Q1-2015 10Q


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
o
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.
Hudson Pacific Properties, L.P.
(Exact name of Registrant as specified in its charter)

Hudson Pacific Properties, Inc.

Maryland
(State or other jurisdiction of incorporation or organization)
27-1430478
(I.R.S. Employer Identification Number)
Hudson Pacific Properties, L.P.

Maryland
(State or other jurisdiction of incorporation or organization)
80-0579682
(I.R.S. Employer Identification Number)
11601 Wilshire Blvd., Sixth 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
Hudson Pacific Properties, Inc.
 
8.375% Series B Cumulative Redeemable Preferred Stock, $.01 par value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
Registrant
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Hudson Pacific Properties, L.P.
 
Common Units Representing Limited Partnership Interests
 
None
(Former name, former address and
former fiscal year if changed since last report)
______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Hudson Pacific Properties, Inc. Yes  x   No  o        Hudson Pacific Properties, L.P. Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Hudson Pacific Properties, Inc. Yes  x    No  o        Hudson Pacific Properties, L.P. Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    
Hudson Pacific Properties, Inc.

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Hudson Pacific Properties, L.P.
Large accelerated filer o   Accelerated filer o   Non-accelerated filer x   Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Hudson Pacific Properties, Inc.  Yes  o    No  x    Hudson Pacific Properties, L.P. Yes  o    No  x

The number of shares of common stock outstanding at May 6, 2015 was 89,317,622.









EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the three months ended March 31, 2015 of Hudson Pacific Properties, Inc., a Maryland corporation, and Hudson Pacific Properties, L.P., a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or “our Company” refer to Hudson Pacific Properties, Inc. together with its consolidated subsidiaries, including Hudson Pacific Properties, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” refer to Hudson Pacific Properties, L.P. together with its consolidated subsidiaries.
Our Company is a real estate investment trust, or REIT, and the sole general partner of our operating partnership. As of March 31, 2015, we owned approximately 97.1% of the outstanding common units of partnership interest in our operating partnership, or common units. The remaining approximately 2.9% of outstanding common units are owned by certain of our executive officers and directors, certain of their affiliates, and other outside investors, including funds affiliated with Farallon Capital Management, LLC. As the sole general partner of our operating partnership, our Company has the full, exclusive and complete responsibility for our operating partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of our Company and our operating partnership into this single report results in the following benefits:
enhancing investors’ understanding of our Company and our operating partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation because a substantial portion of the disclosure applies to both our Company and our operating partnership; and
creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.

There are a few differences between our Company and our operating partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between our Company and our operating partnership in the context of how we operate as an interrelated, consolidated company. Our Company is a REIT, the only material assets of which are the partnership units of our operating partnership. As a result, our Company does not conduct business itself, other than acting as the sole general partner of our operating partnership, issuing equity from time to time and guaranteeing certain debt of our operating partnership. Our Company itself does not issue any indebtedness but guarantees some of the debt of our operating partnership. 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.  Our operating partnership is structured as a partnership and has no public traded equity. Except for net proceeds from equity issuances by our Company, which are generally contributed to our operating partnership in exchange for units of partnership interest in our operating partnership, our operating partnership generates the capital required by our Company’s business through our operating partnership’s operations, our operating partnership’s incurrence of indebtedness or through the issuance of units of partnership interest in our operating partnership.
The presentation of non-controlling common units, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our operating partnership. The common units in our operating partnership are accounted for as partners’ capital in our operating partnership’s consolidated financial statements and, to the extent not held by our Company, as non-controlling common units in our Company’s consolidated financial statements. The differences between stockholders’ equity, partners’ capital and non-controlling common units result from the differences in the equity issued by our Company and our operating partnership.
To help investors understand the few but significant differences between our Company and our operating partnership, this report presents the consolidated financial statements separately for our Company and our operating partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our operating partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and our operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our operating partnership.





Hudson Pacific Properties, Inc.
Hudson Pacific Properties, L.P.
FORM 10-Q
March 31, 2015
TABLE OF CONTENTS
 
 
 
Page
 
ITEM 1.
Financial Statements of Hudson Pacific Properties, Inc.
 
 
 
 
 
 
ITEM 1.
Financial Statements of Hudson Pacific Properties, L.P.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 


3



PART I—FINANCIAL INFORMATION

HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
(audited)
ASSETS
 
 
 
REAL ESTATE ASSETS
 
 
 
Land
$
620,805

 
$
620,805

Building and improvements
1,302,802

 
1,284,602

Tenant improvements
120,273

 
116,317

Furniture and fixtures
9,957

 
13,721

Property under development
151,982

 
135,850

Total real estate held for investment
2,205,819

 
2,171,295

Accumulated depreciation and amortization
(143,502
)
 
(134,657
)
Investment in real estate, net
2,062,317

 
2,036,638

Cash and cash equivalents
247,890

 
17,753

Restricted cash
16,906

 
14,244

Accounts receivable, net
13,313

 
16,247

Notes receivable
28,372

 
28,268

Straight-line rent receivables
35,812

 
33,006

Deferred leasing costs and lease intangibles, net
103,022

 
102,023

Deferred finance costs, net
11,271

 
8,723

Interest rate contracts

 
3

Goodwill
8,754

 
8,754

Prepaid expenses and other assets
273,986

 
6,692

Assets associated with real estate held for sale

 
68,534

TOTAL ASSETS
$
2,801,643

 
$
2,340,885

LIABILITIES AND EQUITY
 
 
 
Notes payable
$
787,190

 
$
918,059

Accounts payable and accrued liabilities
61,735

 
36,844

Below-market leases, net
39,169

 
40,969

Security deposits
6,179

 
6,257

Prepaid rent
9,606

 
8,600

Interest rate contracts
2,538

 
1,750

Liabilities associated with real estate held for sale
326

 
43,214

TOTAL LIABILITIES
906,743

 
1,055,693

6.25% series A cumulative redeemable preferred units of the Operating Partnership
10,177

 
10,177

EQUITY
 
 
 
Hudson Pacific Properties, Inc. stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 10,000,000 authorized; 8.375% series B cumulative redeemable preferred stock, $25.00 liquidation preference, 5,800,000 shares outstanding at March 31, 2015 and December 31, 2014, respectively
145,000

 
145,000

Common stock, $0.01 par value, 490,000,000 authorized, 79,518,874 shares and 66,797,816 shares outstanding at March 31, 2015 and December 31, 2014, respectively
795

 
668

Additional paid-in capital
1,441,741

 
1,070,833

Accumulated other comprehensive loss
(3,049
)
 
(2,443
)
Accumulated deficit
(15,603
)
 
(34,884
)
Total Hudson Pacific Properties, Inc. stockholders’ equity
1,568,884

 
1,179,174

Non-controlling interest—members in Consolidated Entities
262,709

 
42,990

Non-controlling common units in the Operating Partnership
53,130

 
52,851

TOTAL EQUITY
1,884,723

 
1,275,015

TOTAL LIABILITIES AND EQUITY
$
2,801,643

 
$
2,340,885



The accompanying notes are an integral part of these consolidated financial statements.
4




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)
 
