More annual reports from Hudson Pacific Properties:
2023 ReportPeers and competitors of Hudson Pacific Properties:
CLS HoldingsToggle SGML Header (+)
Section 1: 10-K (10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____
Commission file number 001-34789 (Hudson Pacific Properties, Inc.)
Commission file number: 333-202799-01 (Hudson Pacific Properties, L.P.)
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)
(310) 445-5700
(Registrant’s telephone number, including area code)
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
Hudson Pacific Properties, L.P.
Title of each class
Name of each exchange on which registered
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 (cid:95) No (cid:134) Hudson Pacific Properties, L.P. Yes (cid:134) No (cid:95)
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 (cid:134) No (cid:95) Hudson Pacific Properties, L.P. Yes (cid:134) No (cid:95)
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 (cid:95) No (cid:134) Hudson Pacific Properties, L.P. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 (cid:95) No (cid:134) Hudson Pacific Properties, L.P. Yes (cid:95) No (cid:134)
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. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Hudson Pacific Properties, Inc.
Large accelerated filer (cid:95)
Accelerated filer (cid:134)
Non-accelerated filer (cid:134)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:134)
Emerging growth company (cid:134)
Hudson Pacific Properties, L.P.
Large accelerated filer (cid:134)
Accelerated filer (cid:134)
Non-accelerated filer (cid:95)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:134)
Emerging growth company (cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
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 (cid:134) No (cid:95) Hudson Pacific Properties, L.P. Yes (cid:134) No (cid:95)
As of June 30, 2017, 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 and directors are “affiliates” of the registrant) was $5.23 billion based upon the last sales price on June 30, 2017 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 9, 2018 was 156,679,052.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2018 Annual Meeting of Stockholders to be held May 24, 2018 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.
Table of Contents
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the period ended December 31, 2017 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, 2017, 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.
The remaining approximately 0.4% of outstanding common units at December 31, 2017 were owned by certain of our executive officers and directors, certain of their affiliates and other
outside investors. 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 disclosures apply 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.
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.
2
Table of Contents
HUDSON PACIFIC PROPERTIES, INC. AND HUDSON PACIFIC PROPERTIES, L.P.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
ITEM 5.
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
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
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.
Exhibits, Financial Statement Schedules
SIGNATURES
PART IV
3
Page
4
9
27
27
37
37
38
40
43
44
70
71
71
71
73
74
74
74
74
74
74
80
Table of Contents
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 and management expertise to create additional value. As of December 31, 2017, our portfolio included
office properties, comprising an aggregate of approximately 13.3 million square feet, and media and entertainment properties, comprising approximately 1.2 million square feet of
sound-stage, office and supporting production facilities. We also own undeveloped density rights for approximately 3.0 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 and 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.
Major Tenants
As of December 31, 2017, the 15 largest tenants in our office portfolio represented approximately 37.3% of the total annualized base rent generated by our office properties. As
of December 31, 2017, our two largest tenants were Google, Inc. and Netflix, Inc., which together accounted for 9.8% of the annualized base rent generated by our office properties.
For further detail regarding major tenants, see Item 2 “Properties—Tenant Diversification of Office Portfolio.”
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, 2017, our senior management team owned approximately 1.5% 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
4
Table of Contents
•
•
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 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 14 offerings (including two public
offerings of 8.375% Series B Cumulative Preferred Stock, ten public offerings of our common stock, one private placement of our common stock and one public offering of
senior notes) and continuous offerings under our at-the-market (“ATM”) program for aggregate total proceeds of approximately $3.81 billion (before underwriters’
discounts and transaction costs) as of December 31, 2017. 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, 2017, we had total borrowing capacity of
approximately $400.0 million under our unsecured revolving credit facility, $100.0 million of which had been drawn. Based on the closing price of our common stock of
$34.25 on December 31, 2017, 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 31.2%. We believe our access to capital and flexible and conservative capital structure provide us with an advantage over many of our private and
public competitors as we look to take advantage of growth opportunities.
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 (“EOP Acquisition”) from certain affiliates of Blackstone Group L.P. (“Blackstone”).
The EOP Acquisition consisted of 26 high-quality office assets totaling approximately 8.2 million square feet and two development parcels located throughout Northern California. 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 informed us that they no longer owned common stock or common units 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
5
Table of Contents
with sellers of similar properties to locate suitable purchasers may result in us receiving lower proceeds from a sale or in us not being able to dispose of a property at a time of our
choosing due to the lack of an acceptable return.
For further discussion of the potential impact of competitive conditions on our business, see Item 1A “Risk Factors.”
Segment and Geographic Financial Information
We report our results of operations through two segments: (i) office properties and (ii) media and entertainment properties. As of December 31, 2017, the office properties
reporting segment included 51 properties, totaling approximately 13.3 million square feet strategically located in many of our target markets, while the media and entertainment reporting
segment included three properties, totaling approximately 1.2 million square feet.
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, 2017, we had 293 employees. At December 31, 2017, four of our employees were subject to collective bargaining agreements. Each 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 have 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 (“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
6
Table of Contents
properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination.
Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated,
and these restrictions may require substantial expenditures.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum
products or other hazardous or toxic substances. Similarly, some of our properties were used in the past for commercial or industrial purposes, or are currently used for commercial
purposes, that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar
commercial or industrial purposes. As a result, some of our properties have been or may be impacted by contamination arising from the release of such hazardous substances or
petroleum products. Where we have deemed appropriate, we have taken steps to address identified contamination or mitigate risks associated with such contamination; however, we are
unable to ensure that further actions will not be necessary. As a result of the foregoing, we could potentially incur material liabilities.
Independent environmental consultants have conducted Phase I Environmental Site Assessments at all of the properties in our portfolio using the American Society for Testing
and Materials (“ASTM”) Practice E 1527-05. A Phase I Environmental Site Assessment is a report prepared for real estate holdings that identifies potential or existing environmental
contamination liabilities. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties.
These assessments do not generally include soil samplings, subsurface investigations or asbestos or lead surveys. None of the recent site assessments identified any known past or
present contamination that we believe would have a material adverse effect on our business, assets or operations. However, the 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 (“ACBM”) or lead-based paint (“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.
7
Table of Contents
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 50% of the portfolio achieving an ENERGY 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, in 2017 we developed and began implementing 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 Giving 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.
8
Table of Contents
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
the inability to successfully integrate acquired properties, realize the anticipated benefits of acquisitions or capitalize on value creation opportunities;
9
Table of Contents
•
•
•
the impact of changes in the tax laws as a result of recent federal tax reform legislation and uncertainty as to how some of those changes may be applied;
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 area of the San Francisco submarket. 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:
•
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;
10
Table of Contents
•
•
•
we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently
unable to complete;
even if we enter into agreements for the acquisition of properties, these agreements are typically subject to customary conditions to closing, including the satisfactory
completion of our due diligence investigations; and
we may be unable to finance the acquisition on favorable terms or at all.
If we are unable to finance property acquisitions or acquire properties on favorable terms, or at all, our financial condition, results of operations, cash flow and the per share
trading price of our securities could be adversely affected. In addition, failure to identify or complete acquisitions of suitable properties could slow our growth.
Our future acquisitions may not yield the returns we expect.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be exposed to the following significant risks:
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;
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;
•
•
•
•
•
• 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 federal corporate income tax to the extent that we
distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may
11
Table of Contents
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:
•
•
•
•
•
•
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, registered senior notes, term loan facility and note purchase agreement restrict our ability to engage in some business activities.
Our unsecured revolving credit facility, registered senior notes, term loan facility and note purchase agreement contain customary negative covenants and other financial and
operating covenants that, among other things:
•
•
restrict our ability to incur additional indebtedness;
restrict our ability to make certain investments;
12
Table of Contents
•
•
•
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:
•
•
•
•
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 Sunset Las Palmas Studios property has only been under our management since it was acquired in 2017. This property may have characteristics or deficiencies unknown to
us that could affect its valuation or revenue potential. In addition, there can be no assurance that the operating performance of this property will not decline under our management. We
cannot assure you that we will be able to operate this property 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.
13
Table of Contents
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, 2017, the 15 largest tenants in our office portfolio represented approximately 37.3%
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, 2017, our two largest tenants were Google, Inc. and Netflix, Inc.,
which together accounted for 9.8% of the annualized base rent generated by our office properties. If Google, Inc. and Netflix, 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, 2017, approximately 10.5% of the square footage of the office properties in our portfolio was available (taking into account uncommenced leases signed as
of December 31, 2017), and an additional approximately 13.8% of the square footage of the office properties in our portfolio is scheduled to expire in 2018 (includes leases scheduled to
expire on December 31, 2017). Furthermore, substantially all of the square footage of the media and entertainment properties in our portfolio (other than KTLA and Netflix, Inc. 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 adversely affect 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.
14
Table of Contents
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.
Eleven 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 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 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 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 building and may no longer have the right to receive any of the rental income from the Del Amo 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 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 those arising 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.
15
Table of Contents
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 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 office property. On October 7, 2016, we entered into another joint venture with CPPIB to acquire the Hill7 property. In addition to our joint ventures with 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.
16
Table of Contents
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.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology
(“IT”) networks and related systems.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions, malware, computer viruses, attachments to e-mails, persons inside our
organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or
disruption, particularly through cyber attacks or cyber intrusions, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number,
intensity and sophistication of attempted attacks and intrusions from around the world have recently increased. Our IT networks and related systems are essential to the operation of our
business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants.
Although we make efforts to maintain the security and integrity of our IT networks and related systems, and we have implemented various measures to manage the risk of a security
breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or
damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches
evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be
unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
•
•
•
•
•
•
•
•
A security breach or other significant disruption involving our IT networks and related systems could:
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;
result in misstated financial reports, violations of loan covenants, and/or missed reporting deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or
others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any resulting damages;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
damage our reputation among our tenants and investors generally.
Any or all of the foregoing could have an adverse effect on our financial condition, results of operations, cash flow and the per share trading price of our securities.
17
Table of Contents
Our business and operations would suffer in the event of IT networks and related systems failures.
Despite system redundancy and the planned implementation of a disaster recovery plan and security measures for our IT networks and related systems, our systems are
vulnerable to damage from any number of sources, including computer viruses, energy blackouts, natural disasters, terrorism, war, and telecommunication failure. We rely on our IT
networks and related systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including
financial transactions and keeping of records, which may include personal identifying information of tenants and lease data. We rely on commercially available systems, software, tools
and monitoring to provide security for processing, transmitting and storing confidential tenant information, such as individually identifiable information relating to financial accounts.
Any failure to maintain proper function, security and availability of our IT networks and related systems could interrupt our operations, damage our reputation and subject us to liability
claims or regulatory penalties. Further, we are dependent on our personnel and, although we are working to implement a formal disaster recovery plan to assist our employees and to
facilitate their maintaining continuity of operations after events such as energy blackouts, natural disasters, terrorism, war, and telecommunication failures, we can provide no assurance
that any of the foregoing events would not have an adverse effect on our results of operations.
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:
•
•
•
•
•
•
•
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
18
Table of Contents
financial condition or prospects of prospective purchasers, changes in national or international economic conditions, such as the current economic downturn, and changes in laws,
regulations or fiscal policies of jurisdictions in which the property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable
to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of
properties that otherwise would be in our best interest.
Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our financial
condition, results of operations, cash flow and per share trading price of our securities.
We could incur significant costs related to government regulation and litigation over environmental matters.
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and
damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to
investigate, clean up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal,
fines or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our
properties may expose us to third-party liability for costs of remediation and/or personal or property damage or materially adversely affect our ability to sell, lease or develop our
properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it
incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be
used or businesses may be operated, and these restrictions may require substantial expenditures. Some of our properties have been or may be impacted by contamination arising from
current or prior uses of the property, or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum or hazardous substances or
releases from tanks used to store such materials. 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
19
Table of Contents
or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or
other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain
or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants
could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to have occurred.
We may incur significant costs complying with various federal, state and local laws, regulations and covenants that are applicable to our properties.
The properties in our portfolio are subject to various covenants and federal, state and local laws and regulatory requirements, including permitting and licensing requirements.
Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and
may require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from local officials of community standards
organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things,
these restrictions may relate to fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and regulatory policies will not
adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs.
Our growth strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief or to comply with
applicable laws could have an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our securities.
In addition, federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our properties and operations. Under the ADA, all public
accommodations must meet federal requirements related to access and use by disabled persons. Some of our properties may currently be in non-compliance with the ADA. If one or
more of the 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
20
Table of Contents
engage in a fundamental change, including a recapitalization, a merger and a sale of all or substantially all of our assets, as a result of which our common stock ceases to be publicly
traded or common units cease to be exchangeable (at our option) for publicly traded shares of our stock, without the consent of holders of Series A preferred units if following such
transaction we will maintain certain leverage ratios and equity requirements, and pay certain minimum tax distributions to holders of our outstanding Series A preferred units.
Alternatively, we may redeem all or any portion of the then outstanding Series A preferred units for cash (at a price per unit equal to the redemption price). 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
21
Table of Contents
authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into
one or more classes or series of stock and set the terms of such newly classified or reclassified shares. Although our board of directors has no such intention at the present time, it could
establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium
price for our securities or that our stockholders otherwise believe to be in their best interest.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control
transactions that our stockholders otherwise believe to be in their best interest. Certain provisions of the Maryland General Corporation Law (“the 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
22
Table of Contents
•
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 through 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 through 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
23
Table of Contents
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 corporate income tax on our taxable
income;
we also could be subject to the federal alternative minimum tax for taxable years prior to 2018 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
24
Table of Contents
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 the value of
our total assets may be represented by securities of taxable REIT subsidiaries. We anticipate that the aggregate value of the stock and other securities of any taxable REIT subsidiaries
that we own will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable asset test 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.
25
Table of Contents
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.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs,
however, generally are not eligible for these reduced rates. Under recently enacted tax legislation (the “2017 Tax Legislation”), U.S. stockholders that are individuals, trusts and estates
generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years
beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6%
assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income.
Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations
that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our securities.
The power of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders and unitholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no
longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no
longer be required to distribute most of our taxable income to our stockholders and accordingly, distributions Hudson Pacific Properties, L.P. makes to its unitholders could be similarly
reduced.
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.
The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes
made by the 2017 Tax Legislation that could affect us and our stockholders include:
•
•
•
•
•
•
•
temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for
taxable years beginning after December 31, 2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax
rate of 21%;
permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as capital gain
dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31,
2017 and before January 1, 2026;
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real
property interests from 35% to 21%;
limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (determined without regard to the
dividends paid deduction);
generally limiting the deduction for net business interest expense in excess of 30% of a business’s “adjusted taxable income,” except for taxpayers that engage in certain real
estate businesses (including most equity REITs) and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer
depreciation periods); and
eliminating the corporate alternative minimum tax.
Many of these changes that are applicable to us are effective beginning with our 2018 taxable year, without any transition periods or grandfathering for existing transactions.
The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the IRS
and the U.S. Department of the Treasury, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will
affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax
legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial in the future. We continue to work with our tax advisors and
auditors to determine the full impact that the 2017 Tax Legislation as a whole will have on us.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
As of December 31, 2017, our portfolio consisted of 54 properties (52 wholly-owned properties and two properties owned by joint ventures), located in 13 California
submarkets and in three Seattle submarkets, totaling approximately 14.5 million square feet.
27
Table of Contents
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. Same-Store properties include all of the properties owned and included in our stabilized portfolio as of January 1, 2016 and still owned and included in the stabilized
portfolio as of December 31, 2017. Lease-up properties are defined as those properties that have not yet reached 92.0% occupancy since the date they were acquired or placed under
redevelopment or development.
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, 2017:
Location
SAME-STORE(5)
Greater Seattle, Washington
Northview Center
Met Park North
Merrill Place
505 First
83 King
Subtotal
San Francisco Bay Area, California
1455 Market(6)
275 Brannan
625 Second
875 Howard
901 Market
Rincon Center
Towers at Shore Center
Skyway Landing
3176 Porter (formerly Lockheed)
3400 Hillview
Clocktower Square
Foothill Research Center
Campus Center
1740 Technology
Concourse
Skyport Plaza
Subtotal
Los Angeles, California
6922 Hollywood
6040 Sunset (formerly Technicolor Building)
3401 Exposition
10900 Washington
10950 Washington
Element LA
Del Amo
Subtotal
Total Same-Store
NON-SAME-STORE
San Francisco Bay Area, California
555 Twin Dolphin
Page Mill Center
Submarket
Square Feet(1)
Percent Leased(2)
Annualized Base
Rent(3)
Annualized Base
Rent Per Square
Foot(4)
Lynnwood
South Lake Union
Pioneer Square
Pioneer Square
Pioneer Square
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
San Francisco
Redwood Shores
Redwood Shores
Palo Alto
Palo Alto
Palo Alto
Palo Alto
Milpitas
North San Jose
North San Jose
North San Jose
Hollywood
Hollywood
West Los Angeles
West Los Angeles
West Los Angeles
West Los Angeles
Torrance
182,009
190,748
163,768
288,140
185,206
1,009,871
94.8% $
3,544,226
$
95.8
95.8
97.4
100.0
96.8%
5,296,965
4,738,713
6,455,866
4,742,559
24,778,329
1,025,833
99.7% $
40,472,477
54,673
138,080
286,270
206,697
580,850
334,483
247,173
42,899
207,857
100,344
195,376
471,580
206,876
944,386
418,086
100.0
100.0
100.0
100.0
94.4
83.2
88.9
100.0
100.0
79.0
100.0
100.0
98.0
96.9
99.1
3,261,352
8,664,372
12,197,068
11,004,655
30,361,087
16,381,859
9,944,188
3,011,716
13,735,024
4,112,028
12,920,752
15,845,088
7,466,150
28,212,197
13,639,733
5,461,463
96.7% $
231,229,746
205,523
114,958
63,376
9,919
159,025
284,037
113,000
949,838
7,421,172
87.7% $
100.0
100.0
100.0
100.0
100.0
100.0
97.3% $
96.8% $
8,493,830
5,220,427
2,783,957
422,549
6,717,466
15,871,935
3,327,208
42,837,372
298,845,447
$
$
$
$
$
$
21.23
28.99
30.66
23.00
28.64
26.07
39.56
59.65
62.77
42.63
55.41
55.39
58.84
46.87
70.20
66.08
78.83
66.14
33.60
36.81
32.50
33.59
44.59
47.13
45.41
43.93
42.60
42.24
55.88
29.44
46.33
42.32
Redwood Shores
Palo Alto
198,936
176,245
93.1% $
9,595,641
$
99.9
12,090,642
51.83
68.64
28
Table of Contents
Location
Page Mill Hill
Subtotal
Los Angeles, California
ICON
Subtotal
Total Non-Same-Store
Total Stabilized
LEASE-UP
Greater Seattle, Washington
Hill7(7)
Subtotal
San Francisco Bay Area, California
Peninsula Office Park
Metro Center
333 Twin Dolphin
Shorebreeze
Palo Alto Square
Techmart
Gateway
Metro Plaza
Subtotal
Los Angeles, California
11601 Wilshire
Subtotal
Total Lease-Up
Total In-Service
REDEVELOPMENT
Greater Seattle, Washington
Submarket
Palo Alto
Hollywood
South Lake Union
San Mateo
Foster City
Redwood Shores
Redwood Shores
Palo Alto
Santa Clara
North San Jose
North San Jose
West Los Angeles
95 Jackson (formerly Merrill Place Theater Building)
Pioneer Square
Subtotal
Los Angeles, California
MaxWell
Fourth & Traction
604 Arizona
Subtotal
Total Redevelopment
DEVELOPMENT
Greater Seattle, Washington
450 Alaskan
Subtotal
Los Angeles, California
CUE
Subtotal
Downtown Los Angeles
Downtown Los Angeles
West Los Angeles
Pioneer Square
Hollywood
29
Square Feet(1)
Percent Leased(2)
Annualized Base
Rent(3)
Annualized Base
Rent Per Square
Foot(4)
182,676
557,857
325,757
325,757
883,614
8,304,786
284,527
284,527
447,739
730,215
182,789
230,932
333,254
284,440
609,093
456,921
87.1
93.3% $
10,371,206
32,057,489
100.0% $
100.0% $
95.8% $
96.7% $
17,800,735
17,800,735
49,858,224
348,703,671
100.0% $
100.0% $
89.0% $
79.6
74.6
71.5
76.8
88.9
81.3
76.5
9,371,541
9,371,541
18,550,336
27,571,653
7,735,117
8,730,444
20,373,010
10,536,177
15,811,721
12,382,999
3,275,383
80.4% $
121,691,457
500,475
500,475
4,060,385
12,365,171
88.1% $
88.1% $
82.7% $
92.1% $
17,876,406
17,876,406
148,939,404
497,643,075
$
$
$
$
$
$
$
$
$
$
$
$
$
31,659
31,659
99,090
120,937
44,260
264,287
295,946
170,974
170,974
91,953
91,953
79.2% $
79.2% $
—% $
—
100.0
16.7% $
23.4% $
— $
— $
— $
—
—
— $
— $
67.6% $
67.6% $
3,584,540
3,584,540
$
$
100.0% $
100.0% $
— $
— $
65.16
61.60
54.64
54.64
58.92
44.10
36.57
36.57
47.24
47.45
56.73
56.09
79.61
43.71
34.48
35.55
47.36
41.66
41.66
45.76
44.58
—
—
—
—
—
—
—
38.00
38.00
—
—
Table of Contents
Location
Total Development
Submarket
Square Feet(1)
Percent Leased(2)
Annualized Base
Rent(3)
Annualized Base
Rent Per Square
Foot(4)
262,927
78.9% $
3,584,540
$
38.00
HELD FOR SALE
San Francisco Bay Area, California
2600 Campus Drive (building 6 of Peninsula Office Park)
2180 Sand Hill
Embarcadero Place
Subtotal
Los Angeles, California
9300 Wilshire
Subtotal
Total Held for Sale
San Mateo
Palo Alto
Palo Alto
West Los Angeles
63,050
45,613
197,402
306,065
61,422
61,422
367,487
—% $
— $
94.6
77.2
4,228,529
6,969,599
63.9% $
11,198,128
78.9% $
78.9% $
66.4% $
56.2% $
2,276,443
2,276,443
13,474,571
17,059,111
$
$
$
$
$
—
97.97
45.74
57.27
46.99
46.99
55.23
50.42
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 (“BOMA”) rentable area. Square footage may change over time due to
926,360
re-measurement or re-leasing.
(2) Calculated as (i) square footage under commenced and uncommenced leases as of December 31, 2017, 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 leases as of December 31, 2017, 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 leases as of December 31, 2017. Annualized base rent does not reflect tenant reimbursements.
(5) Defined as all of the properties owned and included in our stabilized portfolio as of January 1, 2016 and still owned and included in the stabilized portfolio as of December 31, 2017.
(6) We have a 55% ownership interest in the consolidated joint venture that owns the 1455 Market property.
(7) We have a 55% ownership interest in the consolidated joint venture that owns the Hill7 property.
The following table sets forth certain information relating to each of the land properties owned as of December 31, 2017:
Location
San Francisco Bay Area, California
Cloud10 (formerly Skyport Plaza)
Campus Center
Subtotal
Los Angeles, California
EPIC
Sunset Bronson Studios—Lot D(2)
Sunset Gower Studios—Redevelopment
Sunset Las Palmas Studios—Harlow (formerly 1021 Seward)(3)
Sunset Las Palmas Studios—Redevelopment
Element LA
Subtotal
Submarket
Square Feet(1)
Percent of Total
North San Jose
Milpitas
Hollywood
Hollywood
Hollywood
Hollywood
Hollywood
West Los Angeles
350,000
946,350
1,296,350
300,000
19,816
423,396
106,125
400,000
500,000
1,749,337
TOTAL
_____________
(1) Square footage for land assets represents management’s estimate of developable square feet, the majority of which remains subject to entitlement approvals that have not yet been obtained.
(2) Square footage for Sunset Bronson Studios—Lot D represents management’s estimate of developable square feet for 33 residential units.
(3) Square footage for Sunset Las Palmas Studios—Harlow would require the demolition of approximately 45,000 square feet of existing improvements.
3,045,687
30
11.5%
31.1
42.6%
9.8%
0.7
13.9
3.5
13.1
16.4
57.4%
100.0%
Table of Contents
Leases at our media and entertainment properties are typically short-term leases of one year or less, other than the KTLA and Netflix, Inc. 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, 2017:
Property
Sunset Gower Studios
Sunset Bronson Studios
Total Same-Store Media & Entertainment
Sunset Las Palmas Studios(5)
Total Non-Same-Store Media & Entertainment
Total Media & Entertainment
Square Feet
Percent Leased
Annual Base Rent(2)
(1)
564,976
308,026
873,002
88.5%
94.9
90.7% (2)
$
$
16,733,352
11,197,439
27,930,791 (3)
$
$
Annual Base Rent Per
Leased Square Foot(3)
33.47
38.30
35.26 (4)
376,925
376,925
1,249,927
76.1
76.1% (6)
_____________
(1) Square footage for Sunset Gower Studios excludes 6,650 square feet of restaurant space that was taken off-line for redevelopment during the third quarter of 2017.
(2) Percent leased for Same-Store Media and Entertainment properties is the average percent leased for the 12 months ended December 31, 2017.
(3) Annual base rent for Same-Store Media and Entertainment properties reflects actual base rent for the 12 months ended December 31, 2017, excluding tenant reimbursements.
(4) Annual base rent per leased square foot for the Same-Store Media and Entertainment properties is calculated as (i) annual base rent divided by (ii) square footage under lease as of December 31, 2017.
(5) The base rent for Sunset Las Palmas Studios for the eight months ended December 31, 2017 is $7.8 million ($41.11 per leased square foot), excluding tenant reimbursements.
(6) Percent leased for Non-Same-Store Media and Entertainment properties is the average percent leased for the eight months ended December 31, 2017.
Office Portfolio
Our office portfolio consists of 51 office properties comprising an aggregate of approximately 13.3 million square feet. As of December 31, 2017, our in-service office
properties were approximately 92.1% 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, 2017, the weighted average remaining lease term for our stabilized office portfolio was 4.8 years.
31
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, 2017:
Tenant
Google, Inc.(2)
Netflix, Inc.(3)
Cisco Systems, Inc.(4)
Riot Games, Inc.(5)
Uber Technologies, Inc.(6)
Qualcomm
Salesforce.com(7)
Square, Inc.(8)
Stanford(9)
GSA(10)
EMC Corporation(11)
NetSuite, Inc.(12)
NFL Enterprises(13)
Nutanix, Inc.(14)
White & Case LLP(15)
Property
Various
ICON
Various
Element LA
1455 Market
Skyport Plaza
Rincon Center
1455 Market
Various
Various
Various
Peninsula Office
Park
Various
Various
Palo Alto Square
Number of
Leases
Properties
3
1
2
1
1
2
2
1
4
5
3
2
2
2
2
3
1
2
1
1
1
1
1
3
5
2
1
2
2
1
Lease
Expiration
Various
12/31/2026
Various
3/31/2030
2/28/2025
7/31/2022
Various
9/27/2023
Various
Various
Various
Various
12/31/2023
3/31/2021
Various
Total
Leased
Square
Feet
472,189
325,757
474,576
284,037
309,811
376,817
265,394
338,910
151,249
194,485
294,756
166,667
167,606
176,446
66,363
Percentage
of Office
Portfolio
Square
Feet
3.6%
$
2.5
3.6
2.1
2.3
2.8
2.0
2.5
1.1
1.5
2.2
1.3
1.3
1.3
0.5
Annualized
Base Rent(1)
32,636,370
17,800,735
15,946,113
15,871,935
15,042,228
13,276,016
13,260,782
11,761,423
10,615,279
9,139,692
8,055,636
8,020,100
7,140,016
6,751,364
5,829,623
Percentage
of Office
Portfolio
Annualized
Base Rent
6.3%
3.5
3.1
3.1
2.9
2.6
2.6
2.3
2.1
1.8
1.6
1.6
1.4
1.3
1.1
Total
_____________
(1) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents (before abatements)) under commenced leases as of December 31, 2017, by (ii) 12. Annualized base rent does not reflect
30.6% $
191,147,312
4,065,063
37.3%
27
33
tenant reimbursements.
(2) Google, Inc. expirations by property and square footage: (i) 207,857 square feet at 3400 Hillview expiring on November 30, 2021; (ii) 97,872 square feet at Foothill Research Center expiring on February 28, 2025 and (iii)
166,460 square feet at Rincon Center on February 29, 2028.
(3) Netflix, Inc. is expected to take possession of an additional 52,626 square feet at CUE during the first quarter of 2018 and 39,327 square feet at CUE during the fourth quarter of 2018.
(4) Cisco Systems, Inc. expirations by property and square footage: (i) 471,580 square feet at Campus Center expiring on December 31, 2017 and (ii) 2,996 square feet at Concourse expiring March 31, 2018. Campus Center was
taken off-line for redevelopment on January 1, 2018.
(5) Riot Games, Inc. may elect to exercise their early termination right effective March 31, 2025.
(6) Uber Technologies, Inc. is expected to take possession of an additional 15,209 square feet at 1455 Market during the first quarter of 2018.
(7) Salesforce.com expirations by square footage: (i) 83,016 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.
(8) Square, Inc. is expected to take possession of an additional 26,011 square feet at 1455 Market during the third quarter of 2018.
(9) 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.
(10) GSA expirations by property and square footage: (i) 5,266 square feet at Rincon Center expiring March 7, 2018; (ii) 71,729 square feet at 1455 Market expiring on February 19, 2019; (iii) 28,993 square feet at Northview
Center expiring on April 4, 2020; (iv) 28,316 square feet at Rincon Center expiring May 31, 2020; (v) 41,793 square feet at 901 Market expiring on July 31, 2021 and (vi) 18,388 square feet at Concourse expiring on May 7,
2024. This tenant may elect to exercise their early termination right at 901 Market with respect to 41,793 square feet any time after November 1, 2017 with 120 days prior written notice.
(11) EMC expirations by property and square footage: (i) 66,510 square feet at 875 Howard 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.
(12) NetSuite, Inc. expirations by square footage: (i) 37,597 square feet expiring on August 31, 2019 and (ii) 129,070 square feet expiring on May 31, 2022.
(13) 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 December 31, 2022.
(14) Nutanix, Inc. expirations by square footage: (i) 148,325 square feet at 1740 Technology and (ii) 28,121 square feet at Metro Plaza. At 1740 Technology, Nutanix is expected to take possession of an additional 19,027 square
feet during the second quarter of 2018 and 8,652 square feet during the fourth quarter of 2018.
(15) White & Case LLP expirations by square footage at Palo Alto Square: (i) 26,490 square feet on January 14, 2018 and (ii) 39,873 square feet on January 31, 2028.
32
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, 2017:
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
252
369
82
63
37
19
24
28
28.9%
42.2
9.4
7.2
4.2
2.2
2.7
3.2
367,337
1,892,796
1,166,050
1,777,484
2,266,243
3,873,907
156,532
412,720
Percentage
of Office
Portfolio
Leased
Square Feet
3.1% $
15.9
9.8
14.9
19.0
32.5
1.3
3.5
Annualized
Base Rent(1)
15,488,708
86,640,667
56,835,075
87,583,849
104,350,966
163,802,920
—
20,735,630
Percentage
of Office
Portfolio
Annualized
Base Rent
2.9%
16.1
10.6
16.4
19.5
30.6
—
3.9
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, 2017 (ii) by 12. Annualized base rent does not
100.0% $
535,437,815
11,913,069
100.0%
874
100.0%
reflect tenant reimbursements.
33
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, 2017 plus available space, for each of the ten full calendar
years beginning January 1, 2017 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
Expiring Leases
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)
Vacant
2017(3)
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
Building management use
Signed leases not commenced(4)
19
161
162
128
98
86
42
35
17
14
26
24
28
1,378,462
728,519
1,092,776
1,670,751
1,142,245
1,313,784
1,175,667
1,122,788
599,925
708,427
561,905
1,164,442
156,532
412,720
$
10.5%
5.5
8.3
12.6
8.6
9.9
8.9
8.5
4.5
5.4
4.2
8.8
1.2
3.1
25,038,886
48,431,136
75,658,067
53,934,005
55,100,389
52,550,007
41,446,929
29,965,786
34,980,819
31,082,496
64,871,598
—
20,735,630
4.6% $
9.1
14.2
10.1
10.3
9.8
7.8
5.6
6.6
5.8
12.2
—
3.9
34.37
44.32
45.28
47.22
41.94
44.70
36.91
49.95
49.38
55.32
55.71
—
50.24
Total/Weighted Average(5)
_____________
(1) Rent data for our office properties is presented on an annualized basis without regard to cancellation options. Annualized base rent for office properties is calculated by multiplying (i) base rental payments (defined as cash base
45.04
100.0% $
100.0% $
533,795,748
13,228,943
840
rents (before abatements)) as of December 31, 2017, by (ii) 12. Annualized base rent does not reflect tenant reimbursements.
(2) Annualized base rent per square foot for all lease expiration years is calculated 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, 2017.
Included within the expiring square footage for 2017 is 471,850 square feet related to the Cisco Systems, Inc. lease at Campus Center.
(3)
(4) Annualized base rent per leased square foot and annualized base rent per square foot at expiration for signed leases not commenced reflects uncommenced leases for space not occupied as of December 31, 2017 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, 2017, divided by (ii) square footage under uncommenced leases as of
December 31, 2017.
(5) Total expiring square footage does not include 62,588 square feet of month-to-month leases.
