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, 2016
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., Ninth 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
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 o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Hudson Pacific Properties, Inc. Yes x No o Hudson Pacific Properties, L.P. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions 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 Act.)
Hudson Pacific Properties, Inc. Yes o No x Hudson Pacific Properties, L.P. Yes o No x
As of June 30, 2016, 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 and The Blackstone Group L.P. are “affiliates” of the registrant) was $2.49 billion
based upon the last sales price on June 30, 2016 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.
The number of shares of common stock of Hudson Pacific Properties, Inc. outstanding at February 10, 2017 was 146,275,476.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2017 Annual Meeting of Stockholders to be held May 24, 2017 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 United States Securities and Exchange Commission, or the SEC, not later than 120
days after the end of the registrant’s fiscal year.
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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2016 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” or “the operating partnership” refer to Hudson Pacific Properties, L.P. together with its
consolidated subsidiaries.
Hudson Pacific Properties, Inc. is a real estate investment trust, or REIT, and the sole general partner of our operating partnership. As of December 31, 2016, Hudson
Pacific Properties, Inc. owned approximately 93.6% of the outstanding common units of partnership interest (including unvested restricted units) in our operating partnership,
or common units. The remaining approximately 6.4% of outstanding common units at December 31, 2016 were owned by certain of our executive officers and directors, certain
of their affiliates, and other outside investors, including funds affiliated with The Blackstone Group L.P. (“Blackstone”) and Farallon Capital Management, LLC (“Farallon
Funds”). On January 10, 2017, Blackstone and Farallon Funds sold their ownership interests in the Company and the operating partnership following the completion of a
common stock offering and a common unit repurchase. Immediately following this transaction, Hudson Pacific Properties, Inc. owned approximately 99.6% of the outstanding
common units of partnership interest (including unvested restricted units) in our operating partnership, or common units. As the sole general partner of our operating
partnership, Hudson Pacific Properties, Inc. 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 Hudson Pacific Properties, Inc. and the 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. Hudson Pacific
Properties, Inc. is a REIT, the only material assets of which are the units of partnership interest in our operating partnership. As a result, Hudson Pacific Properties, Inc. 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. Hudson Pacific Properties, Inc. itself does not issue any indebtedness but guarantees some of the debt of our operating partnership. Our operating
partnership, which is structured as a partnership with no publicly traded equity, holds substantially all of the assets of our Company and conducts substantially all of our
business. Except for net proceeds from equity issuances by Hudson Pacific Properties, Inc., 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 its operations, its incurrence
of indebtedness or through the issuance of units of partnership interest in our operating partnership.
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 a 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.
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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 Part II, Item 9A “Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of Hudson Pacific Properties, Inc. 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
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Hudson Pacific Properties, Inc.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Hudson Pacific Properties, L.P.’s Common Capital, Related Unitholder Matters and Issuer Purchases of Units
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
SIGNATURES
Exhibits, Financial Statement Schedules
PART IV
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Item 1. Business
Company Overview
PART I
We are a vertically integrated real estate company focused on acquiring, repositioning, developing and operating high-quality office and state-of-the-art media and
entertainment properties in high-growth, high-barrier-to-entry submarkets throughout Northern and Southern California and the Pacific Northwest. We invest across the risk-
return spectrum, favoring opportunities where we can employ leasing, capital investment expertise to create additional value. As of December 31, 2016, our portfolio included
office properties, comprising an aggregate of approximately 14.1 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 2.5 million square feet of future office and residential
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 (“IPO”). 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 invest in Class-A office and media and entertainment properties located in high barrier-to-entry, innovation-centric submarkets with significant growth potential.
Our positioning within these submarkets allows us to attract and retain quality, growth companies as tenants, many in the technology, media and entertainment sectors. The
purchase of properties with a value-add component, typically through off-market transactions, also facilitates our growth. These types of assets afford us the opportunity to
capture embedded rent growth and occupancy upside, and to strategically invest capital to reposition and redevelop assets to generate additional cash flow. We take a more
measured approach to ground-up development, with most under construction, planned or potential projects located on ancillary sites part of existing operating assets.
Management expertise across disciplines supports execution at all levels of the company’s operations. In particular, aggressive leasing and proactive asset management,
combined with a focus on conservatively managing our balance sheet, are central to our strategy.
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 25 years of experience in the commercial real estate industry, with a focus on acquiring, repositioning, developing
and operating office properties in Northern and Southern 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, 2016, our senior management team owned approximately 1.4% of our
common stock on a fully diluted basis, thereby aligning management’s interests with those of our stockholders.
• Northern and Southern California and the 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 Northern and Southern
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
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participants in the Northern and Southern 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 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 IPO, including through 11 offerings
(including two public offerings of 8.375% Series B Cumulative Preferred Stock, eight 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 aggregate total proceeds of approximately $2.77 billion (before
underwriters’ discounts and transaction costs) as of December 31, 2016. 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, 2016, we had total borrowing capacity of approximately $400.0 million under our unsecured revolving credit facility, $300.0 million of which had
been drawn. Based on the closing price of our common stock of $34.78 on December 31, 2016, we had a debt-to-market capitalization ratio (counting Series A
preferred units in our operating partnership, or Series A preferred units, as debt) of approximately 34.5%. 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.
We have access to and are actively pursuing a pipeline of potential acquisitions consistent with our investment strategy. We believe our significant expertise in
operating in the Northern and Southern California and Pacific Northwest office sectors and extensive, long-term relationships with real estate owners, developers and lenders,
coupled with our conservative capital structure and access to capital, will allow us to capitalize on current market opportunities.
On April 1, 2015, we completed the acquisition of the EOP Northern California Portfolio (the “EOP Acquisition”) from certain affiliates of Blackstone. The EOP
Acquisition consisted 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 North San Jose submarkets. The total consideration paid for the EOP Acquisition, before certain credits, prorations
and closing costs, included a cash payment of $1.75 billion and an aggregate of 63,474,791 shares of common stock of Hudson Pacific Properties, Inc. and common units in our
operating partnership. Following a common stock offering and common unit repurchase on January 10, 2017, Blackstone no longer holds an ownership interest in the
Company or the operating partnership.
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
our properties are 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.”
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Segment and Geographic Financial Information
We report our results of operations through two segments: (i) office properties and (ii) media and entertainment properties. As of December 31, 2016, the office
properties reporting segment included 54 properties totaling approximately 14.1 million square feet strategically located in many of our target markets, while the media and
entertainment reporting segment included two properties, the Sunset Gower Studios property and the Sunset Bronson Studios property, totaling approximately 0.9 million
square feet located in the heart of Hollywood, California.
All of our business is conducted in Northern and Southern California and the Pacific Northwest. For information about our revenues and other financial information,
see our consolidated financial statements included in this report and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations.”
Employees
At December 31, 2016, we had 257 employees. At December 31, 2016, two of our employees were subject to collective bargaining agreements. Both of these
employees are on-site at the Sunset Bronson Studios property. We believe that relations with our employees are good.
Principal Executive Offices
Our principal executive offices are located at 11601 Wilshire Blvd., Ninth 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.
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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
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.
Corporate Sustainability and Giving
We are committed to high performance sustainable operations. All of our office properties are benchmarked in the U.S. Environmental Protection Agency’s ENERGY
STAR Portfolio Manager, with 53% of the portfolio achieving an ENERGY
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STAR certification, and all developments are or will be Leadership in Energy & Environmental Design (LEED) certified. We are keenly focused on developing and operating
innovative, energy and water efficient world class properties that also incorporate robust recycling and green cleaning best practices. In keeping with our continuous process
improvement approach, we have completed a Sustainability Assessment and are in the process of evaluating a Sustainability Strategic Plan to ensure the appropriate
evolution of sustainability execution, with a focus on ways to drive positive financial and environmental outcomes for shareholders, tenants, employees and the communities
in which we invest.
We are also committed to corporate social responsibility as part of our culture and value proposition to stakeholders. We uphold the highest business ethics, are
committed to best-in-class standards for the health and safety for our employees, tenants and service provider partners, and have a robust community-giving program.
Specifically, we support and encourage our employees’ contributions to charitable organizations. To assist employees’ charitable giving and augment the impact of their
charitable dollars, we created the Hudson Pacific Properties Charitable Program. This program encourages employees to contribute to qualifying charitable organizations by
matching donations and providing additional paid time off for volunteerism and providing donations to qualifying nonprofit organizations to which our employees volunteer.
Available Information
On the Investor Relations page on our Company’s Website at investors.hudsonpacificproperties.com 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 page on our Website free of charge. Also available on our Investor Relations page on our Website, 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 Website 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.,
Ninth 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 diversion of management’s attention from ongoing business operations and the impact on customers,
tenants, lenders, operating results and business;
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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 Northern and Southern 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 Northern and Southern 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 areas, including Los Angeles, San Francisco, Silicon Valley and Seattle, exposing us to
risks associated with those specific areas. We are susceptible to adverse developments in the economic and regulatory environments of Northern and Southern 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 has had historical periods of 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 Northern and
Southern 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 technology and media and entertainment industries, which makes us particularly
susceptible to demand for rental space in those industries.
A significant portion of our rental revenue is derived from tenants in the technology and media and entertainment industries. Consequently, we are susceptible to
adverse developments affecting the demand by tenants in these industries for office, production and support space in Northern and Southern California and the Pacific
Northwest and, more particularly, in Hollywood and the South of Market submarket of San Francisco. As we continue our development and potential acquisition activities in
markets populated by knowledge-and creative-based tenants in the technology and media and entertainment industries, our tenant mix could become more concentrated,
further exposing us to risks in those industries. Any adverse development in the technology and media and entertainment 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;
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even if we enter into agreements for the acquisition of properties, these agreements are typically subject to customary conditions to closing, including the
satisfactory completion of our due diligence investigations; and
• we may be unable to finance the acquisition on favorable terms or at all.
If we are unable to finance property acquisitions or acquire properties on favorable terms, or at all, our financial condition, results of operations, cash flow and the
per share trading price of our securities could be adversely affected. In addition, failure to identify or complete acquisitions of suitable properties could slow our growth.
Our future acquisitions may not yield the returns we expect.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be exposed to the following significant risks:
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even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;
• we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet
our expectations;
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our cash flow may be insufficient to meet our required principal and interest payments;
• we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
• we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and
as a result our results of operations and financial condition could be adversely affected;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
• we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities
for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties,
liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others indemnified by the
former owners of the properties.
If we cannot operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flow and the per share trading price of
our securities could be adversely affected.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our
ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our
operating partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation
we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through
restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions
could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are required to meet various requirements under the Internal Revenue Code of 1986, as amended, or 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
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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 (“FASB”), Accounting Standards Codification (“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.
Our unsecured revolving credit facility, term loan facility and note purchase agreement restrict our ability to engage in some business activities.
Our unsecured revolving credit facility, term loan facility and note purchase agreement contain customary negative covenants and other financial and operating
covenants that, among other things:
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restrict our ability to incur additional indebtedness;
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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 and term loan facility contain 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.
Volatility in the United States 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 11601 Wilshire, Hill7 and Page Mill Hill properties have only been under our management since they were acquired in 2016. 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 such properties will not decline under our management. We cannot assure you that we will be able to operate these properties successfully.
We face significant competition, which may decrease or prevent increases in 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.
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We depend on significant tenants, and several of our properties are single-tenant properties or are currently occupied by single tenants.
As of December 31, 2016, the 15 largest tenants in our office portfolio represented approximately 34.0%
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, 2016, our two largest
tenants were Google, Inc. and Uber Technologies, Inc., which together accounted for 7.2% of the annualized base rent generated by our office properties. If Google, Inc. and
Uber Technologies, Inc. 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.
We may be unable to renew leases, lease vacant space or re-let space as leases expire.
As of December 31, 2016, approximately 11.2% of the square footage of the office properties in our portfolio was available (taking into account uncommenced leases
signed as of December 31, 2016), and an additional approximately 11.3% of the square footage of the office properties in our portfolio is scheduled to expire in 2017 (including
leases scheduled to expire as of, but including, December 31, 2016). Furthermore, substantially all of the square footage of the media and entertainment properties in our
portfolio (other than KTLA and Netflix leases at Sunset Bronson Studios) are typically short-term leases of one year or less. We cannot assure you that leases will be renewed
or that our properties will be re-let at net effective rental rates equal to or above the current average net effective rental rates or that substantial rent abatements, tenant
improvements, early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants. If the rental rates for our properties
decrease, our existing tenants do not renew their leases or we do not re-let a significant portion of our available space and space for which leases will expire, our financial
condition, results of operations, cash flow and per share trading price of our securities could be adversely affected.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract tenants,
causing our financial condition, results of operations, cash flow and per share trading price of our securities to be adversely affected.
To the extent adverse economic conditions continue in the real estate market and demand for office space remains low, we expect that, upon expiration of leases at
our properties, we will be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or
provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to
attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable,
we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which could cause an adverse effect to our
financial condition, results of operations, cash flow and the per share trading price of our securities.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll-down from time to time.
As a result of various factors, including competitive pricing pressure in our submarkets, adverse conditions in the Northern or Southern California 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.
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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.
Thirteen of our properties are subject to ground leases (including properties with a portion of the land subject to a ground lease). See Part IV, Item 15(a) “Financial
Statement and Schedules—Note 7 to the Consolidated Financial Statements—Future Minimum Base Rents and Lease Payments Future Minimum Rents” for more information
regarding our ground lease agreements. 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 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 Northern and Southern 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.
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Future terrorist activity or engagement in war by the United States may have an adverse effect on our financial condition and operating results.
Terrorist attacks in the United States 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 United States 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.
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 the Canada
Pension Plan Investment Board (“CPPIB”), through which CPPIB purchased a 45% interest in our 1455 Market Street office property. On October 7, 2016, we entered into
another joint venture with CPPIB to acquire the Hill7 property, a 285,680 square-foot office property located in Seattle, Washington. 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 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.
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If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a
public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of
internal controls we may discover material weaknesses or significant deficiencies in our internal controls. As a result of weaknesses that may be identified in our internal
controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will
make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely
effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect
our ability to remain listed with the NYSE. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information,
which would likely have a negative effect on the per share trading price of our securities.
Risks Related to the Real Estate Industry
Our performance and value are subject to risks associated with real estate assets and the real estate industry.
Our ability to pay expected dividends to our stockholders depends on our ability to generate revenues in excess of expenses, pay scheduled principal payments on
debt and pay capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease
cash available for distribution and the value of our properties. These events include many of the risks set forth above under “—Risks Related to Our Properties and Our
Business,” as well as the following:
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local oversupply or reduction in demand for office or media and entertainment-related space;
adverse changes in financial conditions of buyers, sellers and tenants of properties;
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early
termination rights or below-market renewal options, and the need to periodically repair, renovate and re-let space;
increased operating costs, including insurance premiums, utilities, real estate taxes and state and local taxes;
civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes and floods, which may result in uninsured or underinsured losses;
decreases in the underlying value of our real estate; and
changing submarket demographics.
In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events
may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial condition, results of
operations, cash flow and per share trading price of our securities.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our
financial condition.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our
portfolio in response to changing economic, financial and investment conditions is limited. Return of capital and realization of gains, if any, from an investment generally will
occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or refinancing at attractive
prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, our ability to dispose of one or more properties within a specific
time period is subject to certain limitations imposed by our tax protection agreements, as well as weakness in or even the lack of an established market for a property, changes
in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, such as the current economic downturn, and
changes in laws, regulations or fiscal policies of jurisdictions in which the property is located.
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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. 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
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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 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
The Series A preferred units that were issued to some contributors in connection with our IPO 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 IPO, 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 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
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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). 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.
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 (i) 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, (ii) 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 (iii) 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.
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 our
common 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. 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 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. 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
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unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the terms of such newly classified or reclassified shares. Although
our board of directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay,
defer or prevent a transaction or a change of control that might involve a premium price for our securities or that our stockholders otherwise believe to be in their best interest.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other
change of control transactions that our stockholders otherwise believe to be in their best interest. Certain provisions of the Maryland General Corporation Law, or MGCL,
may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could be in the best
interest of our stockholders, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined
generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who
was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within the two-year
period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an interested stockholder, and
thereafter impose fair price and/or supermajority and stockholder voting requirements on these combinations; and
“control share” provisions that provide that “control shares” of our Company (defined as shares that, when aggregated with other shares controlled by the
stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except
to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all
interested shares.
As permitted by the MGCL, we have elected, by resolution of our board of directors, to exempt from the business combination provisions of the MGCL, any business
combination that is first approved by our disinterested directors and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the control share
provisions of the MGCL. However, our board of directors may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by
amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to
implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of
limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under
circumstances that otherwise could be in the best interest of our stockholders. Our charter contains a provision whereby we have elected to be subject to the provisions of
Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.
Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us. Provisions in the partnership
agreement of our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes of our control. These provisions could discourage third
parties from making proposals 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
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•
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 monetary 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 IPO on June 29, 2010 through certain specified dates
ranging until 2027, we will indemnify the third-party contributors for certain tax liabilities payable as a result of the sale (as well as tax liabilities payable as a result of the
reimbursement payment). Certain contributors’ rights under the tax protection agreements with respect to these properties will, however, expire at various times (depending on
the rights of such partner) during the period beginning in 2017 and prior to the expiration, in 2027, of the maximum period for 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 IPO 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
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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. 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.
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
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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 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.
Further, for taxable years beginning after December 31, 2017, not more than 20% of our total assets may be represented by securities of taxable REIT subsidiaries. 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 these limitations or avoid application of the 100% excise tax discussed above.
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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 United States 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 United States federal income tax on our taxable
income and would no longer be required to distribute most of our taxable income to our stockholders and accordingly, distributions Hudson Pacific Properties, L.P. makes to
its unitholders could be similarly reduced.
26
Table of Contents
Legislative or other actions affecting REITs could have a negative effect on our investors and 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 United States
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, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law
relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an
investment in a REIT.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2016, our portfolio consisted of 56 properties (52 wholly-owned properties and four properties owned by joint ventures), located in 13 California
submarkets and in three Seattle submarkets, totaling approximately 15.0 million square feet.
Our in-service office properties include stabilized office properties and lease-up office properties. Stabilized office properties consist of Same-Store properties and
Non-Same-Store properties. Lease-up properties are defined as those properties we recently purchased, developed, or redeveloped that have not yet reached 92.0%
occupancy and are within one year following purchase and cessation of major construction activities, as applicable.
The following table sets forth certain information relating to each of the in-service office properties, redevelopment, development and held-for-sale properties owned
as of December 31, 2016:
Location
Submarket
Square Feet(1)
Percent Leased
(2)
Annualized Base
Rent(3)
Annualized
Base Rent Per
Square Foot(4)
SAME-STORE(5)
Greater Seattle, Washington
Northview Center
Met Park North
Merrill Place
505 First Avenue
83 King Street
Subtotal
San Francisco Bay Area, California
1455 Market Street(6)
275 Brannan Street
625 Second Street
875 Howard Street
Rincon Center
Subtotal
Los Angeles, California
Pinnacle I(7)
Pinnacle II(7)
6922 Hollywood
Technicolor Building
3401 Exposition
10900 Washington
10950 Washington
604 Arizona
Lynnwood
South Lake Union
Pioneer Square
Pioneer Square
Pioneer Square
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
Burbank
Burbank
Hollywood
Hollywood
West Los Angeles
West Los Angeles
West Los Angeles
West Los Angeles
27
182,009
190,748
163,768
288,140
184,083
1,008,748
1,025,833
54,673
138,080
230,443
580,850
2,029,879
393,777
230,000
205,523
114,958
63,376
9,919
159,025
44,260
84.4% $
95.7
92.6
97.4
90.0
92.6%
99.7%
100.0
99.4
99.4
91.9
97.4%
97.0%
100.0
87.7
100.0
100.0
100.0
100.0
100.0
$
3,290,522
5,157,599
4,095,027
6,223,470
4,604,500
23,371,118
34,738,947
3,166,361
7,476,121
5,994,025
24,330,869
75,706,323
15,203,019
9,099,401
8,227,961
5,043,851
2,702,871
403,505
6,414,707
1,944,237
21.41
28.25
28.66
22.17
27.81
25.25
34.07
57.91
54.46
26.17
45.73
38.37
41.16
39.56
46.52
43.88
42.65
40.68
40.34
43.93
Table of Contents
Location
9300 Wilshire
Del Amo Office
Subtotal
Total Same-Store
NON-SAME-STORE
San Francisco Bay Area, California
901 Market Street
Towers at Shore Center
Skyway Landing
Lockheed
2180 Sand Hill Road
3400 Hillview
Clocktower Square
Foothill Research Center
Embarcadero Place
Page Mill Center
Page Mill Hill
Campus Center
1740 Technology
Concourse
Skyport Plaza
Subtotal
Los Angeles, California
Element LA
Subtotal
Total Non-Same-Store
Total Stabilized
LEASE-UP
Greater Seattle, Washington
Hill7(8)
Subtotal
San Francisco Bay Area, California
Peninsula Office Park
Metro Center
333 Twin Dolphin Plaza
555 Twin Dolphin Plaza
Shorebreeze
Palo Alto Square
Techmart Commerce Center
Gateway
Metro Plaza
Subtotal
Los Angeles, California
11601 Wilshire
Subtotal
Square Feet(1)
Percent Leased
(2)
Annualized Base
Rent(3)
Annualized
Base Rent Per
Square Foot(4)
61,224
113,000
1,395,062
4,433,689
206,218
334,483
247,173
42,899
45,613
207,857
100,344
195,376
197,402
176,245
182,676
471,580
206,876
944,386
418,086
3,977,214
284,037
284,037
4,261,251
8,694,940
285,680
285,680
510,789
730,215
182,789
198,936
230,932
328,251
284,440
609,093
456,921
3,532,366
500,475
500,475
90.8
100.0
96.9%
96.2%
100.0
84.3
99.8
100.0
97.2
100.0
71.0
100.0
94.2
99.9
97.4
100.0
99.3
96.8
96.5
96.3%
100.0%
100.0%
96.6%
96.4%
80.4%
80.4%
77.7%
74.9
80.3
91.8
65.0
95.0
74.4
82.5
83.9
80.2%
85.9%
85.9%
2,403,385
3,327,208
54,770,145
153,847,586
10,034,130
15,725,500
10,806,037
2,923,996
4,108,486
13,334,941
5,199,587
12,544,286
8,143,825
11,738,492
11,382,043
15,279,192
7,049,130
28,110,231
13,148,205
169,528,081
15,409,645
15,409,645
184,937,726
338,785,312
4,312,961
4,312,961
17,423,165
21,993,418
7,741,898
9,041,965
8,031,283
21,521,012
8,551,906
14,606,280
11,738,413
120,649,340
16,109,529
16,109,529
46.13
29.44
41.90
36.36
48.66
55.80
43.82
68.16
92.70
64.15
72.99
64.21
43.79
66.64
63.99
32.40
34.30
31.00
32.59
44.31
54.25
54.25
44.99
40.63
36.93
36.93
45.57
46.64
52.73
49.50
53.47
75.32
40.81
30.72
32.16
45.20
38.85
38.85
Submarket
West Los Angeles
Torrance
San Francisco
Redwood Shores
Redwood Shores
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Milpitas
North San Jose
North San Jose
North San Jose
West Los Angeles
South Lake Union
San Mateo
Foster City
Redwood Shores
Redwood Shores
Redwood Shores
Palo Alto
Santa Clara
North San Jose
North San Jose
West Los Angeles
28
Table of Contents
Location
Submarket
Square Feet(1)
Percent Leased
(2)
Annualized Base
Rent(3)
Annualized
Base Rent Per
Square Foot(4)
Total Lease-up
Total In-Service
REDEVELOPMENT
Greater Seattle, Washington
Merrill Place Theater Building
Subtotal
San Francisco Bay Area, California
875 Howard Street (1st Floor)
Subtotal
Los Angeles, California
405 Mateo
4th & Traction
3402 Pico (Existing)(9)
Subtotal
Total Redevelopment
DEVELOPMENT
Greater Seattle, WA
450 Alaskan Way
Subtotal
Los Angeles, California
Icon
CUE
Subtotal
Total Development
HELD-FOR-SALE
San Francisco Bay Area, California
222 Kearny Street(10)
Total Held-for-Sale
Pioneer Square
San Francisco
Downtown Los Angeles
Downtown Los Angeles
West Los Angeles
Pioneer Square
Hollywood
Hollywood
4,318,521
13,013,461
80.9%
91.2% $
141,071,830
479,857,142
$
$
44.07
41.58
29,385
29,385
55,827
55,827
83,285
120,937
50,687
254,909
340,121
166,800
166,800
323,273
91,953
415,226
582,026
—% $
—% $
—% $
—% $
—% $
—
—
—% $
—% $
54.8% $
54.8% $
100.0% $
100.0
100.0% $
87.0% $
—
—
$
$
—
—
$
$
—
—
—
—
—
$
$
$
—
—
$
$
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
San Francisco
148,797
148,797
88.7% $
88.7% $
6,930,440
6,930,440
$
$
55.13
55.13
Total Redevelopment, Development and Held-for-
Sale
_____________
(1) 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
59.6% $
6,930,440
1,070,944
$
55.13
may change over time due to re-measurement or re-leasing.
(2) Calculated as (i) square footage under commenced and uncommenced leases as of December 31, 2016, divided by (ii) total square feet, expressed as a percentage.
(3) Presented on an annualized basis and is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) under commenced and uncommenced leases as of
December 31, 2016, by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
(4) Calculated as (i) annualized base rent divided by (ii) square footage under commenced and uncommenced leases as of December 31, 2016.
(5) Defined as all of the properties owned and included in our stabilized portfolio as of January 1, 2015 and still owned and included in the stabilized portfolio as of December 31, 2016.
(6) We own 55% of the ownership interests in the consolidated joint venture that owns the 1455 Market Street property.
(7) We own 65% of the ownership interests in the consolidated joint venture that owns the Pinnacle I and II properties.
(8) We own 55% of the ownership interests in the consolidated joint venture that owns the Hill7 property.
(9) On January 20, 2017, we entered into an agreement to sell our 3402 Pico (Existing) property.
(10) On February 14, 2017, we sold our 222 Kearny Street property.
29
Table of Contents
The following table sets forth certain information relating to each of the land properties owned as of December 31, 2016:
Location
San Francisco Bay Area, California
Skyport Plaza
Campus Center
Subtotal
Los Angeles, California
Epic (Sunset Bronson—Lot A)
Sunset Bronson—Lot D(2)
Sunset Gower—Redevelopment
Element LA
3402 Pico (Residential)(3)
Subtotal
Submarket
Square Feet(1)
Percent of Total
North San Jose
Milpitas
Hollywood
Hollywood
Hollywood
West Los Angeles
West Los Angeles
350,000
946,350
1,296,350
300,000
19,816
423,396
500,000
TBD
1,243,212
13.8 %
37.2
51.0
11.8
0.8
16.7
19.7
—
49.0
TOTAL
_____________
(1) Represents management’s estimate of developable square feet, the majority of which remains subject to entitlement approvals that have not yet been obtained.
(2) Square footage for Sunset Bronson Lot D represents management’s estimate of developable square feet for 33 residential units.
(3) Management estimates that 3402 Pico (Residential) could be improved with up to 26 residential units. On January 20, 2017, we entered into an agreement to sell our 3402 Pico (Residential)
2,539,562
100.0 %
property.
Leases at our media and entertainment properties are typically short-term leases of one year or less, other than the KTLA and Netflix leases at our Sunset Bronson
Studios property. The following table sets forth certain information relating to each of the media and entertainment properties owned as of December 31, 2016:
Property
Sunset Gower Studios
Sunset Bronson Studios
TOTAL
_____________
(1) Represents the average percent leased for the 12 months ended December 31, 2016.
(2) Reflects actual base rent for the 12 months ended December 31, 2016, excluding tenant reimbursements.
(3) Calculated as (i) annual base rent divided by (ii) square footage under lease as of December 31, 2016.
Office Portfolio
Square Feet Percent Leased(1)
Annual Base Rent(2)
Annual Base Rent Per
Leased Square Foot(3)
571,626
308,026
879,652
89.0 % $
89.4
89.1 % $
16,474,771
9,519,585
25,994,356
$
$
32.39
34.57
33.16
Our office portfolio consists of 54 office properties comprising an aggregate of approximately 14.1 million square feet. As of December 31, 2016, our in-service office
properties were approximately 91.2% leased (giving effect to leases signed but not commenced as of that date). All of our office properties are located in Northern and
Southern California and the Pacific Northwest. As of December 31, 2016, the weighted average remaining lease term for our stabilized office portfolio was 4.6 years.
30
Table of Contents
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, 2016:
Tenant
Google, Inc.(2)
Uber Technologies, Inc.(3)
Riot Games, Inc.(4)
Cisco Systems, Inc.(5)
Qualcomm
Salesforce.com(6)
Square, Inc.
Stanford(7)
Warner Bros. Entertainment
Warner Music Group
NetSuite, Inc.(8)
EMC Corporation(9)
NFL Enterprises(10)
GSA(11)
AIG, Inc.
Number of
Properties
Lease
Expiration
Total
Leased
Square
Feet
Percentage
of Office
Portfolio
Square
Feet
Annualized
Base Rent (1)
Percentage
of Office
Portfolio
Annualized
Base Rent
2
2
2
2
1
1
1
3
1
1
1
2
2
5
1
Various
Various
Various
Various
7/31/2022
Various
9/27/2023
Various
12/31/2021
12/31/2019
Various
Various
6/30/2021
Various
7/31/2017
305,729
330,057
286,629
474,576
376,817
261,250
338,910
151,249
230,000
195,166
166,667
294,756
167,606
202,097
132,600
3,914,109
2.2 % $
2.3
2.0
3.4
2.7
1.9
2.4
1.1
1.6
1.4
1.2
2.1
1.2
1.4
0.9
27.8 % $
19,564,885
15,680,394
15,563,610
15,377,341
12,887,141
12,771,888
11,425,384
10,306,167
9,099,401
8,169,569
7,798,348
7,787,478
6,818,212
6,473,190
6,232,200
165,955,208
4.0 %
3.2
3.2
3.2
2.6
2.6
2.3
2.1
1.9
1.7
1.6
1.6
1.4
1.3
1.3
34.0 %
Total
_____________
(1) Calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) under commenced leases as of December 31, 2016, by (ii) 12. Annualized base rent does not
reflect tenant reimbursements.
(2) Google, Inc. expirations by property and square footage: (i) 207,857 square feet at 3400 Hillview expiring on November 30, 2021 and (ii) 97,872 square feet at Foothill Research Center expiring
on February 28, 2025.
(3) Uber Technologies, Inc. expirations by property and square footage: (i) 20,246 square feet at Skyway Landing expiring March 31, 2017 and (ii) 309,811 square feet at 1455 Market Street
expiring on February 28, 2025.
(4) Riot Games, Inc. expirations by property and square footage: (i) 2,592 square feet at Shorebreeze expiring on November 30, 2017 and (ii) 284,037 square feet at Element LA expiring on March
31, 2030. This tenant may elect to exercise their early termination right at Element LA effective March 31, 2025.
(5) Cisco Systems, Inc. expirations by property and square footage: (i) 2,996 square feet at Concourse expiring March 31, 2018 and (ii) 471,580 square feet at Campus Center expiring on December
31, 2019. This tenant may elect to exercise their early termination right at Campus Center effective December 31, 2017.
(6) Salesforce.com is expected to take possession of an additional 4,144 square feet during the second quarter of 2017. Expirations by square footage: (i) 78,872 square feet expiring on July 31, 2025;
(ii) 83,372 square feet expiring on April 30, 2027; (iii) 93,028 square feet expiring on October, 31, 2028; and (iv) 5,978 square feet of month-to-month storage space. This tenant may elect to
exercise their early termination right with respect to 74,966 square feet between August 1, 2021 and September 30, 2021.
(7) Stanford expirations by property and square footage: (i) Board of Trustees Stanford 18,753 square feet at Page Mill Hill expiring February 28, 2019; (ii) Stanford Healthcare 63,201 square feet at
Page Mill Center expiring June 30, 2019; (iii) Stanford University 26,080 square feet at Palo Alto Square expiring on December 31, 2019; and (iv) Board of Trustees Stanford 43,215 square feet
at Page Mill Center expiring December 31, 2022.
(8) NetSuite, Inc. expirations by square footage: (i) 37,597 square feet expiring on August 31, 2019 and (ii) 129,070 square feet expiring May 31, 2022.
(9) EMC expirations by property and square footage: (i) 66,510 square feet at 875 Howard Street expiring on June 30, 2019; (ii) 185,292 square feet at 505 First expiring on October 18, 2021; and
(iii) 42,954 square feet at 505 First expiring on December 31, 2023.
