Blackstone Group sells property portfolio for $3.5bn

February 2015 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

In December 2014, American multinational private equity firm the Blackstone Group agreed to sell its portfolio of Northern California office buildings to Los Angeles-based real estate investment trust Hudson Pacific Properties for $3.5bn.

For Blackstone, the sale is the latest in a number of major real estate transactions the firm has conducted in 2014; for Hudson, it solidifies their status as the West Coast’s leading office REIT. When the transaction closes in the first half of 2015, Hudson is expected to have an equity market capitalisation of $3.7bn and a total enterprise value of approximately $6.5bn.

The buildings included in the definitive asset purchase agreement – located in San Francisco and Silicon Valley – are part of Blackstone’s Equity Office Properties Trust portfolio and are being sold in a cash and stock transaction which will give Blackstone a 48 percent share of Hudson. The California portfolio includes 26 office buildings, totalling 8.2 million square feet, and two development parcels.

The sale represents a major slice of the portfolio which Blackstone originally acquired for $39bn in 2007.

However, disposing of the portfolio has taken some time, with the economic downturn causing a major slowdown in the commercial real estate market. But this year, with the market showing significant signs of recovery, Blackstone sold five Equity Office properties in the Boston area for $2.1bn.

Once the transaction is complete, there will be two highly complementary office portfolios with a combined asset base of 53 properties totalling approximately 14.6 million square feet across Northern and Southern California and the Pacific Northwest.

The strategic and financial benefits of the deal include an exclusive, direct opportunity to acquire a large portfolio complementary to existing assets, along with value-added opportunities which will leverage in-house leasing and repositioning expertise. The deal also offers strong Bay Area office market fundamentals, a flexible balance sheet and increased scale which will provide long-term capital advantages. Blackstone will also have the ability to retain a significant equity stake and its representatives will serve on Hudson’s board of directors.

“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,” said Victor J. Coleman, Hudson’s chairman and chief executive. “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.”

Jonathan D. Gray, Blackstone’s head of real estate, added: “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 portfolio.”

The deal saw Goldman Sachs provide financial advice to Blackstone while Simpson Thacher & Bartlett and Pircher, Nichols & Meeks acted as legal advisers. For Hudson, financial advice was provided by Wells Fargo’s Eastdil Secured group, Bank of America Merrill Lynch and Houlihan Lokey. Hudson also took legal advice from Latham & Watkins and Gibson, Dunn & Crutcher.

The deal is subject to approval by Hudson’s shareholders, with one, Farallon Capital Management, already having endorsed the deal at the time of writing. Rocky Fried, managing member at Farallon Capital Management, L.L.C, said: “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.”

2014 was a busy year for Blackstone as it conducted sales of its real estate holdings. Major deals included the sale of warehouse landlord IndCor Properties to Singapore’s sovereign wealth fund for $8.1bn, as well as the unloading of the Waldorf-Astoria hotel to a Chinese insurance company for almost $2bn.

Fraser Tennant