Hudson Pacific Properties Inc. has agreed to purchase 26 Bay Area office properties for $3.5 billion in cash and stock, underscoring the hot Silicon Valley real estate market and greatly expanding the Los Angeles firm's portfolio.
The real estate investment trust is acquiring the Northern California properties from the Blackstone Group, a private equity giant that scooped up the assets in its 2007 leveraged buyout of Equity Office Properties Trust.
Hudson Pacific said Monday that it would pay $1.75 billion in cash, while issuing Blackstone tens of millions in shares.
The transaction roughly doubles Hudson's holdings, as well as its market capitalization, which the Brentwood firm expects will reach $3.75 billion.
"This is a once-in-a-generation opportunity to establish a dominant presence in these markets," Hudson Pacific Chief Executive Victor J. Coleman said in a conference call with analysts. "We believe that the Bay Area office markets are among the best in the country."
Underscoring that strength, Blackstone won't simply dump its assets for cash, as it has with recent sales. When the transaction closes, Blackstone will own about 48% of Hudson, the companies said.
"We want to continue to play in Northern California," Jonathan D. Gray, Blackstone's global head of real estate, said on the conference call.
The 26 properties mark Hudson's entry into Silicon Valley and the peninsula towns south of San Francisco.
The properties are in Redwood City, Burlingame, Foster City, San Mateo, Redwood Shores, Menlo Park, Palo Alto, Milpitas, Santa Clara and San Jose. They total about 8.2 million square feet. Tenants include Google Inc., Oracle Corp. and Wal-Mart Stores Inc. The deal also includes 40 acres of developable land, split between two sites.
Rents are currently 15% below market value, and the properties are 81% occupied, compared to about 90% for the overall market, Hudson said.
That gives the Los Angeles firm an opportunity to capitalize on a hot real estate market.
But the investment is not without risks, said Richard Anderson, an analyst with Mizuho Securities. The market is humming now, but it's unknown how long the current tech boom will last.
"This will end eventually," Anderson said. "The question isn't if but when."
The deal is the largest in the area since 2007 when Blackstone picked up Equity Office's holdings, said Joe Moriarty, an executive vice president in CBRE's San Jose office.
If it closes as expected, Hudson would have 53 properties, totaling 14.6 million square feet, in the Bay Area, Southern California and the Seattle region. The deal must still receive approval from Hudson shareholders.
Hudson Pacific shares rose 63 cents, or 2.2%, to $28.80 on Monday.