(10) NFL Enterprises by property and square footage: (i) 157,687 square feet at 10950 Washington and (ii) 9,919 square feet at 10900 Washington. This tenant may elect to exercise their early
termination right with respect to 167,606 square feet effective June 30, 2020.
(11) GSA expirations by property and square footage: (i) 71,729 square feet at 1455 Market Street expiring on February 19, 2019; (ii) 28,993 square feet at Northview Center expiring on April 4,
2020; (iii) 33,582 square feet at Rincon Center expiring May 31, 2020; (iv) 49,405 square feet at 901 Market Street expiring on July 31, 2021; and (v) 18,388 square feet at Concourse expiring
on May 7, 2024.
31
Table of Contents
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, 2016:
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
Signed leases not commenced
Number
of
Leases
Percentage
of All
Leases
Total Leased
Square Feet
Percentage
of Office
Portfolio
Leased
Square Feet
Annualized
Base Rent (1)
Percentage
of Office
Portfolio
Annualized
Base Rent
243
372
89
70
34
21
25
28
882
27.5 %
42.2
10.1
7.9
3.9
2.4
2.8
3.2
100.0 %
357,917
1,924,427
1,243,109
1,914,803
1,962,938
4,108,967
153,181
845,630
12,510,972
2.9 % $
15.4
9.9
15.3
15.7
32.8
1.2
6.8
100.0 % $
14,821,498
84,287,724
56,975,262
86,338,664
89,861,177
154,503,256
—
38,184,513
524,972,094
2.8 %
16.1
10.9
16.4
17.1
29.4
—
7.3
100.0 %
Office Portfolio Total:
_____________
(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, 2016 (ii) by 12.
Annualized base rent does not reflect tenant reimbursements.
32
Table of Contents
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, 2016 plus available space, for each of the ten full
calendar years beginning January 1, 2016 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
Square
Footage
of
Expiring
Leases
Percentage
of Office
Portfolio
Square Feet
Annualized
Base Rent (1)
Percentage
of Office
Portfolio
Annualized
Base Rent
Annualized
Base Rent
Per Leased
Square Foot(2)
Expiring
Leases
Vacant
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Thereafter
Building management use
Signed leases not commenced(3)
8
182
163
141
102
83
37
27
22
12
25
25
28
855
1,573,433
77,452
1,504,130
1,241,556
2,255,198
1,096,289
1,707,194
864,404
798,745
373,629
656,042
904,868
153,181
845,630
14,051,751
11.2 %
$
0.6
10.7
8.8
16.0
7.8
12.1
6.2
5.7
2.7
4.7
6.4
1.1
6.0
2,944,623
61,667,751
49,658,316
88,826,633
51,155,104
70,444,725
36,669,233
30,597,416
16,464,163
31,667,839
46,003,682
—
38,184,513
524,283,998
0.6 % $
11.8
9.5
16.9
9.8
13.4
7.0
5.8
3.1
6.0
8.8
—
7.3
38.02
41.00
40.00
39.39
46.66
41.26
42.42
38.31
44.07
48.27
50.84
—
45.16
42.02
Total/Weighted Average(4)
_____________
(1) Presented on an annualized basis without regard to cancellation options and is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) as of
100.0 % $
100.0 % $
December 31, 2016, by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
(2) Calculated for all lease expiration years as (i) base rental payments (defined as cash base rents (before abatements)) under commenced leases, divided by (ii) square footage under commenced leases
as of December 31, 2016.
(3) Annualized base rent per leased square foot for signed leases but not yet commenced reflects uncommenced leases and is calculated as (i) base rental payments (defined as cash base rents (before
abatements)) under uncommenced leases for vacant space as of December 31, 2016, divided by (ii) square footage under uncommenced leases as of December 31, 2016.
(4) Total expiring square footage does not include 32,654 square feet of month-to-month leases.
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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 our office properties:
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,
2016
2015
2014
124
1,588,437
9.19
7.59
16.78
$
$
140
1,321,824
52.56
16.28
68.84
$
$
90
661,724
12.00
6.71
18.71
$
$
135
924,832
34.55
13.70
48.25
$
$
264
2,910,261
28.89
11.53
40.42
$
$
225
1,586,556
25.14
10.78
35.92
$
$
$
$
$
$
$
$
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
_____________
(1) Excludes 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) Includes 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 office properties:
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,
2016
2015
2014
2,150,780
241,474
806,559
61,586
(3,631 )
(3,633 )
256,611
1,561,081
—
(231,589 )
166,800
(54,268 )
1,252,708
3,666,353
798,026
650,133
644,761
2,092,920
1,573,433
683,567
3,221,692
533,577
139,188
398,147
1,070,912
2,150,780
311,164
208,299
491
183,972
413,000
(8,900 )
241,494
1,349,520
359,077
47,549
136,335
542,961
806,559
Our portfolio of operating properties includes two properties that we consider to be media and entertainment properties, comprising an aggregate of 879,652 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. The 12 month average percent leased for 2016 was approximately 89.1% for our media and entertainment properties. 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, lease
terms 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. 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).
Accordingly, our other property-related revenues tend to track overall occupancy of our media and entertainment properties. As a result of the short-term nature of the leases
into which we enter at our media and entertainment properties, and because entertainment industry tenants generally do not shoot on weekends due to higher costs, we
believe stabilized occupancy rates at our media and entertainment properties are lower than those rates achievable at our traditional office assets, where tenants enter into
longer-term lease arrangements.
Description of Our Media and Entertainment Properties
Sunset Gower Studios, Hollywood, California
Sunset Gower Studios 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 Studios provides a fully-integrated environment for its media
and entertainment-focused tenants within which they can access creative
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and technical talent for film and television production as well as post-production. Sunset Gower Studios typically serves as home to single-camera television and motion
picture production tenants. The 12 month average percent leased for 2016 was approximately 89.0% at Sunset Gower Studios.
In addition to Sunset Gower Studios’ existing facilities, the current zoning designation for Sunset Gower Studios, 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, 2016, we had no immediate plans to develop additional facilities on the property.
Sunset Bronson Studios, Hollywood, California
Sunset Bronson Studios 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 Studios 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 Studios, Sunset Bronson Studios 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 Studios, which typically serves single-camera
television and motion picture productions, Sunset Bronson Studios 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. The 12 month average percent leased for 2016 was approximately 89.4% at
Sunset Bronson Studios.
In addition to Sunset Bronson Studios' existing facilities, the current zoning designation for Sunset Bronson Studios, 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 Studios Lot A
In connection with our purchase of Sunset Bronson Studios 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 Studios and Sunset Bronson Studios properties. The site
is currently used as a surface parking lot and can be developed to include up to 60,855 square feet of retail and office space based on current zoning, with the opportunity to
add additional developable square footage through certain municipal land entitlement approvals. We estimate that with further entitlements, we could increase the
developable square footage to approximately 273,913 square feet. While we are holding this property for its development potential, we do not currently have any plans for its
development.
Item 3. Legal Proceedings
From time to time, we are a party to various lawsuits, claims and other legal proceedings arising out of, or incident to, our ordinary course of business. We are not
currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or that, individually or in the aggregate, would be expected to have a material
adverse effect on our business, financial condition, 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 Hudson Pacific Properties, Inc. Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Overview
As of February 10, 2017, Hudson Pacific Properties, Inc. had approximately 146,275,476 shares of common stock outstanding, including unvested restricted stock
grants. Hudson Pacific Properties, Inc. 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, 2015 through December 31, 2016, as reported by the NYSE, are set forth below for the periods indicated.
Distributions
We intend to make distributions each taxable year (not including a return of capital for federal income tax purposes) equal to at least 90% of our taxable income. We
intend to pay regular quarterly dividend distributions to our stockholders. Currently, we pay distributions to our stockholders quarterly in 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, 2016, the reported closing sale price per share of our common stock on the NYSE was $34.78. The following table shows our dividends declared,
and the high, low and closing sale prices for our common stock as reported by the NYSE for the periods indicated:
Fiscal year 2016
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2015
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
High
Low
Close
Per Share of
Common
Stock Dividends
Declared
$
29.60
30.18
34.38
35.84
$
22.77
26.79
28.85
31.58
$
28.92
29.18
32.87
34.78
0.200
0.200
0.200
0.200
High
Low
Close
Per Share of
Common
Stock Dividends
Declared
$
33.85
34.25
31.84
30.97
$
29.82
28.09
27.57
26.66
$
33.19
28.37
28.79
28.14
0.125
0.125
0.125
0.200
The closing sale price for our common stock on February 10, 2017, as reported by the NYSE, was $35.65. As of February 10, 2017, there were 62 stockholders of
record of our common stock.
Issuer Purchases of Equity Securities
During the three months ended December 31, 2016, certain employees surrendered common shares owned by them to satisfy their statutory federal income tax
obligation associated with the vesting of restricted common shares of beneficial interest issued under our 2010 Incentive Award Plan.
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The following table summarizes all of the repurchases of Hudson Pacific Properties, Inc. equity securities during the fourth quarter of 2016:
Period
October 1 - October 31, 2016
November 1 - November 30, 2016
December 1 - December 31, 2016
Total
Total Number of
Shares Purchased
Average Price
Paid Per
Share(1)
—
—
191,203
191,203
$
$
$
$
—
—
34.50
34.50
Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans
Or Programs
Maximum Number
Of Shares That May
Yet Be Purchased
Under The Plans Or
Programs
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
_____________
(1) The price paid per share is based on the closing price of Company common shares as of the date of the determination of the statutory federal tax income.
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 six holders of record of
common units (including through our general partnership interest).
As of February 10, 2017, our operating partnership had 569,045 common units outstanding that were not owned by us. There is no active trading market for our
operating partnership units.
The following table reports the distributions per common unit declared during the years ended December 31, 2016 and 2015, respectively.
Fiscal year 2016
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2015
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Per Unit Distributions
Declared
0.200
0.200
0.200
0.200
Per Unit Distributions
Declared
0.125
0.125
0.125
0.200
Recent Sales of Unregistered Securities
During the fourth quarter of December 31, 2016, our operating partnership issued partnership units in private placements in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act, in the amounts and for the consideration set forth below:
During the fourth quarter of December 31, 2016, the Company issued an aggregate of 403,768 shares of its common stock in connection with restricted stock awards
for no cash consideration, out of which 191,203 shares of common stock were forfeited to the Company in connection with restricted stock awards for a net issuance of
212,565 shares of common stock. For each share of common stock issued by the Company in connection with such an award, our operating partnership issued a restricted
common unit to the Company as provided in our operating partnership’s partnership agreement. During the fourth quarter of December 31, 2016, our operating partnership
issued an aggregate of 403,768 common units to the Company.
All other issuances of unregistered equity securities of our operating partnership during the year ended December 31, 2016 have previously been disclosed in filings
with the SEC. For all issuances of units to the Company, our operating partnership relied on the Company’s status as a publicly traded NYSE-listed company with over $6.68
billion in total consolidated assets and as our operating partnership’s majority owner and sole general partner as the basis for the exemption under Section 4(a)(2) of the
Securities Act.
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Issuer Purchases of Equity Securities
The following table summarizes all of the repurchases of operating partnership equity securities during the fourth quarter of 2016:
Period
October 1 - October 31, 2016
November 1 - November 30, 2016
December 1 - December 31, 2016
Total
Total Number of
Units Purchased
Average Price
Paid Per
Unit(1)
—
17,533,099
191,203
17,724,302
$
$
$
$
—
32.50
34.50
32.52
Total Number Of
Units Purchased
As Part Of Publicly
Announced Plans
Or Programs
Maximum Number
Of Units That May
Yet Be Purchased
Under The Plans Or
Programs
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
_____________
(1) The price paid per unit is based on the closing price of Company common shares as of the date of the determination of the statutory federal tax income.
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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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 five-year period ending on December 31, 2016. The graph assumes a $100 investment in
each of the indices on December 31, 2011 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 500, and industry peer groups. 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 U.S. REIT Equity
MSCI US REIT
NAREIT All Equity REITs
Period Ending
12/31/13
162.64
153.57
124.71
120.68
123.12
12/31/14
227.96
174.60
159.00
157.34
157.63
12/31/15
217.58
177.01
163.39
161.30
162.10
12/31/16
276.01
198.18
177.90
175.17
176.08
12/31/11
100.00
100.00
100.00
100.00
100.00
12/31/12
153.02
116.00
120.23
117.77
119.70
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Item 6. Selected Financial Data
The following tables set forth selected consolidated financial and operating data. The financial information has been derived from our historical Consolidated
Balance Sheets and Statements of Operations, and is adjusted for the impact of subsequent accounting changes that require retrospective applications, if any. The following
data should be read in conjunction with our financial statements and the related notes, see Part IV, Item 15(a) and Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included below in this report.
HUDSON PACIFIC PROPERTIES, INC. and HUDSON PACIFIC PROPERTIES, L.P.
(in thousands)
2016
2015(1)
2014
2013
2012
Year Ended December 31,
Statements of Operations Data:
Total office revenues
Total Media & Entertainment revenues
Income from operations
_____________
(1) Reflects our ownership of the properties acquired in the EOP Acquisition for the period from April 1, 2015 to December 31, 2015.
593,236
46,403
89,407
481,718
39,132
47,388
213,786
39,629
48,677
165,441
40,117
27,960
120,328
40,133
14,267
Basic and diluted per share amounts:
Net income (loss) attributable to common stockholders—basic
Net income (loss) attributable to common stockholders—diluted
$
$
Weighted average shares of common stock outstanding—basic
Weighted average shares of common stock outstanding—diluted
HUDSON PACIFIC PROPERTIES, INC.
Year Ended December 31,
2016
2015(1)
2014
2013
2012
0.26
0.25
106,188,902
110,369,055
0.800
$
$
(0.19 ) $
(0.19 ) $
85,927,216
85,927,216
0.575
0.15
0.15
65,792,447
66,509,447
0.500
$
$
$
(0.27 ) $
(0.27 ) $
(0.41 )
(0.41 )
55,182,647
55,182,647
0.500
$
$
41,640,691
41,640,691
0.500
Dividends declared per common share
_____________
(1) Reflects our ownership of the properties acquired in the EOP Acquisition for the period from April 1, 2015 to December 31, 2015.
$
$
$
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HUDSON PACIFIC PROPERTIES, INC. and HUDSON PACIFIC PROPERTIES, L.P.
(in thousands)
As of December 31,
Balance Sheet Data:
Investment in real estate, net(1)
Total assets
Notes payable, net(1)
Total liabilities
6.25% Series A cumulative redeemable preferred units of the operating
partnership
Series B cumulative redeemable preferred stock
Other data:
Cash flows provided by (used in)
Operating activities
Investing activities
Financing activities
Stabilized office properties leased rate as of end of period(2)
In-Service office properties leased rate as of end of period(3)
Media & Entertainment occupied rate as of end of period(4)
$
$
$
$
2016
2015
2014
2013
2012
$
6,050,933
6,678,998
2,688,010
2,966,071
10,177
—
$
5,359,600
6,254,035
2,260,716
2,514,821
10,177
—
$
2,036,638
2,335,140
912,683
1,049,948
10,177
145,000
$
1,844,614
1,553,321
575,714
643,624
10,475
145,000
1,340,361
1,147,638
394,718
446,495
12,475
145,000
219,607
(524,897 )
334,754
$
$
$
96.4 %
91.2 %
89.1 %
174,856
(1,797,699 )
1,658,641
$
$
$
95.3 %
90.1 %
78.5 %
63,168
(246,361 )
170,590
$
$
$
94.6 %
94.6 %
71.6 %
41,547
(424,042 )
393,947
$
$
$
95.4 %
95.4 %
69.9 %
42,821
(423,470 )
385,848
93.5 %
93.5 %
73.7 %
_____________
(1) Balance for the years ended December 31, 2012, 2013 and 2014 does not reflect the classification related to the held for sale properties at December 31, 2016.
(2) Stabilized office properties include Same-Store properties and Non-Same-Store properties.
(3) In-service office properties include stabilized and lease-up office properties.
(4) Percent occupied for media and entertainment properties is the average percent leased for the 12 months ended as of the year indicated.
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 consolidated financial statements and the
related notes, see Part IV, Item 15(a). 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 Part I, Item 1A, “Risk Factors” and the discussion under the captions “Forward-looking Statements” above and “Liquidity and Capital
Resources” contained in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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, 2016, our consolidated office portfolio
consisted of approximately 14.1 million square feet of in-service, redevelopment, development and held-for-sale properties, and our media and entertainment portfolio
consisted of 0.9 million square feet. As of December 31, 2016, our consolidated in-service office portfolio was 91.2% leased (including leases not yet commenced). Our media
and entertainment properties were 89.1% leased for the trailing 12-month period ended December 31, 2016.
Current Year Acquisitions, Dispositions, Held for Sale, Redevelopment/Development and Financings
Acquisitions
The following table summarizes the properties acquired in 2016:
Property
11601 Wilshire(2)
Hill7(3)
Page Mill Hill(4)
Total
Submarket
West Los Angeles
South Lake Union
Palo Alto
Date of
Acquisition
7/1/2016
10/7/2016
12/12/2016
Square Feet
Purchase Price(1) (in
millions)
500,475
285,680
182,676
968,831
$
$
311.0
179.8
150.0
640.8
_____________
(1) Represents purchase price before certain credits, prorations and closing costs.
(2) Previously owned by an affiliate of Blackstone, the property has served as our corporate headquarters since its IPO. We funded this acquisition with proceeds from the unsecured revolving credit
facility.
(3) We purchased the property through a joint venture with the Canadian Pension Plan Investment Board. We own 55% of the ownership interest in the consolidated joint venture. In conjunction
with the acquisition, the joint venture closed a secured non-recourse loan in the amount of $101.0 million. Refer to Part IV, Item 15(a) “ Financial Statement and Schedules—Note 5 to the
Consolidated Financial Statements—Notes Payable, net” for details.
(4) We funded this acquisition with proceeds from the unsecured revolving credit facility.
Dispositions
The following table summarizes the properties sold in 2016. These properties were non-strategic assets to our portfolio:
Property
Bayhill Office Center
Patrick Henry Drive
One Bay Plaza
12655 Jefferson
Total(2)
_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) Excludes our sale of an option to acquire land at 9300 Culver on December 6, 2016.
Held for Sale
Date of Disposition
Square Feet
Sales Price(1) (in
millions)
1/14/2016
4/7/2016
6/1/2016
11/4/2016
554,328
70,520
195,739
100,756
921,343
$
$
215.0
19.0
53.4
80.0
367.4
On December 30, 2016, we entered into an agreement to sell our 222 Kearny Street property for $51.8 million (before certain credits, prorations and closing costs). We
determined that this property met the criteria to be classified as held for sale and reclassified the balances related to this property within the Consolidated Balance Sheets as
of December 31, 2016 and 2015.
222 Kearny Street was subsequently sold on February 14, 2017. We applied $45.0 million of proceeds from the sale to pay down amounts outstanding under the unsecured
revolving credit facility.
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Redevelopment/Development
Properties are selected for redevelopment when we believe the result of doing so will render a higher economic return. We may engage in the development or
redevelopment of office properties when market conditions support a favorable risk-adjusted return. A redevelopment can consist of a range of improvements to a property,
and may constitute a complete structural renovation of a building or remodeling select areas to make the property more attractive to tenants. Redevelopment and development
properties are excluded from our in-service portfolio to maintain consistency in evaluating our performance from period to period. The redevelopment and development
process is generally capital-intensive and occurs over the course of several months or years. Commonly associated with newly-acquired properties, redevelopment efforts
may also occur at properties we currently own. At December 31, 2016, there were a total of eight properties included in property under development in our Consolidated
Balance Sheets: Merrill Place Theater Building, 875 Howard Street (1st Floor), 405 Mateo, 4th & Traction, 3402 Pico (Existing), 450 Alaskan Way, Icon and CUE.
Financings
On May 3, 2016, we drew on the $175.0 million 5-Year Term Loan due November 2020 and $125.0 million 7-Year Term Loan due November 2022, both of which were
entered into on November 17, 2015. Amounts drawn were used to fully pay down $30.0 million of the 901 Market mortgage loan that was set to mature on October 31, 2016, to
partially pay down $110.0 million of the Sunset Gower Studios & Sunset Bronson Studios mortgage loans and $100.0 million of the 5-Year Term Loan due April 2020.
On June 7, 2016, Pinnacle II Hudson MC Partners, our consolidated joint venture, entered into a $87.0 million ten-year mortgage loan secured by our Pinnacle II office
property. This new loan has a maturity date of June 11, 2026 and bears a fixed rate of 4.30% per annum with interest only payable every month during the term of the loan and
principal payment at maturity. Proceeds were used to fully pay down the previous loan secured by our Pinnacle II office property that was scheduled to mature on September
6, 2016.
On July 6, 2016, we entered into a private placement of debt for $150.0 million of 3.98% guaranteed senior notes due July 6, 2026. The $150.0 million was drawn on July
6, 2016. Proceeds were used to pay down the unsecured revolving credit facility. We also secured an additional $50.0 million of funds from a private placement of 3.66%
guaranteed senior notes due September 15, 2023, which was drawn on September 15, 2016. Proceeds were used to pay down the unsecured revolving credit facility.
On October 7, 2016, we acquired Hill7 property through a consolidated joint venture. In conjunction with the acquisition, the joint venture closed a $101.0 million
mortgage loan with a fixed interest rate of 3.38% per annum. This loan bears interest only payable every month during the term of the loan and principal payment at maturity.
Factors That May Influence Our Operating Results
Business and Strategy
We invest in Class-A office and media and entertainment properties located in high barrier-to-entry, innovation-centric submarkets with significant growth potential.
Our positioning within these submarkets allows us to attract and retain quality, growth companies as tenants, many in the technology, media and entertainment sectors. The
purchase of properties with a value-add component, typically through off-market transactions, also facilitates our growth. These types of assets afford us the opportunity to
capture embedded rent growth and occupancy upside, and to strategically invest capital to reposition and redevelop assets to generate additional cash flow. We take a more
measured approach to ground-up development, with most under construction, planned or potential projects located on ancillary sites part of existing operating assets.
Management expertise across disciplines supports execution at all levels of the company’s operations. In particular, aggressive leasing and proactive asset management,
combined with a focus on conservatively managing our balance sheet, are central to our strategy.
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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, 2016, the percent leased for our in-service office
properties was approximately 91.2% (or 88.7%, 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 89.1%. 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 Northern and Southern California and the Pacific Northwest submarkets. Positive or negative changes in economic or
other conditions in Northern and Southern California or the 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 IPO 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
IPO 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
Hudson Pacific Services, Inc., or our services company, is a Maryland corporation that is wholly owned by our operating partnership. We have elected, together with
our services company, to treat our services company as a taxable REIT subsidiary for federal income tax purposes, and we may form additional taxable REIT subsidiaries in the
future. Our services company generally may provide both customary and non-customary services to our tenants and engage in other activities that we may not engage in
directly without adversely affecting our qualification as a REIT. Our services company and its wholly owned subsidiaries provide a number of services to certain tenants at
our media and entertainment properties and, from time to time, one or more taxable REIT subsidiaries may provide services to our tenants at these and other properties. In
addition, our operating partnership has contributed some or all of its interests in certain wholly owned subsidiaries or their assets to our services company. We currently
lease space to wholly owned subsidiaries of our services company at our media and entertainment properties and may, from time to time, enter into additional leases with one
or more taxable REIT subsidiaries. Any income earned by our taxable REIT subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross
income tests, except to the extent such income is distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross
income test. Because a taxable REIT subsidiary is subject to federal income tax, and state and local income tax (where applicable), as a regular C corporation, the income
earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax as compared to the income earned by our other subsidiaries.
Critical Accounting Policies
Investment in Real Estate Properties
Acquisitions
Our acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in our Consolidated
Statements of Operations from the date of acquisition.
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During the fourth quarter of 2016 we early adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”),
which changes the definition of a business. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as an asset
acquisition.
We evaluate each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be
accounted for as a business combination. An integrated set of assets and activities would fail to qualify as a business if either (i) substantially all of the fair value of the gross
assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the integrated set of assets and activities is lacking, at a
minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction). An
acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized
workforce), that is skilled, knowledgeable, and experienced in performing the process, (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the
process is considered unique or scarce.
Acquisitions of real estate will generally not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable
asset or group of similar identifiable assets (i.e. land, buildings and improvements and related intangible assets or liabilities) or because the acquisition does not include a
substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
When we acquire properties that are considered business combinations, assets acquired and liabilities assumed are fair valued at the acquisition date. Assets
acquired and liabilities assumed include, but are not limited to, land, building and improvements, intangible assets related to above-and below-market leases, intangible assets
related to in-place leases, debt and other assumed assets and liabilities. The initial accounting for a business combination is based on management’s preliminary assessment,
which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price assignment are made within the measurement period,
which typically does not exceed one year, within the Consolidated Balance Sheets. Acquisition-related expenses associated with business combinations are expensed in the
period incurred.
When we acquire properties that are considered asset acquisitions, the purchase price is allocated based on relative fair value of the assets acquired and liabilities
assumed. There is no measurement period concept for asset acquisitions, with the purchase price accounting being final in the period of acquisition. Additionally, acquisition-
related expenses associated with asset acquisition are capitalized as part of the purchase price.
We assess fair value based on Level 2 and Level 3 inputs within the fair value framework, which includes estimated cash flow projections that utilize appropriate
discount, capitalization rates, renewal probability and available market information, which includes market rental rate and market rent growth rates. 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. The fair value of acquired “above- and below-”
market leases are based on the estimated cash flow projections utilizing 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 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.
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Cost Capitalization
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.
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.
Operating Properties
The properties are generally carried at cost less accumulated depreciation and amortization. We compute depreciation and amortization using the straight-line method
over the estimated useful lives of the assets as represented in the table below:
Asset Description
Building and improvements
Land improvements
Furniture and fixtures
Tenant improvements
Estimated useful life (years)
Shorter of the ground lease term or 39 years
15
5 to 7
Shorter of the estimated useful life or the lease term
We amortize above- and below-market lease intangibles to the rental line item of the Consolidated Statements of Operations over the remaining non-cancellable lease
terms and bargain renewal periods, if applicable. The in-place lease intangibles are amortized to the depreciation and amortization line item of the Consolidated Statements of
Operations over the remaining non-cancellable lease term. When tenants vacate prior to the expiration of their lease, the amortization of intangible assets and liabilities is
accelerated. We amortize above- and below-market ground lease intangibles to the office operating expense and media and entertainment operating expense line items of the
Consolidated Statements of Operations over the remaining non-cancellable lease terms.
Impairment of Long-Lived Assets
We assess the carrying value of real estate assets and related intangibles for impairment on a quarterly basis and whenever events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with generally accepted accounting principles in the United States
(“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.
Allowance for Doubtful Accounts
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. We evaluate the collectability of accounts receivable based on a combination of factors. The
allowance for doubtful accounts is based on specific identification of uncollectible accounts and our historical collection experience. We recognize an allowance for doubtful
accounts based on the length of time the receivables are past due, the current business environment and our historical experience. Historical experience has been within
management’s expectations. For straight-line rent amounts, our assessment is based on amounts estimated to be recoverable over the term of the lease. We evaluate the
collectability of straight-line rent receivables based on length of time the related rental receivables are past due, the current business environment and historical experience.
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. If the lease provides for tenant
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improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements,
the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially
completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a
reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
• whether the lease stipulates how and on what a tenant improvement allowance may be spent;
• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
• whether the tenant improvements are unique to the tenant or general-purpose in nature; and
• whether the tenant improvements are expected to have any residual value at the end of the lease.
Certain leases provide for additional rents contingent upon a percentage of the tenant’s revenue in excess of specified base amounts or other thresholds. Such
revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. Such revenue is recognized only
after the contingency has been removed (when the related thresholds are achieved), which may result in the recognition of rental revenue in periods subsequent to when such
payments are received.
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 during which 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, 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
Compensation cost of restricted stock, restricted stock units and performance units under our equity incentive award plans are accounted for under ASC Topic
718, Compensation-Stock Compensation (“ASC 718”). During the fourth quarter of 2016, we early adopted ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), and elected to account for forfeitures of awards as they occur.
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 entities that
own the 1455 Market Street and Hill7 properties, REITs) 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, 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.
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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 own and may acquire direct or indirect interests in one or more Subsidiary REITs. 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 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.
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. As such, no provision for federal income taxes has been included for the operating partnership.
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.
We are subject to the statutory requirements of the states in which we conduct business.
We periodically evaluate our 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, 2016, we have not established a liability for uncertain tax
positions.
We and our TRS file income tax returns with the United States federal government and various state and local jurisdictions. We and our TRS are no longer subject to
tax examinations by tax authorities for years prior to 2012. Generally, we have assessed our tax positions for all open years, which include 2012 to 2016, and concluded that
there are no material uncertainties to be recognized.
Results of Operations
The following table identifies each of the properties in our portfolio acquired through December 31, 2016 (excluding properties sold prior to January 1, 2016):
Properties
Predecessor properties:
875 Howard Street
Sunset Gower Studios
Sunset Bronson Studios
Technicolor Building
Properties acquired after IPO:
Del Amo Office
9300 Wilshire
222 Kearny Street
Acquisition Date
Square Feet
Consideration Paid
(In thousands)
2/15/2007
8/17/2007
1/30/2008
6/1/2008
8/13/2010
8/24/2010
10/8/2010
$
286,270
545,673
308,026
114,958
113,000
61,224
148,797
—
—
—
—
27,327
14,684
34,174
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1455 Market Street(1)
Rincon Center
10950 Washington
604 Arizona
275 Brannan Street
625 Second Street
6922 Hollywood
6050 Sunset Blvd. & 1445 N. Beachwood Drive
10900 Washington
901 Market Street
Element LA
1455 Gordon Street
Pinnacle I(2)
3401 Exposition
Pinnacle II(2)
Seattle Portfolio (First & King, Met Park North and Northview Center)
1861 Bundy
Merrill Place
3402 Pico (Existing)
12655 Jefferson(3)
EOP Northern California Portfolio (see table on next page for property list)(4)
4th & Traction
405 Mateo
11601 Wilshire
Hill7
Page Mill Hill
Properties under development(5):
Icon(6)
CUE(7)
450 Alaskan Way(8)
Total
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
9/26/2013
2/12/2014
2/28/2014
10/14/2014
4/1/2015
5/22/2015
8/17/2015
7/1/2016
10/7/2016
12/12/2016
N/A
N/A
N/A
1,025,833
580,850
159,024
44,260
54,673
138,080
205,523
20,032
9,919
206,199
247,545
5,921
393,777
63,376
230,000
844,980
36,492
193,153
50,687
100,756
7,941,273
120,937
83,285
500,475
285,680
182,676
323,273
91,953
166,800
15,885,380
$
92,365
184,571
46,409
21,373
12,370
57,119
92,802
6,502
2,605
90,871
88,436
2,385
209,504
25,722
136,275
368,389
11,500
57,034
18,546
38,000
3,767,869
49,250
40,000
311,000
179,800
150,000
N/A
N/A
N/A
6,136,882
_____________
(1) We sold a 45% joint venture interest in the 1455 Market Street property on January 7, 2015.
(2) We acquired a 98.25% joint venture interest in the Pinnacle I property on November 8, 2012. On June 14, 2013 our joint venture partner contributed its interest in Pinnacle II, which reduced our
entire interest in the joint venture to 65.0%.
(3) This property was sold during the fourth quarter of 2016.
(4) Includes Bayhill Office Center, which was sold on January 14, 2016, Patrick Henry Drive, which was sold on April 7, 2016, and One Bay Plaza, which was sold on June 1, 2016.
(5) The properties under development were included within acquisitions listed above.
(6) This development was completed in the fourth quarter of 2016 and is estimated to be stabilized in the second quarter of 2017.
(7) We estimate this development will be completed in the third quarter of 2017 and stabilized in the second quarter of 2019.
(8) We estimate this development will be completed in the fourth quarter of 2017 and stabilized in the second quarter of 2018.
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The following table identifies each of the properties that were acquired as part of the EOP Acquisition (excluding properties sold prior to January 1, 2016):
Properties
Properties currently owned:
Metro Center
2180 Sand Hill Road
Campus Center
Palo Alto Square
Lockheed
3400 Hillview
Foothill Research Center
Clocktower Square
Page Mill Center
555 Twin Dolphin Plaza
Shorebreeze
333 Twin Dolphin Plaza
Towers at Shore Center
Skyway Landing
Gateway
Metro Plaza
1740 Technology
Skyport Plaza
Peninsula Office Park
Concourse
Techmart Commerce Center
Embarcadero Place
Properties sold:
Bayhill Office Center
One Bay Plaza
Patrick Henry Drive
Total
Square Feet
730,215
45,613
471,580
328,251
42,899
207,857
195,376
100,344
176,245
198,936
230,932
182,789
334,483
247,173
609,093
456,921
206,876
418,086
510,789
944,386
284,440
197,402
554,328
195,739
70,520
7,941,273
The following table identifies each of the properties that were disposed through December 31, 2016:
Property
City Plaza
Tierrasanta
First Financial
Bay Park Plaza
Bayhill Office Center
Patrick Henry Drive
One Bay Plaza
12655 Jefferson
Total(2)(3)
Disposition Date
Square Feet
Sales Price(1) (in
millions)
7/12/2013
7/16/2014
3/6/2015
9/29/2015
1/14/2016
4/7/2016
6/1/2016
11/4/2016
333,922
112,300
223,679
260,183
554,328
70,520
195,739
100,756
1,851,427
$
$
56.0
19.5
89.0
90.0
215.0
19.0
53.4
80.0
621.9
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_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) Excludes the disposition of a 45% interest in the 1455 Market Street office property on January 7, 2015.
