013 compared to $24.2 million for
the year ended December 31, 2012. Operating expenses for the year ended
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December 31, 2013 reflect a property tax reimbursement resulting from the reassessment of the Sunset Gower media and entertainment property of $0.8 million, with no
comparable activity for the year ended December 31, 2012. If this supplemental property tax reimbursement is disregarded, then operating expenses from continuing
operations at the Company’s media and entertainment properties would have increased by $0.6 million, or 2.5%, over the same period a year ago. This increase in
operating expenses was the result of higher production activity compared to the same period a year ago.
Other Expense (Income)
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 20.9%, to $20.0 million for the year ended December 31, 2013 compared to $16.5 million for the year ended December 31, 2012. 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 expense increased $15.3 million, or 28.0%, to $70.1 million for the year ended December 31, 2013 compared to $54.8 million for the
year ended December 31, 2012. The increase was primarily the result of the 901 Market property acquired on June 1, 2012, the Pinnacle I and Pinnacle II buildings our
joint venture with MDP/Worthe acquired on November 8, 2012 and June 14, 2013, respectively, and the Seattle Portfolio acquired on July 31, 2013
Interest expense increased $6.4 million or 33.6% to $25.5 million for the year ended December 31, 2013 compared to $19.1 million for the year ended December 31,
2012. At December 31, 2013, the Company had $931.3 million of notes payable, including note payable for real estate held for sale, compared to $582.1 million of notes
payable, including note payable for real estate held for sale, at December 31, 2012. The increase was primarily due to interest expenses for a full year on the indebtedness
associated with our First Financial and 10950 Washington properties, the increase in indebtedness associated with our 275 Brannan property financing on October 5,
2012, our 901 Market property financing on October 29, 2012, the indebtedness associated with the Pinnacle I and Pinnacle II buildings acquired on November 8, 2012
and June 14, 2013, respectively, and the indebtedness associated with the acquisition of the Seattle Portfolio.
Acquisition-related expenses increased $0.4 million, or 37.6%, to $1.4 million for the year ended December 31, 2013 compared to $1.1 million for the year ended
December 31, 2012. The increase in acquisition-related expenses was primarily due to higher expenses associated with the loan assumption in connection with the
acquisition of Pinnacle II.
Net (Loss) Income From Discontinued Operations
During the year ended December 31, 2013, the Company sold its City Plaza property in Orange, California, for approximately $56.0 million (before certain credits,
prorations and closing costs). Accordingly, the City Plaza property was reclassified as held for sale and its financial results are accounted for as discontinued operations
for the year ended December 31, 2013 and December 31, 2012. Income from discontinued operations associated with the City Plaza property increased $1.1 million, or
248.3%, to $1.6 million for the year ended December 31, 2013 compared to $0.5 million for the year ended December 31, 2012. The Company also recognized $5.6 million of
impairment loss in the year ended December 31, 2013 based on the loss on sale of the City Plaza property, with no comparable activity in the same period a year ago.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $17.8 million of cash and cash equivalents at December 31, 2014. In addition, the lead arrangers for our unsecured revolving credit facility
have secured commitments that will allow borrowings of up to $300.0 million. As of December 31, 2014, we had total borrowing capacity of approximately $300.0 million
under our unsecured revolving credit facility, $130.0 million of which had been drawn.
On January 20, 2015, we closed the public offering of 12,650,000 shares of our common stock. We used $130.0 million of proceeds from that stock offering to
fully pay down the $130.0 million outstanding balance on our unsecured credit facility. As a result, we have total borrowing capacity of approximately $300.0 million
under our unsecured revolving credit facility, none of which has been drawn.
We have an At-the-Market, or ATM, program which allows us to sell up to $125.0 million of common stock, $14.5 million of which has been sold as of
December 31, 2014.
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We intend to use the unsecured revolving credit facility and ATM program, 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 $30.06 as of December 31, 2014, our ratio of debt to total market capitalization was approximately 30.2%
(counting series A preferred units as debt) as of December 31, 2014. 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 and 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 cash on hand, net cash provided by operations, reserves established from existing cash and, if necessary, by drawing upon
our unsecured revolving credit facility.
Our long-term liquidity needs consist primarily of funds necessary to pay 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, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our
unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of
factors as well, including general market conditions for REITs and market perceptions about the Company.
Consolidated Indebtedness
Senior Unsecured Revolving Credit Facility
On September 23, 2014, we amended and restated our $250.0 million unsecured revolving credit facility to increase the unsecured revolving credit facility to
$300.0 million, extend the term of that facility to September 23, 2018, and add a five-year, $150.0 million unsecured term loan facility with a group of lenders for which
Wells Fargo Bank, N.A. acts as administrative agent, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated act as joint lead
arrangers, and Bank of America, N.A. and Barclays Bank PLC, act as joint syndication agents, and Keybank, N.A., acts as documentation agent.
The $150.0 million unsecured term loan facility was fully drawn by the Company on the closing date to repay a $95.0 million loan secured by the Company’s 505
First Street and 83 King properties, with the remaining $55.0 million used to repay amounts outstanding under the Company’s prior unsecured revolving facility.
Our Operating Partnership continues to be the borrower under the new facility and the Company and all subsidiaries that own unencumbered properties will
continue to provide guaranties unless the Company obtains and maintains a credit rating of at least BBB- from S&P or Baa3 from Moody’s, in which case such
guaranties are not required except under limited circumstances. Subject to the satisfaction of certain conditions and lender commitments, the Company may increase the
availability of either or both of the unsecured revolving credit facility or term loan facility so long as the aggregate commitments under both facilities do not exceed
$700.0 million.
Under the unsecured revolving credit facility, the Company may elect to pay interest at a rate equal to either LIBOR plus 115 to 155 basis points per annum or a
specified base rate plus 15 to 55 basis points per annum, depending on the Company’s leverage ratio. Under the term loan facility, the Company may elect to pay interest
at a rate equal to either LIBOR plus 130 to 190 basis points per annum or a specified base rate plus 30 to 90 basis points per annum, again depending on the Company’s
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 equal to either LIBOR plus 87.5 to 165 basis points per annum or the specified base rate plus 0 to 65 basis points per
annum, and for the term loan facility equal to either LIBOR plus 90 to 190 basis points per annum or the specified base rate plus 0 to 90 basis points per annum, in each
case depending on the credit rating.
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The unsecured revolving credit facility is subject to a facility fee in an amount equal to the Company’s revolving credit commitments (whether or not utilized)
multiplied by a rate per annum equal to 20 to 35 basis points, depending on the Company’s leverage ratio, or, if the Company makes the credit rating election, in an
amount equal to the aggregate amount of its revolving credit commitments multiplied by a rate per annum equal to 12.5 to 30 basis points, depending upon the credit
rating. Unused amounts of the facility are no longer subject to a separate fee.
The Company’s ability to borrow under the facility remains subject to ongoing compliance with a number of customary restrictive covenants. In addition to
these covenants, the facility also includes certain limitations on dividend payouts and distributions, limits on certain types of investments outside of the Company’s
primary business, and other customary affirmative and negative covenants.
As of December 31, 2014, we were in compliance with our unsecured revolving credit facility’s financial covenants. As of December 31, 2014, we had total
borrowing capacity of approximately $300.0 million under our unsecured revolving credit facility, $130.0 million of which had been drawn.
Outstanding Indebtedness
Our indebtedness creates the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on or other amounts in respect of our
indebtedness and other obligations. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other
purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our leverage,
including our ability to service our debt, would increase.
As of December 31, 2014, we had outstanding notes payable of $957.5 million (including a $42.4 million note payable on real estate held for sale, and before $3.1
million loan premium), of which $565.6 million, or 59.1%, was variable rate debt. $156.5 million of the variable rate debt is subject to the interest rate contracts described in
footnotes 7 and 10 in the table below.
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The following table sets forth information as of December 31, 2014 with respect to our outstanding indebtedness (in thousands).
Debt
Unsecured revolving credit facility - new
Unsecured revolving credit facility
Unsecured term loan
Mortgage loan secured by 3401 Exposition Boulevard(2)
Mortgage loan secured by 6922 Hollywood Boulevard(3)
Mortgage loan secured by 275 Brannan
Mortgage loan secured by Pinnacle II(4)
Mortgage loan secured by 901 Market(5)
Mortgage loan secured by Element LA(6)
Mortgage loan secured by Sunset Gower/Sunset Bronson(7)
Mortgage loan secured by Rincon Center(8)
Mortgage loan secured by First & King(9)
Mortgage loan secured by Met Park North(10)
Mortgage loan secured by 10950 Washington(11)
Mortgage loan secured by Pinnacle I(12)
Subtotal
Unamortized loan premium, net(13)
Total
Mortgage loan on real estate held for sale:
Mortgage loan secured by First Financial(14)
__________________
Outstanding
December 31,
2014
December 31,
2013
$
$
$
$
$
130,000
—
150,000
—
—
15,000
87,421
49,600
59,490
97,000
104,126
—
64,500
28,866
129,000
915,003
3,056
918,059
$
$
$
42,449
960,508
$
$
—
155,000
—
13,233
40,396
15,000
88,540
49,600
566
97,000
105,853
95,000
64,500
29,300
129,000
882,988
5,320
888,308
43,000
931,308
Interest Rate(1)
LIBOR+1.15% to 1.55%
LIBOR+1.55% to 2.20%
LIBOR+1.30% to 1.90%
LIBOR+3.80%
5.58%
LIBOR+2.00%
6.313%
LIBOR+2.25%
LIBOR+1.95%
LIBOR+2.25%
5.134%
LIBOR+1.60%
LIBOR+1.55%
5.316%
3.954%
Maturity
Date
9/23/2018
N/A
9/23/2019
N/A
N/A
10/5/2015
9/6/2016
10/31/2016
11/1/2017
2/11/2018
5/1/2018
N/A
8/1/2020
3/11/2022
11/7/2022
4.580%
2/1/2022
(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 May 22, 2013 in connection with the closing of our acquisition of the 3401 Exposition Boulevard property. This loan was paid off during 2014.
(3) This loan was assumed on November 22, 2011 in connection with the closing of our acquisition of the 6922 Hollywood Boulevard property. This loan was paid off during 2014.
(4) This loan was assumed on June 14, 2013 in connection with the contribution of the Pinnacle II building to the Company’s joint venture with M. David Paul & Associates/Worthe Real
Estate Group. This loan bore interest only for the first five years. Beginning with the payment due October 6, 2011, monthly debt service includes annual debt amortization payments based
on a 30-year amortization schedule.
(5) On October 29, 2012, we obtained a loan for our 901 Market property pursuant to which we borrowed $49.6 million upon closing, with the ability to draw up to an additional $11.9 million
for budgeted base building, tenant improvements, and other costs associated with the renovation and lease-up of that property.
(6) We had the ability to draw up to $65.5 million for budgeted site-work, construction of a parking garage, base building, tenant improvement, and leasing commission costs associated with the
renovation and lease-up of the property. On November 24, 2014 we amended our construction loan for Element LA to, among other things, increase availability from $65,500 to $102,406
for budgeted site-work, construction of a parking garage, base building, tenant improvement, and leasing commission costs associated with the renovation and lease-up of the property.
(7) 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 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 February 11, 2016. Effective August 22, 2013, the
terms of this loan were amended to increase the outstanding balance from $92.0 million to $97.0 million, reduce the interest rate from LIBOR plus 3.50% to LIBOR plus 2.25%, and extend
the maturity date from February 11, 2016 to February 11, 2018.
(8) This loan is amortizing based on a 30-year amortization schedule.
(9) This loan was paid off during 2014.
(10) This loan bears interest only at a rate equal to one-month LIBOR plus 1.55%. The full loan amount is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of
2.1644% through the loan's maturity on August 1, 2020.
(11) This loan is amortizing based on a 30-year amortization schedule.
(12) This loan bears interest only for the first five years. Beginning with the payment due December 6, 2017, monthly debt service will include annual debt amortization payments based on a 30-
year amortization schedule.
(13) Represents unamortized amount of the non-cash mark-to-market adjustment on debt associated with Pinnacle II.
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(14) This 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 $2.6 million. This note has been recorded as part of the liabilities associated with real estate held for sale.
.
Contractual Obligations
The following table provides information with respect to our commitments at December 31, 2014, including any guaranteed or minimum commitments under
contractual obligations. The table does not reflect available debt extensions and the $42.4 million mortgage loan secured by First Financial.
Contractual Obligation
Total
2015
2016
2017
2018
2019
Principal payments on mortgage loans
Interest payments(1)
Operating leases
Tenant-related commitments
Ground leases(2)
Total:
$
$
915,003
78,536
3,267
45,190
56,493
1,098,489
$
$
18,323
17,661
781
44,669
1,417
82,851
$
$
138,199
16,599
2,486
521
1,417
159,222
$
$
62,195
11,851
—
—
1,417
75,463
$
$
328,320
8,703
$
152,885
6,467
1,417
338,440
$
1,417
160,769
$
$
More than
5 years
215,081
17,255
—
—
49,408
281,744
Payments Due by Period
(1) Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed. The information in the table above reflects our projected interest
obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 59.1% of our debt bears interest at variable rates based on LIBOR
plus a spread. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our
variable rate debt as we cannot predict what LIBOR rates will be in the future.
(2) 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, 2014, we did not have any off-balance sheet arrangements.
Cash Flows
Cash Flows
Comparison of the year ended December 31, 2014 to the year ended December 31, 2013 is as follows:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Year Ended December 31,
2014
2013
Dollar Change
Percentage Change
$
$
63,168
(246,361)
170,590
($ in thousands)
$
41,547
(424,042)
393,947
21,621
177,681
(223,357)
52.0 %
(41.9)%
(56.7)%
Cash and cash equivalents were $17.8 million and $30.4 million at December 31, 2014 and 2013, respectively.
Operating Activities
Net cash provided by operating activities increased by $21.6 million or 52.0% to $63.2 million for the year ended December 31, 2014 as compared to $41.5 million
for the year ended December 31, 2013. The increase was primarily attributable to an increase in cash NOI, as defined, from our office properties, primarily from the
acquisitions of the Seattle portfolio on July 31, 2013, Merrill Place on February 12, 2014 and Pinnacle II on June 14, 2013. In addition, the increase was also attributable to
an increase in prepaid rent and decrease in payment of leasing costs associated with leases signed at 1455 Market, Rincon and 275 Brannan, partially offset by an
increase accounts receivable, compared to the year-end December 31, 2013.
Investing Activities
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Net cash used in investing activities decreased by $177.7 million of 41.9% to $246.4 million for the year ended December 31, 2014 as compared to $424.0 million
for year ended December 31, 2013. The decrease was primarily attributable to the decrease in property acquisition for the year ended December 31, 2014 as compared to
year ended December 31, 2013. The decrease is partially offset by an increase in additions to investment property primarily as a result in increased tenant improvement
costs and redevelopment costs during the year ended December 31, 2014 as compared to the year ended December 31, 2013 a decrease in sale of real estate (sold our
Tierrasanta property in July 2014 and sold our City Plaza property in July 2013) and an increase investing activities related to the acquisition of a note receivable in
August 2014.
Financing Activities
Net cash provided by financing activities decreased by $223.4 million or 56.7% to $170.6 million for the year ended December 31, 2014 as compared to $393.9
million for the year ended December 31, 2013. The decrease was due to an increase in repayment of debt and an increase in dividends paid to common stock and unit
holders as compared to the year ended December 31, 2013. In addition, we issued equity (both common and preferred) securities generating total proceeds, after
underwriters’ discounts, of approximately $202.5 million (before transaction costs) in 2013 compared to equity securities generating total proceeds, after underwriters’
discounts, of approximately $197.5 million (before transaction costs) in 2014.
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.
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 in that environment. Further, in the event of a change 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.
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 initially bore 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 original maturity of 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 original maturity of February 11, 2016. Effective August 22, 2013,
the terms of this loan were amended to increase the outstanding balance from $92.0 million to $97.0 million, reduce the interest rate from LIBOR plus 3.50% to LIBOR plus
2.25%, and extend the maturity date from February 11, 2016 to February 11, 2018. The interest rate contracts described above were not changed in connection with this
loan amendment, therefore $5.0 million of the outstanding loan balance is not covered by the interest rate cap described above.
On July 31, 2013, we closed a seven-year loan totaling $64.5 million with Union Bank, N.A., secured by our Met Park North property. The loan bears interest at a
rate equal to one-month LIBOR plus 155 basis points. The full loan is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of 2.1644%
through the loans maturity on August 1, 2020.
Our unsecured revolving credit facility and unsecured term loan, as well as the loans on each of our 901 Market, 275 Brannan, and Element LA properties, are
not subject to interest rate hedges. As of December 31, 2014, we had $130.0 million drawn under our unsecured revolving credit facility.
