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Consistent with its strategy of adding high-class properties, Hudson Pacific Properties, Inc. (HPP - Snapshot Report) recently penned a joint venture deal with M. David Paul & Associates/Worthe Real Estate Group (MDP/Worthe) to acquire a Class-A property - The Pinnacle, located in Burbank in southern California. Burbank, known as the Media Capital of the world, is situated a few miles northeast of Hollywood.

The acquisition of a major property in Burbank portrays company strategy to own and operate best-in-class office properties with strong media and entertainment tenancy. As a matter of fact, the company mostly targets high barrier-to-entry, in-fill locations with favorable, long-term supply-demand characteristics in markets such as Los Angeles, Orange County, San Diego and San Francisco.

 As per the agreement, MDP/Worthe property ownership will be contributed to the newly created joint venture. Since its inception in 1967, MDP/Worthe has engaged in development and acquisition activities in the Los Angeles area. The company has previously partnered with many well-known companies in this respect. Currently, the company’s portfolio consists of 21 properties spanning over 5 million square feet leased to world-class entertainment firms, including Walt Disney Co. (DIS - Analyst Report), Viacom, Inc. and Lions Gate Entertainment Corp. (LGF - Analyst Report).

The joint venture has closed the acquisition of the 393,776 square feet Pinnacle I building for $212.5 million, of which $129 million was financed through a 10-year project loan. Hudson Pacific paid $83.9 million in swap for roughly 98% of the joint venture. Of this, around $45.9 million was paid in cash and the rest was drawn from its unsecured credit facility.

MDP/Worthe has agreed to contribute its ownership in Pinnacle II to the joint venture for $130 million (including the assumption of an existing loan worth $89.6 million) by first-quarter 2013. Except for funding closing costs, Hudson Pacific will not have to make further capital contribution in connection with the Pinnacle II acquisition.

On completion of the transaction, the joint venture will have possession of both the buildings for a combined price of $342.5 million. Hudson Pacific anticipates owning about 65% of the joint venture and is expected to look after day-to-day property management responsibilities.

Positioned in the midst of Burbank Media District, The Pinnacle comprises two buildings – Pinnacle I and Pinnacle II – and spans 625,640 square feet. The building is strategically located in proximity to Warner Bros. Studios, Burbank Studios and Walt Disney Studios.

The property is currently 95% leased and boasts a cluster of media and entertainment companies such as - Sony Corporation (SNE - Snapshot Report), Warner Bros. Entertainment, Inc. of Time Warner Inc. (TWX - Analyst Report) and Clear Channel Communications of Clear Channel Outdoor Holdings Inc. (CCO - Snapshot Report). The Pinnacle building has high tenant retention ratio, with some tenants retained since its inception.

Taking into account the acquisition of the ownership interest in the joint venture holding Pinnacle I, Hudson Pacific increased its full year 2012 adjusted FFO per share guidance to a range of 86 cents to 89 cents from the previous view of 83 cents to 87 cents. As a point of reference, the company recently reported the third quarter adjusted FFO per share of 21 cents, beating the Zacks Consensus Estimate by a penny.

We remain impressed with the company’s major acquisition and expect the new joint venture to serve as a long-term platform for further Class-A office property acquisitions within the MDP/Worthe portfolio.

Hudson Pacific is focused on ownership, operation and acquisition of high-quality office properties and state-of-the-art media and entertainment properties primarily in North and South California. As of now, Hudson Pacific's portfolio consists of property of approximately 5.5 million square feet of space.

We have a long-term Neutral recommendation on Hudson Pacific. Also, it carries a short-term Zacks #3 Rank (Hold).

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