Inside Hudson Pacific and Blackstone’s field of streams

As many developers just try to hang on during the pandemic, Victor Coleman is celebrating.

During an earnings call at the end of July, Coleman could hardly contain his excitement about what he called “the milestone.” Blackstone Group, the New York-based investment giant, had agreed to buy a 49 percent stake in his company’s $1.65 billion Hollywood real estate portfolio.

“Our sale of 49 percent to Blackstone, arguably, the preeminent institutional real estate investor, provides validation to the stock market,” Coleman, the CEO of Hudson Pacific Properties, declared. The seeds he sowed nearly 15 years ago had borne lucrative fruit.

But for Blackstone, the deal for 2 million square feet of Hollywood office buildings and soundstages represents something else entirely. It’s a dramatic entree into what some see as a recession-proof real estate play: capitalizing on the streaming frenzy.

Blackstone Global Co-Head of Real Estate Ken Caplan

“Our business is driven by investing thematically in sectors with powerful secular tailwinds,” said Ken Caplan, global co-head of Blackstone Real Estate. “And there is no better example of that than content creation in Los Angeles.”

Industry insiders agree the planned Blackstone-Hudson Pacific venture is an exclamation point on the value of soundstage space, which they say is an asset class still little understood by real estate investors.

Meanwhile, Blackstone’s money could be used to satiate Coleman’s acquisition ambitions. Or Blackstone could even swallow Hudson Pacific whole.

“I think there is a chance that Hudson would ultimately be acquired,” said Alexander Goldfarb, a real estate investment trust analyst with Piper Sandler. “I think it would make a great pairing.”

Blackstone Goes Hollywood

The deal, which closed this week,* centers on Sunset Bronson, Sunset Gower, and Sunset Las Palmas film production facilities, plus adjoining office buildings.

The soundstage space involved totals 1.2 million square feet. There is an additional 1.1 million square feet of adjacent, under-utilized land owned by Hudson Pacific, SEC filings show, that the REIT may convert into production facilities.

Fifty percent of the Sunset soundstage leases are long-term, said Hudson Pacific chief operating officer Alex Vouvalides, with Netflix the biggest long-term tenant.

Hudson Pacific COO Alex Vouvalides

Netflix also leases 100 percent of the Icon, Epic and Cue office buildings, Vouvalides said. An old guard showbiz player – Technicolor – leases the remaining office space. In all, Blackstone is taking a stake in about 966,000 square feet of office space.

Blackstone’s Core+ fund will run the deal, sources close to the transaction said. Blackstone is considering asset-level financing, per the SEC filings, which would give Hudson Pacific “anticipated cash proceeds of up to $1.268 billion.”

The deal was discussed “for quite some time pre-Covid,” Vouvalides said.

“Hudson Pacific gets a deep-pocketed investor on board as they move forward with the renovation and expansion of their Hollywood facilities,” said Michael Soto, Southern California research director at Savills. “Blackstone gets to invest in studio facilities which has become a niche product with insatiable demand due to streaming.”

Blackstone perhaps signaled its interest during an April earnings call.

“We’ve also been emphasizing deployment in faster growing sectors over the past several years, which are showing great resiliency in this environment,” Jonathan Gray, Blackstone’s president and chief operating officer, said at the time. “Key themes include logistics, life sciences, cloud migration, and online content creation – all which are holding up quite well.”

In public statements, Gray and CEO Stephen Schwarzman seem to play to Blackstone’s master of the universe reputation by emphasizing that the company brims with capital. Blackstone officials used the phrase “dry powder” a total of 13 times during the company’s two earnings calls this year.

But even the country’s largest commercial landlord by total property value has scaled back some of its ambitions amid the pandemic. Blackstone wound down a mortgage-backed security fund that had net assets of $553 million as of May 31, and skipped a $274 million hotel loan payment earlier this month.

“There are only so many things they can do,” said Sam Alavi, a real estate attorney at Paul Hastings.

Blackstone and Hudson Pacific have previously done at least two major deals. Hudson Pacific bought a majority stake in a San Francisco and Silicon Valley office portfolio valued at $3.5 billion from Blackstone in 2014, and the firms have an office and retail space joint venture in Vancouver.

And Blackstone is not a neophyte when it comes to the L.A. entertainment space. It bought $1.7 billion worth of properties in Burbank, buildings with tenants such as Walt Disney, Warner Bros. Entertainment, and NBCUniversal. But that deal was almost all office space, not soundstages.

“Running studios is a niche operation,” said Craig Coan, a real estate lawyer at Greenberg Glusker.

Life’s a Soundstage

A Vancouver native, Coleman is mostly written about as a hockey fan and minority investor of the Las Vegas Golden Knights hockey team. But the developer has had a notable if low-profile impact on Southern California real estate for three decades.

After graduating from Golden Gate University in 1990, Coleman broke into real estate by partnering with property mogul Richard Ziman to start Arden Realty. In less than 15 years, the company became Southern California’s largest office landlord, with 192 buildings and 18.5 million square feet across four counties. In 2005, General Electric’s real estate arm bought Arden for $3.2 billion.

Sunset Gower Studios (Google Maps)

A year later, Coleman founded Hudson Capital (later renamed Hudson Pacific Properties) and began scooping up film studios. In the next two years, his company acquired Sunset Gower Studios, the iconic former Hollywood headquarters of Columbia Pictures, and then Sunset Bronson Studios, the first production center for Warner Brothers.

