By Scott Baltic, Contributing Editor
In a stock-and-cash transaction valued at $3.5 billion, Hudson Pacific Properties Inc., of Los Angeles, has agreed to acquire Equity Office Properties’ approximately 8.2 million-square-foot San Francisco Peninsula and Silicon Valley office portfolio from Blackstone Real Estate Partners V and VI, Hudson announced Monday.
The off-market transaction will effectively double Hudson’s size and result in Hudson having an equity market capitalization of $3.7 billion and total enterprise value of approximately $6.5 billion. It will reportedly also nail down the company’s position as the leading West Coast office REIT, expanding Hudson’s portfolio to 53 properties totaling 14.6 million square feet in Northern and Southern California and the Pacific Northwest.
Per the acquisition agreement, Hudson will fund the purchase with $1.75 billion in cash and approximately 63.5 million Hudson common shares and operating partnership units issued to Blackstone. Hudson reportedly has obtained $1.75 billion of committed bridge financing, but is exploring alternatives to fund the cash portion of the transaction, including existing asset sales and joint ventures and new secured or unsecured financing, potentially coinciding with pursuit of an investment-grade credit rating.
After closing, which is expected in the first half of next year, pre-transaction Hudson equity holders will own about 52 percent of the company’s common equity on a fully diluted basis, and Blackstone funds will own the remaining approximately 48 percent.
Hudson’s existing management team, led by chairman & CEO Victor Coleman, will continue to lead the company, while Blackstone will appoint three of 12 members to Hudson’s board of directors.
“Hudson has long targeted these two Northern California regions for expansion, and while we expect the transaction to be immediately accretive to FFO, we also intend to move quickly to employ our leasing, repositioning and development expertise to extract additional value for our stockholders,” Coleman said in a release.
Among the transaction’s benefits, Hudson’s announcement touted the value-add opportunities. The portfolio’s occupancy and rents are currently about 10 percent and 15 percent below market, respectively, with about 60 percent of leased square footage expiring by the end of 2017, affording opportunity for substantial embedded NOI growth, according to Hudson.
The transaction is subject to customary closing conditions, including Hudson stockholder approval of the proposed equity issuance.
As of press time, Hudson had not responded to Commercial Property Executive’s request for further information.
The Eastdil Secured group of Wells Fargo Securities L.L.C. is Hudson’s lead financial advisor, with BofA Merrill Lynch and Houlihan Lokey also acting as financial advisors on the transaction. Latham & Watkins L.L.P. and Gibson, Dunn & Crutcher L.L.P. are Hudson’s legal counsel.
Goldman, Sachs & Co. is Blackstone’s financial advisor, and Simpson Thacher & Bartlett L.L.P. and Pircher, Nichols & Meeks are acting as its legal counsel.
The portfolio consists of 75 buildings in 26 developments (number of buildings in parentheses):
- · San Francisco Peninsula submarket: Bayhill Office Center, Redwood City (2); One Bay Plaza, Burlingame (1); Bay Park Plaza, Burlingame (2); Metro Center, Foster City (3); Peninsula Office Park, San Mateo (7).
- · Redwood Shores submarket: Shorebreeze (2), 333 Twin Dolphin Plaza (1), 555 Twin Dolphin Plaza (1), Towers at Shores Center (2), Skyway Landing (2).
- · Palo Alto submarket: 2180 Sand Hill Road, Menlo Park (1), and (remainder Palo Alto) Embarcadero Place (4), Palo Alto Square (6), Clocktower Square (4), Page Mill Center (4), Lockheed (1), 3400 Hillview (5), Foothill Research Center (4).
- · Silicon Valley submarket: Campus Center, Milpitas (3); Techmart Commerce Center, Santa Clara (1); Patrick Henry Drive, Santa Clara (1).
- · San Jose Airport submarket: Gateway (5), Metro Plaza (3), 1740 Technology (1), Concourse (7), Skyport Plaza (2).
Two development parcels in Bay Area submarkets round out the portfolio.