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 price on CIO’s web working revenue (85% occupancy).
It has been 5 years because the worst of the pandemic, return to workplace tendencies maintain transferring in the correct path. Anecdotally, my commuter prepare is mostly as crowded because it was pre-pandemic (excluding Fridays) and the Chicago loop appears principally regular once more. New provide is nearly non-existent, seemingly can be for the foreseeable future, this stuff take time, however non-public fairness appears prepared to take a threat 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, offers me nightmares of the New York REIT (NYRT) pitch.
However this example has principally 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 necessary 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 may find yourself getting extinguished through 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 answerable for a lot of the working bills of the property (web lease or triple web lease). Holding issues easy, beneath is a fast again of the envelope illustration of what NLOP could be roughly value at a ten% cap price, 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 circulation 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 lease 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 believe it is a manageable.
Disclosure: I lastly joined the get together and now personal shares of NLOP