Hudson Pacific is a different kind of real estate investment trust. Not in a boilerplate “We think differently to create value, blah blah blah” corporate culture sense, but in a tangible way: The company leases buildings to high-profile entertainment and technology companies with very specific operational needs.

Coleman spotted an opportunity not just with Netflix, but leasing San Francisco office space to Uber and Santa Monica buildings to esports’ Riot Games when those companies were getting started.

“The focus of Hudson Pacific really was around the media and tech real estate business, and our first acquisitions were two large studios that we bought in Los Angeles,” Coleman told REIT Magazine last year.

Hudson Pacific’s work with Netflix dovetailed with the streaming services move to “Netflix originals” that directly compete with legacy studios, as well as the emergence of other streaming platforms — from Amazon Prime to NBCUniversal’s fledgling Peacock — that need space to produce their own original content.

Hudson Pacific’s Hollywood portfolio alone accounts for a fifth of the 5.2 million square feet of L.A. County’s leasable soundstages, according to Film LA, a local government entity. In fact, Hudson Pacific owns the most soundstage space in the country, with the exception of legacy studios Disney, Warner, Sony, Paramount and Universal.

Sunset Bronson Studios (Google Maps)

That, of course, is a major exception. The Paramount lot alone in Hollywood is set to span 4.1 million square feet after construction is completed.

The life of a soundstage space landlord is a lucrative but chaotic endeavor. There is no shortage of film producers roaming L.A. willing to pay to shoot for a few weeks (Film LA studies show county soundstage occupancy at around 95 percent before the pandemic). But besides the problem of short-term tenants, the landlord must also coordinate the production.

“What makes it complicated for everyone is that the components of the cost go far beyond rent,” said a real estate broker who does business at the Hudson Pacific studios. “There’s a slew of add-ons – trailers, stages, production offices, green rooms, and more.”

Hudson Pacific along with Hackman Capital Partners, which leases studio space to Amazon, has tried to operate soundstage leasing to more closely resemble other types of commercial leases.

“Rents were very inconsistent, until Netflix and Amazon began looking at long-term leases,” the consultant said, who added long-term leases can shift operational headaches to the renter.

Still, Hudson Pacific must handle the 50 percent of soundstages not leased to Netflix. According to Vouvalides, the company was leasing 92 percent of its total soundstage space at the end of March, a number that presumably dropped amid the lockdown.

But in L.A., the roughly 600,000-square feet of studio space not leased to Netflix is still seen as exceedingly valuable.

“This space will be in huge demand once all restrictions are lifted,” Coan said. “I understand that there are a lot of content creators waiting to get into the studios.”

“While everyone is crying [about] the death of the office,” noted Alavi of Paul Hastings. “There will be studio demand.”

On Wall Street, the view is more complicated. As Netflix’s stock has shot up 30 percent since March, the stock of its L.A. landlord has been up and down since March, more in line with other real estate investment trusts.

Hudson Pacific’s stock was trading around $24 after its second quarter earnings call, or about a dollar below its share value in March.

The share price was boosted after the announced deal with Blackstone. An analyst note from Bank of America, which is also a financial advisor on the deal, said Blackstone overvalued Hudson Pacific’s Hollywood portfolio by about 10 percent.

L.A. brokers counter that the soundstage space was undervalued. “This is pretty much irreplaceable space on urban infill sites that sold at or below replacement level cost,” one said. “Building a new soundstage would cost $500 per square foot, while this sold at $530 a square foot as a growing business.”

The broker added that some investors still don’t make the connection between the proliferation of amply bankrolled streaming services with soundstages long-term value. “Soundstages are a space few on Wall Street understand.”

The Next Scene

Hudson Pacific is in acquisition mode following the Blackstone deal. “Especially now that we have reduced our funding requirements for future development, we are nimble and poised to take advantage of market dislocations in the current environment to expand in office as well as studios,” Coleman said on the July earnings call.

One move could be Hudson Pacific acquiring the remaining 25 percent of One Westside Pavilion, office space leased to Google. To own the project, which is being built for $475 million, Hudson Pacific would have to buy off Macerich, a Santa Monica-based real estate investment trust that’s reeling from mall tenants not paying rent.

“Buying up One Westside is certainly a possibility, but it still leaves them with a lot of firepower,” said Goldfarb of Piper Sandler. “They have identified that they want to grow in L.A.”

One Westside Pavilion (Google Maps)

One path is repurposing sites for more soundstage space. Despite the proliferation in streaming. less than a handful of new L.A. County soundstages have come into operation in the past two decades, according to Film LA data.

There’s also whispers of a very different direction: Blackstone and Hudson Pacific extending their partnership by Blackstone buying Hudson Pacific.

While a big player in Hollywood, Hudson Pacific has just four percent of the market capitalization of Blackstone.

“The downturn may produce more mergers,” said one L.A. commercial broker. “It’s harder for everyone to operate independently.”

Coan sees Blackstone maybe “testing the waters,” and then perhaps snagging a majority stake in the Hollywood studios.

The attorney noted that Hudson Pacific has built a strong brand, but “everybody is always for sale.”

* Clarification: Shortly before this story was published, the Hudson Pacific-Blackstone agreement officially closed. The SEC filing indicates deal terms are unchanged since the June announcement.