Three Months Ended 
 March 31,
 
2015
 
2014
Revenues
 
 
 
Office
 
 
 
Rental
$
41,576

 
$
36,010

Tenant recoveries
6,064

 
5,571

Parking and other
5,295

 
4,479

Total office revenues
52,935

 
46,060

Media & entertainment
 
 
 
Rental
5,467

 
5,449

Tenant recoveries
240

 
320

Other property-related revenue
4,109

 
3,634

Other
73

 
133

Total media & entertainment revenues
9,889

 
9,536

Total revenues
62,824

 
55,596

Operating expenses
 
 
 
Office operating expenses
17,135

 
15,927

Media & entertainment operating expenses
6,005

 
6,005

General and administrative
9,200

 
5,776

Depreciation and amortization
17,158

 
16,668

Total operating expenses
49,498

 
44,376

Income from operations
13,326

 
11,220

Other expense
 
 
 
Interest expense
5,493

 
6,524

Interest income
(53
)
 
(9
)
Acquisition-related expenses
6,044

 
105

Other expenses
(41
)
 
1

 
11,443

 
6,621

Income from continuing operations before gain on sale of real estate
1,883

 
4,599

Gain on sale of real estate
22,691

 

Income from continuing operations
24,574

 
4,599

 
 
 
 
(Loss) income from discontinued operations

 
(66
)
Net loss from discontinued operations

 
(66
)
Net income
24,574

 
4,533

Net income attributable to preferred stock and units
(3,195
)
 
(3,200
)
Net income attributable to restricted shares
(70
)
 
(69
)
Net (income) loss attributable to non-controlling interest in consolidated entities
(1,502
)
 
43

Net income attributable to common units in the Operating Partnership
(596
)
 
(47
)
Net income attributable to Hudson Pacific Properties, Inc. common stockholders
$
19,211

 
$
1,260

Basic and diluted per share amounts:
 
 
 
Net income from continuing operations attributable to common stockholders
0.25

 
0.02

Net income (loss) from discontinued operations

 

Net income attributable to common stockholders’ per share—basic and diluted
$
0.25

 
$
0.02

Weighted average shares of common stock outstanding—basic
76,783,351

 
63,625,751

Weighted average shares of common stock outstanding—diluted
77,330,351

 
63,625,751

Dividends declared per share of common stock
$
0.1250

 
$
0.1250


The accompanying notes are an integral part of these consolidated financial statements.
5




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands, except share and per share amounts)

 
Three Months Ended 
 March 31,
 
2015
 
2014
Net income
$
24,574

 
$
4,533

Other comprehensive loss: cash flow hedge adjustment
(625
)
 
(552
)
Comprehensive income
23,949

 
3,981

Comprehensive income attributable to preferred stock and units
(3,195
)
 
(3,200
)
Comprehensive income attributable to restricted shares
(70
)
 
(69
)
Comprehensive (income) loss attributable to non-controlling interest in consolidated real estate entities
(1,502
)
 
43

Comprehensive income attributable to common units in the Operating Partnership
(577
)
 
(27
)
Comprehensive income attributable to Hudson Pacific Properties, Inc. stockholders
$
18,605

 
$
728


The accompanying notes are an integral part of these consolidated financial statements.
6




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands, except share and per share amounts)
 
Hudson Pacific Properties, Inc. Stockholders’ Equity
 
 
 
 
 
Shares of Common
Stock
Stock
Amount
Series B Cumulative Redeemable Preferred Stock
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss)
Income
Non-
controlling
Interests —
Common units
in the
Operating
Partnership
Non-controlling Interest — Members in Consolidated Entities
Total Equity
Non-
controlling
Interests —
Series A
Cumulative
Redeemable
Preferred
Units
Balance at January 1, 2014
57,230,199

$
572

$
145,000

$
903,984

$
(45,113
)
$
(997
)
$
53,737

$
45,683

$
1,102,866

$
10,475

Distributions







(2,842
)
(2,842
)

Proceeds from sale of common stock, net of underwriters’ discount
9,563,500

96


197,372





197,468


Equity offering transaction costs



(1,599
)




(1,599
)

Redemption of Series A Cumulative Redeemable Preferred Units









(298
)
Issuance of unrestricted stock
6,922










Issuance of restricted stock










Forfeiture of restricted stock










Shares repurchased
(2,805
)


(3,129
)




(3,129
)

Declared dividend


(12,144
)
(33,774
)


(1,192
)

(47,110
)
(641
)
Amortization of stock-based compensation



7,979





7,979


Net income


12,144


10,229


359

149

22,881

641

Cash flow hedge adjustment





(1,446
)
(53
)

(1,499
)

Balance at December 31, 2014
66,797,816

$
668

$
145,000

$
1,070,833

$
(34,884
)
$
(2,443
)
$
52,851

$
42,990

$
1,275,015

$
10,177

Contributions







219,150

219,150


Distributions







(933
)
(933
)

Proceeds from sale of common stock, net of underwriters’ discount
12,650,000

127


385,445





385,572


Equity offering transaction costs



(5,050
)




(5,050
)

Issuance of unrestricted stock
127,100

1







1


Shares repurchased
(56,042
)
(1
)

(1,749
)




(1,750
)

Declared Dividend


(3,036
)
(9,989
)


(298
)

(13,323
)
(159
)
Amortization of stock-based compensation



2,251





2,251


Net income


3,036


19,281


596

1,502

24,415

159

Cash Flow Hedge Adjustment





(606
)
(19
)

(625
)

Balance at March 31, 2015
79,518,874

$
795

$
145,000

$
1,441,741

$
(15,603
)
$
(3,049
)
$
53,130

$
262,709

$
1,884,723

$
10,177


The accompanying notes are an integral part of these consolidated financial statements.
7




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands) 
 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
24,574

 
$
4,533

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,158

 
16,668

Amortization of deferred financing costs and loan premium, net
508

 
79

Amortization of stock-based compensation
2,149

 
1,277

Straight-line rent receivables
(3,464
)
 
(2,685
)
Amortization of above-market leases
370

 
658

Amortization of below-market leases
(1,814
)
 
(1,902
)
Amortization of lease incentive costs
138

 
53

Bad debt (recovery) expense
(44
)
 
83

Amortization of ground lease
62

 
62

Amortization of discount and net origination fees on purchased and originated loans
(104
)


Gain from sale of real estate
(22,691
)
 

Change in operating assets and liabilities:
 
 
 
Restricted cash
177

 
(964
)
Accounts receivable
2,960

 
2,317

Deferred leasing costs and lease intangibles
(1,900
)
 
(819
)
Prepaid expenses and other assets
(5,535
)
 
(13
)
Accounts payable and accrued liabilities
13,445

 
(3,086
)
Security deposits
(404
)
 
206

Prepaid rent
1,540

 
2,934

Net cash provided by operating activities
27,125

 
19,401

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(30,635
)
 
(25,099
)
Property acquisitions

 
(75,580
)
Proceeds from sale of real estate
88,316

 

Deposits for property acquisitions
(261,648
)
 

Net cash used in investing activities
(203,967
)
 
(100,679
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
319

 
52,843

Payments of notes payable
(173,200
)
 
