Hudson Pacific Properties Inc

Previous wording

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 I, Item 1 “Financial Statements of Hudson Pacific Properties, Inc.,” “Financial Statements of Hudson Pacific Properties, L.P.” and “Notes to Unaudited Consolidated Financial Statements.” Statements in this Item 2 contain forward-looking statements. 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 II, Item 1A “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

Current wording

The following discussion relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and the related notes, refer to Part I, Item 1 “Financial Statements of Hudson Pacific Properties, Inc.,” “Financial Statements of Hudson Pacific Properties, L.P.” and “Notes to Unaudited Consolidated Financial Statements.” Statements in this Item 2 contain forward-looking statements. 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, refer to Part II, Item 1A “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

Previous wording

Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at June 30, 2024, our portfolio of owned real estate included office properties comprising approximately 14.7 million square feet, studio properties comprising approximately 47 sound stages and 1.7 million square feet and land properties comprising approximately 3.2 million square feet of undeveloped density rights. Our production services assets include vehicles, lighting and grip, production supplies and other equipment and the lease rights to 27 sound stages.

Current wording

Through our interest in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at September 30, 2024, our portfolio of owned real estate included office properties comprising approximately 14.7 million square feet, studio properties comprising approximately 45 sound stages and 1.7 million square feet and land properties comprising approximately 3.2 million square feet of undeveloped density rights. Our production services assets include vehicles, lighting and grip, production supplies and other equipment and the lease rights to 27 sound stages.

Previous wording

As of June 30, 2024, our in-service office portfolio was 80.0% leased (including leases not yet commenced). Our same-store studio properties were 76.1% leased for the average percent leased for the 12 months ended June 30, 2024.

Current wording

As of September 30, 2024, our in-service office portfolio was 80.0% leased (including leases not yet commenced). Our same-store studio properties were 73.8% leased for the average percent leased for the 12 months ended September 30, 2024.

Previous wording

See Repositioning table in this document for the office and studio projects under repositioning as of June 30, 2024.

Current wording

Refer to Repositioning table in this document for the office and studio projects under repositioning as of September 30, 2024.

Previous wording

Includes 546,000 square feet related to the office development Washington 1000, 241,000 square feet related to Sunset Glenoaks Studios and 232,000 square feet related to Sunset Pier 94 Studios.

Current wording

Includes 546,000 square feet related to the office development Washington 1000 and 232,000 square feet related to Sunset Pier 94 Studios.

Previous wording

We had no business acquisitions during the six months ended June 30, 2024.

Current wording

We had no business acquisitions during the nine months ended September 30, 2024.

Previous wording

We had no property acquisitions during the six months ended June 30, 2024.

Current wording

We had no property acquisitions during the nine months ended September 30, 2024.

Previous wording

We had no property dispositions during the six months ended June 30, 2024.

Current wording

We had no property dispositions during the nine months ended September 30, 2024.

Previous wording

Does not include 24 month-to-month leases.

Current wording

Does not include 22 month-to-month leases.

Previous wording

During the six months ended June 30, 2024, there were $80.0 million of borrowings on the unsecured revolving credit facility, net of repayments. The Company generally uses the unsecured revolving credit facility to finance the acquisition of properties and businesses, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.

Current wording

During the nine months ended September 30, 2024, there were $103.0 million of borrowings on the unsecured revolving credit facility, net of repayments. The Company generally uses the unsecured revolving credit facility to finance the acquisition of properties and businesses, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.

Previous wording

In addition, some of the statements and assumptions in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the quarter and beyond. See “Forward-looking Statements.”

Current wording

In addition, some of the statements and assumptions in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the quarter and beyond. Refer to “Forward-looking Statements.”

Previous wording

For the three months ended June 30, 2024, the Company recorded net loss of $47.6 million compared to $31.5 million for the three months ended June 30, 2023. The reasons for the change are discussed below with respect to the decrease in net operating income for the same period.

Current wording

Net loss increased $71.3 million, or 199.3%, to $107.0 million for the three months ended September 30, 2024 compared to $35.8 million for the three months ended September 30, 2023. The reasons for the change are discussed below with respect to the decrease in net operating income for the same period.