For sensitivity purposes, with respect to the $130.0 million drawn under our unsecured revolving credit facility the $150.0 million drawn under our unsecured
term loan, the $97.0 million loan on our Sunset Gower and Sunset Bronson media and entertainment properties ($5.0 million of which is not subject to an interest rate
contract), the $49.6 million loan on our 901 Market property, the $15.0 million loan on our 275 Brannan property, and the $59.5 million loan on our Element LA properties,
if one-month LIBOR as of December 31, 2014 was to increase by 100 basis points, or 1.0%, the resulting increase in annual interest expense would impact our future
earnings and cash flows by $5.0 million.
As of December 31, 2014, we had outstanding notes payable of $957.5 million (before loan premium), of which $565.6 million, or 59.1%, was variable rate debt.
$92.0 million of the variable rate debt is subject to the interest rate contracts described in footnote 7 to the table under Outstanding Indebtedness in Item 7, and $64.5
million of the variable rate debt is
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subject to the interest rate contract described in footnote 10 to the table under Outstanding Indebtedness in Item 7, and $391.9 million of which was fixed rate secured
mortgage loans. As of December 31, 2014, the estimated fair value of our fixed rate secured mortgage loans was $400.6 million. The estimated fair value of our variable rate
debt equals the carrying value.
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
Disclosure Controls and Procedures (Hudson Pacific Properties, Inc.)
Hudson Pacific Properties, Inc. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act that are
designed to ensure that information required to be disclosed in Hudson Pacific Properties, Inc.’s reports under the Exchange 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 Exchange Act, Hudson Pacific Properties, Inc. 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.
Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded, as of that time, that Hudson Pacific Properties, Inc.’s disclosure
controls and procedures were effective in providing a reasonable level of assurance that information Hudson Pacific Properties, Inc. is required to disclose in reports
that Hudson Pacific Properties, Inc.’s file under the Exchange 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.
Disclosure Controls and Procedures (Hudson Pacific Properties, L.P.)
Hudson Pacific Properties, L.P. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act that are
designed to ensure that information required to be disclosed in Hudson Pacific Properties, L.P.’s reports under the Exchange 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 of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.), 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 Exchange Act, Hudson Pacific Properties, L.P. carried out an evaluation, under the supervision and with the
participation of management including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson
Pacific Properties, L.P.), 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.
Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific
Properties, L.P.) concluded, as of that time, that Hudson Pacific Properties, L.P.’s disclosure controls and procedures were effective in providing a reasonable level of
assurance that information Hudson
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Pacific Properties, L.P. is required to disclose in reports that Hudson Pacific Properties, L.P. files under the Exchange 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 of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.), as appropriate, to allow for
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, Inc.)
There have been no changes that occurred during the fourth quarter of the year covered by this report in Hudson Pacific Properties, Inc.’s 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.
Changes in Internal Control Over Financial Reporting (Hudson Pacific Properties, L.P.)
There have been no changes that occurred during the fourth quarter of the year covered by this report in Hudson Pacific Properties, L.P.’s 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 (Hudson Pacific Properties, Inc.)
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 Exchange Act.
Hudson Pacific Properties, Inc.’s system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and
preparation of Hudson Pacific Properties, Inc.’s financial statements for external reporting purposes in accordance with GAAP. Hudson Pacific Properties, Inc.’s
management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of Hudson Pacific Properties, Inc.’s internal control over
financial reporting as of December 31, 2014. In conducting its assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission on Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management concluded that, as of December 31, 2014,
Hudson Pacific Properties, Inc.’s internal control over financial reporting was effective based on those criteria.
Management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc., does not expect that Hudson Pacific
Properties, Inc.’s disclosure controls and procedures, or Hudson Pacific Properties, Inc.’s 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.
Management’s Annual Report on Internal Control over Financial Reporting (Hudson Pacific Properties, L.P.)
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 Exchange Act.
Hudson Pacific Properties, L.P.’s system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and
preparation of Hudson Pacific Properties, L.P.’s financial statements for external reporting purposes in accordance with GAAP. Hudson Pacific Properties, L.P.’s
management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties,
L.P.), assessed the effectiveness of Hudson Pacific Properties, L.P.’s internal control over financial reporting as of December 31, 2014. In conducting its assessment,
management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control-Integrated Framework (1992
Framework). Based on this assessment, management concluded that, as of December 31, 2014, Hudson Pacific Properties, L.P.’s internal control over financial reporting
was effective based on those criteria.
Management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific
Properties, L.P.), does not expect that Hudson Pacific Properties, L.P.’s disclosure controls and procedures, or Hudson Pacific Properties, L.P.’s 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
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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.
Attestation Report of the Registered Accounting Firm (Hudson Pacific Properties, Inc.)
The effectiveness of Hudson Pacific Properties, Inc.’s internal control over financial reporting as of December 31, 2014, 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 Hudson Pacific Properties, Inc.’s internal control over financial reporting as of
December 31, 2014.
Item 9B. Other Information
Not applicable.
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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 2015. 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 2015.
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 2015.
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 2015.
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 2015.
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
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FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, INC.
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, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012
FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, L.P.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Capital for the Years Ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loan on Real Estate
F- 1
F- 2
F- 3
F- 4
F- 5
F- 6
F- 7
F- 9
F- 11
F- 12
F- 13
F- 14
F- 15
F- 16
F- 18
F- 46
F- 49
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
2.1
Asset Purchase Agreement, dated as of December 6, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and certain affiliates of The
Blackstone Group L.P.(35)
3.1
3.2
3.3
3.4
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
10.24
10.25
10.26
10.27
10.28
10.29
10.30
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)
Second Amended and Restated Bylaws of Hudson Pacific Properties, Inc. (36)
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.(9)
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)
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)
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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
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
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)
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)*
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10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86
12.1
22.1
23.1
31.1
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.(22)
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.
Amendment No. 1 to the Credit Agreement among the Company, Hudson Pacific Properties, L.P., as Borrower, and each of the Lenders party thereto (as defined in the
original credit agreement, dated August 3, 2012).(24)
Purchase Agreement between 1220 Howell LLC, a Delaware limited liability company, King & Dearborn LLC, a Delaware limited liability company, and Northview
Corporate Center LLC, a Delaware limited liability company, as Sellers, and Hudson Pacific Properties, L.P., a Maryland limited partnership, as Buyer.(25)
First Modification and Additional Advance Agreement by and among Wells Fargo Bank, N.A., as Lender, and Sunset Bronson Entertainment Properties, LLC, and Sunset
Gower Entertainment Properties, LLC as Borrower.(26)
Supplemental Federal Income Tax Considerations.(27)
2014 Outperformance Award Agreement.(28)*
Consulting Agreement by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P., and Howard S. Stern dated January 16, 2014.(29)*
Addendum to Outperformance Agreement.(30)*
Employment Agreement, dated as of June 27, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Victor J. Coleman.(31)*
Employment Agreement, dated as of June 27, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Mark T. Lammas.(31)*
Employment Agreement, dated as of June 27, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Christopher Barton.(31)*
Employment Agreement, dated as of June 27, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Dale Shimoda.(31)*
Employment Agreement, dated as of June 27, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Alex Vouvalides.(31)*
Amendment to Equity Distribution Agreement, dated as of July 21, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Barclays
Capital Inc. (33)
Amendment to Equity Distribution Agreement, dated as of July 21, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. (33)
Amendment to Equity Distribution Agreement, dated as of July 21, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and KeyBanc
Capital Markets Inc. (33)
Amendment to Equity Distribution Agreement, dated as of July 21, 2014, by and among Hudson Pacific Properties, Inc., Hudson Pacific Properties, L.P. and Wells Fargo
Securities, LLC. (33)
Amended and Restated Credit Agreement by and among Hudson Pacific Properties, L.P., as borrower, 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 September 23, 2014. (32)
Hudson Pacific Properties, Inc. Revised Non-Employee Director Compensation Program.(34)
Bridge Commitment Letter, dated as of December 6, 2014, by and among the Operating Partnership, Wells Fargo Bank, National Association, Wells Fargo Securities, LLC,
Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs Bank USA.(35)
Backstop Commitment Letter, dated as of December 6, 2014, by and among the Operating Partnership, Wells Fargo Bank, National Association and Wells Fargo
Securities, LLC.(35)
Indemnification Agreement, dated December 15, 2014, by and between Hudson Pacific Properties, Inc. and Robert L. Harris II.
2015 Outperformance Award Agreement. (36)*
First Amended and Restated Limited Partnership Agreement of Hudson 1455 Market, L.P. (37)
Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 2014, 2013, 2012, 2011 and 2010.
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.
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31.2
32
99.1
101
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)
The following financial information from Hudson Pacific Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive
Income (Loss), (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements **
(1 ) 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.
(2 ) 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.
(3 ) 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.
(4 ) 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.
(5 ) 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.
(6 ) 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.
(7 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on July 1, 2010.
(8 ) Previously filed with the Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on November 22, 2010.
(9 ) 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.
(10 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on February 15, 2011.
(11 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on May 4, 2011.
(12 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on December 21, 2010.
(13 ) Previously filed with the Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on April 14, 2011.
(14 ) 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 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 6, 2012.
(18 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 23, 2012.
(19 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on June 12, 2012.
(20 ) 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.
(22 ) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
(23 ) Previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(24 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on May 20, 2013.
(25 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on July 1, 2013.
(26 ) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.
(27 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on November 22, 2013.
(28 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 3, 2014.
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(29 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 16, 2014.
(30 ) Previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
(31 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on June 27, 2014.
(32 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on September 29, 2014.
(33 ) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
(34 ) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.
(35 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on December 11, 2014.
(36 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 2, 2015.
(37 ) Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 12, 2015.
*
**
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.
82
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Hudson Pacific Properties, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 2, 2015
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 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/ 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/ ROBERT L. HARRIS II
Robert L. Harris II
/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)
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
83
Date
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Hudson Pacific Properties, L.P. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 2, 2015
HUDSON PACIFIC PROPERTIES, L.P.
/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 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/ 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/ ROBERT L. HARRIS II
Robert L. Harris II
/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)
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
84
Date
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
March 2, 2015
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, 2014. In conducting its
assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated
Framework (1992 Framework). Based on this assessment, management concluded that, as of December 31, 2014, 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, 2014, 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, 2014.
/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
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
To the Board of Directors and Stockholders of
Hudson Pacific Properties, Inc.
We have audited Hudson Pacific Properties, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (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, 2014,
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, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), equity, and
cash flows for each of the three years in the period ended December 31, 2014, and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Irvine, California
March 2, 2015
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, 2014 and 2013, and
the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31,
2014. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and schedules 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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, 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, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated March 2, 2015 expressed an unqualified opinion thereon.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective January 1,
2014.
Irvine, California
March 2, 2015
/s/ ERNST & YOUNG LLP
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
Assets associated with real estate held for sale
TOTAL ASSETS
LIABILITIES AND EQUITY
Notes payable
Accounts payable and accrued liabilities
Below-market leases, net
Security deposits
Prepaid rent
Interest rate contracts
Liabilities associated with real estate held for sale
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 outstanding at December 31, 2014 and 2013, respectively
Common stock, $0.01 par value, 490,000,000 authorized, 66,797,816 shares and 57,230,199 shares outstanding at December 31,
2014 and 2013, respectively
Additional paid-in capital
Accumulated other comprehensive deficit
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
F- 4
December 31,
2014
December 31,
2013
$
$
$
$
$
620,805
1,284,602
116,317
13,721
135,850
2,171,295
(134,657 )
2,036,638
17,753
14,244
16,247
28,268
33,006
102,023
8,723
3
8,754
6,692
68,534
2,340,885
918,059
36,844
40,969
6,257
8,600
1,750
43,214
1,055,693
10,177
$
$
145,000
668
1,070,833
(2,443 )
(34,884 )
1,179,174
42,990
52,851
1,275,015
2,340,885
$
570,671
1,199,242
99,625
14,383
69,104
1,953,025
(108,411 )
1,844,614
30,356
13,929
8,862
—
19,715
108,402
8,113
192
8,754
5,094
83,245
2,131,276
888,308
26,118
45,184
5,677
7,524
—
45,124
1,017,935
10,475
145,000
572
903,984
(997 )
(45,113 )
1,003,446
45,683
53,737
1,102,866
2,131,276
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31,
2014
2013
2012
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
Acquisition-related expenses
Other income
Income (loss) from continuing operations before gain on sale of real estate
Gain on sale of real estate
Income (loss) from continuing operations
(Loss) income from discontinued operations
Impairment loss from discontinued operations
Net (loss) income from discontinued operations
Net income (loss)
Net income attributable to preferred stock and units
Net income attributable to restricted shares
Net (income) loss attributable to non-controlling interest in consolidated entities
Net (income) loss attributable to common units in the Operating Partnership
Net income (loss) attributable to Hudson Pacific Properties, Inc. common stockholders
Basic and diluted per share amounts:
Net income (loss) from continuing operations attributable to common stockholders
Net (loss) income from discontinued operations
Net income (loss) attributable to common stockholders’ per share—basic
Net income (loss) attributable to common stockholders’ per share—diluted
Weighted average shares of common stock outstanding—basic
Weighted average shares of common stock outstanding—diluted
$
$
$
$
$
$
156,806
34,509
22,471
213,786
22,138
1,128
15,751
612
39,629
253,415
78,372
25,897
28,253
72,216
204,738
48,677
25,932
(30 )
4,641
(14 )
30,529
18,148
5,538
23,686
(164 )
—
(164 )
$
23,522
(12,785 )
(274 )
(149 )
(359 )
9,955
$
$
$
0.15
—
0.15
0.15
$
124,839
25,870
14,732
165,441
23,003
1,807
15,072
235
40,117
205,558
63,434
24,149
19,952
70,063
177,598
27,960
25,470
(272 )
1,446
(99 )
26,545
1,415
—
1,415
1,571
(5,580 )
(4,009 )
(2,594 ) $
(12,893 )
(300 )
321
633
(14,833 ) $
(0.20 ) $
(0.07 )
(0.27 ) $
(0.27 )
88,459
22,029
9,840
120,328
23,598
1,598
14,733
204
40,133
160,461
50,599
24,340
16,497
54,758
146,194
14,267
19,071
(306 )
1,051
(92 )
19,724
(5,457 )
—
(5,457 )
451
—
451
(5,006 )
(12,924 )
(295 )
21
1,014
(17,190 )
(0.42 )
0.01
(0.41 )
(0.41 )
65,792,447
55,182,647
41,640,691
66,509,447
55,182,647
41,640,691
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 INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss): cash flow hedge adjustment
Comprehensive income (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 (income) loss attributable to common units in the Operating Partnership
Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. stockholders
Year Ended December 31,
2014
2013
2012
$
$
23,522
(1,499 )
22,023
(12,785 )
(274 )
(149 )
(306 )
$
8,509
$
(2,594 ) $
303
(2,291 )
(12,893 )
(300 )
321
620
(14,543 ) $
(5,006 )
(429 )
(5,435 )
(12,924 )
(295 )
21
1,039
(17,594 )
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
Non-
controlling
Interests —
Common
units
in the
Operating
Partnership
Non-controlling
Interest -
Members in
Consolidated
Entities
Total Equity
Balance, January 1, 2012
Contributions
Proceeds from sale of common
stock, net of underwriters'
discount
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
Contributions
Distributions
Proceeds from sale of common
stock, net of underwriters’
discount
Common 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
33,840,854 $
—
338 $
—
87,500 $
—
552,043 $
—
13,225,000
132
—
—
—
7,094
268,060
(1,474 )
(71,180 )
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
57,500
—
—
—
—
—
(12,144 )
—
12,144
—
190,666
(727 )
—
(1,870 )
—
(2 )
—
(1,385 )
(21,972 )
4,314
—
—
228,378
47,496,732 $
—
—
3
475 $
—
—
—
145,000 $
—
—
5,538
726,605 $
—
—
9,812,644
98
—
5,756
44,219
(3,415 )
(125,737 )
—
—
—
—
—
—
(1 )
—
—
—
—
—
—
—
(12,144 )
202,444
(577 )
—
—
—
(2,755 )
(28,415 )
6,682
(13,685 ) $
(883 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(16,895 )
—
—
—
(404 )
—
(30,580 ) $
—
(1,287 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
63,356 $
—
— $
1,481
688,669
1,481
—
—
—
—
—
—
—
—
(1,227 )
—
(1,014 )
(25 )
—
—
—
—
—
—
—
—
—
—
(21 )
—
190,798
(727 )
57,500
(1,870 )
—
—
—
(1,385 )
(35,343 )
4,314
(5,786 )
(429 )
(5,541 )
55,549 $
—
—
—
1,460 $
45,704
(1,160 )
—
897,222
45,704
(1,160 )
—
—
—
—
—
—
(1,192 )
—
—
—
—
—
—
—
—
202,542
(577 )
—
—
—
(2,756 )
(41,751 )
6,682
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY—(Continued)
(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
Non-
controlling
Interests —
Common
units
in the
Operating
Partnership
Non-controlling
Interest -
Members in
Consolidated
Entities
Total Equity
(14,533)
—
(45,113) $
—
290
(997) $
Net income (loss)
Cash Flow Hedge Adjustment
—
—
Balance, December 31, 2013
57,230,199 $
Distributions
Proceeds from sale of common
stock, net of underwriters’
discount
Common stock issuance
transaction costs
Issuance of unrestricted stock
Shares repurchased
Declared Dividend
Amortization of stock-based
compensation
Net income (loss)
Cash Flow Hedge Adjustment
—
9,563,500
—
6,922
(2,805)
—
—
—
—
Balance, December 31, 2014
66,797,816 $
—
—
572 $
—
12,144
—
145,000 $
—
—
—
903,984 $
—
96
—
—
—
—
—
—
—
668 $
—
197,372
—
—
—
(12,144)
12,144
—
145,000 $
(1,599)
—
(3,129)
(33,774)
7,979
—
—
1,070,833 $
—
—
—
—
—
—
—
10,229
—
(34,884) $
(633)
13
53,737 $
—
(321)
(3,343)
—
303
45,683 $ 1,102,866
(2,842)
(2,842)
—
—
—
—
(1,192)
—
359
(53)
—
—
—
—
—
—
149
—
197,468
(1,599)
—
(3,129)
(47,110)
7,979
22,881
(1,499)
—
—
—
—
—
—
—
—
(1,446)
(2,443) $
52,851 $
42,990 $ 1,275,015
The accompanying notes are an integral part of these consolidated financial statements.