34
Table of Contents
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,
2017
2016
2015
110
865,937
5.46
5.63
11.09
135
1,263,707
50.32
15.81
66.13
245
2,129,644
32.08
11.67
43.75
$
$
$
$
$
$
124
1,588,437
9.19
7.59
16.78
140
1,321,824
52.56
16.28
68.84
264
2,910,261
28.89
11.53
40.42
$
$
$
$
$
$
90
661,724
12.00
6.71
18.71
135
924,832
34.55
13.70
48.25
225
1,586,556
25.14
10.78
35.92
$
$
$
$
$
$
_____________
(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.
Includes retained tenants that have relocated or expanded into new space within our portfolio.
(4)
35
Table of Contents
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
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,
2017
1,573,433
64,254
30,108
—
—
(79,156)
1,499,147
3,087,786
889,863
526,981
292,480
1,709,324
1,378,462
2016
2,150,780
241,474
(3,631)
256,611
—
(231,589)
1,252,708
3,666,353
798,026
650,133
644,761
2,092,920
1,573,433
2015
806,559
61,586
(3,633)
1,561,081
166,800
(54,268)
683,567
3,221,692
533,577
139,188
398,147
1,070,912
2,150,780
Our portfolio of operating properties includes three properties that we consider to be media and entertainment properties, comprising an aggregate of 1.2 million square feet
located in the heart of Hollywood in Southern California. 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 feature a fully-integrated environment within
which our media and entertainment-focused tenants can access production, post-production, traditional office component and support facilities that enables them to conduct their
business in a collaborative and efficient setting.
Leasing Characteristics
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 typically 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 Properties
Sunset Gower Studios, Hollywood, California
Sunset Gower Studios is a 15.7-acre media and entertainment property. 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 offers
12 stages and typically serves as home to single-camera television and motion picture production tenants.
36
Table of Contents
Sunset Bronson Studios, Hollywood, California
Sunset Bronson Studios is a 10.6-acre media and entertainment property. 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. Sunset Bronson Studios offers 11 stages and
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.
Sunset Las Palmas Studios, Hollywood, California
In May 2017, we acquired Sunset Las Palmas Studios, a 15-acre media and entertainment property. The property, which was built in 1919, has played host to iconic television
shows such as I Love Lucy, The Addams Family, and Jeopardy!, as well as a scores of films including The Karate Kid, When Harry Met Sally..., The Player and Hell’s Angels. Sunset
Las Palmas Studios offers 12 stages, with a mix of single camera and multi-camera productions. The primary focus is production requiring multi-camera stages and control rooms, with
notable current tenants including Comedy Central, ABC and The Walt Disney Company.
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.
37
Table of Contents
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 9, 2018, Hudson Pacific Properties, Inc. had approximately 156,679,052 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, 2016 through December 31, 2017, 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, 2017, the reported closing sale price per share of our common stock on the NYSE was $34.25. 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 2017
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2016
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
Close
$
$
$
$
36.75
36.14
34.54
35.90
29.60
30.18
34.38
35.84
High
$
$
33.48
32.41
31.53
32.94
22.77
26.79
28.85
31.58
Low
Close
Per Share of Common
Stock Dividends
Declared
0.25
0.25
0.25
0.25
Per Share of Common
Stock Dividends
Declared
0.20
0.20
0.20
0.20
$
$
34.64
34.19
33.53
34.25
28.92
29.18
32.87
34.78
The closing sale price for our common stock on February 9, 2018, as reported by the NYSE, was $29.21. As of February 9, 2018, there were 68 stockholders of record of our
common stock.
Issuer Purchases of Equity Securities
During the three months ended December 31, 2017, 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.
38
Table of Contents
The following table summarizes all of the repurchases of Hudson Pacific Properties, Inc. equity securities during the fourth quarter of 2017:
Period
October 1 - October 31, 2017
November 1 - November 30, 2017
December 1 - December 31, 2017
Total Number of
Shares Purchased
Average Price
Paid Per
Share(1)
— $
—
343,127
—
—
34.25
Total
_____________
(1) The price paid per share is based on the closing price of our common stock, as reported by the NYSE, as of the date of the determination of the statutory federal tax income.
34.25
$
343,127
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
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 “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.
39
Table of Contents
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 February 9, 2018, there were six holders of record of common units
(including through our general partnership interest).
As of February 9, 2018, 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, 2017 and 2016, respectively.
Fiscal year 2017
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year 2016
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Per Unit Distributions
Declared
0.25
0.25
0.25
0.25
Per Unit Distributions
Declared
0.20
0.20
0.20
0.20
Recent Sales of Unregistered Securities
During the fourth quarter of December 31, 2017, 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, 2017, the Company issued an aggregate of 642,835 shares of its common stock in connection with restricted stock awards for no cash
consideration, out of which 343,127 shares of common stock were forfeited to the Company in connection with restricted stock awards for a net issuance of 299,708 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, 2017, our operating partnership issued an aggregate of 642,835 common units to the
Company.
All other issuances of unregistered equity securities of our operating partnership during the year ended December 31, 2017 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 $6.62 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.
40
Table of Contents
Issuer Purchases of Equity Securities
The following table summarizes all of the repurchases of operating partnership equity securities during the fourth quarter of 2017:
Period
October 1 - October 31, 2017
November 1 - November 30, 2017
December 1 - December 31, 2017
Total Number of
Units Purchased
Average Price
Paid Per
Unit(1)
— $
—
343,127
—
—
34.25
Total
_____________
(1) The price paid per unit is based on the closing price of our common stock, as reported by the NYSE, as of the date of the determination of the statutory federal tax income.
34.25
$
343,127
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
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 “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.
41
Table of Contents
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, 2017. The graph assumes a $100 investment in each of the
indices on December 31, 2012 and the reinvestment of all dividends. The graph also shows the cumulative total returns of the Standard & Poor’s 500 Stock Index (“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
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Period Ending
106.28
132.39
103.72
102.47
102.86
148.97
150.51
132.24
133.60
131.69
142.18
152.59
135.89
136.97
135.42
180.37
170.84
147.96
148.75
147.11
181.58
208.14
159.94
156.29
159.86
100.00
100.00
100.00
100.00
100.00
42
Table of Contents
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,
Statements of Operations, and Statements of Cash Flows 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)
2017
2016
2015
2014
2013
Year Ended December 31,
Statements of Operations Data:
Total Office revenues
Total Media & Entertainment revenues
Income from operations
667,110
61,029
136,603
593,236
46,403
89,407
481,718
39,132
47,388
213,786
39,629
48,677
165,441
40,117
27,960
HUDSON PACIFIC PROPERTIES, INC.
Year Ended December 31,
2017
2016
2015
2014
2013
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
Dividends declared per common share
$
$
$
0.44
0.44
$
$
0.26
0.25
$
$
153,488,730
153,882,814
106,188,902
110,369,055
(0.19)
(0.19)
$
$
85,927,216
85,927,216
0.15
0.15
$
$
65,792,447
66,509,447
(0.27)
(0.27)
55,182,647
55,182,647
1.000
$
0.800
$
0.575
$
0.500
$
0.500
43
Table of Contents
Balance Sheet Data:(1)
Investment in real estate, net
Total assets
Notes payable, net
HUDSON PACIFIC PROPERTIES, INC. and HUDSON PACIFIC PROPERTIES, L.P.
(in thousands)
As of December 31,
2017
2016
2015
2014
2013
$
5,889,943
$
6,050,933
$
5,500,462
$
2,036,638
$
6,622,070
2,421,380
2,700,929
10,177
6,678,998
2,688,010
2,966,071
10,177
6,254,035
2,260,716
2,514,821
10,177
2,335,509
912,683
1,050,317
10,177
1,918,988
2,124,904
924,938
1,011,563
10,475
Total liabilities
6.25% Series A cumulative redeemable preferred units of the operating
partnership
Series B cumulative redeemable preferred stock
—
—
—
145,000
145,000
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)
Same-Store Media & Entertainment occupied rate as of end of period(4)
Non-Same-Store Media & Entertainment occupied rate as of end of period
(5)
$
$
$
292,959
(333,038)
33,167
$
$
$
226,774
(524,897)
334,754
$
$
$
175,783
(1,797,699)
1,658,641
$
$
$
63,483
(246,361)
170,590
$
$
$
96.7%
92.1%
90.7%
76.1%
96.4%
91.2%
89.1%
N/A
95.3%
90.1%
78.5%
N/A
94.6%
N/A
71.6%
N/A
43,975
(424,042)
393,947
95.4%
N/A
69.9%
N/A
_____________
(1) These balances are presented as stated in their respective Form 10-Ks, with the exception of subsequent accounting changes that require retrospective applications.
(2) Stabilized office properties include Same-Store and Non-Same-Store properties.
(3)
In-service office properties include stabilized and lease-up office properties.
(4) Percent leased for Same-Store Media and Entertainment properties is the average percent leased for the 12 months ended December 31, 2017.
(5) Percent leased for Non-Same-Store Media and Entertainment properties is the average percent leased for the eight months ended December 31, 2017.
44
Table of Contents
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) “Financial Statements and Schedules.” Statements in this Item 7 contain 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. In particular, information concerning
projected future occupancy rates, rental rate increases, property development timing and investment amounts contain forward-looking statements. Furthermore, all of the statements
regarding future financial performance (including anticipated funds from operations (“FFO”) market conditions and demographics) are forward-looking statements. 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. Accordingly, investors should use caution and not place undue reliance on this information, which speaks only as of the date of this report. We expressly disclaim any
responsibility to update 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 statements see Part I, Item 1A “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
Executive Summary
Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at December 31, 2017, our consolidated office portfolio consisted of
approximately 13.3 million square feet of in-service, redevelopment, development and held for sale properties. Additionally, as of December 31, 2017, our media and entertainment
portfolio consisted of 1.2 million square feet of in-service and redevelopment properties.
As of December 31, 2017, our consolidated in-service office portfolio was 92.1% leased (including leases not yet commenced). Our Same-Store media and entertainment
properties were 90.7% leased for the average percent leased for the 12 months ended December 31, 2017. Our Non-Same-Store media and entertainment property was 76.1% leased for
the average percent leased for the eight months ended December 31, 2017.
Current Year Highlights
Acquisitions
During 2017, we continued to focus on strategic acquisitions by investing across the risk-return spectrum, favoring opportunities where we can employ leasing, capital
investments and management expertise to create additional value. We purchased Sunset Las Palmas Studios (formerly Hollywood Center Studios), a 373,150 square-foot media and
entertainment campus with future development rights consisting of 13 stages, production offices and support space on 15 acres. Additionally, we purchased the ground lease related to
our 11601 Wilshire property. The following table summarizes the properties acquired in 2017:
Property
Sunset Las Palmas Studios(2)
11601 Wilshire land(3)
6666 Santa Monica(4)
Total
_____________
Month of
Acquisition
May 2017
June 2017
June 2017
Square Feet
369,000
$
N/A
4,150
373,150
$
Purchase Price(1) (in
millions)
200.0
50.0
3.2
253.2
Submarket
Hollywood
West Los Angeles
Hollywood
45
Table of Contents
(1) Represents purchase price before certain credits, prorations and closing costs.
(2) The purchase price above does not include equipment purchased by us for $2.8 million, which was transacted separately from the studio acquisition. In April 2017, we drew $150.0 million under the unsecured revolving credit
facility to fund the acquisition.
(3) On July 1, 2016, we purchased a partial interest in land held as a tenancy in common in conjunction with our acquisition of the 11601 Wilshire property. The land interest held as a tenancy in common was accounted for as an
equity method investment. On June 15, 2017, we purchased the remaining interest, which was fair valued and allocated to land and building.
(4) This parcel is adjacent to the Sunset Las Palmas Studios property.
Dispositions
We disposed of four office properties during 2017 that were non-strategic assets in our portfolio. These dispositions resulted in $45.6 million of gains. The following table
summarizes the properties sold in 2017:
Property
222 Kearny
3402 Pico
Pinnacle I and Pinnacle II(2)
Total
Month of Disposition
Square Feet
Sales Price(1) (in
millions)
February 2017
March 2017
November 2017
148,797
$
50,687
623,777
823,261
$
51.8
35.0
350.0
436.8
_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) The consolidated joint venture that owned Pinnacle I and Pinnacle II sold the properties to affiliates of Blackstone. In conjunction with the sale, the $216.0 million debt secured by these properties was assumed by the
purchasers.
Held for Sale
As of December 31, 2017, we had four properties that met the criteria to be classified as held for sale. The following table summarizes properties classified as held for sale as of
December 31, 2017:
Property
2180 Sand Hill
2600 Campus Drive (building 6 of Peninsula Office Park)
Embarcadero Place
9300 Wilshire
Total
____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
Redevelopment/Development
Purchase and Sale
Executed
November 2017
December 2017
December 2017
December 2017
Square Feet
Sales Price(1) (in
millions)
$
45,613
63,050
197,402
61,422
367,487
$
82.5
22.5
136.0
13.8
254.8
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,
2017, there were a total of four properties included in property under development in our Consolidated Balance Sheets: 95 Jackson (formerly Merrill Place Theater Building), MaxWell,
CUE and EPIC.
Financings
In January 2017, we completed an underwritten public offering of 8,881,575 shares of common stock for total proceeds, net of transaction costs, of approximately $310.9
million. Proceeds were used to repurchase 8,881,575 common units in the operating partnership from Blackstone and Farallon Capital Management, LLC (“the Farallon Funds”).
46
Table of Contents
In March 2017, we completed an underwritten public offering of 9,775,000 shares of common stock for total proceeds, net of transaction costs, of approximately $337.5 million.
Proceeds from the offering were used to fully repay a $255.0 million balance outstanding under our unsecured revolving credit facility and for our acquisition of Sunset Las Palmas.
In October 2017, we completed our inaugural public offering of $400.0 million registered senior notes due November 1, 2027. The net proceeds from the offering, after
deducting the underwriting discounts and offering expenses, were approximately $396.7 million and were used to repay $150.0 million of our 5-year term loan due April 2020 with the
remainder of the net proceeds, together with cash on hand, used to repay $250.0 million outstanding under our unsecured revolving credit facility.
In November 2017, the consolidated joint venture that owned Pinnacle I and Pinnacle II sold the properties to affiliates of Blackstone for $350.0 million. In conjunction with the
sale, the $216.0 million debt secured by these properties was assumed by the purchasers. Additionally, we used proceeds from the sale and cash on hand to repay $100.0 million of our
5-year term loan due November 2020.
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 of which are in the technology and 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 our operations. In particular, aggressive leasing and proactive asset management, combined with a focus on conservatively managing our balance sheet,
are central to our strategy.
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, 2017, the percent leased for our in-service office properties was
approximately 92.1% (or 90.3%, excluding leases signed but not commenced as of that date). As of December 31, 2017, the percent leased, based on a 12-month trailing average, was
approximately 90.7% and 76.1% for same-store media and entertainment and non-same-store media and entertainment properties, respectively. 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. 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.
47
Table of Contents
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
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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On
an ongoing basis, we evaluate our estimates, including those related to acquiring, developing and assessing the carrying values of our real estate properties, our accrued liabilities, and
our performance-based equity compensation awards. We base our 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. The following critical accounting policies discussion reflect what we believe are the most
significant estimates, assumptions and judgements used in the preparation of our consolidated financial statements. See Part IV, Item 15 “Financial Statement and Schedules—Note 2 to
the Consolidated Financial Statements—Summary of Significant Accounting Policies” for details on our significant 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.
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 in accordance with ASC 805, Business Combinations. 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
48
Table of Contents
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 asset acquisitions, the purchase price, which includes transaction-related expenses, is allocated based on relative fair value of the
assets acquired and liabilities assumed. 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 purchase price accounting is finalized in the period of acquisition.
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 below-market 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.
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
15
5 to 7
Shorter of the estimated useful life or the lease term
We amortize above- and below-market lease intangibles over the remaining non-cancellable lease terms and bargain renewal periods, if applicable. The in-place lease
intangibles are amortized 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 over the remaining non-cancellable lease terms.
49
Table of Contents
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 our 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 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
50
Table of Contents
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.
The new standard related to revenue recognition does not have a material impact on our consolidated financial statements. See Part IV, Item 15 “Financial Statement and
Schedules—Note 2 to the Consolidated Financial Statements—Summary of Significant Accounting Policies.”
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 718, Compensation-
Stock Compensation (“ASC 718”). For time-based awards, stock-based compensation is valued based on the quoted closing price of our common stock on the applicable grant date and
discounted for any hold restrictions. For performance-based awards, stock-based compensation is valued 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 on a straight-line basis and graded vesting basis for time-based awards and performance-based
awards, respectively. Pursuant to the adoption of ASU 2016-09, we 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 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.
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 corporate income tax, including any applicable alternative minimum tax for taxable years prior to 2018. 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
51
Table of Contents
holding assets that we cannot hold directly, will be conducted by a TRS. A TRS is subject to federal and, where applicable, state and local 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, 2017, we have not established a liability for uncertain tax positions.
We and our TRS file income tax returns with the U.S. 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.
52
Table of Contents
Results of Operations
The following table identifies the properties in our portfolio as of December 31, 2017:
Properties
Predecessor properties:
875 Howard
Sunset Gower Studios
Sunset Bronson Studios
6040 Sunset (formerly Technicolor Building)(1)
Properties acquired after IPO:
Del Amo
9300 Wilshire(2)
1455 Market(3)
Rincon Center
10950 Washington
604 Arizona
275 Brannan
625 Second
6922 Hollywood
6050 Sunset & 1445 N. Beachwood
10900 Washington
901 Market
Element LA (includes 1861 Bundy)
1455 Gordon
3401 Exposition
Seattle Portfolio (83 King, 505 First, Met Park North and Northview Center)
Merrill Place
EOP Northern California Portfolio (see table on next page for property list)
Fourth & Traction(4)
MaxWell (formerly known as 405 Mateo)(5)
11601 Wilshire(6)
Hill7(7)
Page Mill Hill
Sunset Las Palmas Studios (includes 6666 Santa Monica)
Development Properties(8):
ICON(9)
450 Alaskan(10)
CUE(11)
95 Jackson (formerly Merrill Place Theater Building)(12)
EPIC(13)
Total
Acquisition Date
Acquisition/Estimated
Rentable Square Feet
Consideration Paid
(In thousands)
2/15/2007
8/17/2007
1/30/2008
8/17/2007
8/13/2010
8/24/2010
12/16/2010
12/16/2010
12/22/2010
7/26/2011
8/19/2011
9/1/2011
11/22/2011
12/16/2011
4/5/2012
6/1/2012
9/5/2012 & 9/23/2013
9/21/2012
5/22/2013
7/31/2013
2/12/2014
4/1/2015
5/22/2015
8/17/2015
7/1/2016 & 6/15/2017
10/7/2016
12/12/2016
5/1/2017 & 6/29/2017
N/A
N/A
N/A
N/A
N/A
286,270
$
545,673
308,026
114,958
113,000
61,224
1,025,833
580,850
159,024
44,260
54,673
138,080
205,523
20,032
9,919
206,199
284,037
5,921
63,376
844,980
193,153
7,120,686
120,937
83,285
500,475
285,680
182,676
373,150
325,757
170,974
91,953
31,659
300,000
—
—
—
—
27,327
14,684
92,365
184,571
46,409
21,373
12,370
57,119
92,802
6,502
2,605
90,871
99,936
2,385
25,722
368,389
57,034
3,489,541
49,250
40,000
361,000
179,800
150,000
203,200
N/A
N/A
N/A
N/A
N/A
14,852,243
$
5,675,255
_____________
(1) We acquired this property in August 2007 and completed its development in June 2008.
(2) This property was classified as held for sale as of December 31, 2017 and the sale is expected to close during the first quarter of 2018.
(3) We have a 55% ownership interest in the consolidated joint venture that owns the 1455 Market property.
(4) This development was completed in the second quarter of 2017.
(5) We estimate this development will be completed in the fourth quarter of 2018 and stabilized in the second quarter of 2019. As a result of this development, the estimated rentable square footage increased to 99,090.
(6) We acquired the building and partial interest in the land on July 1, 2016 and acquired the remaining interest in the land on June 15, 2017.
(7) We have a 55% ownership interest in the consolidated joint venture that owns the Hill7 property.
(8) Properties that were related to acquisitions that were subsequently developed by us.
53
Table of Contents
(9) The land related to this development was included in our acquisition of Sunset Bronson Studios. We completed this development in the fourth quarter of 2016.
(10) The land related to this development was included in our acquisition of Merrill Place. We completed this development in the third quarter of 2017.
(11) The land related to this development was included in our acquisition of Sunset Bronson Studios. We completed this development in the third quarter of 2017 and it is estimated to be stabilized in the second quarter of 2019.
(12) The land related to this development was included in our acquisition of Merrill Place. We estimate this development will be completed in the first quarter of 2018 and stabilized in the fourth quarter of 2018.
(13) The land related to this development was included in our acquisition of Sunset Bronson Studios. We estimate this development will be completed in the first quarter of 2020 and stabilized in the third quarter of 2021.
The following table identifies each of the properties that we owned as of December 31, 2017 that were acquired as part of the EOP Acquisition:
Properties
1740 Technology
2180 Sand Hill(1)
333 Twin Dolphin
3176 Porter (formerly Lockheed)
3400 Hillview
555 Twin Dolphin
Campus Center
Clocktower Square
Concourse
Embarcadero Place(1)
Foothill Research Center
Gateway
Metro Center
Metro Plaza
Page Mill Center
Palo Alto Square
Peninsula Office Park(2)
Shorebreeze
Skyport Plaza
Skyway Landing
Techmart
Towers at Shore Center
Total
Acquisition Square Feet
206,876
45,613
182,789
42,899
207,857
198,936
471,580
100,344
944,386
197,402
195,376
609,093
730,215
456,921
176,245
328,251
510,789
230,932
418,086
247,173
284,440
334,483
7,120,686
_____________
(1) These properties were classified as held for sale as of December 31, 2017. Embarcadero Place was sold on January 25, 2018. The sale of 2180 Sand Hill is expected to close during the first quarter of 2018.
(2) Building 6 of this property, 63,050 square feet, was classified as held for sale as of December 31, 2017 and subsequently sold on January 31, 2018.
54
Table of Contents
The following table identifies each of the properties that were disposed through December 31, 2017:
Property
City Plaza
Tierrasanta
First Financial
Bay Park Plaza
Bayhill Office Center
Patrick Henry
One Bay Plaza
12655 Jefferson
222 Kearny
3402 Pico
Pinnacle I and Pinnacle II(2)
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
2/4/2017
3/21/2017
11/16/2017
333,922
$
112,300
223,679
260,183
554,328
70,520
195,739
100,756
148,797
50,687
623,777
2,674,688
$
56.0
19.5
89.0
90.0
215.0
19.0
53.4
80.0
51.8
35.0
350.0
1,058.7
Total(3)(4)
_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) We sold our ownership interest in the consolidated joint venture that owned these properties to certain affiliates of Blackstone.
(3) Excludes the disposition of a 45% interest in our 1455 Market property in 2015.
(4) Excludes our sale of an option to acquire land at 9300 Culver in 2016.
All amounts and percentages used in this discussion of our results of operations are calculated using the numbers presented in the financial statements contained in this report
rather than the rounded numbers appearing in this discussion. The dollar amounts included in the tables in this discussion of our results of operations are presented in thousands.
55
Table of Contents
Comparison of the year ended December 31, 2017 to the year ended December 31, 2016
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 or cash flows as measured by GAAP and should not be considered an alternative to income from continuing operations, as an indication of our performance, or as an
alternative to cash flows as a measure of liquidity, or our ability to make distributions. All companies may not calculate NOI in the same manner. We consider NOI to be a useful
performance measure to investors and management because when compared across periods, NOI reflects the revenues and expenses directly associated with owning and operating our
properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective not immediately apparent from income from continuing
operations. We calculate NOI as net income (loss) excluding corporate general and administrative expenses, depreciation and amortization, impairments, gains/losses on sales of real
estate, interest expense, transaction-related expenses and other non-operating items. We define NOI as operating revenues (including rental revenues, other property-related revenue,
tenant recoveries and other operating revenues), less property-level operating expenses (which includes external management fees, if any, and property-level general and administrative
expenses). NOI on a cash basis is NOI on a GAAP basis, adjusted to exclude the effect of straight-line rent and other non-cash adjustments required by GAAP. We believe that NOI on a
cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.
Management further analyzes NOI by evaluating the performance from the following property groups:
•
•
Same-Store properties, which include all of the properties owned and included in our stabilized portfolio as of January 1, 2016 and still owned and included in the stabilized
portfolio as of December 31, 2017; and
Non-Same-Store properties, held for sale properties, development projects, redevelopment properties, and lease-up properties as of December 31, 2017 and other properties not
owned or not in operation from January 1, 2016 through December 31, 2017.
The following table reconciles net income to NOI:
Net income
Adjustments:
Interest expense
Interest income
Unrealized loss on ineffective portion of derivatives
Transaction-related expenses
Other income
Gains on sale of real estate
Income from operations
Adjustments:
General and administrative
Depreciation and amortization
NOI
Same-Store NOI
Non-Same-Store NOI
NOI
Year Ended December 31,
2017
2016
Dollar Change
Percentage Change
$
94,561
$
43,758
$
50,803
116.1 %
90,037
(97)
70
598
(2,992)
(45,574)
136,603
54,459
283,570
474,632
287,498
187,134
474,632
$
$
$
76,044
(260)
1,436
376
(1,558)
(30,389)
89,407
52,400
269,087
410,894
262,077
148,817
410,894
$
$
$
13,993
163
(1,366)
222
(1,434)
(15,185)
47,196
2,059
14,483
63,738
25,421
38,317
63,738
18.4
(62.7)
(95.1)
59.0
92.0
50.0
52.8
3.9
5.4
15.5 %
9.7 %
25.7
15.5 %
$
$
$
56
Table of Contents
The following table summarizes certain statistics of our Same-Store Office and Media and Entertainment properties:
Same-Store Office statistics:
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
Same-Store Media and Entertainment statistics:
Number of properties
Rentable square feet
Average % occupied for the period
The following table gives further detail on our NOI:
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,
2017
2016
28
28
7,421,172
7,421,172
96.8%
95.1%
94.7%
95.5%
95.1%
94.6%
$
42.32
$
38.92
2
873,002
90.7%
2
873,002
89.2%
Year Ended December 31,
2017
2016
Same-Store
Non-Same-Store
Total
Same-Store
Non-Same-Store
Total
$
300,584 $
244,869 $
545,453
$
282,058 $
204,898 $
60,312
17,678
378,574
28,674
1,105
18,254
348
48,381
31,932
11,735
288,536
7,855
231
4,551
11
12,648
92,244
29,413
667,110
36,529
1,336
22,805
359
61,029
56,988
12,621
351,667
26,837
1,884
17,380
302
46,403
27,398
9,273
241,569
—
—
—
—
—
486,956
84,386
21,894
593,236
26,837
1,884
17,380
302
46,403
Total revenues
426,955
301,184
728,139
398,070
241,569
639,639
Operating expenses
Office operating expenses
Media & Entertainment operating expenses
Total operating expenses
Office NOI
Media & Entertainment NOI
NOI
113,188
26,269
139,457
265,386
22,112
105,685
8,365
114,050
182,851
4,283
218,873
34,634
253,507
448,237
26,395
110,183
25,810
135,993
241,484
20,593
92,752
—
92,752
148,817
—
$
287,498 $
187,134 $
474,632
$
262,077 $
148,817 $
202,935
25,810
228,745
390,301
20,593
410,894
57
Table of Contents
The following table gives further detail on our change in NOI:
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 NOI
Media & Entertainment NOI
NOI
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016
Same-Store
Non-Same-Store
Total
Dollar Change
Percent Change
Dollar Change
Percent Change
Dollar Change
Percent Change
$
$
18,526
3,324
5,057
26,907
1,837
(779)
874
46
1,978
28,885
3,005
459
3,464
23,902
1,519
25,421
6.6 % $
5.8
40.1
7.7
6.8
(41.3)
5.0
15.2
4.3
7.3
2.7
1.8
2.5
9.9
7.4
9.7 % $
39,971
4,534
2,462
46,967
7,855
231
4,551
11
12,648
59,615
12,933
8,365
21,298
34,034
4,283
38,317
19.5% $
16.5
26.6
19.4
100.0
100.0
100.0
100.0
100.0
24.7
13.9
100.0
23.0
22.9
100.0
25.7% $
58,497
7,858
7,519
73,874
9,692
(548)
5,425
57
14,626
88,500
15,938
8,824
24,762
57,936
5,802
63,738
12.0 %
9.3
34.3
12.5
36.1
(29.1)
31.2
18.9
31.5
13.8
7.9
34.2
10.8
14.8
28.2
15.5 %
•
•
NOI increased $63.7 million, or 15.5%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily resulting from:
$23.9 million, or 9.9%, increase in NOI from our Same-Store Office properties resulting primarily from increased rental revenues relating to leases signed at our 1455 Market
(Uber Technologies, Inc. and Bank of America), 875 Howard (Glu Mobile, Inc. and Snap, Inc.), 625 Second (Github, Inc. and Ziff Davis, LLC) and Rincon Center (Google,
Inc.) properties at a higher rate than expiring leases. The increase was also due to a reduction in above-market lease amortization at our Towers at Shore Center property.
Parking and other revenues increased primarily due to lease termination fees related to our Campus Center property. Tenant recoveries increased primarily due to higher
recoveries for our 1455 Market property, partially offset by prior year property tax reassessments for our Rincon Center property. Office operating expenses increased due to
higher repairs and maintenance costs and higher property tax expenses at our 1455 Market property, partially offset by property tax reassessments related to the prior year for
our Rincon Center property.
$34.0 million, or 22.9%, increase in NOI from our Non-Same-Store Office store properties resulting primarily from the commencement of Netflix, Inc.’s lease at our ICON
property in the first quarter of 2017 and acquisitions in 2016, which include 11601 Wilshire (acquired in July 2016), Hill7 (acquired in October 2016) and Page Mill Hill
(acquired in December 2016), collectively referred to as the “2016 Acquisitions.” The increase was partially offset by the sale of our One Bay Plaza (sold in June 2016), 12655
Jefferson (sold in November 2016), 222 Kearny (sold in February 2017), Pinnacle I and Pinnacle II (sold in November 2017) properties. Rental revenues increased primarily
due to leases signed at our Metro Center (Qualys, Inc., BrightEdge Technologies, Inc. and Scale Management, LLC) property at a higher rate than expiring leases, partially
offset by lower revenues from our 604 Arizona property, which was taken off-line for a redevelopment project. Office operating expenses increased due to the commencement
of Netflix, Inc.’s lease at our ICON property, the 2016 Acquisitions and higher operating expense at our Metro Center property, partially offset by the sale of our One Bay Plaza
property.
58
Table of Contents
•
•
$1.5 million, or 7.4%, increase in NOI from our Same-Store Media and Entertainment properties resulting primarily from higher rental revenues and other property-related
revenues, partially offset by lower tenant recoveries. The increase was primarily a result of an increase in occupancy and production at Sunset Bronson Studios, partially offset
by lower recoveries primarily due to a reimbursement in connection with the reconciliation of prior year operating expense recoveries under the lease with KTLA at Sunset
Bronson Studios.
$4.3 million, or 100.0%, increase in NOI from our Non-Same-Store Media and Entertainment property resulting from our acquisition of Sunset Las Palmas Studios in May
2017.
Office NOI
Same-Store
Same-Store office rental revenues increased $18.5 million, or 6.6%, to $300.6 million for the year ended December 31, 2017 compared to $282.1 million for the year ended
December 31, 2016. The increase was primarily due to leases signed at our 1455 Market (Uber Technologies, Inc. and Bank of America), 875 Howard (Glu Mobile, Inc. and Snap, Inc.),
625 Second (Github, Inc. and Ziff Davis, LLC) and Rincon Center (Google, Inc.) properties at a higher rate than expiring leases. The increase was also due to a reduction in above-
market lease amortization at our Towers at Shore Center property.
Same-Store office tenant recoveries increased by $3.3 million, or 5.8%, to $60.3 million for the year ended December 31, 2017 compared to $57.0 million for the year ended
December 31, 2016. The increase was primarily related to higher recoveries for our 1455 Market property, partially offset by property tax reassessments related to the prior year for our
Rincon Center property.
Same-Store office parking and other revenues increased by $5.1 million, or 40.1%, to $17.7 million for the year ended December 31, 2017 compared to $12.6 million for the
year ended December 31, 2016. The increase was primarily due to lease termination fees related to our Campus Center property.
Same-Store office operating expenses increased $3.0 million, or 2.7%, to $113.2 million for the year ended December 31, 2017 compared to $110.2 million for the year ended
December 31, 2016. The increase was primarily due to higher repairs and maintenance costs and higher property tax expenses at our 1455 Market property, partially offset by property
tax reassessments related to the prior year for our Rincon Center property.
Non-Same-Store
Non-Same-Store office rental revenues increased $40.0 million, or 19.5%, to $244.9 million for the year ended December 31, 2017 compared to $204.9 million for the year
ended December 31, 2016. The increase was primarily due to the commencement of Netflix, Inc.’s lease at our ICON property in the first quarter of 2017 and the 2016 Acquisitions,
partially offset by the sale of our One Bay Plaza (sold in June 2016), 12655 Jefferson (sold in November 2016), 222 Kearny (sold in February 2017), Pinnacle I and Pinnacle II (sold in
November 2017) properties. The increase was also attributable to leases signed at our Metro Center (Qualys, Inc., BrightEdge Technologies, Inc. and Scale Management, LLC) property
at a higher rate than expiring leases, partially offset by lower revenues from our 604 Arizona property, which was taken off-line for a redevelopment project.
