This REIT Just Hit An All-Time High After A Major Deal With Blackstone
Normally a deal that doubles the size of a successful company is huge news.
Hudson Pacific Properties Inc (NYSE: HPP) purchasing the entire Northern California Equity Office Properties (EOP) portfolio from two The Blackstone Group L.P. (NYSE: BX) real estate partnerships by way of a negotiated transaction is certainly no exception.
But there is far more to this arrangement than just a large asset sale. The terms of the deal announced on December 8 are actually more strategic than transactional.
Blackstone To Become Largest HPP Shareholder
Blackstone will receive $1.75 billion in cash and be issued common shares and operating partnership units that will equate to ~48 percent of the HPP common equity outstanding. It will also obtain three seats on the Hudson Pacific board of directors.
According to Hudson Chairman and CEO Victor Coleman, the contribution of Blackstone office assets in return for 63.5 million shares and operating partnership units is a "transformational event" for Hudson Pacific.
Hudson Pacific Shares Hit All-Time High
Tale Of The Tape
During the third quarter, Kilroy delivered and stabilized a $300 million, 587,000 SF, three building project located in Sunnyvale, CA. The campus is 100 percent leased to the professional network giant LinkedIn Corp.
Boston Properties just announced a special $4.50 per share cash dividend for its shareholders after the bell on December 8, along with its regular quarterly dividend of $0.65 per share.
During 2014, Boston Properties sold about ~$2.3 billion of office assets, including eight office buildings sold to Google, Inc. near its Mountain View, CA corporate headquarters.
Before And After $3.5 Billion Deal
Currently, $1.8 billion cap Hudson Pacific owns 27 of office, media and entertainment properties, totaling 6.4 million SF, plus undeveloped land that could support an additional 1.9 million square feet.
After closing on the Blackstone EOP portfolio, Hudson Pacific is expected to have a market cap of $3.7 billion and a total enterprise value of $6.5 billion. The acquisition is expected to immediately be accretive to Hudson's normalized funds from operations (FFO) in 2015.
The combined assets after closing the transaction in 2015 will now increase to 53 properties, totaling 14.6 million SF.
The opportunity to acquire the EOP portfolio was described on the call as a "generational opportunity" on the conference call.
A Deeper Dive
The most notable and significant change is Hudson Pacific jumping to the No. 1 spot in the coveted high-tech corridors located in SF Peninsula/Silicon Valley markets.
Hudson will control ~44 percent of these Stanford assets after closing on this portfolio.
Hudson Pacific has already budgeted the funds for cap-ex in order to reposition valuable older assets to result in a huge re-leasing upside.
NoCal Economic Tailwinds
The existing 20 percent vacancy, and significant lease expirations from 2015 - 2017 for the EOP portfolio in many office markets would be a huge red flag.
However, strong demand in place from global tech giants and a vibrant Bay Area economy seems to imply a huge upside for Hudson Pacific shareholders moving forward.
Huge Operational Upside
Coleman pointed out on the call that Hudson Pacific was acquiring these assets at an implied price of $425 per SF, which is below replacement cost.
The going-in cap rate of 5.1 percent is expected to be stabilized at closer to 7.1 percent -- representing double digit returns in a relatively short time frame.
The Big Picture
The existing Hudson Pacific portfolio is leased under relatively long-term leases. The value-added opportunities embedded in the former NoCal EOP assets should help to grow cash available for distribution to HPP shareholders at a more impressive clip moving forward.
According to Jonathan Gray (Blackstone's Head of Global Real Estate) on the joint conference call, "Blackstone views this more as a contribution of assets to Hudson Pacific than as a sale."
Blackstone has about $1.3 billion of debt on the portfolio, so at closing, there will be very little net cash for Blackstone. The real value to Blackstone moving forward is in maintaining a large presence in what Gray believes is "the strongest market in the U.S." -- through its equity shares in Hudson Pacific.
This appears to be a very logical combination, which should generate multiple synergies from the much larger scale of Hudson Pacific operations, as well as through Blackstone's overall market intelligence and better access to capital markets.
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