Previous wording

NOI decreased $29.0 million, or 21.7%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily resulting from:

Current wording

NOI decreased $33.7 million, or 28.3%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, primarily resulting from:

Previous wording

•a $15.8 million decrease in same-store NOI driven by a decrease in office NOI of $15.4 million primarily due to:

Current wording

•a $24.4 million decrease in same-store NOI driven by a decrease in office NOI of $24.0 million primarily due to:

Previous wording

•a $29.2 million decrease in rental revenues mainly driven by lease expirations at several properties in the San Francisco Bay Area throughout the second half of 2023 and first half of 2024 partially offset by a reversal of straight-line rent reserve for WeWork at our Hill7 property; and

Current wording

•a $22.8 million decrease in rental revenues driven by lease expirations at several properties in the San Francisco Bay Area during the last twelve months and a straight-line rent reserve related to transitioning a tenant to cash basis reporting; and

Previous wording

•a $1.2 million increase in operating expenses predominantly due to higher tax and utility expenses at several properties in 2024.

Current wording

•a $1.3 million increase in operating expenses predominantly due to higher tax and utility expenses at several properties in 2024.

Previous wording

•a decrease in office NOI of $14.4 million primarily resulting from the sales of our One Westside and Westside Two properties in December 2023 and 604 Arizona and 3401 Exposition in August 2023, partially offset by an increase due to new leases commencing at our Metro Center property during the first half of 2024; partially offset by

Current wording

•a decrease in office NOI of $11.7 million primarily resulting from the sales of our One Westside property in December 2023 and our 604 Arizona and 3401 Exposition properties in August 2023, partially offset by an increase due to new leases commencing at our Metro Center property during the first half of 2024; partially offset by

Previous wording

•an increase in studio NOI of $1.2 million driven by increased activity at Quixote during the three months ended June 30, 2024.

Current wording

•an increase in studio NOI of $2.3 million driven by increased activity at Quixote during the three months ended September 30, 2024.

Previous wording

We recorded a $2.5 million loss from unconsolidated real estate entities for the three months ended June 30, 2024 compared to $0.7 million for the three months ended June 30, 2023. The change was primarily driven by higher interest expense at the unconsolidated entities due to an increase in the average reference rates for variable rate debt.

Current wording

We recorded a $3.2 million loss from unconsolidated real estate entities for the three months ended September 30, 2024 compared to a loss of $0.8 million for the three months ended September 30, 2023. The change was primarily driven by higher interest expense at the unconsolidated entities due to an increase in the average reference rates for variable rate debt and a mark-to-market adjustment for an interest rate swap that does not qualify for hedge accounting.

Previous wording

We recognized fee income of $2.5 million for the six months ended June 30, 2024 compared to $4.7 million for the six months ended June 30, 2023. Fee income represents the management fee income earned from our unconsolidated real estate entities. The primary reason for the decrease in fee income is due to less construction activity at Sunset Waltham Cross during the six months ended June 30, 2024.

Current wording

We recognized fee income of $1.4 million for the three months ended September 30, 2024 compared to $0.3 million for the three months ended September 30, 2023. Fee income represents the management fee income earned from our unconsolidated real estate entities. The increase in fee income is primarily driven by an increase in construction activity at the Sunset Pier 94 Studios development during the three months ended September 30, 2024.

Previous wording

Gross interest expense decreased by $1.3 million, or 2.5%, to $53.1 million for the three months ended June 30, 2024 compared to $54.4 million for the three months ended June 30, 2023. The decrease was primarily driven by a repayment of the One Westside & Westside Two construction loan in December 2023, a decrease in the average outstanding borrowings on the Company’s unsecured revolving credit facility and repayments of the Quixote seller note in April 2023 and Series E notes in September 2023.