Non-Same-Store office tenant recoveries increased $4.5 million, or 16.5%, to $31.9 million for the year ended December 31, 2017 compared to $27.4 million for the year ended
December 31, 2016. The increase was primarily due the commencement of Netflix, Inc.’s lease at our ICON property and the 2016 Acquisitions, partially offset by the sale of our One
Bay Plaza, 222 Kearny, Pinnacle I and Pinnacle II properties.
Non-Same-Store office parking and other revenues increased $2.5 million, or 26.6%, to $11.7 million for the year ended December 31, 2017 compared to $9.3 million for the
year ended December 31, 2016. The increase was primarily due the commencement of Netflix, Inc.’s lease at our ICON property and the 2016 Acquisitions, partially offset by the sale of
our 222 Kearny, Pinnacle I and Pinnacle II properties.
Non-Same-Store office operating expenses increased by $12.9 million, or 13.9%, to $105.7 million for the year ended December 31, 2017 compared to $92.8 million for the
year ended December 31, 2016. The increase was primarily due to the commencement of Netflix, Inc.’s lease at our ICON property, the 2016 Acquisitions and higher operating expense
at our Metro Center property, partially offset by the sale of our One Bay Plaza property.
59
Table of Contents
Media & Entertainment NOI
Same-Store
Same-Store Media and Entertainment revenues increased by $2.0 million, or 4.3%, to $48.4 million for the year ended December 31, 2017 compared to $46.4 million for the
year ended December 31, 2016. The increase was primarily attributable to a $1.8 million increase in rental revenues to $28.7 million and a $0.9 million increase in other property-related
revenues to $18.3 million. The increase in rental revenues and other property-related revenues were primarily due to higher occupancy and production at Sunset Bronson Studios. This
was partially offset by lower recoveries primarily due to a reimbursement in connection with the reconciliation of prior year operating expense recoveries under the lease with KTLA at
Sunset Bronson Studios.
Same-Store Media and entertainment operating expenses increased by $0.5 million, or 1.8%, to $26.3 million for the year ended December 31, 2017 compared to $25.8 million
for the year ended December 31, 2016. The increase was due to an overall increase in occupancy and production.
Non-Same-Store
Non-Same-Store Media and Entertainment revenues were $12.6 million for the year ended December 31, 2017. Non-Same-Store Media and Entertainment operating expenses
were $8.4 million for the year ended December 31, 2017. We acquired Sunset Las Palmas Studios in May 2017, which caused the increase in revenues and expenses.
Other Expense (Income)
Interest expense increased $14.0 million, or 18.4%, to $90.0 million for the year ended December 31, 2017 compared to $76.0 million for the year ended December 31, 2016.
The increase in interest expense was primarily attributable to higher weighted average debt outstanding in 2017 as compared to 2016, primarily due to $200.0 million of private
placement borrowings in the third quarter of 2016 and $101.0 million of borrowings related to our Hill7 property in the fourth quarter of 2016.
We recognized unrealized loss on our derivatives of $70.0 thousand for the year ended December 31, 2017 as compared to $1.4 million for the year ended December 31, 2016.
The unrealized loss was related to a portion of our derivatives that was evaluated to be ineffective. 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 swaps and designated the amended swaps as a hedge in order to minimize the ineffective portion of the original derivatives.
Other income increased $1.4 million, or 92.0%, to $3.0 million for the year ended December 31, 2017 compared to $1.6 million for the year ended December 31, 2016. The
change was primarily due to increased income related to a joint venture we entered into June 16, 2016 to co-originate a loan secured by land in Santa Clara, California.
During 2017, we completed the sale of our 222 Kearny, 3402 Pico, Pinnacle I and Pinnacle II properties, resulting in gains of $45.6 million for the year ended December 31,
2017. We recognized a $30.4 million gain on sale of real estate for the year ended December 31, 2016 from the sale of our Bayhill Office Center, Patrick Henry, One Bay Plaza and
12655 Jefferson properties.
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 $2.1 million, or
3.9%, to $54.5 million for the year ended December 31, 2017 compared to $52.4 million for the year ended December 31, 2016. The increase in general and administrative expenses was
primarily attributable to the adoption of the 2017 Hudson Pacific Properties, Inc. Outperformance Program and increased staffing to meet operational needs.
Depreciation and amortization expense increased $14.5 million, or 5.4%, to $283.6 million for the year ended December 31, 2017 compared to $269.1 million for the year
ended December 31, 2016. The increase was primarily related to depreciation expenses associated with the 2016 Acquisitions, our ICON property and the acquisition of Sunset Las
Palmas Studios, partially offset by the reduction of depreciation expense as a result of the sale of our One Bay Plaza, 222 Kearny, Pinnacle I and Pinnacle II properties.
60
Table of Contents
Comparison of the year ended December 31, 2016 to the year ended December 31, 2015
Management further evaluates NOI by evaluating the performance from the following property groups:
•
•
Same-Store properties, which include 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; and
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 reconciles net income (loss) to NOI:
Net income (loss)
Adjustments:
Interest expense
Interest income
Unrealized loss on ineffective portion of derivatives
Transaction-related expenses
Other (income) expense
Gains on sale of real estate
Income from operations
Adjustments:
General and administrative
Depreciation and amortization
NOI
Same-Store NOI
Non-Same-Store NOI
NOI
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
52,400
269,087
410,894
155,989
254,905
410,894
$
$
$
50,667
(124)
—
43,336
62
(30,471)
47,388
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 %
The following table summarizes certain statistics of our Same-Store Office and Media and Entertainment properties:
Same-Store Office statistics:
Number of properties
Rentable square feet
Ending % leased
Ending % occupied
Average % occupied for the period
Average annual rental rate per square foot
Same-Store Media and Entertainment statistics:
Number of properties
Rentable square feet
Average % occupied for the period
61
Year Ended December 31,
2016
2015
20
20
4,433,689
4,433,689
96.2%
95.4%
93.0%
94.0%
92.4%
92.8%
36.36
$
34.01
2.00
$
879,652
89.1%
2.00
879,652
78.5%
$
$
Table of Contents
The following table gives further detail on our NOI:
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,
2016
2015
Same-Store
Non-Same-Store
Total
Same Store
Non-Same-Store
Total
$
156,258 $
330,698 $
486,956
$
144,822 $
249,721 $
28,463
16,096
200,817
26,837
1,884
17,380
302
46,403
55,923
5,798
392,419
—
—
—
—
—
84,386
21,894
593,236
26,837
1,884
17,380
302
46,403
27,703
15,450
187,975
23,027
943
14,849
313
39,132
38,532
5,490
293,743
—
—
—
—
—
394,543
66,235
20,940
481,718
23,027
943
14,849
313
39,132
Total revenues
247,220
392,419
639,639
227,107
293,743
520,850
Operating expenses
Office operating expenses
Media & Entertainment operating expenses
Total operating expenses
Office NOI
Media & Entertainment NOI
NOI
65,421
25,810
91,231
135,396
20,593
137,514
—
137,514
254,905
—
202,935
25,810
228,745
390,301
20,593
66,233
23,726
89,959
121,742
15,406
99,898
—
99,898
193,845
—
$
155,989 $
254,905 $
410,894
$
137,148 $
193,845 $
166,131
23,726
189,857
315,587
15,406
330,993
62
Table of Contents
The following tables gives further detail on our change in NOI:
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 NOI
Media & Entertainment NOI
NOI
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
7.9 % $
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
$
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:
•
•
•
$13.7 million, or 11.2%, increase in NOI from our same-store office properties resulting primarily from higher rents related to new leases signed at our 1455 Market (Uber and
Vevo) and 625 Second (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 6040 Sunset and Element LA. The increase was partially offset by straight-line rent write-off related to our 875 Howard 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 property.
$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 (Saks), Page Mill Center (Toyota Research Institute and Stanford),
Skyport Plaza (Qualcomm), 3176 Porter 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.
$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 resulting from higher production activity and revenues
associated with lighting and grip at Sunset Bronson Studios.
63
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 (Uber and Vevo) and 625 Second (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 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 6040 Sunset and Element LA properties, partially offset by
lower property tax recovery resulting from a reassessment of the 1455 Market 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 (Saks), Page Mill Center (Toyota Research Institute and Stanford), Skyport Plaza (Qualcomm), 3176 Porter 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
Same-Store 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 resulting 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.
Same-Store 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
64
Table of Contents
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 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 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 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 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, Fourth & Traction, and MaxWell 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 derivatives 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 derivatives.
Transaction-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, 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.
Liquidity and Capital Resources
We have remained capitalized since our initial public offering through public offerings, private placements and continuous offerings under our at-the-market (“ATM”) program.
We currently expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital, strategic acquisitions, capital expenditures,
tenant improvements, leasing costs, dividends and distributions, and repayments of outstanding debt financing will include:
•
•
•
•
Cash on hand, cash reserves and net cash provided by operations;
Proceeds from additional equity securities;
Our ATM program;
Borrowings under the operating partnership’s unsecured revolving credit facility; and
65
Table of Contents
•
Proceeds from additional secured or unsecured debt financings or offerings.
Liquidity Sources
We had approximately $78.9 million of cash and cash equivalents at December 31, 2017. Our principal source of operating cash flow is related to leasing and operating the
properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly
dividend and distribution requirements.
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.
We have an ATM program that allows us to sell up to $125.0 million of common stock, $20.1 million of which has been sold through December 31, 2017. Any future sales will
depend on several factors, including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining
shares available for sale under this program.
As of December 31, 2017, we had total borrowing capacity of $400.0 million under our unsecured revolving credit facility, $100.0 million of which had been drawn.
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. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.
Based on the closing price of our common stock of $34.25 as of December 31, 2017, our ratio of debt to total market capitalization was approximately 31.2% (counting Series A
preferred units as debt) as of December 31, 2017.
Market capitalization
Notes payable(1)
Series A preferred units
Common equity capitalization(2)
Total market capitalization
December 31, 2017
2,439,311
10,177
5,400,294
7,849,782
$
$
Series A preferred units & debt/total market capitalization
_____________
(1) Notes payable excludes unamortized deferred financing costs and loan discount.
(2) Common equity capitalization represents the shares of common stock (including unvested restricted shares), OP units outstanding and dilutive shares multiplied by the closing price of our stock at the end of the period.
31.2%
66
Table of Contents
Outstanding Indebtedness
The following table sets forth information as of December 31, 2017 and December 31, 2016 with respect to our outstanding indebtedness:
December 31, 2017
December 31, 2016
Interest Rate(1)
Contractual Maturity
Date
UNSECURED NOTES PAYABLE
Unsecured Revolving Credit Facility(2)
5-Year Term Loan due April 2020(2)(4)
5-Year Term Loan due November 2020(2)
7-Year Term Loan due April 2022(2)(5)
7-Year Term Loan due November 2022(2)(6)
Series A Notes
Series E Notes
Series B Notes
Series D Notes
Registered Senior Notes(7)
Series C Notes
$
100,000
$
300,000
75,000
350,000
125,000
110,000
50,000
259,000
150,000
400,000
56,000
300,000
450,000
175,000
350,000
125,000
110,000
50,000
259,000
150,000
—
56,000
TOTAL UNSECURED NOTES PAYABLE
1,975,000
2,025,000
SECURED NOTES PAYABLE
Rincon Center(8)(9)
Sunset Gower Studios/Sunset Bronson Studios
Met Park North(10)
10950 Washington(8)
Element LA
Hill7(11)
Pinnacle I(12)
Pinnacle II(12)
TOTAL SECURED NOTES PAYABLE
TOTAL NOTES PAYABLE
Held for sale balances(12)
Unamortized deferred financing costs and loan discounts(13)
98,392
5,001
64,500
27,418
168,000
101,000
—
—
464,311
2,439,311
—
(17,931)
100,409
5,001
64,500
27,929
168,000
101,000
129,000
87,000
682,839
2,707,839
(216,000)
(18,513)
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%
3.95%
4.79%
5.13%
LIBOR + 2.25%
LIBOR + 1.55%
5.32%
4.59%
3.38%
3.95%
4.30%
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
11/1/2027
12/16/2027
5/1/2018
3/4/2019 (3)
8/1/2020
3/11/2022
11/6/2025
11/6/2028
11/7/2022
6/11/2026
TOTAL NOTES PAYABLE, NET
$
2,421,380
$
2,473,326
_____________
(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, 2017, 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, 2017, no such election had been made.
(3) The maturity date may be extended once for an additional one-year term.
(4)
In July 2016, $300.0 million of the term loan was effectively fixed at 2.75% to 3.65% per annum through the use of two interest rate swaps. See Part IV, Item 15(a) “Financial Statement and Schedules—Note 6 to the
Consolidated Financial Statements—Derivatives” for details.
In July 2016, the outstanding balance of the term loan was effectively fixed at 3.36%% to 4.31% per annum through the use of two interest rate swaps. See Part IV, Item 15(a) “Financial Statement and Schedules—Note 6 to the
Consolidated Financial Statements—Derivatives” for details.
In June 2016, the outstanding balance of the term loan was 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—Derivatives” for details.
(5)
(6)
(7) On October 2, 2017, we completed an underwritten public offering of $400.0 million of senior notes, which were issued at 99.815% of par.
(8) Monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule with a balloon payment at maturity.
(9) On February 1, 2018, we repaid the full outstanding balance of the mortgage loan secured by our Rincon Center property.
(10) 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—Derivatives” for details.
(11) We have a 55% ownership interest in the consolidated joint venture that owns the Hill7 property. The full amount of the loan is shown. This loan bears interest only at 3.38% until November 6, 2026, at which time the interest
rate will increase and monthly debt service will include principle payments with a balloon payment at maturity.
(12) On November 16, 2017, we sold our ownership interest in the consolidated join venture that owned Pinnacle I and Pinnacle II. The debt balances related to these properties were classified as held for sale at December 31, 2016.
(13) Excludes deferred financing costs related to properties held for sale and amounts related to establishing our unsecured revolving credit facility.
67
Table of Contents
The operating partnership was in compliance with its financial covenants as of December 31, 2017.
Liquidity Uses
Contractual Obligations
The following table provides information with respect to our commitments at December 31, 2017, including any guaranteed or minimum commitments under contractual
obligations.
Contractual Obligation
Principal payments on mortgage loans(1)
Interest payments—fixed rate(1)(2)
Interest payments—variable rate(3)
Capital improvements(4)
Ground leases(5)
Total
Payments Due by Period
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
2,439,311
$
469,218
101,147
239,272
452,825
98,930
57,477
30,357
239,272
14,111
$
545,664
$
500,717
$
111,509
49,004
—
28,322
110,370
21,786
—
28,322
3,701,773
$
440,147
$
734,499
$
661,195
$
1,294,000
189,862
—
—
382,070
1,865,932
$
$
_____________
(1) Amount includes debt secured by our Rincon Center property that was paid in full on February 1, 2018. The mortgage loan was scheduled to mature in May 2018.
(2)
(3)
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.
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 derivatives 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, 2017.
(4) Amount represents capital improvement commitments related to development and redevelopment projects and contractual obligations related to tenant improvements as of December 31, 2017. Contractual obligations, of $1.0
million, related to properties classified as held for sale as of December 31, 2017 are included in the amounts disclosed.
(5) 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. Contractual obligations of $1.1 million related to 9300 Wilshire, which is classified as held for sale as of December 31,
2017, is included in the amounts disclosed.
Off-Balance Sheet Arrangements
At December 31, 2017, we did not have any off-balance sheet arrangements.
Cash Flows
Comparison of the year ended December 31, 2017 to the year ended December 31, 2016 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,
2017
2016
Dollar Change
Percentage Change
$
292,959
$
226,774
$
(333,038)
33,167
(524,897)
334,754
66,185
191,859
(301,587)
29.2 %
(36.6)
(90.1)
Cash and cash equivalents and restricted cash were $101.3 million and $108.2 million at December 31, 2017 and 2016, respectively.
68
Table of Contents
Operating Activities
Net cash provided by operating activities increased by $66.2 million, or 29.2%, to $293.0 million for the year ended December 31, 2017 as compared to $226.8 million for the
year ended December 31, 2016. The change resulted primarily from an increase in cash NOI, as defined, from our office and media and entertainment properties, driven by our Sunset
Las Palmas Studios acquisition, the 2016 Acquisitions and higher rental revenue across our portfolio, partially offset by lower cash NOI related to One Bay Plaza (sold in June 2016),
12655 Jefferson (sold in November 2016), 222 Kearny (sold in February 2017), Pinnacle I and Pinnacle II (sold in November 2017) properties.
Investing Activities
Net cash used in investing activities decreased by $191.9 million, or 36.6%, to $333.0 million for the year ended December 31, 2017 as compared to $524.9 million for year
ended December 31, 2016. The change resulted primarily from a reduction in cash used to acquire real estate, partially offset by a reduction in proceeds from sales of real estate
properties and an increase in cash used for additions to investment in real estate.
Financing Activities
Net cash provided by financing activities decreased by $301.6 million, or 90.1%, to $33.2 million for the year ended December 31, 2017 as compared to $334.8 million for the
year ended December 31, 2016. The change resulted primarily from a reduction in proceeds from the sale of stock and a reduction in proceeds from notes payable, partially offset by a
reduction in payment for redemption of common units in our operating partnership.
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 cash 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.
69
Table of Contents
The following table presents a reconciliation of net income to FFO:
Net income
Adjustments:
Depreciation and amortization of real estate assets
Gains on sale of real estate
FFO attributable to non-controlling interests
Net income attributable to preferred units
FFO to common stockholders and unitholders
Year Ended December 31,
2017
2016
94,561
$
43,758
281,773
(45,574)
(24,068)
(636)
306,056
$
267,245
(30,389)
(18,817)
(636)
261,161
$
$
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 derivatives 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
derivatives, refer to Part IV, Item 15(a) “Financial Statement and Schedules—Note 6 to the Consolidated Financial Statements—Derivatives.”
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, 2017, we had a $64.5 million mortgage loan secured by our Met Park North property. The full loan is subject to a derivative 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 the 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 derivatives swap one-month LIBOR, which includes 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%.
An additional $350.0 million of the 7-Year Term Loan due April 2022 has been effectively hedged through two interest rate swaps. Both derivatives 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 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 rate debt, which includes the $100.0 million drawn under our unsecured revolving credit facility, the $75.0 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, is not subject to derivatives. For sensitivity purposes, if
one-month LIBOR as of December 31, 2017 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 $1.8 million.
As of December 31, 2017, we had outstanding notes payable of $2.44 billion (before $17.9 million of net deferred financing costs and loan discounts), of which $1.02 billion, or
41.8%, was variable rate debt. $839.5 million of the variable rate debt is subject to derivatives. As of December 31, 2017, the estimated fair value of our fixed rate secured mortgage
loans was $1.40 billion. The estimated fair value of our variable rate debt equals the carrying value.
70
Table of Contents
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.
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
71
Table of Contents
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, 2017. 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, 2017, 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, 2017. 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, 2017, Hudson Pacific Properties, L.P.’s internal control over financial reporting was effective based on those criteria.
Management, including the Chief Executive Officer and Chief Financial Officer of Hudson Pacific Properties, Inc. (the sole general partner of Hudson Pacific Properties, L.P.),
does not expect that Hudson Pacific Properties, L.P.’s disclosure controls and procedures, or Hudson Pacific Properties, L.P.’s internal controls will prevent all error and fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives 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
72
Table of Contents
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, 2017, 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, 2017.
ITEM 9B. Other Information
Not applicable.
73
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 2018. 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 2018.
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 2018.
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 2018.
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 2018.
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:
74
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, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
FINANCIAL STATEMENTS OF HUDSON PACIFIC PROPERTIES, L.P.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Capital for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
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- 54
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.
75
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
4.3
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
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.
S-11/A
S-11/A
8-K
10-K
10-Q
333-164916
333-170751
001-34789
001-34789
001-34789
Form of Certificate of Common Stock of Hudson Pacific Properties, Inc.
S-11/A
333-164916
Indenture, dated October 2, 2017, among Hudson Pacific Properties, L.P., and U.S. Bank National Association
Supplemental Indenture No. 1, dated October 2, 2017, among Hudson Pacific Properties, L.P., Hudson Pacific Properties,
Inc. and U.S. Bank National Association
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.
8-K
8-K
S-11
S-11
S-11
S-11
S-11
S-11
S-11
S-11
S-11
S-11
S-11
S-11/A
S-11/A
S-11/A
001-34789
001-34789
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-170751
333-164916
333-170751
333-164916
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.
S-11/A
333-164916
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.
S-11/A
333-164916
S-11/A
333-164916
S-11/A
333-164916
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.
S-11/A
333-164916
Tax Protection Agreement between Hudson Pacific Properties, L.P. and the persons named therein, dated June 29, 2010.
8-K
001-34789
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.
S-11/A
333-164916
76
3.1
3.3
3.1
10.1
3.4
4.1
4.1
4.2
10.2
10.3
10.5
10.6
10.7
10.8
10.10
10.11
10.12
10.13
10.14
10.5
10.17
10.11
10.12
10.13
10.14
10.16
10.17
10.3
10.20
May 12, 2010
December 6, 2010
January 12, 2015
February 26, 2016
November 4, 2016
June 14, 2010
October 2, 2017
October 2, 2017
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
November 22, 2010
June 14, 2010
December 6, 2010
April 9, 2010
April 9, 2010
April 9, 2010
April 9, 2010
April 9, 2010
April 9, 2010
July 1, 2010
June 11, 2010
Table of Contents
Incorporated by Reference
File No.
Exhibit No.
Exhibit
No.
10.22
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
10.43
10.44
10.45
10.46
Description
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.
Form
S-11/A
333-164916
S-11/A
333-164916
S-11/A
333-164916
S-11/A
333-164916
S-11/A
333-164916
S-11/A
333-164916
8-K
001-34789
First Amendment to Purchase and Sale Agreement, dated October 1, 2010, by and between ECI Washington LLC and
Hudson Pacific Properties, L.P.
S-11/A
333-170751
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.
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.*
2013 Outperformance Award Agreement.*
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.
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.
77
8-K
S-11
S-11
8-K
8-K
8-K
8-K
8-K
10-Q
8-K
8-K
10-K
10-Q
10-Q
10-Q
10-Q
8-K
001-34789
333-173487
333-173487
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
10.24
10.25
10.26
10.27
10.28
10.29
10.5
10.45
10.1
10.48
10.49
4.1
10.1
10.1
10.1
10.1
10.66
99.1
10.1
10.70
10.76
10.77
10.78
10.79
10.1
Filing Date
June 22, 2010
June 22, 2010
June 22, 2010
June 22, 2010
June 22, 2010
June 22, 2010
July 1, 2010
December 6, 2010
December 21, 2010
April 14, 2011
April 14, 2011
May 4, 2011
May 4, 2011
January 6, 2012
January 7, 2013
July 1, 2013
November 7, 2013
November 22, 2013
January 3, 2014
March 3, 2014
August 7, 2014
August 7, 2014
August 7, 2014
August 7, 2014
December 11, 2014
Table of Contents
Exhibit
No.
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
12.1
12.2
21.1
23.1
31.1
Description
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 Unit Award Grant Notice and Restricted Stock Unit 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
2017 Outperformance Award Agreement (REIT Shares)*
2017 Outperformance Award Agreement (LTIP Units)*
Amended and Restated Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan*
Indemnification Agreement, dated August 16, 2017, by and between Hudson Pacific Properties, Inc. and Andrea Wong
2018 Outperformance Award Agreement (REIT Shares)*
2018 Outperformance Award Agreement (LTIP Units)*
Statement of Computation of Ratio of Earnings to Fixed Charges and Consolidated Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends of Hudson Pacific Properties, Inc.
Statement of Computation of Ratio of Earnings to Fixed Charges of Hudson Pacific Properties, L.P.
Subsidiaries of Hudson Pacific Properties, Inc.
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.
78
Incorporated by Reference
Form
8-K
10-K
8-K
8-K
8-K
8-K
10-Q
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
10-Q
8-K
8-K
8-K
10-Q
File No.
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
001-34789
Exhibit No.
Filing Date
10.2
10.84
10.1
10.1
10.1
10.2
10.91
10.93
10.2
10.3
10.4
10.2
10.3
10.4
10.5
10.6
10.95
10.96
10.1
10.2
10.8
10.1
10.2
10.1
10.2
December 11, 2014
March 2, 2015
January 2, 2015
January 12, 2015
March 12, 2015
March 12, 2015
August 10, 2015
November 6, 2015
November 20, 2015
November 20, 2015
November 20, 2015
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
December 21, 2015
February 26, 2016
February 26, 2016
March 21, 2016
March 21, 2016
August 4, 2016
February 10, 2017
February 10, 2017
May 25, 2017
November 6, 2017
Table of Contents
Exhibit
No.
31.2
31.3
31.4
32.1
32.2
99.1
101
*
**
Description
Form
File No.
Exhibit No.
Filing Date
Incorporated by Reference
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.
Certificate of Correction
8-K
001-34789
99.1
January 23, 2012
The following financial information from Hudson Pacific Properties, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2017 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 Capital, (vi) Consolidated Statements of Cash Flows and (vii) 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.
79
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 15, 2018
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/ 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
/S/ ANDREA L. WONG
Andrea L. Wong
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
80
Date
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
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 15, 2018
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/ 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
/S/ ANDREA L. WONG
Andrea L. Wong
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
81
Date
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
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, 2017. 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, 2017, 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, 2017, 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, 2017.
/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.
Opinion on Internal Control over Financial Reporting
We have audited Hudson Pacific Properties, Inc.’s internal control over financial reporting as of December 31, 2017, 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). In our opinion, Hudson Pacific Properties, Inc.
(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Hudson
Pacific Properties, Inc. as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated February 15, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Los Angeles, California
February 15, 2018
F- 2
Table of Contents
The Board of Directors and Stockholders of
Hudson Pacific Properties, Inc.
Opinion on the Financial Statements
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, 2017 and 2016, 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, 2017, and the related notes and financial
statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial
reporting as of December 31, 2017, 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 15, 2018 expressed an unqualified opinion thereon.
Adoption of ASC No. 2017-01
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.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
Los Angeles, California
February 15, 2018
F- 3
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Investment in real estate, at cost
Accumulated depreciation and amortization
Investment in real estate, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Prepaid expenses and other assets, net
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 and 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, 155,602,508 shares and 136,492,235 shares outstanding at December 31, 2017 and 2016, respectively
$
$
Additional paid-in capital
Accumulated other comprehensive income
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
December 31,
2017
December 31,
2016
$
6,423,441
$
(533,498)
5,889,943
78,922
22,358
4,363
109,457
244,554
61,138
211,335
5,878,480
(375,207)
5,503,273
83,015
25,177
7,007
79,209
288,929
77,214
615,174
6,622,070
$
6,678,998
2,421,380
$
163,107
49,930
64,031
265
2,216
2,700,929
10,177
1,556
3,622,988
13,227
—
3,637,771
258,602
14,591
3,910,964
2,473,326
114,674
73,267
66,878
1,303
236,623
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
$
6,622,070
$
F- 4
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 derivatives
Transaction-related expenses
Other (income) expense
TOTAL OTHER EXPENSES
INCOME (LOSS) BEFORE GAINS ON SALE OF REAL ESTATE
Gains on sale of real estate
NET INCOME (LOSS)
Net income attributable to preferred stock and units
Original issuance costs of redeemed Series B preferred stock
Net income attributable to participating securities
Net income attributable to non-controlling interest in consolidated entities
Net (income) loss attributable to non-controlling interest 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,
2017
2016
2015
$
545,453
$
486,956
$
92,244
29,413
667,110
36,529
1,336
22,805
359
61,029
728,139
218,873
34,634
54,459
283,570
591,536
136,603
90,037
(97)
70
598
(2,992)
87,616
48,987
45,574
94,561
(636)
—
(1,003)
(24,960)
(375)
67,587
0.44
0.44
153,488,730
153,882,814
$
$
$
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
(636)
—
(766)
(9,290)
(5,848)
27,218
0.26
0.25
106,188,902
110,369,055
$
$
$
$
$
$
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)
(12,105)
(5,970)
(356)
(3,853)
21,969
(16,397)
(0.19)
(0.19)
85,927,216
85,927,216
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income: change in fair value of derivatives
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 non-controlling interest in the operating partnership
Comprehensive income (loss) attributable to Hudson Pacific Properties, Inc. common stockholders
Year Ended December 31,
2017
2016
2015
$
94,561
$
43,758
$
7,398
101,959
(636)
—
(1,003)
(24,960)
(420)
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
$
74,940
$
37,795
$
(15,035)
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share data)
Hudson Pacific Properties, Inc. Stockholders’ Equity
Shares of Common
Stock
Stock Amount
Series B Redeemable
Preferred Stock
Additional
Paid-in
Capital
Accumulated Deficit
Accumulated Other
Comprehensive (Loss)
Income
Non-controlling
interest—Units in
the operating
partnership
Non-controlling
interest—Members in
Consolidated Entities
Total Equity
Balance, December 31, 2014
66,797,816
$
668
$
145,000
$
1,070,833
$
(34,884) $
(2,443) $
52,851
$
42,990
$
1,275,015
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 common units in the
operating partnership for
common stock
—
—
12,650,000
—
—
8,820,482
36,223
(85,469)
—
—
—
—
934,728
Balance, December 31, 2015
89,153,780
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
—
—
47,010,695
590,520
(262,760)
—
—
—
—
—
—
—
127
—
—
87
—
—
—
—
—
—
9
891
—
—
470
6
(3)
—
—
—
—
—
Balance, December 31, 2016
136,492,235
Contributions
—
1,364
—
—
—
—
(145,000)
—
—
—
—
(11,469)
—
11,469
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
380,493
—
—
285,358
—
(5,128)
(50,244)
8,832
—
—
20,835
—
—
—
—
—
—
—
—
—
—
(10,071)
—
—
—
—
—
—
—
—
—
—
—
—
—
1,362
—
—
—
—
—
1,814,936
—
—
—
(25,631)
—
(21,969)
1,235
(20,844)
217,795
(2,013)
—
—
—
—
—
—
—
—
3,853
—
—
217,795
(2,013)
380,620
(145,000)
1,814,936
285,445
—
(5,128)
(87,344)
8,832
(16,718)
2,597
—
1,710,979
(44,955)
(1,081)
1,800,578
262,625
3,729,037
—
—
1,449,111
—
(8,424)
(90,005)
13,609
—
—
34,124
3,109,394
—
—
—
—
—
—
—
—
27,984
—
—
(16,971)
—
—
—
—
—
—
—
—
—
10,577
—
—
—
—
—
(27,814)
1,045
5,848
(4,635)
—
(1,480,163)
33,996
(1,303)
—
—
—
—
—
9,290
—
—
33,996
(1,303)
1,449,581
6
(8,427)
(117,819)
14,654
43,122
5,942
(1,446,039)
9,496
—
294,859
—
304,608
3,870
3,702,750
3,870
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
Table of Contents
HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY—(Continued)
(in thousands, except share data)
Hudson Pacific Properties, Inc. Stockholders’ Equity
Shares of Common
Stock
Stock
Amount
Series B Redeemable
Preferred Stock
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
—
18,656,575
—
187
917,086
(463,388)
—
—
—
—
—
9
(4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Additional
Paid-in
Capital
—
647,195
(9)
(16,037)
(106,269)
13,249
—
—
(24,535)
Accumulated Deficit
Accumulated Other
Comprehensive (Loss)
Income
Non-controlling
interest—Units in
the operating
partnership
—
—
—
—
(51,619)
—
68,590
—
—
—
—
—
—
—
—
—
7,353
—
—
—
—
(656)
2,666
375
45
(3,622)
(282,698)
Non-controlling
interest—Members in
Consolidated Entities
(74,836)
—
—
—
—
—
24,960
—
—
Total Equity
(74,836)
647,382
—
(16,041)
(158,544)
15,915
93,925
7,398
(310,855)
Balance, December 31, 2017
155,602,508 $
1,556 $
— $
3,622,988 $
— $
13,227
$
14,591 $
258,602
$
3,910,964
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
Non-cash portion of interest expense
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
Other non-cash adjustments(1)
Gains on sale of real estate
Change in operating assets and liabilities:
Accounts receivable
Deferred leasing costs and lease intangibles
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Security deposits and prepaid rent
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to investment property
Property acquisitions
Contributions to unconsolidated entities
Distributions from unconsolidated entities
Proceeds from repayment of notes receivable
Proceeds from sales of real estate
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable
Payments of notes payable
Proceeds from issuance of common stock, net
Payments for redemption of common units in the operating partnership
Redemption of Series B preferred stock
Distributions paid to common stock and unitholders
Distributions paid to preferred stock and unitholders
Contributions from non-controlling member in consolidated entities
Distributions to non-controlling member in consolidated entities
Payments to satisfy tax withholding
Payments of loan costs
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash—beginning of period
Cash and cash equivalents and restricted cash—end of period
Year Ended December 31,
2017
2016
2015
$
94,561
$
43,758
$
(16,082)
283,570
6,032
15,079
(29,638)
433
(18,062)
2,505
1,546
883
269,087
4,464
14,144
(29,079)
1,023
(19,734)
2,160
1,388
707
(45,574)
(30,389)
1,929
(32,244)
233
19,447
(7,741)
292,959
(302,447)
(257,734)
(1,071)
15,964
—
212,250
(333,038)
766,660
(822,526)
647,382
(310,855)
—
(158,544)
(636)
3,870
(74,836)
(16,041)
(1,307)
33,167
(6,912)
108,192
15,088
(43,476)
(7,312)
(4,426)
9,371
226,774
(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)
334,754
36,631
71,561
$
101,280
$
108,192
$
245,071
4,746
8,421
(29,392)
408
(22,073)
1,642
581
(246)
(30,471)
(5,734)
(28,980)
(17,032)
18,342
46,582
175,783
(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)
1,658,641
36,725
34,836
71,561
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 capitalized interest
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accounts payable and accrued liabilities for real estate investments
Reclassification of investment in unconsolidated entities for real estate investments
Relief of debt in conjunction with sale of real estate
Proceeds from sale of real estate
Issuance of common stock in connection with property acquisition
Additional paid-in capital in connection with property acquisition
Non-controlling common units in the operating partnership in connection with property acquisition
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
$
$
77,234
(19,587)
7,835
(216,000)
216,000
—
—
—
$
$
$
$
$
$
$
$
82,491
(37,364)
—
—
—
—
—
—
$
$
$
$
$
$
$
$
50,208
(27,972)
—
—
—
87
285,358
1,814,936
_____________
(1) Represents bad debt expense/recovery, amortization of discount and net origination fees on purchased and originated loans and unrealized loss/gain on ineffective portion of derivative instruments.