F- 8
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (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 (recovery)
Amortization of ground lease intangible
Amortization of discount and net origination fees on notes receivable
Gain / Loss on real estate
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
Proceeds from sale of real estate
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
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
Redemption of 6.25% series A cumulative redeemable preferred units
Distribution to non-controlling member in consolidated real estate entity
Repurchase of vested restricted stock
Payment of loan costs
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents—beginning of period
Cash and cash equivalents—end of period
Year Ended December 31,
2014
2013
2012
$
23,522
$
(2,594) $
(5,006)
72,216
949
7,559
(13,362)
2,026
(7,661)
425
(97)
248
(156)
(5,538)
(333)
(7,375)
(12,266)
(1,602)
3,114
485
1,014
63,168
70,852
486
6,454
(10,383)
2,542
(8,570)
36
959
247
—
5,580
807
3,557
(24,213)
(803)
957
(500)
(3,867)
$
$
$
$
$
$
$
$
41,547
$
(123,298) $
(113,580)
(28,112)
18,629
(246,361) $
(87,153) $
(389,883)
—
52,994
(424,042) $
$
448,972
(417,508)
$
444,927
(202,122)
197,468
(1,599)
—
—
(34,966)
(12,785)
(298)
(2,842)
(3,129)
(2,723)
$
170,590
(12,603)
30,356
17,753
$
$
202,542
(577)
—
—
(29,607)
(12,893)
(2,000)
(1,160)
(2,756)
(2,407)
393,947
11,452
18,904
30,356
$
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
F- 9
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of amounts capitalized
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable and accrued liabilities for investment in property
Assumption of secured debt in connection with property acquisitions (Notes 3 and 6)
Assumption of other assets and liabilities in connection property acquisitions, net (Note 3)
Non-controlling interest in consolidated real estate entity (Note 3)
Year Ended December 31,
2014
2013
2012
$
$
$
$
$
32,107
$
28,894
$
18,586
(4,720) $
(2,554) $
—
$
—
$
—
$
102,299
$
(2,423) $
45,704
$
(751)
—
(889)
1,481
The accompanying notes are an integral part of these consolidated financial statements.
F- 10
Table of Contents
The Partners of Hudson Pacific Properties, L.P.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Hudson Pacific Properties, L.P. (the “Operating Partnership”), as of December 31, 2014
and 2013, and the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the three years in the period ended
December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the
responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedules 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. We were not engaged to perform
an audit of the Operating Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Operating
Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 the Operating Partnership
at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Operating Partnership changed its method for reporting discontinued operations effective
January 1, 2014.
Irvine, California
March 2, 2015
/s/ ERNST & YOUNG LLP
The accompanying notes are an integral part of these consolidated financial statements.
F- 11
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per unit data)
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
Assets associated with real estate held for sale
TOTAL ASSETS
LIABILITIES
Notes payable
Accounts payable and accrued liabilities
Below-market leases, net
Security deposits
Prepaid rent
Interest rate contracts
Liabilities associated with real estate held for sale
TOTAL LIABILITIES
6.25% series A cumulative redeemable preferred units of the Operating Partnership
CAPITAL
Partners' Capital:
8.375% series B cumulative redeemable preferred units, 5,800,000 units issued and outstanding at December 31, 2014 and 2013,
respectively ($25.00 per unit liquidation preference,)
Common units, 69,180,379 and 59,612,762 issued and outstanding at December 31, 2014 and 2013, respectively
Total Hudson Pacific Properties, Inc. Capital
Non-controlling interest—members in Consolidated Entities
TOTAL CAPITAL
TOTAL LIABILITIES AND CAPITAL
December 31,
2014
December 31,
2013
$
$
$
$
$
620,805
1,284,602
116,317
13,721
135,850
2,171,295
(134,657)
2,036,638
17,753
14,244
16,247
28,268
33,006
102,023
8,723
3
8,754
6,692
68,534
2,340,885
918,059
36,844
40,969
6,257
8,600
1,750
43,214
1,055,693
10,177
$
$
145,000
1,087,025
1,232,025
42,990
1,275,015
2,340,885
$
570,671
1,199,242
99,625
14,383
69,104
1,953,025
(108,411)
1,844,614
30,356
13,929
8,862
—
19,715
108,402
8,113
192
8,754
5,094
83,245
2,131,276
888,308
26,118
45,184
5,677
7,524
—
45,124
1,017,935
10,475
145,000
912,183
1,057,183
45,683
1,102,866
2,131,276
The accompanying notes are an integral part of these consolidated financial statements.
F- 12
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit and per unit 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
Acquisition-related expenses
Other income
Income (loss) from continuing operations before gain on sale of real estate
Gain on sale of real estate
Income (loss) from continuing operations
(Loss) income from discontinued operations
Impairment loss from discontinued operations
Net (loss) income from discontinued operations
Net income (loss)
Net (income) loss attributable to non-controlling interest in consolidated entities
Net income (loss) attributable to Hudson Pacific Properties, L.P.
Preferred distributions - Series A units
Preferred distributions - Series B units
Total preferred distributions
Net income attributable to restricted shares
Net income (loss) available to common unitholders
Basic and diluted per unit amounts:
Net income (loss) from continuing operations attributable to common unitholders
Net income (loss) income from discontinued operations
Net income (loss) attributable to common unitholders per unit—basic
Net income (loss) attributable to common unitholders per unit—diluted
Weighted average shares of common units outstanding—basic
Weighted average shares of common units outstanding—diluted
Year Ended December 31,
2014
2013
2012
$
$
$
$
$
$
$
$
$
$
156,806
34,509
22,471
213,786
22,138
1,128
15,751
612
39,629
253,415
78,372
25,897
28,253
72,216
204,738
48,677
25,932
(30)
4,641
(14)
30,529
18,148
5,538
23,686
(164)
—
(164)
23,522
$
(149)
23,373
$
(641)
(12,144)
(12,785) $
(274) $
$
124,839
25,870
14,732
165,441
23,003
1,807
15,072
235
40,117
205,558
63,434
24,149
19,952
70,063
177,598
27,960
25,470
(272)
1,446
(99)
26,545
1,415
—
1,415
1,571
(5,580)
(4,009)
(2,594) $
321
(2,273) $
(749)
(12,144)
(12,893) $
(300) $
88,459
22,029
9,840
120,328
23,598
1,598
14,733
204
40,133
160,461
50,599
24,340
16,497
54,758
146,194
14,267
19,071
(306)
1,051
(92)
19,724
(5,457)
—
(5,457)
451
—
451
(5,006)
21
(4,985)
(780)
(12,144)
(12,924)
(295)
10,314
$
(15,466) $
(18,204)
$
$
0.15
—
0.15
0.15
(0.20) $
(0.07)
(0.27) $
(0.27)
(0.42)
0.01
(0.41)
(0.41)
68,175,010
57,565,210
44,104,771
68,721,339
57,565,210
44,104,771
The accompanying notes are an integral part of these consolidated financial statements.
F- 13
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss): cash flow hedge adjustment
Comprehensive income (loss)
Comprehensive income attributable to Series A preferred units
Comprehensive income attributable to Series B preferred units
Comprehensive income attributable to restricted shares
Comprehensive (income) loss attributable to non-controlling interest in consolidated real estate entities
Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. stockholders
Year Ended December 31,
2014
2013
2012
$
$
$
23,522
(1,499)
22,023
(641)
(12,144)
(274)
(149)
8,815
$
(2,594) $
303
(2,291)
(749)
(12,144)
(300)
321
(15,163) $
(5,006)
(429)
(5,435)
(780)
(12,144)
(295)
21
(18,633)
The accompanying notes are an integral part of these consolidated financial statements.
F- 14
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(in thousands, except share and per unit amounts)
Partners' Capital
Preferred
Units
Number of
Common Units
Common
Units
Non-controlling
Interest -
Members in
Consolidated
Entities
Total
Partners'
Capital
Total
Capital
Balance, January 1, 2012
Contributions
Proceeds from sale of common units, net of underwriters' discount
Common unit issuance transaction costs
Issuance of Series B Cumulative Redeemable Preferred Units
Series B unit issuance transaction costs
Issuance of unrestricted units
Issuance of restricted units
Forfeiture of restricted units
Units repurchased
Declared Distributions
Amortization of unit based compensation
Net income (loss)
Cash Flow Hedge Adjustment
Balance, December 31, 2012
Contributions
Distributions
Proceeds from sale of common units, net of underwriters' discount
Common unit issuance transaction costs
Issuance of unrestricted units
Issuance of restricted units
Forfeiture of restricted units
Units repurchased
Declared Distributions
Amortization of unit based compensation
Net income (loss)
Cash Flow Hedge Adjustment
Balance, December 31, 2013
Contributions
Distributions
Proceeds from sale of common units, net of underwriters' discount
Common unit issuance transaction costs
Issuance of unrestricted units
Units repurchased
Declared Distributions
Amortization of unit based compensation
Net income (loss)
Cash Flow Hedge Adjustment
Balance, December 31, 2014
$
$
$
$
87,500
—
—
—
57,500
—
—
—
—
—
(12,144)
—
12,144
—
145,000
—
—
—
—
—
—
—
(12,144)
12,144
—
145,000
—
—
—
—
—
—
(12,144)
12,144
—
145,000
36,451,795 $
601,169 $
—
13,225,000
—
—
—
7,094
268,060
(1,474)
(71,180)
—
—
—
—
49,879,295 $
—
—
9,812,644
—
5,756
44,219
(3,415)
(125,737)
—
—
—
—
59,612,762 $
—
—
9,563,500
—
6,922
(2,805)
190,798
(727)
(1,870)
(1,385)
(23,199)
4,314
(17,909)
(429)
750,762 $
—
—
202,542
(577)
—
—
—
(2,756)
(29,607)
6,682
(15,166)
303
912,183 $
—
—
197,468
(1,599)
—
(3,129)
688,669 $
—
190,798
(727)
57,500
(1,870)
—
—
—
(1,385)
(35,343)
4,314
(5,765)
(429)
895,762 $
—
—
202,542
(577)
—
—
—
(2,756)
(41,751)
6,682
(3,022)
303
1,057,183 $
—
—
197,468
(1,599)
—
(3,129)
—
—
—
—
(34,966)
(47,110)
7,979
10,588
(1,499)
7,979
22,732
(1,499)
— $
1,481
—
—
—
—
—
—
—
—
—
—
(21)
—
1,460 $
45,704
(1,160)
—
—
—
—
—
—
—
—
(321)
688,669
1,481
190,798
(727)
57,500
(1,870)
—
—
—
(1,385)
(35,343)
4,314
(5,786)
(429)
897,222
45,704
(1,160)
202,542
(577)
—
—
—
(2,756)
(41,751)
6,682
(3,343)
—
303
45,683 $ 1,102,866
—
(2,842)
—
(2,842)
—
—
—
—
—
—
149
—
197,468
(1,599)
—
(3,129)
(47,110)
7,979
22,881
(1,499)
69,180,379 $
1,087,025 $
1,232,025 $
42,990 $ 1,275,015
The accompanying notes are an integral part of these consolidated financial statements.
F- 15
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (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 (recovery)
Amortization of ground lease intangible
Amortization of discount and net origination fees on notes receivable
Gain / Loss on real estate
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
Proceeds from sale of real estate
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable
Payments of notes payable
Proceeds from issuance of common units
Common units issuance transaction costs
Proceeds from issuance of Series B cumulative redeemable preferred units
Series B unit issuance transaction costs
Distributions paid to common unitholders
Distributions paid to preferred unitholders
Redemption of 6.25% series A cumulative redeemable preferred units
Distribution to non-controlling member in consolidated real estate entity
Repurchase of vested restricted units
Payment of loan costs
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents—beginning of period
Cash and cash equivalents—end of period
Year Ended December 31,
2014
2013
2012
$
23,522
$
(2,594) $
(5,006)
72,216
949
7,559
(13,362)
2,026
(7,661)
425
(97)
248
(156)
(5,538)
(333)
(7,375)
(12,266)
(1,602)
3,114
485
1,014
63,168
70,852
486
6,454
(10,383)
2,542
(8,570)
36
959
247
—
5,580
807
3,557
(24,213)
(803)
957
(500)
(3,867)
$
$
$
$
$
$
$
$
41,547
$
(123,298) $
(113,580)
(28,112)
18,629
(246,361) $
(87,153) $
(389,883)
—
52,994
(424,042) $
$
448,972
(417,508)
$
444,927
(202,122)
197,468
(1,599)
—
—
(34,966)
(12,785)
(298)
(2,842)
(3,129)
(2,723)
$
170,590
(12,603)
30,356
17,753
$
$
202,542
(577)
—
—
(29,607)
(12,893)
(2,000)
(1,160)
(2,756)
(2,407)
393,947
11,452
18,904
30,356
$
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
F- 16
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of amounts capitalized
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable and accrued liabilities for investment in property
Assumption of secured debt in connection with property acquisitions (Notes 3 and 6)
Assumption of other assets and liabilities in connection property acquisitions, net (Note 3)
Non-controlling interest in consolidated real estate entity (Note 3)
Year Ended December 31,
2014
2013
2012
$
$
$
$
$
32,107
$
28,894
$
18,586
(4,720) $
(2,554) $
—
$
—
$
—
$
102,299
$
(2,423) $
45,704
$
(751)
—
(889)
1,481
The accompanying notes are an integral part of these consolidated financial statements.
F- 17
Table of Contents
1. Organization
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements
(In thousands, except square footage and share data or as otherwise noted)
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”).
Since the completion of the IPO, the concurrent private placement, and the related formation transactions, 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" or the
“Operating Partnership” and is also referred to in these financial statements as the "Company", "we", "us", or "our") 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, 2014, we owned a portfolio of 26 office properties and
two media and entertainment properties. These properties are located in California and Washington.
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 consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership
and all of our wholly owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position
and results of operations of the Operating Partnership, and all wholly owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and
transactions have been eliminated in the consolidated financial statements.
Certain prior period amounts in the consolidated financial statements have been reclassified to reflect properties held for sale.
Any reference to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s audit
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.
F- 18
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 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 their time on development activities are also capitalized and allocated to the
projects to which they relate. Capitalized personnel costs were approximately $3.1 million and $1.9 million for the years ended December 31, 2014 and 2013, respectively.
Interest is capitalized on the construction in progress at a rate equal to the Company’s weighted average cost of debt. Capitalized interest was approximately $6.9 million
and $4.6 million for the years ended December 31, 2014 and 2013, respectively. 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 they are incurred. Costs previously capitalized related to abandoned acquisitions
or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as they are incurred.
The Company computes depreciation using the straight-line method over the estimated useful lives of 39 years for building and improvements, 15 years for land
improvements, 5 or 7 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 recorded $5.6 million of impairment charges related to a property that it sold during the year ended December 31,
2013 with no comparable charge for the year ended December 31, 2014. There was one property held for sale at December 31, 2014 and no properties held for sale at
December 31, 2013.
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, 2014 and 2013, respectively, was $8.8 million. We do not amortize this asset but instead analyze it on an
annual basis for impairment. No impairment indicators have been noted during the years ended December 31, 2014 and 2013.
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.
F- 19
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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.
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, 2014 and 2013, respectively, the Company has reserved $0.6 million and $0.3 million 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 $(97), $959 and $724 of bad debt (recovery) expense for the years ended December 31, 2014, 2013 and 2012, respectively.
The following summarizes our accounts receivable net of allowance for doubtful accounts as of:
December 31, 2014
December 31, 2013
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
Notes Receivable
$
$
$
17,287
(1,040)
16,247
$
9,898
(1,036)
8,862
On August 19, 2014, the Company entered into a loan participation agreement for a loan with a maximum principal of $140.0 million. The Company’s share was
23.77%, or $33.3 million. The note receivable is secured by a real estate property, has a balance of $28.5 million as of December 31, 2014, bears interest at 11.0% and
matures on August 18, 2016. Interest is payable monthly with the principal due at maturity. The Company received a $0.4 million commitment fee as a result of this
transaction. The balance as of December 31, 2014, net of the commitment fee, was $28.3 million and was classified as a Note Receivable on the Consolidated Balance
Sheets.
