OREANDA-NEWS.  Fitch Ratings has assigned a 'BBB-' rating to Hudson Pacific Properties L.P.'s $425 million unsecured notes issued through a multi-tranche private placement on Dec. 16, 2015. The $425 million issuance includes $110 million of 4.34% Series A guaranteed senior notes (GSNs) due Jan. 2, 2023, $259 million of 4.69% Series B GSNs due Dec. 16, 2025, and $56 million of 4.79% Series C GSNs due Dec. 16, 2027. Hudson Pacific Properties, L.P. is the operating subsidiary of Hudson Pacific Properties, Inc.(HPP or the company).

A full list of ratings follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects Hudson's strong competitive market position in select densely populated, supply-constrained office markets in Northern and Southern California and the Pacific Northwest. These markets have favorable demographics that include population growth, vibrant, highly educated work forces and above-average household income levels. The company's sizable unencumbered asset pool and appropriate leverage and fixed-charge coverage (FCC) metrics for the rating are additional credit strengths.

Tenant industry concentration risk is Fitch's principal credit concern that balances Hudson's ratings. Hudson owns office properties that appeal to the fast growing technology and media sector tenants, which could exhibit more volatility than other industry types. Fitch also views HPP's value-added acquisition growth strategy as riskier than purchasing stabilized 'core' properties, in spite of the potential for greater returns and the company's successful track record. Finally, Hudson's access to unsecured debt capital is less developed than many of its investment grade REIT peers, as it consists primarily of its unsecured credit facility.

Leverage to Moderate

Fitch expects HPP's leverage to sustain in the low-to-mid-6x range through 2017. HPP's leverage was 6.1x based on an annualized run rate of recurring operating EBITDA for the quarter ended Sept. 30, 2015, which is down from 7.0x at Dec. 31, 2014 and 8.7x at Dec. 31, 2013.

Strong FCC

Fitch expects HPP's FCC to sustain in the the mid-to-high-3x range through 2017, aided by mid-single-digit cash same-store net operating income (NOI) growth (excluding incremental NOI from non-stabilized properties included in HPP's same-store pool), incremental NOI from new developments, and the refinancing of its preferred stock when it became callable in fourth-quarter 2015 (4Q15). HPP's FCC was 3.7x for the quarter ended Sept. 30, 2015, 1.7x at Dec. 31, 2014 and 1.0x at Dec. 31, 2013.

Portfolio Acquisition Enhances Position

Fitch views Hudson's purchase of the EOP Northern California portfolio from Blackstone (the EOP portfolio) favorably. The portfolio enjoys a strong competitive position due to strict regulatory supply constraints in California. HPP should also be able to improve its NOI by stabilizing occupancy and marking expiring leases to market. HPP has successfully repositioned several non-stabilized office acquisitions during its short public tenure.

HPP completed the acquisition of the EOP portfolio on April 1, 2015. The combination more than doubled the company's size and strengthens HPP's existing presence in attractive, supply-constrained, west coast markets by making it the dominant office owner (25% market share) in select San Francisco Peninsula/Silicon Valley office submarkets.

Good Contingent Liquidity

The EOP portfolio acquisition provided Hudson with a high-quality pool of unencumbered assets with above-average financibility and saleability characteristics. Fitch estimates the company's unencumbered assets cover its net unsecured debt by 2x based on a direct capitalization approach of unencumbered NOI using a stressed 7.75% capitalization rate. Fitch views this level of coverage as adequate for the rating.

Adequate Liquidity

HPP maintains an adequate liquidity position. The company's sources cover its uses by 1.5x, based on Fitch's base case liquity analysis for the Oct. 1, 2015 to Dec. 31, 2017 period. HPP's liquidity coverage would improve to 1.7x assuming the company refinances maturing mortgages at 80% of current balances.

HPP has $86.3 million of mortgage maturities and amortization remaining through 2017 and no unsecured debt maturities. Committed, unfunded (re)development expenditures and recurring and non-routine leasing and maintenance capex, primarily related to the stabilization of the EOP portfolio, comprise the largest uses of capital through 2017 at roughly $260 million as estimated by Fitch.