Current wording

Gross interest expense decreased by $4.2 million or 7.2%, to $53.5 million for the three months ended September 30, 2024 compared to $57.7 million for the three months ended September 30, 2023. The decrease was primarily driven by a repayment of the One Westside and Westside Two construction loan in December 2023, a decrease in the average outstanding borrowings on the Company’s unsecured revolving credit facility and a repayment of the Series E notes in September 2023. The decrease was partially offset by interest on the loan secured by Sunset Glenoaks Studios, which became a consolidated property as of April 1, 2024.

Previous wording

Non-cash interest expense decreased by $5.5 million, or 73.5%, to $2.0 million for the three months ended June 30, 2024 compared to $7.5 million for the three months ended June 30, 2023. The decrease was primarily driven by the amortization of mark-to-market gains related to the interest rate cap on our Hollywood Media Portfolio loan during the three months ended June 30, 2023. The cap expired in August 2023 and was accounted for under the mark-to-market approach until it was designated as a cash flow hedge in December 2022. Additionally, there was a decrease in deferred financing cost amortization due to the deferred financing costs related to the Hollywood Media Portfolio debt being fully amortized as of August 2023 and the write-off of the deferred financing costs related to the One Westside & Westside Two construction loan in December 2023.

Current wording

Non-cash interest expense decreased by $2.5 million, or 55.7%, to $2.0 million for the three months ended September 30, 2024 compared to $4.5 million for the three months ended September 30, 2023. The decrease in non-cash interest expense was primarily due to the amortization of mark-to-market gains related to the interest rate cap on our Hollywood Media Portfolio loan during the three months ended September 30, 2023. The cap expired in August 2023 and was accounted for under the mark-to-market approach until it was designated as a cash flow hedge in December 2022. Additionally, there was a decrease in deferred financing cost amortization due to the deferred financing costs related to the Hollywood Media Portfolio debt and the One Westside and Westside Two construction loan being fully amortized as of August 2023 and December 2023, respectively.

Previous wording

We recognized an unrealized loss on non-real estate investments of $1.0 million for the three months ended June 30, 2024 compared to an unrealized loss of $0.8 million for the three months ended June 30, 2023, which were due to the observable changes in the fair value of the investments.

Current wording

We recognized an unrealized loss on non-real estate investments of $1.1 million for the three months ended September 30, 2024 compared to an unrealized loss of $2.3 million for the three months ended September 30, 2023, which were due to the observable changes in the fair value of the investments.

Previous wording

During the six months ended June 30, 2023, we recognized a $7.0 million gain on the sale of our Skyway Landing property. No gain or loss on sale was recognized during the six months ended June 30, 2024.

Current wording

During the three months ended September 30, 2023, we recognized a gain on sale of $16.1 million attributable to the sales of our 604 Arizona and 3401 Exposition properties in August 2023. No gain or loss on sale was recognized during the three months ended September 30, 2024.

Previous wording

We recorded an income tax provision of $0.5 million for the three months ended June 30, 2024 compared to $6.3 million for the three months ended June 30, 2023. The change was primarily due to a valuation allowance recorded against certain deferred tax assets as well as the tax impact of the gain on extinguishment of debt recognized during the three months ended June 30, 2023.

Current wording

We recorded an income tax provision of $2.2 million for the three months ended September 30, 2024 compared to a benefit of $0.4 million for the three months ended September 30, 2023. The change was primarily due to a valuation allowance recorded against certain deferred tax assets during the three months ended September 30, 2024.

Previous wording

General and administrative expenses increased by $1.8 million, or 9.3%, to $20.7 million for the three months ended June 30, 2024 compared to $18.9 million for the three months ended June 30, 2023. The increase was primarily driven by an increase in non-cash compensation, salaries and wages, bonuses and information technology-related expenses, as well as lower capitalization of expenses during the three months ended June 30, 2024 as compared to the prior period. The increase was partially offset by lower professional fees expense during the three months ended June 30, 2024.

Current wording

General and administrative expenses increased by $2.0 million, or 11.6%, to $19.5 million for the three months ended September 30, 2024 compared to $17.5 million for the three months ended September 30, 2023. The increase was primarily driven by lower capitalization of expenses during the three months ended September 30, 2024 due to less development activity as compared to the prior period, as well as an increase in information technology-related expenses and professional fees. The increase was partially offset by lower travel and entertainment expenses during the three months ended September 30, 2024.