(156,147
)
Proceeds from issuance of common stock
385,572

 
197,468

Common stock issuance transaction costs
(5,050
)
 
(580
)
Dividends paid to common stock and unit holders
(10,287
)
 
(8,676
)
Dividends paid to preferred stock and unit holders
(3,195
)
 
(3,200
)
Contributions by members
219,150

 

Redemption of 6.25% series A cumulative redeemable preferred units

 
(298
)
Distribution to non-controlling member in consolidated real estate entity
(933
)
 
(1,416
)
Repurchase of vested restricted stock
(1,750
)
 

Payment of loan costs
(3,647
)
 
(9
)
Net cash provided by financing activities
406,979

 
79,985

Net increase (decrease) in cash and cash equivalents
230,137

 
(1,293
)
Cash and cash equivalents—beginning of period
17,753

 
30,356

Cash and cash equivalents—end of period
$
247,890

 
$
29,063


The accompanying notes are an integral part of these consolidated financial statements.
8




HUDSON PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands) 


 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
7,095

 
$
7,363

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for investment in property
$
(7,850
)
 
$
2,285

Assumption of other (assets) and liabilities in connection with property acquisitions, net (Note 3)
$

 
$
(449
)


The accompanying notes are an integral part of these consolidated financial statements.
9




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
March 31, 2015
 
December 31, 2014
 
(unaudited)
 
(audited)
ASSETS
 
 
 
REAL ESTATE ASSETS
 
 
 
Land
$
620,805

 
$
620,805

Building and improvements
1,302,802

 
1,284,602

Tenant improvements
120,273

 
116,317

Furniture and fixtures
9,957

 
13,721

Property under development
151,982

 
135,850

Total real estate held for investment
2,205,819

 
2,171,295

Accumulated depreciation and amortization
(143,502
)
 
(134,657
)
Investment in real estate, net
2,062,317

 
2,036,638

Cash and cash equivalents
247,890

 
17,753

Restricted cash
16,906

 
14,244

Accounts receivable, net
13,313

 
16,247

Notes receivable
28,372

 
28,268

Straight-line rent receivables
35,812

 
33,006

Deferred leasing costs and lease intangibles, net
103,022

 
102,023

Deferred finance costs, net
11,271

 
8,723

Interest rate contracts

 
3

Goodwill
8,754

 
8,754

Prepaid expenses and other assets
273,986

 
6,692

Assets associated with real estate held for sale

 
68,534

TOTAL ASSETS
$
2,801,643

 
$
2,340,885

LIABILITIES
 
 
 
Notes payable
$
787,190

 
$
918,059

Accounts payable and accrued liabilities
61,735

 
36,844

Below-market leases, net
39,169

 
40,969

Security deposits
6,179

 
6,257

Prepaid rent
9,606

 
8,600

Interest rate contracts
2,538

 
1,750

Liabilities associated with real estate held for sale
326

 
43,214

TOTAL LIABILITIES
906,743

 
1,055,693

6.25% series A cumulative redeemable preferred units of the Operating Partnership
10,177

 
10,177

CAPITAL
 
 
 
Partners’ Capital:
 
 
 
8.375% series B cumulative redeemable preferred units, 5,800,000 units issued and outstanding at March 31, 2015 and December 31, 2014, respectively ($25.00 per unit liquidations preference.)
145,000

 
145,000

Common units, 81,901,437 and 69,180,379 issued and outstanding at March 31, 2015 and December 31, 2014, respectively
1,477,014

 
1,087,025

Total Hudson Pacific Properties, Inc. Capital
1,622,014

 
1,232,025

Non-controlling interest—members in Consolidated Entities
262,709

 
42,990

TOTAL CAPITAL
1,884,723

 
1,275,015

TOTAL LIABILITIES AND CAPITAL
$
2,801,643

 
$
2,340,885



The accompanying notes are an integral part of these consolidated financial statements.
10




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per unit amount)
 
Three Months Ended 
 March 31,
 
2015
 
2014
Revenues
 
 
 
Office
 
 
 
Rental
$
41,576

 
$
36,010

Tenant recoveries
6,064

 
5,571

Parking and other
5,295

 
4,479

Total office revenues
52,935

 
46,060

Media & entertainment
 
 
 
Rental
5,467

 
5,449

Tenant recoveries
240

 
320

Other property-related revenue
4,109

 
3,634

Other
73

 
133

Total media & entertainment revenues
9,889

 
9,536

Total revenues
62,824

 
55,596

Operating expenses
 
 
 
Office operating expenses
17,135

 
15,927

Media & entertainment operating expenses
6,005

 
6,005

General and administrative
9,200

 
5,776

Depreciation and amortization
17,158

 
16,668

Total operating expenses
49,498

 
44,376

Income from operations
13,326

 
11,220

Other income
 
 
 
Interest expense
5,493

 
6,524

Interest income
(53
)
 
(9
)
Acquisition-related expenses
6,044

 
105

Other income
(41
)
 
1

 
11,443

 
6,621

Income from continuing operations before gain on sale of real estate
1,883

 
4,599

Gain on sale of real estate
22,691

 

Income from continuing operations
24,574

 
4,599

Loss from discontinued operations

 
(66
)
Net income
$
24,574

 
$
4,533

Net loss (income) attributable to non-controlling interest in consolidated entities
(1,502
)
 
43

Net income attributable to Hudson Pacific Properties, L.P.
$
23,072

 
$
4,576

Preferred distributions—Series A units
(159
)
 
(164
)
Preferred distributions—Series B units
(3,036
)
 
(3,036
)
Total preferred distributions
$
(3,195
)
 
$
(3,200
)
Net income attributable to restricted shares
$
(70
)
 
$
(69
)
Net income available to common unitholders
$
19,807

 
$
1,307

Basic and diluted per unit amounts:
 
 
 
Net income from continuing operations attributable to common unitholders
$
0.25

 
$
0.02

Net income (loss) from discontinued operations

 

Net income attributable to common unitholders per unit—basic
$
0.25

 
$
0.02

Net income attributable to common unitholders per unit—diluted
$
0.25

 
$
0.02

Weighted average shares of common units outstanding—basic
79,165,914

 
66,008.314

Weighted average shares of common units outstanding—diluted
79,712,914

 
66,008.314


The accompanying notes are an integral part of these consolidated financial statements.
11




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands, except share and per unit amounts)

 
Three Months Ended 
 March 31,
 
2015
 
2014
Net income
$
24,574

 
$
4,533

Other comprehensive loss: cash flow hedge adjustment
(625
)
 
(552
)
Comprehensive income
23,949

 
3,981

Comprehensive income attributable to Series A preferred units
(159
)
 
(164
)
Comprehensive income attributable to Series B preferred units
(3,036
)
 
(3,036
)
Comprehensive income attributable to restricted shares
(70
)
 
(69
)
Comprehensive (income) loss attributable to non-controlling interest in consolidated real estate entities
(1,502
)
 
43

Comprehensive income attributable to Hudson Pacific Properties, Inc. stockholders
$
19,182

 
$
755



The accompanying notes are an integral part of these consolidated financial statements.
12




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited, in thousands, except share and per unit amounts)
 
