Columbia Property Trust (NYSE: CXP) has agreed to a privatization transaction with funds managed by leading fixed-income investment manager PIMCO. The deal ends a months-long strategic review process, kicked off by an unsolicited takeover offer from another investor group. The all-cash deal, which values the office-focused real estate investment trust (REIT) at $3.9 billion, could close by year-end.
Here's a closer look at the deal and why institutional investors like PIMCO are buying office properties in major gateway cities.
Finally finding a deal to its liking
An investor group initially made an unsolicited, nonbinding acquisition offer for Columbia earlier this year. The group, which collectively owned a 3.3% stake in the office REIT, proposed to take it private at $19.50 per share. In response, the REIT initiated a strategic review, which included running a full sales process. It invited nearly 90 potential bidders to participate in the process.
That review culminated in a deal with PIMCO. The all-cash offer values Columbia at $19.30 per share. That's a 27% premium to the REIT's share price before the investor group made their offer public. In addition, investors will receive one final $0.21 per share quarterly dividend payment, pushing the total cash value to $19.51 per share.
In agreeing to the acquisition by PIMCO, Columbia has finally found a suitable deal. The company previously received takeover interest in 2018, which led it to explore a sale. However, after launching a strategic review process, it opted to remain publicly traded. This time, the REIT is going private amid strong interest from institutional investors for office properties in major gateway cities.
A strong appetite for office buildings
The investor group that initially sparked the latest strategic review made their offer because they didn't believe the public market was the best place for Columbia's assets. The company owns 15 office properties with more than 6 million square feet across New York, San Francisco, Washington, D.C., and Boston, with four more in development. They concluded that "Columbia's stockholders 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."
That's because public REIT investors remain concerned about how the pandemic will impact office properties in the near term. That's why the investor group believed the company would be better off in the "more forgiving, stable private market."
Indeed, institutional investors see things differently. That's evident in PIMCO's comments on the deal in the announcement press release. John Murray, PIMCO global head of private commercial real estate, stated: "We continue to believe that high-quality office buildings in major U.S. cities offer long-term value for our clients, and Columbia has assembled a modernized, well-located portfolio of assets that we expect will perform well in the years ahead." It's looking past the current uncertainty to a future where companies will see the value of having their employees together in high-quality office space once again.
PIMCO isn't alone in this view. Institutional investors are gobbling up office properties these days. For example, Brookfield Asset Management (NYSE: BAM) took its real estate arm, Brookfield Property, private this year in a $6.5 billion deal. Brookfield Property owns a portfolio of office buildings in major gateway cities along with shopping malls in the U.S.
In addition, Brookfield spent $766 million to purchase a portfolio of 12 office buildings in Washington, D.C., from diversified REIT WashREIT (NYSE: WRE). Meanwhile, private-equity giant KKR (NYSE: KKR) bought The Exchange in San Francisco from office REIT Kilroy Realty (NYSE: KRC). It paid a jaw-dropping $1.08 billion for that property, the second-highest sales price ever in San Francisco, representing a record $1,440 per square foot.
These institutional investors are taking a longer-term view on the future of the office. They believe demand will recover in a post-pandemic world. Further, they see these properties as stable income generators thanks to their long-term lease structures, making them attractive in today's low-yield environment. They offer institutional investors the ability to earn bond-like yields with the potential for equity-like upside.
Privatization of office real estate continues
Office REITs remain out of favor with investors due to the continued uncertainty about their future. That's allowing institutional investors to scoop up high-quality properties, setting them up to earn solid yields with upside potential. This dynamic suggests the current privatization wave in the office sector will continue.