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
F- 20
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
• 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
(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 during which 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 (loss), 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 three interest rate contracts as of December 31, 2014 and 2013, all of which have been accounted for as cash flow hedges as more fully
described in note 6 below.
Stock-Based Compensation
Accounting Standard Codification, or ASC, Topic 718, Compensation—Stock Compensation (referred to as ASC Topic 718), 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.
Income Taxes
Our property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the entity that
owns the 1455 Market Street property, a REIT) for federal 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. To qualify as a REIT, we are required to distribute at least 90% of our net taxable income, excluding net capital gains, 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.
F- 21
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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.
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 may undertake, such as non-customary services for our tenants and holding assets that we cannot hold directly, will be conducted by a TRS. A TRS is
subject to federal and, where applicable, state income taxes on its net income.
The Company is subject to the statutory requirements of the states in which it conducts business.
The Company periodically evaluates its tax positions to determine 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, 2014, the Company has not
established a liability for uncertain tax positions.
The REIT and its TRS file income tax returns with the U.S. federal government and various state and local jurisdictions. The REIT and the TRS are no longer
subject to tax examinations by tax authorities for years prior to 2011. Generally, The Company has assessed its tax positions for all open years, which includes 2011 to
2014, and concluded that there are no material uncertainties to be recognized.
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
F- 22
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 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, 2014, 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
Interest Rate Swaps
Non-designated Hedges
Number of Instruments
2
1
Notional Amount
$92.0 million
$64.5 million
For the years ended December 31, 2014 and 2013, 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 a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2014 and 2013.
The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that
derivative assets and liabilities are presented on the consolidated balance sheets.
Derivatives designated as hedging instruments:
Interest rate products
Total
Asset Derivatives
Liability Derivatives
Fair Value as of
Fair Value as of
Balance Sheet
Location
December 31,
2014
December 31,
2013
Balance Sheet
Location
December 31,
2014
December 31,
2013
Interest rate
contracts
$
$
3
$
192
Interest rate
contracts
$
1,750
3
$
192
1,750
—
—
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 years ended December 31, 2014
and 2013.
F- 23
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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
Allocation of OCI, non-controlling interests
Accumulated other comprehensive deficit
Credit-Risk-Related Contingent Features
As of December 31, 2014, the Company had one derivatives that was in a net liability position.
Recently Issued Accounting Literature
Year Ended December 31,
2014
2013
2012
$
$
1,162
1,939
(440 )
$
1,465
(121 )
(182 )
1,036
457
(28 )
$
1,499
$
(303 ) $
429
$
$
2,661
(218 )
$
1,162
(165 )
1,465
(178 )
$
2,443
$
997
$
1,287
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.
On June 19, 2014, the FASB issued their final standard to amend the accounting guidance for stock compensation tied to performance targets (ASU No. 2014-
12). The issue is the result of a consensus of the FASB Emerging Issues Task Force (Issue No. 13-D). The standard requires that a performance target that could be
achieved after the requisite service period be treated as a performance condition, and as a result, this type of performance condition may delay expense recognition until
achievement of the performance target is probable. The ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15,
2015, and early adoption is permitted. The Company will adopt the guidance effective January 1, 2016 and the guidance is not expected to have a material impact on our
consolidated financial statements or notes to our consolidated financial statements.
On May 28, 2014, the FASB issued their final standard on revenue from contracts with customers. The guidance specifically notes that lease contracts with
customers are a scope exception. The standard (ASU No. 2014-09) outlines a single comprehensive model for entities to use in accounting for revenues arising from
contracts with customers. The ASU is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, and early adoption is not
permitted. The Company will adopt the guidance effective January 1, 2017 and is currently assessing the impact on our consolidated financial statements and notes to
our consolidated financial statements.
On April 10, 2014, the FASB issued final guidance to change the criteria for reporting discontinued operations while enhancing disclosures in this area (ASU
No. 2014-08). Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business
activity classified as held for sale should be reported as discontinued operations. The guidance also expands the disclosure requirements for discontinued operations
and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. The guidance will be applied prospectively to new
disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for annual financial statements with fiscal years
beginning on or after December 15, 2014 with early adoption permitted for disposals or classifications as held for sale that have not been reported in financial statements
previously issued or available for issuance. As of January 1, 2014, we have early adopted the amended guidance and it resulted in the sale of Tierrasanta and the First
Financial properties held for sale, not meeting the definition of a discontinued operation. As a result, the Company did not reclassify the properties' operations including
the $5.5 million gain on sale of real estate into discontinued operations for the years ended December 31, 2014, 2013 and 2012.
F- 24
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
3. Investment in Real Estate
A summary of the activity of our investment in real estate including investment in real estate held for sale (First Financial, Tierrasanta and City Plaza) is as
follows:
Investment in real estate
Beginning balance
Acquisitions
Improvements, capitalized costs
Disposal
Cost of property sold
Ending Balance
Reclassification to assets associated with real estate held for sale
Total Investment in real estate
Accumulated depreciation
Beginning balance
Additions
Deletions
Ending Balance
Reclassification to assets associated with real estate held for sale
Total Accumulated depreciation
Acquisitions
$
$
$
$
$
$
Year Ended
December 31, 2014
Year Ended
December 31, 2013
Year Ended
December 31, 2012
$
2,035,330
114,008
128,018
(37,615 )
—
2,239,741
$
(68,446 )
2,171,295
$
(116,342 ) $
(50,044 )
23,825
(142,561 ) $
7,904
(134,657 ) $
$
1,475,955
538,322
89,707
(9,638 )
(59,016 )
2,035,330
$
(82,305 )
1,953,025
$
(85,184 ) $
(41,454 )
10,296
(116,342 ) $
7,931
(108,411 ) $
1,060,504
390,370
27,901
(2,820 )
—
1,475,955
—
1,475,955
(53,329 )
(34,675 )
2,820
(85,184 )
—
(85,184 )
On December 6, 2014, the Company entered into an asset purchase agreement to acquire the EOP Northern California Portfolio from Blackstone Real Estate
Partners V and VI ("Blackstone"). The EOP Northern California Portfolio consists of 26 high-quality office assets totaling approximately 8.2 million square feet and two
development parcels located throughout the San Francisco Peninsula, Redwood Shores, Palo Alto Silicon Valley and San Jose Airport submarkets. The total
consideration to be paid for the EOP Northern California Portfolio before certain credits, proration, and closing costs will be a cash payment equal to $1.75 billion and
equity consideration totaling 63,474,791 shares of our common stock or common units of limited partnership interest in the Operating Partnership. The Company expects
the transaction to close in late first quarter or early second quarter subject to customary closing conditions, including the receipt of the requisite stockholder approval
for the equity issued in connection with the transaction.
F- 25
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
During 2014, we acquired the following properties: Merrill Place, 3402 Pico Blvd., and 12655 Jefferson. 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
Total consideration
Allocation of consideration paid
Investment in real estate, net
Above-market leases
Deferred leasing costs and lease intangibles, net
Below-market leases
Other (liabilities) asset assumed, net
Total consideration paid
Merrill Place
3402 Pico Blvd.
12655 Jefferson
February 12, 2014
February 28, 2014
October 17, 2014
Total
$
$
$
$
57,034
57,034
$
$
$
57,508
173
3,163
(3,315 )
(495 )
57,034
$
18,546
18,546
$
$
18,500
—
—
—
46
18,546
$
$
38,000
38,000
$
$
38,000
—
—
—
—
38,000
$
$
113,580
113,580
114,008
173
3,163
(3,315 )
(449 )
113,580
During 2013, we acquired the following properties: 3401 Exposition, Pinnacle II, the Seattle Portfolio, and 1861 Bundy. 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
Notes Receivable
Debt Assumed
Non-controlling interest in consolidated real estate entity
Total consideration
Allocation of consideration paid
Investment in real estate, net
Deferred leasing costs and lease intangibles, net
Fair market unfavorable debt value
Below-market leases
Other (liabilities) asset assumed, net
Total consideration paid
$
$
$
$
3401 Exposition
Pinnacle II
Seattle Portfolio
1861 Bundy
May 22, 2013
June 14, 2013
July 31, 2013
September 26, 2013
Total
1,505
—
89,066
45,704
136,275
$
$
$
134,289
12,637
(5,820)
(7,783)
2,952
136,275
$
368,389
—
—
—
368,389
$
$
$
367,094
21,619
—
(14,666)
(5,658)
368,389
$
11,500
—
—
—
11,500
11,500
—
—
—
—
11,500
$
$
$
389,883
4,000
102,299
45,704
541,886
538,322
34,256
(5,820)
(22,449)
(2,423)
$
541,886
8,489
4,000
13,233
—
25,722
25,439
—
—
—
283
25,722
$
$
$
$
F- 26
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
During 2012, we acquired the following properties: 10900 Washington, 901 Market Street, Element LA (Olympic Bundy), 1455 Gordon Street and Pinnacle I. 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
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
Below-market leases
Other (liabilities) asset assumed, net
Total consideration paid
$
$
$
$
10900
Washington
901 Market
Element LA
April 5, 2012
June 1, 2012
September 5,
2012
1455 Gordon
Street
September 21,
2012
Pinnacle I
November 8, 2012
Total
2,605
$
90,871
$
88,436
$
2,385
$
208,023
$
392,320
—
2,605
2,600
—
—
—
—
5
2,605
$
$
$
—
90,871
$
—
88,436
$
—
2,385
$
1,481
209,504
$
1,481
393,801
$
97,187
—
2,968
548
(10,249 )
417
90,871
$
$
88,024
—
1,325
46
(666 )
(293 )
$
2,384
—
96
22
(27 )
(90 )
$
200,175
167
11,710
3,456
(5,076 )
(928 )
88,436
$
2,385
$
209,504
$
390,370
167
16,099
4,072
(16,018 )
(889 )
393,801
The table below shows the pro forma financial information for the years ended December 31, 2014 and 2013 as if these properties had been acquired as of
January 1, 2013.
Total revenues
Net loss
Dispositions
Year Ended December 31,
2014
2013
$
$
253,924
23,540
$
$
224,102
(5,620 )
On December 29, 2014, the Company entered into a purchase and sale agreement to sell its First Financial office property for $89.0 million (before certain credits,
prorations, and closing costs). As a result, the Company has reclassified First Financial's assets and liabilities to held for sale as of December 31, 2014 and 2013. The
transaction is subject to assumption of an existing $42.4 million loan and is expected to close in the first quarter of 2015. Pursuant to the Company's adoption of ASU
No. 2014-08, the Company has not presented the operating results in net income (loss) from discontinued operations.
On July 16, 2014, the Company sold its Tierrasanta property for $19.5 million (before certain credits, prorations, and closing costs) and therefore, reclassified
Tierrasanta's assets and liabilities to held for sale at July 16, 2014 and December 31, 2013. Pursuant to the Company's adoption of ASU No. 2014-08, the Company has not
presented the operating results in net income (loss) from discontinued operations.
On May 31, 2013, the Company entered into an agreement to sell its City Plaza property for approximately $56.0 million (before certain credits, prorations, and
closing costs). The transaction closed on July 12, 2013. The transaction resulted in an approximately $5.6 million impairment loss. The Company reclassified City Plaza’s
results of operations for the years ended December 31, 2014, 2013 and 2012 to discontinued operations on its consolidated statements of operations.
F- 27
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
The following table sets forth the discontinued operations for the years ended December 31, 2014, 2013 and 2012 for the City Plaza:
Total office revenues
Office operating expenses
Depreciation and amortization
Income from discontinued operations
Year Ended December 31,
2014
2013
2012
$
$
$
—
(164 )
—
(164 ) $
$
4,321
(1,961 )
(789 )
1,571
$
5,695
(2,978 )
(2,266 )
451
The following table summarizes the components that comprise the assets and liabilities associated with real estate held for sale as of December 31, 2014 and
2013:
ASSETS
Investment in real estate, net
Restricted cash
Straight-line rent receivables
Deferred leasing costs and lease intangibles, net
Other
Assets associated with real estate held for sale
LIABILITIES AND EQUITY
Liabilities:
Notes payable
Accounts payable and accrued liabilities
Other
Liabilities associated with real estate held for sale
Equity
Total liabilities and equity associated with real estate held for sale
F- 28
Year Ended December 31,
2014
2013
$
$
$
$
60,542
2,839
2,151
2,457
545
68,534
42,449
322
443
43,214
25,320
68,534
$
$
$
$
74,374
2,821
1,997
3,693
360
83,245
43,000
1,393
731
45,124
38,121
83,245
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
4. Deferred Leasing Costs and Lease Intangibles, net
The following summarizes our deferred leasing costs and lease intangibles as of:
December 31,
2014
December 31,
2013
Above-market leases
Leases in place
Below-market ground leases
Other lease intangibles
Lease buy-out costs
Deferred leasing costs
Accumulated amortization
Deferred leasing costs and lease intangibles, net
Below-market leases
Accumulated accretion
Below-market leases, net
$
$
$
$
$
10,891
60,130
7,513
26,731
4,597
38,912
148,774
(46,751 )
$
102,023
$
57,420
(16,451 )
40,969
$
14,869
83,793
7,513
35,651
3,107
28,270
173,203
(64,801 )
108,402
67,284
(22,100 )
45,184
During the years ended December 31, 2014, 2013 and 2012, the Company recognized $20.9 million, $24.4 million, and $19.8 million, respectively, of amortization
expense related to lease costs and in-place leases, and amortized $2.0 million, $2.5 million, and $3.8 million respectively, of above-market leases against rental revenue. As
of December 31, 2014 and 2013, the weighted-average amortization period for lease intangibles was 6.17 years and 7.78 years, respectively.
As of December 31, 2014, 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
2015
2016
2017
2018
2019
Thereafter
Deferred leasing costs
and lease intangibles,
net
$
$
19,096
17,289
14,087
12,334
10,976
28,241
102,023
During the years ended December 31, 2014, 2013 and 2012, the Company amortized $7.7 million, $8.6 million, and $7.3 million, respectively of below-market leases
in rental revenue. As of December 31, 2014 and 2013, the weighted-average amortization period for below-market leases was 6.54 years and 7.23 years, respectively.
F- 29
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
As of December 31, 2014 the estimated amortization of below-market leases, net for each of the next five years and thereafter are as follows:
Year ended
2015
2016
2017
2018
2019
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 $207 and $629 respectively
Trade name, net of accumulated amortization of $751 and $649, respectively
Other
Reclassification to assets associated with real estate held for sale
Below Market Lease
$
$
7,158
6,798
6,334
5,609
5,311
9,759
40,969
December 31, 2014
December 31, 2013
$
$
3,025
427
1,405
271
1,564
—
6,692
$
$
2,677
5
490
372
1,626
(76 )
5,094
Trade name is being amortized over a 10-year period from the date of acquisition of our Sunset Gower property on August 17, 2007.
F- 30
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
6. Notes Payable
The following table sets forth information as of December 31, 2014 with respect to our outstanding indebtedness (in thousands).
Debt
Unsecured revolving credit facility - new
Unsecured revolving credit facility
Unsecured term loan
Mortgage loan secured by 3401 Exposition Boulevard(2)
Mortgage loan secured by 6922 Hollywood Boulevard(3)
Mortgage loan secured by 275 Brannan
Mortgage loan secured by Pinnacle II(4)
Mortgage loan secured by 901 Market(5)
Mortgage loan secured by Element LA(6)
Mortgage loan secured by Sunset Gower/Sunset Bronson(7)
Mortgage loan secured by Rincon Center(8)
Mortgage loan secured by First & King(9)
Mortgage loan secured by Met Park North(10)
Mortgage loan secured by 10950 Washington(11)
Mortgage loan secured by Pinnacle I(12)
Subtotal
Unamortized loan premium, net(13)
Total
Mortgage loan on real estate held for sale:
Mortgage loan secured by First Financial(14)
Outstanding as of
December 31,
2014
December 31,
2013
$
$
$
$
$
130,000
—
150,000
—
—
15,000
87,421
49,600
59,490
97,000
104,126
—
64,500
28,866
129,000
915,003
3,056
918,059
$
$
$
42,449
960,508
$
$
—
155,000
—
13,233
40,396
15,000
88,540
49,600
566
97,000
105,853
95,000
64,500
29,300
129,000
882,988
5,320
888,308
43,000
931,308
Interest Rate(1)
LIBOR+1.15% to 1.55%
LIBOR+1.55% to 2.20%
LIBOR+1.30% to 1.90%
LIBOR+3.80%
5.58%
LIBOR+2.00%
6.313%
LIBOR+2.25%
LIBOR+1.95%
LIBOR+2.25%
5.134%
LIBOR+1.60%
LIBOR+1.55%
5.316%
3.954%
Maturity
Date
9/23/2018
N/A
9/23/2019
N/A
N/A
10/5/2015
9/6/2016
10/31/2016
11/1/2017
2/11/2018
5/1/2018
N/A
8/1/2020
3/11/2022
11/7/2022
4.580%
2/1/2022
__________________
(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 May 22, 2013 in connection with the closing of our acquisition of the 3401 Exposition Boulevard property. This loan was paid off during 2014.
