Landlord Paramount Group, the owner of Class A office properties in New York and San Francisco, agreed to sell itself to alternative asset manager Rithm Capital for $1.6 billion in a reflection of increased demand for this type of real estate in those cities.
Rithm, founded in 2013 under Fortress Investment Group, said in a statement that it was drawn to the deal following a strategic review with optimism in the office market’s recovery from the downturn caused by the COVID-19 pandemic.
New York has led the U.S. office market recovery, driven by properties with first-rate amenities and companies implementing stricter attendance policies. While San Francisco is still behind compared to markets such as New York, it has shown growing signs of improvement thanks to leasing from firms tied to artificial intelligence.
“The Paramount portfolio is situated in cities where we have a strong conviction in the recovery of office market fundamentals, including improving rent rolls, a more favorable interest rate environment, and increasing demand,” Rithm Chief Executive Michael Nierenberg said in a statement.
Under the agreement, Rithm would acquire all of the outstanding shares of Paramount common stock for $6.60 a share, New York-based Rithm said Wednesday. The purchase, if approved by Paramount shareholders, is to be funded with a combination of cash and potential opportunities from co-investors with a price that marked an 11% discount to Paramount’s Tuesday close. The stock slumped almost 12% to end trading at $6.53 Wednesday.
The deal, expected to be completed in the late fourth quarter, would give Rithm ownership of Paramount’s portfolio including 13 owned and four managed “high-quality” office properties spanning more than 13.1 million square feet, 85.4% of which is leased as of June 30, Rithm said.
Office market locations
The portfolio includes such properties as 1301 and 1325 Avenue of the Americas in Manhattan and San Francisco’s One Front St. and One Market Plaza.
The deal capped off Paramount’s strategic alternative review that began in May as analysts said the New York real estate investment trust’s stock had lagged that of its peers. Despite some recent signs of improvement, including landing a $900 million refinancing loan for its top-tier Manhattan tower at 1301 Avenue of the Americas, Paramount has reported losses after having been hurt by changing work habits and San Francisco’s slow office market recovery, analysts have said.
The company also reported over the summer that it was under investigation by the Securities and Exchange Commission on its disclosures tied to executive compensation and other items.
“We believe the acquisition of Paramount is a generational opportunity that will serve as a springboard to build out our commercial real estate and asset management platform and expands our owner-operator model,” Nierenberg said in the statement.
The Federal Reserve cut its benchmark interest rate by a quarter point Wednesday. Nierenberg said on a conference call ahead of the decision that the market has priced in the U.S. central bank cutting rates five to six times over the next 1.5 years, boding well for the office market.
“We've been waiting for this for a long time,” he said on the call.
Return to the office
Things have changed in the office market, he said, pointing to demand for top-tier buildings and the fact that “people are back to work.”
With Rithm, Paramount found an “ideal partner” that offers the “financial scale” needed to improve Paramount’s fundamental operating performance, Martin Bussmann, Paramount’s lead independent director, said in the statement, adding the agreement with Rithm followed “an extensive process and evaluation of a range of strategic alternatives.”
Rithm’s bid beat out those from prominent real estate owners including Blackstone, the world’s largest commercial property owner, and Manhattan office landlords SL Green Realty and Vornado Realty Trust, The Wall Street Journal reported.
Still, it remains to be seen if Paramount investors will sign off on the deal.
Rithm’s offer price of $6.60 per share is “disappointing,” Evercore ISI analyst Steve Sakwa said Wednesday in a report, adding that Evercore ISI’s internal study indicated “a value range of $7.58 to $12 per share with a midpoint of $9.72.”
“While we understand that transaction costs may be high in this deal including transfer costs, severance, legal, etc. ... The agreed price falls well below the midpoint and is almost $1 below the low end of our fair value band which is a headscratcher with fundamentals on the upswing” in the New York and San Francisco office markets, he said, adding “it’s unclear if shareholders will accept this initial offer.”