Partners Capital
 
 
 
 
 
Preferred Units
Number of Common Units
Common Units
Total Partners Capital
Non-controlling Interest - Members in Consolidated Entities
Total Capital
Non-
controlling
Interests —
Series A
Cumulative
Redeemable
Preferred
Units
Balance at January 1, 2014
$
145,000

59,612,762

$
912,183

$
1,057,183

$
45,683

1,102,866

10,475

Distributions




(2,842
)
(2,842
)

Proceeds from sale of common units, net of underwriters’ discount

9,563,500

197,468

197,468


197,468


Equity offering transaction costs


(1,599
)
(1,599
)

(1,599
)

Redemption of Series A Cumulative Redeemable Preferred Units






(298
)
Issuance of unrestricted units

6,922






Units repurchased

(2,805
)
(3,129
)
(3,129
)

(3,129
)

Declared distributions
(12,144
)

(34,966
)
(47,110
)

(47,110
)
(641
)
Amortization of unit based compensation


7,979

7,979


7,979


Net income
12,144


10,588

22,732

149

22,881

641

Cash flow hedge adjustment


(1,499
)
(1,499
)

(1,499
)

Balance at December 31, 2014
$
145,000

69,180,379

$
1,087,025

$
1,232,025

$
42,990

$
1,275,015

$
10,177

Contributions




219,150

219,150


Distributions




(933
)
(933
)

Proceeds from sale of common units, net of underwriters’ discount

12,650,000

385,572

385,572


385,572


Equity offering transaction costs


(5,050
)
(5,050
)

(5,050
)

Issuance of unrestricted units

127,100

1

1


1


Units repurchased

(56,042
)
(1,750
)
(1,750
)

(1,750
)

Declared distributions
(3,036
)

(10,287
)
(13,323
)

(13,323
)
(159
)
Amortization of unit based compensation


2,251

2,251


2,251


Net income
3,036


19,877

22,913

1,502

24,415

159

Cash Flow Hedge Adjustment


(625
)
(625
)

(625
)

Balance at March 31, 2015
$
145,000

81,901,437

$
1,477,014

$
1,622,014

$
262,709

$
1,884,723

$
10,177



The accompanying notes are an integral part of these consolidated financial statements.
13




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
24,574

 
$
4,533

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,158

 
16,668

Amortization of deferred financing costs and loan premium, net
508

 
79

Amortization of stock-based compensation
2,149

 
1,277

Straight-line rent receivables
(3,464
)
 
(2,685
)
Amortization of above-market leases
370

 
658

Amortization of below-market leases
(1,814
)
 
(1,902
)
Amortization of lease incentive costs
138

 
53

Bad debt (recovery) expense
(44
)
 
83

Amortization of ground lease
62

 
62

Amortization of discount and net origination fees on purchased and originated loans
(104
)
 

Gain from sale of real estate
(22,691
)
 

Change in operating assets and liabilities:
 
 
 
Restricted cash
177

 
(964
)
Accounts receivable
2,960

 
2,317

Deferred leasing costs and lease intangibles
(1,900
)
 
(819
)
Prepaid expenses and other assets
(5,535
)
 
(13
)
Accounts payable and accrued liabilities
13,445

 
(3,086
)
Security deposits
(404
)
 
206

Prepaid rent
1,540

 
2,934

Net cash provided by operating activities
27,125

 
19,401

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to investment property
(30,635
)
 
(25,099
)
Property acquisitions

 
(75,580
)
Proceeds from sale of real estate
88,316

 

Deposits for property acquisitions
(261,648
)
 

Net cash used in investing activities
(203,967
)
 
(100,679
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
319

 
52,843

Payments of notes payable
(173,200
)
 
(156,147
)
Proceeds from issuance of common units
385,572

 
197,468

Common units issuance transaction costs
(5,050
)
 
(580
)
Dividends paid to common unitholders
(10,287
)
 
(8,676
)
Dividends paid to preferred unitholders
(3,195
)
 
(3,200
)
         Contributions by members
219,150

 

Redemption of 6.25% series A cumulative redeemable preferred units

 
(298
)
Distribution to non-controlling member in consolidated real estate entity
(933
)
 
(1,416
)
Repurchase of vested restricted units
(1,750
)
 

Payment of loan costs
(3,647
)
 
(9
)
Net cash provided by financing activities
406,979

 
79,985

Net increase (decrease) in cash and cash equivalents
230,137

 
(1,293
)
Cash and cash equivalents—beginning of period
17,753

 
30,356

Cash and cash equivalents—end of period
$
247,890

 
$
29,063


The accompanying notes are an integral part of these consolidated financial statements.
14




HUDSON PACIFIC PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(Unaudited, in thousands) 


 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
7,095

 
$
7,363

NON-CASH INVESTING ACTIVITIES:
 
 
 
Accounts payable and accrued liabilities for investment in property
$
(7,850
)
 
$
2,285

Assumption of other (assets) and liabilities in connection with property acquisitions, net (Note 3)
$

 
$
(449
)


The accompanying notes are an integral part of these consolidated financial statements.
15




Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements
(Unaudited, tabular amounts in thousands, except square footage and share data or as otherwise noted)

1. Organization

Hudson Pacific Properties, Inc. (which is referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on November 9, 2009 that did not have any meaningful operating activity until the consummation of our initial public offering and the related acquisition of our predecessor and certain other entities on June 29, 2010 (“IPO”).

Since the completion of the IPO and the related formation transactions, we have been a fully integrated, self-administered, and self-managed real estate investment trust (“REIT”). Through our controlling interest in Hudson Pacific Properties, L.P. (“our operating partnership” or the “Operating Partnership” and is also referred to in these financial statements as the “Company,” “we,” “us,” or “our”) and its subsidiaries, we own, manage, lease, acquire and develop real estate, consisting primarily of office and media and entertainment properties. As of March 31, 2015, we owned a portfolio of 25 office properties and two media and entertainment properties. These properties are located in California and Washington. The results of operations for properties acquired after our IPO are included in our consolidated statements of operations from the date of each such acquisition.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited interim financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership and all of our wholly owned and controlled subsidiaries. The unaudited interim financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership and all wholly owned and controlled subsidiaries of the Operating Partnership. The effect of all significant intercompany balances and transactions has been eliminated.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2014 Annual Report on Form 10-K and the notes thereto. Any reference to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties, its accrued liabilities, and its performance-based equity compensation awards. The Company bases its estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from these estimates.

Investment in Real Estate Properties

The properties are carried at cost less accumulated depreciation and amortization. The Company assigns the cost of an acquisition, including the assumption of liabilities, to the acquired tangible assets and identifiable intangible assets and liabilities based on their estimated fair values in accordance with GAAP. The Company assesses fair value based on estimated cash flow projections that utilize discount and/or capitalization rates and available market information. Estimates of future cash flows are

16

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant.

Acquisition-related expenses associated with acquisition of operating properties are expensed in the period incurred.

The Company records acquired above- and below- market leases at fair value using discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related costs.