(3) This loan was assumed on November 22, 2011 in connection with the closing of our acquisition of the 6922 Hollywood Boulevard property. This loan was paid off during 2014.
(4) This loan was assumed on June 14, 2013 in connection with the contribution of the Pinnacle II building to the Company’s joint venture with M. David Paul & Associates/Worthe Real
Estate Group. This loan bore interest only for the first five years. Beginning with the payment due October 6, 2011, monthly debt service includes annual debt amortization payments based
on a 30-year amortization schedule.
(5) On October 29, 2012, we obtained a loan for our 901 Market property pursuant to which we borrowed $49.6 million upon closing, with the ability to draw up to an additional $11.9 million
for budgeted base building, tenant improvements, and other costs associated with the renovation and lease-up of that property.
(6) On November 24, 2014 we amended our construction loan for Element LA to, among other things, increase availability from $65.5 million to $102.4 million for budgeted site-work,
construction of a parking garage, base building, tenant improvement, and leasing commission costs associated with the renovation and lease-up of the property.
(7) 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 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 February 11, 2016. Effective August 22, 2013, the
terms of this loan were amended to increase the outstanding balance from $92.0 million to $97.0 million, reduce the interest rate from LIBOR plus 3.50% to LIBOR plus 2.25%, and extend
the maturity date from February 11, 2016 to February 11, 2018.
(8) This loan is amortizing based on a 30-year amortization schedule.
(9) This loan was paid off during 2014.
(10) This loan bears interest only at a rate equal to one-month LIBOR plus 1.55%. The full loan amount is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of
2.1644% through the loan's maturity on August 1, 2020.
(11) This loan is amortizing based on a 30-year amortization schedule.
(12) This loan bears interest only for the first five years. Beginning with the payment due December 6, 2017, monthly debt service will include annual debt amortization payments based on a 30-
year amortization schedule.
(13) Represents unamortized amount of the non-cash mark-to-market adjustment on debt associated with Pinnacle II.
F- 31
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
(14) Beginning with the payment made March 1, 2014, monthly debt service includes principal payments based on a 30-year amortization schedule, for total annual debt service of $2.6 million.
This note has been recorded as part of the liabilities associated with real estate held for sale (see note 3).
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, 2014, excluding the non-cash loan premium
amortization and the $42.4 million mortgage loan secured by First Financial, were as follows (in thousands):
Year ended
2015
2016
2017
2018
2019
Thereafter
Total
Annual Principal
Payments
$
$
18,323
138,199
62,195
328,320
152,885
215,081
915,003
Senior Unsecured Revolving Credit Facility
On September 23, 2014, the Company amended and restated its $250.0 million unsecured revolving credit facility to increase the unsecured revolving credit
facility from $250.0 million to $300.0 million, extend the term of that facility to September 23, 2018, and add a five-year, $150.0 million unsecured term loan facility with a
group of lenders for which Wells Fargo Bank, N.A. acts as administrative agent, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner and Smith
Incorporated act as joint lead arrangers, and Bank of America, N.A. and Barclays Bank PLC, act as joint syndication agents, and Keybank, N.A., acts as documentation
agent.
The $150.0 million unsecured term loan facility was fully drawn by the Company on the closing date to repay a $95.0 million loan secured by the Company’s 505
First Street and 83 King properties, with the remaining $55.0 million used to repay amounts outstanding under the Company’s prior unsecured revolving facility.
The Operating Partnership continues to be the borrower under the new facility, and the Company and all subsidiaries that own unencumbered properties will
continue to provide guaranties unless the Company obtains and maintains a credit rating of at least BBB- from S&P or Baa3 from Moody’s, in which case such
guaranties are not required except under limited circumstances. Subject to the satisfaction of certain conditions and lender commitments, the Company may increase the
availability of either or both of the unsecured revolving credit facility or term loan facility so long as the aggregate commitments under both facilities do not exceed
$700.0 million.
Under the unsecured revolving credit facility, the Company may elect to pay interest at a rate equal to either LIBOR plus 115 to 155 basis points per annum or a
specified base rate plus 15 to 55 basis points per annum, depending on the Company’s leverage ratio. Under the term loan facility, the Company may elect to pay interest
at a rate equal to either LIBOR plus 130 to 190 basis points per annum or a specified base rate plus 30 to 90 basis points per annum, again depending on the Company’s
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 equal to either LIBOR plus 87.5 to 165 basis points per annum or the specified base rate plus 0 to 65 basis points per
annum, and for the term loan facility equal to either LIBOR plus 90 to 190 basis points per annum or the specified base rate plus 0 to 90 basis points per annum, in each
case depending on the credit rating.
The unsecured revolving credit facility is subject to a facility fee in an amount equal to the Company’s revolving credit commitments (whether or not utilized)
multiplied by a rate per annum equal to 20 to 35 basis points, depending on the Company’s leverage ratio, or, if the Company makes the credit rating election, in an
amount equal to the aggregate amount of its revolving
F- 32
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
credit commitments multiplied by a rate per annum equal to 12.5 to 30 basis points, depending upon the credit rating. Unused amounts of the facility are no longer
subject to a separate fee.
The Company’s ability to borrow under the facility remains subject to ongoing compliance with a number of customary restrictive covenants. In addition to
these covenants, the facility also includes certain limitations on dividend payouts and distributions, limits on certain types of investments outside of the Company’s
primary business, and other customary affirmative and negative covenants.
As of December 31, 2014, the Company was in compliance with its unsecured revolving credit facility’s financial covenants. As of December 31, 2014, we had
total borrowing capacity of approximately $300.0 million under our unsecured revolving credit facility, $130.0 million of which had been drawn.
Repayment Guaranties
Sunset Gower and Sunset Bronson Loan
In connection with the $97.0 million loan secured by our Sunset Gower and Sunset Bronson properties, we have guaranteed in favor of and promised to pay to
the lender 19.5% of the principal payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At December 31,
2014, the outstanding balance was $97.0 million, which results in a maximum guarantee amount for the principal under this loan of $18.9 million.
Element LA Loan
In connection with our Element LA construction loan, we have guaranteed in favor of and promised to pay to the lender 25.0% of the principal, together with all
interest and any other sum payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At December 31, 2014,
the outstanding balance was $59.5 million, which results in a maximum guarantee amount for the principal under this loan of $14.9 million. Upon the satisfaction of certain
conditions, as defined in the repayment guaranty agreement, our liability with respect to the principal under this loan will be reduced to zero, unless certain further
events, described in the guarantee occur, in which case our maximum liability as guarantor will be restored to 25.0% of the principal under the loan. Furthermore, we
agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the
borrower. The borrower has completed the core and shell construction. If the borrower fails to complete the remaining required work, the guarantor agrees to perform
timely all of the completion obligations, as defined in the agreement.
275 Brannan Loan
In connection with our 275 Brannan loan, we have guaranteed in favor of and promised to pay to the lender 35.0% of the principal under the loan in the event
the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At December 31, 2014, the outstanding balance was $15.0 million, which results in a
maximum guarantee amount for the principal under this loan of $5.3 million. Furthermore, we agreed to guarantee the completion of the construction improvements
including tenant improvements, as defined in the agreement, in the event of any default of the borrower. The borrower has completed the improvements subject to this
completion guaranty.
901 Market Loan
In connection with our 901 Market Street loan, we have guaranteed in favor of and promised to pay to the lender 35.0% of the principal under the loan in the
event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At December 31, 2014, the outstanding balance was $49.6 million, which results
in a maximum guarantee amount for the principal under this loan of $17.4 million. Furthermore, we agreed to guarantee the completion of the construction improvements
including tenant improvements, as defined in the agreement, in the event of any default of the borrower. The borrower has completed various of the improvements
subject to this completion guaranty. If the borrower fails to complete the remaining required work, the guarantor agrees to perform timely all of the completion
obligations, as defined in the agreement.
Other Loans
Although the rest of our loans are secured and non-recourse to the Company and the Operating Partnership, the Operating Partnership provides limited
customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.
F- 33
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
7. Interest Rate Contracts
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 each of these interest rate cap
contracts as a cash flow hedge for accounting purposes.
Effective August 22, 2013, the terms of this loan were amended to, among other changes, increase the outstanding balance from $92.0 million to $97.0 million and
extend the maturity date from February 11, 2016 to February 11, 2018. The interest rate contracts described above were not changed in connection with this loan
amendment.
On July 31, 2013, we closed a seven-year loan totaling $64.5 million with Union Bank, N.A., secured by our Met Park North property. The loan bears interest at a
rate equal to one-month LIBOR plus 1.55%. The full loan is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of 2.1644% through the
loan’s maturity on August 1, 2020.
The combined fair market value of the interest rate caps at December 31, 2014 and 2013 was $0.003 million and $0.192 million, respectively. The fair market value
of the interest rate swap at December 31, 2014 was a $1.75 million liability.
8. Future Minimum Base Rents and Future Minimum Lease Payments
Our properties are leased to tenants under operating leases with initial term expiration dates ranging from 2015 to 2020. Approximate future combined minimum
rentals (excluding tenant reimbursements for operating expenses and without regard to cancellation options) for properties at December 31, 2014 are presented below for
the years/periods ended December 31. The table below does not include rents under leases at our media and entertainment properties with terms of one year or less.
Future minimum base rents under our operating leases in each of the next five years and thereafter are as follows (in thousands):
Year Ended
2015
2016
2017
2018
2019
Thereafter
Total
Future Minimum Lease Payments
Non-cancelable
Subject to early
termination
options
$
$
170,355 $
168,323
152,138
139,835
123,690
539,180
1,293,521 $
826
3,437
6,971
9,628
10,749
19,527
51,138
$
$
Total
171,181
171,760
159,109
149,463
134,439
558,707
1,344,659
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) with a related party for a portion of the land. 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. The rental rate is subject to adjustment again in March 2018 and every seven years thereafter.
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.
F- 34
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 table below reflects the $975 per year lease payment.
The following table provides information regarding our future minimum lease payments at December 31, 2014 under these lease agreements.
Year Ended
2015
2016
2017
2018
2019
Thereafter
Total
Future Minimum
Lease Payments
$
$
1,417
1,417
1,417
1,417
1,417
49,408
56,493
9. Fair Value of Financial Instruments
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 inputs. 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
Notes receivable
Derivative assets, disclosed as “Interest rate contracts”
Derivative liabilities, disclosed as “Interest rate contracts”
December 31, 2014
December 31, 2013
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$
$
960,508
28,268
3
1,750
$
969,259
28,268
3
1,750
$
931,308
—
192
—
940,435
—
192
—
F- 35
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 the Operating
Partnership. Investors who own common units have the right to cause the 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, issue shares of our common stock in exchange for common units on a one-for-one basis. In
February 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, in accordance with our limited partnership agreement, to issue shares of our common stock in exchange for the
common units to satisfy the redemption notice. Accordingly, 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 exchanges, as reflected in the consolidated
statements of equity under the caption “—Exchange of Non-Controlling Interest of Common Units in the Operating Partnership for Common Stock.”
Non-controlling interest—members in consolidated entities
Non-controlling interest—members in consolidated entities refers to our joint venture partner, Media Center Partners, LLC, with which we entered into a joint
venture, Hudson MC Partners, LLC (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 of December 31, 2014, we own a 65.0% in the Pinnacle JV. As of December 31, 2012 and until the acquisition by the Pinnacle JV of the 231,864
square-foot Pinnacle II building on June 14, 2013, we owned a 98.25% interest in the Pinnacle JV, which owns the 393,776 square-foot Pinnacle I building.
6.25% series A cumulative redeemable preferred units of the Operating Partnership
6.25% series A cumulative redeemable preferred units of the Operating Partnership are 407,066 series A preferred units of partnership interest in the Operating
Partnership, or series A preferred units, that are not owned by the Company. 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 became convertible at the option of the holder into common units or redeemable into cash or, at the
Company's election, exchangeable for registered shares of common stock, after June 29, 2013. In October 2013, one of our series A preferred unit holders required us to
redeem 80,000 series A preferred units. We elected to redeem these units for cash equal to the liquidation preference of $25.00 per unit. As a result of this redemption, our
outstanding series A preferred units decreased from 419,014 units outstanding to 407,066 units outstanding. For a description of the conversion and redemption rights of
the series A preferred units, please see “Description of the Partnership Agreement of Hudson Pacific Properties, L.P.—Material Terms of Our Series A Preferred Units” in
our June 23, 2010 Prospectus.
8.375% Series B cumulative redeemable preferred stock
8.375% series B cumulative redeemable preferred stock are 5,800,000 shares of 8.375% preferred stock, with a liquidation preference of $25.00 per share, $0.01 par
value per share. 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’ option to purchase additional shares 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’ option to purchase
additional shares 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
F- 36
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 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. For a full description of the Series B cumulative redeemable preferred stock, please see “Description of our
Preferred Stock” in our December 7, 2010 Prospectus.
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’ 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).
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’ 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).
January 2014 Common Stock Offering
On January 28, 2014, we completed the public offering of 8,250,000 shares of common stock and the exercise of the underwriters’ option to purchase an
additional 1,237,500 shares of our common stock at the public offering price of $21.50 per share, less the underwriting discount.
Total proceeds from the public offering, after underwriters’ discount, were approximately $195.8 million (before transaction costs).
At-the-Market, or ATM, program
During the fourth quarter of 2012, we instituted a new At-the-Market, or ATM, program permitting sales of up to $125.0 million of stock. During the year ended
December 31, 2014, we sold 76,000 shares of common stock at prices ranging from $21.92 to $22.07 per share under this ATM program. During the year ended
December 31, 2013, we sold 612,644 shares of common stock at prices ranging from $20.55 to $22.27 per share under this ATM program. A cumulative total of $14.5
million has been sold as of December 31, 2014.
F- 37
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
Exchange of Common Units for Common Stock
In February 2012, we elected to issue 155,878 shares of our common stock in exchange for a corresponding number of
common units to satisfy the common unit redemption notice of Glenborough Fund XIV, L.P.
In December 2012, we elected to issue 72,500 shares of our common stock in exchange for a corresponding number of common units to satisfy the common unit
redemption notice of Howard S. Stern.
Dividends
During the year ended December 31, 2014, we declared dividends on our common stock and non-controlling common partnership interests of $0.500 per share
and unit. We also declared dividends on our series A preferred partnership interests of $1.5625 per unit. In addition, we declared dividends on our series B preferred
shares of $2.09375 per share. The fourth quarter 2014 dividends were declared on December 19, 2014 and paid to holders of record on December 30, 2014.
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):
Ordinary Dividends
Record Date
Payment Date
Distributions per
Share
Total
Non-qualified
Qualified
Return of Capital
3/21/2014
6/20/2014
9/20/2014
12/19/2014
$
3/31/2014
6/30/2014
9/30/2014
12/30/2014
Total
$
0.12500 $
0.12500
0.12500
0.12500
0.50000 $
100%
0.05647 $
0.05647
0.05647
0.05647
0.22588 $
45.176%
0.05647 $
0.05647
0.05647
0.05647
0.22588 $
— $
—
—
—
— $
0.06853
0.06853
0.06853
0.06853
0.27412
54.824%
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
3/21/2014
6/20/2014
9/20/2014
12/19/2014
3/31/2014
6/30/2014
9/30/2014
12/30/2014
Total
$
$
0.52344 $
0.52344
0.52344
0.52344
2.09376 $
0.52344 $
0.52344
0.52344
0.52344
2.09376 $
0.52344 $
0.52344
0.52344
0.52344
2.09376 $
—
—
—
—
—
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
F- 38
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 is 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 is
three years. These awards are generally subject to a two-year hold upon vesting.
The following table summarizes the restricted share activity for the year ended December 31, 2014 and status of all unvested restricted share awards to our non-
employee board members and employees at December 31, 2014:
Non-vested Shares
Balance at December 31, 2012
Granted
Vested
Canceled
Balance at December 31, 2013
Granted
Vested
Canceled
Balance at December 31, 2014
Shares
Weighted-Average Grant-
Date Fair Value
632,344 $
263,039
(350,788 )
(3,415 )
541,180 $
281,491
(275,051 )
(3,913 )
543,707 $
17.12
22.16
16.50
16.09
19.98
29.38
16.83
20.44
26.43
Year Ended December 31,
2014
2013
2012
Non-Vested Shares
Issued
Weighted Average
Grant - dated Fair
Value
Vested Shares
Total Vest-Date Fair Value
(in thousands)
$
281,491
263,039
268,060
29.38
22.16
20.33
(275,051 ) $
(350,788 )
(262,908 )
9,794
7,664
5,096
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. Outperformance Programs
In each of 2012, 2013 and 2014, the Compensation Committee of our Board of Directors adopted a Hudson Pacific Properties, Inc. Outperformance Program
(individually, the “2012 OPP,” the “2013 OPP” and the “2014 OPP” and, together, the “OPPs”). Participants in the 2012 OPP, 2013 OPP and 2014 OPP may earn, in the
aggregate, up to $10 million, $11 million and $12 million, respectively, of stock-settled awards based on our Total stockholder Return, or TSR, for the three-year period
beginning January 1 of the year in which the applicable OPP was adopted and ending December 31 of 2014, 2015 or 2016, respectively.
