Blackstone to Sell California Offices for $3.5 BillionHui-yong Yu and Oshrat Carmiel
Blackstone Group LP agreed to sell 26 Northern California properties to Hudson Pacific Properties Inc. for $3.5 billion in its latest deal to exit office holdings acquired seven years ago near the market’s peak.
Hudson Pacific agreed to pay $1.75 billion in cash for the properties and the rest in stock, giving Blackstone about a 48 percent stake in the real estate investment trust, the companies said in a statement today. The deal will roughly double the asset base of Los Angeles-based Hudson Pacific.
“This is a once-in-a-generation opportunity,” Victor Coleman, chairman and chief executive officer of the REIT, said on a conference call today. “We’ve been patient waiting for this opportunity.”
Blackstone has been selling assets from its 2007 acquisition of Equity Office Properties Trust as occupancies increase and rents recover from the real estate crash. The Hudson Pacific transaction marks the New York-based firm’s biggest sale of office buildings since just after the $39 billion Equity Office takeover, when it flipped many of the properties to reduce debt.
The buildings total 8.2 million square feet (761,000 square meters) and are located in the San Francisco area and Silicon Valley. Those areas were among the top three markets in the U.S. for office-rent growth in the third quarter, as technology tenants drive leasing demand, according to Reis Inc.
The deal would make Hudson Pacific the largest publicly traded office owner in Silicon Valley, ahead of Boston Properties Inc., according to an investor presentation.
The properties are located in cities south of San Francisco, such as Redwood Shores, Palo Alto and San Jose. The deal doesn’t include Blackstone’s downtown San Francisco holdings, such as 100 Montgomery St. and the landmark Ferry Building, Mark Lammas, Hudson Pacific’s chief financial officer, said in a telephone interview. The Ferry Building was acquired in the Equity Office takeover, while 100 Montgomery was a later purchase.
The acquisition, expected to close in the first half of 2015, is the biggest yet for Hudson Pacific, which was incorporated in 2009 and went public a year later. Coleman, who founded the REIT’s predecessor company, is the co-founder and former president of Arden Realty Inc., which was sold to a unit of General Electric Co. in 2006. He has been trying to bring a National Hockey League team to Seattle.
Hudson Pacific, with a market value of about $1.9 billion, currently owns 27 properties totaling 6.4 million square feet, excluding land that can support another 1.9 million square feet, according to its website. The buildings are in Northern and Southern California and the Seattle area.
Hudson Pacific rose 2.2 percent today to $28.80. Blackstone was unchanged at $33.94.
The buildings in the deal have occupancies averaging about 80 percent, with about 60 percent of leases expiring in the next three years, Coleman said on the conference call.
Hudson Pacific expects costs of about $85 million to lease up the properties, including tenant-improvement allowances, broker commissions and renovations, Coleman said. The company is exploring sales and joint ventures of existing assets to help finance the acquisition, and doesn’t expect to sell any of the assets it’s buying from Blackstone, he said.
Blackstone will be required to hold its shares in Hudson Pacific until the end of 2016, Coleman said. The private-equity firm will gain three board seats at the REIT. It will retain some office assets in Marin County and San Francisco, Jon Gray, Blackstone’s global head of real estate, said on the call.
By taking a stake in Hudson Pacific, Blackstone can still benefit from leasing demand and rent growth in Northern California, where new construction is muted, Gray said.
“The Northern California supply picture is attractive,” Gray said on the call. “This is a market where we want to have an ongoing presence and stake. Two plus two equals five.”
Blackstone owns about 50 million square feet of office space in the U.S., including the properties being sold to Hudson Pacific, said Frank Cohen, a senior managing director at the firm.
After the sale, Blackstone will hold about 10 million square feet of former Equity Office buildings, including in West Los Angeles and Boston, that it’s likely to sell by the end of next year, Cohen said.
Blackstone in November agreed to sell a 42-story office building on Manhattan’s Bryant Park to an Ivanhoe Cambridge venture for about $2.25 billion, according to two people with knowledge of the deal. The sale would be the largest of a whole U.S. office property since a group led by Boston Properties purchased the General Motors Building in New York for a record $2.8 billion in 2008, according to Real Capital Analytics Inc.
In September, Blackstone sold five office buildings in the Boston area to investors led by Oxford Properties Group, a unit of the Ontario Municipal Employees Retirement System, for about $2.1 billion.
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