(3) Excludes our sale of an option to acquire land at 9300 Culver on December 6, 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. The dollar amounts included in the tables in this discussion of our results of operations are
presented in thousands.
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Comparison of the year ended December 31, 2016 to the year ended December 31, 2015
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 our properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective not immediately apparent
from income from continuing operations. We calculate net operating income as net income (loss) excluding corporate general and administrative expenses, depreciation and
amortization, impairments, gains/losses on sales of real estate, interest expense, acquisition-related expenses and other non-operating items. We define NOI as operating
revenues (including rental revenues, other property-related revenue, tenant recoveries and other operating revenues), less property-level operating expenses (which includes
external management fees, if any, and property-level general and administrative expenses). NOI on a cash basis is NOI on a GAAP basis, adjusted to exclude the effect of
straight-line rent and other non-cash adjustments required by GAAP. We believe that NOI on a cash basis is helpful to investors as an additional measure of operating
performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.
Management further evaluates NOI by evaluating the performance from the following property groups:
•
Same-Store Properties—which includes all of the properties owned and included in our stabilized portfolio as of January 1, 2015 and still owned and
included in the stabilized portfolio as of December 31, 2016,
• Non-Same-Store properties, development projects, redevelopment properties, and lease-up properties as of December 31, 2016; and other properties not
owned or in operation from January 1, 2015 through December 31, 2016. The activity from the EOP acquisition is included in non-same store properties.
The following table presents our NOI for the years ended December 31, 2016 and 2015 and a reconciliation of net income (loss) to NOI:
Net income (loss)
Adjustments:
Interest expense
Interest income
Unrealized loss on ineffective portion of derivative instruments
Acquisition-related expenses
Other (income) expense
Gains on sales
Income from operations
Adjustments:
General and administrative
Depreciation and amortization
Net Operating Income
Same-Store net operating income
Non-Same-Store net operating income
Net Operating Income
Year Ended December 31,
2016
2015
Dollar
Change
Percentage
Change
$
43,758
$
(16,082 ) $
59,840
372.1 %
76,044
(260 )
1,436
376
(1,558 )
(30,389 )
89,407
50,667
(124 )
—
43,336
62
(30,471 )
47,388
52,400
269,087
410,894
155,989
254,905
410,894
$
$
$
38,534
245,071
330,993
137,148
193,845
330,993
$
$
$
$
$
$
25,377
(136 )
1,436
(42,960 )
(1,620 )
82
42,019
13,866
24,016
79,901
18,841
61,060
79,901
50.1
109.7
100.0
(99.1 )
(2,612.9 )
(0.3 )
88.7
36.0
9.8
24.1 %
13.7 %
31.5
24.1 %
54
Table of Contents
The following table summarizes certain statistics of our same-store office and media and entertainment properties for the years ended December 31, 2016 and 2015:
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
The following table gives further detail on our NOI for the years ended December 31, 2016 and 2015:
Year Ended December 31,
2016
20
4,433,689
96.2%
95.4%
93.0%
2015
20
4,433,689
94.0%
92.4%
92.8%
$
36.36
$
34.01
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,
2016
2015
Same-Store
Non-Same-Store
Total
Same-Store
Non-Same-Store
Total
$
156,258 $
28,463
16,096
200,817
330,698 $
55,923
5,798
392,419
$
486,956
84,386
21,894
593,236
144,822 $
27,703
15,450
187,975
249,721 $
38,532
5,490
293,743
394,543
66,235
20,940
481,718
26,837
1,884
17,380
302
46,403
—
—
—
—
—
26,837
1,884
17,380
302
46,403
23,027
943
14,849
313
39,132
—
—
—
—
—
23,027
943
14,849
313
39,132
247,220
392,419
639,639
227,107
293,743
520,850
65,421
25,810
91,231
137,514
—
137,514
135,396
20,593
155,989 $
254,905
—
254,905 $
$
202,935
25,810
228,745
390,301
20,593
410,894
66,233
23,726
89,959
99,898
—
99,898
121,742
15,406
137,148 $
193,845
—
193,845 $
$
166,131
23,726
189,857
315,587
15,406
330,993
55
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The following table gives further detail on our change to NOI for the years ended December 31, 2016 and 2015:
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, 2016 as compared to the Year Ended December 31, 2015
Same-Store
Non-Same-Store
Total
Dollar Change
Percent
Change
Dollar Change
Percent
Change
Dollar Change
Percent
Change
$
$
11,436
760
646
12,842
3,810
941
2,531
(11 )
7,271
20,113
(812 )
2,084
1,272
13,654
5,187
18,841
7.9 % $
$
2.7
4.2
6.8
16.5
99.8
17.0
(3.5 )
18.6
8.9
(1.2 )
8.8
1.4
11.2
33.7
13.7 % $
80,977
17,391
308
98,676
—
—
—
—
—
32.4 % $
45.1
5.6
33.6
92,413
18,151
954
111,518
—
—
—
—
—
3,810
941
2,531
(11 )
7,271
98,676
33.6
118,789
37,616
—
37,616
61,060
—
61,060
37.7
—
37.7
31.5
—
31.5 % $
36,804
2,084
38,888
74,714
5,187
79,901
23.4 %
27.4
4.6
23.2
16.5
99.8
17.0
(3.5 )
18.6
22.8
22.2
8.8
20.5
23.7
33.7
24.1 %
NOI increased $79.9 million, or 24.1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily resulting from:
• A $13.7 million or 11.2% increase in NOI from our same-store office properties resulting primarily from higher rents, in turn resulting primarily from rental
income related to new leases signed at our 1455 Market Street (Uber and Vevo) and 625 Second Street (Anaplan, Metamarkets and Github) properties at
higher rents than expiring leases, and increased tenant recoveries due to increased property tax recoveries arising from the reassessment of the Technicolor
Building and Element LA. The increase was partially offset by straight-line rent write-off related to our 875 Howard Street property (Heald College)
recognized in the second quarter of 2015 and decreased tenant recoveries due to lower property tax recoveries resulting from the reassessment of the 1455
Market Street property.
• A $61.1 million or 31.5% increase in net operating income from our non-same-store properties driven primarily by the EOP Acquisition and 2016 acquisitions.
The increase was also related to higher rents and occupancy due to lease-up of our Element LA (Riot Games), 901 Market Street (Saks), Page Mill Center
(Toyota Research Institute and Stanford), Skyport Plaza (Qualcomm), Lockheed, and Metro Center (BrightEdge) properties. The increase was partially offset
by the sale of our First Financial (sold in March 2015), Bay Park Plaza (sold in September 2015), Bayhill Office Center (sold in January 2016) and One Bay
Plaza (sold in June 2016) properties.
• A $5.2 million or 33.7% increase in NOI from our same-store media and entertainment properties resulting primarily from higher occupancy at Sunset
Bronson Studios and Sunset Gower Studios. In the first quarter of 2015, we decided to take certain buildings and stages offline to facilitate our Icon and
CUE developments and other longer-term plans for the Sunset Bronson Studios property. In addition, other property-related revenues increased primarily
due to the completion of parking structures at Sunset Bronson Studios and Sunset Gower Studios in the fourth quarter of 2015. The increase in other
property-related revenue largely resulted from higher production activity and revenues associated with lighting and grip at Sunset Bronson Studios.
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Table of Contents
Office NOI
Same-Store
Same-Store office rental revenue increased $11.4 million or 7.9% to $156.3 million for the year ended December 31, 2016 compared to $144.8 million for the year ended
December 31, 2015. The increase is primarily due to rental income relating to new leases signed at our 1455 Market Street (Uber and Vevo) and 625 Second Street (Anaplan,
Metamarkets and Github) properties at higher rents than expiring leases. The increase was partially offset by a straight-line rent write-off related to the 875 Howard Street
property (Heald College) recognized in the second quarter of 2015.
Same-Store office tenant recoveries increased by $0.8 million or 2.7% to $28.5 million for the year ended December 31, 2016 compared to $27.7 million for the year
ended December 31, 2015. The increase is primarily related to increased property tax recovery resulting from reassessments of the Technicolor Building and Element LA
properties, partially offset by lower property tax recovery resulting from a reassessment of the 1455 Market Street property.
Same-Store office parking and other revenue was $16.1 million for the year ended December 31, 2016, relatively flat as compared to $15.5 million for the year ended
December 31, 2015.
Same-Store office operating expenses were $65.4 million for the year ended December 31, 2016, relatively flat as compared to $66.2 million for the year ended
December 31, 2015.
Non-Same-Store
Non-Same-Store office rental revenue increased $81.0 million, or 32.4%, to $330.7 million for the year ended December 31, 2016 compared to $249.7 million for the year
ended December 31, 2015, driven primarily by the EOP Acquisition and 11601 Wilshire acquisition. The increase was also related to higher rents and occupancy attributable to
lease-up of our Element LA (Riot Games), 901 Market Street (Saks), Page Mill Center (Toyota Research Institute and Stanford), Skyport Plaza (Qualcomm), Lockheed and
Metro Center (BrightEdge) properties. The increase was partially offset by the sale of our First Financial (sold in March 2015), Bay Park Plaza (sold in September 2015), Bayhill
Office Center (sold in January 2016) and One Bay Plaza (sold in June 2016) properties.
Non-Same-Store office tenant recoveries increased $17.4 million, or 45.1%, to $55.9 million for the year ended December 31, 2016 compared to $38.5 million for the year
ended December 31, 2015. The increase is primarily attributable to the EOP Acquisition, 11601 Wilshire acquisition, and 100% occupancy at our Element LA property, partially
offset by the sale of our First Financial (sold in March 2015), Bay Park Plaza (sold in September 2015), Bayhill Office Center (sold in January 2016), and One Bay Plaza (sold in
June 2016) properties.
Non-Same-Store office parking and other revenue was $5.8 million for the year ended December 31, 2016, relatively flat as compared to $5.5 million for the year ended
December 31, 2015.
Non-Same-Store office operating expenses increased by $37.6 million, or 37.7%, to $137.5 million for the year ended December 31, 2016 compared to $99.9 million for
the year ended December 31, 2015. The increase is primarily attributable to the EOP Acquisition, 11601 Wilshire acquisition, and 100% occupancy at our Element LA property,
partially offset by the sale of our First Financial (sold in March 2015), Bay Park Plaza (sold in September 2015), Bayhill Office Center (sold in January 2016) and One Bay Plaza
(sold in June 2016) properties.
Same-Store Media & Entertainment
Media and entertainment rental revenue, tenant recoveries and other property-related revenue increased by $7.3 million or 18.6% to $46.4 million for the year ended
December 31, 2016 compared to $39.1 million for the year ended December 31, 2015. The increase is primarily attributable to a $3.8 million increase in rental revenues to $26.8
million and a $2.5 million increase in other property-related revenue to $17.4 million. The increase in rental revenue is primarily due to higher occupancy at Sunset Gower
Studios and Sunset Bronson Studios. The increase in other property-related revenue largely resulted from higher production activity and revenues associated with lighting
and grip at Sunset Bronson Studios during the year ended December 31, 2016 as compared to the same period in 2015.
Media and entertainment operating expenses increased by $2.1 million, or 8.8%, to $25.8 million for the year ended December 31, 2016 compared to $23.7 million for
the year ended December 31, 2015. The increase is primarily attributable to higher occupancy at Sunset Gower Studios and Sunset Bronson Studios
57
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Other Expense (Income)
General and administrative expenses include 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 $13.9 million, or 36.0%, to $52.4 million for the year ended December 31, 2016 compared to $38.5 million for the year ended December 31, 2015. The increase in general
and administrative expenses was primarily attributable to stock-compensation awards, office expenses, shareholder relations costs and increased staffing to meet operational
needs arising from growth related to the EOP Acquisition.
Depreciation and amortization expense increased $24.0 million, or 9.8%, to $269.1 million for the year ended December 31, 2016 compared to $245.1 million for the year
ended December 31, 2015. The increase was primarily related to depreciation expenses associated with properties in the EOP Acquisition and acquisitions in 2016. The
remaining increase is related to tenant improvement depreciation expense associated with the lease-up of our Element LA and 1455 Market Street properties, lease termination
at our Rincon Center property, and increase in depreciation expense at Sunset Gower Studios related to the recently completed parking garage, partially offset by the
reduction of depreciation expense as a result of the sale of our 2015 and 2016 disposed properties, and increased depreciation expense related to our 875 Howard Street
property (Heald College) due to an early termination in the second quarter of 2015.
Interest expense increased $25.4 million, or 50.1%, to $76.0 million for the year ended December 31, 2016 compared to $50.7 million for the year ended December 31,
2015. At December 31, 2016, we had $2.71 billion, before deferred loan costs recorded as a net against the loan balance, of notes payable, compared to $2.28 billion at
December 31, 2015. The increase was primarily attributable to $400.0 million of term loans and private placement borrowings and additional borrowings related to our Hill7 loan,
partially offset by interest savings related to our paydown of our five-year term loan due April 2020, repayment of our indebtedness associated with our 901 Market Street
property, and paydown on our indebtedness associated with our Sunset Gower Studios/Sunset Bronson Studios property. The increase in interest expense was further offset
by increased capitalized interest primarily due to the Icon, CUE, 4th & Traction, and 405 Mateo developments, partially offset by lower capitalized interest primarily due to
Element LA redevelopment during the year ended December 31, 2016 compared to the same period in 2015.
We recognized unrealized loss of $1.4 million related to a portion of our derivative instruments that was evaluated to be ineffective in 2016. In July 2016, we amended
the interest rate swaps to add a 0.00% floor to one-month LIBOR, and then de-designated the original swap and designated the amended swaps as a hedge in order to
minimize the ineffective portion of the original derivative instruments.
Acquisition-related expenses decreased $43.0 million, or 99.1%, to $0.4 million for the year ended December 31, 2016 compared to $43.3 million for the year ended
December 31, 2015. We incurred $43.3 million of acquisition-related expenses associated with the EOP Acquisition and incurred $0.4 million of acquisition-related expenses
associated with the acquisition of our 11601 Wilshire property purchased on July 1, 2016.
During 2016 we completed the sale of our Bayhill Office Center, Patrick Henry Drive, One Bay Plaza, and 12655 Jefferson properties and sale related to our option to
acquire land at 9300 Culver, which generated gains of $30.4 million for the year ended December 31, 2016 compared to a $30.5 million gain on sale of real estate for the year
ended December 31, 2015 resulting from the sale of our First Financial and Bay Park Plaza properties.
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Comparison of the year ended December 31, 2015 to the year ended December 31, 2014
Management evaluates NOI by evaluating the performance from the following property groups for the comparison of the year ended December 31, 2015 to 2014
results of operations:
•
Same-Store Properties—which includes all of the properties owned and included in our stabilized portfolio as of January 1, 2014 and still owned and
included in the stabilized portfolio as of December 31, 2015,
• Non-Same-Store properties, development projects, redevelopment properties, and lease-up properties as of December 31, 2015; and other properties not
owned or in operation from January 1, 2014 through December 31, 2015.
The following table presents our NOI for the years ended December 31, 2015 and 2014 and a reconciliation of net (loss) income to NOI:
Net (loss) income
Adjustments:
Interest expense
Interest income
Acquisition-related expenses
Other expense (income)
Gains on sales
Net loss from discontinued operations
Income from operations
Adjustments:
General and administrative
Depreciation and amortization
Net Operating Income
Same-Store net operating income
Non-Same-Store net operating income
Net Operating Income
Year Ended December 31,
2015
2014
Dollar
Change
Percentage
Change
$
(16,082 ) $
23,522
$
(39,604 )
(168.4 )%
50,667
(124 )
43,336
62
(30,471 )
—
47,388
38,534
245,071
330,993
134,020
196,973
330,993
$
$
$
25,932
(30 )
4,641
(14 )
(5,538 )
164
48,677
24,735
(94 )
38,695
76
(24,933 )
(164 )
(1,289 )
28,253
72,216
149,146
133,186
15,960
149,146
$
$
$
10,281
172,855
181,847
834
181,013
181,847
$
$
$
95.4
313.3
833.8
542.9
450.2
(100.0 )
(2.6 )
36.4
239.4
121.9 %
0.6 %
1,134.2
121.9 %
The following table summarizes certain statistics of our same-store office and media and entertainment properties for the years ended December 31, 2015 and 2014:
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
59
Year Ended December 31,
2015
19
4,355,341
93.8%
92.4%
92.6%
2014
19
4,355,341
95.6%
93.4%
90.6%
$
34.48
$
33.07
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The following tables give further detail on the Net Operating Income from continuing operations, as defined, for our total portfolio for the years ended December 31,
2015 and 2014:
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
Year Ended December 31,
2015
2014
Same-Store
Non-Same-Store
Total
Same Store
Non-Same-Store
Total
$
142,928 $
27,505
15,322
185,755
251,615 $
38,730
5,618
295,963
$
394,543
66,235
20,940
481,718
136,723 $
32,722
19,478
188,923
20,083 $
1,787
2,993
24,863
156,806
34,509
22,471
213,786
23,027
943
14,849
313
39,132
—
—
—
—
—
23,027
943
14,849
313
39,132
22,138
1,128
15,751
612
39,629
—
—
—
—
—
22,138
1,128
15,751
612
39,629
Total revenues
224,887
295,963
520,850
228,552
24,863
253,415
Operating expenses
Office operating expenses
Media & Entertainment operating expenses
Total operating expenses
Office Net Operating Income
Media & Entertainment Net Operating Income
Net Operating Income
67,141
23,726
90,867
98,990
—
98,990
118,614
15,406
134,020 $
196,973
—
196,973 $
$
166,131
23,726
189,857
315,587
15,406
330,993
69,469
25,897
95,366
8,903
—
8,903
119,454
13,732
133,186 $
15,960
—
15,960 $
$
78,372
25,897
104,269
135,414
13,732
149,146
60
Table of Contents
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, 2015 as compared to the Year Ended December 31, 2014
Same-Store
Non-Same-Store
Total
Dollar Change
Percent
Change
Dollar Change
Percent
Change
Dollar Change
Percent
Change
$
$
6,205
(5,217 )
(4,156 )
(3,168 )
889
(185 )
(902 )
(299 )
(497 )
4.5 % $
(15.9 )
(21.3 )
(1.7 )
4.0
(16.4 )
(5.7 )
(48.9 )
(1.3 )
231,532
36,943
2,625
271,100
1,152.9 % $
2,067.3
87.7
1,090.4
237,737
31,726
(1,531 )
267,932
—
—
—
—
—
—
—
—
—
—
889
(185 )
(902 )
(299 )
(497 )
151.6 %
91.9
(6.8 )
125.3
4.0
(16.4 )
(5.7 )
(48.9 )
(1.3 )
(3,665 )
(1.6 )
271,100
1,090.4
267,435
105.5
(2,328 )
(2,171 )
(4,499 )
(840 )
1,674
834
(3.3 )
(8.4 )
(4.7 )
(0.7 )
12.2
0.6 % $
90,087
—
90,087
181,013
—
181,013
1,011.9
—
1,011.9
87,759
(2,171 )
85,588
1,134.2
—
1,134.2 % $
180,173
1,674
181,847
112.0
(8.4 )
82.1
133.1
12.2
121.9 %
Net Operating Income increased $181.8 million, or 121.9%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily resulting
from:
• A $181.0 million or 1,134.2% increase in net operating income from our non-same-store properties resulting primarily from the EOP Acquisition on April 1,
2015. The remaining increase is a result of lease-up of our Element LA (Riot Games), 901 Market Street (Nordstrom Rack, Saks and Company, Nerdwallet),
3401 Exposition (Deluxe Entertainment Services) properties and income from our purchase of the Broadway properties-secured note receivable, which we
purchased on August 19, 2014. This increase was partially offset by the sale of our First Financial property on March 5, 2015 and the sale of our Tierrasanta
property on July 16, 2014.
• A $0.8 million or 0.7% decrease in net operating income from our same-store office properties resulting primarily from a decrease in lease termination fees in
the current year as compared to the prior year. During the year ended December 31, 2014 we received one-time lease termination fees from Fox Interactive
($3.1 million) and The Children’s Place ($1.2 million). The decrease was partially offset by the lease-up of our 1455 Market Street (Uber and Square) and
Rincon Center (Sales Force) properties.
• A $1.7 million or 12.2% increase in NOI from our same-store media and entertainment properties resulting primarily from the higher rental revenue generated
by strong occupancy and heightened production activity at the Sunset Gower Studios property, partially offset by our decision to take certain buildings
and stages offline to facilitate our Icon development and other longer-term plans for the Sunset Bronson Studios 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
Same-Store office rental revenue increased $6.2 million or 4.5% to $142.9 million for the year ended December 31, 2015 compared to $136.7 million for the year ended
December 31, 2014. The increase is primarily due to rental income relating
61
Table of Contents
to new leases signed at our 1455 Market Street (Uber and Square) and Rincon Center (Sales Force) properties at higher rents than expiring leases, partially offset by a one-time
GAAP straight line rent write-off at our 875 Howard Street property (Heald College).
Same-Store office tenant recoveries decreased by $5.2 million or 15.9% to $27.5 million for the year ended December 31, 2015 compared to $32.7 million for the year
ended December 31, 2014. The decrease is primarily related to $3.6 million of
one-time property tax recoveries 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 the third quarter of 2014.
Same-Store office parking and other revenue decreased by $4.2 million or 21.3% to $15.3 million for the year ended December 31, 2015 compared to $19.5 million for
the year ended December 31, 2014. The decrease is primarily due to a one time termination fee at our 625 Second Street (Fox Interactive) and 222 Kearny Street (The Children’s
Place) properties recognized in 2014.
Same-Store office operating expenses decreased by $2.3 million or 3.3% to $67.1 million for the year ended December 31, 2015 compared to $69.5 million for the year
ended December 31, 2014. The decrease is primarily due to one time property tax expenses of $4.7 million 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 the third quarter of 2014, partially offset by increases
in operating expenses across all same store properties.
Same-Store Media & Entertainment
Media and entertainment rental revenue, tenant recoveries and other property-related revenue decreased by $0.5 million or 1.3% to $39.1 million for the year ended
December 31, 2015 compared to $39.6 million for the year ended December 31, 2014. The decrease is primarily due to the decision to take certain buildings and stages offline to
facilitate the Icon development and other longer-term plans for the Sunset Bronson Studios property, partially offset by higher tenant recoveries generated by strong
occupancy at the Sunset Gower Studios property.
Media and entertainment operating expenses decreased $2.2 million, or 8.4%, to $23.7 million for the year ended December 31, 2015 compared to $25.9 million for the
year ended December 31, 2014. The decrease is the result of our decision to take certain buildings and stages offline to facilitate the Icon development and other longer-term
plans for the Sunset Bronson Studios property, partially offset by additional lighting expense in connection with the heightened production activity at the Sunset Gower
Studios property.
Other Expense (Income)
General and administrative expenses include 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 $10.3 million, or 36.4%, to $38.5 million for the year ended December 31, 2015 compared to $28.3 million for the year ended December 31, 2014. The increase in general
and administrative expenses was primarily attributable to the adoption of the 2015 OPP Plan and increased staffing to meet operational needs stemming from growth related to
the EOP Acquisition, which was completed on April 1, 2015.
Depreciation and amortization expense increased $172.9 million, or 239.4%, to $245.1 million for the year ended December 31, 2015 compared to $72.2 million for the
year ended December 31, 2014. The increase was primarily related to depreciation expenses associated with the EOP Acquisition on April 1, 2015. The remaining increase is a
result of the assets associated with the early termination of a tenant at our Howard Street property, lease-up of our Element LA, 1455 Market Street, 901 Market Street and 3401
Exposition properties, partially offset by the reduction of depreciation expense as a result of the sale of our First Financial property on March 5, 2015 and sale of our
Tierrasanta property on July 16, 2014.
Interest expense increased $24.7 million, or 95.4%, to $50.7 million for the year ended December 31, 2015 compared to $25.9 million for the year ended December 31,
2014. At December 31, 2015, we had $2,278.4 million, before deferred loan costs recorded as a net against the loan balance, of notes payable, compared to $957.5 million at
December 31, 2014. The increase was primarily attributable to $1.3 billion of term loan borrowings used to finance the EOP Acquisition, partially offset by interest savings
related to our repayment of indebtedness associated with our 6922 Hollywood, 275 Brannan Street and First & King properties and repayment of debt associated with the sale
of our First Financial property on March 5, 2015.
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Acquisition-related expenses increased $38.7 million, or 833.8%, to $43.3 million for the year ended December 31, 2015 compared to $4.6 million for the year ended
December 31, 2014. The increase is primarily a result of acquisition costs related to the EOP Acquisition.
Gain on sale of real estate increase by $24.9 million, or 450.2% to $30.5 million for the year ended December 31, 2015 compared to $5.5 million or the year ended
December 31, 2014. The increase in gain on sale is a result of the sales of First Financial on March 5, 2015 for $89.0 million (before certain credits, prorations and closing costs)
and Bay Park Plaza on September 29, 2015 for $90.0 million (before certain credits, prorations and closing costs) generating $30.5 million of gain on sale of real estate for the
year ended December 31, 2015 as compared to a $5.5 million gain on sale of real estate for the year ended December 31, 2014 resulting from the sale of our Tierrasanta property
for $19.5 million (before certain credits, prorations and closing costs) on July 16, 2014.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $83.0 million of cash and cash equivalents at December 31, 2016.
As of December 31, 2016, we had total borrowing capacity of $400.0 million under our unsecured revolving credit facility, $300.0 million of which had been drawn.
We have an ATM program which allows us to sell up to $125.0 million of common stock, $20.1 million of which has been sold through December 31, 2016.
On January 20, 2016, our board of directors authorized a share repurchase program to buy up to $100.0 million of our outstanding common stock. No share
repurchases were made during 2016.
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 $34.78 as of December 31, 2016, our ratio of debt to total market capitalization was approximately 34.5% (counting
Series A preferred units as debt) as of December 31, 2016. Our total market capitalization is defined as the sum of the market value of our outstanding common stock (which
may decrease, thereby increasing our debt to total capitalization ratio), including restricted stock that we may issue to certain of our directors and executive officers, plus the
aggregate value of common units not owned by us, plus the liquidation preference of outstanding Series A preferred units, plus the 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 us.
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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, 2016, we had outstanding notes payable of $2.71 billion (before $19.8 million of deferred finance costs), of which $1.47 billion, or 54.3%, was
variable rate debt. $839.5 million of the variable rate debt is subject to derivative instruments described in Part IV, Item 15(a) “Financial Statement and Schedules—Note 6 to
the Consolidated Financial Statements—Derivative Instruments.”
The following table summarizes the balances of our indebtedness as of:
Notes payable
Less: unamortized loan premium and deferred financing costs, net(1)
December 31, 2016
December 31, 2015
$
2,707,839
$
(19,829 )
2,278,445
(17,729 )
Notes payable, net
_____________
(1) Excludes deferred financing costs related to establishing our unsecured revolving credit facility and undrawn term loans of $1.5 million and $4.1 million as of December 31, 2016 and December 31,
$
2,688,010
$
2,260,716
2015, respectively, which are included in prepaid expenses and other assets, net in the Consolidated Balance Sheets.
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The following table sets forth information as of December 31, 2016 and December 31, 2015 with respect to our outstanding indebtedness.
December 31, 2016
December 31, 2015
Principal
Amount
Deferred
Financing
Costs, net
Principal
Amount
Unamortized
Loan Premium
and Deferred
Financing Costs,
net
Interest Rate(1)
Contractual
Maturity Date
UNSECURED LOANS
Unsecured Revolving Credit Facility(2)
$
300,000
$
—
$
230,000
$
—
5-Year Term Loan due April 2020(2)(4)
450,000
(3,513 )
550,000
(5,571 )
5-Year Term Loan due November 2020(2)
175,000
(745 )
—
—
7-Year Term Loan due April 2022(2)(5)
350,000
(2,265 )
350,000
(2,656 )
7-Year Term Loan due November 2022(2)(6)
125,000
(931 )
—
—
Series A Notes
Series E Notes
Series B Notes
Series D Notes
Series C Notes
TOTAL UNSECURED LOANS
110,000
50,000
259,000
150,000
56,000
2,025,000
(930 )
(300 )
(2,271 )
(898 )
(539 )
(12,392 )
110,000
—
259,000
—
56,000
1,555,000
(1,011 )
—
(2,378 )
—
(509 )
(12,125 )
LIBOR + 1.15% to
1.85%
LIBOR + 1.30% to
2.20%
LIBOR + 1.30% to
2.20%
LIBOR + 1.60% to
2.55%
LIBOR + 1.60% to
2.55%
4.34%
3.66%
4.69%
3.98%
4.79%
MORTGAGE LOANS
Mortgage Loan secured by Rincon Center(7)
Mortgage Loan secured by Sunset Gower Studios/Sunset Bronson
Studios
Mortgage Loan secured by Met Park North(8)
Mortgage Loan secured by 10950 Washington(7)
Mortgage Loan secured by Pinnacle I(9)(10)
Mortgage Loan secured by Element LA
Mortgage Loan secured by Pinnacle II(10)
Mortgage Loan secured by Hill7(12)
Mortgage Loan secured by 901 Market Street
TOTAL MORTGAGE LOANS
TOTAL
100,409
5,001
(198 )
(1,534 )
102,309
115,001
(355 )
5.13%
(2,232 )
LIBOR + 2.25%
64,500
27,929
129,000
168,000
87,000
101,000
—
682,839
$ 2,707,839
$
(398 )
(354 )
(593 )
(2,321 )
(720 )
(1,319 )
—
(7,437 )
64,500
28,407
129,000
168,000
86,228
—
30,000
723,445
(19,829 ) $ 2,278,445
(509 )
(421 )
(694 )
(2,584 )
1,310
—
(119 )
(5,604 )
(11)
LIBOR + 1.55%
5.32%
3.95%
4.59%
4.30%
3.38%
N/A
(13)
$
(17,729 )
4/1/2019 (3)
4/1/2020
11/17/2020
4/1/2022
11/17/2022
1/2/2023
9/15/2023
12/16/2025
7/6/2026
12/16/2027
5/1/2018
3/4/2019 (3)
8/1/2020
3/11/2022
11/7/2022
11/6/2025
6/11/2026
11/6/2028 (13)
N/A
_____________
(1) Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed. Interest rates are as of December 31, 2016, which may be different than the
interest rates as of December 31, 2015 for corresponding indebtedness.
(2) We have the option to make an irrevocable election to change the interest rate depending on our credit rating. As of December 31, 2016, no such election had been made.
(3) The maturity date may be extended once for an additional one-year term.
(4) Effective May 1, 2015, $300.0 million of the term loan has been effectively fixed at 2.66% to 3.56% per annum through the use of an interest rate swap. In July 2016, we amended this interest
rate swap to add a 0.00% floor to one-month LIBOR, and then de-designated the original swap and designated the amended swap as a hedge in order to minimize the ineffective portion of the
original derivative instruments related to this loan. Therefore, the effective interest rate with respect to $300.0 million of the term loan increased to a range of 2.75% to 3.65% per annum. See
Part IV, Item 15(a) “ Financial Statement and Schedules—Note 6 to the Consolidated Financial Statements—Derivative Instruments for details.
(5) Effective May 1, 2015, the outstanding balance of the term loan has been effectively fixed at 3.21% to 4.16% per annum through the use of an interest rate swap. In July 2016, we amended this
interest rate swap to add a 0.00% floor to one-month LIBOR, and then de-designated the original swap and designated the amended swap as a hedge in order to minimize the ineffective portion of
the original derivative instruments related to this loan. Therefore, the effective interest rate increased to a range of 3.36% to 4.31% per annum. See Part IV, Item 15(a) “ Financial Statement and
Schedules—Note 6 to the Consolidated Financial Statements—Derivative Instruments for details.
(6) Effective June 1, 2016, the outstanding balance of the term loan has been effectively fixed at 3.03% to 3.98% per annum through the use of an interest rate swap. See Part IV, Item 15(a)
“ Financial Statement and Schedules—Note 6 to the Consolidated Financial Statements—Derivative Instruments for details.
(7) Monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule with a balloon payment at maturity.