The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a real estate project. Indirect development costs, including salaries and benefits, office rent, and associated costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and allocated to the projects to which they relate. Capitalized personnel costs for the three months ended March 31, 2015 and 2014 were approximately $0.9 million and $0.6 million, respectively. Interest is capitalized on the construction in progress at a rate equal to the Company’s weighted average cost of debt. Capitalized interest for the three months ended March 31, 2015 and 2014 was approximately $2.0 million and $1.6 million, respectively. Construction and development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements but no later than one year after cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as they are incurred. Costs previously capitalized related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as they are incurred.

The Company computes depreciation using the straight-line method over the estimated useful lives of 39 years for building and improvements, 15 years for land improvements, five to seven years for furniture and fixtures and equipment, and over the shorter of asset life or life of the lease for tenant improvements. Above- and below-market lease intangibles are amortized to revenue over the remaining non-cancellable lease terms and bargain renewal periods, if applicable. Other in-place lease intangibles are amortized to expense over the remaining non-cancellable lease term. Depreciation is discontinued when a property is identified as held for sale.

Impairment of Long-Lived Assets

The Company assesses the carrying value of real estate assets and related intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with GAAP. Impairment losses are recorded on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company recognizes impairment losses to the extent the carrying amount exceeds the fair value of the properties. Properties held for sale are recorded at the lower of cost or estimated fair value less cost to sell. There were no properties held for sale at March 31, 2015 and one property held for sale at December 31, 2014. The Company recorded no impairment charges for the three months ended March 31, 2015 and 2014.


17

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



Goodwill

Goodwill represents the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets acquired and liabilities assumed in business combinations. Our goodwill balance as of March 31, 2015 was $8.8 million. We do not amortize this asset but instead analyze it on an annual basis for impairment. No impairment indicators have been noted during the three months ended March 31, 2015 and 2014.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased.

The Company maintains some of its cash in bank deposit accounts that, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.

Restricted Cash

Restricted cash consists of amounts held by lenders to provide for future real estate taxes and insurance expenditures, repairs and capital improvements reserves, general and other reserves and security deposits.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due for monthly rents and other charges. The Company maintains an allowance for doubtful accounts for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants and operators on an ongoing basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. At March 31, 2015 and December 31, 2014, the Company had reserved $0.6 million and $0.6 million, respectively, of straight-line receivables. The Company evaluates the collectability of accounts receivable based on a combination of factors. The allowance for doubtful accounts is based on specific identification of uncollectible accounts and the Company’s historical collection experience. The Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due, the current business environment and the Company’s historical experience. Historical experience has been within management’s expectations. The Company recognized $(0.04) million and $0.1 million of bad debt (recovery) expense for the three months ended March 31, 2015 and 2014, respectively.

The following summarizes our accounts receivable net of allowance for doubtful accounts as of:

 
March 31, 2015
 
December 31, 2014
Accounts receivable
$
14,187

 
$
17,287

Allowance for doubtful accounts
(874
)
 
(1,040
)
Accounts receivable, net
$
13,313

 
$
16,247


Notes Receivable

On August 19, 2014, the Company entered into a loan participation agreement for a loan with a maximum principal of $140.0 million. The Company’s share was 23.77%, or $33.3 million. The note receivable is secured by real property, has a balance of $28.5 million as of March 31, 2015, bears interest at 11.0% and matures on August 18, 2016. Interest is payable monthly with the principal due at maturity. The Company received a $0.4 million commitment fee as a result of this transaction. The balance as of March 31, 2015, net of the commitment fee, was $28.4 million and was classified as a note receivable on the consolidated balance sheet. The Company believes these balances are fully collectible.

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

18

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



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 (phone and Internet). Other property-related revenue is recognized when these items are provided.

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Company is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

The Company recognizes gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the full accrual method when (i) the collectability of the sales price is reasonably assured, (ii) the Company is not obligated to perform significant activities after the sale, (iii) the initial investment from the buyer is sufficient and (iv) other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the requirements for gain recognition have been met.

Deferred Financing Costs

Deferred financing costs are amortized over the term of the respective loan.

Derivative Financial Instruments

The Company manages interest rate risk associated with borrowings by entering into interest rate derivative contracts. The Company recognizes all derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value and the changes in fair value are reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income, which is a component of equity. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

The Company held three interest rate contracts as of March 31, 2015 and December 31, 2014, respectively, all of which have been accounted for as cash flow hedges as more fully described in Note 6 below.


19

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



Stock-Based Compensation

Accounting Standard Codification, (ASC), Topic 718, Compensation—Stock Compensation (referred to as ASC Topic 718), requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, restricted stock units and performance units under our equity incentive award plans are accounted for under ASC Topic 718. Our compensation committee regularly considers the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs.

Income Taxes

Our property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the entity that owns the 1455 Market Street property, a REIT) for federal income tax purposes. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements for the activities of these entities.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year. To qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT-qualifying activities. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

We have elected, together with one of our subsidiaries, to treat such subsidiary as a taxable REIT subsidiary (“TRS”) for federal income tax purposes. Certain activities that we undertake, such as non-customary services for our tenants and holding assets that we cannot hold directly, will be conducted by a TRS. A TRS is subject to federal and, where applicable, state income taxes on its net income.

The Company is subject to the statutory requirements of the states in which it conducts business.

The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of March 31, 2015, the Company had not established a liability for uncertain tax positions.

The REIT and its TRS file income tax returns with the U.S. federal government and various state and local jurisdictions. The REIT and the TRS are no longer subject to tax examinations by taxing authorities for the years prior to 2011. Generally, the Company has assessed its tax positions for all open years, which includes 2011 to 2014, and concluded that there are no material uncertainties to be recognized.

Fair Value of Assets and Liabilities

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants 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.

20

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)




When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

The Company considers the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal-to-principal market).

The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.    

The Company’s interest rate contract agreements are classified as Level 2 and their fair value is derived from estimated values obtained from observable market data for similar instruments.

As of March 31, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative
Number of Instruments
Notional Amount
Interest Rate Caps
2
$92.0 million
Interest Rate Swaps
1
$64.5 million

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2015 and December 31, 2014. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.


21

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value as of
 
 
Fair Value as of
 
 
Balance Sheet Location
March 31, 2015
 
December 31, 2014
 
Balance Sheet Location
March 31, 2015
 
December 31, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
Interest rate contracts
$

 
$
3

 
Interest rate contracts
$
2,538

 
$
1,750

 
 
 
 
 
 
 
 
 
 
 
Total
 
 
$

 
$
3

 
 
$
2,538

 
$
1,750


Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the Statement of Operations for the three months ended March 31, 2015 and 2014.

 
Three Months Ended 
 March 31, 2015
 
Three Months Ended 
 March 31, 2014
 
 
Beginning balance of OCI related to interest rate contracts
$
2,661

 
$
1,162

 
 
 
 
Unrealized loss recognized in OCI due to change in fair value of interest rate contracts
791

 
634

Loss reclassified from OCI into income (as interest expense)
(166
)
 
(82
)
Net change in OCI
625

 
552

 
 
 
 
Ending balance of accumulated OCI related to derivatives
3,286

 
1,714

Allocation of OCI, non-controlling interests
(237
)
 
(185
)
Accumulated other comprehensive loss
$
3,049

 
$
1,529


Credit-Risk-Related Contingent Features

As of March 31, 2015, the Company had one derivative that was in a net liability position.

