Hudson Pacific Properties (HPP) to Acquire Blackstone's (BX) EOP Northern California Portfolio in $3.5B Deal

Hudson Pacific Properties (NYSE: HPP) announced that it has entered into a definitive asset purchase agreement under which Hudson will acquire Equity Office Properties’ San Francisco Peninsula and Silicon Valley portfolio (the “EOP Northern California Portfolio”) from Blackstone Real Estate Partners V and VI (NYSE: BX) in a stock and cash transaction valued at $3.5 billion, solidifying Hudson’s position as the leading West Coast office REIT. Upon closing of the transaction, Hudson is expected to have an equity market capitalization of $3.7 billion and total enterprise value of approximately $6.5 billion.

“The acquisition of the EOP Northern California Portfolio perfectly aligns with our strategy to acquire high-quality office properties in West Coast markets poised for continued growth through off-market transactions. 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,” said Victor J. Coleman, Hudson’s Chairman and Chief Executive Officer.

The transaction brings together two highly complementary office portfolios with a combined asset base of 53 properties totaling approximately 14.6 million square feet across Northern and Southern California and the Pacific Northwest. Under the terms of the agreement, the Company will fund the acquisition with $1.75 billion in cash and approximately 63.5 million Hudson common shares and operating partnership units issued to Blackstone.

“We chose to take a major stake in Hudson given its high-quality portfolio, outstanding management team and attractive prospects for growth. We believe strongly in the upside potential of the EOP Northern California Portfolio and this combination creates a market-leading West Coast office REIT,” said Jonathan D. Gray, Blackstone’s Global Head of Real Estate.

Hudson has obtained $1.75 billion of committed bridge financing, but is exploring alternatives to fund the transaction’s cash needs, including existing asset sales and joint ventures and new secured or unsecured financing potentially coinciding with pursuit of an investment grade credit rating. The transaction is subject to customary closing conditions, including Hudson stockholder approval of the proposed equity issuance. Affiliates of Farallon Capital Management, L.L.C., which own approximately 15% of the Company's outstanding common equity on a fully diluted basis, have entered into a voting agreement supporting the transaction.

"As long time shareholders, we are excited about Hudson's latest growth opportunity, and are confident that they will continue their excellent track record of execution," said Rocky Fried, Managing Member at Farallon Capital Management, L.L.C.

The parties currently expect the transaction to close in the first half of 2015, and to be immediately accretive to Hudson’s 2015 normalized Funds From Operations (“FFO”).

Strategic and Financial Benefits

• Exclusive, direct opportunity to acquire a large portfolio complementary to existing assets. The EOP Northern California Portfolio consists of 26 high-quality office assets totaling approximately 8.2 million square feet and two development parcels in irreplaceable Bay Area submarkets with a strong, diversified tenancy, including several blue chip technology companies.
• Value-add opportunities will leverage in-house leasing and repositioning expertise. The EOP Northern California Portfolio’s current occupancy and rents are approximately 10% and 15% below market, respectively, with approximately 60% of leased square footage expiring by year-end 2017, affording opportunity for substantial embedded net operating income growth.
• Strong Bay Area office market fundamentals. The Bay Area has achieved employment growth more than twice the national average since 2010, and Class A office market rents are still 42% below year 2000 levels, while the overall vacancy rate is 430 basis points above year 2000 levels.
• Flexible balance sheet and increased scale provide long-term capital advantages. Upon closing of the transaction, Hudson will effectively double in size, resulting in improved access to capital and G&A ratios, as well as a path to an investment grade credit rating.
• Blackstone relationship. Blackstone will retain a significant equity stake and its representatives will serve on Hudson’s Board of Directors, providing the Company unique access to Blackstone’s industry relationships, global capital sources and market intelligence.

Leadership and Integration

The Company’s Board of Directors has approved the EOP Northern California Portfolio acquisition. Hudson’s existing management team, led by Victor J. Coleman as Chairman and Chief Executive Officer, will continue to lead the Company. Blackstone will appoint three of twelve members to Hudson’s Board of Directors.

Ownership

Following the acquisition, pre-transaction Hudson equity holders will own approximately 52% of the Company’s common equity on a fully diluted basis, and Blackstone funds will own approximately 48% of the Company’s common equity on a fully diluted basis. Hudson expects Blackstone’s common stock ownership at closing will be 9.8% with the right to convert operating partnership units for up to 20% of total outstanding common shares. Blackstone will have no right to vote its operating partnership units on matters voted by the Company’s stockholders except with respect to change of control and related matters.

Dividend Policy

Following transaction closing, Hudson intends to maintain its current quarterly dividend of $0.125/share.

Advisors

The Eastdil Secured group of Wells Fargo Securities, LLC is acting as Hudson’s lead financial advisor, with BofA Merrill Lynch and Houlihan Lokey also acting as financial advisors in connection with the transaction. Latham & Watkins LLP and Gibson, Dunn & Crutcher LLP are acting as the Company’s legal counsel.

Goldman, Sachs & Co. is acting as Blackstone’s financial advisor and Simpson Thacher & Bartlett LLP and Pircher, Nichols & Meeks are acting as its legal counsel in connection with the transaction.

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