Under each OPP, participants will be entitled to share in a performance pool with a value, subject to the applicable dollar-denominated cap described above,
equal to the sum of: (i) 4% of the amount by which our TSR during the applicable performance period exceeds 9% simple annual TSR (the “absolute TSR component”),
plus (ii) 4% of the amount by which our TSR during the applicable 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 applicable 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 applicable performance period. In addition, the relative TSR component may be a negative value equal to 4% of
F- 39
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
the amount by which we underperform the SNL Equity REIT Index by more than 3% per year during the applicable performance period (if any).
With respect to the 2012 OPP, 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 applicable 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 million bonus pool
limitation). Similarly, with respect to the 2013 OPP , 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 applicable
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 million
bonus pool limitation).
At the end of the applicable 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 RSUs that vest in equal annual installments over the two years immediately following the applicable
performance period (based on continued employment) and which carry tandem dividend equivalent rights. However, if the applicable performance period is terminated in
connection with a change in control, OPP 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 OPP award entitles its holder to a cash payment equal to the aggregate dividends that would have been paid during the applicable
performance period on the total number of shares and RSUs ultimately issued or granted in respect of such OPP 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 applicable performance
period (referred to as qualifying terminations), the participant will be paid his or her OPP 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 applicable performance period. If we experience a
change in control or a participant experiences a qualifying termination of employment, in either case, after the end of the applicable performance period, any unvested
RSUs that remain outstanding will accelerate and vest in full upon such event.
The cost of the 2012 OPP, the 2013 OPP and the 2014 OPP (approximately $3.49 million, $4.14 million and $3.21 million, respectively, subject to a forfeiture
adjustment equal to 6%, 6% and 10%, respectively, of the total cost) will be amortized through the final vesting period under a graded vesting expense recognition
schedule.
F- 40
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
The 2012 OPP, 2013 OPP and 2014 OPP were valued, in accordance with ASC 718, at an aggregate of approximately $3.49 million, $4.14 million and $3.21 million,
respectively, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a
statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run 100,000 times. For each simulation, the payoff is calculated at the
settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on
the award date. Assumptions used in the valuations included (1) factors associated with the underlying performance of the Company’s stock price and total stockholder
return over the term of the performance awards including total stock return volatility and risk-free interest and (2) factors associated with the relative performance of the
Company’s stock price and total stockholder return when compared to the SNL Equity REIT Index. The valuation was performed in a risk-neutral framework, so no
assumption was made with respect to an equity risk premium. The fair value of the OPP awards is based on the sum of: (1) the present value of the expected payoff to the
awards on the measurement date, if the TSR over the applicable measurement period exceeds performance hurdles of the absolute and the relative TSR components; and
(2) the present value of the distributions payable on the awards. The ultimate reward realized on account of the OPP awards by the holders of the awards is contingent
on the TSR achieved on the measurement date, both in absolute terms and relative to the TSR of the SNL Equity REIT Index. The per unit fair value of each 2012 OPP
award, 2013 OPP award and 2014 OPP award was estimated on the date of grant using the following assumptions in the Monte Carlo valuation: expected price volatility
for the Company and the SNL Equity REIT index of 36% and 35%, 33% and 25%, and 28% and 26%, respectively; a risk-free rate of 0.40%, 0.38% and 0.77%, respectively;
and total dividend payments over the measurement period of $1.62, $1.50 and $1.50, respectively, per share.
For the years ended December 31, 2014 and 2013, $7,979 and $6,682, respectively, of non-cash compensation expense for all stock compensation was recognized
as additional paid-in capital, of which $7,559 and $6,454, respectively, was included in general and administrative expenses, with the remaining $420 and $228,
respectively, of stock compensation capitalized to tenant improvements 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 had an initial lease term through May 31, 2014. The lease was extended to May 31, 2015. The
monthly rental obligation under the lease for the remaining period is $0.012 million, the base rent component. 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, 2014, 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
As of December 31, 2014, the majority of the Company’s properties were located in California, which exposes the Company to greater economic risks than if it
owned a more geographically dispersed portfolio. Further, for the years ended December 31, 2014 and 2013, approximately 16% and 20%, 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.
Other
As of December 31, 2014, the Company has commitments to tenants to deliver space totaling $45.2 million.
F- 41
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
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 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. Asset information by segment is not reported because we do not use
this measure to assess performance or make decisions to allocate resources.
Summary information for the reportable segments for the year ended December 31, 2014 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
$
$
213,786
78,372
135,414
$
$
Media and
Entertainment
Properties
39,629
25,897
13,732
$
$
Total
253,415
104,269
149,146
Summary information for the reportable segments for the year ended December 31, 2013 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
$
$
165,441
63,434
102,007
$
$
Media and
Entertainment
Properties
40,117
24,149
15,968
$
$
Summary information for the reportable segments for the year ended December 31, 2012 is as follows:
Revenue
Operating expenses
Net operating income
Office Properties
Media and
Entertainment
Properties
$
$
120,328
50,599
69,729
$
$
40,133
24,340
15,793
$
$
Total
205,558
87,583
117,975
Total
160,461
74,939
85,522
The following is reconciliation from NOI to reported net income, the most direct comparable financial measure calculated and presented in accordance with GAAP:
F- 42
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
December 31, 2014
December 31, 2013
December 31, 2012
Net operating income
General and administrative
Depreciation and amortization
Interest expense
Interest income
Acquisition-related expenses
Other expense
Income (loss) from continuing operations before gain on sale of real estate
$
$
$
$
149,146
(28,253 )
(72,216 )
(25,932 )
30
(4,641 )
14
18,148
$
117,975
(19,952 )
(70,063 )
(25,470 )
272
(1,446 )
99
1,415
$
85,522
(16,497 )
(54,758 )
(19,071 )
306
(1,051 )
92
(5,457 )
There were no inter-segment sales or transfers during either of the years ended December 31, 2014 and 2013.
F- 43
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
14. Quarterly Financial Information (unaudited)
Total revenues
Income from operations
Net (loss) income from discontinued operations
Net income (loss)
Net (loss) income attributable to Hudson Pacific Properties, Inc. stockholders’
Net loss (income) from continuing operations attributable to common
stockholders’ per share— basic and diluted
Net (loss) income from discontinued operations per share— basic and diluted
Net loss attributable to common stockholders’ per share— basic and diluted
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Three months ended
$
$
$
$
$
$
68,787
11,640
—
885
(2,290 ) $
(0.03 ) $
—
$
(0.03 ) $
$
68,155
12,622
(38 )
11,415
7,620
$
0.11
$
—
$
0.11
$
$
62,129
13,195
(60 )
6,689
3,365
$
0.05
$
—
$
0.05
$
55,596
11,220
(66 )
4,533
1,260
0.02
—
0.02
Weighted average shares of common stock outstanding— basic and diluted
66,512,651
66,506,179
66,485,639
63,625,751
Total revenues
Income from operations
Net (loss) income from discontinued operations
Net income (loss)
Net loss attributable to Hudson Pacific Properties, Inc. stockholders’
Net loss (income) from continuing operations attributable to common
stockholders’ per share— basic and diluted
Net (loss) income from discontinued operations per share— basic and diluted
Net loss attributable to common stockholders’ per share— basic and
diluted
Weighted average shares of common stock outstanding— basic and diluted
15. Subsequent Events
1455 Market Street Joint Venture
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Three months ended
$
$
$
$
$
$
57,417
10,407
(37 )
3,269
(83 ) $
—
$
—
$
—
$
$
53,348
5,170
(155 )
(2,752 )
(5,694 ) $
(0.10 ) $
—
$
$
47,390
7,314
(4,552 )
(3,428 )
(6,184 ) $
(0.03 ) $
(0.08 ) $
(0.10 ) $
(0.11 ) $
47,403
3,668
735
317
(2,872 )
(0.07 )
0.01
(0.06 )
56,271,285
56,144,099
56,075,747
52,184,280
On January 7, 2015, we entered into a joint venture with Canada Pension Plan Investment Board ("CPPIB"), through which CPPIB purchased a 45% interest in
our 1455 Market Street office property for a purchase price of $219.2 million (before certain credits, proration and closing costs).
.
January 2015 Common Stock Offering
On January 20, 2015, we completed the public offering of 11,000,000 shares of common stock and the exercise of the underwriters’ over-allotment option to
purchase an additional 1,650,000 shares of our common stock at the public offering price of $31.75 per share. Total proceeds from the public offering, after underwriters’
discount, were approximately $385.2 million (before transaction costs).
Hudson Pacific Properties, Inc. 2015 Outperformance Program
F- 44
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
The Compensation Committee adopted the 2015 Outperformance Program ("OPP") under our 2010 Incentive Award Plan. The OPP authorizes grants of incentive
awards linked to our absolute and relative total stockholder return ("TSR") over the performance period beginning on January 1, 2015 and ending on the earlier to occur
of December 31, 2017 or the date on which we experience a change in control. Each OPP award confers a percentage participation right in a dollar-denominated, stock-
settled bonus pool, as well as certain dividend equivalent rights. Upon adoption of the OPP, the Compensation Committee granted Victor J. Coleman, Mark T. Lammas,
Christopher Barton and Alex Vouvalides, each of whom is a named executive officer, OPP awards of 22.4%, 12%, 8% and 10%, respectively.
Under the OPP, a bonus pool of up to (but not exceeding) $15 million will be determined at the end of the performance period as 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
performance exceeds that of the SNL Equity REIT Index (on a percentage basis) over the performance period (the relative TSR component), except that the relative TSR
component will be reduced on a linear basis from 100% to 0% for absolute TSR performance ranging from 7% to 0% 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). The target bonus pool is equal to $3.6 million, which would be attained if the Company achieves during the performance
period (i) a TSR is equal to that of the SNL Equity REIT Index and (ii) a 10.5% simple annual TSR.
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 carry tandem dividend equivalent rights. However, if the performance period is terminated prior
to December 31, 2017 in connection with a change in control, OPP 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 OPP 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 OPP 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 OPP 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, 2017, any unvested RSUs that remain outstanding will
accelerate and vest in full upon such event.
F- 45
Table of Contents
Property name
Office
Technicolor Building
(1)
875 Howard Street
Property(1)
Del Amo
9300 Wilshire
222 Kearny(1)
Rincon Center
1455 Market(1)
10950 Washington
604 Arizona(1)
275 Brannan Street
625 Second Street(1)
6922 Hollywood
10900 Washington
901 Market Street
Element LA
Pinnacle I
Pinnacle II
3401 Exposition
First & King
Met Park North
Northview
3402 Pico
Merrill Place
Jefferson
Icon
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Schedule III - Consolidated Real Estate and Accumulated Depreciation
December 31, 2014
(In thousands)
Initial Costs
Cost Capitalized
Subsequent to Acquisition
Gross Carrying Amount at
December 31, 2014
Encumbrances
at December,
31 2014
Land
Building &
Improvements Improvements
Carrying
Costs
Land
Building &
All
Improvements Total
Accumulated
Depreciation
at December
31, 2014
Year
Built /
Renovated Year Acquired
$
—
$ 6,599 $
27,187
$
25,460
$ 3,088
$ 6,599 $
55,735
$ 62,334 $
(13,316 )
2008
—
—
—
—
104,126
—
28,866
—
15,000
—
—
—
49,600
59,490
129,000
87,421
—
—
64,500
—
—
—
18,058
—
—
7,563
58,251
41,226
17,979
5,620
4,187
10,744
16,608
1,400
17,882
79,769
28,518
15,430
14,120
35,899
28,996
4,803
16,410
27,684
6,040
—
41,046
18,000
10,718
23,793
110,656
34,990
25,110
14,745
8,063
42,650
72,392
1,200
79,305
19,755
171,657
115,537
11,319
184,437
71,768
41,191
2,136
29,824
31,960
—
12,436
1,167
696
2,768
11,763
25,934
416
1,384
14,026
(70 )
3,835
735
13,719
69,529
3,976
208
9,953
5,619
499
151
1,066
1,539
73
13,121
18,058
—
—
7,563
58,251
41,226
17,979
5,620
4,187
10,744
16,608
1,400
17,882
79,769
28,518
15,430
14,120
35,899
28,996
4,803
16,410
27,684
6,040
—
1,180
—
—
—
—
—
—
—
1,115
—
—
—
—
9,225
—
—
1,028
—
—
—
627
2
—
84
F- 46
54,662
19,167
11,414
26,561
122,419
60,924
25,526
16,129
23,204
42,580
76,227
1,935
93,024
98,509
175,633
115,745
22,300
190,056
72,267
41,342
3,829
31,365
32,033
13,205
72,720
19,167
11,414
34,124
180,670
102,150
43,505
21,749
27,391
53,324
92,835
3,335
110,906
178,278
204,151
131,175
36,420
225,955
101,263
46,145
20,239
59,049
38,073
13,205
1986
1985
(12,408 ) Various
(2,656 )
(1,427 ) 1965/2001
(3,349 ) Various
(14,755 )
(1,419 )
1977
(3,329 ) Various
(1,385 )
(1,811 )
(4,267 )
(7,551 )
(209 )
1,973
1950
1905
1906
1965
(6,300 ) 1912/1985
(113 )
(10,961 )
(5,298 )
(81 )
1949
2002
2005
1961
(7,751 ) 1904/2009
(3,011 )
(2,354 )
2000
1991
—
1950
(1,307 ) Various
—
—
1985
Ongoing
2007
2007
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012, 2013
2012
2013
2013
2013
2013
2013
2014
2014
2014
2008
Table of Contents
Property name
Media &
Entertainment
Sunset Gower(2)
Sunset Bronson(2)
Total
Real estate held for
sale:
First Financial
Initial Costs
Cost Capitalized
subsequent to Acquisition
Gross Carrying Amount at
December 31, 2014
Encumbrances
at December,
31 2014
Land
Building &
Improvements Improvements
Carrying
Costs
Land
Building &
All
Improvements Total
Accumulated
Depreciation
at December
31, 2014(3)
Year
Built /
Renovated
Year
Acquired
97,000
—
635,003
79,321
77,698
64,697
32,374
$620,805 $ 1,286,510
$
15,685
11,682
247,370
139
122
$ 16,610
79,321
77,698
80,521
44,178
$620,805 $ 1,550,490
159,842
121,876
$2,171,295 $
(15,856) Various
(13,743) Various
(134,657)
2007, 2011,
2012
2008
42,449
677,452
8,115
52,137
$628,920 $ 1,338,647
$
8,194
255,564
—
$ 16,610
8,115
60,331
$628,920 $ 1,610,821
68,446
$2,239,741 $
(7,904)
(142,561)
1986
2010
$
$
______________________________
(1)
(2)
These properties are secured under our line of credit, which, as of December 31, 2014, has an outstanding balance of $130,000.
Effective August 22, 2013, the terms of this loan were amended to increase the outstanding balance from $92,000 to $97,000, reduce the interest rate from LIBOR plus 3.50% to
LIBOR plus 2.25%, and extend the maturity date from February 11, 2016 to February 11, 2018.
The Company computes depreciation using the straight-line method over the estimated useful lives of 39 years for building and improvements, 15 years for land improvements, and
over the shorter of asset life or life of the lease for tenant improvements.
(3)
The aggregate gross cost of property included above for federal income tax purposes approximated $2.2 billion, unaudited as of December 31, 2014.
The following table reconciles the historical cost of total real estate held for investment and accumulated depreciation from January 1, 2012 to December 31, 2014:
F- 47
Table of Contents
Total Investment in real estate, beginning of year
$
2,035,330 $
1,475,955 $
1,060,504
Year Ended December 31,
2014
2013
2012
Additions during period:
Acquisitions
Improvements, capitalized costs
Total additions during period
Deductions during period
Disposal (fully depreciated assets and early terminations)
Cost of property sold
Total deductions during period
Ending balance, before reclassification to assets associated with
real estate held for sale
Reclassification to assets associated with real estate held for sale
Total Investment in real estate, end of year
Total accumulated depreciation, beginning of year
$
$
Additions during period:
Depreciation of real estate
Total additions during period
Deductions during period:
Deletions
Write-offs due to sale
Total deductions during period
Ending balance, before reclassification to assets associated with
real estate held for sale
Reclassification to assets associated with real estate held for sale
Total accumulated depreciation, end of year
$
114,008
128,018
242,026
(23,977)
(13,638)
(37,615)
538,322
89,707
628,029
(9,638)
(59,016)
(68,654)
2,239,741
(68,446)
2,171,295 $
2,035,330
(82,305)
1,953,025 $
390,370
27,901
418,271
(2,820)
—
(2,820)
1,475,955
—
1,475,955
(116,342) $
(85,184) $
(53,329)
(50,044)
(50,044)
22,310
1,515
23,825
(142,561)
7,904
(134,657) $
(41,454)
(41,454)
4,837
5,459
10,296
(116,342) $
7,931
(108,411) $
(34,675)
(34,675)
2,820
—
2,820
(85,184)
—
(85,184)
F- 48
Table of Contents
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Schedule IV - Mortgage Loan on Real Estate
December 31, 2014
(In thousands)
Description
Interest Rate
Final Maturity
Date
Periodic Payment
Terms
Prior
Liens
Face Amount of
Mortgage
Carrying Amount of
Mortgage
Principal Amount of Loans
Subject to Delinquent Principal or
Interest
Subordinated debt:
Office - Los Angeles, CA
11%
8/18/2016
Interest Only
—
Total
$
$
28,528
28,528
$
$
28,268
28,268
—
F- 49
Table of Contents
SIGNATURES
Pursuant to the requirements 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.