Recently Issued Accounting Literature

Changes to GAAP are established by the Financial Accounting Standards Board, or FASB, in the form of ASUs. We consider the applicability and impact of all ASUs. Recently issued ASUs not listed below are not expected to have a material impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.

On April 7, 2015 the FASB issued ASU No. 2015-03 (ASU 2015-03) “Simplifying the Presentation of Debt Issuance Cost.” to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company expects to adopt the guidance effective January 1, 2016 and our adoption of the guidance is not anticipated to have a material impact on our consolidated financial statements.

On February 18, 2015 the FASB issued ASU No. 2015-02 “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (ASU 2015-02) to amend the accounting guidance for consolidation. The standard simplifies the current guidance for consolidation and reduces the number of consolidation models through the elimination of the indefinite deferral of Statement 167. Additionally, the standard places more emphasis on risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. The Company expects to adopt the guidance effective January 1, 2016, and our adoption of the guidance is not anticipated to have a material impact on our consolidated financial statements.

22

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)




On January 9, 2015, the FASB issued ASU No. 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” (ASU 2015-01). ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 will be effective for the Company’s fiscal year beginning January 1, 2016 and subsequent interim periods. The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.

On August 27, 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15).  This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted.  The implementation of this update is not expected to have a material effect on the Company’s consolidated financial statements.

On May 28, 2014, the FASB issued their final standard on revenue from contracts with customers. The guidance specifically notes that lease contracts with customers are a scope exception. The standard (ASU No. 2014-09) outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. The ASU is effective for annual reporting periods (including interim periods) beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt the guidance effective January 1, 2017 and is currently assessing the impact on our consolidated financial statements and notes to our consolidated financial statements.

3. Investment in Real Estate

Acquisitions

We had no acquisitions during the first quarter of 2015. However, on April 1, 2015, we completed the acquisition of the EOP Northern California Portfolio from Blackstone Real Estate Partners V and VI as more fully described in Note 13 below.

During 2014, we acquired Merrill Place, 3402 Pico Blvd. and 12655 Jefferson. The results of operations for each of these acquisitions are included in our consolidated statements of operations from the date of acquisition. The following table represents our purchase price accounting for each of these acquisitions:

 
Merrill Place
 
3402 Pico Blvd.
 
12655 Jefferson
 
 
Date of Acquisition
February 12, 2014
 
February 28, 2014
 
October 17, 2014
 
Total
Consideration paid
 
 
 
 
 
 
 
Cash consideration
$
57,034

 
$
18,546

 
$
38,000

 
$
113,580

Total consideration
$
57,034

 
$
18,546

 
$
38,000

 
$
113,580

Allocation of consideration paid
 
 
 
 
 
 
 
Investment in real estate, net
$
57,508

 
$
18,500

 
$
38,000

 
$
114,008

Above-market leases
173

 

 

 
173

Deferred leasing costs and lease intangibles, net
3,163

 

 

 
3,163

Below-market leases
(3,315
)
 

 

 
(3,315
)
Other (liabilities) asset assumed, net
(495
)
 
46

 

 
(449
)
Total consideration paid
$
57,034

 
$
18,546

 
$
38,000

 
$
113,580


Dispositions

On March 6, 2015, the Company sold its First Financial office property for $89.0 million (before certain credits, prorations, and closing costs). Pursuant to ASU No. 2014-08, we will not be presenting the operating results in net income (loss) from

23

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



discontinued operations and, therefore, reclassified First Financial’s assets and liabilities to assets and liabilities associated with real estate held for sale as of December 31, 2014.
 
4. Deferred Leasing Costs and Lease Intangibles, net

The following summarizes our deferred leasing cost and lease intangibles as of:
 
 
March 31,
2015
 
December 31,
2014
Above-market leases
$
10,891

 
$
10,891

Leases in place
59,398

 
60,130

Below-market ground leases
7,513

 
7,513

Other lease intangibles
26,545

 
26,731

Lease buy-out costs
4,771

 
4,597

Deferred leasing costs
44,632

 
38,912

 
$
153,750

 
$
148,774

Accumulated amortization
(50,728
)
 
(46,751
)
Deferred leasing costs and lease intangibles, net
$
103,022

 
$
102,023

 
 
 
 
Below-market leases
$
57,401

 
$
57,420

Accumulated accretion
(18,232
)
 
(16,451
)
Below-market leases, net
$
39,169

 
$
40,969


5. Notes Payable

The following table sets forth information as of March 31, 2015 with respect to our outstanding indebtedness.
 
 
Outstanding
 
 
 
 
Debt
March 31, 2015
 
December 31, 2014
 
Interest Rate(1)
 
Maturity
Date
Unsecured revolving credit facility
$

 
$
130,000

 
LIBOR+ 1.15% to 1.55%
 
9/23/2018
Unsecured term loan
150,000

 
150,000

 
LIBOR+ 1.30% to 1.90%
 
9/23/2019
Mortgage loan secured by 275 Brannan(2)
15,000

 
15,000

 
LIBOR+2.00%
 
10/5/2015
Mortgage loan secured by Pinnacle II(3)
87,111

 
87,421

 
6.313%
 
9/6/2016
Mortgage loan secured by 901 Market(4)
49,600

 
49,600

 
LIBOR+2.25%
 
10/31/2016
Mortgage loan secured by Element LA(5)
59,809

 
59,490

 
LIBOR+1.95%
 
11/1/2017
Mortgage loan secured by Rincon Center(6)
103,803

 
104,126

 
5.134%
 
5/1/2018
Mortgage loan secured by Sunset Gower/Sunset Bronson(7)
97,000

 
97,000

 
LIBOR+2.25%
 
3/4/2019
Mortgage loan secured by Met Park North(8)
64,500

 
64,500

 
LIBOR+1.55%
 
8/1/2020
Mortgage loan secured by 10950 Washington(9)
28,748

 
28,866

 
5.316%
 
3/11/2022
Mortgage loan secured by Pinnacle I(10)
129,000

 
129,000

 
3.954%
 
11/7/2022
Subtotal
$
784,571

 
$
915,003

 
 
 
 
Unamortized loan premium, net(11)
2,619

 
3,056

 
 
 
 
Total
$
787,190

 
$
918,059

 
 
 
 
Mortgage loan on real estate held for sale:
 
 
 
 
 
 
 
Mortgage loan secured by First Financial(12)
$

 
$
42,449

 
4.580%
 
2/1/2022
 
$
787,190

 
$
960,508

 
 
 
 
__________________ 
(1)
Interest rate with respect to indebtedness is calculated on the basis of a 360-day year for the actual days elapsed, excluding the amortization of loan fees and costs.
(2)
Subsequent to March 31, 2015 the loan was fully repaid.

