The pandemic cast a cloud of uncertainty across the office sector. Investors aren't sure how companies will utilize office space in a post-pandemic world. That's weighed on the public stock market values of office REITs (real estate investment trusts) like Columbia Properties Trust (NYSE: CXP).
However, while the public market has concerns about the future of offices, institutional investors like private equity and pension funds are much more optimistic. That's leading an investor group to offer Columbia Properties Trust the opportunity to go private. It's the latest in a string of public-to-private transactions in the office sector.
Digging into the offer
Arkhouse Partners, AS8888 LLC, and 8F Investment Partners made an all-cash offer to take Columbia Properties Trust private at $19.50 per share, representing a hefty 29% premium to Columbia's recent closing price and 35% above its average trading price during the last 30 days. The investor group currently owns a 3.3% interest in Columbia.
The group wants to acquire the rest of the company because they "believe in the long-term value of Columbia's high-quality office holdings," according to a letter the group wrote to Columbia's board of directors. They've spent time evaluating the REIT's portfolio, operating market, management, and strategy.
While they like what they see, they're "concerned about the company's lengthy track record of underperformance in the public market." That's led them to conclude that current investors are "not likely to realize the value of the company's assets in the foreseeable future if the company remains on its current course in the public market."
Columbia has confirmed the offer and plans to review the proposal. Analysts covering the company believe it will be tough for the board to reject the bid. It's at a hefty premium, making it less likely a rival offer will emerge. However, the company did reportedly receive interest in 2018 that didn't culminate in a deal, leaving some skepticism that they'll work out a deal with this investor group.
The public-private disconnect continues driving deal-making
The offer to take Columbia Properties Trust private is the latest in a string of proposed, pending, and completed transactions in the office sector involving private institutional investors. One of the more notable corporate proposals is Brookfield Asset Management's (NYSE: BAM) offer to take its publicly traded real estate affiliates, Brookfield Property Partners (NASDAQ: BPY) and Brookfield Property REIT (NASDAQ: BPYU), private.
Brookfield Asset Management offered a roughly 14% premium to buy the rest of Brookfield Property it doesn't already own. The primary driver is the valuation disconnect between the publicly traded Brookfield Property and the underlying value of its real estate assets in the private marketplace.
This valuation disconnect is evident in recent office building sales from publicly traded REITs to private institutional investors. For example, leading Manhattan office landlord SL Green Realty (NYSE: SLG) agreed to sell its 410 Tenth Avenue redevelopment project for $952.5 million to an undisclosed buyer last November. While it intended to hold the building as a long-term investment, it chose to cash in on an opportunity to lock in extraordinary profits. It achieved a 35% IRR and generated $175 million in total profits over the seven-year hold period on the project via this sale.
SL Green also sold an interest in an office condo in Manhattan to a fund managed by Brookfield earlier this year. In commenting on that deal, chief investment officer David Schonbraun stated in a press release, "The transaction also serves to further demonstrate the resiliency of the Manhattan office market and the continued demand by institutional investors for well-located, Class A real estate assets in Midtown."
SL Green is using the proceeds to buy back its undervalued shares. CEO Marc Holliday commented in a press release announcing a $500 million increase to its repurchase program: "We believe the stock price continues to significantly lag behind the real financial value of the platform. So we intend to continue to invest in a strategic share repurchase program with the proceeds from asset sales, as we believe strongly that using incremental capital to buy our stock provides our shareholders the highest return on investment."
Meanwhile, West Coast-focused office REIT Kilroy Realty (NYSE: KCR) cashed in on a recently completed office development project in San Francisco. The REIT sold The Exchange to an undisclosed buyer for $1.08 billion. That's the second-highest absolute price for a property in the city and a record value of $1,440 per square foot. This "strong price underscores the embedded value of our stabilized portfolio," stated CEO John Kilroy in a press release. Kilroy said it could use the proceeds to buy back some of its undervalued shares.
Privatization of the office market continues
Public REIT investors have a dimmer view of the future of offices than their private counterparts. That's leading institutional investors to take advantage of the disconnect by offering to buy up office REITs and buildings at what they believe are compelling valuations despite the hefty premiums. This trend suggests office REITs have plenty of upside potential.