(8) This loan bears interest only. Interest on the full loan amount has been effectively fixed at 3.71% per annum through use of an interest rate swap. See Part IV, Item 15(a) “ Financial Statement
and Schedules—Note 6 to the Consolidated Financial Statements—Derivative Instruments for details.
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(9) 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 with a balloon payment at maturity.
(10) We own 65% of the ownership interests in the consolidated joint venture that owns the Pinnacle I and II properties. The full amount of the loan is shown.
(11) Represents unamortized premium amount of the non-cash mark-to-market adjustment.
(12) We own 55% of the ownership interest in the consolidated joint venture that owns the Hill7 property. The full amount of the loan is shown.
(13) The maturity date can be extended for an additional two years at a higher interest rate and with principal amortization.
Contractual Obligations
The following table provides information with respect to our commitments at December 31, 2016 for each of the next five years and thereafter, including any
guaranteed or minimum commitments under contractual obligations.
Contractual Obligation
Total
2017
2018
2019
2020
2021
More than 5
years
Payments Due by Period
Principal payments on mortgage loans
Interest payments-fixed rate(1)
Interest payments-variable rate(2)
Capital improvements(3)
Ground leases(4)
$
$
$
$
$
$
$
2,707,839
417,103
155,762
197,639
537,585
4,015,928
2,714
54,117
38,463
197,639
13,989
306,922
101,157
50,542
38,463
—
15,588
205,750
307,886
48,742
34,152
—
15,638
406,418
692,493
48,634
22,861
—
15,638
779,626
3,142
48,485
15,547
—
15,659
82,833
1,600,447
166,583
6,276
—
461,073
2,234,379
Total
_____________
(1) Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed. Reflects our projected interest obligations for fixed rate debts.
(2) Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed. Reflects our projected interest obligations for variable rate debts, including those
$
$
$
$
$
$
$
that are effectively fixed as a result of derivative instruments and in instances where interest is paid based on a LIBOR margin, we used the average December LIBOR and current margin based on
the leverage ratio as of December 31, 2016.
(3) Amount represents capital improvement commitments related to development and redevelopment projects and contractual obligations related to tenant improvements as of December 31, 2016.
(4) Reflects minimum lease payments through the contractual lease expiration date before the impact of extension options. Refer to Part IV, Item 15(a) “ Financial Statement and Schedules—Note 7
to the Consolidated Financial Statements—Future Minimum Rent and Lease Payments” for details of our ground lease agreements.
Off-Balance Sheet Arrangements
At December 31, 2016, we did not have any off-balance sheet arrangements.
Cash Flows
Comparison of the year ended December 31, 2016 to the year ended December 31, 2015 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,
2016
2015
Dollar Change
Percentage Change
$
$
219,607
(524,897 )
334,754
$
174,856
(1,797,699 )
1,658,641
44,751
1,272,802
(1,323,887 )
25.6 %
(70.8 )
(79.8 )
Cash and cash equivalents were $83.0 million and $53.6 million at December 31, 2016 and 2015, respectively.
Operating Activities
Net cash provided by operating activities increased by $44.8 million or 25.6% to $219.6 million for the year ended December 31, 2016 as compared to $174.9 million for
the year ended December 31, 2015. The increase was primarily attributable to an increase in cash NOI, as defined, from our office properties, arising primarily from the EOP
Acquisition and 11601 Wilshire acquisition, increased occupancy and higher rental revenue across our portfolio. In addition, in 2016 we had lower acquisition-related costs.
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Investing Activities
Net cash used in investing activities decreased by $1.27 billion or 70.8% to $524.9 million for the year ended December 31, 2016 as compared to $1.80 billion for year
ended December 31, 2015. The decrease was primarily attributable to less cash used for acquisitions, increased proceeds from sales of real estate investments in the current
year, and cash proceeds from the repayment of notes receivable, partially offset by increased cash used for additions to investment in real estate and contributions to our
unconsolidated entities.
Financing Activities
Net cash provided by financing activities decreased by $1.32 billion or 79.8% to $334.8 million for the year ended December 31, 2016 as compared to $1.66 billion for
the year ended December 31, 2015. The decrease was primarily due to repurchases of common units in our operating partnership in 2016, decrease in proceeds from notes
payable and increase in dividends paid to common stockholders and unitholders, partially offset by an increase in proceeds from sale of common stock. Additionally, in 2015
we redeemed our Series B preferred stock.
Non-GAAP Supplemental Financial Measure: Funds From Operations
We calculate FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts.
The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of
depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. The calculation of FFO includes
the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We believe that
FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors
and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also,
because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs.
However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over
time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results
for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that
FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on
which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide. We use FFO per share to
calculate annual cost bonuses for certain employees.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or
the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could
materially impact our results from operations.
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The following table presents our FFO for the years ended December 31, 2016 and 2015 and a reconciliation of net income (loss) to FFO:
Net income (loss)
Adjustments:
Depreciation and amortization of real estate assets
Gains on sales
FFO attributable to non-controlling interest
Net income attributable to preferred stock and units
FFO to common stockholders and unit holders
Year Ended December 31,
2016
2015
$
$
43,758
$
267,245
(30,389 )
(18,817 )
(636 )
261,161
$
(16,082 )
244,182
(30,471 )
(14,216 )
(12,105 )
171,308
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. For a summary of our outstanding indebtedness, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources.” For a summary of our derivative instruments, refer to Part IV, Item 15(a) “Financial Statement and Schedules—Note 6 to the Consolidated
Financial Statements—Derivative Instruments.”
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.
As of December 31, 2016, we had a $64.5 million mortgage loan secured by our Met Park North property. The full loan is subject to a derivative instrument that swaps
one-month LIBOR to a fixed rate of 2.16% through the loan’s maturity on August 1, 2020. Therefore, the interest rate is effectively hedged at 3.71%.
An additional $300.0 million of our $450.0 million 5-Year Term Loan due April 2020 has been effectively hedged through two interest rate swaps, each with a notional
amount of $150.0 million. Both derivative instruments swap one-month LIBOR, which include a 0.00% floor, to a fixed rate of 1.45% through the loan’s maturity. Therefore, the
interest rate is effectively hedged within a range of 2.75% to 3.65%. The unhedged portion bears interest at a rate equal to one-month LIBOR plus 1.30% to 2.20%, depending
on our leverage ratio.
An additional $350.0 million of the 7-Year Term Loan due April 2022 has been effectively hedged through two interest rate swaps. Both derivative instruments swap
one-month LIBOR, which includes a 0.00% floor, to a fixed rate of 1.76% through the loan’s maturity. Therefore, the interest rate is effectively hedged within a range of 3.36%
to 4.31%.
An additional $125.0 million of the 7-Year Term Loan due November 2022 has been effectively hedged through an interest rate swap. The derivative instrument
swapped one-month LIBOR, which includes a 0.00% floor, to a fixed rate of 1.43% through the loan’s maturity. Therefore, the interest rate is effectively hedged within a range
of 3.03% to 3.98%.
The remaining variable debt rate, which consists of our unsecured revolving credit facility and unsecured term loans, are not subject to derivative instruments.
For sensitivity purposes, with respect to the $300.0 million drawn under our unsecured revolving credit facility, the $450.0 million drawn under our 5-Year Term Loan
due April 2020 ($150.0 million of which is not subject to a derivative instrument), the 175.0 million loan drawn under our 5-Year Term Loan due November 2020, and the $5.0
million on our mortgage loan secured by Sunset Gower Studios/Sunset Bronson Studios, if one-month LIBOR as of December 31, 2016 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 $6.3 million.
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As of December 31, 2016, we had outstanding notes payable of $2.71 billion (before $19.8 million of net deferred financing costs), of which $1.47 billion, or 54.3%, was
variable rate debt. $839.5 million of the variable rate debt is subject to derivative instruments. As of December 31, 2016, the estimated fair value of our fixed rate secured
mortgage loans was $1.21 billion. 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, our 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. 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, 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.
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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 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, 2016. 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, 2016, 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, 2016. 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, 2016, Hudson Pacific Properties, L.P.’s internal control over financial reporting was effective based on those
criteria.
70
Table of Contents
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 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, 2016, 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, 2016.
Item 9B. Other Information
Not applicable.
71
Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 2017. 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 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and 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 2017.
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 2017.
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 2017.
PART IV
Item 15. Exhibits, 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:
72
Table of Contents
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, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, L.P.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Capital for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
F- 1
F- 2
F- 3
F- 4
F- 5
F- 6
F- 7
F- 9
F- 11
F- 12
F- 13
F- 14
F- 15
F- 16
F- 18
F- 57
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.
73
Table of Contents
(3) Exhibits
Exhibit
No.
Description
Form
File No.
Exhibit No.
Filing Date
Incorporated by Reference
3.1
3.2
3.3
3.4
3.5
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
Articles of Amendment and Restatement of Hudson Pacific Properties, Inc.
Form of Articles Supplementary of Hudson Pacific Properties, Inc.
Second Amended and Restated Bylaws of Hudson Pacific Properties, Inc.
Fourth Amended and Restated Agreement of Limited Partnership of Hudson Pacific Properties, L.P. dated
as of December 17, 2015.
Certificate of Limited Partnership of Hudson Pacific Properties, L.P.
Form of Certificate of Common Stock of Hudson Pacific Properties, Inc.
Form of Certificate of Series B Preferred Stock of Hudson Pacific Properties, Inc.
Registration Rights Agreement among Hudson Pacific Properties, Inc. and the persons named therein.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Victor J. Coleman.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Mark
T. Lammas.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Christopher Barton.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Dale
Shimoda.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Theodore R. Antenucci.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Richard B. Fried.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Jonathan M. Glaser.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and Mark
D. Linehan.
Indemnification Agreement, dated June 29, 2010, by and between Hudson Pacific Properties, Inc. and
Robert M. Moran, Jr.
Indemnification Agreement, dated June 29, 1010, by and between Hudson Pacific Properties, Inc. and
Barry A. Porter.
Restricted Stock Award Grant Notice and Restricted Stock Award Agreement.*
Hudson Pacific Properties, Inc. Director Stock Plan.*
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.
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.
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.
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.
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.
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.
Tax Protection Agreement between Hudson Pacific Properties, L.P. and the persons named therein, dated
June 29, 2010.
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.
Amended and Restated First Modification Agreement between Sunset Bronson Entertainment Properties,
LLC and Wells Fargo Bank, N.A. dated as of June 20, 2010.
74
S-11/A
S-11/A
8-K
10-K
333-164916
333-170751
001-34789
001-34789
10-Q
001-34789
S-11/A
S-11/A
S-11
S-11
333-164916
333-170751
333-170751
333-170751
3.1
3.3
3.1
10.1
3.4
4.1
4.2
10.2
10.3
May 12, 2010
December 6, 2010
January 12, 2015
February 26, 2016
November 4, 2016
June 14, 2010
December 6, 2010
November 22, 2010
November 22, 2010
S-11
333-170751
10.5
November 22, 2010
S-11
333-170751
10.6
November 22, 2010
S-11
333-170751
10.7
November 22, 2010
S-11
333-170751
10.8
November 22, 2010
S-11
333-170751
10.1
November 22, 2010
S-11
333-170751
10.11
November 22, 2010
S-11
333-170751
10.12
November 22, 2010
S-11
333-170751
10.13
November 22, 2010
S-11
333-170751
10.14
November 22, 2010
S-11/A
S-11/A
S-11/A
333-164916
333-170751
333-164916
10.5
10.17
10.11
June 14, 2010
December 6, 2010
April 9, 2010
S-11/A
333-164916
10.12
April 9, 2010
S-11/A
333-164916
10.13
April 9, 2010
S-11/A
333-164916
10.14
April 9, 2010
S-11/A
333-164916
10.16
April 9, 2010
S-11/A
333-164916
10.17
April 9, 2010
8-K
001-34789
10.3
July 1, 2010
S-11/A
333-164916
10.2
June 11, 2010
8-K
001-34789
10.4
July 1, 2010
Table of Contents
Exhibit
No.
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Description
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.
Conditional Consent Agreement between GLB Encino, LLC, as Borrower, and SunAmerica Life Insurance
Company, as Lender, dated as of June 10, 2010.
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.
Amended and Restated Promissory Note by GLB Encino, as Maker, to SunAmerica Life Insurance
Company, as Holder, dated as of January 26, 2007.
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.
Loan and Security Agreement between Glenborough Tierrasanta, LLC, as Borrower, and German American
Capital Corporation, as Lender, dated as of November 28, 2006.
Note by Glenborough Tierrasanta, LLC, as Borrower, in favor of German American Capital Corporation, as
Lender, dated as of November 28, 2006.
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.
First Amendment to Purchase and Sale Agreement, dated October 1, 2010, by and between ECI
Washington LLC and Hudson Pacific Properties, L.P.
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.
Contract for Sale dated as of December 15, 2010 by and between Hudson 1455 Market, LLC and Bank of
America, National Association.
Contribution Agreement by and between BCSP IV U.S. Investments, L.P. and Hudson Pacific Properties,
L.P., dated as of December 15, 2010.
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.
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.
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.
Loan Agreement by and between Hudson Rincon Center, LLC, as Borrower, and JPMorgan Chase Bank,
National Association, as Lender, dated April 29, 2011.
2012 Outperformance Award Agreement.*
Limited Liability Company Agreement of Hudson MC Partners, LLC, dated as of November 8, 2012.
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.
Loan Agreement dated as of November 8, 2012 between P1 Hudson MC Partners, LLC, as Borrower and
Jefferies Loancore LLC, as Lender.
10.43
2013 Outperformance Award Agreement.*
10.44
10.45
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.
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.
75
Incorporated by Reference
Form
File No.
Exhibit No.
S-11/A
333-164916
10.23
Filing Date
June 22, 2010
S-11/A
333-164916
10.24
June 22, 2010
S-11/A
333-164916
10.25
June 22, 2010
S-11/A
333-164916
10.26
June 22, 2010
S-11/A
333-164916
10.27
June 22, 2010
S-11/A
333-164916
10.28
June 22, 2010
S-11/A
333-164916
10.29
June 22, 2010
8-K
001-34789
10.5
July 1, 2010
S-11/A
333-170751
10.45
December 6, 2010
8-K
001-34789
10.1
February 15, 2011
8-K
001-34789
10.1
December 21, 2010
S-11
333-173487
10.48
April 14, 2011
S-11
333-173487
10.49
April 14, 2011
8-K
001-34789
10.1
April 5, 2011
8-K
001-34789
4.1
May 4, 2011
8-K
001-34789
10.1
May 4, 2011
8-K
10-Q
10-Q
001-34789
001-34789
001-34789
10.1
10.58
10.59
January 6, 2012
November 9, 2012
November 9, 2012
10-Q
001-34789
10.6
November 9, 2012
8-K
8-K
001-34789
001-34789
10.1
10.1
January 7, 2013
July 1, 2013
10-Q
001-34789
10.66
November 7, 2013
Table of Contents
Exhibit
No.
Description
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
Supplemental Federal Income Tax Considerations.
2014 Outperformance Award Agreement.*
Addendum to Outperformance Agreement.*
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.
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.
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.
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.
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.
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.
Indemnification Agreement, dated December 15, 2014, by and between Hudson Pacific Properties, Inc. and
Robert L. Harris II.
2015 Outperformance Award Agreement.*
First Amended and Restated Limited Partnership Agreement of Hudson 1455 Market, L.P.
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan (2012
Outperformance program) Restricted Stock Unit Award Agreement.
Addendum to 2014 Outperformance Award Agreement.
Hudson Pacific Properties, Inc. Revised Non-Employee Director Compensation Program.
Loan Agreement dated as of October 9, 2015 between Hudson Element LA, LLC, as Borrower and Cantor
Commercial Real Estate Lending, L.P. and Goldman Sachs Mortgage Company, collectively, as Lender.
Note Purchase Agreement, dated as of November 16, 2015, by and among Hudson Pacific Properties, L.P.
and the purchasers named therein.
Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of November 17, 2015, by
and among Hudson Pacific Properties, L.P., as borrower, each of the financial institutions a signatory
thereto, as lenders, and Wells Fargo Bank, National Association, as administrative agent.
Amendment No. 2 to Term Loan Credit Agreement, dated as of November 17, 2015, by and among
Hudson Pacific Properties, L.P., as borrower, each of the financial institutions a signatory thereto, as
lenders, and Wells Fargo Bank, National Association, as administrative agent.
Amended and Restated Employment Agreement between Hudson Pacific Properties, Inc. and Victor J.
Coleman, dated January 1, 2016.*
Amended and Restated Employment Agreement between Hudson Pacific Properties, Inc. and Mark T.
Lammas, dated January 1, 2016.*
Amended and Restated Employment Agreement between Hudson Pacific Properties, Inc. and Christopher
Barton, dated January 1, 2016.*
Amended and Restated Employment Agreement between Hudson Pacific Properties, Inc. and Alex
Vouvalides, dated January 1, 2016.*
Restricted Stock Award Grant Notice and Restricted Stock Award Agreement.*
Employment Agreement between Hudson Pacific Properties, Inc. and Joshua Hatfield*
Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement (2013 Outperformance
Program)*
2016 Outperformance Award Agreement (REIT Shares)*
2016 Outperformance Program OPP Unit Agreement (LTIP Units)*
Note Purchase Agreement, dated as of July 6, 2016, by and among Hudson Pacific Properties, L.P. and the
purchasers named therein
76
Incorporated by Reference
Form
8-K
8-K
10-K
10-Q
File No.
Exhibit No.
Filing Date
001-34789
001-34789
001-34789
001-34789
99.1
10.1
10.76
November 22, 2013
January 3, 2014
March 3, 2014
August 7, 2014
10-Q
001-34789
10.77
August 7, 2014
10-Q
001-34789
10.78
August 7, 2014
10-Q
001-34789
10.79
August 7, 2014
8-K
001-34789
10.1
December 11, 2014
8-K
001-34789
10.2
December 11, 2014
10-K
001-34789
10.84
March 2, 2015
8-K
8-K
8-K
8-K
10-Q
10-Q
8-K
8-K
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
10.1
10.1
10.1
10.2
10.91
10.93
January 2, 2015
January 12, 2015
March 12, 2015
March 12, 2015
August 10, 2015
November 6, 2015
001-34789
10.2
November 20, 2015
001-34789
10.3
November 20, 2015
8-K
001-34789
10.4
November 20, 2015
8-K
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
10-Q
001-34789
10.2
December 21, 2015
001-34789
10.3
December 21, 2015
001-34789
10.4
December 21, 2015
001-34789
10.5
December 21, 2015
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
10.6
10.95
10.96
10.1
10.2
10.8
December 21, 2015
February 26,2016
February 26,2016
March 21, 2016
March 21, 2016
August 4, 2016
Table of Contents
Exhibit
No.
10.75
10.76
10.77
12.1
21.1
23.1
31.1
31.2
31.3
31.4
32.1
32.2
Description
Form
File No.
Exhibit No.
Filing Date
Incorporated by Reference
8-K
8-K
001-34789
001-34789
10.1
10.2
February 10, 2017
February 10, 2017
Second Amendment to Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive
Award Plan*
2017 Outperformance Award Agreement (REIT Shares)*
2017 Outperformance Award Agreement (LTIP Units)*
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
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 for
Hudson Pacific Properties, Inc.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
Hudson Pacific Properties, Inc.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
Hudson Pacific Properties, L.P.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Hudson
Pacific Properties, L.P.
Certifications by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for Hudson Pacific Properties, Inc.
Certifications by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for Hudson Pacific Properties, L.P.
99.1
Certificate of Correction
8-K
001-34789
99.1
January 23, 2012
101
*
**
The following financial information from Hudson Pacific Properties, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2016 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 Statements of Equity, (v) Consolidated Statements of
Cash Flows and (vi) Notes to Consolidated Financial Statements **
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.
77
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.
February 17, 2017
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/ THEODORE R. ANTENUCCI
Theodore R. Antenucci
/S/ FRANK COHEN
Frank Cohen
/S/ RICHARD B. FRIED
Richard B. Fried
/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/ MICHAEL NASH
Michael Nash
/S/ BARRY A. PORTER
Barry A. Porter
Title
Chief Executive Officer, President and
Chairman of the Board of Directors (Principal Executive Officer)
Chief Operating Officer, Chief Financial Officer and Treasurer (Principal
Financial Officer)
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
78
Date
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
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.
February 17, 2017
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/ THEODORE R. ANTENUCCI
Theodore R. Antenucci
/S/ FRANK COHEN
Frank Cohen
/S/ RICHARD B. FRIED
Richard B. Fried
/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/ MICHAEL NASH
Michael Nash
/S/ BARRY A. PORTER
Barry A. Porter
Title
Chief Executive Officer, President and
Chairman of the Board of Directors (Principal Executive Officer)
Chief Operating Officer, Chief Financial Officer and Treasurer (Principal
Financial Officer)
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
79
Date
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
February 17, 2017
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, 2016. 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, 2016, 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, 2016, 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, 2016.
/S/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer, President and
Chairman of the Board of Directors
/S/ MARK T. LAMMAS
Mark T. Lammas
Chief Operating Officer, Chief Financial Officer and Treasurer
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, 2016, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 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, 2016, 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, 2016 and 2015, 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, 2016, and our report dated February 17, 2017 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 17, 2017
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, 2016 and 2015, 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, 2016. Our
audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hudson Pacific Properties, Inc.
at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 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 Company changed its method for accounting for property acquisitions effective October 1, 2016
when the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 17, 2017 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 17, 2017
F- 3
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share 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, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Derivative assets
Goodwill
Prepaid expenses and other assets, net
Investment in unconsolidated entities
Assets associated with real estate held for sale
TOTAL ASSETS
LIABILITIES AND EQUITY
Notes payable, net
Accounts payable and accrued liabilities
Lease intangible liabilities, net
Security deposits
Prepaid rent
Derivative liabilities
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:
Common stock, $0.01 par value, 490,000,000 authorized, 136,492,235 shares and 89,153,780 shares outstanding at December 31, 2016
and 2015, respectively.
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Hudson Pacific Properties, Inc. stockholders’ equity
Non-controlling interest—members in consolidated entities
Non-controlling interest—units in the operating partnership
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
F- 4
December 31,
2016
December 31,
2015
$
$
$
$
$
1,281,809
4,502,235
373,778
4,276
308,203
6,470,301
(419,368 )
6,050,933
83,015
25,177
6,852
—
87,281
310,062
5,935
8,754
27,153
37,228
36,608
6,678,998
2,688,010
120,572
80,130
31,495
40,755
1,303
3,806
2,966,071
10,177
$
$
1,364
3,109,394
9,496
(16,971 )
3,103,283
304,608
294,859
3,702,750
6,678,998
$
1,244,921
3,907,807
288,146
9,578
173,007
5,623,459
(263,859 )
5,359,600
53,551
18,010
20,996
28,684
58,783
312,930
2,061
8,754
27,156
—
363,510
6,254,035
2,260,716
81,658
94,395
20,363
38,104
2,010
17,575
2,514,821
10,177
891
1,710,979
(1,081 )
(44,955 )
1,665,834
262,625
1,800,578
3,729,037
6,254,035
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share 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 loss on ineffective portion of derivative instruments
Acquisition-related expenses
Other (income) expense
TOTAL OTHER EXPENSES
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE GAINS ON SALES
Gains on sales
INCOME (LOSS) FROM CONTINUING OPERATIONS
Loss from discontinued operations
NET INCOME (LOSS)
Net income attributable to preferred stock
Original issuance costs of redeemed Series B preferred stock (note 11)
Net income attributable to participating securities
Net income 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) attributable to common stockholders—basic
Net income (loss) attributable to common stockholders—diluted
Weighted average shares of common stock outstanding—basic
Weighted average shares of common stock outstanding—diluted
Year Ended December 31,
2016
2015
2014
$
$
486,956
84,386
21,894
593,236
26,837
1,884
17,380
302
46,403
639,639
202,935
25,810
52,400
269,087
550,232
89,407
394,543
66,235
20,940
481,718
23,027
943
14,849
313
39,132
520,850
166,131
23,726
38,534
245,071
473,462
47,388
76,044
(260 )
1,436
376
(1,558 )
76,038
13,369
30,389
43,758
—
43,758
(636 )
—
(766 )
(9,290 )
(5,848 )
27,218
$
50,667
(124 )
—
43,336
62
93,941
(46,553 )
30,471
(16,082 )
—
(16,082 )
(12,105 )
(5,970 )
(356 )
(3,853 )
21,969
(16,397 ) $
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 )
23,522
(12,785 )
—
(274 )
(149 )
(359 )
9,955
0.26
$
0.25
$
(0.19 ) $
(0.19 ) $
0.15
0.15
106,188,902
110,369,055
85,927,216
85,927,216
65,792,447
66,509,447
$
$
$
$
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)
Year Ended December 31,
2016
2015
2014
Net income (loss)
Other comprehensive income (loss): change in fair value of derivative instruments
Comprehensive income (loss)
Comprehensive income attributable to preferred stock and units
Comprehensive income attributable to redemption of Series B preferred stock
Comprehensive income attributable to participating securities
Comprehensive income attributable to non-controlling interest in consolidated entities
Comprehensive (income) loss attributable to common units in the operating partnership
$
43,758
5,942
49,700
(636 )
—
(766 )
(9,290 )
(1,213 )
$
(16,082 ) $
2,597
(13,485 )
(12,105 )
(5,970 )
(356 )
(3,853 )
20,734
(15,035 ) $
23,522
(1,499 )
22,023
(12,785 )
—
(274 )
(149 )
(306 )
8,509
Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. common stockholders
$
37,795
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
Table of Contents
Balance, December 31,
2013
Distributions
Proceeds from sale of
common stock, net of
underwriters’ discount and
transaction costs
Issuance of unrestricted
stock
Shares withheld to satisfy
tax withholding
Declared dividend
Amortization of stock-
based compensation
Net income
Change in fair value of
derivatives
Balance, December 31,
2014
Contributions
Distributions
Proceeds from sale of
common stock, net of
underwriters’ discount and
transaction costs
Redemption of Series B
Preferred Stock
Issuance of common units
for acquisition properties
Issuance of unrestricted
stock
Issuance of restricted stock
Shares withheld to satisfy
tax withholding
Declared dividend
Amortization of stock-
based compensation
Net income (loss)
Change in fair value of
derivatives
Exchange of Non-
controlling Interests —
common units in the
operating partnership for
common stock
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share data)
Hudson Pacific Properties, Inc. Stockholders’ Equity
Common
Shares
Stock
Amount
Series B
Cumulative
Redeemable
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Compreh-ensive
Income (Loss)
Non-
controlling
Interests —
Common units
in the
Operating
Partnership
Non-controlling
Interest —
Members in
Consolidated
Entities
Total Equity
57,230,199
$
572
$
145,000
$
903,984
$
(45,113 ) $
(997 ) $
53,737
$
45,683
$
1,102,866
—
9,563,500
6,922
(2,805 )
—
—
—
—
66,797,816
—
—
12,650,000
—
—
8,820,482
36,223
(85,469 )
—
—
—
—
934,728
—
96
—
—
—
—
—
—
668
—
—
127
—
—
87
—
—
—
—
—
—
9
—
—
—
—
—
195,773
—
(3,129 )
(12,144 )
(33,774 )
—
7,979
—
—
—
—
—
—
—
—
—
—
—
—
12,144
—
—
—
10,229
—
—
(1,446 )
—
—
—
—
(1,192 )
—
359
(53 )
(2,842 )
—
(2,842 )
195,869
—
—
—
—
149
—
—
(3,129 )
(47,110 )
7,979
22,881
(1,499 )
145,000
1,070,833
(34,884 )
(2,443 )
52,851
42,990
1,275,015
—
—
—
—
—
380,493
(145,000 )
—
—
—
—
—
—
285,358
—
(5,128 )
(11,469 )
(50,244 )
—
8,832
11,469
—
—
—
—
20,835
—
—
—
—
—
—
—
—
—
—
(10,071 )
—
—
—
—
—
—
—
—
—
—
—
—
—
1,362
—
—
—
—
1,814,936
—
—
—
(25,631 )
—
(21,969 )
1,235
217,795
(2,013 )
—
217,795
(2,013 )
380,620
—
—
—
—
—
—
—
3,853
—
(145,000 )
1,814,936
285,445
—
(5,128 )
(87,344 )
8,832
(16,718 )
2,597
—
(20,844 )
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY—(Continued)
(in thousands, except share data)
Hudson Pacific Properties, Inc. Stockholders’ Equity
Balance, December 31,
2015
Contributions
Distributions
Proceeds from sale of
common stock, net of
underwriters’ discount and
transaction costs
Issuance of unrestricted
stock
Shares withheld to satisfy
tax withholding
Declared dividend
Amortization of stock-
based compensation
Net income
Change in fair value of
derivatives
Redemption of common
units in the operating
partnership
Balance, December 31,
2016
Common
Shares
89,153,780
—
—
47,010,695
590,520
(262,760)
—
—
—
—
—
Series B
Cumulative
Redeemable
Preferred Stock
Stock
Amount
891
—
—
470
6
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Additional
Paid-in
Capital
1,710,979
—
—
1,449,111
—
(8,424)
(90,005)
13,609
Accumulated
Deficit
Accumulated
Other
Compreh-ensive
Income (Loss)
Non-
controlling
Interests —
Common units
in the
Operating
Partnership
Non-controlling
Interest —
Members in
Consolidated
Entities
Total Equity
(44,955)
(1,081)
1,800,578
262,625
3,729,037
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(27,814)
1,045
5,848
(4,635)
33,996
(1,303)
33,996
(1,303)
—
1,449,581
—
—
—
—
6
(8,427)
(117,819)
14,654
9,290
—
43,122
5,942
—
—
27,984
—
—
10,577
34,124
—
—
(1,480,163)
—
(1,446,039)
136,492,235
$
1,364
$
—
$
3,109,394
$
(16,971) $
9,496
$
294,859
$
304,608
$
3,702,750
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 rents
Straight-line rent expenses
Amortization of above- and below-market leases, net
Amortization of above- and below-market ground lease, net
Amortization of lease incentive costs
Bad debt (recovery) expense
Amortization of discount and net origination fees on purchased and originated loans
Unrealized loss on ineffective portion of derivative instruments
Gains from sales
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
Contributions to unconsolidated entities
Proceeds from repayment of notes receivable
Acquisition of notes receivable
Proceeds from sales of real estate investments
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, net
Payments for redemption of common units in the operating partnership
Redemption of Series B preferred stock
Dividends paid to common stock and unitholders
Dividends paid to preferred stock and unitholders
Redemption of 6.25% Series A cumulative redeemable preferred units
Contributions from non-controlling member in consolidated real estate entities
Distributions to non-controlling member in consolidated real estate entities
Payments to satisfy tax withholding
Payments of loan costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of period
Cash and cash equivalents — end of period
Year Ended December 31,
2016
2015
2014
$
43,758
$
(16,082 ) $
23,522
269,087
4,464
14,144
(29,079 )
1,023
(19,734 )
2,160
1,388
(521 )
(208 )
1,436
(30,389 )
(7,167 )
15,088
(43,476 )
(7,312 )
(4,426 )
10,054
(683 )
219,607
(258,718 )
(630,145 )
(37,228 )
28,892
—
372,302
(524,897 )
1,318,000
(888,607 )
1,449,581
(1,446,039 )
—
(117,819 )
(636 )
—
33,996
(1,303 )
(8,427 )
(3,992 )
245,071
4,746
8,421
(29,392 )
408
(22,073 )
1,642
581
170
(416 )
—
(30,471 )
(927 )
(5,734 )
(28,980 )
(17,032 )
18,342
15,351
31,231
174,856
(170,590 )
(1,804,597 )
—
—
—
177,488
(1,797,699 )
2,234,687
(913,694 )
380,620
—
(145,000 )
(75,875 )
(12,071 )
—
217,795
(2,013 )
(5,128 )
(20,680 )
334,754
29,464
53,551
83,015
$
1,658,641
35,798
17,753
53,551
$
$
72,216
949
7,559
(13,362 )
—
(5,635 )
248
425
(97 )
(156 )
—
(5,538 )
(333 )
(7,375 )
(12,266 )
(1,602 )
3,114
485
1,014
63,168
(123,298 )
(113,580 )
—
—
(28,112 )
18,629
(246,361 )
448,972
(417,508 )
195,869
—
—
(34,966 )
(12,785 )
(298 )
—
(2,842 )
(3,129 )
(2,723 )
170,590
(12,603 )
30,356
17,753
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 disclosure of cash flow information
Cash paid for interest, net of amounts capitalized
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable and accrued liabilities for investment in property
Issuance of common stock in connection with property acquisition (note 3)
Additional paid-in capital in connection with property acquisition (note 3)
Assumption of other assets and liabilities in connection with operating and development property acquisitions, net
Non-controlling common units in the Operating Partnership in connection with property acquisition (note 3)
Year Ended December 31,
2016
2015
2014
$
$
$
$
$
$
82,491
$
50,208
$
32,107
(37,364) $
(27,972) $
(4,720)
—
$
—
$
—
$
—
$
87
$
285,358
$
—
$
1,814,936
$
—
—
(449)
—
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, 2016 and 2015,
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,
2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the
Operating Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 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 Company changed its method for accounting for property acquisitions effective October 1, 2016
when the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 17, 2017
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 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, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Derivative assets
Goodwill
Prepaid expenses and other assets, net
Investment in unconsolidated entities
Assets associated with real estate held for sale
TOTAL ASSETS
LIABILITIES
Notes payable, net
Accounts payable and accrued liabilities
Lease intangible liabilities, net
Security deposits
Prepaid rent
Derivative liabilities
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:
Common units, 145,942,855 and 145,450,095 issued and outstanding at December 31, 2016 and 2015, respectively
Total Hudson Pacific Properties, L.P. capital
Non-controlling interest—members in consolidated entities
TOTAL CAPITAL
TOTAL LIABILITIES AND CAPITAL
December 31,
2016
December 31,
2015
$
$
$
$
$
1,281,809
4,502,235
373,778
4,276
308,203
6,470,301
(419,368)
6,050,933
83,015
25,177
6,852
—
87,281
310,062
5,935
8,754
27,153
37,228
36,608
6,678,998
2,688,010
120,572
80,130
31,495
40,755
1,303
3,806
2,966,071
10,177
$
$
3,398,142
3,398,142
304,608
3,702,750
6,678,998
$
1,244,921
3,907,807
288,146
9,578
173,007
5,623,459
(263,859)
5,359,600
53,551
18,010
20,996
28,684
58,783
312,930
2,061
8,754
27,156
—
363,510
6,254,035
2,260,716
81,658
94,395
20,363
38,104
2,010
17,575
2,514,821
10,177
3,466,412
3,466,412
262,625
3,729,037
6,254,035
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 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 loss on ineffective portion of derivative instruments
Acquisition-related expenses
Other (income) expense
TOTAL OTHER EXPENSES
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE GAINS ON SALES
Gains on sales
INCOME (LOSS) FROM CONTINUING OPERATIONS
Loss from discontinued operations
NET INCOME (LOSS)
Net income attributable to non-controlling interest in consolidated entities
Net income (loss) attributable to Hudson Pacific Properties, L.P.