24

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



(3)
This loan was assumed on June 14, 2013 in connection with the contribution of the Pinnacle II building to the Company’s joint venture with M. David Paul & Associates/Worthe Real Estate Group. This loan bore interest only for the first five years. Beginning with the payment due October 6, 2011, monthly debt service includes annual debt amortization payments based on a 30-year amortization schedule.
(4)
On October 29, 2012, we obtained a loan for our 901 Market property pursuant to which we borrowed $49.6 million upon closing, with the ability to draw up to an additional $11.9 million for budgeted base building, tenant improvements, and other costs associated with the renovation and lease-up of that property. Subsequent to March 31, 2015, we paid down the outstanding loan balance by $19.6 million.
(5)
On November 24, 2014 we amended our construction loan for Element LA to, among other things, increase availability from $65.5 million to $102.4 million for budgeted site-work, construction of a parking garage, base building, tenant improvement, and leasing commission costs associated with the renovation and lease-up of the property.
(6)
This loan is amortizing based on 30-year amortization schedule.
(7)
On March 16, 2011, we purchased an interest rate cap in order to cap one-month LIBOR at 3.715% with respect to $50.0 million of the loan through February 11, 2016. On January 11, 2012 we purchased an interest rate cap in order to cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan through February 11, 2016. Effective March 4, 2015, the terms of this loan were amended and restated to introduce the ability to draw up to an additional $160.0 million for budgeted construction costs associated with our ICON development and to extend the maturity date from February 11, 2018 to March 4, 2019.
(8)
This loan bears interest only at a rate equal to one-month LIBOR plus 1.55%. The full loan amount is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of 2.1644% through the loans maturity on August 1, 2020.
(9)
This loan is amortizing based on a 30-year amortization schedule.
(10)
This loan bears interest only for the first five years. Beginning with the payment due December 6, 2017, monthly debt service will include annual debt amortization payments based on a 30-year amortization schedule, for total annual debt service of $7,349.
(11)
Represents unamortized amount of the non-cash mark-to-market adjustment on debt associated with Pinnacle II.
(12)
This note has been recorded as part of the liabilities associated with real estate held for sale (see note 3).

The Company presents its financial statements on a consolidated basis. Notwithstanding such presentation, except to the extent expressly indicated, such as in the case of the project financing for our Sunset Gower and Sunset Bronson properties, our separate property-owning subsidiaries are not obligors of the debt of their respective affiliates and each property-owning subsidiary’s separate liabilities do not constitute obligations of its respective affiliates.

The minimum future annual principal payments due on our secured and unsecured notes payable at March 31, 2015, excluding the non-cash loan premium amortization, were as follows (in thousands):

2015 (nine months ending December 31, 2015)
$
17,572

2016
138,199

2017
62,514

2018
198,320

2019
152,885

Thereafter
215,081

Total
$
784,571


Senior Unsecured Revolving Credit Facility

On September 23, 2014, the Company amended and restated its $250.0 million unsecured revolving credit facility to increase the unsecured revolving credit facility from $250.0 million to $300.0 million, extend the term of that facility to September 23, 2018, and add a five-year, $150 million unsecured term loan facility with a group of lenders for which Wells Fargo Bank, N.A. acts as administrative agent, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated act as joint lead arrangers, and Bank of America, N.A. and Barclays Bank PLC, act as joint syndication agents, and Keybank, N.A., acts as documentation agent.

The $150 million unsecured term loan facility was fully drawn by the Company on the closing date to repay a $95.0 million loan secured by the Company’s 505 First Street and 83 King properties, with the remaining $55.0 million used to repay amounts outstanding under the Company’s prior unsecured revolving facility.

The Operating Partnership continues to be the borrower under the new facility, and the Company and all subsidiaries that own unencumbered properties will continue to provide guaranties unless the Company obtains and maintains a credit rating of at least BBB- from S&P or Baa3 from Moody’s, in which case such guaranties are not required except under limited circumstances.  Subject to the satisfaction of certain conditions and lender commitments, the Company may increase the availability of either or both of the unsecured revolving credit facility or term loan facility so long as the aggregate commitments under both facilities do not exceed $700.0 million.

Under the unsecured revolving credit facility, the Company may elect to pay interest at a rate equal to either LIBOR plus 115 to 155 basis points per annum or a specified base rate plus 15 to 55 basis points per annum, depending on the Company’s

25

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



leverage ratio. Under the term loan facility, the Company may elect to pay interest at a rate equal to either LIBOR plus 130 to 190 basis points per annum or a specified base rate plus 30 to 90 basis points per annum, again depending on the Company’s leverage ratio. If the Company obtains a credit rating for its senior unsecured long term indebtedness, it may make an irrevocable election to change the interest rate for the unsecured revolving credit facility to a rate equal to either LIBOR plus 87.5 to 165 basis points per annum or the specified base rate plus 0 to 65 basis points per annum, and for the term loan facility equal to either LIBOR plus 90 to 190 basis points per annum or the specified base rate plus 0 to 90 basis points per annum, in each case depending on the credit rating.

The unsecured revolving credit facility is subject to a facility fee in an amount equal to the Company’s revolving credit commitments (whether or not utilized) multiplied by a rate per annum equal to 20 to 35 basis points, depending on the Company’s leverage ratio, or, if the Company makes the credit rating election, in an amount equal to the aggregate amount of its revolving credit commitments multiplied by a rate per annum equal to 12.5 to 30 basis points, depending upon the credit rating. Unused amounts of the facility are no longer subject to a separate fee.

The Company’s ability to borrow under the facility remains subject to ongoing compliance with a number of customary restrictive covenants. In addition to these covenants, the facility also includes certain limitations on dividend payouts and distributions, limits on certain types of investments outside of the Company’s primary business, and other customary affirmative and negative covenants.

As of March 31, 2015, the Company was in compliance with its unsecured revolving credit facility’s financial covenants. As of March 31, 2015, we had total borrowing capacity of $300 million under our unsecured revolving credit facility, none of which had been drawn.

Repayment Guaranties

Sunset Gower and Sunset Bronson Loan    

In connection with the loan secured by our Sunset Gower and Sunset Bronson properties, we have guaranteed in favor of and promised to pay to the lender 19.5% of the principal payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At March 31, 2015, the outstanding balance was $97.0 million, which results in a maximum guarantee amount for the principal under this loan of $18.9 million. Furthermore, we agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the borrower. 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.

Element LA Loan

In connection with our Element LA construction loan, we have guaranteed in favor of and promised to pay to the lender 25.0% of the principal, together with all interest and any other sum payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At March 31, 2015, the outstanding balance was $59.8 million, which results in a maximum guarantee amount for the principal under this loan of $14.9 million. Upon the satisfaction of certain conditions, as defined in the repayment guaranty agreement, our liability with respect to the principal under this loan will be reduced to zero, unless certain further events, described in the guarantee occur, in which case our maximum liability as guarantor will be restored to 25.0% of the principal under the loan. Furthermore, we agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the borrower. 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.

275 Brannan Loan

In connection with our 275 Brannan loan, we have guaranteed in favor of and promised to pay to the lender 35.0% of the principal under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At  March 31, 2015, the outstanding balance was $15.0 million, which results in a maximum guarantee amount for the principal under this loan of $5.3 million. Furthermore, we agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the borrower. The borrower has completed the improvements subject to this completion guaranty. This loan was fully repaid on April 10, 2015.