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.
Opinion of the Financial Statements
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, 2017 and 2016, 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, 2017, and the related notes and
financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated financial position of the Operating Partnership at December 31, 2017 and 2016, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Adoption of ASC No. 2017-01
As discussed in Note 2 to the consolidated financial statements, the Operating Partnership changed its method for accounting for property acquisitions effective October 1, 2016 when
the Operating Partnership adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
Basis for Opinion
These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Operating Partnership’s auditor since 2015.
Los Angeles, California
February 15, 2018
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
Investment in real estate, at cost
Accumulated depreciation and amortization
Investment in real estate, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Prepaid expenses and other assets, net
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 and 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
Hudson Pacific Properties, L.P. partners’ capital:
Common units, 156,171,553 and 145,942,855 issued and outstanding at December 31, 2017 and 2016, respectively.
Accumulated other comprehensive income
Total Hudson Pacific Properties, L.P. partners' capital
Non-controlling interest—members in consolidated entities
TOTAL CAPITAL
TOTAL LIABILITIES AND CAPITAL
December 31,
2017
December 31,
2016
$
6,423,441
$
(533,498)
5,889,943
78,922
22,358
4,363
109,457
244,554
61,138
211,335
5,878,480
(375,207)
5,503,273
83,015
25,177
7,007
79,209
288,929
77,214
615,174
$
$
$
$
6,622,070
$
6,678,998
2,421,380
$
163,107
49,930
64,031
265
2,216
2,700,929
10,177
3,639,086
13,276
3,652,362
258,602
3,910,964
6,622,070
$
$
2,473,326
114,674
73,267
66,878
1,303
236,623
2,966,071
10,177
3,392,264
5,878
3,398,142
304,608
3,702,750
6,678,998
The accompanying notes are an integral part of these consolidated financial statements.
F- 12
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
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 derivatives
Transaction-related expenses
Other (income) expense
TOTAL OTHER EXPENSES
INCOME (LOSS) BEFORE GAINS ON SALE OF REAL ESTATE
Gains on sale of real estate
NET INCOME (LOSS)
Net income attributable to non-controlling interest in consolidated entities
Net income (loss) attributable to Hudson Pacific Properties, L.P.
Net income attributable to preferred stock and units
Original issuance costs of redeemed Series B preferred stock
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
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
Year Ended December 31,
2017
2016
2015
$
545,453
$
486,956
$
92,244
29,413
667,110
36,529
1,336
22,805
359
61,029
728,139
218,873
34,634
54,459
283,570
591,536
136,603
90,037
(97)
70
598
(2,992)
87,616
48,987
45,574
94,561
(24,960)
69,601
(636)
—
(636)
(1,003)
67,962
0.44
0.44
154,276,773
154,670,857
$
$
$
$
$
$
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
(9,290)
34,468
(636)
—
(636)
(766)
33,066
0.23
0.23
$
$
$
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)
(3,853)
(19,935)
(12,105)
(5,970)
(18,075)
(356)
(38,366)
(0.30)
(0.30)
The accompanying notes are an integral part of these consolidated financial statements.
F- 13
145,595,246
146,739,246
128,948,077
128,948,077
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income: change in fair value of derivatives
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 Hudson Pacific Properties, L.P. partners’ capital
$
75,360
$
39,008
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 14
Year Ended December 31,
2017
2016
2015
$
94,561
$
43,758
$
(16,082)
7,398
101,959
(636)
—
(1,003)
(24,960)
5,942
49,700
(636)
—
(766)
(9,290)
2,597
(13,485)
(12,105)
(5,970)
(356)
(3,853)
(35,769)
Table of Contents
HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(in thousands, except unit data)
Partners’ Capital
Preferred Units
Number of Common
Units
Common Units
Accumulated Other
Comprehensive (Loss)
Income
Total Partners’
Capital
Non-controlling
Interest— Members in
Consolidated Entities
Total Capital
Balance, December 31, 2014
$
145,000
69,180,379
$
1,089,686
$
(2,661) $
1,232,025
$
42,990
$
Contributions
Distributions
Proceeds from sale of common units, net of
underwriters’ discount and transaction costs
Issuance of unrestricted units
Issuance of restricted units
Units withheld to satisfy tax withholding
Declared distributions
Amortization of unit-based compensation
Net income (loss)
Change in fair value of derivatives
Redemption of Series B preferred stock
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 derivatives
Repurchase of operating partnership units
Balance, December 31, 2016
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 derivatives
Redemption of common units
Balance, December 31, 2017
$
—
—
—
—
—
—
(11,469)
—
11,469
—
(145,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,650,000
380,620
63,668,962
2,100,381
36,223
(85,469)
—
—
—
—
—
—
(5,128)
(75,875)
8,832
(32,040)
—
—
145,450,095
3,466,476
—
—
—
—
47,010,695
1,449,581
590,520
(262,760)
—
—
—
—
(46,845,695)
145,942,855
—
—
6
(8,427)
(117,819)
14,654
33,832
—
(1,446,039)
3,392,264
—
—
18,656,575
647,382
917,086
(463,388)
—
—
—
—
—
(16,041)
(158,544)
15,915
68,965
—
(8,881,575)
(310,855)
—
—
—
—
—
—
—
—
—
2,597
—
(64)
—
—
—
—
—
—
—
—
5,942
—
5,878
—
—
—
—
—
—
—
—
7,398
—
—
—
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
(1,446,039)
3,398,142
—
—
647,382
—
(16,041)
(158,544)
15,915
68,965
7,398
(310,855)
217,795
(2,013)
—
—
—
—
—
—
3,853
—
—
262,625
33,996
(1,303)
—
—
—
—
—
9,290
—
—
304,608
3,870
(74,836)
—
—
—
—
—
24,960
—
—
156,171,553
$
3,639,086
$
13,276
$
3,652,362
$
258,602
$
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
(1,446,039)
3,702,750
3,870
(74,836)
647,382
—
(16,041)
(158,544)
15,915
93,925
7,398
(310,855)
3,910,964
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:
Year Ended December 31,
2017
2016
2015
$
94,561
$
43,758
$
(16,082)
Depreciation and amortization
Non-cash portion of interest expense
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
Other non-cash adjustments(1)
Gains on sale of real estate
Change in operating assets and liabilities:
Accounts receivable
Deferred leasing costs and lease intangibles
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Security deposits and prepaid rent
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to investment property
Property acquisitions
Contributions to unconsolidated entities
Distributions from unconsolidated entities
Proceeds from repayment 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 stock
Distributions paid to common unitholders
Distributions paid to preferred unitholders
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 (decrease) increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash—beginning of period
Cash and cash equivalents and restricted cash—end of period
283,570
6,032
15,079
(29,638)
433
(18,062)
2,505
1,546
883
269,087
4,464
14,144
(29,079)
1,023
(19,734)
2,160
1,388
707
(45,574)
(30,389)
1,929
(32,244)
233
19,447
(7,741)
292,959
(302,447)
(257,734)
(1,071)
15,964
—
212,250
(333,038)
766,660
(822,526)
647,382
(310,855)
—
(158,544)
(636)
3,870
(74,836)
(16,041)
(1,307)
33,167
(6,912)
108,192
15,088
(43,476)
(7,312)
(4,426)
9,371
226,774
(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)
334,754
36,631
71,561
$
101,280
$
108,192
$
245,071
4,746
8,421
(29,392)
408
(22,073)
1,642
581
(246)
(30,471)
(5,734)
(28,980)
(17,032)
18,342
46,582
175,783
(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)
1,658,641
36,725
34,836
71,561
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 capitalized interest
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accounts payable and accrued liabilities for real estate investments
Reclassification of investment in unconsolidated entities for real estate investments
Relief of debt in conjunction with sale of real estate
Proceeds from sale of real estate
Common units in the operating partnership in connection with property acquisition
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
77,234
(19,587)
7,835
(216,000)
216,000
—
$
$
$
$
$
$
82,491
(37,364)
—
—
—
—
$
$
$
$
$
$
50,208
(27,972)
—
—
—
2,100,381
_____________
(1) Represents bad debt expense/recovery, amortization of discount and net origination fees on purchased and originated loans and unrealized loss/gain on ineffective portion of derivative instruments.
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/unit data)
Hudson Pacific Properties, Inc. is a Maryland corporation formed on November 9, 2009 as 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 “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 Northern
California. 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.
The Company’s portfolio consists of properties located throughout Northern and Southern California and the Pacific Northwest. The following table summarizes the Company’s
portfolio as of December 31, 2017:
Segments
Office
Media & Entertainment
Total(1)
_________________
(1)
Includes redevelopment, development and held for sale properties.
2. Summary of Significant Accounting Policies
Basis of Presentation
Number of Properties
51
3
54
Square Feet
(unaudited)
13,291,531
1,249,927
14,541,458
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, acres 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 the prior periods have been reclassified to conform to the current year presentation. Included in the reclassified
amounts are properties held for sale. These amounts are related to 3402 Pico, which was sold on March 21, 2017, Pinnacle I and Pinnacle II, which were sold on November 16, 2017 as
well as four other properties, which were classified as held for sale as of December 31, 2017. See Note 3 for details of the properties classified as held for sale.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company, the operating partnership and all wholly owned and controlled subsidiaries. The
consolidated financial statements of the operating partnership include the accounts of the operating partnership and all wholly owned and controlled subsidiaries. All intercompany
balances and transactions have been eliminated in the consolidated financial statements.
Under the consolidation guidance, we first evaluate an entity using the variable interest model, then the voting model. The Company ultimately consolidates all entities that the
Company controls through either majority ownership or voting rights,
including all variable interest entities (“VIEs”) of which the Company is considered the primary beneficiary. The Company accounts for all other unconsolidated joint ventures using the
cost or equity method of accounting. In addition, we continually evaluate each legal entity that is not wholly owned for reconsideration based on changing circumstances.
VIEs are defined as entities in which equity investors do not have:
the characteristics of a controlling financial interest;
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties; and/or
the entity is structured with non-substantive voting rights.
•
•
•
The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with both the power to direct the activities that most significantly affect the
VIE’s economic performance and 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 of December 31, 2017,
the Company has determined that three joint ventures and our operating partnership met the definition of a VIE. Two of the joint ventures are consolidated entities and one joint venture
is a non-consolidated entity.
Consolidated Entities
On November 16, 2017, the Company sold its 65.0% ownership interest in the single joint venture that owned both Pinnacle I and Pinnacle II. As a result of the disposition, the
Company no longer consolidates Pinnacle and Pinnacle II.
As of December 31, 2017, the operating partnership has determined that two of its joint ventures met the definition of a VIE and are consolidated:
Property
1455 Market
Hill7
Ownership interest
55.0%
55.0%
As of December 31, 2017, the Company has determined that our operating partnership met the definition of a VIE and is consolidated. Substantially all of the assets and
liabilities of the Company are related to these VIEs.
Non-consolidated Entities
On June 15, 2017, the Company purchased the remaining interest in land at its 11601 Wilshire property. Refer to Note 3 for details. As a result of the purchase, the Company is
now consolidating the interest in land.
On June 16, 2016, the Company entered into a joint venture to co-originate a loan secured by land in Santa Clara, California. The assets of the joint venture consist of notes
receivable. As of December 31, 2017, the Company has determined this joint venture meets the definition of a VIE, however, it is not the primary beneficiary. Due to its significant
influence over the non-consolidated entity, the Company accounts for it using the equity method of accounting. 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 of $14.2 million is reflected within prepaid
expenses and other assets on the Consolidated Balance Sheets which represents the Company’s maximum exposure for loss. The Company’s share of net income or loss from the entity
is included within other (income) expense on the Consolidated Statements of Operations. The Company owns 21% of the non-consolidated 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
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)
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 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 in accordance with ASC 805, Business Combinations. 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 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 which is included in the
transaction-related expenses line item of the Consolidated Statements of Operations.
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 were 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 below-market 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 and legal and other related costs.
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)
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:
Capitalized personnel costs
Capitalized interest
Operating Properties
Year Ended December 31,
2017
2016
2015
$
$
10,853
10,655
9,347
$
11,307
7,349
6,516
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
15
5 to 7
Shorter of the estimated useful life or the lease term
The Company amortizes above- and below-market lease intangibles over the remaining non-cancellable lease terms and bargain renewal periods, if applicable. The in-place
lease intangibles are amortized 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 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 Standards Codification (“ASC”) 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 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. There were no discontinued operations for the years ended December 31, 2017, 2016, and 2015.
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)
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, 2017, 2016 and 2015.
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,
2017 and 2016, respectively. Goodwill is included in the prepaid expenses and other assets, net line item on the Consolidated Balance Sheets.
Cash, Cash Equivalents and Restricted Cash
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. Restricted cash
primarily consists of amounts held by lenders to fund reserves such as capital improvements, taxes, insurance, debt service and operating expenditures.
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.
Pursuant to the adoption of ASU 2016-18, the Company included restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows, which resulted
in an increase of $7.2 million and $0.9 million in the net cash provided by operating activities line item in the Consolidated Statements of Cash Flows for the years ended December 31,
2016 and 2015.
The following table provides a reconciliation of cash and cash equivalents and restricted cash at the beginning and end of the periods presented:
Beginning of period:
Cash and cash equivalents
Restricted cash
Total
End of period:
Cash and cash equivalents
Restricted cash
Total
_____________
(1)
Includes restricted cash that was previously included in assets held for sale as of December 31, 2014.
Accounts Receivable, net
December 31,
2017
2016
2015(1)
$
$
$
$
83,015
25,177
108,192
78,922
22,358
101,280
$
$
$
$
53,551
18,010
71,561
83,015
25,177
108,192
$
$
$
$
17,753
17,083
34,836
53,551
18,010
71,561
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
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)
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 as of:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
Straight-line Rent Receivables, net
December 31, 2017
December 31, 2016
$
$
6,835
(2,472)
4,363
$
$
8,834
(1,827)
7,007
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 as of:
Straight-line rent receivables
Allowance for doubtful accounts
Straight-line rent receivables, net(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
Prepaid Expenses and Other Assets, net
December 31, 2017
December 31, 2016
$
$
109,457
—
109,457
$
$
79,345
(136)
79,209
Prepaid expenses and other assets primarily consists of investments in unconsolidated entities, goodwill and derivative assets. These balances were presented separately on the
2016 Form 10-K, however, these accounts have been reclassified on our Consolidated Balance Sheets to conform to the current year’s presentation.
The following table represents the Company’s prepaid expenses and other assets, net as of:
Investment in unconsolidated entities
Goodwill
Derivative assets
Other
Prepaid expenses and other assets, net(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
Security Deposits and Prepaid Rent
December 31, 2017
December 31, 2016
$
$
14,240
$
8,754
12,586
25,558
61,138
$
37,228
8,754
5,935
25,297
77,214
The security deposits and prepaid rent balances were presented separately on the 2016 Form 10-K, however, these accounts have been reclassified on our Consolidated Balance
Sheets to conform to the current year’s presentation.
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)
The following table represents the Company’s security deposits and prepaid rent as of:
Security deposits
Prepaid rent
Security deposits and prepaid rent(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
Segment Reporting
December 31, 2017
December 31, 2016
$
$
36,458
27,573
64,031
$
$
29,837
37,041
66,878
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 immaterial, 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
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)
sufficient and (iv) other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the requirements for gain recognition have
been met.
Deferred Financing Costs and Debt Discount/Premium
Deferred financing costs are amortized over the contractual loan term 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.
Debt discounts and premiums are amortized and accreted on a straight-line basis over the contractual loan term, which approximates the effective interest method, into interest
expense on the Consolidated Statements of Operations. Discounts are recorded as additional interest expense and premiums are recorded as a reduction to interest expense.
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
718, Compensation-Stock Compensation (“ASC 718”). The Company accounts for forfeitures of awards as they occur.
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 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.
The Company 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, the Company is generally not subject to corporate level income tax on the earnings distributed currently to its
stockholders. If the Company 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, the Company
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 the Company 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
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)
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.
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 2017, 2016 or 2015.
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, 2017, 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.
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)
The Company considers the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current
information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated
with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied
liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s
estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or
significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets
or liabilities, and (viii) little information is released publicly (for example, a principal-to-principal market).
The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual
and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near 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.
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“the FASB”) in the form of Accounting Standards Update (“ASU”). The following ASUs were
issued from 2016 to 2017 and have been adopted by the Company:
Standard
Description
ASU 2017-04, Intangibles—Goodwill
and Other (Topic 350): Simplifying the
Test for Goodwill Impairment
ASU 2017-03, Accounting Changes and
Error Corrections (Topic 250) and
Investments—Equity Method and Joint
Ventures (Topic 323): Amendments to
SEC Paragraphs Pursuant to Staff
Announcements at the September 22,
2016 and November 17, 2016 EITF
Meetings (SEC Update)
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.
The guidance in this ASU is based on two SEC staff announcements made at the September 2016 and
November 2016 EITF meetings. In the September meeting, the SEC announced that a registrant
should disclose the potential material effects of the ASUs related to revenues, leases and credit losses
on financial instruments. As a result of the November meeting, the ASU conforms to ASC 323 to the
guidance issued in ASU 2014-01 related to investments in qualified affordable housing projects.
ASU 2017-01, Business Combinations
(Topic 805): Clarifying the Definition
of a Business
This update amends the guidance for determining whether a transaction involves the purchase or
disposal of a business or an asset. The amendments clarify that when substantially all of the fair value
of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of
similar assets, the set of assets and activities is not a business.
Effect on the Financial Statements or Other
Significant Matters
The Company early adopted this guidance during the
second quarter of 2017 and applied it prospectively. The
adoption did not have an impact on the Company’s
consolidated financial statements.
The Company adopted this guidance during the first
quarter of 2017 and applied it prospectively. With the
adoption, the Company provided updates on its
implementation of the ASUs related to revenue, leases
and credit losses on financial instruments. Please refer to
sections below for updates on the implementation of
revenue and lease ASUs. The ASU related to credit
losses on financial instruments could have a material
impact on trade receivables and the Company is
currently assessing the impact of this ASU on its
consolidated financial statements and notes to the
consolidated financial statements.
The Company early adopted the guidance in the fourth
quarter of 2016. The adoption of this guidance changed
the accounting for the transaction costs for acquisitions
of operating properties treated as asset acquisitions such
that transaction costs are capitalized as part of the
purchase price of the acquisition instead of being
expensed as transaction-related expenses.
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)
Standard
Description
ASU 2016-19, Technical Corrections
and Improvements
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
ASU 2016-15, Classification of Certain
Cash Receipts and Cash Payments
ASU 2016-07, Investments—Equity
Method and Joint Ventures (Topic 323),
Simplifying the Transition to the Equity
Method of Accounting
ASU 2016-06,
Investments—Derivatives and Hedging
(Topic 815), Contingent Put and Call
Options in Debt Instruments
ASU 2016-05, Derivatives and Hedging
(Topic 815), Effect of Derivative
Contract Novations on Existing Hedge
Accounting Relationships
The technical corrections make minor change to certain aspects of the FASB ASC, including changes
to resolve differences between current and pre-Codification guidance, updates to wording, references
to avoid misapplication and textual simplifications to increase the Codification’s utility and
understandability and minor amendments to guidance that are not expected to have a significant effect
on current accounting practice or create a significant administrative cost to most entities.
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.
This guidance outlines how a single decisionmaker 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.
This ASU clarifies how certain transactions should be classified in the statement of cash flows,
including debt prepayment costs, contingent consideration payments made after a business
combination and distributions received from equity method investments. The ASU provides two
approaches to determine the classification of cash distributions received from equity method
investments: (i) the “cumulative earnings” approach, under which distributions up to the amount of
cumulative equity in earnings recognized will be classified as cash inflows from operating activities,
and those in excess of that amount will be classified as cash inflows from investing activities and (ii)
the “nature of the distribution” approach, under which distributions will be classified based on the
nature of the underlying activity that generated cash distributions. The guidance requires a Company
to elect either the “cumulative earnings” approach or the “nature of the distribution” approach at the
time of adoption.
The guidance eliminates the requirement that an investor retrospectively apply equity method
accounting when an investment that it had accounted for by another method initially qualifies for use
of the equity method. The guidance also requires an investor that has an available-for-sale security
that subsequently qualifies for the equity method to recognize in net income the unrealized holding
gains or losses in accumulated other comprehensive income related to that security when it begins
applying the equity method. It is required to apply this guidance prospectively.
The guidance requires a four-step decision sequence when assessing whether an embedded contingent
put or call option is clearly and closely related to the debt host instrument.
The guidance states that the novation of a derivative contract (e.g., a change in the counterparty) in a
hedge accounting relationship does not, in and of itself, require de-designation of that hedge
accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the
other hedge accounting criteria are met, including the expectation that the hedge will be highly
effective when the creditworthiness of the new counterparty to the derivative contract is considered.
Either a prospective or a modified retrospective approach can be applied.
F- 27
Effect on the Financial Statements or Other
Significant Matters
The Company adopted this guidance during the first
quarter of 2017 and applied it prospectively. The
adoption did not have a material impact on the
Company’s consolidated financial statements.
The Company early adopted this guidance during the
second quarter of 2017 and applied it retrospectively.
Pursuant to the adoption, the Company revised the
Consolidated Statement of Cash Flows and disclosed the
reconciliation to the related captions in the Consolidated
Balance Sheets.
The Company adopted this guidance during the first
quarter of 2017 and applied it retrospectively. The
adoption did not have a material impact on the
Company’s consolidated financial statements and did
not change the consolidation conclusion.
The Company early adopted this guidance during the
second quarter of 2017 and applied it retrospectively.
Pursuant to the adoption, the Company elected the
“nature of the distribution” approach related to the
distributions received from its equity method
investments. The adoption did not have an impact on the
Company’s Consolidated Statements of Cash Flows.
The Company adopted this guidance during the first
quarter of 2017 and applied it prospectively. The
adoption did not have a material impact on the
Company’s consolidated financial statements.
The Company adopted this guidance during the first
quarter of 2017 and applied it prospectively. The
adoption did not have an impact on the Company’s
consolidated financial statements.
The Company adopted this guidance during the first
quarter of 2017 and applied it prospectively. The
adoption did not have a material impact on the
Company’s consolidated financial statements.
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)
Update on ASC 606, Revenue from Contracts with Customers (“ASC 606”), implementation
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—Principal
versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2014-09, Revenue from Contracts with Customers.
Issued on March 17, 2016, 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. Issued on May 28, 2014, 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.
ASC 606 provides practical expedients associated with the determination of whether a significant financing component exists and the expedient for recording an immediate
expense for certain incremental costs of obtaining a contract with a customer. This ASU is effective for annual reporting periods (including interim periods) beginning after December
15, 2017. Either the full retrospective approach (to the beginning of its contracts) or modified retrospective approach (from the beginning of the latest fiscal year of adoption) is
permitted.
The Company has compiled an inventory of its sources of revenues and has preliminarily identified three revenue streams, which include other property related revenues, tenant
recoveries and parking and other. Two of these revenue streams will be accounted for under ASC 606 when it becomes effective on January 1, 2018. The remaining revenue stream,
tenant recoveries, which is integral to the Company’s leasing revenues, will be accounted for under ASC 606 on January 1, 2019, when the Company adopts ASC 842, Leases (“ASC
842”). Under the current ASC 842 guidance, the Company would be required to classify our tenant recoveries into lease and non-lease components. In January 2018, the FASB issued a
proposed amendment to ASC 842 which if elected allows the Company to classify tenant recoveries as a single lease component and ASC 606 would then not apply.
The Company has completed its implementation of ASC 606 and has concluded that the recognition of revenues will not be materially impacted by this standard. The Company
adopted ASC 606 on January 1, 2018 using the modified retrospective approach and is using the practical expedients associated with expensing incremental costs of obtaining a contract
with a customer with terms of one year or less.
Update on ASC 842, Leases, implementation
On February 25, 2016, the FASB issued ASU 2016-02, Leases, to amend the accounting guidance for leases and set out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). This ASU is effective for annual reporting periods (including interim periods)
beginning after December 15, 2018. A modified retrospective approach must be applied for leases that exist or are entered into after January 1, 2017, the beginning of the earliest
comparative period presented in the 2019 consolidated financial statements, with a cumulative adjustment to the opening balance of accumulated deficit on January 1, 2017, and
restatement of the amounts presented prior to January 1, 2019.
In January 2018, the FASB issued a proposed amendment to ASU 842 that would provide an entity the optional transition method to initially account for the impact of the
adoption with a cumulative adjustment to accumulated deficit on the effective date of the ASU, January 1, 2019 rather than January 1, 2017, which would eliminate the need to restate
amounts presented prior to January 1, 2019.
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.
ASC 842 provides practical expedients that allow entities to not (i) reassess whether any expired or existing contracts are considered or contain leases; (ii) reassess the lease
classification for any expired or existing leases; and (iii) reassess initial direct costs for any existing leases.
The Company plans to adopt the standard on January 1, 2019 and expects to elect the use of practical expedients. If the proposed amendment to ASU 842 is adopted, the
Company would elect the transition method for adoption as described above.
F- 28
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)
Lessor Accounting
The Company recognized rental revenues and tenant recoveries of $675.6 million for the year ended December 31, 2017. This ASU requires companies to identify lease and
non-lease components of a lease agreement. Lease components relate to the right to use the leased asset and non-lease components relate to payments for goods or services that are
transferred separately from the right to use the underlying asset. Total lease consideration is allocated to lease and non-lease components on a relative standalone basis. The recognition
of revenues related to lease components will be governed by ASC 842 while revenue related to non-lease components will be subject to ASC 606.
Under current accounting standards, 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. 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.
In the FASB-proposed amendment to ASU 842, lessors can elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on
their relative standalone selling prices. If adopted, this practical expedient will allow lessors to elect a combined single lease component presentation if (i) the timing and pattern of the
revenue recognition of the combined single lease component is the same, and (ii) the related lease component and, the combined single lease component would be classified as an
operating lease.
The Company has not completed its analysis of this ASU. If the proposed practical expedient mentioned above is adopted and elected, tenant recoveries that qualify as non-
lease components will be combined under a single lease component presentation. However, without the proposed practical expedient, the Company expects that it will continue to
recognize the lease revenue component using an approach that is substantially equivalent to existing guidance. The Company expects that tenant recoveries will be separated into lease
and non-lease components. Tenant recoveries that are categorized as lease components will generally be variable consideration with revenue recognized as the recoverable services are
provided. Tenant recoveries that are categorized as non-lease components will be recognized at either a point in time or over time based on the pattern of transfer of the underlying goods
or services to our tenants.
The ASU also requires lessors to capitalize only those costs that are defined as initial direct costs. Under the current accounting standards, the Company capitalizes initial direct
and indirect leasing costs. During the year ended December 31, 2017, the Company capitalized $8.9 million of indirect leasing costs. Under this new ASU, these costs will be expensed
as incurred.
Lessee Accounting
As of December 31, 2017, the future undiscounted minimum lease payments under the Company’s ground leases totaled $452.8 million. This guidance requires lessees to
record a lease liability at lease inception, with a corresponding right-of-use asset, except for short-term leases. The Company continues to evaluate the amount of right-of-use asset and
lease liability that will ultimately be recorded with respect to its ground leases agreements, where it is the lessee.
F- 29
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
Other recently issued ASUs
The Company considers the applicability and impact of all ASUs. The following table lists the recently issued ASUs that have not been adopted by the Company. The list
excludes those ASUs that are not expected to have a material impact on the Company’s consolidated financial statements and the ASUs related to the ASC 606 and ASC 842 which are
discussed above.
Standard
Description
ASU 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for
Hedging Activities
ASU 2017-09, Compensation—Stock
Compensation (Topic 718): Scope of
Modification Accounting
The guidance eliminates the requirement to separately measure and
report hedge ineffectiveness and generally requires the entire change in
the fair value of a hedging instrument to be presented in the same
income statement line as the hedged item. Therefore, a cumulative
effect adjustment related to elimination of ineffectiveness
measurement is required to be recorded to the opening balance of
accumulated deficit as of the beginning of the fiscal year of adoption
for cash flow hedges. The guidance also eases certain documentation
and assessment requirements and modifies the accounting for
components excluded from the assessment of hedge effectiveness. This
guidance must be applied using a modified retrospective approach.
The guidance clarifies when changes to the terms or conditions of a
share-based payment award must be accounted for as modifications.
This guidance must be applied prospectively.
ASU 2017-05, Other Income—Gains and
Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope
of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial
Assets
The guidance updates the definition of an in substance nonfinancial
asset and clarifies the scope of ASC 610-20 on the sale or transfer of
nonfinancial assets to noncustomers, including partial sales. It also
clarifies the derecognition guidance for nonfinancial assets to conform
with the new revenue recognition standard. Either a full or modified
retrospective approach can be applied.
Effective Date
Effective for annual
reporting periods (including
interim periods) beginning
after December 15, 2018
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, 2017
ASU 2016-13, Financial Instruments—Credit
Losses
ASU 2016-01, Financial Instruments—Overall
(Subtopic 825-10), Recognition and
Measurement of Financial Assets and Financial
Liabilities.
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.
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, 2019
Effective for annual
reporting periods (including
interim periods) beginning
after December 15, 2017
F- 30
Effect on the Financial Statements or Other
Significant Matters
The Company is currently evaluating the impact
of this standard on its consolidated financial
statements and notes to the consolidated
financial statements. The Company expects that
the adoption would impact derivative
instruments that have portions of
ineffectiveness. The Company plans to early
adopt this guidance during the first quarter in
2018 and apply it using the modified
retrospective approach.
The Company does not currently expect a
material impact of this ASU on its consolidated
financial statements and notes to the
consolidated financial statements. The Company
plans to adopt this guidance during the first
quarter in 2018.
The Company currently expects that the
adoption of this ASU could have a material
impact on its consolidated financial statements;
however, such impact will not be known until
the Company disposes of any of its investments
in real estate properties, which would all be
sales of nonfinancial assets. The Company plans
to adopt this guidance during the first quarter in
2018 and apply it using the modified
retrospective approach.
The Company is currently evaluating the impact
of this standard.
The Company is currently evaluating the impact
of this standard.
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
The following table summarizes the Company’s investment in real estate, at cost as of:
Land
Building and improvements
Tenant improvements
Furniture and fixtures
Property under development
Investment in real estate, at cost(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
Acquisitions
December 31, 2017
December 31, 2016
$
$
1,302,907
$
4,480,993
411,706
8,608
219,227
1,155,037
4,069,005
354,940
4,264
295,234
6,423,441
$
5,878,480
The following table summarizes the information on the acquisitions completed in 2017 and 2016:
Property
Sunset Las Palmas Studios(2)
11601 Wilshire land(3)
6666 Santa Monica(4)
Total acquisitions in 2017
11601 Wilshire(5)
Hill7(6)
Page Mill Hill(7)
Total acquisitions in 2016
Submarket
Hollywood
West Los Angeles
Hollywood
West Los Angeles
South Lake Union
Palo Alto
Segment
Month of Acquisition
Square Feet
Purchase Price(1) (in
millions)
Media and Entertainment
Office
Media and Entertainment
May 2017
June 2017
June 2017
Office
Office
Office
July 2016
October 2016
December 2016
369,000
$
N/A
4,150
373,150
500,475
285,680
182,676
$
$
968,831
$
200.0
50.0
3.2
253.2
311.0
179.8
150.0
640.8
_____________
(1) Represents purchase price before certain credits, prorations and closing costs.
(2) The property consists of stages, production office and support space on 15 acres near Sunset Gower Studios and Sunset Bronson Studios. The purchase price above does not include equipment purchased by the Company for
$2.8 million, which was transacted separately from the studio acquisition. In April 2017, the Company drew $150.0 million under the unsecured revolving credit facility to fund the acquisition.
(3) On July 1, 2016 the Company purchased a partial interest in land held as a tenancy in common in conjunction with its acquisition of the 11601 Wilshire property. The land interest held as a tenancy in common was accounted
for as an equity method investment. On June 15, 2017, the Company purchased the remaining interest, which was fair valued and allocated to land and building.
(4) This parcel is adjacent to the Sunset Las Palmas Studios property.
(5) 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.
(6) The Company purchased the property through a joint venture with the Canadian Pension Plan Investment Board. The Company has a 55% 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.
(7) The Company funded this acquisition with proceeds from the unsecured revolving credit facility.