Series A and B preferred units distributions
Original issuance costs of redeemed Series B preferred units (note 11)
Total preferred distributions
Net income attributable to participating securities
Net income (loss) available to common unitholders
Basic and diluted per unit amounts:
Net income (loss) attributable to common unitholders—basic
Net income (loss) attributable to common unitholders—diluted
Weighted average shares of common units outstanding—basic
Weighted average shares of common units outstanding—diluted
Year Ended December 31,
2016
2015
2014
$
486,956
84,386
21,894
593,236
26,837
1,884
17,380
302
46,403
639,639
202,935
25,810
52,400
269,087
550,232
89,407
76,044
(260)
1,436
376
(1,558)
76,038
13,369
30,389
43,758
—
43,758
(9,290)
34,468
(636)
—
(636)
(766)
33,066
$
$
394,543
66,235
20,940
481,718
23,027
943
14,849
313
39,132
520,850
166,131
23,726
38,534
245,071
473,462
47,388
50,667
(124)
—
43,336
62
93,941
(46,553)
30,471
(16,082)
—
(16,082)
(3,853)
(19,935)
(12,105)
(5,970)
(18,075)
(356)
(38,366) $
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)
23,522
(149)
23,373
(12,785)
—
(12,785)
(274)
10,314
0.23
$
0.23
$
(0.30) $
(0.30) $
0.15
0.15
145,595,246
128,948,077
146,739,246
128,948,077
68,175,010
68,721,339
$
$
$
$
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): change in fair value of derivative instruments
Comprehensive income (loss)
Comprehensive income attributable to Series A and B preferred units
Comprehensive income attributable to original issuance costs related to redeemed Series B preferred units
Comprehensive income attributable to participating securities
Comprehensive income attributable to non-controlling interest in consolidated entities
Comprehensive income (loss) attributable to common unitholders
$
$
Year Ended December 31,
2016
2015
2014
$
(16,082) $
43,758
5,942
49,700
(636)
—
(766)
(9,290)
39,008
$
2,597
(13,485)
(12,105)
(5,970)
(356)
(3,853)
(35,769) $
23,522
(1,499)
22,023
(12,785)
—
(274)
(149)
8,815
The accompanying notes are an integral part of these consolidated financial statements.
F- 14
Table of Contents
Balance at December 31, 2013
Distributions
Proceeds from sale of common units, net
of underwriters’ discount and transaction
costs
Issuance of unrestricted units
Units repurchased
Declared distributions
Amortization of unit-based compensation
Net income
Change in fair value of derivative
instruments
Balance, December 31, 2014
Contributions
Distributions
Proceeds from sale of common units, net
of underwriters’ discount and transaction
costs
Issuance of unrestricted units
Issuance of restricted units
Units repurchased
Declared distributions
Amortization of unit-based compensation
Net income (loss)
Change in fair value of derivative
instruments
Redemption of Series B Preferred Stock
(145,000)
Balance, December 31, 2015
Contributions
Distributions
Proceeds from sale of common units, net
of underwriters’ discount and transaction
costs
Issuance of unrestricted units
Units withheld to satisfy tax withholding
Declared distributions
Amortization of unit-based compensation
Net income
Change in fair value of derivative
instruments
Redemption of common units
Balance, December 31, 2016
—
—
—
—
—
—
—
—
—
—
—
—
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(in thousands, except unit data)
Partners’ Capital
Preferred Units
Number of Common
Units
Common Units
Total
Partners’ Capital
Non-controlling
Interest —
Members in
Consolidated Entities
Total Capital
145,000
—
—
—
—
(12,144)
—
12,144
—
145,000
—
—
—
—
—
—
(11,469)
—
11,469
—
59,612,762 $
—
9,563,500
912,183 $
—
195,869
1,057,183 $
—
195,869
45,683 $
(2,842)
—
6,922
(2,805)
—
—
—
—
69,180,379
—
—
12,650,000
63,668,962
36,223
(85,469)
—
—
—
—
—
145,450,095
—
47,010,695
590,520
(262,760)
—
—
—
—
—
(3,129)
(34,966)
7,979
10,588
(1,499)
1,087,025
—
—
380,620
2,100,381
—
(5,128)
(75,875)
8,832
(32,040)
2,597
—
3,466,412
—
—
1,449,581
6
(8,427)
(117,819)
14,654
33,832
5,942
—
(3,129)
(47,110)
7,979
22,732
(1,499)
1,232,025
—
—
380,620
2,100,381
—
(5,128)
(87,344)
8,832
(20,571)
2,597
(145,000)
3,466,412
—
—
1,449,581
6
(8,427)
(117,819)
14,654
33,832
5,942
—
—
—
—
149
—
42,990
217,795
(2,013)
—
—
—
—
—
—
3,853
—
—
262,625
33,996
(1,303)
—
—
—
—
—
9,290
—
1,102,866
(2,842)
195,869
—
(3,129)
(47,110)
7,979
22,881
(1,499)
1,275,015
217,795
(2,013)
380,620
2,100,381
—
(5,128)
(87,344)
8,832
(16,718)
2,597
(145,000)
3,729,037
33,996
(1,303)
1,449,581
6
(8,427)
(117,819)
14,654
43,122
5,942
(46,845,695)
(1,446,039)
(1,446,039)
145,942,855 $
3,398,142 $
3,398,142 $
—
304,608 $
(1,446,039)
3,702,750
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 unit-based compensation
Straight-line rents
Straight-line rent expenses
Amortization of above- and below-market leases, net
Amortization of above- and below-market ground lease, net
Amortization of lease incentive costs
Bad debt (recovery) expense
Amortization of discount and net origination fees on purchased and originated loans
Unrealized loss on ineffective portion of derivative instruments
Gains from sales
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
Contributions to unconsolidated entities
Proceeds from repayment of notes receivable
Acquisition of notes receivable
Proceeds from sales of real estate investments
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, net
Payments for redemption of common units
Redemption of Series B preferred units
Distributions paid to common unitholders
Distributions paid to preferred unitholders
Redemption of 6.25% Series A cumulative redeemable preferred units
Contributions from non-controlling member in consolidated real estate entities
Distributions to non-controlling member in consolidated real estate entities
Payments to satisfy tax withholding
Payments of loan costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of period
Cash and cash equivalents — end of period
Year Ended December 31,
2016
2015
2014
$
43,758
$
(16,082 ) $
23,522
269,087
4,464
14,144
(29,079 )
1,023
(19,734 )
2,160
1,388
(521 )
(208 )
1,436
(30,389 )
(7,167 )
15,088
(43,476 )
(7,312 )
(4,426 )
10,054
(683 )
219,607
(258,718 )
(630,145 )
(37,228 )
28,892
—
372,302
(524,897 )
1,318,000
(888,607 )
1,449,581
(1,446,039 )
—
(117,819 )
(636 )
—
33,996
(1,303 )
(8,427 )
(3,992 )
245,071
4,746
8,421
(29,392 )
408
(22,073 )
1,642
581
170
(416 )
—
(30,471 )
(927 )
(5,734 )
(28,980 )
(17,032 )
18,342
15,351
31,231
174,856
(170,590 )
(1,804,597 )
—
—
—
177,488
(1,797,699 )
2,234,687
(913,694 )
380,620
—
(145,000 )
(75,875 )
(12,071 )
—
217,795
(2,013 )
(5,128 )
(20,680 )
334,754
29,464
53,551
83,015
$
1,658,641
35,798
17,753
53,551
$
$
72,216
949
7,559
(13,362 )
—
(5,635 )
248
425
(97 )
(156 )
—
(5,538 )
(333 )
(7,375 )
(12,266 )
(1,602 )
3,114
485
1,014
63,168
(123,298 )
(113,580 )
—
—
(28,112 )
18,629
(246,361 )
448,972
(417,508 )
195,869
—
—
(34,966 )
(12,785 )
(298 )
—
(2,842 )
(3,129 )
(2,723 )
170,590
(12,603 )
30,356
17,753
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 disclosure of cash flow 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 other (assets) and liabilities in connection with property acquisitions, net (note 3)
Common units in the operating partnership in connection with property acquisition (note 3)
Year Ended December 31,
2016
2015
2014
$
$
$
$
82,491
$
50,208
$
32,107
(37,364) $
(27,972) $
—
$
—
$
—
$
2,100,381
$
(4,720)
(449)
—
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
(Tabular amounts in thousands, except square footage and share data)
Hudson Pacific Properties, Inc. is a Maryland corporation formed on November 9, 2009 that did not have any meaningful operating activity until the consummation of
its initial public offering and the related acquisition of its 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, Hudson Pacific Properties, Inc. has been a fully integrated, self-administered and self-managed real estate
investment trust (“REIT”). Through its controlling interest in the operating partnership and its subsidiaries, Hudson Pacific Properties, Inc. owns, manages, leases, acquires
and develops real estate, consisting primarily of office and media and entertainment properties. Unless otherwise indicated or unless the context requires otherwise, all
references in these financial statements to the “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 the “our operating partnership” or “the operating partnership” refer to
Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.
On April 1, 2015, the Company completed the acquisition of the EOP Northern California Portfolio (“EOP Acquisition”) from Blackstone Real Estate Partners V and VI
(“Blackstone”). The EOP Acquisition consisted 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 North San Jose submarkets. The total consideration paid for the EOP Acquisition before certain
credits, prorations and closing costs included a cash payment of $1.75 billion and an aggregate of 63,474,791 shares of common stock of Hudson Pacific Properties, Inc. and
common units in the operating partnership. Following a common stock offering and common unit repurchase on January 10, 2017, Blackstone no longer holds an ownership
interest in the Company or the operating partnership.
As of December 31, 2016, the Company owned a portfolio of 54 office properties and two media and entertainment properties. These properties are located
throughout Northern and Southern California and the Pacific Northwest.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company and the operating partnership are prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”). Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent
registered public accounting firm’s audit of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight
Board (“PCAOB”).
Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current year presentation. Specifically, in the
Consolidated Balance Sheets for the prior period, certain amounts have been reclassified to held for sale. These amounts are related to Patrick Henry Drive, One Bay Plaza and
12655 Jefferson, which were sold in 2016, and to 222 Kearny Street, which was determined to be held for sale as of December 31, 2016.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company, the operating partnership and all wholly owned subsidiaries and
variable interest entities (“VIEs”), of which the Company is the primary beneficiary. The consolidated financial statements of the operating partnership include the accounts of
the operating partnership, and all wholly owned subsidiaries and VIEs of which the operating partnership is the primary beneficiary. All intercompany balances and
transactions have been eliminated in the consolidated financial statements.
During the first quarter of 2016, the Company adopted ASU 2015-02, Consolidation (“Topic 810”): Amendments to the Consolidation Analysis, to amend the
accounting guidance for consolidation. The standard simplifies the current guidance for consolidation and reduces the number of consolidation models through the
elimination of the indefinite deferral of the previous guidance under ASC 810. Additionally, the standard places more emphasis on risk of loss when determining a controlling
financial interest. The Company consolidates all entities that the Company controls through either majority ownership or voting rights. In addition, the Company consolidates
all VIEs of which the Company is considered the primary
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)
beneficiary. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary
beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the right to receive
benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. As a result of the adoption, the Company concluded that two of the
Company’s joint ventures and its operating partnership met the definition of a VIE. The Company is the primary beneficiary of these VIEs and continued to consolidate these
entities. Substantially all of the assets and liabilities of the Company are related to these VIEs.
During the second quarter of 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. This joint venture met
the definition of a VIE, however the Company is not the primary beneficiary and is not consolidating the joint venture, but due to its significant influence over this entity, the
Company accounts for it using the equity method of accounting.
During the third quarter of 2016, the Company entered into an agreement with an unaffiliated third party related to the land on which its 11601 Wilshire property is
located. The agreement does not meet the definition of a VIE and the Company is not consolidating the land interest. The Company accounts for the interest in the land using
the equity method of accounting. On December 27, 2016, the Company entered into an agreement to purchase the land underlying the ground lease portion on the 11601
Wilshire property. The transaction is expected to close in the second quarter of 2017, however there can be no guaranty that it will close as expected.
During the fourth quarter of 2016, the Company entered into a joint venture to purchase Hill7 (refer to Note 3 for details). This joint venture met the definition of a VIE
and the Company concluded that it is the primary beneficiary of this VIE and is consolidating this entity.
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 ongoing 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
Acquisitions
The Company’s acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in the Company’s
Consolidated Statements of Operations from the date of acquisition.
During the fourth quarter of 2016 the Company early adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU
2017-01”), which changes the definition of a business. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for
as an asset acquisition.
The Company evaluates each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need
to be accounted for as a business combination. An integrated set of assets and activities would fail to qualify as a business if either (i) substantially all of the fair value of the
gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the integrated set of assets and activities is lacking, at a
minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction).
An acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized
workforce), that is skilled, knowledgeable, and experienced in performing the process (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the
process is considered unique or scarce.
Acquisitions of real estate will generally not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable
asset or group of similar identifiable assets (i.e. land, buildings and
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)
improvements and related intangible assets or liabilities) or because the acquisition does not include a substantive process in the form of an acquired workforce or an
acquired contract that cannot be replaced without significant cost, effort or delay.
When the Company acquires properties that are considered business combinations, assets acquired and liabilities assumed are fair valued at the acquisition date.
Assets acquired and liabilities assumed include, but are not limited to, land, building and improvements, intangible assets related to above-and below-market leases, intangible
assets related to in-place leases, debt and other assumed assets and liabilities. The initial accounting for a business combination is based on management’s preliminary
assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price assignment are made within the
measurement period, which typically does not exceed one year, within the Consolidated Balance Sheets. Acquisition-related expenses associated with business combinations
are expensed in the period incurred.
When the Company acquires properties that are considered asset acquisitions, the purchase price is allocated based on relative fair value of the assets acquired and
liabilities assumed. There is no measurement period concept for asset acquisitions, with the purchase price accounting being final in the period of acquisition. Additionally,
acquisition-related expenses associated with asset acquisitions are capitalized as part of the purchase price.
The Company assesses fair value based on Level 2 and Level 3 inputs within the fair value framework, which includes estimated cash flow projections that utilize
appropriate discount, capitalization rates, renewal probability and available market information, which includes market rental rate and market rent growth rates. 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. The fair value of acquired “above- and below-”
market leases are based on the estimated cash flow projections utilizing 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.
Cost Capitalization
The Company capitalizes direct construction and development costs, including redevelopment 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. 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 that related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are
expensed as they are incurred.
The Company recognized the following capitalized costs the years ended December 31, 2016, 2015 and 2014:
Capitalized personnel costs
Capitalized interest
Year Ended December 31,
2016
2015
2014
$
$
9,347
11,307
$
7,349
6,516
3,061
6,938
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)
Operating Properties
The properties are generally carried at cost, less accumulated depreciation and amortization. The Company computes depreciation and amortization using the
straight-line method over the estimated useful lives of the assets as represented in the table below:
Asset Description
Building and improvements
Land improvements
Furniture and fixtures
Tenant improvements
Estimated useful life (years)
Shorter of the ground lease term or 39 years
15
5 to 7
Shorter of the estimated useful life or the lease term
The Company amortizes above- and below-market lease intangibles to the rental line item of the Consolidated Statements of Operations over the remaining non-
cancellable lease terms and bargain renewal periods, if applicable. The in-place lease intangibles are amortized to the depreciation and amortization line item of the
Consolidated Statements of Operations over the remaining non-cancellable lease term. When tenants vacate prior to the expiration of lease, the amortization of intangible
assets and liabilities are accelerated. The Company amortizes above- and below-market ground lease intangibles to the office operating expense and media and entertainment
operating expense line items of the Consolidated Statements of Operations over the remaining non-cancellable lease terms.
Held for sale
The Company classifies properties as held for sale when certain criteria set forth in Accounting Standard Codification (“ASC”) Topic 360, Property, Plant, and
Equipment, are met. These criteria include (i) whether the Company is committed to a plan to sell, (ii) whether the asset or disposal group is available for immediate sale, (iii)
whether an active program to locate a buyer and other actions required to complete the plan to sell have been initiated, (iv) whether the sale of the asset or disposal group is
probable (i.e., likely to occur) and the transfer is expected to qualify for recognition as a completed sale within one year, (v) whether the long-lived asset or disposal group is
being actively marketed for sale at a price that is reasonable in relation to its current fair value, (vi) whether actions necessary to complete the plan indicate that it is unlikely
significant changes to the plan will be made or that the plan will be withdrawn. At the time a property is classified as held for sale, the Company reclassifies its assets and
liabilities to held for sale in the Consolidated Balance Sheets for the periods presented and ceases recognizing depreciation expense. Properties held-for-sale are reported at
the lower of their carrying value or their estimated fair value, less estimated costs to sell.
According to ASC Topic 205 Presentation of Financial Statements, the Company does not present the operating results in net loss from discontinued operations for
disposals if they do not represent a strategic shift in the Company’s business. The Company reclassified City Plaza’s results of operations to net loss from discontinued
operations on its Consolidated Statements of Operations and recorded $0.2 million of loss from discontinued operations in 2014. There were no discontinued operations for
the years ended December 31, 2016 and 2015.
Impairment of Long-Lived Assets
The Company assesses the carrying value of real estate assets and related intangibles for impairment on a quarterly basis and 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. No impairment indicators have
been noted and the Company recorded no impairment charges during the years ended December 31, 2016, 2015 and 2014.
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)
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
acquisitions. The Company does not amortize this asset but instead analyzes it on a quarterly basis for impairment. No impairment indicators have been noted during the
years ended December 31, 2016 and 2015, respectively.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased.
The Company maintains some of its cash in bank deposit accounts that, at times, may exceed the federally insured limit. No losses have been experienced related to
such accounts.
Restricted Cash
Restricted cash primarily consists of amounts held by lenders to fund reserves such as capital improvements, taxes, insurance, debt service and operating
expenditures.
Accounts Receivable, net
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, length of time the
receivables are past due, specific identification of uncollectible amounts, historical experience and other relevant factors. Historical experience has been within management’s
expectations.
The following table represents the Company’s accounts receivable, net of allowance for doubtful accounts as of:
December 31, 2016
December 31, 2015
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
Straight-line rent receivables, net
$
$
$
8,697
(1,845)
6,852
$
22,008
(1,012)
20,996
For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company evaluates the
collectability of straight-line rent receivables based on the length of time the related rental receivables are past due, the current business environment and the Company’s
historical experience.
The following table represents the Company’s straight-line rent receivables, net of allowance for doubtful accounts as of:
Straight-line rent receivables
Allowance for doubtful accounts
Straight-line rent receivables, net
December 31, 2016
December 31, 2015
$
$
87,417
$
(136)
87,281
$
59,753
(970)
58,783
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)
Notes Receivable, net
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 notes receivable under this agreement was classified as a notes receivable on the Consolidated Balance Sheets. The notes receivable is secured
by a real estate property, bears interest at 11.0% and was to mature on August 22, 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, 2015, net of the accretion of commitment fee, was $28.7 million. The notes
receivable under the loan participation agreement were fully repaid during the second quarter of 2016.
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 net operating income of the combined properties in each segment.
The media and entertainment segment is not material, and therefore separate income information by segment has not been presented. Asset information by segment is not
reported because the Company does not use this measure to assess performance or make decisions to allocate resources.
Revenue Recognition
The Company recognizes rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken
possession or controls the physical use of the leased asset. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for
accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken
physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the
tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant
improvement ownership is determined based on various factors including, but not limited to:
• whether the lease stipulates how and on what a tenant improvement allowance may be spent;
• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
• whether the tenant improvements are unique to the tenant or general-purpose in nature; and
• whether the tenant improvements are expected to have any residual value at the end of the lease.
Certain leases provide for additional rents contingent upon a percentage of the tenant’s revenue in excess of specified base amounts or other thresholds. Such
revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. Such revenue is recognized only
after the contingency has been removed (when the related thresholds are achieved), which may result in the recognition of rental revenue in periods subsequent to when such
payments are received.
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 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.
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)
Deferred Financing Costs
Deferred financing costs are amortized over the term of the respective loans into interest expense on the Consolidated Statements of Operations. Deferred financing
costs, and related amortization, related to the unsecured revolving credit facility and undrawn term loans are presented within prepaid expenses and other assets, net in the
Consolidated Balance Sheets. All other deferred financing costs, and related amortization, are included in the notes payable, net line item in the Consolidated Balance Sheets.
Derivative Instruments
The Company manages interest rate risk associated with borrowings by entering into derivative instruments. The Company recognizes all derivative instruments on
the Consolidated Balance Sheets on a gross basis at fair value. Derivative instruments that are not effective hedges are adjusted to fair value and the changes in fair value are
reflected as income or expense. If the derivative instrument is an effective hedge, depending on the nature of the hedge, changes in the fair value 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 instrument’s change in fair value is immediately recognized in earnings.
Stock-Based Compensation
Compensation cost of restricted stock, restricted stock units and performance units under the Company’s equity incentive award plans are accounted for under ASC
Topic 718, Compensation-Stock Compensation (“ASC 718”). During the fourth quarter of 2016, the Company early adopted ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting (“ASU 2016-09”), and elected to account for forfeitures of awards as they occur. If the Company had adopted ASU 2016-09 on January 1, 2016,
the cumulative effect on additional paid-in capital and non-controlling interest in the operating partnership would have been $0.7 million.
Income Taxes
The Company’s property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the
entities that own the 1455 Market Street and Hill7 properties, REITs) 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.
Hudson Pacific Properties, Inc. has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with its taxable
year ended December 31, 2010. The Company believes that it has operated in a manner that has allowed the Company to qualify as a REIT for federal income tax purposes
commencing with such taxable year, and the Company intends to continue operating in such manner. To qualify as a REIT, the Company is required to distribute at least 90%
of its net taxable income, excluding net capital gains, to the Company’s stockholders and to 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 it continues to qualify for taxation as a REIT, Hudson Pacific Properties, Inc. is generally not subject to corporate level income tax on the earnings
distributed currently to its stockholders. If Hudson Pacific Properties, Inc. fails to qualify as a REIT in any taxable year, and is unable to avail itself of certain savings
provisions set forth in the Code, all of its 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, Hudson Pacific Properties, Inc. would be ineligible to elect to be treated as a REIT for the four taxable years
following the year for which the Company loses its qualification. It is not possible to state whether in all circumstances Hudson Pacific Properties, Inc. would be entitled to
this statutory relief.
The Company may acquire direct or indirect interests in one or more Subsidiary REITs. A Subsidiary REIT is subject to the various REIT qualification requirements
and other limitations described herein that are applicable to the Company. 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 REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs and (iii) it is possible that the
Company would fail certain of the asset tests applicable to REITs, in which event the Company would fail to qualify as a REIT unless the Company could avail itself of certain
relief provisions.
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)
The Company believes that its operating partnership is properly treated as a partnership for federal income tax purposes. As a partnership, the Company’s operating
partnership is not subject to federal income tax on its income. Instead, each of its partners, including the Company, is allocated, and may be required to pay tax with respect to,
its share of the operating partnership’s income. As such, no provision for federal income taxes has been included for the operating partnership.
The Company has elected, together with one of the Company’s subsidiaries, to treat such subsidiary as a taxable REIT subsidiary (“TRS”) for federal income tax
purposes. Certain activities that the Company may undertake, such as non-customary services for the Company’s tenants and holding assets that the Company 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’s TRS did not have significant tax
provisions or deferred income tax items for 2016, 2015 or 2014.
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, 2016, the Company has not established a
liability for uncertain tax positions.
The Company and its TRS file income tax returns with the U.S. federal government and various state and local jurisdictions. The Company and its TRS are no longer
subject to tax examinations by tax authorities for years prior to 2012. Generally, the Company has assessed its tax positions for all open years, which include 2012 to 2016, 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 on 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
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)
or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably
uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators
(such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all
available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii)
there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information
is released publicly (for example, a principal-to-principal market).
The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there
was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near 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.
Investment in Unconsolidated Entities
Investment in unconsolidated real estate in which the Company has the ability to exercise significant influence (but not control) is accounted for under the equity
method of investment. Under the equity method, the Company initially records the investment at cost, and subsequently adjusts for equity in earnings or losses and cash
contributions and distributions. The Company’s net equity investment is reflected within investment in unconsolidated entities on the Consolidated Balance Sheets, and the
Company’s share of net income or loss from the entity is included within other expense (income) on the Consolidated Statements of Operations.
On June 16, 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. The Company holds a 21% interest in the joint
venture. The assets of the joint venture consist of notes receivable. The Company’s investment in this joint venture at December 31, 2016 was $29.4 million, which represents
the maximum exposure for loss for the Company. The joint venture meets the criteria of a VIE and the Company accounts for this investment under the equity method of
accounting since the Company is not the primary beneficiary.
On July 1, 2016, the Company entered into an agreement with an unaffiliated third party related to the land on which its 11601 Wilshire property is located. The
Company holds a 28% interest in the land. The agreement does not meet the definition of a VIE and the Company accounts for its interest in the land under the equity method
of accounting. The Company’s interest in the land at December 31, 2016 was $7.8 million. On December 27, 2016, the Company entered into an agreement to purchase the
remaining interest in the land. The transaction is expected to close in the second quarter of 2017, however there can be no guaranty that it will close as expected.
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)
Recently Issued Accounting Literature
Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of ASUs. The following ASUs were adopted by the
Company in 2016:
Standard
Description
ASU 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a
Business
This guidance amends ASC 805 to provide a more robust
framework to use in determining when a set of assets and
activities is a business.
Adoption period
Fourth quarter of 2016
Effect on the financial statements or
other significant matters
The adoption had an impact on the
accounting treatment for two of the
property acquisitions, which were made
during the fourth quarter of 2016, resulting
in the capitalization of acquisition costs
incurred. Additionally, the purchase price
was assigned to various components of the
acquisition based on relative fair value.
Refer to Note 2 and 3 for details.
The adoption had an impact on the
Company’s consolidated financial
statements. Refer to Note 2 for discussion.
ASU 2016-09, Improvements to Employee
Share-Based Payment Accounting
ASU 2015-16, Business Combinations
(Topic 805), Simplifying the Accounting
for Measurement-Period Adjustments
ASU 2015-02, Consolidation (Topic 810),
Amendments to the Consolidation
Analysis
This guidance simplifies several aspects of the accounting for
employee share-based payment transactions, including the
accounting for income taxes, classification of excess tax benefits
on the statement of cash flows and forfeitures.
The guidance eliminates the requirement that an acquirer in a
business combination account for measurement-period
adjustments retrospectively. Instead, an acquirer will recognize
a measurement period adjustment during the period in which it
determines the amount of the adjustment, including the effect on
earnings of any amounts it would have recorded in previous
periods if the accounting had been completed at the acquisition
date.
The guidance simplifies the current guidance for consolidation
and reduces the number of consolidation models through the
elimination of the indefinite deferral of the previous guidance
under ASC 810.
F- 27
Fourth quarter of 2016
First quarter of 2016
The adoption had an impact on the
measurement-period adjustment related to
11601 Wilshire. Refer to Note 3.
First quarter of 2016
The adoption did not have a material
impact on the Company’s consolidated
financial statements as the conclusion for
consolidation did not change. Additional
disclosures have been included in Notes 2
and 11.
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)
Standard
Description
ASU 2015-01, Income Statement —
Extraordinary and Unusual Items (Subtopic
225-20), Simplifying Income Statement
Presentation by Eliminating
the Concept of Extraordinary Items
ASU 2014-16, Derivatives and Hedging
(Topic 815), Determining Whether the Host
Contract in a Hybrid Financial Instrument
Issued in the Form
of a Share Is More Akin to Debt or to Equity
ASU 2014-15, Presentation of Financial
Statements—Going Concern: Disclosure of
Uncertainties about an Entity’s Ability to
Continue as a Going Concern.
The guidance simplifies income statement presentation by
eliminating the need to determine whether to classify an item as an
extraordinary item. Current presentation and disclosure
requirements for an event or transaction that is of an unusual
nature or of a type that indicates infrequency of occurrence
have been retained.
The guidance outlines the considerations for hybrid financial
instruments issued in the form of a share. An entity (an issuer or
an investor) should determine the nature of the host contract by
considering all stated and implied substantive terms and features
of the hybrid financial instrument, weighing each term and feature
on the basis of relevant facts and
circumstances.
This update requires an entity to evaluate whether there are
conditions or events that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the
date that the financial statements are issued (or within one year
after the financial statements are available to be issued, when
applicable) and to provide related footnote disclosures in certain
circumstances.
Adoption Period
First quarter of 2016
Effect on the financial statements or
other significant matters
The adoption did not have an impact on the
Company’s consolidated financial
statements.
First quarter of 2016
The adoption did not have a material impact
on the Company’s consolidated financial
statements.
First quarter of 2016
The adoption did not have a material impact
on the Company’s consolidated financial
statements.
The Company considers the applicability and impact of all ASUs. The ASUs not listed in the tables below are not expected to have a material impact on the
Company’s consolidated financial statements, because either the ASU is not applicable or the impact is expected to be immaterial. The ASUs that are not yet adopted by the
Company are listed as below:
Standard
Description
ASU 2017-04, Intangibles—Goodwill and
Other (Topic 350): Simplifying the Test for
Goodwill Impairment
ASU 2016-18, Statement of Cash Flows
(Topic 230): Restricted Cash (a consensus of
the FASB Emerging Issues Task Force)
ASU 2016-17, Consolidation (Topic 810):
Interests Held through Related Parties That
Are under Common Control
This guidance removes step two from the goodwill impairment
test. As a result, an entity should perform its annual, or interim,
goodwill impairment test by comparing the fair value of a
reporting unit with its carrying amount and should recognize an
impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill
allocated to that reporting unit.
This guidance requires entities to include restricted cash and
restricted cash equivalents with cash and cash equivalents when
reconciling the beginning of period and end of period total
amounts shown on the statement of cash flows. As a result,
entities will no longer present transfers between cash and cash
equivalents and restricted cash and restricted cash equivalents in
the statement of cash flows.
This guidance outlines how a single decision-maker of a VIE
should treat indirect interests held through other related parties
that are under common control with the reporting entity when
determining whether it is the primary beneficiary of that VIE.
F- 28
Effective Date
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2019
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2017
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2016
Effect on the financial statements or
other significant matters
The Company does not currently anticipate
a material impact of this update on its
consolidated financial statements.
The adoption of this new guidance will
impact the presentation of the Consolidated
Statement of Cash Flows as well as require
additional footnote disclosure to reconcile the
totals in the revised cash flow statement
presentation to the related captions in the
Consolidated Balance Sheets.
The adoption of this new guidance will not
impact our conclusions related to
consolidation of the Company’s VIE’s.
