Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

The Company’s 2010 Incentive Plan permits the Company’s board of directors (the “Board”) to grant, among other things, restricted stock, restricted stock units, operating partnership performance units and performance-based awards. As of December 31, 2018, 2.5 million common shares were available for grant under the 2010 Plan. The calculation of shares available for grant is determined after taking into account unvested restricted stock, unvested operating partnership performance units, unvested RSUs, awards under our one-time retention performance-based awards, and awards under our outstanding outperformance programs, assuming the maximum bonus pool eligible ultimately is earned and based on a stock price of $29.06.

The Board awards restricted shares to non-employee Board members on an annual basis as part of such Board members’ annual compensation and to newly elected non-employee board members in accordance with the Non-Employee Director Compensation Program. The time-based awards are generally issued in the second quarter, in conjunction with the director’s election to the Board and the individual share awards vest in equal annual installments over the applicable service vesting period, which is three years.

The Board awards time-based restricted shares or time-based operating partnership performance units to certain employees on an annual basis as part of the employees’ annual compensation. These time-based awards are generally issued in the fourth quarter, and vest in equal annual installments over the applicable service vesting period, which is generally three years. Additionally, certain awards are subject to a mandatory holding period upon vesting if the grantee is a named executive officer.

The compensation committee of our Board (the “Compensation Committee”) annually adopts a Hudson Pacific Properties, Inc. Outperformance Program (“OPP Plan”) under our 2010 Plan. With respect to OPP Plan awards granted through 2016, to the extent an award is earned following the completion of a three-year performance period, 50% of the earned award will vest in full at the end of the three-year performance period and 50% of the earned award will vest in equal annual installments over the two years thereafter, subject to the participant’s continued employment. OPP Plan awards are settled in common stock and in the case of certain executives, awards are settled in performance units in our operating partnership. Commencing with our 2017 OPP Plan, the two-year post performance vesting period was replaced with a two-year mandatory holding period upon vesting. In February 2018, the Compensation Committee adopted the 2018 OPP Plan. The 2018 OPP Plan is substantially similar to the previous OPP Plans except for (i) the performance period is January 1, 2018 to December 31, 2020, (ii) the maximum bonus pool is $25.0 million, (iii) the relative comparison index is the SNL US Office REIT index, (iv) the absolute TSR hurdle will be 21% (or 7% per annum) and (v) adjusted the sliding scale low return factor so that relative TSR pool can only be reduced by 75% under this feature.

In December 2015, the Compensation Committee of the Board awarded a one-time special retention award to certain executives. The grants consist of time-based awards and performance-based awards. The time-based awards vest in equal 25% installments over a four-year period, subject to the participant’s continued employment. The performance-based awards vest over a four-year period, subject to the achievement of applicable performance goals and the participant’s continued employment.

Time-Based Awards

The stock-based compensation is valued based on the quoted closing price of the Company’s common stock on the applicable grant date and discounted for the hold restriction in accordance with ASC 718. The stock-based compensation is amortized through the final vesting period on a straight-line basis. Forfeitures of awards are recognized as they occur.

Performance-Based Awards

OPP Plan

An award under the OPP Plan is ultimately earned to the extent the Company outperforms a predetermined total shareholder return (“TSR”) goal and/or achieves goals with respect to the outperformance of its peers in a particular REIT index. The ultimate aggregate award cannot exceed the predetermined maximum bonus pool. The following table outlines key components of the 2018 and 2017 OPP Plans:


	2018 OPP Plan	2017 OPP Plan
Maximum bonus pool, in millions	$25.0	$20.0
Performance period	1/1/2018 to 12/31/2020	1/1/2017 to 12/31/2019

The stock-based compensation costs of the OPP Plans were valued in accordance with ASC 718, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The stock-based compensation is amortized through the final vesting period under a graded vesting expense recognition schedule. Forfeitures of awards are recognized as they occur.

The per unit fair value of OPP award granted was estimated on the date of grant using the following assumptions in the Monte Carlo valuation:


	2018	2017	2016
Expected price volatility for the Company	20.00%	24.00%	24.00%
Expected price volatility for the particular REIT index	18.00%	17.00%	17.00%
Risk-free rate	2.37%	1.47%	1.09%
Dividend yield	2.90%	2.30%	2.40%

One-Time Retention Awards

At the end of each year in the four-year performance period and over the four-year performance period, the ultimate award is earned if the Company outperforms a predetermined TSR goal and/or achieves goals with respect to its outperformance of its peers in a particular REIT index.

The stock-based compensation costs were valued in accordance with ASC 718, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The stock-based compensation is amortized through the final vesting period under a graded vesting expense recognition schedule. Forfeitures of awards are recognized as they occur.

The per unit fair value of one-time retention award granted was estimated on the date of grant using the following assumptions in the Monte Carlo valuation:


			Assumptions
Expected price volatility for the Company			23.00%
Expected price volatility for the particular REIT index			18.00%
Risk-free rate			1.63%
Dividend yield			3.20%

Summary of Unvested Share Activity

The following table summarizes the activity and status of all unvested stock awards:


	2018				2017					2016
	Shares	Weighted-Average Grant-Date Fair Value		Shares	Weighted-Average Grant-Date Fair Value		Shares	Weighted-Average Grant-Date Fair Value
Unvested at January 1	1,087,186	$	33.64	887,179	$	31.09	827,950	$	28.92
Granted	190,557	29.53		918,884	34.37		489,826	30.95
Vested	(571,481)	32.74		(705,508)	31.42		(430,597)	26.75
Canceled	(2,466)	33.38		(13,369)	32.14		—	—
Unvested at December 31	703,796	$	32.93	1,087,186	$	33.64	887,179	$	31.09


Year Ended December 31,	Non-Vested Shares Issued	Weighted Average Grant-Date Fair Value		Vested Shares	Total Vest-Date Fair Value (in thousands)
2018	190,557	$	29.53	(571,481)	$	16,735
2017	918,884	34.37		(705,508)	24,155
2016	489,826	30.95		(430,597)	14,736

During 2018, the Company granted 318,549 time-based restricted operating partnership performance units with a weighted-average grant-date fair value of $28.41. There have been no other operating partnership performance units granted, vested or canceled.

Share-based Compensation Recorded

The following table presents the classification and amount recognized for stock-based compensation related to the Company’s awards:


	For the Year Ended December 31,
	2018		2017		2016
Expensed stock compensation⁽¹⁾	$	17,028	$	15,079	$	14,144
Capitalized stock compensation⁽²⁾	1,097		836		510
Total stock compensation⁽³⁾	$	18,125	$	15,915	$	14,654

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1.Amounts are recorded in general and administrative expenses in the Consolidated Statements of Operations.

2.Amounts are recorded in deferred leasing costs and lease intangible assets, net and investment in real estate, at cost in the Consolidated Balance Sheets.

3.Amounts are recorded in additional paid-in capital and non-controlling interest—units in the operating partnership in the Consolidated Balance Sheets.

As of December 31, 2018, total unrecognized compensation cost related to unvested share-based payments was $32.2 million, and is expected to be recognized over a weighted-average period of three years.