The Company’s acquisitions in 2017 did not meet the definition of a business and were therefore accounted for as asset acquisitions. In accordance with asset acquisitions, the
purchase price includes capitalized acquisition costs. The following table represents the Company’s final aggregate purchase price accounting, as of the respective acquisition dates, for
each of the Company’s acquisitions completed in 2017:
Investment in real estate
Deferred leasing costs and in-place lease intangibles(2)
Total assets assumed
_____________
Sunset Las Palmas
Studios(1)
$
$
202,723
1,741
204,464
$
$
11601 Wilshire land
6666 Santa Monica
Total
50,034
—
50,034
$
$
3,091
145
3,236
$
$
255,848
1,886
257,734
F- 31
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
(1) The purchase price allocation includes equipment purchased by the Company of $2.8 million.
(2) Represents weighted-average amortization period of 1.2 years.
The following table represents the final 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 lease intangibles(4)
Below-market leases(5)
Net asset and liabilities assumed
11601 Wilshire
Hill7
Page Mill Hill
Total
$
$
292,382
$
173,967
$
131,402
$
7,836
167
212
13,884
(6,562)
—
—
—
7,617
(1,417)
—
307
12,125
14,697
(8,636)
307,919
$
180,167
$
149,895
$
597,751
7,836
474
12,337
36,198
(16,615)
637,981
_____________
(1) Represents the fair value of the Company’s interest in the land which was included in investment in unconsolidated entities in the Consolidated Balance Sheets at December 31, 2016. On June 15, 2017, the Company purchased
the remaining interest, which was fair valued and allocated to land and building. Refer to the 2017 acquisitions above for details.
(2) Represents weighted-average amortization period of 5.4 years.
(3) Represents weighted-average amortization period of 33.2 years.
(4) Represents weighted-average amortization period of 5.8 years.
(5) Represents weighted-average amortization period of 6.4 years.
Dispositions
The following table summarizes the properties sold in 2017, 2016 and 2015. These properties were considered non-strategic to the Company’s portfolio:
Property
222 Kearny
3402 Pico
Pinnacle I and Pinnacle II(2)
Total dispositions in 2017
Bayhill Office Center
Patrick Henry
One Bay Plaza
12655 Jefferson
Total dispositions in 2016(3)
First Financial
Bay Park Plaza
Total dispositions in 2015(4)
Month of Disposition
Square Feet
Sales Price(1) (in
millions)
February 2017
March 2017
November 2017
January 2016
April 2016
June 2016
November 2016
March 2015
September 2015
148,797
$
50,687
623,777
823,261
554,328
70,520
195,739
100,756
921,343
223,679
260,183
483,862
$
$
$
$
$
51.8
35.0
350.0
436.8
215.0
19.0
53.4
80.0
367.4
89.0
90.0
179.0
_____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
(2) The consolidated joint venture that owned Pinnacle I and Pinnacle II sold the properties to affiliates of Blackstone. In conjunction with the sale, the $216.0 million debt secured by these properties was assumed by the
purchasers.
(3) Excludes the sale of an option to acquire land at 9300 Culver on December 6, 2016.
(4) Excludes the 45% ownership interest in 1455 Market completed on January 7, 2015.
The disposition of these properties resulted in gains of $45.6 million, $30.4 million and $30.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Included in gains on sale of real estate line item on the Consolidated Statements of Operations in 2016 is a gain of $7.5 million related to a sale of an option to purchase land at 9300
Culver.
F- 32
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
Held for sale
As of December 31, 2017, the Company had four properties that met the criteria to be classified as held for sale. The following table summarizes properties classified as held for
sale as of December 31, 2017:
Property
2180 Sand Hill
2600 Campus Drive (building 6 of Peninsula Office Park)
Embarcadero Place
9300 Wilshire
Total
____________
(1) Represents gross sales price before certain credits, prorations and closing costs.
Purchase and Sale
Executed
November 2017
December 2017
December 2017
December 2017
Square Feet
Sales Price(1) (in
millions)
$
45,613
63,050
197,402
61,422
367,487
$
82.5
22.5
136.0
13.8
254.8
As of December 31, 2016, the Company had eight properties that met the criteria to be classified as held for sale which includes the properties sold during 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
Accounts receivable, net
Straight-line rent receivables, net
Deferred leasing costs and lease intangible assets, net
Prepaid expenses and other assets, net
Assets associated with real estate held for sale
LIABILITIES
Notes payable, net
Accounts payable and accrued liabilities
Lease intangible liabilities, net
Security deposits and prepaid rent
Liabilities associated with real estate held for sale
F- 33
December 31, 2017
December 31, 2016
$
$
$
$
204,895
$
85
2,234
4,063
58
211,335
$
580,261
183
8,849
23,078
2,803
615,174
— $
214,684
782
95
1,339
2,216
8,816
6,890
6,233
$
236,623
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
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(1)
Below-market leases
Accumulated amortization
Below-market leases, net
Above-market ground leases
Accumulated amortization
Above-market ground leases, net
Lease intangible liabilities, net(1)
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
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 revenues in the Consolidated Statements of Operations.
(2) Amortization is recorded in depreciation and amortization expenses and office rental revenues in the Consolidated Statements of Operations.
(3) Amortization is recorded in office operating expenses in the Consolidated Statements of Operations.
F- 34
December 31, 2017
December 31, 2016
19,222
$
(15,731)
3,491
311,599
(132,426)
179,173
68,388
(6,498)
61,890
244,554
105,233
(56,265)
48,968
1,095
(133)
962
$
$
49,930
$
23,075
(12,645)
10,430
343,807
(129,830)
213,977
68,601
(4,079)
64,522
288,929
127,950
(55,689)
72,261
1,095
(89)
1,006
73,267
$
$
$
$
For the Year Ended December 31,
2017
2016
2015
$
(6,953)
$
(11,259)
$
25,015
(72,883)
43
(2,548)
30,993
(84,492)
43
(2,203)
(12,534)
34,607
(91,965)
46
(1,688)
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 provides information regarding the Company’s estimated amortization of deferred leasing costs and lease intangibles as of December 31, 2017:
For the Year Ended December 31,
Above-market lease
Deferred lease cost and in-
place lease intangibles
Below-market ground lease
Below-market lease
Above-market ground lease
2018
2019
2020
2021
2022
Thereafter
Total(1)
$
$
(1,529)
$
(1,014)
(466)
(327)
(106)
(49)
(41,300)
$
(2,410)
$
(31,533)
(22,966)
(18,224)
(13,068)
(52,082)
(2,410)
(2,410)
(2,410)
(2,410)
(49,840)
$
14,713
11,317
8,514
6,084
3,575
4,765
(3,491)
$
(179,173)
$
(61,890)
$
48,968
$
43
43
43
43
43
747
962
_____________
(1) Excludes balances related to properties that have been classified as held for sale.
5. Notes Payable, net
The following table sets forth information with respect to the amounts included in notes payable, net as of:
December 31, 2017
December 31, 2016
Interest Rate(1)
Contractual Maturity
Date
UNSECURED NOTES PAYABLE
Unsecured Revolving Credit Facility(2)
5-Year Term Loan due April 2020(2)(4)
5-Year Term Loan due November 2020(2)
7-Year Term Loan due April 2022(2)(5)
7-Year Term Loan due November 2022(2)(6)
Series A Notes
Series E Notes
Series B Notes
Series D Notes
Registered Senior Notes(7)
Series C Notes
$
100,000
$
300,000
75,000
350,000
125,000
110,000
50,000
259,000
150,000
400,000
56,000
300,000
450,000
175,000
350,000
125,000
110,000
50,000
259,000
150,000
—
56,000
TOTAL UNSECURED NOTES PAYABLE
1,975,000
2,025,000
SECURED NOTES PAYABLE
Rincon Center(8)(9)
Sunset Gower Studios/Sunset Bronson Studios
Met Park North(10)
10950 Washington(8)
Element LA
Hill7(11)
Pinnacle I(12)
Pinnacle II(12)
TOTAL SECURED NOTES PAYABLE
TOTAL NOTES PAYABLE
Held for sale balances(12)
Unamortized deferred financing costs and loan discounts(13)
98,392
5,001
64,500
27,418
168,000
101,000
—
—
464,311
2,439,311
—
(17,931)
TOTAL NOTES PAYABLE, NET
$
2,421,380
$
100,409
5,001
64,500
27,929
168,000
101,000
129,000
87,000
682,839
2,707,839
(216,000)
(18,513)
2,473,326
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%
3.95%
4.79%
5.13%
LIBOR + 2.25%
LIBOR + 1.55%
5.32%
4.59%
3.38%
3.95%
4.30%
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
11/1/2027
12/16/2027
5/1/2018
3/4/2019 (3)
8/1/2020
3/11/2022
11/6/2025
11/6/2028
11/7/2022
6/11/2026
_____________
(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, 2017, which may be different than the interest rates as of December 31,
2016 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, 2017, no such election had been made.
(3) The maturity date may be extended once for an additional one-year term.
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)
In July 2016, $300.0 million of the term loan was effectively fixed at 2.75% to 3.65% per annum through the use of two interest rate swaps. See Note 6 for details.
In July 2016, the outstanding balance of the term loan was effectively fixed at 3.36%% to 4.31% per annum through the use of two interest rate swaps. See Note 6 for details.
In June 2016, the outstanding balance of the term loan was effectively fixed at 3.03% to 3.98% per annum through the use of an interest rate swap. See Note 6 for details.
(4)
(5)
(6)
(7) On October 2, 2017, the Company completed an underwritten public offering of $400.0 million of senior notes, which were issued at 99.815% of par.
(8) Monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule with a balloon payment at maturity.
(9) On February 1, 2018, the Company repaid the full outstanding balance of the mortgage loan secured by our Rincon Center property.
(10) 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.
(11) The Company has a 55% ownership interest in the consolidated joint venture that owns the Hill7 property. The full amount of the loan is shown. This loan bears interest only at 3.38% until November 6, 2026, at which time the
interest rate will increase and monthly debt service will include principle payments with a balloon payment at maturity.
(12) On November 16, 2017, the Company sold its ownership interest in the consolidated joint venture that owned Pinnacle I and Pinnacle II. The debt balances related to these properties were classified as held for sale at December
31, 2016.
(13) Excludes deferred financing costs related to properties held for sale and amounts related to establishing the Company’s unsecured revolving credit facility.
Current Year Activity
On November 16, 2017, the consolidated joint venture that owned Pinnacle I and Pinnacle II sold the properties to certain affiliates of Blackstone for $350.0 million, before
credits, prorations and closing costs, including the assumption of $216.0 million of secured notes payable. The loan balance related to these properties as of December 31, 2016 is
reflected in liabilities associated with real estate held for sale in the Consolidated Balance Sheets. The Company used proceeds from the sale and cash on hand to repay $100.0 million of
the Company's 5-year term loan due November 2020.
On October 2, 2017, the operating partnership completed an underwritten public offering of $400.0 million senior notes due November 1, 2027. The net proceeds from the
offering, after deducting the underwriting discounts and offering expenses, were approximately $396.7 million and was used to repay $150.0 million of the Company’s 5-year term loan
due April 2020 with the remainder of the net proceeds, together with cash on hand, used to repay $250.0 million outstanding under the Company’s unsecured revolving credit facility.
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, 2017 and
December 31, 2016 are lockbox and reserve funds as follows:
Property
Rincon Center
Element LA
Hill7
10950 Washington
Pinnacle I
Pinnacle II
Total
December 31, 2017
December 31, 2016
$
14,220
3,581
2,392
1,406
—
—
21,599
$
16,291
2,627
1,643
1,249
1,811
1,382
25,003
$
$
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)
The following table provides information regarding the Company’s future minimum principal payments due on the Company’s notes payable (before the impact of extension
options, if applicable) as of December 31, 2017:
For the Year Ended December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Senior Unsecured Notes Payable
Registered Senior Notes
Annual Principal Payments
98,930
105,569
440,095
632
500,085
1,294,000
2,439,311
$
$
On October 2, 2017, our operating partnership completed an underwritten public offering of $400.0 million in senior notes due November 1, 2027. The notes were issued
at 99.815% of par, with a coupon of 3.95%. The notes are fully and unconditionally guaranteed by the Company.
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 5-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 7-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, its senior unsecured long-term indebtedness was assigned an investment grade rating. The Company has not made the credit rating election.
Credit Facility Agreement
The operating partnership maintains and periodically amends its credit facility agreement with a group of lenders. On April 1, 2015, the agreement was amended and restated to,
among other things, (i) extend the maturity date of the unsecured revolving credit facility 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 from $150.0 million to $550.0 million and extend 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 agreement (“Amended and Restated Credit Facility Agreement”) 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.
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 unsecured revolving credit facility is available for various purposes, including 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 general corporate purposes of the Company, the operating partnership
and its subsidiaries.
Interest on the unsecured revolving 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. Unused amounts under the Amended and Restated Credit Facility Agreement 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 credit facility agreement so long as the
aggregate commitments under the unsecured revolving 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 Amended and Restated Credit Facility Agreement, and the Company and all subsidiaries that own
unencumbered properties will continue to provide guarantees 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 guarantees are not required except under limited circumstances.
The following table summarizes borrowing capacity and outstanding borrowings under the unsecured revolving credit facility as of:
Outstanding borrowings(1)
Remaining borrowing capacity(1)
Total borrowing capacity
Interest rate(2)
Facility fee-annual rate(2)
Contractual maturity date(3)
_________________
(1) On January 30, 2018, the Company borrowed an additional $100.0 million bringing the total outstanding borrowings to $200.0 million.
(2) The rate is based on the operating partnership’s leverage ratio.
(3) The maturity date may be extended once for an additional one-year term.
Guaranteed Senior Notes
December 31, 2017
December 31, 2016
$
$
100,000
300,000
400,000
$
$
300,000
100,000
400,000
LIBOR + 1.15% to 1.85%
0.20% or 0.35%
4/1/2019
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.
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 “Series D Notes”). Upon
issuance, the notes pay interest semi-annually on the 6th day of January and July in each year until maturity. 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 (the “Series E Notes”), which were drawn on September 15, 2016. Upon issuance, the notes pay interest
semi-annually on the 15th day of March and September in each year until maturity.
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)
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 Amended and Restated Credit Facility Agreement,
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 unsecured notes payable remains subject to ongoing compliance with financial and other covenants as defined in their
respective agreements. 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 following table summarizes existing covenants and their covenant levels, when considering the most restrictive term:
Covenant Ratio
Leverage ratio
Unencumbered leverage ratio
Fixed charge coverage ratio
Secured indebtedness leverage ratio
Unsecured interest coverage ratio
Covenant Level
less than 60%
less than 60%
greater than 1.5x
less than 45%
greater than 2x
The operating partnership was in compliance with its financial covenants as of December 31, 2017.
Repayment Guarantees
Registered Senior Notes
The Company has fully and unconditionally guaranteed the operating partnership’s registered senior notes of $400.0 million due November 1, 2027.
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, 2017, 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.
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)
Interest Expense
The following table represents a reconciliation from the gross interest expense to the amount on the interest expense line item in the Consolidated Statements of Operations:
Year Ended December 31,
2017
2016
2015
$
$
94,660
$
82,887
$
(10,655)
6,032
(11,307)
4,464
90,037
$
76,044
$
52,437
(6,516)
4,746
50,667
Gross interest expense(1)
Capitalized interest
Amortization of deferred financing costs and loan discount/premium, net
Interest expense
_________________
(1)
Includes interest on the Company’s notes payable and hedging activities and extinguishment costs related to partial paydowns in our term loans of $1.1 million during the year ended December 31, 2017.
6. Derivatives
The Company enters into derivatives in order to hedge interest rate risk. As of December 31, 2017 and 2016, the Company had six interest rate swaps with aggregate notional
amounts of $839.5 million. These derivatives were designated as effective cash flow hedges for accounting purposes.
The Company’s derivatives 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%, depending on the operating partnership’s leverage ratio. The unhedged portion bears interest at a rate equal to one-month LIBOR plus 1.30% to 2.20%, depending on
the operating partnership’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%, depending on the operating partnership’s leverage
ratio.
In July 2016, the derivatives 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 derivatives. 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, in each case per annum. The interest rate
within the range is based on the 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 terms of the derivatives.
The Company recognized an unrealized loss of $70 thousand and $1.4 million during the years ended December 31, 2017 and 2016, respectively, reflected on the unrealized
loss on ineffective portion of derivatives line item on the Consolidated Statement of Operations. There was no recognized unrealized loss or gain during the year ended December 31,
2015.
7-Year Term Loan due November 2022
On May 3, 2016, the Company entered into a derivative with respect to $125.0 million of the 7-Year Term Loan due November 2022. This derivative 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)
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 derivatives is presented on a gross basis in prepaid and other expenses, net and derivative liabilities line items on the Consolidated Balance Sheets. The
derivative assets as of December 31, 2017 and 2016 were $12.6 million and $5.9 million, respectively. The derivative liabilities as of December 31, 2017 and 2016 were $0.3 million and
$1.3 million, respectively.
The Company reclassifies into earnings in the same period during which the hedged forecasted transaction affects earnings. As of December 31, 2017, the Company
expects $1.5 million of unrealized gain 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 2018 to 2033.
The following table summarizes the future minimum base rents (excluding tenant reimbursements for operating expenses and termination fees related to tenants exercising early
termination options) for properties as of December 31, 2017:
Year ended
2018
2019
2020
2021
2022
Thereafter
Total
_____________
(1) Excludes rents under leases at the Company’s media and entertainment properties with terms of one year or less.
(2)
Includes properties classified as held for sale as of December 31, 2017.
F- 41
Non-cancellable
Subject to early termination
options
Total(1)(2)
476,777
$
4,002
$
445,032
376,361
315,588
246,997
805,449
11,775
20,232
32,772
45,437
124,383
480,779
456,807
396,593
348,360
292,434
929,832
2,666,204
$
238,601
$
2,904,805
$
$
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, 2017:
Property
3400 Hillview
Expiration Date
Notes
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 Fair Market Value (“FMV”) of the land or $1.0 million grown at 75% of the cumulative increases in consumer price index (“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 multiplied by 24.125%. This lease was prepaid
through October 31, 2017.
9300 Wilshire
8/14/2032 The ground rent is the greater of minimum annual rent or percentage annual rent. Percentage annual rent is gross income multiplied by 6%. The
property related to this ground lease is expected to be sold in the first quarter of 2018.
Clocktower Square
Del Amo
9/26/2056 The ground rent is minimum annual rent (adjusted every 10 years) plus 25% of adjusted gross income (“AGI”) less minimum annual rent.
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.
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 multiplied by 24.125%.
3176 Porter (formerly
Lockheed)
Metro Center
Page Mill Center
Page Mill Hill
Palo Alto Square
Sunset Gower Studios
Techmart
7/31/2040 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 Lockheed’s base rent multiplied by 24.125%.
4/29/2054 Every 10 years rent adjusts to 7.233% of FMV of the land (since 2008) and adjusts to reflect the change in CPI from the preceding FMV adjustment
date (since 2013).
11/30/2041 The ground rent is minimum annual rent (adjusted on 1/1/2019 and 1/1/2029) plus 25% of AGI, less minimum annual rent.
11/17/2049 The ground rent is minimum annual rent (adjusted every 10 years) plus 60% of the average of the percentage annual rent for the previous 7 lease
years.
11/30/2045 The ground rent is minimum annual rent (adjusted every 10 years starting 1/1/2022) plus 25% of AGI less minimum annual rent.
3/31/2060 Every 7 years rent adjusts to 7.5% of FMV of the land.
5/31/2053 Rent subject to a 10% increase every 5 years.
Contingent rental expense is recorded in the period in which the contingent event becomes probable. The following table summarizes rental expense for ground leases and a
corporate office lease:
Contingent rental expense
Minimum rental expense
For the Year Ended December 31,
2017
2016
2015
$
8,775
$
8,651
$
12,412
12,085
3,843
9,196
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)
The following table provides information regarding the Company’s future minimum lease payments for its ground leases (before the impact of extension options, if applicable)
as of December 31, 2017:
For the Year Ended December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Ground Leases(1)(2)
14,111
14,161
14,161
14,161
14,161
382,070
452,825
$
$
_____________
(1)
In situations where ground lease obligation adjustments are based on third-party appraisals of fair market land value, CPI adjustments and/or 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, 2017.
(2) Balance includes future minimum ground lease obligation for 9300 Wilshire which is expected to be sold in the first quarter of 2018.
8. Fair Value of Financial Instruments
The Company’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following as of:
December 31, 2017
December 31, 2016
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Derivative assets(1)
$
— $
12,586
$
— $
12,586
$
—
265
—
265
— $
—
$
5,935
1,303
— $
—
5,935
1,303
Derivative liabilities
_____________
(1)
Included in the prepaid expenses and other assets, net line item in the Consolidated Balance Sheets.
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 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 the Company’s notes payable as of:
December 31, 2017
December 31, 2016
Carrying Value
Fair Value
Carrying Value
Fair Value
Unsecured notes payable(1)(2)
$
1,974,278
$
1,960,560
$
2,025,000
$
Secured notes payable(3)
_____________
(1) Amounts represent notes payable excluding unamortized deferred financing costs.
(2) The $400.0 million senior registered notes were issued at a discount. The discount, net of amortization was $722 thousand at December 31, 2017 and is included within unsecured notes payable.
(3)
Includes balances related to properties that have been classified as held for sale.
682,839
464,311
458,441
2,011,210
669,924
9. Stock-Based Compensation
The Company’s 2010 Incentive Plan permits the Company’s board of directors (“the Board”) to grant, among other things, restricted stock, restricted stock units and
performance-based awards. At our annual meeting of stockholders on May 24, 2017, stockholders approved an amended and restatement of the 2010 Incentive Plan (the “2010 Plan”),
which included an increase in the maximum number of shares that may be issued or awarded. Each restricted share, restricted stock unit and common share issued reduces the share
reserve by 5.14 shares. As of December 31, 2017, 3,961,867 common shares were available for grant under the 2010 Plan. The calculation of shares available for grant is determined
after taking into account
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)
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 $34.25.
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 the Non-Employee Director Compensation Program. The time-based awards are generally issued in the second quarter, in conjunction with
the director’s election to the Board 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 a mandatory holding period upon vesting if the grantee is a named executive officer.
The compensation committee of our Board (“Compensation Committee”) annually adopts a Hudson Pacific Properties, Inc. Outperformance Program (“OPP Plan”) under our
2010 Plan. With respect to OPP Plan awards granted through 2017, 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 February 2017, the Compensation Committee adopted the 2017 OPP Plan. The 2017 OPP Plan is substantially similar to the previous OPP Plans except for (i) the
performance period is January 1, 2017 to December 31, 2019 (ii) the maximum bonus pool is $20.0 million and (iii) the two-year post-performance vesting period was replaced with
a two-year mandatory holding period upon vesting.
In December 2015, the Compensation Committee of the 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 a four-year period, 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 2017 and 2016 OPP Plans:
Maximum bonus pool, in millions
Performance period
2017 OPP Plan
$20.0
2016 OPP Plan
$17.5
1/1/2017 to 12/31/2019
1/1/2016 to 12/31/2018
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.
F- 44
Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Tables in thousands, except square footage and share data)
The 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
2017
24.00%
17.00%
1.47%
2.30
2016
24.00%
17.00%
1.09%
2.40
2015
22.00%
22.00%
1.13%
1.50
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
2017
2016
2015
Shares
887,179
$
918,884
(705,508)
(13,369)
1,087,186
$
Weighted-Average
Grant-Date Fair
Value
Shares
Weighted-Average
Grant-Date Fair
Value
Shares
Weighted-Average
Grant-Date Fair
Value
31.09
34.37
31.42
32.14
33.64
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
Year Ended December 31,
Non-Vested Shares Issued
Weighted Average Grant-Date
Fair Value
Vested Shares
Total Vest-Date Fair Value (in
thousands)
2017
2016
2015
918,884
$
489,826
629,504
34.37
30.95
29.01
(705,508)
$
(430,597)
(335,544)
24,155
14,736
9,606
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)
Share-based Compensation Recorded
The following table presents the classification and amount recognized for stock-based compensation related to the Company’s awards:
For the Year Ended December 31,
2017
2016
2015
Expensed stock compensation(1)
Capitalized stock compensation(2)
$
15,079
836
$
Total stock compensation(3)
_________________
(1) Amounts are recorded in general and administrative expenses in the Consolidated Statements of Operations.
(2) Amounts are recorded in deferred leasing costs and lease intangible assets, net and investment in real estate, at cost in the Consolidated Balance Sheets.
(3) Amounts are recorded in additional paid-in capital and non-controlling interest—units in the operating partnership in the Consolidated Balance Sheets.
15,915
$
$
14,144
510
14,654
$
$
8,421
411
8,832
As of December 31, 2017, total unrecognized compensation cost related to unvested share-based payments was $31.2 million, and is expected to be recognized over a weighted-
average period of two years.
10. Earnings Per Share
Hudson Pacific Properties, Inc.
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. Hudson Pacific Properties, Inc. 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, whichever is more dilutive. 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:
Numerator:
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
Basic earnings per common share
For the Year Ended December 31,
2017
2016
2015
$
$
$
67,587
—
67,587
$
$
27,218
451
27,669
$
$
153,488,730
394,084
153,882,814
106,188,902
4,180,153
110,369,055
(16,397)
—
(16,397)
85,927,216
—
85,927,216
0.44
$
0.26
$
(0.19)
Diluted earnings per common share
_____________
(1) The Company includes unvested awards and convertible common units as contingently issuable shares in the computation of diluted earnings per share once the market criteria are met, assuming that the end of the reporting
0.25
0.44
$
$
$
(0.19)
period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted earnings per share calculation.
Hudson Pacific Properties, L.P.
The operating partnership calculates basic earnings per share by dividing the net income available to common unitholders for the period by the weighted average number of
common units outstanding during the period. The operating partnership calculates diluted earnings per share by dividing the diluted net income available to common unitholders for the
period by the weighted average number of common units and dilutive instruments outstanding during the period using the
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)
treasury stock method or the if-converted method, whichever is more dilutive. 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 unit pursuant to the two-class method.
The following table reconciles the numerator and denominator in computing the operating partnership’s basic and diluted earnings per unit for net income (loss) available to
common unitholders:
Numerator:
Basic net income (loss) available to common unitholders
Effective of dilutive instruments
Diluted net income (loss) available to common unitholders
Denominator:
Basic weighted average common units outstanding
Effect of dilutive instruments(1)
Diluted weighted average common units outstanding
Basic earnings per common unit
For the Year Ended December 31,
2017
2016
2015
$
$
$
67,962
—
67,962
$
$
33,066
451
33,517
$
$
(38,366)
—
(38,366)
154,276,773
394,084
154,670,857
145,595,246
1,144,000
146,739,246
128,948,077
—
128,948,077
0.44
$
0.23
$
(0.30)
Diluted earnings per common unit
_____________
(1) The operating partnership includes unvested awards as contingently issuable units in the computation of diluted earnings per unit once the market criteria are met, assuming that the end of the reporting period is the end of the
(0.30)
0.23
0.44
$
$
$
contingency period. Any anti-dilutive securities are excluded from the diluted earnings per unit calculation.
11. Equity
The table below presents the effect of the Company’s derivatives on accumulated other comprehensive income (“OCI”):
Hudson Pacific
Properties, Inc.
Stockholder’s Equity
Non-controlling interests
Total Equity
Balance at January 1, 2015
$
(2,443)
$
(218)
$
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 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
Unrealized loss recognized in OCI due to change in fair value
Loss reclassified from OCI into income (as interest expense)
Net change in OCI
Reclassification related to redemption of common units in the operating partnership
Balance at December 31, 2017
(4,976)
6,338
1,362
(1,081)
4,122
6,455
10,577
9,496
3,011
4,342
7,353
(3,622)
(2,687)
3,922
1,235
1,017
(6,989)
2,354
(4,635)
(3,618)
18
27
45
3,622
$
13,227
$
49
$
F- 47
(2,661)
(7,663)
10,260
2,597
(64)
(2,867)
8,809
5,942
5,878
3,029
4,369
7,398
—
13,276
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)
Non-controlling Interests
Common units in the operating partnership
Common units of the operating partnership and shares of common stock of the Company 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 the Company’s election, issue shares of the Company’s common stock in exchange for common
units on a one-for-one basis.
The following table summarizes the ownership of common units, excluding unvested restricted units as of:
December 31, 2017
December 31, 2016
December 31, 2015
Company-owned common units in the operating partnership
Company’s ownership interest percentage
Non-controlling common units in the operating partnership(1)
Non-controlling ownership interest percentage(1)
_____________
(1) Represents common units held by certain of the Company’s executive officers and directors, certain of their affiliates and other outside investors.
The following table summarizes the activity related to common units from January 1, 2016 to December 31, 2017:
Balance at January 1, 2016
May redemption (1)
July redemption (1)
November redemption (1)
Balance at December 31, 2016
January redemption (1)
155,602,508
136,492,235
99.6%
569,045
0.4%
93.5%
9,450,620
6.5%
Non-controlling interest in common units
89,153,780
61.3%
56,296,315
38.7%
56,296,315
(10,117,223)
(19,195,373)
(17,533,099)
9,450,620
(8,881,575)
Balance at December 31, 2017
_____________
(1) 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
569,045
redemption. The Company funded the redemptions using the proceeds from registered underwritten public offering of common stock.
Performance units are partnership interests in the operating partnership. Each performance unit awarded will be deemed equivalent to an award of one share 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.
6.25% Series A cumulative redeemable preferred units of the operating partnership
There are 407,066 Series A preferred units of partnership interest in the operating partnership, or Series A preferred units, which 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 the Company’s June 23, 2010 Prospectus.
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)
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 they were 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.
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/units on the Consolidated Statements of
Equity/Capital
Net income attributable to participating securities
Series B transaction costs allocation
Net income (loss) allocation for common stock/units on the Consolidated Statements of
Operations
Common Stock Activity
Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
2017
2016
2015
2017
2016
2015
$
68,590
$
27,984
$
(10,071)
$
68,965
$
33,832
$
(32,040)
(1,003)
—
(766)
—
(356)
(5,970)
(1,003)
—
(766)
—
(356)
(5,970)
$
67,587
$
27,218
$
(16,397)
$
67,962
$
33,066
$
(38,366)
The Company has remained capitalized since the initial public offerings through public offerings, its note purchase agreement and continuous offerings under our at-the-market,
or ATM, program.
The following table summarizes the common stock offering in 2015, 2016 and 2017:
January 20, 2015 (1)
April 1, 2015 (2)
May 16, 2016 (3)
July 21, 2016 (3)
November 28, 2016 (3)
January 10, 2017 (3)
Number of Common Shares
12,650,000
8,626,311
10,117,223
19,195,373
17,533,099
8,881,575
March 3, 2017 (4)
_____________
(1) Represents a common stock offering of 11,000,000 shares of common stock and the exercise of the underwriters’ option to purchase an additional 1,650,000 shares of our common stock at the public offering price of $31.75 per
9,775,000
share. Total proceeds from the public offering, after underwriters’ discount, were approximately $385.6 million (before transaction costs).
(2) Represents a common stock issuance in connection with the EOP Acquisition. The issuance of common stock is part of the consideration paid.
(3) Proceeds from the offering were used to repurchase common units in the operating partnership.
(4) Represents a common stock offering of 9,775,000 shares of common stock. Proceeds from the offering were used to fully repay a $255.0 million balance outstanding under its unsecured revolving credit facility.
The Company’s ATM program permits sales of up to $125.0 million of common stock. The Company did not utilize the ATM program during 2017. A cumulative total of
$20.1 million has been sold as of December 31, 2017.
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)
The following table summarizes the ATM activity:
Shares of common stock sold during the period
Common stock price ranges
Share repurchase program
2017
—
N/A
2016
165,000
$33.54 to $33.95
2015
—
N/A
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 through December 31, 2017.
Dividends
During the year ended December 31, 2017, the Company declared dividends on its common stock and non-controlling interest in common units in the operating partnership of
$1.000 per share and unit. The Company also declared dividends on its Series A preferred partnership interests of $1.5625 per unit. The fourth quarter 2017 dividends were paid on
December 28, 2017 to stockholders and unitholders of record on December 18, 2017.
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, compensation expense and the basis of depreciable assets and estimated useful lives
used to compute depreciation.
The Company’s dividends related to its common stock will be classified for U.S. federal income tax purposes as follows (unaudited):
Record Date
Payment Date
Distributions Per
Share
3/20/2017
6/20/2017
9/19/2017
12/18/2017
3/30/2017
6/30/2017
9/29/2017
12/28/2017
Totals
$
$
Ordinary Dividends
Total
Non-qualified
Qualified
$
0.14633
$
0.14633
$
— $
0.14633
0.14633
0.14633
0.14633
0.14633
0.14633
—
—
—
0.25000
0.25000
0.25000
0.25000
Capital Gain
Distributions(1)
Return of Capital
$
0.04023
0.04023
0.04023
0.04023
0.06345
0.06345
0.06345
0.06345
0.25380
1.00000
$
0.58532
$
0.58532
$
— $
0.16092
$
_____________
(1)
$0.03000 of the $0.04023 capital gain distributions should be characterized as unrecaptured Section 1250 gain.
100%
58.532%
16.09%
25.38%
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. The Company amended the lease to increase its occupancy to 40,120 square feet 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 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 affiliates of Blackstone for $311.0
million (before credits, prorations and closing costs). Michael Nash, a director on the Board, is a senior managing director of an affiliate of Blackstone.
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)
Disposal of Pinnacle I and Pinnacle II to certain affiliates of Blackstone
On November 16, 2017, the consolidated joint venture that owned Pinnacle I and Pinnacle II sold the properties to certain affiliates of Blackstone for $350.0 million, before
credits, prorations and closing costs, including the assumption of $216.0 million of secured notes payable. Michael Nash, a director on the Board, is a senior managing director of an
affiliate of Blackstone.