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)
Standard
Description
Effective Date
ASU 2016-15, Classification of Certain Cash
Receipts and Cash Payments
ASU 2016-13, Financial Instruments —
Credit Losses
ASU related to Revenue from Contracts with
Customers (Topic 606)
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2017
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2019
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2017
This guidance clarifies how entities should classify certain cash
receipts and cash payments on the statement of cash flows. The
guidance also clarifies how the predominance principle should be
applied when cash receipts and cash payments have aspects of
more than one class of cash flows.
This guidance sets forth a new impairment model for financial
instruments, the current expected credit loss (“CECL”) model,
which is based on expected losses rather than incurred losses.
Under the CECL model, an entity recognizes as an allowance its
estimate of expected credit losses.
The new revenue standard was amended through various ASU’s.
The ASU’s that impact the Company are ASU 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenue Gross versus Net) and
ASU 2014-09, Revenue from Contracts with Customers. ASU
2016-08 clarifies certain aspects of the principal-versus-agent
guidance in its new revenue recognition standard related to the
determination of whether an entity is a principal-versus-agent and
the determination of the nature of each specified good or service.
ASU 2014-09 outlines a single comprehensive model for entities
to use in accounting for revenues arising from contracts with
customers and specifically notes that lease contracts with
customers are a scope exception.
F- 29
Effect on the financial statements or
other significant matters
The Company does not currently anticipate
an impact of this update on its Consolidated
Statement of Cash Flows.
The Company does not currently anticipate
a material impact of this update on its
consolidated financial statements.
The Company does not expect this guidance
to have a material effect on revenue
recognition as it relates to its leasing
contracts until the adoption of ASU 2016-
02, at which time the standard may effect
revenue recognition as it relates to certain
non-lease revenues that are part of its leasing
contracts. The Company is currently
evaluating this standard as part of its
evaluation of the adoption of ASU 2016-02
(see below) as it relates to its other revenue
from its media and entertainment properties
where the Company generates substantially
all of its revenue from leasing contracts that
are scoped out of this standard.
The Company has the option of adopting
this standard on either the full retrospective
basis (to the beginning of its contracts) or
modified retrospective method (from the
beginning of the latest fiscal year of
adoption). The Company plans on adopting
the standard January 1, 2018 using the
modified retrospective method.
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)
Standard
ASU 2016-02, Leases
Description
This guidance requires all lessees to record a lease liability at lease
inception, with a corresponding right of use asset, except for
short-term leases. Lessor accounting will not be fundamentally
changed.
Effective Date
Effect on the financial statements or
other significant matters
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2018
The Company is currently in the process of
evaluating the amount of assets and liabilities
relating to right of use that will need to be
record with respect to its leases where it is
the lessee.
Additionally, the standard will impact the
way the Company will record revenue and
leasing costs where it is the lessor. For
leasing costs, the Company will no longer be
able to capitalize internal leasing costs to the
extent they are not directly attributable to
the lease transaction. Accordingly, payroll
and payroll-related costs that the Company
currently capitalizes in connection with
leasing its space will be required to be
expensed.
With respect to the lease revenue, the
Company will need to break down its current
revenue streams between leasing and non-
leasing components. To the extent there are
non-leasing components the Company will
need to record them in accordance with ASC
606 (see above). The Company is still in the
process of evaluating its existing leasing
components to determine what effect, if any,
this standard will have on its revenue
recognition as it relates to its leases. The
Company will adopt the standard using the
retrospective method to the beginning of the
first year presented on the consolidated
statement of operations which is January 1,
2017.
The Company does not currently anticipate
a material impact of this update on its
consolidated financial statements.
ASU 2016-01, Financial Instruments —
Overall (Subtopic 825-10), Recognition and
Measurement of Financial Assets and
Financial Liabilities.
This guidance provides a new measurement alternative for equity
investments that do not have readily determinable fair values and
do not qualify for the net asset value practical expedient. Under
this alternative, these investments can be measured at cost, less
any impairment, plus or minus changes resulting from observable
price changes in orderly transactions for the identical or a similar
investment of the same issuer.
Effective for annual
reporting periods
(including interim
periods) beginning after
December 15, 2017
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)
3. Investment in Real Estate
Acquisitions
During 2016, the Company acquired 11601 Wilshire, Hill7 and Page Mill Hill. During 2015, the Company completed the EOP Acquisition, and acquired 4th & Traction
and 405 Mateo. The following table summarizes the information on our acquisitions completed in 2016 and 2015:
Property
11601 Wilshire(2)
Hill7(3)
Page Mill Hill(4)
Total acquisitions in 2016
EOP Acquisition(5)
4th & Traction
405 Mateo
Submarket
West Los Angeles
South Lake Union
Palo Alto
Various
Downtown Los Angeles
Downtown Los Angeles
Date of
Acquisition
7/1/2016
10/7/2016
12/12/2016
4/1/2015
5/22/2015
8/17/2015
Square Feet
(unaudited)
Purchase Price(1) (in
millions)
$
500,475
285,680
182,676
968,831
311.0
179.8
150.0
640.8
8,201,456
120,937
83,285
8,405,678
3,815.7
49.3
40.0
3,905.0
Total acquisitions in 2015
_____________
(1) Represents purchase price before certain credits, prorations and closing costs.
(2) Previously owned by an affiliate of Blackstone, the property has served as the Company’s corporate headquarters since its IPO. The Company funded this acquisition with proceeds from the
$
unsecured revolving credit facility.
(3) The Company purchased the property through a joint venture with the Canadian Pension Plan Investment Board. The Company owns 55% of the ownership interest in the consolidated joint
venture. In conjunction with the acquisition, the joint venture closed a secured non-recourse loan in the amount of $101.0 million. Refer to Note 5 for details.
(4) The Company funded this acquisition with proceeds from the unsecured revolving credit facility.
(5) The EOP Acquisition consisted of 26 office assets and two development parcels located throughout the San Francisco Peninsula, Redwood Shores, Palo Alto, Silicon Valley and North San Jose
submarkets.
The Company evaluated the Hill7 and Page Mill Hill acquisitions under the new framework for determining whether an integrated set of assets and activities meet the
definition of a business (pursuant to ASU 2017-01). Substantially all of the fair value of the gross assets is concentrated in either a single identifiable asset or group of similar
identifiable assets (e.g., operating property). Accordingly, Hill7 and Page Mill Hill did not meet the definition of a business and were accounted for as asset acquisitions.
In previous reporting periods, the purchase price accounting for 11601 Wilshire was preliminary because the Company was in the process of evaluating the terms of
certain contracts related to the Company’s interest in the land, which affected the identification and valuation of assets acquired and liabilities assumed. The fair value of the
Company’s interest in the land has reflected below in the final purchase price accounting. If the measurement-period adjustment was made as of the acquisition date, the
Company would have recognized an additional $33 thousand of depreciation and amortization expense in the third quarter of 2016. The following table represents the final
aggregate purchase price accounting for each of the Company’s acquisitions completed in 2016:
Investment in real estate, net
Land interest(1)
Above-market leases(2)
Below-market ground leases(3)
Deferred leasing costs and in-place intangibles(4)
Below-market leases(5)
$
$
292,382
7,836
167
212
13,884
(6,562)
173,967
—
—
—
7,617
(1,417)
131,402
—
307
12,125
14,697
(8,636)
11601 Wilshire
Hill7
Page Mill Hill
$
$
Net asset and liabilities assumed
_____________
(1) Represents the fair value of the Company’s interest in the land which is included in investment in unconsolidated entities in the Consolidated Balance Sheets.
(2) Represents weighted-average amortization period of 5.4 years.
(3) Represents weighted-average amortization period of 33.2 years.
307,919
$
180,167
$
$
149,895
$
F- 31
Total
597,751
7,836
474
12,337
36,198
(16,615)
637,981
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) Represents weighted-average amortization period of 5.8 years.
(5) Represents weighted-average amortization period of 6.4 years.
Included in the Company’s consolidated financial statements for the year ended December 31, 2016 were revenues and net loss totaling $14.0 million and $3.5 million,
respectively, from the acquisitions completed in 2016.
The table below shows the pro forma financial information (unaudited) for the years ended December 31, 2016 and 2015 as if the acquisitions in 2016 had completed
as of January 1, 2015:
Total revenues
Net income (loss)
Year Ended December 31,
2016
2015
$
$
677,313
41,685
572,482
(21,652)
The following table represents the final purchase price accounting for each of the Company’s acquisitions completed in 2015:
EOP Northern
California Portfolio
4th & Traction
405 Mateo
Total
Consideration paid
Cash consideration
Common stock
Additional paid-in capital
Non-controlling common units in the Operating Partnership
Total consideration
Allocation of consideration paid
Investment in real estate, net
Above-market leases(1)
Below-market ground leases(2)
Deferred leasing costs and in-place intangibles(3)
Below-market leases(4)
Above-market ground leases(5)
Total consideration paid
_____________
(1) Represents weighted-average amortization period of 3.0 years.
(2) Represents weighted-average amortization period of 27.7 years.
(3) Represents weighted-average amortization period of 3.6 years.
(4) Represents weighted-average amortization period of 4.3 years.
(5) Represents weighted-average amortization period of 25.4 years.
$
$
1,715,346
87
285,358
1,814,936
3,815,727
3,610,039
28,759
52,065
225,431
(99,472)
(1,095)
$
3,815,727
$
F- 32
49,250
—
—
—
49,250
49,250
—
—
—
—
—
49,250
$
$
40,000
—
—
—
40,000
40,000
—
—
—
—
—
40,000
$
$
1,804,596
87
285,358
1,814,936
3,904,977
3,699,289
28,759
52,065
225,431
(99,472)
(1,095)
3,904,977
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)
Dispositions
The following table summarizes the properties sold in 2016, 2015 and 2014. These properties were considered non-strategic to the Company’s portfolio:
Property
Bayhill Office Center
Patrick Henry Drive
One Bay Plaza
12655 Jefferson
Total dispositions in 2016(2)
First Financial
Bay Park Plaza
Total dispositions in 2015(3)
Tierrasanta
Total disposition in 2014
_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) Excludes the sale of an option to acquire land at 9300 Culver on December 6, 2016.
(3) Excludes the disposition of 45% interest in 1455 Market Street office property on January 7, 2015.
Date of Disposition
Square Feet
(unaudited)
Sales Price(1) (in
millions)
1/14/2016
4/7/2016
6/1/2016
11/4/2016
3/6/2015
9/29/2015
7/16/2014
554,328
70,520
195,739
100,756
921,343
$
$
223,679
260,183
483,862
$
$
112,300
112,300
$
$
215.0
19.0
53.4
80.0
367.4
89.0
90.0
179.0
19.5
19.5
The disposition of these properties resulted in a gain of $22.9 million, $30.5 million and $5.5 million for the years ended December 31, 2016, 2015 and 2014,
respectively. The gains on sale of real estate is included in the gains on sales in the Consolidated Statements of Operations. Also included in gains on sales in 2016 is a gain
of $7.5 million related to a sale of an option to purchase land at 9300 Culver.
Held for sale
On December 30, 2016, the Company entered into an agreement to sell its 222 Kearny Street property for $51.8 million (before certain credits, prorations and closing
costs). The Company determined that this property met the criteria to be classified as held for sale and reclassified the balances related to such property within the
Consolidated Balance Sheets as of December 31, 2016 and 2015. 222 Kearny Street was subsequently sold on February 14, 2017.
The following table summarizes the components of assets and liabilities associated with real estate held for sale as of:
ASSETS
Investment in real estate, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Other
Assets associated with real estate held for sale
LIABILITIES
Accounts payable and accrued liabilities
Lease intangible liabilities, net
Other
Liabilities associated with real estate held for sale
F- 33
December 31, 2016 December 31, 2015
$
$
$
$
32,601
777
1,945
1,285
36,608
$
$
2,918
27
861
3,806
$
$
344,202
2,641
15,968
699
363,510
4,578
10,233
2,764
17,575
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 the Company’s deferred leasing costs and lease intangibles, net as of:
December 31,
2016
December 31,
2015
Above-market leases
Accumulated amortization
Above-market leases, net
Deferred leasing costs and in-place lease intangibles
Accumulated amortization
Deferred leasing costs and in-place lease intangibles, net
Below-market ground leases
Accumulated amortization
Below-market ground leases, net
Deferred leasing costs and lease intangible assets, net
Below-market leases
Accumulated amortization
Below-market leases, net
Above-market ground leases
Accumulated amortization
Above-market ground leases, net
Lease intangible liabilities, net
$
$
$
$
23,430
(12,989)
10,441
378,640
(145,551)
233,089
71,423
(4,891)
66,532
310,062
$
141,676
(62,552)
79,124
1,095
(89)
1,006
80,130
$
38,392
(17,166)
21,226
345,434
(110,116)
235,318
59,085
(2,699)
56,386
312,930
138,699
(45,353)
93,346
1,095
(46)
1,049
94,395
The Company recognized the following amortization related to deferred leasing costs and lease intangibles:
Above-market leases(1)
Below-market leases(1)
Deferred leasing costs and in-place lease intangibles(2)
Above-market ground leases(3)
Below-market ground leases(3)
_____________
(1) Amortization is recorded in office rental income in the Consolidated Statements of Operations.
(2) Amortization is recorded in depreciation and amortization expense and office rental income in the Consolidated Statements of Operations.
(3) Amortization is recorded in office operating expenses in the Consolidated Statements of Operations.
$
For the Year Ended December 31,
2016
2015
2014
$
11,259
30,993
84,492
43
2,203
$
12,534
34,607
91,965
46
1,688
2,026
7,661
20,879
—
248
As of December 31, 2016, the estimated aggregate amortization of deferred leasing costs and lease intangible assets for each of the next five years and thereafter are
as follows:
Year ended
2017
2018
2019
2020
2021
Thereafter
Total
Above-market leases
Deferred leasing costs and
in-place lease intangibles
Below-market ground
leases
3,780
3,113
2,598
466
329
155
10,441
$
$
62,686
40,425
31,731
20,447
15,974
61,826
233,089
$
$
2,544
2,544
2,544
2,544
2,544
53,812
66,532
$
$
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)
As of December 31, 2016 the estimated aggregate amortization of lease intangible liabilities for each of the next five years and thereafter are as follows:
Year ended
2017
2018
2019
2020
2021
Thereafter
Total
5. Notes Payable, net
Below-market leases
$
24,394
16,400
12,907
9,460
6,953
9,010
79,124
$
Above-market ground
leases
$
$
43
43
43
43
43
791
1,006
The following table summarizes the balances of the Company’s indebtedness as of:
Notes payable
Less: unamortized loan premium and deferred financing costs, net(1)
December 31, 2016
December 31, 2015
$
2,707,839
$
(19,829)
2,278,445
(17,729)
Notes payable, net
_____________
(1) Excludes deferred financing costs related to establishing the Company’s unsecured revolving credit facility and undrawn term loans of $1.5 million and $4.1 million as of December 31,
$
2,688,010
$
2,260,716
2016 and December 31, 2015, respectively, which are included in prepaid expenses and other assets, net in the Consolidated Balance Sheets.
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)
The following table sets forth information as of December 31, 2016 and 2015 with respect to the Company’s outstanding indebtedness, excluding net deferred
financing costs related to unsecured revolving credit facility and undrawn term loans:
December 31, 2016
December 31, 2015
Principal
Amount
Deferred
Financing
Costs, net
Principal
Amount
Unamortized
Loan Premium
and Deferred
Financing Costs,
net
Interest Rate(1)
Contractual
Maturity Date
LIBOR + 1.15% to
1.85%
LIBOR + 1.30% to
2.20%
LIBOR + 1.30% to
2.20%
LIBOR + 1.60% to
2.55%
LIBOR + 1.60% to
2.55%
4.34%
3.66%
4.69%
3.98%
4.79%
UNSECURED LOANS
Unsecured Revolving Credit Facility(2)
$
300,000
$
—
$
230,000
$
—
5-Year Term Loan due April 2020(2)(4)
450,000
(3,513)
550,000
(5,571)
5-Year Term Loan due November 2020(2)
175,000
(745)
—
—
7-Year Term Loan due April 2022(2)(5)
350,000
(2,265)
350,000
(2,656)
7-Year Term Loan due November 2022(2)(6)
125,000
(931)
—
—
Series A Notes
Series E Notes
Series B Notes
Series D Notes
Series C Notes
TOTAL UNSECURED LOANS
MORTGAGE LOANS
Mortgage Loan secured by Rincon Center(7)
Mortgage Loan secured by Sunset Gower Studios/Sunset Bronson
Studios
Mortgage Loan secured by Met Park North(8)
Mortgage Loan secured by 10950 Washington(7)
Mortgage Loan secured by Pinnacle I(9)(10)
Mortgage Loan secured by Element LA
Mortgage Loan secured by Pinnacle II(10)
Mortgage Loan secured by Hill7(12)
Mortgage Loan secured by 901 Market Street
TOTAL MORTGAGE LOANS
TOTAL
110,000
50,000
259,000
150,000
56,000
2,025,000
100,409
5,001
64,500
27,929
129,000
168,000
87,000
101,000
—
682,839
$ 2,707,839
(930)
(300)
(2,271)
(898)
(539)
(12,392)
110,000
—
259,000
—
56,000
1,555,000
(1,011)
—
(2,378)
—
(509)
(12,125)
(198)
(1,534)
102,309
115,001
(355)
5.13%
(2,232)
LIBOR + 2.25%
(398)
64,500
(354)
28,407
(593)
129,000
(2,321)
168,000
(720)
86,228
(1,319)
—
—
30,000
(7,437)
723,445
(19,829) $ 2,278,445
$
$
(509)
(421)
(694)
(2,584)
1,310
—
(119)
(5,604)
(17,729)
(11)
LIBOR + 1.55%
5.32%
3.95%
4.59%
4.30%
3.38%
N/A
(13)
4/1/2019 (3)
4/1/2020
11/17/2020
4/1/2022
11/17/2022
1/2/2023
9/15/2023
12/16/2025
7/6/2026
12/16/2027
5/1/2018
3/4/2019 (3)
8/1/2020
3/11/2022
11/7/2022
11/6/2025
6/11/2026
11/6/2026 (13)
N/A
_____________
(1) Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed. Interest rates are as of December 31, 2016, which may be different than the
interest rates as of December 31, 2015 for corresponding indebtedness.
(2) The Company has the option to make an irrevocable election to change the interest rate depending on the Company’s credit rating. As of December 31, 2016, no such election had been made.
(3) The maturity date may be extended once for an additional one-year term.
(4) Effective May 1, 2015, $300.0 million of the term loan has been effectively fixed at 2.66% to 3.56% per annum through the use of an interest rate swap. In July 2016, the Company amended
this interest rate swap to add a 0.00% floor to one-month LIBOR, and then de-designated the original swap and designated the amended swap as a hedge in order to minimize the ineffective
portion of the original derivative instrument related to this loan. Therefore, the effective interest rate with respect to $300.0 million of the term loan increased to a range of 2.75% to 3.65% per
annum. See Note 6 for details.
(5) Effective May 1, 2015, the outstanding balance of the term loan has been effectively fixed at 3.21% to 4.16% per annum through the use of an interest rate swap. In July 2016, the Company
amended this interest rate swap to add a 0.00% floor to one-month LIBOR, and then de-designated the original swap and designated the amended swap as a hedge in order to minimize the
ineffective portion of the original derivative instrument related to this loan. Therefore, the effective interest rate increased to a range of 3.36% to 4.31% per annum. See Note 6 for details.
(6) Effective June 1, 2016, the outstanding balance of the term loan has been effectively fixed at 3.03% to 3.98% per annum through the use of an interest rate swap. See Note 6 for details.
(7) Monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule with a balloon payment at maturity.
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)
(8) This loan bears interest only. Interest on the full loan amount has been effectively fixed at 3.71% per annum through use of an interest rate swap. See Note 6 for details.
(9) 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 with a balloon payment at maturity.
(10) The Company owns 65% of the ownership interests in the consolidated joint venture that owns the Pinnacle I and II properties. The full amount of the loan is shown.
(11) Represents unamortized premium amount of the non-cash mark-to-market adjustment.
(12) The Company owns 55% of the ownership interest in the consolidated joint venture that owns the Hill7 property. The full amount of the loan is shown.
(13) The maturity date can be extended for an additional two years at a higher interest rate and with principal amortization.
Current Year Activity
On May 3, 2016, the Company drew on the $175.0 million 5-Year Term Loan due November 2020 and $125.0 million 7-Year Term Loan due November 2022, both of
which were entered into on November 17, 2015. Amounts drawn were used to fully pay down $30.0 million of the 901 Market Street mortgage loan that was set to mature on
October 31, 2016, to partially pay down $110.0 million of the Sunset Gower Studios/Sunset Bronson Studios mortgage loans and $100.0 million of the 5-Year Term Loan due
April 2020.
On June 7, 2016, Pinnacle II Hudson MC Partners, the Company’s consolidated joint venture, entered into an $87.0 million ten-year mortgage loan secured by its
Pinnacle II office property. This new loan has a maturity date of June 11, 2026 and bears a fixed rate of 4.30% per annum with interest only payable every month during the
term of the loan and principal payment at maturity. Proceeds were used to fully pay down the previous loan secured by the Company’s Pinnacle II office property that was
scheduled to mature on September 6, 2016.
On July 6, 2016, the Company entered into a private placement of debt for $150.0 million of 3.98% guaranteed senior notes due July 6, 2026. The $150.0 million was
drawn on July 6, 2016. Proceeds were used to pay down the unsecured revolving credit facility. The Company also secured an additional $50.0 million of funds from a private
placement of 3.66% guaranteed senior notes due September 15, 2023, which was drawn on September 15, 2016. Proceeds were used to repay amounts outstanding under its
unsecured revolving credit facility and for general corporate purposes.
On October 7, 2016, the Company acquired Hill7 property through a consolidated joint venture. In conjunction with the acquisition, the joint venture closed a $101.0
million mortgage loan with a fixed interest rate of 3.38% per annum. This loan bears interest only payable every month during the term of the loan and principal payment at
maturity.
Indebtedness
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 Sunset Gower Studios and Sunset Bronson Studios, the Company’s 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.
Loan agreements include events of default that the Company believes are usual for loan and transactions of this type. As of the date of this filing, there have been
no events of default associated with the Company’s loans.
Certain loan agreements require that some or all receipts collected from properties are deposited in lockbox accounts under the control of the lenders to fund reserves
such as capital improvements, taxes, insurance, debt service and operating expenditures. Included in restricted cash on the Company’s Consolidated Balance Sheets at
December 31, 2016 and December 31, 2015 are lockbox and reserve funds as follows:
Property
Rincon Center
Element LA
Pinnacle I
Hill7
Pinnacle II
10950 Washington
December 31, 2016
December 31, 2015
$
$
16,291
2,627
1,811
1,643
1,382
1,249
25,003
$
$
14,237
1,149
1,792
—
722
1,014
18,914
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)
The minimum future principal payments due on the Company’s secured and unsecured notes payable at December 31, 2016 for each of the next five years and
thereafter were as follows (before the impact of extension options, if applicable):
Year ended
2017
2018
2019
2020
2021
Thereafter
Total
Annual Principal Payments
$
2,714
101,157
307,886
692,493
3,142
1,600,447
2,707,839
$
Senior Unsecured Revolving Credit Facility and Term Loan Agreement
Term Loan Agreement
On November 17, 2015, the operating partnership entered into a term loan credit agreement with a group of lenders for an unsecured $175.0 million five-year delayed
draw term loan with a maturity date of November 2020 (“5-Year Term Loan due November 2020”) and an unsecured $125.0 million seven-year delayed draw term loan with a
maturity date of November 2022 (“7-Year Term Loan due November 2022”). These term loans were fully drawn on May 3, 2016.
Interest on the term loan agreement is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) a specified base rate
plus the applicable base rate margin, dependent on the operating partnership’s leverage ratio. The applicable LIBOR margin will range from 1.30% to 2.20% for the 5-Year Term
Loan due November 2020, depending on our Leverage Ratio (as defined in the term loan agreement) and 1.60% to 2.55% for the 7-Year Term Loan due November 2022,
depending on our Leverage Ratio (as defined in the term loan agreement). Beginning on February 13, 2016, each term loan is subject to an unused commitment fee of .20%.
The operating partnership has the right to terminate or reduce unused commitments under either term loan in the term loan agreement without penalty or premium.
Subject to the satisfaction of certain conditions, the operating partnership has the right to increase the availability of either or both of the term loans so long as the aggregate
commitments under both term loans do not exceed $475.0 million.
If the Company obtains a credit rating for the Company’s senior unsecured long-term indebtedness, the operating partnership may make an irrevocable election to
change the interest rate. During 2016, our senior unsecured long-term indebtedness was assigned an investment grade rating. The Company has not made the credit rating
election.
A&R Credit Agreement
The operating partnership maintains and periodically amends its A&R Credit Agreement with a group of lenders. On April 1, 2015, the agreement governing the credit
facility was amended and restated to, among other things, (i) extend the maturity date of the A&R Credit Agreement with a one-year extension option, (ii) increase available
revolving credit from $300.0 million to $400.0 million, (iii) increase the five-year term loan facility from $150.0 million to $550.0 million and extended the maturity date to April
2020 (“5-Year Term Loan due April 2020”) and (iv) add a $350.0 million seven-year term loan with a maturity date of April 2022 (“7-Year Term Loan due April 2022”). On
November 17, 2015, the operating partnership amended and restated the Credit Facility (“Amended and Restated Credit Facility”) to align certain terms therein with the less
restrictive terms of the term loan agreement. The 5-Year Term Loan due April 2020 and the 7-Year Term Loan due April 2022 were used towards the EOP Acquisition. The A&R
Credit Agreement is available for other purposes, including for payment of redevelopment and development costs incurred in connection with properties owned by the
operating partnership or any subsidiary, to finance capital expenditures and the repayment of indebtedness of the Company, the operating partnership and its subsidiaries, to
provide for general working capital needs of the Company, the operating partnership and its subsidiaries and for the general corporate purposes of the Company, the
operating partnership and its subsidiaries, and to pay fees and expenses incurred in connection with the Amended and Restated Credit Facility.
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)
Interest on the Amended Credit Facility is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) a specified base
rate plus the applicable base rate margin, dependent on the operating partnership’s leverage ratio. The applicable LIBOR margin will range from 1.15% to 1.85% (previously
1.15% to 1.55%) for the A&R Credit Agreement, 1.30% to 2.20% (previously 1.30% to 1.90%) for the 5-Year Term Loan due April 2020, depending on our Leverage Ratio (as
defined in the Amended and Restated Credit Facility) and 1.60% to 2.55% for the 7-Year Term Loan due April 2022, depending on our Leverage Ratio (as defined in the
Amended and Restated Credit Facility). The Amended Facility requires a facility fee in an amount equal to 0.20% or 0.35% of the operating partnership’s revolving credit
commitments depending on the operating partnership’s leverage ratio. Unused amounts under the Amended and Restated Credit Facility are not subject to a separate fee.
Subject to the satisfaction of certain conditions and lender commitments, the operating partnership may increase the availability of the Amended and Restated Credit
Facility so long as the aggregate commitments under the Amended and Restated Credit Facility do not exceed $2.0 billion.
If the Company obtains a credit rating for the Company’s senior unsecured long-term indebtedness, the operating partnership may make an irrevocable election to
change the interest rate and facility fee. During 2016, our senior unsecured long-term indebtedness was assigned an investment grade rating. The Company has not made the
credit rating election.
The operating partnership continues to be the borrower under the New Credit Agreement and the Amended and Restated Credit 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.
Guaranteed Senior Notes
On November 16, 2015, the operating partnership entered into a note purchase agreement with various purchasers, which provides for the private placement of $425.0
million of guaranteed senior notes by the operating partnership, of which (i) $110.0 million are designated as 4.34% Series A guaranteed senior notes due January 2, 2023 (the
“Series A Notes”), (ii) $259.0 million are designated as 4.69% Series B guaranteed senior notes due December 16, 2025 (the “Series B Notes”) and (iii) $56.0 million are
designated as 4.79% Series C guaranteed senior notes due December 16, 2027 (the “Series C Notes”). These notes were issued on December 16, 2015 and upon issuance, the
notes pay interest semi-annually on the 16th day of June and December in each year until their respective maturities. Additional guaranteed senior notes were issued in 2016;
for further detail, refer to the current activity section above.
The operating partnership may prepay at any time all or, from time to time, any part of the guaranteed senior notes in an amount not less than 5% of the aggregate
principal amount of any series of guaranteed senior notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a make-whole
premium.
The operating partnership’s obligations under guaranteed senior notes will be fully and unconditionally guaranteed by the Company. Subsidiaries of the Company
will also issue unconditional guarantees upon the occurrence of certain conditions, including such subsidiaries providing guarantees under the New Credit Agreement and
Amended and Restated Credit Facility, by and among the operating partnership, the financial institutions party thereto, and Wells Fargo Bank, National Association as
administrative agent.
Debt Covenants
The operating partnership’s ability to borrow under the term loan agreement, the Amended and Restated Credit Facility, and guaranteed senior notes remains subject
to ongoing compliance with financial and other covenants as defined in the respective agreements, including, when considering the most restrictive terms, maintaining a
leverage ratio (maximum of 0.60:1.00), unencumbered leverage ratio (maximum of 0.60:1.00), fixed charge coverage ratio (minimum of 1.50:1.00), secured indebtedness leverage
ratio (maximum of 0.45:1.00), and unsecured interest coverage ratio (minimum 2.00:1.00). Certain financial covenant ratios are subject to change in the occurrence of material
acquisitions as defined in the respective agreements. Other covenants include certain limitations on dividend payouts and distributions, limits on certain types of investments
outside of the operating partnership’s primary business, and other customary affirmative and negative covenants.
The operating partnership was in compliance with its financial covenants at December 31, 2016.
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)
Repayment Guaranties
Sunset Gower Studios and Sunset Bronson Studios Loan
In connection with the loan secured by the Sunset Gower Studios and Sunset Bronson Studios properties, the Company has 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 the operating partnership, does not do so. At
December 31, 2016, the outstanding balance was $5.0 million, which results in a maximum guarantee amount for the principal under this loan of $1.0 million. Furthermore, the
Company 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. 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. As of the date of this filing, there has been no event of default associated with this loan.
Other Loans
Although the rest of the operating partnership’s loans are secured and non-recourse, the operating partnership provides limited customary secured debt guarantees
for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.
6. Derivative Instruments
The Company enters into derivative instruments in order to hedge interest rate risk. As of December 31, 2016, the Company had six interest rate swaps with aggregate
notional amounts of $839.5 million. As of December 31, 2015, the Company had two interest rate caps and five interest rate swaps with aggregate notional amounts of $92.0
million and $714.5 million, respectively. These derivatives instruments were designated as effective cash flow hedges for accounting purposes.
The Company’s derivative instruments are classified as Level 2 and their fair values are derived from estimated values obtained from observable market data for
similar instruments.
5-Year Term Loan due April 2020 and 7-Year Term Loan due April 2022
On April 1, 2015, the Company effectively hedged $300.0 million of the 5-Year Term Loan due April 2020 through two interest rate swaps, each with a notional amount
of $150.0 million, which, effective as of May 1, 2015, swapped one-month LIBOR to a fixed rate of 1.36% through the loan’s maturity. Therefore the interest rate is effectively
fixed at 2.66% to 3.56%. The unhedged portion bears interest at a rate equal to one-month LIBOR plus 1.30% to 2.20%, depending on the Company’s leverage ratio. The
Company also effectively hedged its $350.0 million 7-Year Term Loan due April 2022 through two interest rate swaps, which, effective as of May 1, 2015, swapped one-month
LIBOR to a fixed rate of 1.61% through the loan’s maturity. Therefore the interest rate is effectively fixed at 3.21% to 4.16%.
In July 2016, the derivative instruments as described above were amended to include a 0.00% floor to one-month LIBOR, and then de-designated the original swap
and designated the amended swap as a hedge in order to minimize the ineffective portion of the original derivative instruments. Therefore, the effective interest rate increased
to a range of 2.75% to 3.65% with respect to $300.0 million of the 5-Year Term Loan due April 2020 and 3.36% to 4.31% with respect to the 7-Year Term Loan due April 2022,
per annum based on the Company’s operating partnership’s leverage ratio. The amount included in accumulated other comprehensive income (loss) prior to the de-
designation is amortized into interest expense over the remaining original respective terms of the derivative instruments.
During the year ended December 31, 2016, the Company recognized an unrealized loss of $1.4 million on the Consolidated Statement of Operations related to the
ineffective portion of these derivative instruments. This amount is also presented on the unrealized loss on ineffective portion of derivative instruments line item on the
Consolidated Statements of Cash Flow. There was no recognized unrealized loss or gain during the years ended December 31, 2015 and 2014.