Date:
March 2, 2015
HUDSON PACIFIC PROPERTIES, INC.
/S/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer (principal financial officer)
(Back To Top)
F- 50
Section 2: EX-10.84 (EXHIBIT 10.84)
INDEMNIFICATION AGREEMENT
Exhibit 10.84
THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into as of the 15th day of December, 2014, by and
between Hudson Pacific Properties, Inc., a Maryland corporation (the “Company”), and Robert L. Harris II (“Indemnitee”).
WHEREAS, at the request of the Company, Indemnitee currently serves as a director of the Company and may, therefore, be subjected to
claims, suits or proceedings arising as a result of his service; and
WHEREAS, as an inducement to Indemnitee to continue to serve as such director, the Company has agreed to indemnify and to advance
expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the maximum extent permitted by law; and
WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification and advance of expenses;
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby
covenant and agree as follows:
Section 1.
Definitions. For purposes of this Agreement:
(a) “Adjudged” shall mean adjudged finally by a court or arbitral or other authority of competent jurisdiction.
(b) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to
such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if, after the
Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting
power of all of the Company’s then-outstanding securities entitled to vote generally in the election of directors without the prior approval of at least
two-thirds of the members of the Board of Directors in office immediately prior to such person’s attaining such percentage interest; (ii) the Company
is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of
the
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Exhibit 10.84
Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or
event constitute less than a majority of the Board of Directors thereafter; or (iii) at any time, a majority of the members of the Board of Directors are
not comprised of (A) individuals who were directors as of the Effective Date and/or (B) individuals whose election by the Board of Directors or
nomination for election by the Company’s stockholders was approved by the affirmative vote of at least two-thirds of the directors then in office who
were directors as of the Effective Date or whose election for nomination for election was previously so approved.
(c) “Corporate Status” means the status of a person as a present or former director, officer, employee or agent of the Company or as a
director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any Enterprise.
(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which
indemnification and/or advance of Expenses is sought by Indemnitee.
(e) “Effective Date” means the date set forth in the first paragraph of this Agreement.
(f) “Enterprise” means any foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan
or other enterprise in which Indemnitee is or was serving as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or
agent at the request of the Company. As a clarification and without limiting the circumstances in which Indemnitee may be serving at the request of the
Company, service by Indemnitee shall be deemed to be at the request of the Company if Indemnitee serves or served as a director, trustee, officer,
partner, manager, managing member, fiduciary, employee or agent of any corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan or other enterprise (i) of which a majority of the voting power or equity interest is owned directly or indirectly by the Company
or (ii) the management of which is controlled directly or indirectly by the Company.
(g) “Expenses” means any and all disbursements or expenses incurred by Indemnitee in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, being or preparing to be a witness in or otherwise participating in a Proceeding, including, without limitation,
reasonable attorneys’ fees and costs, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing
and binding costs, telephone charges, postage, delivery service fees, federal, state, local or foreign taxes imposed on Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement, and any ERISA excise taxes and penalties. Expenses shall also include (i) expenses
incurred in connection with any appeal resulting from any Proceeding including, without limitation, the
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Exhibit 10.84
premium, security for and other costs relating to any cost bond, supersedeas bond or other appeal bond or its equivalent, (ii) expenses incurred in
connection with recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether the
Indemnitee is ultimately determined to be entitled to such indemnification, advancement or expenses or insurance recovery, as the case may be, and
(iii) expenses incurred by Indemnitee in establishing or enforcing his right to indemnification or reimbursement under this Agreement. Expenses,
however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments, fines or penalties against Indemnitee (other than
ERISA excise tax penalties).
(h) “Independent Counsel” means a law firm, or a member of a law firm, that is of outstanding reputation, experienced in matters of
corporation law and neither is, nor in the past five years preceding the date of selection has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement or of other
indemnitees under similar indemnification agreements), or (ii) any other party to or participant or witness in the Proceeding giving rise to a claim for
indemnification or advance of Expenses hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who,
under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or
Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the
Independent Counsel.
(i) “Proceeding” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution procedure,
investigation, inquiry, administrative hearing or any other proceeding, whether brought by or in the right of the Company or otherwise and whether of
a civil (including intentional or unintentional tort claims), criminal, administrative or investigative (formal or informal) nature, including any appeal
therefrom, in which Indemnitee was, is, will or might be involved as a party or otherwise, by reason of any action taken by or omission by Indemnitee,
or of any action or omission on Indemnitee’s part, in each case in or in connection with Indemnitee’s Corporate Status and whether or not acting or
serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement or advancement of Expenses can be
provided under this Agreement, except one pending or completed on or before the Effective Date, unless otherwise specifically agreed in writing by
the Company and Indemnitee. If Indemnitee reasonably believes that a given situation may lead to or culminate in the institution of a Proceeding, such
situation shall also be considered a Proceeding. The term “Proceeding” shall be broadly construed and shall include, without limitation, the
investigation, preparation, prosecution, defense, settlement, arbitration or appeal of, and the giving of testimony in or
-3-
Exhibit 10.84
related to, any threatened, pending or completed claim, action, suit or other proceeding, whether of a civil, criminal, administrative or investigative
nature.
Section 2. Services by Indemnitee. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the
obligations imposed on it hereby in order to induce the Indemnitee to serve or continue to serve as a director of the Company, and the Company
acknowledges that Indemnitee is relying upon this Agreement in serving or continuing to serve as a director. However, this Agreement shall not
impose any independent obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company. This Agreement shall not be
deemed an employment contract between the Company (or any other entity) and Indemnitee.
Section 3. General. The Company shall indemnify, hold harmless and exonerate, and advance Expenses to, Indemnitee (a) as provided in
this Agreement and (b) otherwise to the maximum extent not prohibited by (and not merely to the extent affirmatively permitted by) Maryland law in
effect on the Effective Date and as amended from time to time; provided, however, that no change in Maryland law shall have the effect of reducing
the benefits available to Indemnitee hereunder based on Maryland law as in effect on the Effective Date. The rights of Indemnitee provided in this
Section 3 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted
by Section 2-418(g) of the Maryland General Corporation Law (the “MGCL”).
Section 4. Indemnification. If Indemnitee is, or is threatened to be, made a party to any Proceeding, the Company shall indemnify, hold
harmless and exonerate Indemnitee against all judgments, penalties, fines and amounts paid in settlement and all Expenses actually and reasonably
incurred by him or on his behalf in connection with any such Proceeding unless (and only to the extent) it is established that (a) the act or omission of
Indemnitee was material to the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services or (c) in the case of any criminal Proceeding,
Indemnitee had reasonable cause to believe that the act or omission was unlawful.
Section 5. Certain Limits on Indemnification. Notwithstanding any other provision of this Agreement (other than Section 6), Indemnitee shall
not be entitled to:
(a) indemnification hereunder if the Proceeding was one by or in the right of the Company and Indemnitee is Adjudged to be liable to the
Company;
(b) indemnification hereunder if Indemnitee is Adjudged to be liable on the basis that personal benefit was improperly received in any
Proceeding charging improper personal benefit to Indemnitee; or
-4-
Exhibit 10.84
(c) indemnification or advance of Expenses hereunder if the Proceeding was brought by Indemnitee unless: (i) the Proceeding was brought to
establish or enforce indemnification rights under this Agreement, and then only to the extent in accordance with and as authorized by Section 12 of this
Agreement, or (ii) the Company’s charter or Bylaws, a resolution of the stockholders entitled to vote generally in the election of directors or of the
Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise.
Section 6. Court-Ordered Indemnification. Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon
application of Indemnitee and such notice as the court shall require, may order indemnification in the following circumstances:
(a) if it determines Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court shall order indemnification, in
which case Indemnitee shall be entitled to recover the Expenses of securing such reimbursement; or
(b) if it determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not
Indemnitee (i) has met the standards of conduct set forth in Section 2-418(b) of the MGCL or (ii) has been Adjudged liable for receipt of an
improper personal benefit under Section 2-418(c) of the MGCL, the court may order such indemnification as the court shall deem proper. However,
indemnification with respect to any Proceeding by or in the right of the Company or in which liability shall have been Adjudged in the circumstances
described in Section 2-418(c) of the MGCL shall be limited to Expenses.
Section 7. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this
Agreement, and without limiting any such provision, to the extent that Indemnitee was or is made a party to (or otherwise becomes a participant in)
any Proceeding and is successful, on the merits or otherwise, in the defense of such Proceeding, Indemnitee shall be indemnified for all Expenses
actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee under this Section 7 for all Expenses actually and reasonably incurred by him or on his behalf in connection with each such claim, issue or
matter, allocated on a reasonable and proportionate basis. For purposes of this Section 7 and, without limitation, the termination of any claim, issue or
matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
-5-
Exhibit 10.84
Section 8. Advance of Expenses for a Party. If Indemnitee was, is, or is threatened to be, made a party to any Proceeding, the Company
shall, without requiring a preliminary determination of Indemnitee’s ultimate entitlement to indemnification hereunder, advance all reasonable Expenses
incurred by or on behalf of Indemnitee in connection with such Proceeding within ten days after the receipt by the Company of a statement or
statements requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation
by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and
by this Agreement has been met and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in
such form as may be required under applicable law as in effect at the time of the execution thereof, to reimburse the portion (if any) of any Expenses
advanced to Indemnitee relating to claims, issues or matters in the Proceeding as to which it shall ultimately be established that the standard of conduct
has not been met by Indemnitee and which have not been successfully resolved as described in Section 7 of this Agreement. Advances shall be
interest-free and unsecured. The undertaking required by this Section 8 shall be an unlimited general obligation by or on behalf of Indemnitee and shall
be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security
therefor.
Section 9. Indemnification and Advance of Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee was, is or may be made a witness or otherwise asked to participate in any Proceeding, whether instituted by the Company or any other
party, and to which Indemnitee is not a party, he shall be advanced all reasonable Expenses and indemnified, held harmless and exonerated against all
Expenses actually and reasonably incurred by him or on his behalf in connection therewith within ten days after the receipt by the Company of a
statement or statements requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by Indemnitee. Advances shall be interest-free and unsecured.
Section 10. Procedure for Determination of Entitlement to Indemnification.
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith
such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. Indemnitee may submit one or more such requests from time to time and at such time(s) as Indemnitee deems
appropriate in his sole discretion. The officer of the Company receiving any such request from Indemnitee shall,
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Exhibit 10.84
promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a) above, a determination, if required by applicable law,
with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by
Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, which Independent Counsel
shall be selected by the Indemnitee and approved by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL, which
approval will not be unreasonably withheld; or (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of
a quorum consisting entirely of Disinterested Directors or, if such a quorum cannot be obtained, then by a majority vote of a duly authorized
committee of the Board of Directors consisting solely of one or more Disinterested Directors, (B) if Independent Counsel has been selected by the
Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL and approved by the Indemnitee, which approval shall not be
unreasonably withheld, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or
(C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company. If it is so determined that Indemnitee
is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the
person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person,
persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure
and which is reasonably available to Indemnitee and reasonably necessary to such determination in the discretion of the Board of Directors or
Independent Counsel if retained pursuant to clause (ii)(B) of this Section 10(b). Any Expenses incurred by Indemnitee in so cooperating with the
person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement
to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.
(c) The Company shall pay the reasonable fees and expenses of Independent Counsel, if one is appointed.
Section 11. Presumptions and Effect of Certain Proceedings.
(a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof and the burden of persuasion by
clear and convincing
-7-
Exhibit 10.84
evidence to overcome that presumption in connection with the making of any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, upon a plea of
nolo contendere or its equivalent, or entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the
requisite standard of conduct described herein for indemnification.
(c) The knowledge and/or actions, or failure to act, of any other director, officer, employee or agent of the Company or any other director,
trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any Enterprise shall not be imputed to Indemnitee for purposes
of determining any other right to indemnification under this Agreement.
(d) For purposes of any determination as to Indemnitee’s entitlement of indemnification, Indemnitee shall be presumed to have met the
standard of conduct for indemnification if, among other things and without limitation, Indemnitee relied on any information, opinion, report or
statement, including any financial statement or other financial data or the records or books of account of the Company or any other Enterprise,
prepared or presented by an officer or employee of the Company or any Enterprise whom Indemnitee reasonably believed to be reliable and
competent in the matters presented, by a lawyer, certified public accountant, appraiser or other person or expert, as to a matter which Indemnitee
reasonably believed to be within the person’s professional or expert competence, or, if Indemnitee was serving on the Board of Directors of the
Company or as a member of any similar body of any Enterprise, by a committee of the Board of Directors or such other body on which Indemnitee
does not serve, as to a matter within its designated authority, if Indemnitee reasonably believes the committee to merit confidence. The provisions of
this Section 11(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee meet, or be presumed to
have met, the applicable standard of conduct set forth in this Agreement.
(e) For purposes of this Agreement, Indemnitee shall be considered to have been wholly successful with respect to any Proceeding if such
Proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to
Indemnitee, (ii) it being Adjudged that Indemnitee was liable to the Company, (iii) a plea of guilty by Indemnitee, (iv) it being Adjudged that an act or
omission of Indemnitee was material to the matter giving rise to the Proceeding and was (A) committed in bad faith or (B) the result of Indemnitee’s
active and deliberate dishonesty, (v) it being Adjudged that Indemnitee actually received an improper personal benefit in money, property or services
or (vi) with respect to any criminal proceeding, it being Adjudged that Indemnitee had reasonable cause to believe the act or omission was unlawful.
-8-
Exhibit 10.84
Section 12. Remedies of Indemnitee.
(a) If (i) a determination is made pursuant to Section 10(b) of this Agreement that Indemnitee is not entitled to indemnification under this
Agreement, (ii) advance of Expenses is not timely made pursuant to Section 8 or Section 9 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 10(b) of this Agreement within 60 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to Section 7 of this Agreement within ten days after receipt by the Company of a
written request therefor, or (v) payment of indemnification pursuant to any other section of this Agreement or the charter or Bylaws of the Company is
not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an
adjudication in an appropriate court located in the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such
indemnification or advance of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence a proceeding seeking an
adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply to a proceeding brought by Indemnitee to enforce his
rights under Section 7 of this Agreement. Except as set forth herein, the provisions of Maryland law (without regard to its conflicts of laws rules) shall
apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.
(b) In any judicial proceeding or arbitration commenced pursuant to this Section 12, Indemnitee shall be presumed to be entitled to
indemnification or advance of Expenses, as the case may be, under this Agreement and the Company shall have the burden of proving that Indemnitee
is not entitled to indemnification or advance of Expenses, as the case may be. If Indemnitee commences a judicial proceeding or arbitration pursuant
to this Section 12, Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 8 of this Agreement until a final
determination is made with respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). If
Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 12, the Company may not refer to or introduce into evidence any
determination pursuant to Section 10(b) of this Agreement adverse to Indemnitee for any purpose and any judicial proceeding or arbitration
commenced pursuant to this Article 12 shall be conducted in all respects as a de novo trial or arbitration. The Company shall, to the fullest extent not
prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures
and presumptions of this Agreement are not valid, binding and enforceable
-9-
Exhibit 10.84
and shall stipulate in any such court or before any such arbitrator that the Company is bound by all of the provisions of this Agreement.
(c) If a determination shall have been made pursuant to Section 10(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12, absent a
misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in
connection with the request for indemnification.
(d) In the event that Indemnitee, pursuant to this Section 12, seeks a judicial adjudication of or an award in arbitration to enforce his rights
under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to advancement from the Company, and shall be indemnified
and held harmless by the Company for, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration in
accordance with this Agreement.
(e) Interest shall be paid by the Company to Indemnitee at the maximum rate allowed to be charged for judgments under the Courts and
Judicial Proceedings Article of the Annotated Code of Maryland for amounts which the Company pays or is obligated to pay for the period
commencing with the date on which the Indemnitee requests indemnification or advancement of Expenses in accordance with this Agreement and
ending on the date such payment is made to Indemnitee by the Company.
Section 13. Defense of the Underlying Proceeding.
(a) Indemnitee shall notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment,
request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder and shall
include with such notice a description of the nature of the Proceeding and a summary of the facts underlying the Proceeding. The failure to give any
such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance
of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is
materially and adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.
