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Own a Piece of Hollywood With This REIT

Jul 17, 2020 by Matthew DiLallo

Hudson Pacific Properties (NYSE: HPP) offers real estate investors a unique opportunity. The real estate investment trust (REIT) currently owns a portfolio of studio properties in Hollywood that it leases to production companies. On top of that, it has developed several office properties near its studios that it leases to traditional and streaming media companies. This media portfolio allows its investors to own a tiny slice of Hollywood via income-generating real estate.

The company's media real estate empire also provides investors with a unique way to profit from the growth of streaming. It recently enhanced its ability to grow by forming a joint venture with private equity giant Blackstone (NYSE: BX). That deal makes this REIT an interesting option for investors.

Building a media and real estate mogul

Hudson Pacific has been in the Hollywood studio business since 2007 when its predecessor company bought its first property. It purchased its second studio a year later and its third in 2017. That three-studio portfolio makes it the largest independent owner and operator of sound stages in Los Angeles. These properties currently have 35 stages consisting of 1.2 million square feet of production and support space used for TV, film, and digital production by both traditional and streaming companies.

The REIT's Hollywood portfolio also includes five Class A office properties, which feature 966,000 square feet of leasable space, either on the studio lots or adjacent to those locations. The company developed all five properties, including one that it expects to finish soon. It counts streaming giant Netflix (NASDAQ: NFLX) as its largest office tenant, at more than 700,000 square feet. The company also leases stage and production space under separate long-term deals.

Those office property developments, along with Hudson Pacific's leasing and property management expertise, have enabled the REIT to significantly improve the cash flow of these studio properties since their acquisition. It's now cashing in on these investments via its joint venture with Blackstone, which will see it sell a 49% interest in this combined office and studio portfolio at a $1.65 billion valuation. It will retain the other 51% stake and manage the entity.

Setting the stage for future growth

Hudson Pacific's joint venture with Blackstone will unlock the value of its media real estate and provide it with even more financial flexibility to expand its portfolio. Before making the deal, the REIT had an elevated leverage ratio of 6.8 times debt-to-EBITDA (a metric that also takes into account gains or losses on asset sales and any asset impairment charges), which constrained its ability to grow its portfolio and dividend. That metric will improve to a much more comfortable 5.9 times after accounting for the joint venture's debt. Meanwhile, its liquidity -- cash and available borrowing capacity -- will rise from $1.1 billion to more than $1.6 billion.

With less leverage, more liquidity, and the deep pockets of Blackstone, Hudson Pacific will be in an even better position to expand its media real estate portfolio. The joint venture includes the right to build another 1.1 million square feet of office and production space at two of its studios. It's well on its way to moving forward with a 487,000-square-foot expansion at one studio, which could start construction by the middle of next year. Meanwhile, it's in the early stages of developing a master plan at the other studio that could pave the way to a 618,00-square-foot expansion in about three years.

In addition to that visible growth, the companies will look to partner on future studio acquisitions in the Los Angeles market and other key media hubs like Vancouver, New York, and London.

Investing in Hollywood could pay dividends

Hudson Pacific Properties offers real estate investors the unique opportunity to own a slice of the Hollywood studio industry. Because of that, investors can earn dividend income from this real estate portfolio and participate in its growth as Hudson Pacific and its private equity partner expand this platform. While this portfolio likely won't produce the same blockbuster-like returns as a company like Netflix has, the REIT does provide income-focused investors with a lower-risk way to potentially make money on the streaming trend.

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Matthew DiLallo owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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