7-Year Term Loan due November 2022
On May 3, 2016, the Company entered into a derivative instrument with respect to $125.0 million of the 7-Year Term Loan due November 2022. This derivative
instrument became effective on June 1, 2016 and swapped one-month LIBOR, which includes a 0.00% floor, to a fixed rate of 1.43% through the loan’s maturity.
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)
Sunset Gower Studios and Sunset Bronson Studios Mortgage
On February 11, 2011, the Company closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A., secured by the Sunset Gower Studios and Sunset
Bronson Studios properties. The loan initially bore interest at a rate equal to one-month LIBOR plus 3.50%. On March 16, 2011, the Company purchased an interest rate cap in
order to cap one-month LIBOR at 3.715% on $50.0 million of the loan through February 11, 2016. On January 11, 2012, the Company purchased an interest rate cap in order to
cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan.
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, reduce
the interest to a rate equal to one-month LIBOR plus 2.25%, and extend the maturity date from February 11, 2016 to February 11, 2018. The derivative instruments described
above were not changed in connection with this loan amendment. Therefore, the interest rate is effectively fixed at 5.97% on $50.0 million of the loan and 4.25% with respect to
$42.0 million of the loan.
Effective March 4, 2015, the terms of this loan were amended and restated to introduce the ability to draw up to an additional $160.0 million for budgeted construction
costs associated with the Icon and CUE developments and to extend the maturity date from February 11, 2018 to March 4, 2019. The derivative instruments described above
were not changed in connection with this loan amendment. These derivative instruments matured on February 11, 2016.
Met Park North
On July 31, 2013, the Company closed a seven-year loan totaling $64.5 million with Union Bank, N.A., secured by the 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 swaps one-month LIBOR to a fixed rate of 2.16% through the
loan’s maturity on August 1, 2020.
Overall
The fair market value of derivative instruments are presented on a gross basis in the Consolidated Balance Sheets. The derivative assets as of December 31, 2016 and
2015 were $5.9 million and $2.1 million, respectively. The derivative liabilities as of December 31, 2016 and 2015 were $1.3 million and $2.0 million, respectively.
The Company reclassifies into earnings in the same period during which the hedged forecasted transaction affects earnings. As of December 31, 2016, the Company
expects $5.3 million of unrealized loss included in accumulated other comprehensive loss will be reclassified to interest expense in the next 12 months.
7. Future Minimum Base Rents and Lease Payments Future Minimum Rents
The Company’s properties are leased to tenants under operating leases with initial term expiration dates ranging from 2017 to 2031. Future minimum base rents
(excluding tenant reimbursements for operating expenses and without regard to cancellation options) for properties at December 31, 2016 for each of the next five years and
thereafter are as follows:
Year ended
2017
2018
2019
2020
2021
Thereafter
Total
Non-cancellable
Subject to early
termination options
Total(1)
$
$
485,078
441,962
392,495
320,117
265,552
811,945
2,717,149
$
$
1,572
21,695
24,858
10,901
16,371
97,900
173,297
$
$
486,650
463,657
417,353
331,018
281,923
909,845
2,890,446
_____________
(1) Excludes rents under leases at the Company’s media and entertainment properties with terms of one year or less.
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)
Future Minimum Lease Payments
The following table summarizes the Company’s ground lease terms related to properties that are held subject to long-term non-cancellable ground lease obligations
as of December 31, 2016:
Property
Expiration Date
Notes
Sunset Gower Studios
3/31/2060
Every 7 years rent adjusts to 7.5% of Fair Market Value (“FMV”) of the land.
Del Amo Office
6/30/2049
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.
9300 Wilshire
222 Kearny Street
Page Mill Center
Clocktower Square
Palo Alto Square
Lockheed
8/14/2032
Additional rent is the sum by which 6% of gross rental from the prior calendar year exceeds the Minimum Rent.
6/14/2054
11/30/2041
9/26/2056
11/30/2045
7/31/2040
Minimum annual rent is the greater of $975 thousand or 20% of the first $8.0 million of the tenant’s “Operating Income” during any “Lease
Year,” as such terms are defined in the ground lease. This property was subsequently sold on February 14, 2017.
Minimum annual rent (adjusted on 1/1/2019 and 1/1/2029) plus 25% of adjusted gross income (“AGI”), less minimum annual rent.
Minimum annual rent (adjusted every 10 years) plus 25% of AGI less minimum annual rent.
Minimum annual rent (adjusted every 10 years starting 1/1/2022) plus 25% of AGI less minimum annual rent.
The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent is the lesser of 10% of FMV
of the land or the previous year’s minimum annual rent plus 75% of consumer price index, or CPI, increase. Percentage annual rent is
improvements lessee’s base rent x 24.125%.
Foothill Research Center
6/30/2039
The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent is the lesser of 10% of FMV
of the land or the previous year’s minimum annual rent plus 75% of CPI increase. Percentage annual rent is gross income x 24.125%.
3400 Hillview
10/31/2040
The ground rent is the greater of the minimum annual rent or percentage annual rent. The minimum annual rent until October 31, 2017 is the
lesser of 10% of FMV of the land or $1.0 million grown at 75% of the cumulative increases in CPI from October 1989. Thereafter,
minimum annual rent is the lesser of 10% of FMV of the land or the minimum annual rent as calculated as of November 1, 2017 plus 75%
of subsequent cumulative CPI changes. Percentage annual rent is gross income x 24.125%. This lease has been prepaid through October 31,
2017.
Metro Center
4/29/2054
Every 10 years rent adjusts to 7.233% of FMV of the land (since 2008) and rent also adjusts every 10 years to reflect the change in CPI
from the preceding FMV adjustment date (since 2013).
Techmart Commerce Center
5/31/2053
Subject to a 10% increase every 5 years.
11601 Wilshire
10/31/2064
Subject to a $50 thousand increase every 5 years. Commencing on August 1, 2026, minimum rent is adjusted to reflect changes in CPI. On
December 27, 2016, the Company entered into an agreement to purchase the land related to this ground lease. The transaction is expected to
close in the second quarter of 2017, however there can be no guaranty that the transaction will close as expected.
Page Mill Hill
11/17/2049
Minimum annual rent (adjusted every 10 years) plus 60% of the average of the percentage annual rent for the previous 7 lease years.
Contingent rental expense is recorded in the period in which the contingent event becomes probable. The Company recognized the following contingent rental
expense and minimum rental expense for our ground leases and corporate office lease:
Contingent rental expense
Minimum rental expense
For the Year Ended December 31,
2016
2015
2014
$
$
8,651
12,085
$
3,843
9,196
125
1,360
The following table provides information regarding the Company’s future minimum lease payments for its ground lease at December 31, 2016 for each of the next five
years and thereafter (before the impact of extension options, if applicable):
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)
For the Year Ended December 31,
Ground Leases (1)(2)(3)(4)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
13,989
15,588
15,638
15,638
15,659
461,073
537,585
_____________
(1) In situations where ground lease obligation adjustments are based on third-party appraisals of fair market land value, the future minimum lease amounts above include the lease rental obligations in
effect as of December 31, 2016.
(2) In situations where ground lease obligation adjustments are based on CPI adjustment, the future minimum lease amounts above include the lease rental obligations in effect as of December 31,
2016.
(3) In situations where ground lease obligation adjustments are based on the percentage of gross income that exceeds the minimum annual rent, the future minimum lease amounts above include the
lease rental obligations in effect as of December 31, 2016.
(4) Balance includes future minimum ground lease obligation for 222 Kearny Street, which was sold on February 14, 2017 and the obligation for 11601 Wilshire. On December 27, 2016, the Company
entered into an agreement to purchase the land related to the 11601 Wilshire ground lease. This transaction is expected to close in the second quarter of 2017, however there can be no guaranty
that the transaction will close.
8. Fair Value of Financial Instruments
The Company measures fair value of financial instruments using Level 2 inputs categorized within the fair value framework. The Company’s financial assets and
liabilities measured and reported at fair value on a recurring basis include the following as of:
December 31, 2016
December 31, 2015
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Derivative assets
Derivative liabilities
$
$
—
—
$
5,935
1,303
$
—
—
$
5,935
1,303
$
—
—
$
2,061
2,010
$
—
—
2,061
2,010
Other Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities are reasonable estimates of fair
value, using Level 1 inputs, because of the short-term nature of these instruments. Fair values for notes payable and notes receivable are estimates based on rates currently
prevailing for similar instruments of similar maturities using Level 2 inputs. The table below represents the carrying value and fair value of assets and liabilities as of:
December 31, 2016
December 31, 2015
Carrying Value
Fair Value
Carrying Value
Fair Value
Notes payable, net(1)
Notes receivable, net
_____________
(1) Amounts represent total notes payable includes unamortized loan premium and excludes net deferred financing fees.
2,707,839
—
$
$
$
2,681,134
—
$
2,279,755
28,684
2,284,429
28,684
9. Stock-Based Compensation
The Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Plan, as amended (the “2010 Plan”), permits us to grant, among other things,
restricted stock, restricted stock units and performance-based awards. Each restricted share, restricted stock unit and common share issued reduces the share reserve by 2.95
shares. As of December 31, 2016, 1,930,668 common shares were available for grant under the 2010 Plan. The calculation of shares available for grant is determined after taking
into account unvested restricted stock, unvested RSUs, awards under our one-time retention performance-based awards, and awards under our outstanding outperformance
programs, assuming the maximum bonus pool eligible ultimately is earned and based on a stock price of $34.78.
The board of directors of Hudson Pacific Properties Inc. (the “Board”) 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 compensation program. The time-based awards are
generally issued in the second
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)
quarter, and the individual share awards vest in equal annual installments over the applicable service vesting period, which is three years.
The Board awards time-based restricted shares to employees on an annual basis as part of the employees’ annual compensation. The time-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 generally three
years. Additionally, certain restricted share awards are subject to holding restrictions upon vesting if the employee is a named executive officer.
The Compensation Committee of our Board annually adopts a Hudson Pacific Properties, Inc. Outperformance Program (“OPP Plan”) under our 2010 Plan. With
respect to OPP Plan awards granted through 2016, to the extent an award is earned following the completion of a three-year performance period, 50% of the earned award will
vest in full at the end of the three-year performance period and 25% of the earned award will vest in equal annual installments over the two years thereafter, subject to the
participant’s continued employment. OPP Plan awards are settled in common stock and in the case of certain executives, awards are settled in performance units in our
operating partnership.
In December 2015, the Compensation Committee of our Board awarded a one-time special retention award to certain executives. The grants consist of time-based
awards and performance-based awards. The time-based awards vest in equal 25% installments over four years, subject to the participant’s continued employment. The
performance-based awards vest over a four-year period, subject to the achievement of applicable performance goals and the participant’s continued employment.
Time-Based Awards
The stock-based compensation is valued based on the quoted closing price of the Company’s common stock on the applicable grant date and discounted for the
hold restriction in accordance with ASC 718. The stock-based compensation is amortized through the final vesting period on a straight-line basis. Forfeitures of awards are
recognized as they occur.
Performance-Based Awards
OPP Plan
An award under the OPP Plan is ultimately earned to the extent the Company outperforms a predetermined total shareholder return (“TSR”) goal and/or achieves
goals with respect to the outperformance of its peers in a particular REIT index. The ultimate aggregate award cannot exceed the predetermined maximum bonus pool. The
following table outlines key components of the 2016 and 2015 OPP Plans:
Maximum bonus pool, in millions
Performance period
2016 OPP Plan
$17.5
2015 OPP Plan
$15.0
1/1/2016 to 12/31/2018
1/1/2015 to 12/31/2017
The stock-based compensation costs of the OPP Plans were valued in accordance with ASC 718, utilizing a Monte Carlo simulation to estimate the probability of the
performance vesting conditions being satisfied. The stock-based compensation is amortized through the final vesting period under a graded vesting expense recognition
schedule. Forfeitures of awards are recognized as they occur. The per unit fair value of OPP award granted was estimated on the date of grant using the following
assumptions in the Monte Carlo valuation:
Expected price volatility for the Company
Expected price volatility for the particular REIT index
Risk-free rate
Dividend yield
One-Time Retention Awards
F- 44
2016
24.00%
17.00%
1.09%
2.40
2015
22.00%
22.00%
1.13%
1.50
2014
28.00%
26.00%
0.77%
1.50
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)
At the end of each year in the four-year performance period and over the four-year performance period, the ultimate award is earned if the Company outperforms a
predetermined TSR goal and/or achieves goals with respect to its outperformance of its peers in a particular REIT index.
The stock-based compensation costs were valued in accordance with ASC 718, utilizing a Monte Carlo simulation to estimate the probability of the performance
vesting conditions being satisfied. The stock-based compensation is amortized through the final vesting period under a graded vesting expense recognition schedule.
Forfeitures of awards are recognized as they occur. The per unit fair value of one-time retention award granted was estimated on the date of grant using the following
assumptions in the Monte Carlo valuation:
Expected price volatility for the Company
Expected price volatility for the particular REIT index
Risk-free rate
Dividend yield
Summary of Unvested Share Activity
The following table summarizes the activity and status of all unvested awards:
Assumptions
23.00%
18.00%
1.63%
3.20
Unvested at January 1
Granted
Vested
Canceled
Unvested at December 31
2016
2015
2014
Shares
Weighted-Average
Grant-Date Fair
Value
Shares
Weighted-Average
Grant-Date Fair
Value
Shares
Weighted-Average
Grant-Date Fair
Value
$
827,950
489,826
(430,597)
—
887,179
$
28.92
30.95
26.75
—
31.09
$
543,707
629,504
(335,544)
(9,717)
827,950
$
26.43
29.01
24.80
38.17
28.92
$
541,180
281,491
(275,051)
(3,913)
543,707
$
19.98
29.38
16.83
20.44
26.43
Year Ended December 31,
2016
2015
2014
Non-Vested Shares Issued
489,826
629,504
281,491
Weighted Average Grant -
Date Fair Value
Vested Shares
Total Vest-Date Fair Value
(in thousands)
$
30.95
29.01
29.38
(430,597) $
(335,544)
(275,051)
14,736
9,606
9,794
Share-based Compensation Recorded
The following table presents the classification and amount recognized for stock-based compensation related to the Company’s awards:
Expensed stock compensation
Capitalized stock compensation
Total stock compensation
For the Year Ended December 31,
2016
2015
2014
$
14,144
510
$
8,421
411
7,559
420
14,654
$
8,832
$
7,979
Consolidated Financial
Statement Classification
General and administrative expenses
Deferred leasing costs and lease intangibles, net and tenant
improvements
Additional paid-in capital and non-controlling interest—units in the
operating partnership
$
$
As of December 31, 2016, total unrecognized compensation cost related to unvested share-based payments was $28.5 million, and is expected to be recognized over a
weighted-average period of three years.
F- 45
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. Earnings Per Share
The Company calculates basic earnings per share by dividing the net income (loss) available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. The Company calculates diluted earnings per share by dividing the diluted net income (loss) available to common
stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the period using the treasury stock method or the
if-converted method. Unvested time-based RSUs and unvested OPP awards that contain nonforfeitable rights to dividends are participating securities and are included in the
computation of earnings per share pursuant to the two-class method. The following table reconciles the numerator and denominator in computing the Company’s basic and
diluted earnings per share for net income (loss) available to common stockholders:
For the Year Ended December 31,
2016
2015
2014
Numerator:
Net income (loss)
Income attributable to preferred stock
Original issuance costs of redeemed Series B preferred stock
Income attributable to participating securities
Income attributable to non-controlling interest in consolidated entities
(Income) loss attributable to non-controlling units of the operating partnership
Basic net income (loss) available to common stockholders
Effect of dilutive instruments
Diluted net income (loss) available to common stockholders
Denominator:
Basic weighted average common shares outstanding
Effect of dilutive instruments(1)
Diluted weighted average common shares outstanding
$
43,758
$
(636)
—
(766)
(9,290)
(5,848)
27,218
451
27,669
106,188,902
4,180,153
110,369,055
0.26
0.25
(16,082) $
(12,105)
(5,970)
(356)
(3,853)
21,969
(16,397)
—
(16,397)
85,927,216
—
85,927,216
23,522
(12,785)
—
(274)
(149)
(359)
9,955
—
9,955
65,792,447
717,000
66,509,447
0.15
0.15
Basic earnings per common share(2)
Diluted earnings per common share(2)
_____________
(1) The Company includes unvested awards and convertible common units as contingently issuable shares in the computation of diluted EPS once the market criteria are met, assuming that the end of
(0.19) $
(0.19) $
$
$
$
$
the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted EPS calculation.
(2) In 2014, the Company had a $164 thousand loss from discontinued operations which resulted in $0.00 basic and diluted earnings per share from discontinued operations.
F- 46
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)
11. Equity
The tables below present the effect of the Company’s derivative financial instruments on accumulated other comprehensive loss (“OCI”):
Balance at January 1, 2014
Unrealized loss recognized in OCI due to change in fair value
Loss reclassified from OCI into income (as interest expense)
Net Change in OCI
Balance at December 31, 2014
Unrealized loss recognized in OCI due to change in fair value
Loss reclassified from OCI into income (as interest expense)
Net Change in OCI
Balance at December 31, 2015
Unrealized (income) loss recognized in OCI due to change in fair value
Loss reclassified from OCI into income (as interest expense)
Net change in OCI
Balance at December 31, 2016
Non-controlling Interests
Common units in the operating partnership
Hudson Pacific
Properties, Inc.
Stockholder’s Equity
Non-controlling
interests
Total Equity
$
$
$
997
1,870
(424)
1,446
2,443
4,976
(6,338)
(1,362)
1,081
(4,122)
(6,455)
(10,577)
(9,496) $
$
165
69
(16)
53
218
2,687
(3,922)
(1,235)
(1,017)
6,989
(2,354)
4,635
3,618
$
1,162
1,939
(440)
1,499
2,661
7,663
(10,260)
(2,597)
64
2,867
(8,809)
(5,942)
(5,878)
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 repurchase 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.
The following table summarizes the activity related to common units from January 1, 2015 to December 31, 2016:
Balance at January 1, 2015
April issuance (1)
April redemption (2)
Balance at December 31, 2015
May redemption (3)
July redemption (3)
November redemption (3)
Non-controlling interest in common
units
2,382,563
54,848,480
(934,728)
56,296,315
(10,117,223)
(19,195,373)
(17,533,099)
Balance at December 31, 2016 (4)
_____________
(1) The Company issued common units to Blackstone as consideration for the EOP Acquisition.
(2) One of our common unitholders required us to repurchase common units and the Company elected, in accordance with our limited partnership agreement, to issue shares of our common stock in
9,450,620
exchange for the common units to satisfy the redemption notice.
(3) The common unitholders requested the operating partnership repurchase common units and the Company elected, in accordance with the limited partnership agreement of the operating
partnership, to settle in cash to satisfy the redemption. The Company funded the redemptions using the proceeds from registered underwritten public offering of common stock.
(4) On January 10, 2017, Blackstone and Farallon Capital Management, LLC (“ Farallon Funds”) sold their ownership interests in the operating partnership following the completion of a common
stock offering and common unit repurchase. Refer to Note 15 for additional details.
F- 47
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)
Performance units are partnership interests in the operating partnership. Each performance unit awarded will be deemed equivalent to an award of one unit of
common stock under the 2010 Plan, reducing the availability for other equity awards on a one-for-one basis. Under the terms of the performance units, the operating
partnership will revalue its assets for tax purposes upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will
be allocated first to the holders of performance units to equalize the capital accounts of such holders with the capital accounts of common unitholders. Subject to any agreed
upon exceptions, once vested and having achieved parity with common unitholders, performance units are convertible into common units in the operating partnership on a
one-for-one basis.
The operating partnership meets the criteria of a VIE and the Company is the primary beneficiary of the operating partnership.
Non-controlling interest—members in consolidated entities
The Company has an interest in a joint venture with Media Center Partners, LLC. The Pinnacle JV owns the Pinnacle, a two-building (Pinnacle I and Pinnacle II),
625,640 square-foot office property located in Burbank, California. The Company initially owned a 98.25% interest in the Pinnacle JV, but its interest decreased to 65.0% when
the Pinnacle JV acquired Pinnacle II on June 14, 2013. As of December 31, 2016, the Company owns a 65.0% interest in the Pinnacle JV.
On January 5, 2015, the Company entered into a joint venture with Canada Pension Plan Investment Board, (“CPPIB”) through which CPPIB purchased a 45% interest
in 1455 Market Street office property located in San Francisco, California, for a purchase price of $219.2 million (before certain credits, proration and closing costs).
On October 7, 2016, the Company entered into another joint venture with CPPIB to purchase the Hill7 office property located in Seattle, Washington for $179.8 million
(before credits, prorations and closing costs). The Company owns a 55% interest in the Hill7 office property, refer to Note 3 for details of the acquisition.
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. 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
5,800,000 shares of 8.375% Series B cumulative redeemable preferred stock of Hudson Pacific Properties, Inc., with a liquidation preference of $25.00 per share, $0.01
par value per share, were outstanding in 2014 and until it was redeemed in 2015. Dividends on the Series B preferred stock were 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.
On December 10, 2015, the Company redeemed its Series B preferred stock in whole for cash at a redemption price of $25.00 per share, plus accrued and unpaid
dividends to, but not including, the date of redemption. During the year ended December 31, 2015, the Company recognized a non-recurring non-cash allocation of additional
loss for purposes of computing earnings per share of $6.0 million as a reduction to net income available to common stockholders for the Company and common unitholder for
the operating partnership for the original issuance costs related to the Series B preferred stock.
F- 48
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 reconciles the net income (loss) allocated to common stock and operating partnership units on the Consolidated Statements of Equity to the
common stock and the common unit net income (loss) allocation on the Consolidated Statements of Operations for the years ended:
Net income (loss) allocation for common stock or common units on the
Consolidated Statements of Equity
Net income attributable to participating securities
Series B transaction costs allocation
Net income (loss) allocation for common stock/common units on the Consolidated
Statements of Operations
$
Common Stock Activity
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
2016
2015
2014
2016
2015
2014
$
27,984
$
(10,071)
$
10,229
$
33,832
$
(32,040)
$
10,588
(766)
—
27,218
(356)
(5,970)
$
(16,397)
$
(274)
—
9,955
(766)
—
33,066
$
(356)
(5,970)
$
(38,366)
$
(274)
—
10,314
The Company has remained well-capitalized since the initial public offerings through public offerings, private placements and continuous offerings under our at-the-
market, or ATM, program.
The following table summarizes the common stock offering in 2014, 2015 and 2016:
Number of Common Shares
January 28, 2014 (1)
January 20, 2015 (2)
April 1, 2015 (3)
May 16, 2016 (4)
July 21, 2016 (4)
November 28, 2016 (4)
_____________
(1) Represents a common stock offering of 8,250,000 shares of common stock and the exercise of the underwriter’s option to purchase an additional 1,237,500 shares of our common stock at the
19,195,373
10,117,223
17,533,099
12,650,000
8,626,311
9,487,500
public offering price of $21.50 per share. Total proceeds from the public offering, after underwriter’s discount, were approximately $195.8 million (before transaction costs).
(2) Represents a common stock offering of 11,000,000 shares of common stock and the exercise of the underwriter’s 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 underwriter’s discount, were approximately $385.6 million (before transaction costs).
(3) Represents a common stock issuance in connection with the EOP Acquisition. The issuance of common stock is part of the consideration paid.
(4) Proceeds from the offering were used to repurchase common units in the operating partnership.
On January 10, 2017, the Company, certain entities affiliated with Blackstone and the Farallon Funds completed an common stock offering of 8,881,575 shares of
common stock of the Company. Immediately following this transaction, Blackstone and the Farallon Funds no longer hold any ownership interests in the Company or the
operating partnership. Refer to Note 15 for additional details.
The Company’s ATM program permits sales of up to $125.0 million of stock. A cumulative total of $20.1 million has been sold as of December 31, 2016. The following
table summarizes the ATM activity:
Shares of common stock sold during the period
Common stock price ranges
Share repurchase program
2016
165,000
$33.54 to $33.95
2015
—
N/A
2014
76,000
$21.92 to $22.07
On January 20, 2016, the Board authorized a share repurchase program to buy up to $100.0 million of the outstanding common stock of Hudson Pacific Properties,
Inc. No share repurchases have been made as of December 31, 2016.
F- 49
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)
Dividends
During the year ended December 31, 2016, the Company declared dividends on its common stock and non-controlling common partnership interests of $0.800 per
share and unit. The Company also declared dividends on its Series A preferred partnership interests of $1.5625 per unit. The fourth quarter 2016 dividends were declared on
December 19, 2016 and paid to holders of record on December 29, 2016.
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) will be classified for United States federal income tax purposes as follows (unaudited):
Record Date
Payment Date
Distributions Per
Share
Total
Non-qualified
Qualified
Capital Gain
Distributions(1)
Return of Capital
Ordinary Dividends
3/20/2016
6/20/2016
9/20/2016
$
3/30/2016
6/30/2016
9/30/2016
12/19/2016
12/29/2016
Totals
$
0.20000
0.20000
0.20000
0.20000
0.80000
$
$
100%
$
0.14542
0.14542
0.14542
0.14542
0.58168
$
72.71%
0.14542
0.14542
0.14542
0.14542
0.58168
$
$
—
—
—
—
—
$
$
0.02447
0.02447
0.02447
0.02447
0.09788
$
$
12.24%
0.03011
0.03011
0.03011
0.03011
0.12044
15.05%
_____________
(1) $0.00540 of the $0.02447 capital gain distributions should be characterized as unrecaptured Section 1250 gain.
12. Related Party Transactions
Employment Agreements
The Company has entered into employment agreements with certain executive officers, effective January 1, 2016, that provide for various severance and change in
control benefits and other terms and conditions of employment.
Lease and Subsequent Purchase of Corporate Headquarters from Blackstone
On July 26, 2006, the Company’s predecessor, Hudson Capital, LLC, entered into a lease agreement and subsequent amendments with landlord Trizec Holdings Cal,
LLC (an affiliate of Blackstone) for the Company’s corporate headquarters at 11601 Wilshire Boulevard. The Company amended the lease to increase its occupancy to
40,120 square feet of the property’s space as a tenant commencing on September 1, 2015. On December 16, 2015, the Company entered into an amendment of that lease to
expand the space to approximately 42,371 square feet of the property’s space and to extend the term by an additional three years, to a total of ten years, through August 31,
2025. On July 1, 2016, the Company purchased the 11601 Wilshire property from funds managed by Blackstone for $311.0 million (before credits, prorations and closing costs).
JMG Capital Lease at 11601 Wilshire
JMG Capital Management LLC leases approximately 6,638 square feet at 11601 Wilshire property pursuant to an eight-year lease at an aggregate rate of approximately
$279 thousand annualized rent per year. Jonathan M. Glaser, a member of the Company’s board of directors, is the founder and managing member of JMG Capital Management
LLC. JMG Capital Management LLC was a tenant of the property at the time it was purchased by the Company.
F- 50
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)
222 Kearny Street Disposition
On December 30, 2016, the Company entered into an agreement to sell its 222 Kearny Street property to a joint venture, a partner of which are affiliates of the Farallon
Funds. Richard B. Fried, an independent director on our Board, is a managing member of the Farallon Funds. 222 Kearny Street was subsequently sold on February 14, 2017.
Agreement Related to EOP Acquisition
On April 1, 2015, the Company completed the EOP Acquisition from certain affiliates of Blackstone, which consisted 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 North San
Jose submarkets. The total consideration paid for the EOP Acquisition before certain credits, prorations and closing costs included a cash payment of $1.75 billion and an
aggregate of 63,474,791 shares of common stock of Hudson Pacific Properties, Inc. and common units in the operating partnership. Following a common stock offering and
common unit repurchase on January 10, 2017, Blackstone no longer holds an ownership interest in the Company or the operating partnership and the Stockholders Agreement
between the Company, the operating partnership and Blackstone automatically terminated.
The Stockholders Agreement
On April 1, 2015, in connection with the closing of the EOP Acquisition as described above, the Company entered into the Stockholders Agreement (the
“Stockholders Agreement”) by and among the Company, the operating partnership, Blackstone Real Estate Advisors L.P. (“BREA”) and Blackstone. The Stockholders
Agreement sets forth various arrangements and restrictions with respect to the governance of the Company and certain rights of Blackstone with respect to the shares of
common stock of Hudson Pacific Properties, Inc. and common units of the operating partnership received by Blackstone in connection with the EOP Acquisition (the “Equity
Consideration”).
Pursuant to the terms of the Stockholders Agreement, in April 2015 the Board was expanded from eight to eleven directors, and three director nominees designated
by Blackstone to the Board were elected. On January 13, 2016, one of Blackstone’s nominees resigned from the Board, and Blackstone indicated that it would not designate an
individual to replace him. Subsequently, the Board voted to decrease its size to ten directors. Subject to certain exceptions, the Board will continue to include Blackstone’
designees in its slate of nominees, and will continue to recommend such nominees, and will otherwise use its reasonable best efforts to solicit the vote of the stockholders of
Hudson Pacific Properties, Inc. to elect to the Board the slate of nominees which includes those designated by Blackstone. Blackstone will have the right to designate three
nominees for so long as it continues to beneficially own, in the aggregate, greater than 50% of the Equity Consideration. If Blackstone’ beneficial ownership of the Equity
Consideration decreases, then the number of director nominees that Blackstone will have the right to designate will be reduced (i) to two, if Blackstone beneficially owns
greater than or equal to 30% but less than or equal to 50% of the Equity Consideration and (ii) to one, if Blackstone beneficially owns greater than or equal to 15% but less
than 30% of the Equity Consideration. The Board nomination rights of Blackstone will terminate at such time as Blackstone beneficially owns less than 15% of the Equity
Consideration or upon written notice of waiver or termination of such rights by Blackstone. So long as Blackstone retains the right to designate at least one nominee to the
Board, Hudson Pacific Properties, Inc. will not be permitted to increase the total number of directors comprising the Board to more than 12 persons without the prior written
consent of Blackstone.
For so long as Blackstone has the right to designate at least two director nominees, subject to the satisfaction of applicable NYSE independence requirements,
Blackstone will also be entitled to appoint one such nominee then serving on the Board to serve on each committee of the Board (other than certain specified committees).
The Stockholders Agreement also includes standstill provisions, which require that, until such time as Blackstone beneficially owns shares of common stock
representing less than 10% of the total number of issued and outstanding shares of common stock on a fully-diluted basis, Blackstone and BREA are restricted from, among
other things, acquiring additional equity or debt securities (other than non-recourse debt and certain other debt) of the Company without the Company’s prior written
consent.
In addition, pursuant to the Stockholders Agreement, until April 1, 2017, the Company is required to obtain the prior written consent of Blackstone prior to the
issuance of common equity securities by it or any of its subsidiaries other than up to an aggregate of 16,843,028 shares of common stock (and certain other exceptions).
Further, until such time as Blackstone beneficially owns, in the aggregate, less than 15% of the Equity Consideration, Blackstone will cause all common stock held by
it to be voted by proxy (i) in favor of all persons nominated to serve as directors
F- 51
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)
by the Board (or the Nominating and Corporate Governance Committee thereof) in any slate of nominees which includes Blackstone’ nominees and (ii) otherwise in
accordance with the recommendation of the Board (to the extent the recommendation is not inconsistent with the rights of Blackstone under the Stockholders Agreement)
with respect to any other action, proposal or other matter to be voted upon by the stockholders of Hudson Pacific Properties, Inc., other than in connection with (A) any
proposed transaction relating to a change of control of Hudson Pacific Properties, Inc., (B) any amendments to the charter or bylaws of Hudson Pacific Properties, Inc.,
(C) any other transaction that Hudson Pacific Properties, Inc. submits to a vote of its stockholders pursuant to Section 312.03 of the NYSE Listed Company Manual or (D) any
other transaction that Hudson Pacific Properties, Inc. submits to a vote of its stockholders for approval.
As required by the Stockholders Agreement, the Company has agreed that Blackstone and certain of its affiliates may engage in investments, strategic relationships
or other business relationships with entities engaged in other business, including those that compete with the Company, and will have no obligation to present any particular
investment or business opportunity to the Company, even if the opportunity is of a character that, if presented to the Company, could be undertaken by the Company. As
required by the Stockholders Agreement, to the maximum extent permitted under Maryland law, the Company has renounced any interest or expectancy in, or in being offered
an opportunity to participate in, any such investment, opportunity or activity presented to or developed by Blackstone, its nominees for election as directors and certain of its
affiliates, other than any opportunity expressly offered to a director nominated at the direction of Blackstone in his or her capacity as a director of Hudson Pacific Properties,
Inc.
Further, without the prior written consent of Blackstone, Hudson Pacific Properties, Inc. may not amend certain provisions of its bylaws relating to the ability of its
directors and officers to engage in other business or to adopt qualification for directors other than those in effect as of the date of the Stockholders Agreement or as are
generally applicable to all directors, respectively.