(b) Subject to the provisions of the last sentence of this Section 13(b) and of Section 13(c) below, the Company shall have the right to
defend Indemnitee in any Proceeding which may give rise to indemnification hereunder using a law firm of the Company’s choice, subject to the prior
written approval of the Indemnitee, which shall not be unreasonably withheld;
-10-
Exhibit 10.84
provided, however, that the Company shall notify Indemnitee in writing of any such decision to defend within 15 calendar days following receipt of
notice of any such Proceeding under Section 13(a) above. Indemnitee shall have the right to retain a separate law firm in any such Proceeding at
Indemnitee’s sole expense. The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or
delayed, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault
of Indemnitee, (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding,
which release shall be in form and substance reasonably satisfactory to Indemnitee or (iii) would impose any Expense, judgment, fine, penalty or
limitation on Indemnitee. This Section 13(b) shall not apply to a Proceeding brought by Indemnitee under Section 12 of this Agreement, a Proceeding
by or in the right of the Company or in the case of clause (ii) of Section 13(c).
(c) Notwithstanding the provisions of Section 13(b) above, if in a Proceeding to which Indemnitee is a party (i) Indemnitee reasonably
concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that he may have
separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other defendants in such Proceeding, (ii)
Indemnitee reasonably concludes that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the
Company, or (iii) if the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by
separate legal counsel of Indemnitee’s choice, subject, except in the case of (ii) or (iii) above, to the prior approval of the Company, which shall not
be unreasonably withheld, at the expense of the Company. In addition, if the Company fails to comply with any of its obligations under this Agreement
or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding
to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel
of Indemnitee’s choice, at the expense of the Company (subject to Section 12(d) of this Agreement), to represent Indemnitee in connection with any
such matter.
Section 14. Jointly Indemnifiable Claims.
(a) Given that certain Jointly Indemnifiable Claims may arise, the Company acknowledges and agrees that the Company shall, and to the
extent applicable shall cause any Enterprise to (i) be fully and primarily responsible for, and be the indemnitor of first resort with respect to, payment
to or payment on behalf of the Indemnitee in respect of indemnification or advancement of Expenses in connection with any such Jointly Indemnifiable
Claim, irrespective of any right of recovery the Indemnitee may have from the Third-Party Indemnitors, and (ii) be required to advance the full amount
of Expenses incurred by the Indemnitee and shall be liable for the full amount of all Expenses, judgments, fines, penalties and amounts paid in
settlement to
-11-
Exhibit 10.84
the extent not prohibited by (and not merely to the extent affirmatively permitted by) applicable law and as required by the terms of this Agreement,
without regard to any rights the Indemnitee may have against the Third-Party Indemnitors. Under no circumstance shall the Company or any
Enterprise be entitled to, and the Company hereby irrevocably waives, relinquishes and releases, any claims against the Third-Party Indemnitors for
subrogation, contribution or recovery of any kind and no right of advancement or recovery the Indemnitee may have from the Third-Party Indemnitors
shall reduce or otherwise alter the rights of the Indemnitee or the obligations of the Company or any Enterprise. The Company further agrees that no
advancement or payment by any Third-Party Indemnitor on behalf of Indemnitee with respect to any Proceeding for which Indemnitee has sought
indemnification, exoneration or hold harmless rights from the Company shall affect the foregoing and the Third-Party Indemnitor(s) shall have a right to
receive from the Company, contribution and/or be subrogated, to the extent of such advancement or payment to all of the rights of recovery of
Indemnitee against the Company. The Company and the Indemnitee agree that each of the Third-Party Indemnitors shall be third-party beneficiaries
with respect to this Agreement entitled to enforce this Section 14 as though each such Third-Party Indemnitor were a party to this Agreement.
(b) For purposes of this Agreement “Third-Party Indemnitor” means any person or entity that has or may in the future provide to the
Indemnitee any indemnification, exoneration, hold harmless or Expense advancement rights and/or insurance benefits other than (i) the Company, (ii)
any Enterprise and (iii) any entity or entities through which the Company maintains liability insurance applicable to the Indemnitee.
(c) For purposes of this Agreement, “Jointly Indemnifiable Claims” shall mean any Proceeding for which the Indemnitee shall be entitled to
indemnification, advancement of expenses or insurance from (i) the Company and/or any Enterprise pursuant to this Agreement, the charter or Bylaws
or other governing documents of the Company or any Enterprise, any agreement or a resolution of the stockholders of the Company entitled to vote
generally in the election of directors or of the Board of Directors, or otherwise, on the one hand, and (ii) any Third-Party Indemnitor pursuant to any
agreement between any Third-Party Indemnitor and the Indemnitee pursuant to which the Indemnitee is indemnified, the laws of the jurisdiction of
incorporation or organization of any Third-Party Indemnitor and/or the certificate of incorporation, certificate of organization, bylaws, partnership
agreement, operating agreement, certificate of formation, certificate of limited partnership or other organizational or governing documents of any
Third-Party Indemnitor, on the other hand.
Section 15. Non-Exclusivity; Survival of Rights; Subrogation.
(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights
to which Indemnitee may at any
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Exhibit 10.84
time be entitled under applicable law, the charter or Bylaws or other governing documents of the Company or any Enterprise, any agreement or a
resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. Unless consented to in
writing by Indemnitee, no amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee
under this Agreement in respect of any action taken or omitted by such Indemnitee in or by reason of his Corporate Status prior to such amendment,
alteration or repeal, regardless of whether a claim with respect to such action or inaction is raised prior or subsequent to such amendment, alteration
or repeal. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right or remedy shall be
cumulative and in addition to every other right or remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion
of any right or remedy hereunder, or otherwise, shall not prohibit the concurrent assertion or employment of any other right or remedy.
(b) Except as set forth in Section 14, in the event of any payment under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights,
including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
Section 16. Insurance. The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and
conditions deemed appropriate by the Board of Directors, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee by
reason of his Corporate Status or by reason of alleged actions or omissions by Indemnitee in such capacity and covering the Company for any
indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against Indemnitee by reason of his Corporate
Status or by reason of alleged actions or omissions by Indemnitee in such capacity. Without in any way limiting any other obligation under this
Agreement, the Company shall indemnify Indemnitee for any payment by Indemnitee arising out of the amount of any deductible or retention and the
amount of any excess of the aggregate of all judgments, penalties, fines, settlements and Expenses incurred by Indemnitee in connection with a
Proceeding over the coverage of any insurance referred to in the previous sentence. The purchase, establishment and maintenance of any such
insurance shall not in any way limit or affect the rights or obligations of the Company or Indemnitee under this Agreement except as expressly
provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall not in any way limit or affect the rights or
obligations of the Company under any such insurance policies. If, at the time the Company receives notice from any source of a Proceeding to which
Indemnitee is a party or a participant (as a witness or otherwise) the Company has director and officer liability insurance in effect, the Company shall
give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies.
-13-
Section 17. Coordination of Payments. Except as set forth in Section 14, the Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise
actually received such payment under any insurance policy, contract, agreement or otherwise.
Section 18. Reports to Stockholders. To the extent required by the MGCL, the Company shall report in writing to its stockholders the
payment of any amounts for indemnification of, or advance of Expenses to, Indemnitee under this Agreement arising out of a Proceeding by or in the
right of the Company with the notice of the meeting of stockholders of the Company next following the date of the payment of any such
indemnification or advance of Expenses or prior to such meeting.
Exhibit 10.84
Section 19. Duration of Agreement; Binding Effect.
(a) This Agreement shall be effective as of the Effective Date and may apply to acts or omissions of Indemnitee taken in or in connection
with Indemnitee’s Corporate Status which occurred prior to such date if Indemnitee was an officer, director, employee or agent of the Company or
was a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any Enterprise at the time such act or omission
occurred.
(b) This Agreement shall continue until and terminate on the later of (i) the date that Indemnitee shall have ceased to serve as a director,
officer, employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any
Enterprise and (ii) the date that Indemnitee is no longer subject to any actual or possible Proceeding (including any rights of appeal thereto and any
Proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement).
(c) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be
enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to
be a director, officer, employee or agent of the Company or a director, trustee, officer, partner, manager, managing member, fiduciary, employee or
agent of any Enterprise, and shall inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors and administrators and other
legal representatives.
(d) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to
Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and
-14-
Exhibit 10.84
to the same extent that the Company would be required to perform if no such succession had taken place.
(e) The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, may be inadequate,
impracticable and difficult of proof, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree
that Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual
damage or irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or
obtaining any other relief to which he may be entitled. Indemnitee shall further be entitled to such specific performance and injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertakings in
connection therewith. The Company acknowledges that, in the absence of a waiver, a bond or undertaking may be required of Indemnitee by a court,
and the Company hereby waives any such requirement of such a bond or undertaking.
Section 20. Section 409A. It is intended that any indemnification payment or advancement of Expenses made hereunder shall be exempt
from Section 409A of the Internal Revenue Code of 1986, as amended, and the guidance issued thereunder (“Section 409A”) pursuant to Treasury
Regulation Section 1.409A-1(b)(10). Notwithstanding the foregoing, if any indemnification payment or advancement of Expenses made hereunder
shall be determined to be “nonqualified deferred compensation” within the meaning of Section 409A, then (i) the amount of the indemnification
payment or advancement of Expenses during one taxable year shall not affect the amount of the indemnification payments or advancement of
Expenses during any other taxable year, (ii) the indemnification payments or advancement of Expenses must be made on or before the last day of the
Indemnitee’s taxable year following the year in which the expense was incurred, and (iii) the right to indemnification payments or advancement of
Expenses hereunder is not subject to liquidation or exchange for another benefit.
Section 21. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any
Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid,
illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the
intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any
Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not
-15-
Exhibit 10.84
itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
Section 22. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be
deemed to be an original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party against
whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.
Section 23. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
Section 24. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 25. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have
been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or
(ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth on the signature page hereto.
(b) If to the Company, to:
Victor J. Coleman, Chief Executive Officer
Hudson Pacific Properties, Inc.
11601 Wilshire Blvd., Sixth Floor
Los Angeles, California 90025
or to such other address as may have been furnished in writing to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
-16-
Section 26. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of Maryland, without regard to its conflicts of laws rules.
Section 27. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.
Exhibit 10.84
[SIGNATURE PAGE FOLLOWS]
-17-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
HUDSON PACIFIC PROPERTIES, INC.:
Exhibit 10.84
By: /s/ Victor J. Coleman
Name: Victor J. Coleman
Title: Chief Executive Officer
INDEMNITEE:
By: /s/ Robert L. Harris
Name: Robert L. Harris
Address: 46 Old Course Drive
Newport Beach, CA 92660
-18-
EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of Hudson Pacific Properties, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain Indemnification Agreement dated the 15th day of December, 2014, by and
between Hudson Pacific Properties, Inc., a Maryland corporation (the “Company”), and the undersigned Indemnitee (the “Indemnification
Agreement”), pursuant to which I am entitled to advance of Expenses in connection with [Description of Proceeding] (the “Proceeding”).
Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I
hereby affirm my good belief that at all times, insofar as I was involved as a director of the Company, in any of the facts or events giving rise to the
Proceeding, I (1) did not act with bad faith or active or deliberate dishonesty, (2) did not receive any improper personal benefit in money, property or
services and (3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance of Expenses by the Company for reasonable attorneys’ fees and related Expenses incurred by me in
connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that (1) an act
or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and
deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal
proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the Advanced
Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this ___ day of ____________________, 20____.
____________________________________
Name:
Address:
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(Back To Top)
Section 3: EX-12.1 (EXHIBIT 12.1)
HUDSON PACIFIC PROPERTIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS
(Unaudited; in thousands, except ratios)
Exhibit 12.1
Consolidated
For the year ended December 31,
Historical
Combined
2014
2013
2012
2011
2010
23,522
$
(2,594) $
(5,006) $
(2,238) $
(2,682)
25,932
6,938
174
33,044
$
$
25,470
4,562
144
30,176
$
$
19,071
1,461
153
20,685
$
$
17,480
189
124
17,793
$
$
8,831
165
46
9,042
232
$
115
$
73
$
73
$
73
(6,938)
49,860
$
(4,562)
23,135
$
(1,461)
14,291
$
(189)
15,439
$
(165)
6,268
$
33,044
12,785
$
30,176
12,924
$
20,685
12,924
$
17,793
8,108
45,829
$
43,100
$
33,609
$
25,901
$
1.09
—
$
0.54
0.43
0.60
19,919
$
19,318
$
10,462
$
9,042
817
9,859
0.64
3,591
$
$
$
$
$
$
$
$
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
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
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Section 4: EX-21 (EXHIBIT 21)
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
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 JW, LLC
Hudson MC Partners, LLC
P1 Hudson MC Partners, LLC
P2 Hudson MC Partners, LLC
Hudson 3401 Exposition, LLC
Hudson Met Park North, LLC
Hudson First & King, LLC
Hudson Northview, LLC
Hudson 1861 Bundy, LLC
Hudson Merrill Place, LLC
Hudson 3402 Pico, LLC
Hudson 801 S. Broadway Participation, LLC
Hudson 1455 Market Street, LLC
Hudson 12655 Jefferson, LLC
Exhibit 21
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
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Hudson 1455 GP, LLC
Hudson Palo Alto Square, LLC
Hudson 3400 Hillview Avenue, LLC
Hudson Embarcadero Place, LLC
Hudson Foothill Research Center, LLC
Hudson Page Mill Center, LLC
Hudson Clocktower Square, LLC
Hudson 3176 Porter Drive, LLC
Hudson 2180 Sand Hill Road, LLC
Hudson Towers at Shore Center, LLC
Hudson Skyway Landing, LLC
Hudson Shorebreeze, LLC
Hudson 555 Twin Dolphin Plaza, LLC
Hudson 333 Twin Dolphin Plaza, LLC
Hudson Bayhill Office Center, LLC
Hudson Peninsula Office Park, LLC
Hudson Bay Park Plaza, LLC
Hudson Metro Center, LLC
Hudson One Bay Plaza, LLC
Hudson Concourse, LLC
Hudson Gateway Place, LLC
Hudson Metro Plaza, LLC
Hudson 1740 Technology, LLC
Hudson Skyport Plaza, LLC
Hudson Techmart Commerce Center, LLC
Hudson Patrick Henry Drive, LLC
Hudson Campus Center, LLC
Hudson Campus Center Land, LLC
Hudson Skyport Plaza Land, LLC
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Exhibit 21
Delaware
Delaware
Delaware
Delaware
Delaware
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-23.1 (EXHIBIT 23.1)
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Registration Statement (Form S-8 No. 333-170914) pertaining to Hudson Pacific Properties, Inc.'s Directors Stock Plan;
Registration Statement (Form S-8 No. 333-167847) pertaining to the Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan;
Registration Statement (Form S-8 No. 333-185497) pertaining to the Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan;
Registration Statement (Form S-3 No. 333-175326) of Hudson Pacific Properties, Inc.;
Registration Statement (Form S-3 No. 333-176543) of Hudson Pacific Properties, Inc.;
Registration Statement (Form S-3 No. 333-197526) of Hudson Pacific Properties, Inc.; and
Registration Statement (Form S-3 No. 333-201457) of Hudson Pacific Properties, Inc.
of our reports dated March 2, 2015, with respect to the consolidated financial statements and schedule of Hudson Pacific Properties, Inc. and the effectiveness of internal
control over financial reporting of Hudson Pacific Properties, Inc. included in this Annual Report (Form 10-K) of Hudson Pacific Properties, Inc. for the year ended
December 31, 2014.
/s/ ERNST & YOUNG LLP
Irvine, California
March 2, 2015
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Section 6: EX-31.1 (EXHIBIT 31.1)
Exhibit 31.1
I, Victor J. Coleman, 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)
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 2, 2015
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
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Section 7: EX-31.2 (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)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
Exhibit 31.2
b)
c)
d)
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 2, 2015
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
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Section 8: EX-31.3 (EXHIBIT 31.3)
Exhibit 31.3
I, Victor J. Coleman, certify that:
1)
I have reviewed this annual report on Form 10-K of Hudson Pacific Properties, L.P.;
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)
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 2, 2015
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
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Section 9: EX-31.4 (EXHIBIT 31.4)
Exhibit 31.4
I, Mark T. Lammas, certify that:
1)
I have reviewed this annual report on Form 10-K of Hudson Pacific Properties, L.P.;
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)
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 2, 2015
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
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Section 10: EX-32.1 (EXHIBIT 32.1)
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32 .1
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, 2014, 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 2, 2015
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Date: March 2, 2015
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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Section 11: EX-32.2 (EXHIBIT 32.2)
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32 .2
The undersigned, Victor J. Coleman, Chief Executive Officer, and Mark T. Lammas, Chief Financial Officer of Hudson Pacific Properties, Inc. in its capacity as sole
general partner of Hudson Pacific Properties, L.P. (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, 2014, 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 2, 2015
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
Hudson Pacific Properties, Inc., sole general partner of Hudson
Pacific Properties, L.P.
Date: March 2, 2015
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Financial Officer
Hudson Pacific Properties, Inc., sole general partner of Hudson
Pacific Properties, L.P.
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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