Disposal of 222 Kearny to certain affiliates of Farallon Funds
On February 14, 2017, the Company sold its 222 Kearny property to a joint venture, a partner of which is an affiliate of the Farallon Funds. Richard B. Fried, a director on the
Board, is a managing member of the Farallon Funds.
JMG Capital Lease at 11601 Wilshire
JMG Capital Management LLC leases approximately 6,638 square feet at the Company’s 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 director on the Board, 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 in 2016.
During 2017, JMG Capital Management LLC assigned the lease to a third party and as a result is no longer a lessee at our 11601 Wilshire property as of December 31, 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 Northern California region. 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. In connection with the EOP Acquisition, the Company, the operating partnership and Blackstone entered into a stockholders agreement, which conferred
Blackstone certain rights, including the right to nominate up to three of the Company’s directors. Additionally, the Company entered into a registration rights agreement with Blackstone
providing for customary registration rights with respect to the equity consideration paid in the EOP Acquisition. Following a common stock offering and common unit repurchase on
January 10, 2017, the stockholders agreement and the registration rights agreement automatically terminated on that date.
Common Stock Offerings and Common Unit Redemptions
On January 10, 2017, the Company, Blackstone and the Farallon Funds completed a public offering of 18,673,808 shares of common stock, consisting of 8,881,575 shares
offered by the Company and 9,792,233 shares offered by the selling stockholders. The offering generated net proceeds for the Company and the selling stockholders of
approximately $310.9 million and $342.7 million, respectively, before expenses. The Company used the net proceeds that it received from the offering to redeem 8,881,575 common
units held by Blackstone and the Farallon Funds.
The Company did not receive any proceeds from the sale of the common stock by the selling stockholders in the offerings described above but it paid approximately half of the
expenses of the offerings with respect to the shares of common stock sold by the Farallon Funds and all of the expenses with respect to the shares of common stock sold by Blackstone,
in each case, other than underwriting discounts, which were borne by the selling stockholders.
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, 2017, the risk of material loss from such legal actions impacting the Company’s financial condition or results from operations has
been assessed as remote.
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)
Concentrations
As of December 31, 2017, 90% 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, 2017,
approximately 16% and 34% of rentable square feet were related to the tenants in the media and entertainment and technology industries, respectively.
As of December 31, 2017, the Company’s 15 largest tenants represented approximately 29% of its rentable square feet and no single tenant accounted for more than 10%.
Letters of Credit
As of December 31, 2017, the Company has outstanding letters of credit totaling approximately $2.5 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 2017 and 2016 for the Company:
Total revenues
Income from operations
Net income
Net income attributable to the Company’s stockholders
Net income attributable to common stockholders’ per share—basic
Net income attributable to common stockholders’ per share—diluted
Total revenues
Income from operations
Net income
Net income attributable to the Company’s stockholders
Net income attributable to common stockholders’ per share—basic
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
For the Three Months Ended(1)
$
189,333
$
190,021
$
180,500
$
43,832
48,944
32,455
0.21
0.21
36,160
14,510
11,064
0.07
0.07
28,108
6,954
3,553
0.02
0.02
168,285
28,503
24,153
20,515
0.14
0.14
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
For the Three Months Ended(1)
$
167,198
$
164,583
$
154,321
$
26,845
28,530
22,279
0.18
23,740
5,217
1,847
0.02
0.02
19,811
4,035
839
0.01
0.01
153,537
19,011
5,976
2,253
0.03
0.03
Net 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.
0.18
15. Subsequent Events
Financing
On January 23, 2018, the Company borrowed an additional $100.0 million under its unsecured revolving credit facility. On February 1, 2018, the Company used proceeds from
the draw to pay in full the debt secured by our Rincon Center property; this loan was expected to mature in May 2018.
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)
Dispositions
On January 25, 2018, the Company sold its Embarcadero Place property for $136.0 million (before credits, prorations and closing costs).
On January 31, 2018, the Company sold its 2600 Campus Drive (building 6 of Peninsula Office Park) property for $22.5 million (before credits, prorations and closing costs).
Hudson Pacific Properties, Inc. 2018 Outperformance Program
On February 14, 2018, the Compensation Committee adopted the 2018 Outperformance Program (“2018 OPP”) under our 2010 Plan. The 2018 OPP authorizes grants of
incentive awards linked to our absolute and relative TSR over the performance period beginning on January 1, 2018 and ending on the earlier to occur of December 31, 2020 or the date
on which we experience a change in control. Each 2018 OPP award confers a percentage participation right in a dollar-denominated bonus pool that is settled in either Company
common stock or performance units of the operating partnership, as well as certain dividend equivalent or distribution rights.
Upon adoption of the 2018 OPP, the Compensation Committee granted Victor J. Coleman, Mark T. Lammas, Christopher Barton, Alex Vouvalides and Josh Hatfield, each of
whom is a named executive officer, OPP awards of 24%, 13.75%, 6.4%, 9.15% and 6.4% respectively. The awards for each were granted in the form of performance units.
Under the 2018 OPP, a bonus pool of up to (but not exceeding) $25 million will be determined at the end of the performance period as the sum of: (i) 3% of the amount by
which our TSR during the performance period exceeds 7% simple annual TSR (the absolute TSR component), plus (ii) 3% of the amount by which our TSR performance exceeds that of
the SNL US Office REIT Index (on a percentage basis) over the performance period (the relative TSR component), except that the relative TSR component will be reduced on a linear
basis from 100% to 25% for absolute TSR performance ranging from 7% to 0% simple annual TSR over the performance period. In addition, the relative TSR component may be a
negative value equal to 3% of the amount by which we underperform the SNL US Office REIT Index by more than 3% per year during the performance period (if any). The target bonus
pool is equal to $4.8 million, which would be attained if the Company achieves during the performance period (i) a TSR is equal to that of the SNL US Office REIT Index and (ii) a 8%
simple annual TSR.
At the end of the three-year performance period, named executive officers who remain employed with us will vest in a number of performance units based on their percentage
interest in the bonus pool (and determined based on the value of the common stock at the end of the performance period), and such vested performance units and will continue to be
subject to an additional two-year holding (i.e., no-sell) period. However, if the performance period is terminated prior to December 31, 2020 in connection with a change in control, 2018
OPP awards will be paid entirely in fully vested performance units immediately prior to the change in control.
In addition to these performance units, each 2018 OPP award entitles its holder to a cash payment equal to the aggregate distributions or dividends that would have been paid
during the performance period on the total number of performance units that performance-vest had such performance units been outstanding throughout the performance period. The
cash payment will be reduced by the aggregate amount of the distributions received during the performance period on the total number of performance units granted.
If a participant’s employment is terminated without “cause,” for “good reason” or due to the participant’s death or disability during the performance period (referred to as
qualifying terminations), the participant will be paid his or her 2018 OPP award at the end of the performance period entirely in fully vested performance units (except for the
performance period distribution/dividend equivalent, which will be paid in cash at the end of the performance period). Any such payment will be pro-rated in the case of a termination
without “cause” or for “good reason” by reference to the participant’s period of employment during the performance period.
The foregoing description of terms of the 2018 OPP is qualified in its entirety by reference to the text of the 2018 Outperformance Award Agreements, which are attached
hereto as Exhibits 10.72 and 10.73 and are incorporated herein by reference.
F- 53
Table of Contents
Hudson Pacific Properties, Inc. And Hudson Pacific Properties, L.P.
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2017
(In thousands)
Initial Costs
Cost Capitalized Subsequent
to Acquisition
Gross Carrying Amount
Property name
Encumbrances
Land
Building &
Improvements
Improvements
Carrying
Costs
Land
Building &
Improvements
Total
Accumulated
Depreciation(4)
Year
Built /
Renovated
Year
Acquired
— $ 18,058
$
41,046
$
17,544
$
1,936
$ 18,058
$
60,526
78,584
$
(13,944)
Various
2007
6,599
27,187
25,032
3,088
6,599
55,307
61,906
(19,426)
2008
2008
Office
875 Howard, San Francisco
Bay Area, CA
$
6040 Sunset (formerly
Technicolor Building), Los
Angeles, CA
ICON, Los Angeles, CA
CUE, Los Angeles, CA
EPIC, Los Angeles, CA
Del Amo, Los Angeles, CA
1455 Market, San Francisco
Bay Area, CA
Rincon Center, San Francisco
Bay Area, CA(1)(2)
10950 Washington, Los
Angeles, CA(2)
604 Arizona, Los Angeles, CA
275 Brannan, San Francisco
Bay Area, CA
625 Second, San Francisco
Bay Area, CA
6922 Hollywood, Los
Angeles, CA
10900 Washington
901 Market, San Francisco
Bay Area, CA
Element LA, Los Angeles, CA
(2)
3401 Exposition, Los Angeles,
CA
505 First, Greater Seattle, WA
83 King, Greater Seattle, WA
Met Park North, Greater
Seattle, WA(2)
Northview Center, Greater
Seattle, WA
Merrill Place, Greater Seattle,
WA
450 Alaskan, Greater Seattle,
WA
Palo Alto Square, San
Francisco Bay Area, CA
3400 Hillview, San Francisco
Bay Area, CA
—
—
—
—
—
—
—
—
—
—
41,226
—
—
—
18,000
34,990
98,392
58,251
110,656
25,110
14,745
8,063
42,650
72,392
1,200
79,305
19,755
11,319
133,034
51,403
71,768
41,191
29,824
27,418
17,979
—
—
—
—
—
—
5,620
4,187
10,744
16,608
1,400
17,882
168,000
79,769
—
—
—
64,500
—
—
—
—
—
14,120
22,917
12,982
28,996
4,803
27,684
—
—
—
146,009
35,837
23,783
2,458
55,661
22,396
745
1,332
14,029
3,319
8,302
738
13,606
5,497
1,326
852
—
—
—
—
423
1,115
—
—
—
—
—
—
—
—
41,226
58,251
17,979
5,620
4,187
10,744
16,608
1,400
17,882
151,506
151,506
(5,494)
2017
37,163
24,635
20,458
90,651
37,163
24,635
20,458
131,877
—
—
Ongoing
Ongoing
(4,767)
(12,725)
1986
1976
2008
2008
2008
2010
2010
133,052
191,303
(24,373)
1940/1989
2010
25,855
43,834
(4,978)
1957/1974
2010
16,500
23,207
22,120
27,394
(2,566)
1950/2005
(6,253)
1905
2011
2011
45,969
56,713
(8,564)
1906/1999
2011
80,694
97,302
(15,166)
1967
2011
1,938
92,911
3,338
110,793
(661)
1973
(15,115)
1912/1985
85,349
10,391
79,769
115,495
195,264
(10,203)
1949
11,046
1,028
14,120
23,393
37,513
(2,844)
1961
3,905
5,300
608
918
22,917
12,982
28,996
4,803
—
—
136,939
159,856
(17,885)
Various
56,703
72,376
69,685
101,372
(8,345)
Various
(10,016)
2000
42,109
46,912
(6,020)
1991
2013
16,287
784
27,684
46,895
74,579
(5,251)
Various
2014
2012
2012
2012,
2013
2013
2013
2013
2013
—
73,226
2,542
326,033
159,641
17,448
2,453
—
—
—
—
—
75,768
75,768
(201)
Ongoing
2014
343,481
343,481
(31,719)
1971
2015
162,094
162,094
(20,037)
1991
2015
F- 54
Table of Contents
Property name
Encumbrances
Land
Building &
Improvements
Improvements
Carrying
Costs
Land
Building &
Improvements
Total
Accumulated
Depreciation(4)
Year
Built /
Renovated
Year
Acquired
Initial Costs
Cost Capitalized Subsequent
to Acquisition
Gross Carrying Amount
Foothill Research Center, San
Francisco Bay Area, CA
Page Mill Center, San
Francisco Bay Area, CA
Clocktower Square, San
Francisco Bay Area, CA
3176 Porter (formerly
Lockheed), San Francisco
Bay Area, CA
Towers at Shore Center, San
Francisco Bay Area, CA
Skyway Landing, San
Francisco Bay Area, CA
Shorebreeze, San Francisco
Bay Area, CA
555 Twin Dolphin, San
Francisco Bay Area, CA
333 Twin Dolphin, San
Francisco Bay Area, CA
Peninsula Office Park, San
Francisco Bay Area, CA
Metro Center, San Francisco
Bay Area, CA
Concourse, San Francisco
Bay Area, CA
Gateway, San Francisco Bay
Area, CA
Metro Plaza, San Francisco
Bay Area, CA
1740 Technology, San
Francisco Bay Area, CA
Skyport Plaza, San Francisco
Bay Area, CA
Techmart, San Francisco Bay
Area, CA
Campus Center, San
Francisco Bay Area, CA
Fourth & Traction, Los
Angeles, CA
MaxWell, Los Angeles, CA
11601 Wilshire, Los Angeles,
CA
Hill7, Greater Seattle, WA(2)
Page Mill Hill, San Francisco
Bay Area, CA
Media & Entertainment
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45,085
33,117
16,038
8,052
29,033
—
59,460
12,140
13,040
28,978
101,000
36,888
—
—
—
—
—
—
72,673
37,959
69,448
40,614
36,441
98,206
133,994
147,625
93,949
34,561
144,188
63,559
59,806
73,457
64,892
93,780
—
313,683
3,011
6,748
539
(292)
7,924
2,812
7,556
5,409
8,275
12,094
39,566
—
—
—
—
—
—
—
—
137,005
137,005
(19,269)
1991
2015
154,373
154,373
(19,348)
1970/2016
2015
94,488
94,488
(7,875)
1983
2015
34,269
34,269
(3,732)
1991
2015
— 72,673
152,112
224,785
(13,102)
2001
2015
— 37,959
66,371
104,330
(6,923)
2001
2015
— 69,448
67,362
136,810
(5,805)
1985/1989
2015
— 40,614
78,866
119,480
(7,074)
1989
2015
— 36,441
73,167
109,608
(7,136)
1985
2015
— 98,206
105,874
204,080
(12,121)
Various
2015
—
—
353,249
353,249
(31,341)
Various
2015
224,271
9,585
— 45,085
233,856
278,941
(23,035)
Various
2015
121,217
26,159
— 33,117
147,376
180,493
(14,718)
Various
2015
106,156
49,486
9,929
3,555
— 16,038
116,085
132,123
(10,924)
1986
2015
—
8,052
53,041
61,093
(7,032)
1985
2015
153,844
(6,501)
— 29,033
147,343
176,376
(10,401)
2000/2001
2015
66,660
79,604
37,110
26,960
321,273
137,079
131,402
10,598
—
—
77,258
77,258
(8,244)
1986
2015
7,834
— 59,460
87,438
146,898
(15,374)
N/A
2015
38,529
6,139
12,140
81,778
93,918
Various
2015
—
—
3,729
13,040
48,484
61,524
Various
— 28,978
338,914
367,892
(15,876)
1983
— 36,888
—
—
150,473
187,361
133,360
133,360
(5,466)
(5,046)
2015
1975
—
2015
2016,
2017
2016
2016
17,795
17,641
13,394
1,958
F- 55
Table of Contents
Property name
Encumbrances
Land
Building &
Improvements
Improvements
Carrying
Costs
Land
Building &
Improvements
Total
Accumulated
Depreciation(4)
Year
Built /
Renovated
Year
Acquired
Initial Costs
Cost Capitalized Subsequent
to Acquisition
Gross Carrying Amount
5,001
79,320
64,697
31,416
207
79,320
96,320
175,640
(23,644)
Various
Sunset Gower Studios, Los
Angeles, CA(3)
Sunset Bronson Studios, Los
Angeles, CA(3)
Sunset Las Palmas Studios,
Los Angeles, CA
Total before held for sale
reclass
Real estate held for sale:
9300 Wilshire, Los Angeles,
CA
Embarcadero Place, San
Francisco Bay Area, CA
2180 Sand Hill, San Francisco
Bay Area, CA
2600 Campus Drive (building
6 of Peninsula Office Park),
San Francisco Bay Area, CA
—
77,698
118,892
32,374
86,922
31,543
422
77,698
64,339
142,037
(11,485)
Various
4,773
13
118,892
91,708
210,600
(1,974)
Various
2017
464,311
1,302,907
4,181,861
899,181
39,492
1,302,907
5,120,534
6,423,441
(533,498)
—
—
—
—
—
41,050
13,663
11,700
10,718
77,006
50,559
10,400
2,024
3,273
385
30
—
—
—
—
—
12,742
12,742
(4,195)
1964/2002
2010
41,050
13,663
11,700
80,279
121,329
(7,155)
1984
50,944
64,607
(3,749)
1973
2015
2015
10,430
22,130
(814)
Various
2015
2007,
2011,
2012
2008
Total
$
464,311
$1,369,320
$
4,330,544
$
904,893
$ 39,492
$1,369,320
$
5,274,929
$6,644,249
$
(549,411)
_____________
(1) The loan was paid in full on February 1, 2018.
(2) These properties are encumbered under our unsecured revolving credit facility, which, as of December 31, 2017, had an outstanding balance of $100.0 million.
(3) 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, net.”
(4) 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 $6.2 billion, unaudited as of December 31, 2017.
F- 56
Table of Contents
The following table reconciles the historical cost of total real estate held for investment and accumulated depreciation from January 1, 2015 to December 31, 2017:
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
Ending balance, before reclassification to assets associated with real estate held for sale
Reclassification to assets associated with real estate held for sale
Total investment in real estate, end of year
Total accumulated depreciation, beginning of year
Additions during period:
Depreciation of real estate
Total additions during period
Deductions during period:
Deletions
Write-offs due to sale
Total deductions during period
Ending balance, before reclassification to assets associated with real estate held for sale
Reclassification to assets associated with real estate held for sale
Total accumulated depreciation, end of year
Year Ended December 31,
2017
2016
2015
$
6,507,484
$
5,976,526
$
2,239,741
$
$
255,848
330,809
586,657
(41,337)
(408,555)
(449,892)
6,644,249
(220,808)
6,423,441
(423,950)
(206,838)
(206,838)
37,925
43,452
81,377
(549,411)
15,913
$
$
597,751
296,399
894,150
(27,451)
(335,741)
(363,192)
6,507,484
(629,004)
5,878,480
(272,724)
(182,219)
(182,219)
25,622
5,371
30,993
(423,950)
48,743
$
$
$
(533,498)
$
(375,207)
$
3,699,289
198,561
3,897,850
(13,556)
(147,509)
(161,065)
5,976,526
(353,067)
5,623,459
(142,561)
(151,066)
(151,066)
12,999
7,904
20,903
(272,724)
8,865
(263,859)
(Back To Top)
Section 2: EX-10.72 (EXHIBIT 10.72)
F- 57
HUDSON PACIFIC PROPERTIES, INC. AND HUDSON PACIFIC PROPERTIES, L.P.
2010 INCENTIVE AWARD PLAN
2018 OUTPERFORMANCE AWARD AGREEMENT
In consideration of the mutual agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Hudson Pacific Properties, Inc., a Maryland corporation (the “Company”), hereby grants to [_____] (the “Participant”), as of [_______], 2018, this
Outperformance Incentive Award (the “Award”) under the Company’s 2010 Incentive Award Plan (as amended from time to time, the “Plan”). This Award, together
with all other Awards granted pursuant to this 2018 Outperformance Award Agreement, shall constitute the Company’s 2018 Outperformance Program (the “2018
OPP”) under the Plan.
The capitalized terms below shall have the following meanings for purposes of this Agreement. Capitalized terms that are used but not defined herein shall have
the meanings provided in the Plan.
ARTICLE I.
DEFINITIONS
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
“2018 OPP” shall have the meaning set forth in the preamble.
“Absolute TSR Component” means, as of any given date, an amount equal to the product of (i) three percent (3%), times (ii) the difference obtained by
subtracting (A) the Aggregate Market Capitalization as of such date, minus (B) the Aggregate Absolute TSR Threshold as of such date, provided, however,
that in no event shall the Absolute TSR Component exceed twenty-five million dollars ($25,000,000) under any circumstances. If the calculation of the
Absolute TSR Component results in a negative number for any given date, then the Absolute TSR Component as of such date shall equal zero for purposes
of such calculation.
“Aggregate Absolute TSR Threshold” means, as of any given date, the sum of the Per Share Absolute TSR Threshold determined for all Shares that are or
were outstanding during the Performance Period through such date.
“Aggregate Baseline Capitalization Value” means, as of any given date, the sum of the Per Share Baseline Capitalization Value determined for all Shares
that are or were outstanding during the Performance Period through such date. For the avoidance of doubt, the Per Share Baseline Capitalization Value of
any Shares that are redeemed or repurchased during the Performance Period prior to such date shall be calculated as a negative number.
“Aggregate Market Capitalization” means, as of any given date, an amount equal to the sum of (i) the aggregate Per Share Market Capitalization determined
for all Shares that are or were outstanding during the Performance Period through such date, plus (ii) the sum of all dividends (including special dividends)
declared by the Company with respect to the Common Stock during the period beginning on (and including) the Grant Start Date and ending on (and
including) such date.
“Agreement” means this 2018 Outperformance Award Agreement.
“Award” shall have the meaning set forth in the preamble.
“Award Value” shall have the meaning set forth in Section 2.1(a) hereof.
US-DOCS\97262773.3
1.9
1.10
1.11
“Bonus Pool” means a dollar-denominated bonus pool determined in accordance with this Agreement.
“Bonus Pool Interest” means the Bonus Pool Interest granted hereunder in accordance with Section 2.1(a) hereof.
“Cause” shall have the meaning provided in an applicable employment or other service agreement between the Company (or an Affiliate) and the Participant
or, if no such agreement exists or such agreement does not contain a “cause” definition, then Cause shall mean the occurrence of any one or more of the
following events:
(a)The Participant’s willful and continued failure to substantially perform the Participant’s duties with the Company (other than any such failure
resulting from Disability);
(b)The Participant’s commission of an act of fraud or dishonesty resulting in reputational, economic or financial injury to the Company or an Affiliate;
(c)The Participant’s commission of, or entry by the Participant of a guilty or no contest plea to, a felony or a crime involving moral turpitude; or
(d)A breach by the Participant of the Participant’s fiduciary duty to the Company or any Affiliate which results in reputational, economic or other injury
to the Company or any Affiliate; or the Participant’s willful and material breach of the Participant’s obligations under a written agreement
between the Company (or an Affiliate) and the Participant.
1.12
“Change in Control” means the occurrence of any of the following events:
(a) A transaction or series of transactions (other than an offering of shares of Common Stock to the general public through a registration statement
filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14
(d)(2) of the Exchange Act) (other than the Company, the Services Company, the Partnership or any Subsidiary, an employee benefit plan maintained by any
of the foregoing entities or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the
Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or
(b) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new
director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in
Section 1.12(a) or Section 1.12(c) hereof) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two (2)-year period or whose election or
nomination for election was previously so approved, cease for any reason to constitute a majority thereof (the transactions contemplated by this Section 1.12
(b), a “Non-Transactional Change in Control”); or
(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more
intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or
2
US-DOCS\97262773.3
substantially all of the Company’s assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction:
(i)Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining
outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or
indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business
of the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined voting
power of the Successor Entity’s outstanding voting securities immediately after the transaction, and
(ii)After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity;
provided, however, that no person or group shall be treated for purposes of this Section 1.12(c)(ii) as beneficially owning 50% or more of
combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the
transaction.
Notwithstanding the foregoing, to the extent required to avoid the imposition of additional taxes under Section 409A, no transaction shall constitute a
Change in Control unless such transaction also constitutes a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5).
1.13
1.14
1.15
1.16
1.17
1.18
“Company” shall have the meaning set forth in the preamble.
“Determination Date” means the date on which the Performance Period ends (whether on December 31, 2020 or earlier upon a Change in Control) and by
reference to which the Final Bonus Pool is determined.
“Determination Date Per Share Value” means the Common Stock’s highest consecutive ten (10) trading-day average market closing price over the one
hundred twenty (120)-day period ending on (and including) the Determination Date.
“Disability” means that the Participant has become “disabled” within the meaning of Section 409A.
“Final Bonus Pool” means, as of any given date, a Bonus Pool equal to the sum of (i) the Absolute TSR Component as of such date, plus (ii) the Relative
TSR Component as of such date (the latter of which, for the avoidance of doubt, may be a negative number), provided, however, that in no event shall the
Final Bonus Pool (i) be greater than twenty-five million dollars ($25,000,000) or (ii) be less than zero. If, as of the Determination Date, the Company attains
TSR (x) that is equal to the Target Aggregate Absolute TSR and (y) that yields a Relative TSR Percentage equal to the Index Return Percentage, the target
Final Bonus Pool will equal $4,756,286.
“Good Reason” shall have the meaning provided in an applicable employment or other service agreement between the Company (or an Affiliate) and the
Participant or, if no such agreement exists or such agreement does not contain a “good reason” definition, then Good Reason shall mean the occurrence of
any one or more of the following events without the Participant’s prior written consent, subject to the cure provisions described below:
3
US-DOCS\97262773.3
(a)The assignment to the Participant of any duties that constitute a material diminution in the Participant’s authority, duties or responsibilities, excluding
for this purpose any isolated, insubstantial or inadvertent actions not taken in bad faith and which are remedied by the Company promptly
after receipt of notice thereof given by the Participant;
(b)A material reduction of the Participant’s base salary as in effect on the date hereof or as the same may be increased from time to time; or
(c)A material change in the geographic location of the Participant’s principal work location which shall, in any event, include only a relocation of the
Participant’s principal work location by more than thirty (30) miles from its existing location.
Notwithstanding the foregoing, the Participant will not be deemed to have resigned for Good Reason unless (1) the Participant provides the Company
with written notice setting forth in reasonable detail the facts and circumstances claimed by the Participant to constitute Good Reason within sixty (60) days
after the date of the occurrence of any event that the Participant knows or should reasonably have known to constitute Good Reason, (2) the Company fails to
cure such acts or omissions within thirty (30) days following its receipt of such notice, and (3) the effective date of the Participant’s termination for Good
Reason occurs no later than thirty (30) days after the expiration of the cure period.
“Grant Start Date” shall mean January 1, 2018.
“Index Return Percentage” means, as of any given date, the total shareholder return for the SNL US Office REIT Index (or any successor or replacement
index thereto or therefor or, in the event there is no successor or replacement index, the NAREIT Office Index) from the Grant Start Date through such given
date, expressed as a percentage and calculated in a manner consistent with TSR calculations under this Agreement.
“Initial Per Share Value” means the Common Stock’s five (5) trading-day trailing average market closing price over the period ending on (and including)
December 31, 2017.
“Non-Transactional Change in Control” shall have the meaning set forth in Section 1.12(b) hereof.
“Participant” shall have the meaning set forth in the preamble.
“Per Share Absolute TSR Threshold” means, as of any given date, with respect to each Share that is or was outstanding during the Performance Period, an
amount equal to the product obtained by multiplying (i) the Per Share Baseline Capitalization Value for such Share, times (ii) the sum of (A) one (1) plus (B)
the product of 0.21 times (X / 1,096), where “X” equals the number of days in the Performance Period (including the date of measurement) during which
such Share has been (or was, as applicable), outstanding.
“Per Share Baseline Capitalization Value” means, as of any given date, (i) with respect to each Share that is issued and outstanding as of the Grant Start
Date, the Initial Per Share Value, (ii) with respect to each Share that is first issued or sold and becomes outstanding during the Performance Period (if any),
the Fair Market Value of the Common Stock on the date on which such Share is issued or sold and becomes outstanding or (iii) notwithstanding anything to
the contrary in the foregoing, with respect to each Share that was repurchased or redeemed by the
1.19
1.20
1.21
1.22
1.23
1.24
1.25
4
US-DOCS\97262773.3
1.26
1.27
1.28
1.29
1.30
1.31
1.32
1.33
Company and which ceased to be outstanding during the Performance Period, the Initial Per Share Value.
“Per Share Market Capitalization” means, as of any given date, with respect to each Share outstanding on such date, the Common Stock’s highest
consecutive ten (10) trading-day average market closing price over the one hundred twenty (120)-day period ending on (and including) such date, provided,
however, that notwithstanding the foregoing, for purposes of determining Per Share Market Capitalization when calculating the Final Bonus Pool (and all
components thereof) in connection with a Change in Control (other than a Non-Transactional Change in Control), the Transaction Price shall be used for the
Shares which are outstanding on such date in lieu of the Common Stock’s highest consecutive ten (10) trading-day average market closing price over the one
hundred twenty (120)-day period ending on (and including) the date of the consummation of such Change in Control.
“Performance Period” means the period beginning on January 1, 2018 and ending on December 31, 2020, unless terminated earlier in connection with a
Change in Control, as provided herein.
“Performance Period Dividend Equivalent” shall have the meaning set forth in Section 2.4 hereof.
“Plan” shall have the meaning set forth in the preamble.
“Pro Rata Vesting Ratio” means a fraction, (i) the numerator of which equals the number of days elapsed in the Performance Period through the date of a
Participant’s termination of Employee status by the Company without Cause or by the Participant for Good Reason, and (ii) the denominator of which equals
the total number of days in the Performance Period through the Determination Date.
“Qualifying Termination” means a termination of the Participant’s Employee status by the Company without Cause, by the Participant for Good Reason or
due to the Participant’s death or Disability.
“Relative TSR Component Adjustment Factor” means the variable determined based on the Relative TSR Sliding Scale Calculation by straight-line
interpolation between (i) 0.25, if the Relative TSR Sliding Scale Calculation equals zero and (ii) one (1) if the Relative TSR Sliding Scale Calculation equals
one (1).
“Relative TSR Component” means, as of any given date, a dollar amount equal to the product obtained by multiplying (i) a percentage equal to the difference
obtained by subtracting (A) the Relative TSR Percentage as of such date minus (B) the Index Return Percentage as of such date, times (ii) the Aggregate
Baseline Capitalization Value as of such date, times (iii) three percent (3%), provided, however, that in no event shall the Relative TSR Component exceed
twenty-five million dollars ($25,000,000) under any circumstances; and provided, further, that if, as of such date, the difference obtained by subtracting the
Index Return Percentage minus the Relative TSR Percentage equals an amount, expressed as a percentage, that is greater than the product obtained by
multiplying (a) nine percent (9%) times (b) (X / 1,096) where “X” equals the number of days elapsed in the Performance Period as of such date, the Relative
TSR Component shall instead equal the Relative TSR Underperformance Component as of such date. In addition, notwithstanding the foregoing, if, on the
date with respect to which the Relative TSR Component is being measured, the Relative TSR Component does not equal the Relative TSR
Underperformance Component, but the Aggregate Market Capitalization as of such date exceeds
5
US-DOCS\97262773.3
the Aggregate Baseline Capitalization Value on such date by less than the percentage obtained by multiplying (A) twenty-one percent (21%) times (B) (X /
1,096) where “X” equals the number of days elapsed in the Performance Period as of such date, then the Relative TSR Component determined in accordance
with the immediately preceding sentence shall be reduced for purposes of such measurement by multiplying the Relative TSR Component determined in
accordance with the preceding sentence by the Relative TSR Component Adjustment Factor, provided, however, that if the Aggregate Market Capitalization
is equal to or less than the Aggregate Baseline Capitalization Value on the given date, then the Relative TSR Component for such date shall equal the lesser
of the Relative TSR Underperformance Component as of such date or zero.
“Relative TSR Percentage” means, as of any given date, the result, expressed as a percentage, determined by subtracting (i) the quotient obtained by dividing
(A) the Aggregate Market Capitalization as of such date, by (B) the Aggregate Baseline Capitalization Value as of such date, minus (ii) one (1), provided,
however, that if the Aggregate Baseline Capitalization Value equals or exceeds the Aggregate Market Capitalization on such date, the Relative TSR
Percentage as of such date shall equal the lesser of the Relative TSR Underperformance Component as of such date or zero.
“Relative TSR Sliding Scale Calculation” means, as of any given date, a fraction, (i) the numerator of which equals the product of one hundred (100) times
the Relative TSR Percentage as of such date, and (ii) the denominator of which equals the product of (A) twenty-one (21) times (B) (X / 1,096) where “X”
equals the number of days elapsed in the Performance Period as of such date.
“Relative TSR Underperformance Component” means, as of any given date, a negative dollar amount equal to the product obtained by multiplying (A) three
percent (3%), times (B) the amount, expressed as a percentage, by which (I) (a) the Index Return Percentage as of such date, minus (b) the Relative TSR
Percentage as of such date, exceeds (II) the product obtained by multiplying (a) nine percent (9%) times (b) (X / 1,096) where “X” equals the number of days
elapsed in the Performance Period as of such date, times (C) the Aggregate Market Capitalization as of such date.
“Section 409A” means Code Section 409A and the Treasury Regulations and other official guidance promulgated thereunder.
“Share” means any share of Common Stock or Partnership common unit.
“Successor Entity” shall have the meaning set forth in Section 1.12(c)(i) hereof.
“Target Aggregate Absolute TSR” means, as of the Determination Date, the Aggregate Market Capitalization as of such date exceeds the Aggregate Baseline
Capitalization Value on such date by at least the percentage obtained by multiplying (i) twenty-four percent (24%) times (ii) (X / 1,096), where “X” equals
the number of days elapsed in the Performance Period as of such date.
“Transaction Price” means the final, publicly announced, price per share of Common Stock paid by an acquirer in connection with a Change in Control
(other than a Non-Transactional Change in Control), provided, however, that the Administrator may, in its sole discretion, discount the value of any earn-out,
escrow or other deferred or contingent consideration (in each case, to zero) as it deems appropriate.