Previous wording

Comparison of the Six Months Ended June 30, 2024 to the Six Months Ended June 30, 2023

Current wording

Comparison of the Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023

Previous wording

Net loss increased $54.6 million, or 118.0%, to $100.9 million for the six months ended June 30, 2024 compared to $46.3 million for the six months ended June 30, 2023. Net loss increased for the reasons discussed below with respect to the decrease in net operating income for the same period.

Current wording

Net loss increased $125.9 million, or 153.4%, to $207.9 million for the nine months ended September 30, 2024 compared to $82.0 million for the nine months ended September 30, 2023. The reasons for the change are discussed below with respect to the decrease in net operating income for the same period.

Previous wording

NOI decreased $66.0 million, or 24.0%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily resulting from:

Current wording

NOI decreased $99.7 million, or 25.3%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily resulting from:

Previous wording

•a $35.4 million decrease in same-store NOI driven by:

Current wording

•a $60.2 million decrease in same-store NOI driven by:

Previous wording

•a $13.8 million decrease in rental revenues primarily driven by lease expirations at several properties in the San Francisco Bay Area throughout the second half of 2023 and first half of 2024 partially offset by a reversal of straight-line rent reserve for WeWork at our Hill7 property; and

Current wording

•a $52.3 million decrease in rental revenues driven by lease expirations at several properties in the San Francisco Bay Area during the last twelve months and a straight-line rent reserve related to transitioning a tenant to cash basis reporting, partially offset by a reversal of a previous straight-line rent reserve at our Hill7 property; and

Previous wording

•a $2.5 million increase in operating expenses predominantly due to a prior-period property tax reimbursement at our ICON property;

Current wording

•a $3.9 million increase in operating expenses predominantly due to a prior-period property tax reimbursement at our ICON property during the nine months ended September 30, 2023 and higher tax, insurance and utility expenses at several properties in 2024, partially offset by a reduction in variable ground rent expense at our Palo Alto Square property driven by the downsize of a large tenant;

Previous wording

•a decrease in studio NOI of $3.0 million primarily due to a lease expiration at our Sunset Las Palmas Studios partially offset by increased production activity at our Sunset Gower Studios during the six months ended June 30, 2024.

Current wording

•a decrease in studio NOI of $3.4 million primarily due to a lease expiration at our Sunset Las Palmas Studios property, partially offset by increased production activity at our Sunset Gower Studios property during the nine months ended September 30, 2024.

Previous wording

We recorded a $3.2 million loss from unconsolidated real estate entities for the six months ended June 30, 2024 compared to $1.5 million for the six months ended June 30, 2023. The change was primarily driven by higher interest expense at the unconsolidated entities due to an increase in the average reference rates for variable rate debt.

Current wording

We recorded a $6.4 million loss from unconsolidated real estate entities for the nine months ended September 30, 2024 compared to a loss of $2.2 million for the nine months ended September 30, 2023. The change was primarily driven by higher interest expense at the unconsolidated entities due to an increase in the average reference rates for variable rate debt and a mark-to-market adjustment for an interest rate swap that does not qualify for hedge accounting.

Previous wording

We recognized fee income of $1.4 million for the three months ended June 30, 2024 compared to $2.3 million for the three months ended June 30, 2023. Fee income represents the management fee income earned from our unconsolidated real estate entities. The primary reason for the decrease in fee income is due to less construction activity at Sunset Waltham Cross during the three months ended June 30, 2024.

Current wording

We recognized fee income of $3.9 million for the nine months ended September 30, 2024 compared to $5.0 million for the nine months ended September 30, 2023. Fee income represents the management fee income earned from our unconsolidated real estate entities. The primary reason for the decrease in fee income is due to less construction activity at the Sunset Waltham Cross Studios development during the nine months ended September 30, 2024.