The Stockholders Agreement also includes certain provisions that, together, are intended to enhance the liquidity of common units to be held by Blackstone.
Redemption Rights of Blackstone
Under the terms of the Stockholders Agreement, the Company (in its capacity as the general partner of the operating partnership) has waived the 14-month holding
period set forth in the Fourth Amended and Restated Limited Partnership Agreement before Blackstone may require the operating partnership to repurchase the common units
and grants certain additional rights to Blackstone in connection with such redemptions. Among other things, the Company generally must give Blackstone notice before 9:30
a.m. Eastern time on the business day after the business day on which Blackstone gives the Company notice of redemption of any common units of the Company’s election,
in its sole and absolute discretion, to either (a) cause the operating partnership to redeem all of the tendered common units in exchange for a cash amount per common units
equal to the value of one share of common stock on the date that Blackstone provided its notice of redemption, calculated in accordance with and subject to adjustment as
provided in the Fourth Amended and Restated Limited Partnership Agreement and the Stockholders Agreement, or (b) subject to the restrictions on ownership and transfer of
the Company’s stock set forth in its charter, acquire all of the tendered common units from Blackstone in exchange for shares of common stock, based on an exchange ratio of
one share of common stock for each common unit, subject to adjustment as provided in the Fourth Amended and Restated Limited Partnership Agreement. If the Company
fails to timely provide such notice, the Company will be deemed to have elected to cause the operating partnership to redeem all such tendered common units in exchange for
shares of common stock. Blackstone redeemed 46,250,000 common units in the operating partnership in exchange for cash in 2016.
The Company may also elect to cause the operating partnership to redeem all common units tendered by Blackstone with the proceeds of a public or private offering
of common stock under certain circumstances as discussed more fully below.
F- 52
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)
Restrictions on Transfer of Common Units by Blackstone
Under the terms of the Stockholders Agreement, the Company (in its capacity as the general partner of the operating partnership) has waived the 14-month holding
period set forth in the Fourth Amended and Restated Limited Partnership Agreement before Blackstone may transfer any common units, and has agreed to admit any
permitted transferee of Blackstone as a substituted limited partner of the operating partnership upon the satisfaction of certain conditions described in the Fourth Amended
and Restated Limited Partnership Agreement and the Stockholders Agreement. Nevertheless, the Covered Securities are subject to the transfer restrictions described above.
Ownership Limit Waiver
In connection with the issuance of the Equity Consideration, the Board granted to Blackstone and certain of its affiliates a limited exception to the restrictions on
ownership and transfer of common stock set forth in the charter of Hudson Pacific Properties, Inc. (the “Charter”) that allows Blackstone and certain of its affiliates to own,
directly or indirectly, in the aggregate, up to 17,707,056 shares of common stock of Hudson Pacific Properties, Inc. (the “Excepted Holder Limit”). This exception is conditioned
upon the continued accuracy of various representations and covenants set forth in Blackstone’s waiver request delivered on April 1, 2015, confirming, among other things,
that neither Blackstone nor certain of its affiliates may own, directly or indirectly, (i) more than 9.9% of the interests in a tenant of the Company (other than a tenant of the 1455
Market Street office property) or (ii) more than 5.45% of the interests in a tenant of the 1455 Market Street office property, in each case subject to certain exceptions that may
reduce such ownership percentage, but not below 2% and representations intended to confirm that Blackstone’s and certain of its affiliates’ ownership of common stock of
Hudson Pacific Properties, Inc. will not cause Hudson Pacific Properties, Inc. to otherwise fail to qualify as a REIT.
The exception for Blackstone and certain of its affiliates will apply until (i) Blackstone or any such affiliate violates any of the representations or covenants in
Blackstone’s waiver request or (ii) (a) Blackstone or any such affiliate owns, directly or indirectly, more than the applicable ownership percentage (as described above) of the
interests in any tenant(s) and (b) the maximum rental income expected to be produced by such tenant(s) exceeds (x) 0.5% of the Company’s gross income (in the case of
tenants other than tenants of the 1455 Market Street office property) or (y) 0.5% of the 1455 Market Street Joint Venture’s gross income (in the case of tenants of the 1455
Market Street office property) for any taxable year (the “Rent Threshold”), at which time the number of shares of common stock that Blackstone and certain of its affiliates
may directly or indirectly own will be reduced to the number of shares of common stock which would result in the amount of rent from such tenant(s) (that would be treated as
related party rents under certain tax rules) representing no more than the Rent Threshold.
The Registration Rights Agreement
On April 1, 2015, in connection with the closing of the EOP Acquisition, the Company entered into a Registration Rights Agreement, dated April 1, 2015 (the
“Registration Rights Agreement”), by and among the Company and Blackstone. The Registration Rights Agreement provides for customary registration rights with respect to
the Equity Consideration, including the following:
•
Shelf Registration. On October 27, 2015, the Company filed a prospectus covering Blackstone’s shares of common stock received as part of the Equity
Consideration as well as shares issuable upon redemption of common units received as part of the Equity Consideration, which was replaced by a
subsequent prospectus filed by the Company on July 21, 2016. The Company is required to use its reasonable best efforts to keep such resale shelf
registration statement effective for as long as Blackstone continues to hold such shares of common stock.
• Demand Registrations. Beginning November 1, 2015 (or earlier if transfer restrictions under the Stockholders Agreement are terminated earlier), Blackstone
may cause the Company to register their shares if the foregoing resale shelf registration statement is not effective or if the Company is not eligible to file a
shelf registration statement.
•
Qualified Offerings. Any registered offerings requested by Blackstone 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 (subject to certain specified
exceptions): (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 $50.0 million.
F- 53
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)
• Piggy-Back Rights. Beginning November 1, 2015 (or earlier if transfer restrictions under the Stockholders Agreement are terminated earlier), Blackstone is
permitted to, among other things, participate in offerings for the Company’s account or the account of any other security holder of the Company (other than
in certain specified cases). If underwriters advise that the success of a proposed offering would be significantly and adversely affected by the inclusion of
all securities in an offering initiated by the Company for the Company’s own account, then the securities proposed to be included by Blackstone together
with other stockholders exercising similar piggy-back rights are cut back first.
Limited Partnership Agreement
On April 1, 2015, in connection with the closing of the EOP Acquisition, the Company, as the general partner of the operating partnership, entered into the Third
Amended and Restated Agreement of Limited Partnership of the operating partnership dated April 1, 2015 along with Blackstone and the other limited partners of the
operating partnership. The principal changes to the Second Amended and Restated Agreement of Limited Partnership of the operating partnership, as amended and as in
effect immediately prior to the closing of the EOP Acquisition, made by the Third Amended and Restated Limited Partnership Agreement were to add the provisions described
below. The Third Amended and Restated Limited Partnership Agreement was subsequently amended and restated on December 17, 2015 by the Fourth Amended and
Restated Limited Partnership Agreement of the operating partnership.
The Stockholders Agreement prohibits the Company, without the prior written consent of Blackstone, from amending certain provisions of the Fourth Amended and
Restated Limited Partnership Agreement in a manner adverse in any respect to Blackstone (in its capacity as limited partners of the operating partnership), or to add any new
provision to the Fourth Amended and Restated Limited Partnership Agreement that would have a substantially identical effect or from taking any action that is intended to or
otherwise would have a substantially identical effect.
Restrictions on Mergers, Sales, Transfers and Other Significant Transactions of the Company
Prior to the date on which Blackstone and any of its affiliates own less than 9.8% of the Equity Consideration, the Company may not consummate any of (a) a merger,
consolidation or other combination of the Company’s or the operating partnership’s assets with another person, (b) a sale of all or substantially all of the assets of the
operating partnership, (c) sale of all or substantially all of the Company’s assets not in the ordinary course of the operating partnership’s business or (d) a reclassification,
recapitalization or change in the Company’s outstanding equity securities (other than in connection with a stock split, reverse stock split, stock dividend, change in par value,
increase in authorized shares, designation or issuance of new classes of equity securities or any event that does not require the approval of the Company’s stockholders), in
each case, which is submitted to the holders of the common stock of Hudson Pacific Properties, Inc. for approval, unless such transaction is also approved by the partners of
the operating partnership holding common units on a “pass through” basis, which, in effect, affords the limited partners of the operating partnership that hold common units
the right to vote on such transaction as though such limited partners held the number of shares of common stock into which their common units were then exchangeable and
voted together with the holders of the outstanding common stock of Hudson Pacific Properties, Inc. with respect to such transaction.
Stock Offering Funding of Redemption
If Blackstone or any of its affiliates who become limited partners of the operating partnership (“Specified Limited Partners”) delivers a notice of redemption with
respect to common units that, if exchanged for common stock, would result in a violation of the Excepted Holder Limit (as defined below) or otherwise violate the restrictions
on ownership and transfer of the Company’s stock set forth in its charter and that have an aggregate value in excess of $50.0 million as calculated pursuant to the terms of the
Fourth Amended and Restated Limited Partnership Agreement, then, if the Company is then eligible to register the offering of its securities on Form S-3 (or any successor
form similar thereto), the Company may elect to cause the operating partnership to redeem such common units with the net proceeds from a public or private offering of the
number of shares of common stock that would be deliverable in exchange for such common units but for the application of the Excepted Holder Limit and other restrictions on
ownership and transfer of the Company’s stock. If the Company elects to fund the redemption of any common units with such an offering, it will allow all Specified Limited
Partners the opportunity to include additional common units held by such Specified Limited Partners in such redemption.
F- 54
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. 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, the 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, 2016, 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, 2016, 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.
A significant portion of the Company’s rental revenue is derived from tenants in the media and entertainment and technology industries. As of December 31, 2016
approximately 14.0% and 27.9% of rentable square feet were related to the media and entertainment and technology industries, respectively.
As of December 31, 2016, the Company’s 15 largest tenants represented approximately 22.4% of its rentable square feet and no single tenant accounted for more than
10%.
Letters of Credit
As of December 31, 2016, the Company has outstanding letters of credit totaling approximately $2.6 million under the unsecured revolving credit facility. The letters
of credit are primarily related to utility company security deposit requirements.
14. Quarterly Financial Information (unaudited)
The tables below present selected quarterly information for 2016 and 2015 for the Company:
Total revenues
Income from operations
Net income
Net income attributable to Hudson Pacific Properties, Inc. stockholders
Net income attributable to common stockholders’ per share—basic
Net income attributable to common stockholders’ per share—diluted
For the Three Months Ended(1)
December 31, 2016 September 30, 2016
June 30, 2016
March 31, 2016
$
$
167,198
26,845
28,530
22,279
0.18
0.18
$
164,583
23,740
5,217
1,847
0.02
0.02
$
154,321
19,811
4,035
839
0.01
0.01
153,537
19,011
5,976
2,253
0.03
0.03
December 31, 2015 September 30, 2015
June 30, 2015
March 31, 2015
For the Three Months Ended(1)
Total revenues
Income from operations
Net (loss) income
Net (loss) income attributable to Hudson Pacific Properties, Inc. stockholders
Net (loss) income attributable to common stockholders’ per share—basic
$
$
154,651
13,803
(2,745)
(6,460)
(0.07)
(0.07)
$
151,556
4,165
(1,828)
(3,905)
(0.04)
(0.04)
$
151,819
16,094
(36,083)
(25,243)
(0.28)
(0.28)
62,824
13,326
24,574
19,211
0.25
0.25
Net (loss) income attributable to common stockholders’ per share— diluted
_____________
(1) The summation of the quarterly financial data may not equal the annual number reported on the consolidated statements of operations due to rounding.
F- 55
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)
15. Subsequent Events
Common Stock Offering and Common Unit Repurchase
On January 10, 2017, the Company, Blackstone and the Farallon Funds completed a public offering of 18,673,808 shares of common stock of Hudson Pacific
Properties, Inc., including 8,881,575 shares offered by the Company and 9,792,233 shares by Blackstone and the Farallon Funds. The Company’s proceeds from the offering
were used to repurchase 8,881,575 common units in the operating partnership held by Blackstone and the Farallon Funds. Following the completion of these transactions,
Blackstone and the Farallon Funds no longer hold any ownership interests in the Company or the operating partnership and the Stockholders Agreement between the
Company, the operating partnership and Blackstone automatically terminated.
3402 Pico Disposition
On January 20, 2017, the Company entered into an agreement to sell its 3402 Pico property for $34.0 million (before certain credits, prorations and closing costs). The
Company expects this transaction to close in the first quarter of 2017, and intends to use proceeds to pay down amounts outstanding under its unsecured revolving credit
facility.
222 Kearny Street Disposition
On February 14, 2017, the Company sold its 222 Kearny Street property for $51.8 million (before certain credits, prorations and closing costs). The Company applied
$45.0 million of proceeds from the sale to pay down amounts outstanding under the unsecured revolving credit facility.
F- 56
Table of Contents
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2016
(In thousands)
Location
Encumbrances Land
Improvements Improvements
Carrying
Costs
Building &
Land
Improvements Total
Accumulated
Depreciation
(3)
Year
Built /
Renovated
Year
Acquired
Initial Costs
Building &
Cost Capitalized
Subsequent to
Acquisition
Gross Carrying Amount
San Francisco
Bay Area, CA
$
—
$18,058
$
41,046
$
11,230
$ 1,736
$18,058
$
54,012
72,070
$
(14,594)
Various
2007
Los Angeles, CA
Technicolor
Building(1)
Icon & CUE Los Angeles, CA
6,599
27,187
25,032
3,088
6,599
55,307
61,906
(17,158)
2008
2008
—
—
—
18,000
137,937
2,371
5,320
—
—
—
143,257
20,371
143,257
20,371
—
(4,020)
Ongoing
1986
2008
2010
100,409
58,251
110,656
18,871
Los Angeles, CA
27,929
17,979
25,110
—
10,718
1,293
41,226
34,990
52,242
—
—
—
—
—
608
1,522
—
12,011
12,011
(3,553)
1964/2002
2010
41,226
87,232
128,458
(9,112)
1976
2010
58,251
129,527
187,778
(23,533)
1940/1989
2010
17,979
25,718
43,697
(4,688)
1957/1974
2010
—
—
—
—
—
5,620
4,187
14,745
8,063
10,744
42,650
16,608
72,392
1,400
1,200
14,029
1,115
4,187
5,620
16,267
23,207
21,887
27,394
(2,440) 1950/2005
(4,772)
1905
2011
2011
3,159
5,573
738
—
—
—
10,744
45,809
56,553
(7,207)
1906/1999
2011
16,608
77,965
94,573
(12,391)
1967
2011
1,400
1,938
3,338
(510)
1973
2012
—
17,882
79,305
16,285
—
17,882
95,590
113,472
(13,465)
1912/1985
2012
Element LA
Los Angeles, CA
168,000
79,769
19,755
85,152
10,391
79,769
115,298
195,067
(6,458)
1949
Pinnacle I
Los Angeles, CA
Los Angeles, CA
129,000
—
28,518
14,120
171,657
11,319
10,157
11,409
—
1,028
28,518
14,120
181,814
23,756
210,332
37,876
(20,168)
(1,920)
2002
1961
2012,
2013
2012
2013
2013
2013
87,000
—
15,430
35,899
115,537
184,437
64,500
28,996
71,768
4,803
41,191
334
7,349
573
(60)
—
—
15,430
35,899
115,871
191,786
131,301
227,685
(12,019)
2005
(19,865)
Various
—
—
28,996
72,341
101,337
(7,678)
2000
2013
4,803
41,131
45,934
(4,516)
1991
2013
27,684
29,824
8,373
379
27,684
38,576
66,260
(3,650)
Various
2014
—
—
30,725
453
—
31,178
31,178
16,410
2,136
8,571
2,257
16,410
12,964
29,374
—
—
Ongoing
2014
1950
2014
—
326,033
6,068
—
—
332,101
332,101
(21,302)
1971
2015
F- 57
Property
name
Office
875 Howard
Street
Property(1)
Del Amo
Office
9300
Wilshire
1455
Market
Street(1)
Rincon
Center
10950
Washington
Los Angeles, CA
Los Angeles, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
604 Arizona
(1)
275 Brannan
Street(1)
Los Angeles, CA
San Francisco
Bay Area, CA
625 Second
Street(1)
San Francisco
Bay Area, CA
6922
Hollywood(1)
10900
Washington
(1)
901 Market
Street(1)
Los Angeles, CA
Los Angeles, CA
San Francisco
Bay Area, CA
3401
Exposition(1)
Pinnacle II
Los Angeles, CA
First & King
(1)
Greater Seattle,
WA
Met Park
North
Northview
Center(1)
Greater Seattle,
WA
Greater Seattle,
WA
Merrill Place
(1)
Greater Seattle,
WA
450 Alaskan
Way
Greater Seattle,
WA
3402 Pico
(Existing)(1)
Palo Alto
Square(1)
Los Angeles, CA
San Francisco
Bay Area, CA
—
—
—
—
—
—
—
—
—
—
Table of Contents
Initial Costs
Cost Capitalized
Subsequent to
Acquisition
Gross Carrying Amount
Property
name
Location
Encumbrances Land
Building &
Improvements Improvements
Carrying
Costs
Land
Building &
Improvements Total
Accumulated
Depreciation
(3)
Year
Built /
Renovated
Year
Acquired
3400
Hillview(1)
San Francisco
Bay Area, CA
Embarcadero
Place(1)
San Francisco
Bay Area, CA
Foothill
Research
Center(1)
Page Mill
Center(1)
Clocktower
Square(1)
Lockheed(1)
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
2180 Sand
Hill Road(1)
San Francisco
Bay Area, CA
Towers at
Shore Center
(1)
Skyway
Landing(1)
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
Shorebreeze
(1)
San Francisco
Bay Area, CA
555 Twin
Dolphin(1)
333 Twin
Dolphin(1)
Peninsula
Office Park
(1)
Metro
Center(1)
Concourse(1)
Gateway(1)
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
Metro Plaza
(1)
San Francisco
Bay Area, CA
1740
Technology
(1)
Skyport
Plaza(1)
Techmart
Commerce
Center(1)
Campus
Center(1)
4th &
Traction(1)
405 Mateo(1)
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
San Francisco
Bay Area, CA
Los Angeles,
CA
Los Angeles,
CA
—
—
—
—
—
—
—
—
—
—
—
—
—
159,641
41,050
77,006
—
—
—
—
133,994
93,949
34,561
13,663
50,559
2,425
3,833
2,803
267
(668)
586
147,625
5,245
72,673
144,188
6,620
37,959
63,559
69,448
59,806
40,614
73,457
36,441
64,892
1,076
3,249
1,933
6,029
—
—
—
—
—
—
—
—
—
—
—
—
—
162,066
162,066
(12,711)
1991
2015
41,050
80,839
121,889
(5,095)
1984
2015
—
—
—
—
136,797
136,797
(12,193)
1991
2015
152,870
152,870
(11,884)
1970/2016
2015
94,216
94,216
(5,282)
1983
2015
33,893
33,893
(2,372)
1991
2015
13,663
51,145
64,808
(2,812)
1973
2015
72,673
150,808
223,481
(8,265)
2001
2015
37,959
64,635
102,594
(4,498)
2001
2015
69,448
63,055
132,503
(3,533)
1985/1989
2015
40,614
75,390
116,004
(4,392)
1989
2015
36,441
70,921
107,362
(4,201)
1985
2015
—
109,906
104,180
5,787
—
109,906
109,967
219,873
(8,071)
Various
2015
—
—
—
—
—
—
—
—
—
—
—
313,683
19,416
45,085
224,271
3,983
33,117
121,217
15,914
16,038
106,156
8,052
49,486
5,610
2,235
29,033
153,844
890
—
66,660
6,505
—
—
—
—
—
—
—
—
333,099
333,099
(19,182)
Various
2015
45,085
228,254
273,339
(15,496)
Various
2015
33,117
137,131
170,248
(11,496)
Various
2015
16,038
111,766
127,804
(7,207)
1986
2015
8,052
51,721
59,773
(4,220)
1985
2015
29,033
154,734
183,767
(12,751)
2000/2001
2015
—
73,165
73,165
(5,228)
1986
2015
59,460
79,604
444
—
59,460
80,048
139,508
(7,249)
N/A
2015
12,140
37,110
25,100
3,077
12,140
65,287
77,427
13,040
26,960
3,127
1,949
13,040
32,036
45,076
—
—
Various
2015
Various
2015
F- 58
Table of Contents
Initial Costs
Building &
Property
name
11601
Wilshire(1)
Hill7
Page Mill Hill
(1)
Location Encumbrances Land
Improvements Improvements
—
—
292,382
2,755
101,000
36,888
137,079
—
—
131,402
60
438
—
—
—
Los
Angeles,
CA
Greater
Seattle,
WA
San
Francisco
Bay
Area, CA
Cost Capitalized
Subsequent to
Acquisition
Gross Carrying Amount
Carrying
Costs
Land
Improvements Total
Building &
—
295,137
295,137
Accumulated
Depreciation
(3)
(5,271)
Year
Built /
Renovated
Year
Acquired
1983
2016
36,888
137,139
174,027
(971)
2015
2016
—
131,840
131,840
(188)
1975
2016
Media &
Entertainment
Sunset Gower
Studios(2)
Sunset
Bronson
Studios(2)
Total
Real estate
held for sale:
222 Kearny
Street(1)
Los
Angeles,
CA
Los
Angeles,
CA
5,001
79,320
64,697
26,805
139
79,320
91,641
170,961
(20,387)
Various
—
77,698
32,374
41,070
422
77,698
73,866
151,564
(9,394)
Various
2007,
2011,
2012
2008
$
682,839
$1,281,808 $ 4,504,061
$
653,078
$ 31,354
$1,281,808 $ 5,188,493
$6,470,301 $
(419,368)
—
7,563
23,793
5,827
—
7,563
29,620
37,183
(4,582)
1901/1986
2010
San
Francisco
Bay
Area, CA
$
682,839
$1,289,371 $ 4,527,854
$
658,905
$ 31,354
$1,289,371 $ 5,218,113
$6,507,484 $
(423,950)
_____________
(1) These properties are encumbered under our line of credit, which, as of December 31, 2016, has an outstanding balance of $300.0 million.
(2) The encumbrance amount relates to both Sunset Gower Studios and Sunset Bronson Studios. See description of notes payable in Part IV, Item 15(a) “ Financial Statement and Schedules-Note 5 to
the Consolidated Financial Statements-Notes Payable.”
(3) The Company computes depreciation using the straight-line method over the estimated useful lives over the shorter of the ground lease term or 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.
The aggregate gross cost of property included above for federal income tax purposes approximated $6.0 billion, unaudited as of December 31, 2016.
F- 59
Table of Contents
The following table reconciles the historical cost of total real estate held for investment and accumulated depreciation from January 1, 2014 to December 31, 2016:
Total investment in real estate, beginning of year
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
Year Ended December 31,
2016
2015
2014
$
5,976,526
$
2,239,741
$
2,035,330
597,751
296,399
894,150
(27,451 )
(335,741 )
(363,192 )
3,699,289
198,561
3,897,850
(13,556 )
(147,509 )
(161,065 )
114,008
128,018
242,026
(23,977 )
(13,638 )
(37,615 )
2,239,741
(68,446 )
2,171,295
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
6,507,484
(37,183 )
5,976,526
(353,067 )
$
6,470,301
$
5,623,459
$
Total accumulated depreciation, beginning of year
$
(272,724 ) $
(142,561 ) $
(116,342 )
Additions during period:
Depreciation of real estate
Total additions during period
Deductions during period:
Deletions
Write-offs due to sale
Total deductions during period
(182,219 )
(182,219 )
(151,066 )
(151,066 )
25,622
5,371
30,993
12,999
7,904
20,903
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
(423,950 )
4,582
(419,368 ) $
(272,724 )
8,865
(263,859 ) $
$
(Back To Top)
F- 60
Section 2: EX-10.75 (EXHIBIT 10.75)
(50,044 )
(50,044 )
22,310
1,515
23,825
(142,561 )
7,904
(134,657 )
Exhibit 10.75
SECOND AMENDMENT TO
HUDSON PACIFIC PROPERTIES, INC.
AND HUDSON PACIFIC PROPERTIES, L.P.
2010 INCENTIVE AWARD PLAN
This Second Amendment (“Second Amendment”) to the Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan, as amended
(the “Plan”), is adopted by the Board of Directors (the “Board”) of Hudson Pacific Properties, Inc., a Maryland corporation (the “Company”), as of December 21, 2016.
Capitalized terms used in this Second Amendment and not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.
A.
The Company currently maintains the Plan.
RECITALS
B.
C.
Pursuant to Section 13.1 of the Plan, the Plan may be wholly or partially amended at any time or from time to time by the Board.
The Board desires to amend the Plan as set forth herein.
AMENDMENT
Effective as of the date set forth above, the Plan is hereby amended as follows.
1. Section 11.2. Section 11.2 of the Plan is hereby amended and restated in its entirety as follows:
“Tax Withholding. The Company and its Affiliates shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company or an
Affiliate, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant’s social security, Medicare and any other employment tax
obligation) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of the Plan. The Administrator may in its sole
discretion and in satisfaction of the foregoing requirement, or in satisfaction of such additional withholding obligations as a Participant may have elected or agreed,
allow a Participant to satisfy such obligations by any payment means described in Section 11.1 above, including without limitation, by allowing such Participant to
elect to have the Company or an Affiliate withhold Shares otherwise issuable under an Award (or allowing the surrender of Shares). The number of Shares which may
be so withheld or surrendered shall be limited to the number of Shares which have a fair market value on the date of withholding or repurchase no greater than the
aggregate amount of such liabilities based on the maximum statutory withholding rates in the applicable jurisdictions for federal, state, local and foreign income tax
and payroll tax purposes that are applicable to such taxable income. The Administrator shall determine the fair market value of the Shares, consistent with applicable
provisions of the Code, for tax withholding obligations due in connection with a broker-assisted cashless Option or Stock Appreciation Right exercise involving the
sale of shares to pay the Option or Stock Appreciation Right exercise price or any tax withholding obligation.”
2. This Second Amendment shall be and is hereby incorporated in and forms a part of the Plan.
3.
Except as expressly provided herein, all terms and conditions of the Plan shall remain in full force and effect.
[Signature Page Follows]
IN WITNESS WHEREOF, I hereby certify that the foregoing Second Amendment was duly adopted by the Board of Directors of Hudson Pacific Properties, Inc. on
December 21, 2016.
Exhibit 10.75
Hudson Pacific Properties, Inc.
By:
/s/ Kay Tidwell
Kay Tidwell
Executive Vice President, General Counsel
Date:
December 21, 2016
(Back To Top)
Section 3: EX-12.1 (EXHIBIT 12.1)
HUDSON PACIFIC PROPERTIES, INC.
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,
2016
2015
2014
2013
2012
$
43,758
$
(16,082) $
23,522
$
(2,594) $
(5,006)
76,044
11,307
1,769
—
89,120
50,667
6,516
1,134
5,970
64,287
25,932
6,938
174
—
33,044
25,470
4,562
144
—
30,176
19,071
1,461
153
—
20,685
577
410
232
115
73
(11,307)
—
122,148
$
(6,516)
(5,970)
36,129
$
(6,938)
—
49,860
$
(4,562)
—
23,135
$
(1,461)
—
14,291
89,120
636
89,756
1.36
—
$
$
64,287
12,105
76,392
0.47
40,263
$
$
33,044
12,785
45,829
1.09
—
$
$
30,176
12,893
43,069
0.54
19,934
$
$
20,685
12,924
33,609
0.43
19,318
$
$
$
Earnings Available for Fixed Charges and Preferred Dividends:
Net income (loss)
Plus fixed charges:
Interest expense (including amortization of loan fees)
Capitalized interest and loan fees
Estimate of interest within rental expense
Distributions on redemption of Series B preferred stock
Fixed Charges
Plus:
Amortization of capitalized interest
Less:
Capitalized interest and loan fees
Distributions on redemption of Series B preferred stock
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
(Back To Top)
Section 4: EX-21.1 (EXHIBIT 21.1)
Subsidiaries of Hudson Pacific Properties, Inc.
Exhibit 21.1
Name
Jurisdiction of Formation / Incorporation
Combined/Hudson 9300 Culver LLC
HCTD, LLC
HFOP City Plaza, LLC
Howard Street Associates, LLC
Hudson 3400 Hillview Avenue, LLC
Hudson 1003 4th Place, LLC
Hudson 10900 Washington, LLC
Hudson 10950 Washington, LLC
Hudson 1099 GP, LLC
Hudson 1099 Stewart L.P.
Hudson 1099 Stewart REIT, LLC
Hudson 1099 Stewart Street, LLC
Hudson 11601 Wilshire, LLC
Hudson 12655 Jefferson, LLC
Hudson 1455 GP, LLC
Hudson 1455 Market Street, LLC
Hudson 1455 Market, L.P.
Hudson 1740 Technology, LLC
Hudson 1861 Bundy, LLC
Hudson 2180 Sand Hill Road, LLC
Hudson 222 Kearny, LLC
Hudson 275 Brannan, LLC
Hudson 3005 Democracy Way, LLC
Hudson 3176 Porter Drive, LLC
Hudson 333 Twin Dolphin Plaza, LLC
Hudson 3401 Exposition, LLC
Hudson 3402 Pico, LLC
Hudson 405 Mateo, LLC
Hudson 4th & Traction, LLC
Hudson 555 Twin Dolphin Plaza, LLC
Hudson 604 Arizona, LLC
Hudson 6040 Sunset, LLC (f/k/a SGS Holdings, LLC)
Hudson 625 Second, LLC
Hudson 6922 Hollywood, LLC
Hudson 801 S. Broadway Participation, LLC
Hudson 901 Market, LLC
Hudson 9300 Culver, LLC
Hudson 9300 Wilshire, LLC
Hudson Campus Center Land, LLC
Hudson Campus Center, LLC
Hudson Capital, LLC
Hudson Clocktower Square, LLC
Hudson Concourse, LLC
Hudson Del Amo Office, LLC
Hudson Element LA, LLC (f/k/a Hudson Lab4, LLC)
Hudson Embarcadero Place, LLC
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
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
Delaware
Delaware
Delaware
Delaware
Delaware
Hudson First & King, LLC
Hudson Foothill Research Center, LLC
Hudson Gateway Place, LLC
Hudson JW, LLC
Hudson MC Partners, LLC
Hudson Media and Entertainment Management, LLC
Hudson Merrill Place, LLC
Hudson Met Park North, LLC
Hudson Metro Center, LLC
Hudson Metro Plaza, LLC
Hudson Northview, LLC
Hudson One Bay Plaza, LLC
Hudson OP Management, LLC
Hudson Pacific Properties, L.P.
Hudson Pacific Services, Inc.
Hudson Page Mill Center, LLC
Hudson Page Mill Hill, LLC
Hudson Palo Alto Square, LLC
Hudson Patrick Henry Drive, LLC
Hudson Peninsula Office Park, LLC
Hudson Rincon Center, LLC
Hudson Shorebreeze, LLC
Hudson Skyport Plaza Land, LLC
Hudson Skyport Plaza, LLC
Hudson Skyway Landing, LLC
Hudson Techmart Commerce Center, LLC
Hudson Towers at Shore Center, LLC
P1 Hudson MC Partners, LLC
P2 Hudson MC Partners, LLC
Rincon Center Commercial, LLC
Sunset Bronson Entertainment Properties, LLC
Sunset Bronson Services, LLC
Sunset Gower Entertainment Properties, LLC
Sunset Gower Services, LLC
Sunset Studios Holdings, LLC
Exhibit 21.1
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
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
(Back To Top)
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)
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. 333-176543) of Hudson Pacific Properties, Inc.; and
Registration Statement (Form S-3 No. 333-202799) of Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
of our reports dated February 17, 2017, with respect to the consolidated financial statements and schedule of Hudson Pacific Properties, Inc. and Hudson Pacific Properties
L.P. 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, 2016.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 17, 2017
(Back To Top)
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:
February 17, 2017
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
(Back To Top)
Section 7: EX-31.2 (EXHIBIT 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 ensure
b)
c)
d)
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:
February 17, 2017
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Operating Officer, Chief Financial Officer and Treasurer
(Back To Top)
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:
February 17, 2017
(Back To Top)
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
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:
February 17, 2017
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Operating Officer, Chief Financial Officer and Treasurer
(Back To Top)
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 Operating Officer and 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, 2016, 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:
February 17, 2017
Date:
February 17, 2017
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Operating Officer, Chief Financial Officer and Treasurer
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.
(Back To Top)
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 Operating Officer and 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, 2016, 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:
February 17, 2017
Date:
February 17, 2017
/s/ VICTOR J. COLEMAN
Victor J. Coleman
Chief Executive Officer
Hudson Pacific Properties, Inc., sole general partner of Hudson
Pacific Properties, L.P.
/s/ MARK T. LAMMAS
Mark T. Lammas
Chief Operating Officer, Chief Financial Officer and Treasurer
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.
(Back To Top)