“TSR” means the Company’s total shareholder return, as determined in accordance with the Absolute TSR Component and Relative TSR Component metrics
described herein.
1.34
1.35
1.36
1.37
1.38
1.39
1.40
1.41
1.42
6
US-DOCS\97262773.3
ARTICLE II.
TERMS OF AWARD
This Award represents the rights to: (i) participate in, and receive payment of a portion of, a Bonus Pool determined by reference to the Company’s absolute
TSR performance and relative TSR performance over the Performance Period, and (ii) receive a cash payment equal to the dividends declared by the Company during
the Performance Period with respect to a number of shares of Common Stock determined by reference to the Award Value, in each case, subject to the performance,
vesting, payment, forfeiture and other terms and conditions set forth in this Agreement.
2.1 Bonus Pool Interest.
(a) Grant of Bonus Pool Interest. The Company hereby grants to the Participant a [__] percent ([__]%) interest in the Final Bonus Pool (the “Bonus
Pool Interest”), subject to the terms and conditions of this Agreement. To the extent that a Final Bonus Pool is created based on the Company’s TSR performance
during the Performance Period and the Award vests and/or becomes payable, in each case, in accordance herewith, the amount of the Award will be determined by
multiplying the Participant’s Bonus Pool Interest (as may be reduced in accordance with Section 2.1(b) hereof) by the dollar value of the Final Bonus Pool (the “Award
Value”).
(b) Excess Grants of Bonus Pool Interests. To the extent (if any) that the sum of all Bonus Pool Interests granted under the 2018 OPP exceeds one
hundred percent (100%) on the Determination Date, then all Bonus Pool Interests that vest and are outstanding under the 2018 OPP on the Determination Date
(including any such Bonus Pool Interests granted in excess of one hundred percent (100%)) shall be reduced pro rata on the Determination Date such that the sum of all
vested Bonus Pool Interests outstanding under 2018 OPP Awards on the Determination Date shall equal one hundred percent (100%) (and any Bonus Pool Interests that
are forfeited on or prior to the Determination Date will be disregarded for purposes of this allocation). If the sum of all Bonus Pool Interests is less than one hundred
percent (100%) on the Determination Date, no Bonus Pool Interest (including the Participant’s Bonus Pool Interest) shall be increased as a result thereof.
2.2 Timing of Final Bonus Pool Determination. The Administrator shall determine the Final Bonus Pool, calculated as of the last day of the Performance
Period: (i) if the Performance Period ends on December 31, 2020 or upon a Non-Transactional Change in Control occurring prior to December 31, 2020, within thirty
(30) days following the Determination Date, or (ii) if the Performance Period ends upon a Change in Control occurring prior to December 31, 2020 (other than a Non-
Transactional Change in Control), on or prior to the Change in Control.
2.3 Vesting and Payment of Award. Notwithstanding any accelerated vesting provisions contained in any other agreement between the Company and the
Participant [(other than that certain 2017 Outperformance Award Agreement dated [_____] between the Company and the Participant, that certain 2016 Outperformance
Award Agreement dated [_____] between the Company and the Participant and/or any Restricted Stock Unit Award Agreement(s) evidencing Restricted Stock Units
granted pursuant to any Company Outperformance Program)], including without limitation that certain Employment Agreement dated [_____] between the Company
and the Participant, which accelerated vesting provisions are hereby expressly superseded and replaced with respect to this Award, the following provisions, as
applicable, shall govern the vesting and payment of the Award.
(a) Three-Year Performance Period, No Qualifying Termination. Except as otherwise provided in Sections 2.3(b) through 2.3(c) hereof, if the
Determination Date occurs on December 31, 2020 (and no Change in Control is consummated prior to such date), subject to the Participant’s continued service as an
Employee through such Determination Date, then 100% of the Award Value will vest on the
7
US-DOCS\97262773.3
Determination Date and be paid, as soon as practicable after January 1, 2021, but in no event later than March 15, 2021, in a number of fully vested shares of Common
Stock determined by dividing the dollar amount of such vested portion of the Award Value by the Determination Date Per Share Value.
(b) Qualifying Termination. Subject to Section 2.1(b) hereof, if the Participant’s service as an Employee is terminated during the Performance Period:
(i) By the Company without Cause or by the Participant for Good Reason, then a portion of the Participant’s Bonus Pool Interest determined
by multiplying such Bonus Pool Interest by the Pro Rata Vesting Ratio will time-vest immediately prior to such termination and remain eligible for payment of the
Award Value following the Determination Date, and any portion of the Bonus Pool Interest which does not vest in accordance with this Section 2.3(b)(i) will be
forfeited upon such termination and will not be eligible for any payout; or
(ii) Due to the Participant’s death or Disability, then the Participant’s entire Bonus Pool Interest will time-vest immediately prior to such
termination and remain eligible for payment of the Award Value following the Determination Date (determined with respect to the Participant’s entire Bonus Pool
Interest).
Any Award Value that becomes payable in respect of Bonus Pool Interests that vest under this Section 2.3(b) will be paid in a number of fully vested
shares of Common Stock (rounded down to the nearest whole share) determined by dividing the dollar amount of the applicable Award Value (if any) by the
Determination Date Per Share Value, with any such shares of Common Stock paid to the Participant on or about the date that vested shares of Common Stock are
delivered to Participants in the 2018 OPP generally in respect of Award Value vesting on the Determination Date but in any event, no later than fifteenth (15th) day of
the third (3rd) month following the Determination Date, provided, however, that if the Determination Date occurs upon the consummation of a Change in Control (other
than a Non-Transactional Change in Control), then the Transaction Price shall be used in lieu of the Determination Date Per Share Value for purposes of calculating the
number of vested shares of Common Stock paid pursuant to this paragraph.
(c) Change in Control That Ends Performance Period. If the Performance Period ends prior to December 31, 2020 upon a Change in Control, then (i)
if the Participant remains in service as an Employee through such Change in Control, the Participant shall vest in full in the Participant’s Bonus Pool Interest and shall
be paid the applicable Award Value, and (ii) if the Participant experienced a Qualifying Termination prior to such Change in Control, the Participant shall receive a
payment of the Participant’s pro rata Award Value determined in accordance with Section 2.3(b) hereof. Payments under this Section 2.3(c) will be made immediately
prior to the consummation of the Change in Control in a number of fully vested shares of Common Stock determined by dividing the dollar amount of the applicable
Award Value (if any) by the Transaction Price, provided, however, that if the Change in Control is a Non-Transactional Change in Control, then (A) the Determination
Date Per Share Value shall be used in lieu of a Transaction Price for purposes of calculating the number of vested shares of Common Stock paid pursuant to this Section
2.3(c), and (B) the payments will be made as soon as practicable after the Determination Date, but in no event later than the fifteenth (15th) day of the third (3rd) month
following the month in which the Determination Date occurs. Any shares of Common Stock issued pursuant to this Section 2.3(c) shall be subject to the terms and
conditions of the definitive Change in Control documents applicable to the Common Stock generally, if any, including without limitation any such terms and conditions
of an applicable purchase agreement, and the Participant hereby consents and agrees to be bound by any and all such terms and conditions with respect to any shares of
Common Stock paid hereunder.
2.4 Performance Period Dividend Equivalent Payment. In addition to any shares of Common Stock that become payable in accordance with Section 2.3
hereof, the Participant shall be entitled to a cash
8
US-DOCS\97262773.3
payment, payable as soon as practicable after the Determination Date, but in no event later than the fifteenth (15th) day of the third (3rd) month following the
Determination Date, in an amount equal to the aggregate dividends declared by the Company during the Performance Period (including both ordinary and extraordinary
dividends) in respect of a number of shares of Common Stock determined by dividing the dollar amount of the Participant’s actual Award Value by the Determination
Date Per Share Value (the “Performance Period Dividend Equivalent”), provided, however, that if the Determination Date occurs upon the consummation of a Change
in Control (other than a Non-Transactional Change in Control), then the Transaction Price shall be used in lieu of the Determination Date Per Share Value for purposes
of calculating the number of shares of Common Stock pursuant to this paragraph. The Performance Period Dividend Equivalent, if any, shall be paid without regard to
whether the Participant remains in service as an Employee through the Determination Date. If the Participant’s Award Value is zero on the Determination Date, then the
Participant shall not be entitled to any payment under this Section 2.4.
2.5 Forfeiture. Upon the earliest to occur of (i) the Participant’s termination of service as an Employee prior to the Determination Date for any reason other
than a Qualifying Termination, or (ii) the Administrator’s determination that the Final Bonus Pool equals zero, the Participant shall forfeit all rights and interests under
this Agreement and the 2018 OPP without further action on the part of the Company or the Participant and without payment of consideration therefor, which forfeiture
shall include, without limitation, any rights or interest in any Award Value and/or any Performance Period Dividend Equivalent.
ARTICLE III.
MISCELLANEOUS
3.1 Tax Withholding. The Company and its Affiliates shall be entitled to require a cash payment (or other form of payment determined in accordance with
Section 11.2 of the Plan) by or on behalf of the Participant and/or to deduct from other compensation payable to the Participant any sums required by federal, state or
local tax law to be withheld with respect to the grant, vesting and/or payment of the Award. In satisfaction of the foregoing requirement with respect to the vesting or
payment of the Award, unless otherwise determined by the Administrator, the Company or its Affiliates shall withhold Shares otherwise issuable under the Award
having a fair market value equal to the sums required to be withheld by federal, state and/or local tax law. The number of Shares which shall be so withheld shall be
limited to the number of Shares which have a fair market value on the date of withholding 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 Company shall have no obligation to make any payment in any form under this Agreement unless and until such tax obligations have been
satisfied. To the extent that any Federal Insurance Contributions Act tax withholding obligations arise in connection with the Award prior to the Determination Date, the
Administrator shall accelerate the payment of a portion of the Award Value sufficient to satisfy (but not in excess of) such tax withholding obligations and any tax
withholding obligations associated with any such accelerated payment, and the Administrator shall withhold such amounts in satisfaction of such withholding
obligations. Any amounts accelerated and withheld in accordance with the preceding sentence shall reduce the Participant’s Award Value on the Determination Date on
a dollar-for-dollar basis.
3.2 Conditions to Delivery of Shares. Any shares of Common Stock deliverable under this Award may be either previously authorized but unissued shares of
Common Stock or issued shares of Common Stock which have then been reacquired by the Company. Such shares of Common Stock shall be fully paid and
nonassessable. The Company shall not be required to issue or deliver any shares of Common Stock under this Agreement prior to fulfillment of all of the following
conditions:
(i) The admission of such shares of Common Stock to listing on all stock exchanges on which the Common Stock is then listed;
9
US-DOCS\97262773.3
(ii) The completion of any registration or other qualification of such shares of Common Stock under any state or federal law or under rulings
or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Administrator shall, in its absolute discretion, deem
necessary or advisable;
absolute discretion, determine to be necessary or advisable;
(iii) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its
(iv) The lapse of such reasonable period of time as the Administrator may from time to time establish for reasons of administrative
convenience.
Notwithstanding the foregoing, the issuance of such shares of Common Stock shall not be delayed to the extent that such delay would result in a violation of
Section 409A. In the event that the Company delays the issuance of any shares of Common Stock because it reasonably determines that the issuance of such shares of
Common Stock will violate federal securities laws or other applicable law, such issuance shall be made at the earliest date at which the Administrator reasonably
determines that issuing such shares of Common Stock will not cause such violation, as required by Treasury Regulation Section 1.409A-2(b)(7)(ii).
3.3 Section 409A.
(a) General. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A. Notwithstanding any provision of this
Agreement to the contrary, if the Company determines that any compensation or benefits payable under this Agreement may be subject to Section 409A, the Company
may adopt such amendments to this Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take
any other actions, that the Administrator determines are necessary or appropriate to avoid the imposition of taxes under Section 409A, provided, however, that this
Section 3.3 shall not create an obligation on the part of the Company to adopt any such amendment, policy or procedure or take any such other action, nor shall the
Company have any liability for failing to do so.
(b) Potential Six-Month Delay. Notwithstanding anything to the contrary in this Agreement, no amounts shall be paid to the Participant under this
Agreement during the six (6)-month period following the Participant’s “separation from service” to the extent that the Administrator determines that the Participant is a
“specified employee” (each within the meaning of Section 409A) at the time of such separation from service and that paying such amounts at the time or times indicated
in this Agreement would be a prohibited distribution under Code Section 409A(a)(2)(b)(i). If the payment of any such amounts is delayed as a result of the previous
sentence, then on the first business day following the end of such six (6)-month period (or such earlier date upon which such amount can be paid under Section 409A
without being subject to such additional taxes), the Company shall pay to the Participant in a lump-sum all amounts that would have otherwise been payable to the
Participant during such six (6)-month period under this Agreement.
3.4 Award Not Transferable.
(a) Neither this Award nor any interest or right herein or part hereof shall be liable for the debts, contracts or engagements of the Participant or the
Participant’s successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether
such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including
bankruptcy), and any attempted disposition hereof shall be null and void and of no effect; provided, however, that this Section 3.4
10
US-DOCS\97262773.3
notwithstanding, with the written consent of the Administrator, the Award may be transferred to certain persons or entities related to the Participant, including but not
limited to members of the Participant’s family, charitable institutions or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant’s
family or to such other persons or entities as may be expressly approved by the Administrator, pursuant to any such conditions and procedures the Administrator may
require.
(b) Notwithstanding anything to the contrary contained herein, the Participant shall not, without the consent of the Administrator (which shall not be
unreasonably withheld), sell, pledge, assign, hypothecate, transfer, or otherwise dispose of (collectively, “Transfer”) any Shares issuable hereunder prior to the second
anniversary of the Determination Date (the “Transfer Restrictions”); provided, however, that the Transfer Restrictions shall not apply to (i) any Transfer of Shares to
the Company, (ii) any Transfer in satisfaction of any withholding obligations with respect to the Award, (iii) any Transfer following the Participant’s Termination of
Service, including without limitation by will or pursuant to the laws of descent and distribution, (iv) any Transfer to certain persons or entitles related to the Participant
as set forth in the proviso in Section 3.4(a) above or (v) any Transfer upon the occurrence of, and in connection with, a Change in Control.
3.5 No Rights as Stockholder. Except as otherwise expressly provided herein, unless and until shares of Common Stock are issued in payment of this Award,
this Award shall not confer any stockholder rights upon the Participant.
3.6 Not a Contract of Employment. Nothing in this Agreement, the 2018 OPP or the Plan shall confer upon the Participant any right to continue to serve as an
Employee or other service provider of the Company or any of its Affiliates or shall interfere with or restrict in any way the rights of the Company and its Affiliates,
which rights are hereby expressly reserved, to discharge or terminate the services of the Participant at any time for any reason whatsoever, with or without Cause, except
to the extent expressly provided to the contrary in a written agreement between the Company or an Affiliate, on the one hand, and the Participant on the other.
3.7 Governing Law. The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of
this Agreement regardless of the law that might be applied under principles of conflicts of laws.
3.8 Incorporation of Terms of Plan; Authority of Administrator. The 2018 OPP and this Agreement are subject to the terms and conditions of the Plan, which
are incorporated herein by reference, including without limitation Section 13.2 of the Plan. In the event of any inconsistency between the Plan and this Agreement
and/or the 2018 OPP generally, the terms of the Plan shall control. In accordance with the Plan (and not in limitation of any other provision), the Administrator shall
make all determinations under this Agreement in its sole and absolute discretion and all interested parties shall be bound by such determinations.
3.9 Decimals. Except as expressly provided herein with respect to rounding, to the extent that any calculations hereunder result in decimals, all such decimals
shall be carried out and rounded to the nearest one hundred thousandth (.00001).
3.10 Consideration to the Company. In consideration of the grant of the Award by the Company, the Participant agrees to render faithful and efficient services
to the Company or any Affiliate.
3.11 Conformity to Securities Laws. The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all
provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission
11
US-DOCS\97262773.3
thereunder, as well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan and the 2018 OPP shall be
administered, and the Award is granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan, the
2018 OPP, this Award and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
3.12 Amendment, Suspension and Termination. To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Administrator or the Board, provided, however, that, except as may otherwise be provided by
the Plan, no amendment, modification, suspension or termination of this Agreement shall adversely affect the Award in any material way without the prior written
consent of the Participant.
3.13 Other Performance Award; Performance-Based Compensation. This Award shall constitute an Other Performance Award for purposes of the Plan. In
addition, this Award is intended to constitute Performance-Based Compensation within the meaning of the Plan.
3.14 Notices. Notices required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit
in the United States mail by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown in the Company records, and to the Company
at its principal executive office.
3.15 Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon the Participant
and his or her heirs, executors, administrators, successors and assigns.
3.16 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or this Agreement, if the Participant is subject to Section
16 of the Exchange Act, then the Plan, the Award and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under
Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the
extent permitted by applicable law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
3.17 Entire Agreement. The Plan and this Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and
agreements of the Company and the Participant with respect to the subject matter hereof. Without limiting the generality of the foregoing, the parties acknowledge and
agree that this Agreement embodies their final intent and understanding with respect to the implementation of the 2018 OPP and the grant of the Award, and supersedes
all previous descriptions, discussions, agreements or other materials relating to the 2018 OPP.
3.18 Limitation on the Participant’s Rights. Participation in the Plan confers no rights or interests other than as herein provided. This Agreement creates only a
contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a trust. The Plan, in and of itself, has no assets. The
Participant shall have only the rights of a general unsecured creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the
shares of Common Stock issuable hereunder.
3.19 Clawback. This Award shall be subject to any clawback or recoupment policy currently in effect or as may be adopted by the Company or the
Partnership, in each case, as may be amended from time to time.
12
US-DOCS\97262773.3
By his or her signature and the Company’s signature below, the Participant agrees to be bound by the terms and conditions of the Plan, the 2018 OPP and this
Agreement. The Participant has reviewed this Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this
Agreement and fully understands all provisions of this Agreement and the Plan. The Participant hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator of the Plan upon any questions arising under the Plan and/or this Agreement. In addition, by signing below, the Participant
acknowledges that the Administrator, in its sole discretion, may satisfy any withholding obligations arising under this Agreement by (i) withholding shares of Common
Stock otherwise issuable to the Participant under this Agreement, (ii) instructing a broker on the Participant’s behalf to sell shares of Common Stock otherwise issuable
to the Participant and to submit the proceeds of such sale to the Company, and/or (iii) any other method permitted under the Plan. If the Participant is married, his or her
spouse has signed the Consent of Spouse attached to hereto as Exhibit A.
HUDSON PACIFIC PROPERTIES, INC.:
PARTICIPANT:
By:
Print Name:
Address:
13
By:
Print Name:
Title:
Address:
US-DOCS\97262773.3
EXHIBIT A
TO OUTPERFORMANCE AWARD AGREEMENT
CONSENT OF SPOUSE
I, ____________________, spouse of _______________, have read and approve the foregoing Agreement. In consideration of issuing to my spouse the shares
of the common stock of Hudson Pacific Properties, Inc. set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares of the common
stock of Hudson Pacific Properties, Inc. issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of
our residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, _____
Signature of Spouse
14
US-DOCS\97262773.3
(Back To Top)
Section 3: EX-10.73 (EXHIBIT 10.73)
HUDSON PACIFIC PROPERTIES, INC. AND HUDSON PACIFIC PROPERTIES, L.P.
2010 INCENTIVE AWARD PLAN
2018 OUTPERFORMANCE PROGRAM
OPP UNIT AGREEMENT
In consideration of the mutual agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Hudson Pacific Properties, L.P., a Maryland limited partnership (the “Partnership”), hereby issues to [_____] (the “Participant”), as of [_____], 2018,
the Profits Interest Units (as defined in the Plan), which includes Performance Units (as defined in the Partnership Agreement) provided for herein (the “Award”) under
the Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan (as amended from time to time, the “Plan”). This Award, together
with all other Awards granted by either the Partnership or Hudson Pacific Properties, Inc. (the “Company”) pursuant to this 2018 Outperformance Program OPP Unit
Agreement or the 2018 Outperformance Award Agreement, shall constitute the 2018 Outperformance Program (the “2018 OPP”) under the Plan.
ARTICLE I.
DEFINITIONS
The capitalized terms below shall have the following meanings for purposes of this Agreement. Capitalized terms that are used but not defined herein shall have
the meanings provided in the Plan.
1.1
1.2
1.3
1.4
1.5
“2018 OPP” shall have the meaning set forth in the preamble.
“Absolute TSR Component” means, as of any given date, an amount equal to the product of (i) three percent (3%), times (ii) the difference obtained by
subtracting (A) the Aggregate Market Capitalization as of such date, minus (B) the Aggregate Absolute TSR Threshold as of such date, provided, however,
that in no event shall the Absolute TSR Component exceed twenty-five million dollars ($25,000,000) under any circumstances. If the calculation of the
Absolute TSR Component results in a negative number for any given date, then the Absolute TSR Component as of such date shall equal zero for purposes
of such calculation.
“Aggregate Absolute TSR Threshold” means, as of any given date, the sum of the Per Share Absolute TSR Threshold determined for all Shares that are or
were outstanding during the Performance Period through such date.
“Aggregate Baseline Capitalization Value” means, as of any given date, the sum of the Per Share Baseline Capitalization Value determined for all Shares
that are or were outstanding during the Performance Period through such date. For the avoidance of doubt, the Per Share Baseline Capitalization Value of
any Shares that are redeemed or repurchased during the Performance Period prior to such date shall be calculated as a negative number.
“Aggregate Market Capitalization” means, as of any given date, an amount equal to the sum of (i) the aggregate Per Share Market Capitalization determined
for all Shares that are or were outstanding during the Performance Period through such date, plus (ii) the sum of all dividends (including special dividends)
declared by the Company with respect to the Common Stock during the period beginning on (and including) the Grant Start Date and ending on (and
including) such date.
1.6
“Agreement” means this 2018 Outperformance Award Agreement.
US-DOCS\97290526.2
1.7
1.8
1.9
1.10
1.11
“Award” shall have the meaning set forth in the preamble.
“Award Value” shall have the meaning set forth in Section 2.1(b) hereof.
“Bonus Pool” means a dollar-denominated bonus pool determined in accordance with this Agreement.
“Bonus Pool Interest” shall have the meaning set forth in Section 2.1(b) hereof.
“Cause” shall have the meaning provided in an applicable employment or other service agreement between the Company (or an Affiliate) and the Participant
or, if no such agreement exists or such agreement does not contain a “cause” definition, then Cause shall mean the occurrence of any one or more of the
following events:
(a)The Participant’s willful and continued failure to substantially perform the Participant’s duties with the Company (other than any such failure
resulting from Disability);
(b)The Participant’s commission of an act of fraud or dishonesty resulting in reputational, economic or financial injury to the Company or an Affiliate;
(c)The Participant’s commission of, or entry by the Participant of a guilty or no contest plea to, a felony or a crime involving moral turpitude; or
(d)A breach by the Participant of the Participant’s fiduciary duty to the Company or any Affiliate which results in reputational, economic or other injury
to the Company or any Affiliate; or the Participant’s willful and material breach of the Participant’s obligations under a written agreement
between the Company (or an Affiliate) and the Participant.
1.12
“Change in Control” means the occurrence of any of the following events:
(a) A transaction or series of transactions (other than an offering of shares of Common Stock to the general public through a registration statement
filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14
(d)(2) of the Exchange Act) (other than the Company, the Services Company, the Partnership or any Subsidiary, an employee benefit plan maintained by any
of the foregoing entities or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the
Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or
(b) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new
director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in
Section 1.12(a) or Section 1.12(c) hereof) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two (2)-year period or whose election or
nomination for election was previously so approved, cease for any reason to constitute a majority thereof (the transactions contemplated by this Section 1.12
(b), a “Non-Transactional Change in Control”); or
2
US-DOCS\97290526.2
(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more
intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the
Company’s assets or (z) the acquisition of assets or stock of another entity, in each case, other than a transaction:
(i)Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining
outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or
indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business
of the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined voting
power of the Successor Entity’s outstanding voting securities immediately after the transaction, and
(ii)After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity;
provided, however, that no person or group shall be treated for purposes of this Section 1.12(c)(ii) as beneficially owning 50% or more of
combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the
transaction.
Notwithstanding the foregoing, to the extent required to avoid the imposition of additional taxes under Section 409A, no transaction shall constitute a
Change in Control unless such transaction also constitutes a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5).
1.13
1.14
1.15
1.16
1.17
“Company” shall have the meaning set forth in the preamble.
“Determination Date” means the date on which the Performance Period ends (whether on December 31, 2020 or earlier upon a Change in Control) and by
reference to which the Final Bonus Pool is determined.
“Determination Date Per Share Value” means the Common Stock’s highest consecutive ten (10) trading-day average market closing price over the one
hundred twenty (120)-day period ending on (and including) the Determination Date.
“Disability” means that the Participant has become “disabled” within the meaning of Section 409A.
“Eligible OPP Units” means a number of OPP Units determined by dividing the Participant’s Award Value by the Determination Date Per Share Value;
provided, however, that (i) in no event shall such number of OPP Units exceed the total number of OPP Units issued to the Participant hereunder, and (ii) if
the Determination Date occurs upon the consummation of a Change in Control (other than a Non-Transactional Change in Control), then the Transaction
Price shall be used in lieu of the Determination Date Per Share Value for purposes of calculating the number of Eligible OPP Units.
1.18
“Final Bonus Pool” means, as of any given date, a Bonus Pool equal to the sum of (i) the Absolute TSR Component as of such date, plus (ii) the Relative
TSR Component as of such date (the latter of which, for the avoidance of doubt, may be a negative number), provided, however, that in no
3
US-DOCS\97290526.2
event shall the Final Bonus Pool (i) be greater than twenty-five million dollars ($25,000,000) or (ii) be less than zero. If, as of the Determination Date, the
Company attains TSR (x) that is equal to the Target Aggregate Absolute TSR and (y) that yields a Relative TSR Percentage equal to the Index Return
Percentage, the target Final Bonus Pool will equal $4,756,286.
1.19
“Good Reason” shall have the meaning provided in an applicable employment or other service agreement between the Company (or an Affiliate) and the
Participant or, if no such agreement exists or such agreement does not contain a “good reason” definition, then Good Reason shall mean the occurrence of
any one or more of the following events without the Participant’s prior written consent, subject to the cure provisions described below:
(a)The assignment to the Participant of any duties that constitute a material diminution in the Participant’s authority, duties or responsibilities, excluding
for this purpose any isolated, insubstantial or inadvertent actions not taken in bad faith and which are remedied by the Company promptly
after receipt of notice thereof given by the Participant;
(b)A material reduction of the Participant’s base salary as in effect on the date hereof or as the same may be increased from time to time; or
(c)A material change in the geographic location of the Participant’s principal work location which shall, in any event, include only a relocation of the
Participant’s principal work location by more than thirty (30) miles from its existing location.
Notwithstanding the foregoing, the Participant will not be deemed to have resigned for Good Reason unless (1) the Participant provides the Company
with written notice setting forth in reasonable detail the facts and circumstances claimed by the Participant to constitute Good Reason within sixty (60) days
after the date of the occurrence of any event that the Participant knows or should reasonably have known to constitute Good Reason, (2) the Company fails to
cure such acts or omissions within thirty (30) days following its receipt of such notice, and (3) the effective date of the Participant’s termination for Good
Reason occurs no later than thirty (30) days after the expiration of the cure period.
“Grant Start Date” shall mean January 1, 2018.
“Index Return Percentage” means, as of any given date, the total shareholder return for the SNL US Office REIT Index (or any successor or replacement
index thereto or therefor or, in the event there is no successor or replacement index, the NAREIT Office Index) from the Grant Start Date through such given
date, expressed as a percentage and calculated in a manner consistent with TSR calculations under this Agreement.
“Initial Per Share Value” means the Common Stock’s five (5) trading-day trailing average market closing price over the period ending on (and including)
December 31, 2017.
“Non-Transactional Change in Control” shall have the meaning set forth in Section 1.12(b) hereof.
“OPP Units” shall have the meaning set forth in Section 2.1(a) hereof.
“Participant” shall have the meaning set forth in the preamble.
“Partnership Agreement” shall have the meaning set forth in Section 2.1(a) hereof.
4
1.20
1.21
1.22
1.23
1.24
1.25
1.26
US-DOCS\97290526.2
1.27
1.28
1.29
1.30
1.31
1.32
1.33
1.34
1.35
1.36
1.37
“Per Share Absolute TSR Threshold” means, as of any given date, with respect to each Share that is or was outstanding during the Performance Period, an
amount equal to the product obtained by multiplying (i) the Per Share Baseline Capitalization Value for such Share, times (ii) the sum of (A) one (1) plus (B)
the product of 0.21 times (X / 1,096), where “X” equals the number of days in the Performance Period (including the date of measurement) during which
such Share has been (or was, as applicable), outstanding.
“Per Share Baseline Capitalization Value” means, as of any given date, (i) with respect to each Share that is issued and outstanding as of the Grant Start
Date, the Initial Per Share Value, (ii) with respect to each Share that is first issued or sold and becomes outstanding during the Performance Period (if any),
the Fair Market Value of the Common Stock on the date on which such Share is issued or sold and becomes outstanding or (iii) notwithstanding anything to
the contrary in the foregoing, with respect to each Share that was repurchased or redeemed by the Company and which ceased to be outstanding during the
Performance Period, the Initial Per Share Value.
“Per Share Market Capitalization” means, as of any given date, with respect to each Share outstanding on such date, the Common Stock’s highest
consecutive ten (10) trading-day average market closing price over the one hundred twenty (120)-day period ending on (and including) such date, provided,
however, that notwithstanding the foregoing, for purposes of determining Per Share Market Capitalization when calculating the Final Bonus Pool (and all
components thereof) in connection with a Change in Control (other than a Non-Transactional Change in Control), the Transaction Price shall be used for the
Shares which are outstanding on such date in lieu of the Common Stock’s highest consecutive ten (10) trading-day average market closing price over the one
hundred twenty (120)-day period ending on (and including) the date of the consummation of such Change in Control.
“Performance Period” means the period beginning on January 1, 2018 and ending on December 31, 2020, unless terminated earlier in connection with a
Change in Control, as provided herein.
“Performance Period Dividend Equivalent” shall have the meaning set forth in Section 2.4 hereof.
“Plan” shall have the meaning set forth in the preamble.
“Pro Rata Eligible OPP Units” shall have the meaning set forth in Section 2.3(b)(i) hereof.
“Pro Rata Vesting Ratio” means a fraction, (i) the numerator of which equals the number of days elapsed in the Performance Period through the date of a
Participant’s termination of Employee status by the Company without Cause or by the Participant for Good Reason, and (ii) the denominator of which equals
the total number of days in the Performance Period through the Determination Date.
“Qualifying Termination” means a termination of the Participant’s Employee status by the Company without Cause, by the Participant for Good Reason or
due to the Participant’s death or Disability.
“Relative TSR Component Adjustment Factor” means the variable determined based on the Relative TSR Sliding Scale Calculation by straight-line
interpolation between (i) 0.25, if the Relative TSR Sliding Scale Calculation equals zero and (ii) one (1) if the Relative TSR Sliding Scale Calculation equals
one (1).
“Relative TSR Component” means, as of any given date, a dollar amount equal to the product obtained by multiplying (i) a percentage equal to the difference
obtained by subtracting (A) the
5
US-DOCS\97290526.2
Relative TSR Percentage as of such date minus (B) the Index Return Percentage as of such date, times (ii) the Aggregate Baseline Capitalization Value as of
such date, times (iii) three percent (3%), provided, however, that in no event shall the Relative TSR Component exceed twenty-five million dollars
($25,000,000) under any circumstances; and provided, further, that if, as of such date, the difference obtained by subtracting the Index Return Percentage
minus the Relative TSR Percentage equals an amount, expressed as a percentage, that is greater than the product obtained by multiplying (a) nine percent
(9%) times (b) (X / 1,096) where “X” equals the number of days elapsed in the Performance Period as of such date, the Relative TSR Component shall
instead equal the Relative TSR Underperformance Component as of such date. In addition, notwithstanding the foregoing, if, on the date with respect to
which the Relative TSR Component is being measured, the Relative TSR Component does not equal the Relative TSR Underperformance Component, but
the Aggregate Market Capitalization as of such date exceeds the Aggregate Baseline Capitalization Value on such date by less than the percentage obtained
by multiplying (A) twenty-one percent (21%) times (B) (X / 1,096) where “X” equals the number of days elapsed in the Performance Period as of such date,
then the Relative TSR Component determined in accordance with the immediately preceding sentence shall be reduced for purposes of such measurement by
multiplying the Relative TSR Component determined in accordance with the preceding sentence by the Relative TSR Component Adjustment Factor,
provided, however, that if the Aggregate Market Capitalization is equal to or less than the Aggregate Baseline Capitalization Value on the given date, then
the Relative TSR Component for such date shall equal the lesser of the Relative TSR Underperformance Component as of such date or zero.
“Relative TSR Percentage” means, as of any given date, the result, expressed as a percentage, determined by subtracting (i) the quotient obtained by dividing
(A) the Aggregate Market Capitalization as of such date, by (B) the Aggregate Baseline Capitalization Value as of such date, minus (ii) one (1), provided,
however, that if the Aggregate Baseline Capitalization Value equals or exceeds the Aggregate Market Capitalization on such date, the Relative TSR
Percentage as of such date shall equal the lesser of the Relative TSR Underperformance Component as of such date or zero.