Tenant Industry Concentration Risk

The company has a high proportion of technology and media-related tenants in its portfolio, owing to its emphasis on select West Coast office markets. Fitch views the company's outsized exposure to tech and new media tenants as a near- to medium-term positive given the outsized growth (roughly double the national average) in tech-related employment during this recovery.

However, HPP's tenant industry concentration is a moderate negative to Fitch's ratings, which are designed to look 'through the cycle' and, therefore, incorporate the near certainty of a future tech downturn. Fitch recognizes that many of today's leading tech companies provide less capital-intensive services and solutions to a diverse industry set. This could reduce the correlation of their business performance and cause future tech down cycles to be less volatile than in the past. However, access to (venture) capital remains an inherent tech-sector risk, in Fitch's view, notwithstanding the greater diversity of end industries served.

Value-Add Strategy Risk

HPP's external growth strategy principally centers on the acquisition and stabilization of office assets, primarily through some combination of lease-up and property redevelopment. Fitch views the relative risk/reward of value add acquisitions as being in between 'core' investments and ground-up development.

HPP had three properties under construction at Sept. 30, 2015 with an estimated total investment of $260 million, representing 6.5% of undepreciated gross assets. The unfunded component was $170.4 million, representing 3.2% of gross assets. HPP had $150 million of committed construction financing in-place at Sept. 30, 2015 available to fund its remaining (re)development spending commitments.

Weak But Improving Dividend Coverage

Fitch expects HPP to target a common dividend payout ratio of approximately 90% of adjusted funds from operations (AFFO) over the rating horizon. The company's AFFO payout ratio improved to 91.6% for the year-to-date period ended Sept. 30, 2015. Prior to 2015, HPP has historically paid a common dividend in excess of the company's AFFO, primarily due to the non-stabilized nature of many of its assets and the related high level of capex associated with repositioning and releasing them. HPP's payout ratio was 153.1% and 1,387% during 2014 and 2013, respectively.

Improving Unsecured Capital Access

HPP has a short track record as a public company, having gone public in June 2010. This track record is balanced by the extensive office real estate and public REIT management experience of HPP's executive team. HPP's sale of $425 million of private placement unsecured notes is an important milestone in the company's transition to a predominantly unsecured borrowing strategy that evidences broader access to unsecured debt capital. Prior to the company's inaugural private unsecured notes placement, HPP's unsecured borrowings were limited to its three term loans, as well as drawdowns under the company's unsecured revolver. However, Fitch continues to view HPP as a relatively unseasoned unsecured bond issuer pending further private placement issuance.

Stable Rating Outlook

The Stable Outlook reflects Fitch's expectations that leverage and FCC will sustain over the next 12 - 24 months, but remain appropriate for the rating.

KEY RATING ASSUMPTIONS

--Strong technology sector employment growth and limited new supply support continued strong office fundamentals in Hudson's west coast office markets;
--The company further develops its access to unsecured debt capital;
--The company continues to unencumber assets as mortgages mature;
--The company sustains leverage in the low-to-mid 6.0x range and FCC in the mid-to-high 3.0x range through 2017.

RATING SENSITIVITIES

The following factors could collectively or individually result in an upgrade to HPP's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.5x for several quarters;
--Fitch's expectation of fixed-charge coverage sustaining above 3x for several consecutive quarters.

Conversely, the following factors may result in negative momentum in the ratings and/or Outlook:

--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining above 7.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2x;
--Fitch's expectation for dividends as a percent of AFFO to sustain above 100%.

FULL LIST OF RATING ACTIONS

Fitch currently rates HPP as follows:

Hudson Pacific Properties, Inc.
--Issuer Default Rating (IDR) 'BBB-'.

Hudson Pacific Properties, L.P.
--IDR 'BBB-';
--$400 million unsecured revolving credit facility 'BBB-';
--$550 million unsecured term loan 'BBB-';
--$350 million unsecured term loan 'BBB-';
--$550 million unsecured term loan 'BBB-'.

Fitch is withdrawing its rating of 'BB' on Hudson Pacific Properties' preferred stock, as these obligations were redeemed and the company does not plan to issue preferred stock in the foreseeable future.

The Rating Outlook is Stable.