Previous wording

Gross interest expense decreased by $4.0 million, or 3.7%, to $103.7 million for the six months ended June 30, 2024 compared to $107.7 million for the six months ended June 30, 2023. The decrease was primarily driven by a decrease in the average outstanding borrowings on the Company’s unsecured revolving credit facility, and repayments of the One Westside & Westside Two construction loan in December 2023, Quixote seller note in April 2023 and Series E notes in September 2023.

Current wording

Gross interest expense decreased by $8.2 million, or 4.9%, to $157.3 million for the nine months ended September 30, 2024 compared to $165.4 million for the nine months ended September 30, 2023. The decrease was primarily driven by a repayment of the One Westside and Westside Two construction loan in December 2023, the Quixote seller note in April 2023 and the Series E notes in September 2023, as well as a decrease in the average outstanding borrowings on the Company’s unsecured revolving credit facility. The decrease was partially offset by interest on the loan secured by Sunset Glenoaks Studios, which became a consolidated property as of April 1, 2024.

Previous wording

Non-cash interest expense decreased by $11.0 million, or 73.8%, to $3.9 million for the six months ended June 30, 2024 compared to $14.9 million for the six months ended June 30, 2023. The decrease in non-cash interest expense was primarily due to the amortization of mark-to-market gains related to the interest rate cap on our Hollywood Media Portfolio loan during the six months ended June 30, 2023. The cap expired in August 2023 and was accounted for under the mark-to-market approach until it was designated as a cash flow hedge in December 2022. Additionally, there was a decrease in deferred financing cost amortization due to the deferred financing costs related to the Hollywood Media Portfolio debt being fully amortized as of August 2023 and the write-off of the deferred financing costs related to the One Westside and Westside Two construction in December 2023.

Current wording

Non-cash interest expense decreased by $13.5 million, or 69.6%, to $5.9 million for the nine months ended September 30, 2024 compared to $19.4 million for the nine months ended September 30, 2023. The decrease in non-cash interest expense was primarily due to the amortization of mark-to-market gains related to the interest rate cap on our Hollywood Media Portfolio loan during the nine months ended September 30, 2023. The cap expired in August 2023 and was accounted for under the mark-to-market approach until it was designated as a cash flow hedge in December 2022. Additionally, there was a decrease in deferred financing cost amortization due to the deferred financing costs related to the Hollywood Media Portfolio debt and the One Westside and Westside Two construction loan being fully amortized as of August 2023 and December 2023, respectively.

Previous wording

Transaction-related expenses increased $3.4 million, or 251.6%, to $2.0 million of expense for the six months ended June 30, 2024 compared to $1.3 million of income for the six months ended June 30, 2023. The increase was primarily related to dead deal costs incurred during the six months ended June 30, 2024 and the remeasurement of the Zio earnout liability to fair value during the six months ended June 30, 2023.

Current wording

Transaction-related expenses increased $3.7 million, or 271.6%, to $2.3 million of expense for the nine months ended September 30, 2024 compared to $1.3 million of income for the nine months ended September 30, 2023. The increase was primarily related to dead deal costs incurred during the nine months ended September 30, 2024 and the remeasurement of the Zio earnout liability to fair value during the nine months ended September 30, 2023.

Previous wording

We recognized an unrealized loss on our non-real estate investments of $1.9 million for the six months ended June 30, 2024 compared to $4.0 thousand for the six months ended June 30, 2023, which were due to the observable changes in the fair value of the investments.

Current wording

We recognized an unrealized loss on our non-real estate investments of $3.0 million for the nine months ended September 30, 2024 compared to a loss of $2.3 million for the nine months ended September 30, 2023, which were due to the observable changes in the fair value of the investments.

Previous wording

During the three months ended June 30, 2023, we recognized a $10.0 million gain on extinguishment of debt due to the settlement of the Quixote note payable at a discount. No gain or loss on extinguishment of debt was recognized during the three months ended June 30, 2024.

Current wording

During the nine months ended September 30, 2023, we recognized a $10.0 million gain on extinguishment of debt due to the settlement of the Quixote note payable at a discount. No gain or loss on extinguishment of debt was recognized during the nine months ended September 30, 2024.