I am beginning up an workplace REIT basket, final week Metropolis Workplace REIT (CIO) introduced it was being acquired by MCME Carrell (an affiliate of Elliott Administration and Morning Calm Administration) for $7/share in money, which is roughly a ten% cap charge on CIO’s internet working revenue (85% occupancy).
It has been 5 years for the reason that worst of the pandemic, return to workplace tendencies hold transferring in the precise path. Anecdotally, my commuter practice is mostly as crowded because it was pre-pandemic (excluding Fridays) and the Chicago loop appears largely regular once more. New provide is nearly non-existent, probably shall be for the foreseeable future, this stuff take time, however non-public fairness appears keen to take a danger on workplace at these valuations.
First up, and sure the least dangerous of the three, is Internet Lease Workplace Properties (NLOP) (~$500MM market cap), a widely known favourite that many different worth bloggers have written up because it was spun off from W.P. Carey (WPC) (NLOP’s exterior supervisor) in November 2023. It’s a automobile designed to be a liquidation with a restricted life, just like different REIT spins of the previous like Retail Worth or Spirit MTA — in style amongst worth buyers, REIT liquidation, provides me nightmares of the New York REIT (NYRT) pitch. Â
However this case has largely de-risked, on the time of the spin, NLOP was saddled with a 14% rate of interest mezzanine mortgage, after a number of preliminary rounds of asset gross sales, the mezzanine mortgage has now been accomplished paid off as of April. That information is vital as a result of the remaining debt is all non-recourse mortgages connected to particular properties, any additional asset gross sales on the unencumbered properties can be utilized to make particular liquidating distributions to shareholders. A lot of the mortgage debt would possibly find yourself getting extinguished by way of foreclosures, can virtually consider these properties as name choices on the workplace restoration.
Because the title suggests, NLOP owns primarily single tenant workplace properties the place the tenant is chargeable for many of the working bills of the property (internet lease or triple internet lease). Holding issues easy, under is a fast again of the envelope illustration of what NLOP can be roughly price at a ten% cap charge, just like the CIO transaction.
There’s much more enjoyable you possibly can have modeling out the liquidation worth right here, together with the money movement from right here till the ultimate distribution, what handing again the keys means on the encumbered properties, and so forth. The portfolio is 85% leased, there’s one chunky property, KBS’s headquarters in Houston that makes up 23% of the hire roll, however I am typically extra optimistic on Houston than others, it wasn’t as impacted by covid and has a extra in-person workplace tradition than another cities. I feel it is a manageable.
Disclosure: I lastly joined the get together and now personal shares of NLOP