26

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



901 Market Loan

In connection with our 901 Market Street loan, we have guaranteed in favor of and promised to pay to the lender 35.0% of the principal under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At  March 31, 2015, the outstanding balance was $49.6 million, which results in a maximum guarantee amount for the principal under this loan of $17.4 million. Furthermore, we agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the borrower. The borrower has completed various of the improvements subject to this completion guaranty. If the borrower fails to complete the remaining required work, the guarantor agrees to perform timely all of the completion obligations, as defined in the agreement. Subsequent to March 31, 2015, we paid down the outstanding loan balance by $19.6 million. As of the date of this filing, there has been no event of default associated with this loan.

Other Loans

Although the rest of our loans are secured and non-recourse to the Company and the Operating Partnership, the Operating Partnership provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.

6. Interest Rate Contracts

Sunset Gower Sunset Bronson Mortgage

On February 11, 2011, we closed a five-year term loan totaling $92.0 million with Wells Fargo Bank, N.A., secured by our Sunset Gower and Sunset Bronson media and entertainment campuses. The loan initially bore interest at a rate equal to one-month LIBOR plus 3.50%. On March 16, 2011, we purchased an interest rate cap in order to cap one-month LIBOR at 3.715% on $50.0 million of the loan through its maturity on February 11, 2016. On January 11, 2012, we purchased an interest rate cap in order to cap one-month LIBOR at 2.00% with respect to $42.0 million of the loan through its maturity on February 11, 2016. We designated each of these interest rate cap contracts as a cash flow hedge for accounting purposes.

Effective August 22, 2013, the terms of this loan were amended to, among other changes, increase the outstanding balance from $92.0 million to $97.0 million, reduce the interest to a rate equal to one-month LIBOR plus 2.25%, and extend the maturity date from February 11, 2016 to February 11, 2018. The interest rate contracts described above were not changed in connection with this loan amendment.

Effective March 4, 2015, the terms of this loan were amended and restated to introduce the ability to draw up to an additional $160.0 million for budgeted construction costs associated with our ICON development and to extend the maturity date from February 11, 2018 to March 4, 2019. The interest rate contracts described above were not changed in connection with this loan amendment.

Met Park North

On July 31, 2013, we closed a seven-year loan totaling $64.5 million with Union Bank, N.A., secured by our Met Park North property. The loan bears interest at a rate equal to one-month LIBOR plus 1.55%. The full loan is subject to an interest rate contract that swapped one-month LIBOR to a fixed rate of 2.1644% through the loan’s maturity on August 1, 2020.

Overall

The combined fair market value of the interest rate caps at March 31, 2015 and December 31, 2014 was an asset of $0.276 thousand and $3 thousand, respectively. The fair market value of the interest rate swap at March 31, 2015 and December 31, 2014 was a liability of $2.5 million and $1.8 million, respectively.


27

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



7. Future Minimum Base Rents and Lease Payments Future Minimum Rents

Our properties are leased to tenants under operating leases with initial term expiration dates ranging from 2015 to 2020. Approximate future combined minimum rentals (excluding tenant reimbursements for operating expenses and without regard to cancellation options) for properties at March 31, 2015 are presented below for the years/periods ended December 31. The table below does not include rents under leases at our media and entertainment properties with terms of one year or less.

Future minimum base rents under our operating leases in each of the next five years and thereafter are as follows (in thousands):

 
Non-cancelable
 
Subject to early termination options
 
Total
2015 (nine months ending December 31, 2015)
$
126,383

 
679

 
$
127,062

2016
164,528

 
3,236

 
167,764

2017
149,492

 
6,892

 
156,384

2018
138,278

 
9,628

 
147,906

2019
124,110

 
10,749

 
134,859

2020
101,106

 
7,522

 
108,628

Thereafter
468,888

 

 
468,888

Total
$
1,272,785

 
$
38,706

 
$
1,311,491


Future Minimum Lease Payments

In conjunction with the acquisition of the Sunset Gower property, our subsidiary, SGS Realty II, LLC, assumed a ground lease agreement (expiring March 31, 2060) for a portion of the land with an unrelated party. As a result of the March 2011 rent adjustment, monthly rent increased to $0.031 million, whereas the monthly rent totaled $0.014 million at the time of acquisition. The rental rate is subject to adjustment again in March 2018 and every seven years thereafter.

In conjunction with the acquisition of the Del Amo Office property, our subsidiary, Hudson Del Amo Office, LLC, assumed a ground sublease (expiring June 30, 2049) with an unrelated party. Rent under the ground sublease is $1.00 per year, with the sublessee being responsible for all impositions, insurance premiums, operating charges, maintenance charges, construction costs and other charges, costs and expenses that arise or may be contemplated under any provisions of the ground sublease.

In conjunction with the acquisition of the 9300 Wilshire Blvd. property, our subsidiary, Hudson 9300 Wilshire, LLC, assumed a ground lease (expiring August 14, 2032) with an unrelated party. Minimum rent under the ground lease is $0.075 million per year (additional rent under this lease of 6% of gross rentals less minimum rent, as defined in such lease, is not included in this amount).

In conjunction with the acquisition of the 222 Kearny Street property, our subsidiary, Hudson 222 Kearny, LLC, assumed a ground lease (expiring June 14, 2054) with an unrelated party. Minimum rent under the ground lease is the greater of $0.975 million per year or 20.0% of the first $8.0 million of the tenant’s “Operating Income” during any “Lease Year,” as such terms are defined in the ground lease. The table below reflects the $0.975 million per year lease payment.

The following table provides information regarding our future minimum lease payments at March 31, 2015 under these lease agreements.


28

Hudson Pacific Properties, Inc. and Hudson Pacific Properties, L.P.
Notes to Consolidated Financial Statements—(Continued)
(Unaudited, tabular amounts in thousands, except square footage and share data)



2015 (nine months ending December 31, 2015)
$
1,063

2016
1,417

2017
1,417

2018
1,417

2019
1,417

Thereafter
49,408

Total
$
56,139


8. Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, receivables, payables, and accrued liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for notes payable, notes receivable and derivative assets and liabilities are estimates based on rates currently prevailing for similar instruments of similar maturities using Level 2 instruments. The estimated fair values of interest-rate contract/cap arrangements were derived from estimated values based on observable market data for similar instruments.
 
 
March 31, 2015
 
December 31, 2014
 
Carrying 
Value
 
Fair Value
 
Carrying 
Value
 
Fair Value
Notes payable
$
787,190

 
$
794,712

 
$
960,508

 
$
969,259

Notes receivable
28,372

 
28,372

 
28,268

 
28,268

Derivative assets, disclosed as “Interest rate contracts”
0.276

 
0.276

 
3

 
3

Derivative liabilities, disclosed as “Interest rate contracts”
2,538

 
2,538

 
1,750

 
1,750

 
9. Equity

Non-controlling Interests

Common units in the Operating Partnership

Common units in the operating partnership consisted of 2,382,563 common units of partnership interests, or common units, not owned by us. Common units and shares of our common stock have essentially the same economic characteristics, as they share equally in the total net income or loss distributions of our operating partnership. Investors who own common units have