“Relative TSR Sliding Scale Calculation” means, as of any given date, a fraction, (i) the numerator of which equals the product of one hundred (100) times
the Relative TSR Percentage as of such date, and (ii) the denominator of which equals the product of (A) twenty-one (21) times (B) (X / 1,096) where “X”
equals the number of days elapsed in the Performance Period as of such date.
“Relative TSR Underperformance Component” means, as of any given date, a negative dollar amount equal to the product obtained by multiplying (A) three
percent (3%), times (B) the amount, expressed as a percentage, by which (I) (a) the Index Return Percentage as of such date, minus (b) the Relative TSR
Percentage as of such date, exceeds (II) the product obtained by multiplying (a) nine percent (9%) times (b) (X / 1,096) where “X” equals the number of days
elapsed in the Performance Period as of such date, times (C) the Aggregate Market Capitalization as of such date.
1.38
1.39
1.40
1.41
“Restrictions” means the exposure to forfeiture set forth in Sections 2.3(a) and 2.3(b) hereof and the restrictions on sale or other transfer set forth in Section
3.1(b) hereof.
1.42
“Section 409A” means Code Section 409A and the Treasury Regulations and other official guidance promulgated thereunder.
1.43
“Share” means any share of Common Stock or Partnership common unit.
6
US-DOCS\97290526.2
1.44
1.45
1.46
“Successor Entity” shall have the meaning set forth in Section 1.12(c)(i) hereof.
“Target Aggregate Absolute TSR” means, as of the Determination Date, the Aggregate Market Capitalization as of such date exceeds the Aggregate Baseline
Capitalization Value on such date by at least the percentage obtained by multiplying (i) twenty-four percent (24%) times (ii) (X / 1,096), where “X” equals
the number of days elapsed in the Performance Period as of such date.
“Transaction Price” means the final, publicly announced, price per share of Common Stock paid by an acquirer in connection with a Change in Control
(other than a Non-Transactional Change in Control), provided, however, that the Administrator may, in its sole discretion, discount the value of any earn-out,
escrow or other deferred or contingent consideration (in each case, to zero) as it deems appropriate.
1.47
“Transfer” shall have the meaning set forth in Section 3.1(b) hereof.
1.48
“Transfer Restrictions” shall have the meaning set forth in Section 3.1(b) hereof.
1.49
“TSR” means the Company’s total shareholder return, as determined in accordance with the Absolute TSR Component and Relative TSR Component metrics
described herein.
1.50
“Unvested Unit” means any OPP Unit that has not become fully vested pursuant to Section 2.2 hereof and remains subject to the Restrictions.
ARTICLE II.
TERMS OF AWARD
This Award represents the rights to: (i) vest in a number of OPP Units representing a portion of a Bonus Pool determined by reference to the Company’s
absolute TSR performance and relative TSR performance over the Performance Period, and (ii) receive a cash payment equal to the dividends declared by the Company
during the Performance Period with respect to a number of OPP Units that become eligible to vest in accordance with this Agreement, as determined by reference to the
Award Value, in each case, subject to the performance, vesting, payment, forfeiture and other terms and conditions set forth in this Agreement.
2.1 Issuance of OPP Units; Award Value.
(a)
Issuance of Award. The Partnership hereby issues to the Participant [___] Performance Units (the “OPP Units”), in each case subject to the vesting
and other terms and conditions of this Agreement, which OPP Units will vest and thereby constitute payment of any portion of the Bonus Pool Interest (as defined
below) that becomes payable hereunder, if any, as set forth herein. This Award is issued pursuant to the Plan and in consideration of the Participant’s agreement to
provide services to or for the benefit of the Partnership. If not already a Partner, the Partnership hereby admits the Participant as a Partner of the Partnership on the terms
and conditions set forth herein, in the Plan and in the Fourth Amended and Restated Agreement of Limited Partnership of Hudson Pacific Properties, L.P., as amended
from time to time (the “Partnership Agreement”). The Partnership and the Participant acknowledge and agree that the OPP Units are hereby issued to the Participant for
the performance of services to or for the benefit of the Partnership in his or her capacity as a Partner or in anticipation of the Participant becoming a Partner. Upon
receipt of the Award, the Participant shall, automatically and without further action on his or her part, be deemed to be a party to, signatory of and bound by the
Partnership Agreement. At the request of the Partnership, the Participant shall execute the Partnership Agreement or a joinder or counterpart signature page thereto. The
Participant acknowledges that the Partnership may from time to time issue or cancel (or
7
US-DOCS\97290526.2
otherwise modify) OPP Units and/or other equity interests in accordance with the terms of the Partnership Agreement. The Award shall have the rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein, in the Plan and in the Partnership
Agreement.
(b) Bonus Pool Interest. Participant’s interest in the Final Bonus Pool shall equal [__] percent ([__]%) (the “Bonus Pool Interest”), which Bonus Pool
Interest shall, to the extent earned and payable in accordance herewith (if at all), be paid through the vesting of all or a portion of the OPP Units, subject to the terms and
conditions set forth in this Agreement. To the extent that a Final Bonus Pool is created based on the Company’s TSR performance during the Performance Period in
accordance herewith, a number of OPP Units will be eligible to vest with a value up to an amount equal to the value determined by multiplying the Participant’s Bonus
Pool Interest (as may be reduced in accordance with Section 2.1(c) hereof) by the dollar value of the Final Bonus Pool (the “Award Value”).
(c) Excess Grants of Bonus Pool Interests. To the extent (if any) that the sum of all Bonus Pool Interests granted under the 2018 OPP exceeds one
hundred percent (100%) on the Determination Date, then all Bonus Pool Interests that vest and are outstanding under the 2018 OPP on the Determination Date
(including any such Bonus Pool Interests granted in excess of one hundred percent (100%)) shall be reduced pro rata on the Determination Date such that the sum of all
vested Bonus Pool Interests outstanding under 2018 OPP Awards on the Determination Date shall equal one hundred percent (100%) (and any Bonus Pool Interests that
are forfeited on or prior to the Determination Date will be disregarded for purposes of this allocation). If the sum of all Bonus Pool Interests is less than one hundred
percent (100%) on the Determination Date, no Bonus Pool Interest (including the Participant’s Bonus Pool Interest) shall be increased as a result thereof.
2.2 Timing of Final Bonus Pool Determination. The Administrator shall determine the Final Bonus Pool, calculated as of the last day of the Performance
Period: (i) if the Performance Period ends on December 31, 2020 or upon a Non-Transactional Change in Control occurring prior to December 31, 2020, within thirty
(30) days following the Determination Date, or (ii) if the Performance Period ends upon a Change in Control occurring prior to December 31, 2020 (other than a Non-
Transactional Change in Control), on or prior to the Change in Control.
2.3 Vesting of Award. Notwithstanding any accelerated vesting provisions contained in any other agreement between the Company and/or the Partnership, on
the one hand, and the Participant on the other [(other than that certain 2017 Outperformance Award Agreement dated [_____] between the Company and the Participant,
that certain 2016 Outperformance Award Agreement dated [_____] between the Company and the Participant and/or any Restricted Stock Unit Award Agreement(s)
evidencing Restricted Stock Units granted pursuant to any Company Outperformance Program)], including without limitation that certain Employment Agreement dated
[_____] between the Company, the Partnership and the Participant, which accelerated vesting provisions are hereby expressly superseded and replaced with respect to
this Award, the following provisions, as applicable, shall govern the vesting of the Award.
(a) Three-Year Performance Period, No Qualifying Termination. Except as otherwise provided in Sections 2.3(b) through 2.3(c) hereof, if the
Determination Date occurs on December 31, 2020 (and no Change in Control is consummated prior to such date), subject to the Participant’s continued service as an
Employee through such Determination Date, then 100% of the Eligible OPP Units will vest, and the Restrictions thereon shall lapse, on the Determination Date.
(b) Qualifying Termination. Subject to Section 2.1(c) hereof, if the Participant’s service as an Employee is terminated during the Performance Period:
8
US-DOCS\97290526.2
(i) By the Company without Cause or by the Participant for Good Reason, then the OPP Units granted hereby shall remain outstanding and
eligible to vest in accordance with Section 2.3(a) or 2.3(c) hereof upon the completion of the Performance Period. In such event, following the completion of the
Performance Period, the Restrictions shall lapse with respect to a number of OPP Units equal to the product of (A) the number of Eligible OPP Units and (B) the Pro
Rata Vesting Ratio (the “Pro Rata Eligible OPP Units”), and such OPP Units shall thereupon become fully vested on the Determination Date; or
(ii) Due to the Participant’s death or Disability, then the OPP Units granted hereby shall remain outstanding and eligible to vest in accordance
with Section 2.3(a) or 2.3(c) hereof upon the completion of the Performance Period. In such event, following the completion of the Performance Period, the Restrictions
shall lapse with respect to a number of OPP Units equal to the Eligible OPP Units, and such OPP Units shall thereupon become fully vested on the Determination Date.
(c) Change in Control That Ends Performance Period. If the Performance Period ends prior to December 31, 2020 upon a Change in Control, then (i)
if the Participant remains in service as an Employee through such Change in Control, the Participant shall vest in full in the Eligible OPP Units, and (ii) if the Participant
experienced a Qualifying Termination prior to such Change in Control, the Participant shall vest in a number of Eligible OPP Units determined in accordance with
Section 2.3(b) hereof, and the Restrictions thereon shall lapse.
2.4 Performance Period Dividend Equivalent Payment. In addition to any OPP Units that vest in accordance with Section 2.3 hereof, the Participant shall be
entitled to a cash payment, payable as soon as practicable after the Determination Date, but in no event later than the fifteenth (15th) day of the third (3rd) month
following the Determination Date, in an amount equal to the excess of (a) the aggregate dividends declared by the Company during the Performance Period (including
both ordinary and extraordinary dividends) in respect of a number of shares of Common Stock equal to the number of Eligible OPP Units (or, solely for purposes of
Section 2.3(b)(i) hereof, the number of Pro Rata Eligible OPP Units) (the “Performance Period Dividend Equivalent”), over (b) the amount of any distributions made
by the Partnership pursuant to Section 19.4.A of the Partnership Agreement to the Participant during the Performance Period in respect of the OPP Units (including
distributions in respect of any OPP Units forfeited pursuant to Section 2.5 hereof). The Performance Period Dividend Equivalent, if any, shall be paid without regard to
whether the Participant remains in service as an Employee through the Determination Date. The Participant shall not be entitled to any payment under this Section 2.4 if
either (x) the Participant’s Award Value is zero on the Determination Date, or (y) the amount of distributions made by the Partnership as described in Section 2.4(b) is
greater than the aggregate dividends declared as described in Section 2.4(a). Any Performance Period Dividend Equivalents granted in connection with this Award, and
any amounts that may become distributable in respect thereof, shall be treated separately from the OPP Units and the rights arising in connection therewith for purposes
of the designation of time and form of payments required by Section 409A.
2.5 Forfeiture. Upon the earliest to occur of (i) the Participant’s termination of service as an Employee prior to the Determination Date for any reason other
than a Qualifying Termination, or (ii) the Administrator’s determination that the Final Bonus Pool equals zero, the Participant shall forfeit all rights and interests under
this Agreement and the 2018 OPP without further action on the part of the Company, the Partnership or the Participant and without payment of consideration therefor,
which forfeiture shall include, without limitation, any rights or interest in any Award Value, the OPP Units and/or any Performance Period Dividend Equivalent. In
addition, any OPP Units granted hereby that do not become Eligible OPP Units automatically shall be forfeited upon the determination of the number of Eligible OPP
Units by the Administrator (including, in connection with a Change in Control, immediately prior to such Change in
9
US-DOCS\97290526.2
Control), and the Participant shall have no rights or interest to such OPP Units and/or any Performance Period Dividend Equivalent with respect to such forfeited OPP
Units.
ARTICLE III.
OPP UNITS AND PARTNERSHIP AGREEMENT
3.1 OPP Units Subject to Partnership Agreement; Transfer Restrictions.
(a) The Award and the OPP Units are subject to the terms of the Plan and the terms of the Partnership Agreement, including, without limitation, the
restrictions on transfer of Units (including, without limitation, Performance Units) set forth in Articles 11 and 19 of the Partnership Agreement. Any permitted
transferee of the Award or OPP Units shall take such Award or OPP Units subject to the terms of the Plan, this Agreement, and the Partnership Agreement. Any such
permitted transferee must, upon the request of the Partnership, agree to be bound by the Plan, the Partnership Agreement, and this Agreement, and shall execute the
same on request, and must agree to such other waivers, limitations, and restrictions as the Partnership or the Company may reasonably require. Any Transfer of the
Award or OPP Units which is not made in compliance with the Plan, the Partnership Agreement and this Agreement shall be null and void and of no effect.
(b) Without the consent of the Administrator (which it may give or withhold in its sole discretion), the Participant shall not sell, pledge, assign,
hypothecate, transfer, or otherwise dispose of (collectively, “Transfer”) any Unvested Units or any portion of the Award attributable to such Unvested Units (or any
securities into which such Unvested Units are converted or exchanged), other than by will or pursuant to the laws of descent and distribution (the “Transfer
Restrictions”); provided, however, that the Transfer Restrictions shall not apply to any Transfer of Unvested Units or of the Award to the Partnership or the Company.
(c) Notwithstanding anything to the contrary contained herein, the Participant shall not, without the consent of the Administrator (which shall not be
unreasonably withheld), Transfer any vested OPP Units or convert the OPP Units into Partnership common units prior to the second anniversary of the Determination
Date (the “Post-Vesting Transfer Restrictions”); provided, however, that the Post-Vesting Transfer Restrictions shall not apply to (i) any Transfer of OPP Units to the
Partnership or the Company, (ii) any Transfer in satisfaction of any withholding obligations with respect to the Award, (iii) any Transfer following the Participant’s
Termination of Service, including without limitation by will or pursuant to the laws of descent and distribution or (iv) any Transfer upon the occurrence of, and in
connection with, a Change in Control with respect to the OPP Units.
3.2 Covenants, Representations and Warranties. The Participant hereby represents, warrants, covenants, acknowledges and agrees on behalf of the Participant
and his or her spouse, if applicable, that:
Investment. The Participant is holding the Award and the OPP Units for the Participant’s own account, and not for the account of any other
Person. The Participant is holding the Award and the OPP Units for investment and not with a view to distribution or resale thereof except in compliance with
applicable laws regulating securities.
(a)
Relation to the Partnership. The Participant is presently an executive officer and employee of, or consultant to, the Partnership or a
Subsidiary, or is otherwise providing services to or for the benefit of the Partnership, and in such capacity has become personally familiar with the business of the
Partnership.
(b)
10
US-DOCS\97290526.2
Access to Information. The Participant has had the opportunity to ask questions of, and to receive answers from, the Partnership with respect
to the terms and conditions of the transactions contemplated hereby and with respect to the business, affairs, financial conditions, and results of operations of the
Partnership.
(c)
(d)
Registration. The Participant understands that the OPP Units have not been registered under the Securities Act of 1933, as amended (the
“Securities Act”), and the OPP Units cannot be transferred by the Participant unless such transfer is registered under the Securities Act or an exemption from such
registration is available. The Partnership has made no agreements, covenants or undertakings whatsoever to register the transfer of the OPP Units under the Securities
Act. The Partnership has made no representations, warranties, or covenants whatsoever as to whether any exemption from the Securities Act, including, without
limitation, any exemption for limited sales in routine brokers’ transactions pursuant to Rule 144 of the Securities Act, will be available. If an exemption under Rule 144
is available at all, it will not be available until at least six months from issuance of the Award and then not unless the terms and conditions of Rule 144 have been
satisfied.
(e)
Public Trading. None of the Partnership’s securities are presently publicly traded, and the Partnership has made no representations, covenants
or agreements as to whether there will be a public market for any of its securities.
(f)
Tax Advice. The Partnership has made no warranties or representations to the Participant with respect to the income tax consequences of the
transactions contemplated by this Agreement (including, without limitation, with respect to the decision of whether to make an election under Section 83(b) of the
Code), and the Participant is in no manner relying on the Partnership or its representatives for an assessment of such tax consequences. Participant hereby recognizes
that the Internal Revenue Service has proposed regulations under Sections 83 and 704 of the Code that may affect the proper treatment of the OPP Units for federal
income tax purposes. In the event that those proposed regulations are finalized, the Participant hereby agrees to cooperate with the Partnership in amending this
Agreement and the Partnership Agreement, and to take such other action as may be required, to conform to such regulations. Participant hereby further recognizes that
the U.S. Congress is considering legislation that would change the federal tax consequences of owning and disposing of OPP Units. The Participant is advised to consult
with his or her own tax advisor with respect to such tax consequences and his or her ownership of the OPP Units.
3.3 Capital Account. The Participant shall make no contribution of capital to the Partnership in connection with the Award and, as a result, the Participant’s
Capital Account balance in the Partnership immediately after its receipt of the OPP Units shall be equal to zero, unless the Participant was a Partner in the Partnership
prior to such issuance, in which case the Participant’s Capital Account balance shall not be increased as a result of its receipt of the OPP Units.
3.4 Redemption Rights. Notwithstanding the contrary terms in the Partnership Agreement, Partnership Units which are acquired upon the conversion of the
OPP Units shall not, without the consent of the Partnership (which may be given or withheld in its sole discretion), be redeemed pursuant to Section 15.1 of the
Partnership Agreement within two years of the date of the issuance of such OPP Units.
3.5 Section 83(b) Election. The Participant covenants that the Participant shall make a timely election under Section 83(b) of the Code (and any comparable
election in the state of the Participant’s residence) with respect to the OPP Units covered by the Award, and the Partnership hereby consents to the making of such
election(s). In connection with such election, the Participant and the Participant’s spouse, if applicable, shall promptly provide a copy of such election to the Partnership.
Instructions for completing
11
US-DOCS\97290526.2
an election under Section 83(b) of the Code and a form of election under Section 83(b) of the Code are attached hereto as Exhibit A. The Participant represents that the
Participant has consulted any tax advisor(s) that the Participant deems advisable in connection with the filing of an election under Section 83(b) of the Code and similar
state tax provisions. The Participant acknowledges that it is the Participant’s sole responsibility, and not the Company’s or the Partnership’s, to timely file an election
under Section 83(b) of the Code (and any comparable state election), even if the Participant requests that the Company or the Partnership, or any representative of the
Company or the Partnership, make such filing on the Participant’s behalf. The Participant should consult his or her tax advisor to determine if there is a comparable
election to file in the state of his or her residence.
3.6 Ownership Information. The Participant hereby covenants that so long as the Participant holds any OPP Units, at the request of the Partnership, the
Participant shall disclose to the Partnership in writing such information relating to the Participant’s ownership of the OPP Units as the Partnership reasonably believes to
be necessary or desirable to ascertain in order to comply with the Code or the requirements of any other appropriate taxing authority.
3.7 Execution and Return of Documents and Certificates. At the Company’s or the Partnership’s request, the Participant hereby agrees to promptly execute,
deliver and return to the Partnership any and all documents or certificates that the Company or the Partnership deems necessary or desirable to effectuate the
cancellation and forfeiture of the Unvested Units and the portion of the Award attributable to the Unvested Units, and/or to effectuate the transfer or surrender of such
Unvested Units and portion of the Award to the Partnership.
3.8 Taxes. The Partnership and the Participant intend that (i) the OPP Units be treated as a “profits interest” as defined in Internal Revenue Service Revenue
Procedure 93-27, as clarified by Revenue Procedure 2001-43, (ii) the issuance of such units not be a taxable event to the Partnership or the Participant as provided in
such revenue procedure, and (iii) the Partnership Agreement, the Plan and this Agreement be interpreted consistently with such intent. In furtherance of such intent,
effective immediately prior to the issuance of the OPP Units, the Partnership may revalue all Partnership assets to their respective gross fair market values, and make the
resulting adjustments to the “Capital Accounts” (as defined in the Partnership Agreement) of the partners, in each case as set forth in the Partnership Agreement. The
Company, the Partnership or any Subsidiary may withhold from the Participant’s wages, or require the Participant to pay to such entity, any applicable withholding or
employment taxes resulting from the issuance of the Award hereunder, from the vesting or lapse of any restrictions imposed on the Award, or from the ownership or
disposition of the OPP Units.
3.9 Remedies. The Participant shall be liable to the Partnership for all costs and damages, including incidental and consequential damages, resulting from a
disposition of the Award or the OPP Units which is in violation of the provisions of this Agreement. Without limiting the generality of the foregoing, the Participant
agrees that the Partnership shall be entitled to obtain specific performance of the obligations of the Participant under this Agreement and immediate injunctive relief in
the event any action or proceeding is brought in equity to enforce the same. The Participant will not urge as a defense that there is an adequate remedy at law
3.10 Restrictive Legends. Certificates evidencing the Award, to the extent such certificates are issued, may bear such restrictive legends as the Partnership
and/or the Partnership’s counsel may deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following
legends or any legends similar thereto:
12
US-DOCS\97290526.2
“The securities represented hereby have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Any transfer of such
securities will be invalid unless a Registration Statement under the Securities Act is in effect as to such transfer or in the opinion of counsel for Hudson
Pacific Properties, L.P. (the “Partnership”) such registration is unnecessary in order for such transfer to comply with the Securities Act.”
“The securities represented hereby are subject to forfeiture, transferability and other restrictions as set forth in (i) a written agreement with the
Partnership, (ii) the Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P. 2010 Incentive Award Plan and (iii) the Fourth Amended and
Restated Agreement of Limited Partnership of Hudson Pacific Properties, L.P., in each case, as has been and as may in the future be amended (or
amended and restated) from time to time, and such securities may not be sold or otherwise transferred except pursuant to the provisions of such
documents.”
3.11 Restrictions on Public Sale by the Participant. To the extent not inconsistent with applicable law, the Participant agrees not to effect any sale or
distribution of the OPP Units or any similar security of the Company or the Partnership, or any securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144 under the Securities Act, during the fourteen (14) days prior to, and for a period of up to ninety (90) days beginning on,
the date of the pricing of any public or private debt or equity securities offering by the Company or the Partnership (except as part of such offering), if and to the extent
requested in writing by the Partnership or the Company in the case of a non-underwritten public or private offering or if and to the extent requested in writing by the
managing underwriter or underwriters (or initial purchaser or initial purchasers, as the case may be) and consented to by the Partnership or the Company, which consent
may be given or withheld in the Partnership’s or the Company’s sole and absolute discretion, in the case of an underwritten public or private offering (such agreement to
be in the form of a lock-up agreement provided by the Company, the Partnership, managing underwriter or underwriters, or initial purchaser or initial purchasers, as the
case may be).
4.1 Section 409A.
ARTICLE IV.
MISCELLANEOUS
(a) To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations
and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the effective date of this
Agreement. Notwithstanding any provision of this Agreement to the contrary, in the event that following the effective date of this Agreement, the Company or the
Partnership determines that the Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of
Treasury guidance as may be issued after the effective date of this Agreement), the Company or the Partnership may adopt such amendments to this Agreement or adopt
other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Company or the Partnership
determines are necessary or appropriate to (a) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided
with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance; provided, however, that this
Section 4.1 shall not create any obligation on the part of the Company, the Partnership or any Subsidiary to adopt any such amendment, policy or procedure or take any
such other action, and none of the Company, the Partnership or any Subsidiary shall have any obligation to indemnify any person for any taxes imposed under or by
operation of Section 409A of the Code.
13
US-DOCS\97290526.2
(b) Potential Six-Month Delay. Notwithstanding anything to the contrary in this Agreement, no amounts shall be paid to the Participant under this
Agreement issued in accordance herewith during the six (6)-month period following the Participant’s “separation from service” to the extent that the Administrator
determines that the Participant is a “specified employee” (each within the meaning of Section 409A) at the time of such separation from service and that paying such
amounts at the time or times indicated in this Agreement would be a prohibited distribution under Code Section 409A(a)(2)(b)(i). If the payment of any such amounts is
delayed as a result of the previous sentence, then on the first business day following the end of such six (6)-month period (or such earlier date upon which such amount
can be paid under Section 409A without being subject to such additional taxes), the Company shall pay to the Participant in a lump-sum all amounts that would have
otherwise been payable to the Participant during such six (6)-month period under this Agreement.
4.2 Not a Contract of Employment. Nothing in this Agreement, the 2018 OPP or the Plan shall confer upon the Participant any right to continue to serve as an
Employee or other service provider of the Company, the Partnership or any of their Affiliates or shall interfere with or restrict in any way the rights of the Company, the
Partnership or their Affiliates, which rights are hereby expressly reserved, to discharge or terminate the services of the Participant at any time for any reason whatsoever,
with or without Cause, except to the extent expressly provided to the contrary in a written agreement between the Company, the Partnership or an Affiliate, on the one
hand, and the Participant on the other.
4.3 Governing Law. The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of
this Agreement regardless of the law that might be applied under principles of conflicts of laws.
4.4 Incorporation of Terms of Plan; Authority of Administrator. The 2018 OPP and this Agreement are subject to the terms and conditions of the Plan, which
are incorporated herein by reference, including without limitation Section 13.2 of the Plan. In the event of any inconsistency between the Plan and this Agreement
and/or the 2018 OPP generally, the terms of the Plan shall control. In accordance with the Plan (and not in limitation of any other provision), the Administrator shall
make all determinations under this Agreement in its sole and absolute discretion and all interested parties shall be bound by such determinations.
4.5 Decimals; Fractional Units. Except as expressly provided herein with respect to rounding, to the extent that any calculations hereunder result in decimals,
all such decimals shall be carried out and rounded to the nearest one hundred thousandth (.00001). For purposes of this Agreement, any fractional OPP Units that vest or
become entitled to distributions pursuant to the Partnership Agreement shall be rounded as determined by the Company or the Partnership; provided, however, that in no
event shall such rounding cause the aggregate number of OPP Units that vest or become entitled to such distributions to exceed the total number of OPP Units set forth
in Section 2.1 of this Agreement.
4.6 Conformity to Securities Laws. The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all
provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, as
well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan and the 2018 OPP shall be administered, and the
Award of OPP Units is made, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan, the 2018
OPP, this Award and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
14
US-DOCS\97290526.2
4.7 Amendment, Suspension and Termination. To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Administrator or the Board, provided, however, that, except as may otherwise be provided by the Plan,
no amendment, modification, suspension or termination of this Agreement shall adversely affect the Award in any material way without the prior written consent of the
Participant.
4.8 Notices. Notices required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in
the United States mail by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown in the Company records, and to the Company
and the Partnership at their principal executive office(s).
4.9 Successors and Assigns. The Company and the Partnership may assign any of its respective rights under this Agreement to single or multiple assignees,
and this Agreement shall inure to the benefit of the successors and assigns of the Company and the Partnership. Subject to the restrictions on transfer herein set forth,
this Agreement shall be binding upon the Participant and his or her heirs, executors, administrators, successors and assigns.
4.10 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or this Agreement, if the Participant is subject to Section
16 of the Exchange Act, then the Plan, the Award and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under
Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the
extent permitted by applicable law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
4.11 Entire Agreement. The Plan and this Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and
agreements of the Company, the Partnership and the Participant with respect to the subject matter hereof. Without limiting the generality of the foregoing, the parties
acknowledge and agree that this Agreement embodies their final intent and understanding with respect to the implementation of the 2018 OPP and the grant of the
Award, and supersedes all previous descriptions, discussions, agreements or other materials relating to the 2018 OPP.
4.12 Clawback. This Award shall be subject to any clawback or recoupment policy currently in effect or as may be adopted by the Company or the
Partnership, in each case, as may be amended from time to time.
4.13 Survival of Representations and Warranties. The representations, warranties and covenants contained in Section 3.2 hereof shall survive the later of the
date of execution and delivery of this Agreement or the issuance of the Award.
15
US-DOCS\97290526.2
By his or her signature and the Partnership’s and the Company’s signature below, the Participant agrees to be bound by the terms and conditions of the Plan, the
2018 OPP and this Agreement. The Participant has reviewed this Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior
to executing this Agreement and fully understands all provisions of this Agreement and the Plan. The Participant hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Administrator of the Plan upon any questions arising under the Plan and/or this Agreement. In addition, by signing below, the
Participant acknowledges that the Administrator, in its sole discretion, may satisfy any withholding obligations arising under this Agreement (if any) by any method
permitted under the Plan. If the Participant is married, his or her spouse has signed the Consent of Spouse attached to hereto as Exhibit B.
HUDSON PACIFIC PROPERTIES, INC.:
PARTICIPANT:
By:
Print Name:
Address:
16
By:
Print Name:
Title:
Address:
HUDSON PACIFIC PROPERTIES, L.P.:
By:
Its:
Hudson Pacific Properties, Inc.
General Partner
By:
Print Name:
Title:
US-DOCS\97290526.2
FORM OF SECTION 83(b) ELECTION AND INSTRUCTIONS
These instructions are provided to assist you if you choose to make an election under Section 83(b) of the Internal Revenue Code, as amended, with respect to
the OPP Units of Hudson Pacific Properties, L.P. transferred to you. Please consult with your personal tax advisor as to whether an election of this nature will be
in your best interests in light of your personal tax situation.
The executed original of the Section 83(b) election must be filed with the Internal Revenue Service not later than 30 days after the grant date. PLEASE
NOTE: There is no remedy for failure to file on time. Follow the steps outlined below to ensure that the election is mailed and filed correctly and in a timely manner.
PLEASE ALSO NOTE: If you make the Section 83(b) election, the election is irrevocable.
Complete all of the Section 83(b) election steps below:
1. Complete the Section 83(b) election form (sample form follows) and make three copies of the signed election form. (Your spouse, if any, should also sign the
Section 83(b) election form.)
2. Prepare a cover letter to the Internal Revenue Service (sample letter included, following election form).
3. Send the cover letter with the originally executed Section 83(b) election form and one copy via certified mail, return receipt requested to the Internal
Revenue Service at the address of the Internal Revenue Service where you file your personal tax returns.
•
It is advisable that you have the package date-stamped at the post office. Enclose a self-addressed, stamped envelope so that the Internal Revenue
Service may return a date-stamped copy to you. However, your postmarked receipt is your proof of having timely filed the Section 83(b) election if
you do not receive confirmation from the Internal Revenue Service.
4. One copy must be sent to Hudson Pacific Properties, L.P. for its records.
5. Keep one copy for your files and, if required by applicable law, attach to your federal income tax return for the applicable calendar year.
6. Retain the Internal Revenue Service file stamped copy (when returned) for your records.
Please consult your personal tax advisor for the address of the office of the Internal Revenue Service to which you should mail your election form.
17
US-DOCS\97290526.2
ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE TO INCLUDE IN GROSS INCOME THE EXCESS OVER THE
PURCHASE PRICE, IF ANY, OF THE VALUE OF PROPERTY TRANSFERRED IN CONNECTION WITH SERVICES
The undersigned hereby elects pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in the undersigned’s gross income for
the taxable year in which the property was transferred the excess (if any) of the fair market value of the property described below, over the amount the undersigned paid
for such property, if any, and supplies herewith the following information in accordance with the Treasury regulations promulgated under Section 83(b):
1. The name, address and taxpayer identification (social security) number of the undersigned, and the taxable year in which this election is being made, are:
TAXPAYER’S NAME:
TAXPAYER’S SOCIAL SECURITY NUMBER:
ADDRESS:
TAXABLE YEAR:
The name, address and taxpayer identification (social security) number of the undersigned’s spouse are (complete if applicable):
SPOUSE’S NAME:
SPOUSE’S SOCIAL SECURITY NUMBER:
ADDRESS:
2. The property with respect to which the election is made consists of __________ OPP Units (the “Units”) of Hudson Pacific Properties, L.P. (the
“Company”), representing an interest in the future profits, losses and distributions of the Company.
3. The date on which the above property was transferred to the undersigned was __________.
4. The above property is subject to the following restrictions: The Units are subject to forfeiture to the extent unvested upon a termination of service with the
Company under certain circumstances or in the event that certain performance objectives are not satisfied. These restrictions lapse upon the satisfaction of certain
conditions as set forth in an agreement between the taxpayer and the Company. In addition, the Units are subject to certain transfer restrictions pursuant to such
agreement and the Fourth Amended and Restated Agreement of Limited Partnership of Hudson Pacific Properties, L.P., as amended (or amended and restated) from
time to time, should the taxpayer wish to transfer the Units.
5. The fair market value of the above property at the time of transfer (determined without regard to any restrictions other than those which by their terms will
never lapse) was $0.
6. The amount paid for the above property by the undersigned was $0.
18
US-DOCS\97290526.2
7. The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not
later than 30 days after the date of transfer of the property. A copy of this election will be furnished to the person for whom the services were performed, and, if required
by applicable law, a copy will be filed with the income tax return of the undersigned to which this election relates. The undersigned is the person performing the
services in connection with which the property was transferred.
____________________________________
Name:
____________________________________
Name of Spouse:
19
Date: _________________
Date: _________________
US-DOCS\97290526.2
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
Internal Revenue Service
______________________________________
[Address where taxpayer files returns]
Re: Election under Section 83(b) of the Internal Revenue Code of 1986
Taxpayer: _______________________________
Taxpayer’s Social Security Number: ___________________________
Taxpayer’s Spouse: _________________________________________
Taxpayer’s Spouse’s Social Security Number: ____________________
Ladies and Gentlemen:
Enclosed please find an original and one copy of an Election under Section 83(b) of the Internal Revenue Code of 1986, as amended, being made by the taxpayer
referenced above. Please acknowledge receipt of the enclosed materials by stamping the enclosed copy of the Election and returning it to me in the self-addressed
stamped envelope provided herewith.
Very truly yours,
___________________________________
Continue reading text version or see original annual report in PDF format above