What Rithm Capital’s $1.6B Paramount Deal Means for Office
The planned acquisition could be a sign of recovery, particularly in gateway metros like New York City and San Francisco.
Rithm Capital Corp., a New York-based global alternative asset manager, believes the U.S. office market has bottomed out and plans to spend $1.6 billion to acquire office REIT Paramount Group and its portfolio of Class A office buildings in New York City and San Francisco to capitalize on its recovery.
Paramount’s portfolio includes 13 owned and four managed high-quality office assets totaling more than 13.1 million square feet. The portfolio, which is primarily in Manhattan, with five San Francisco assets, is 85.4 percent leased.
“We view this as a great opportunity for our company and the right time to grow our commercial real estate asset management business,” Rithm CEO Michael Nierenberg said Wednesday during a call with analysts.
Under a deal that has been approved by both boards of directors, Rithm announced Wednesday it had entered into a definitive agreement with New York City-based Paramount to acquire the REIT and all outstanding shares of common stock at $6.60 per fully diluted share. Paramount shareholders still need to approve the sale, but the deal is expected to close later this year.
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Rithm expects to fund the acquisition with a combination of cash and liquidity from its balance sheet and from potential co-investors. The firm states the addition of the Paramount portfolio will create new opportunities for investors to access Rithm’s real estate platform and bolster its asset management business.
“They want to continue to invest and be able to generate fees off those investments. This is one path to it, and they view the office sector as one that is starting to bottom,” Dylan Burzinsi, a senior analyst & head of office research at Green Street, told Commercial Property Executive. “In their view, they get two very positive characteristics—the ability to generate further fee income off their investments in capital raising as well as getting in an asset class they view as attractive.”
The timing is right
Noting that the company is very bullish on the sector, Nierenberg cited several reasons for the timing being right to acquire an office portfolio. He pointed to the two gateway locations, where they believe there are improving office market fundamentals, including improving rent rolls and increasing demand. Nierenberg also noted the Federal Reserve has begun to cut rates which should lead to cap rate compression.
Perhaps most importantly, he cited the “very, very attractive values” of the underlying properties. Nierenberg stated the assets are valued at 40 percent below pre-COVID values and 25 to 30 percent of replacement costs.
“We have avoided what I would say was the downturn in the real estate market, particularly in the office sector, that’s occurred going back to the COVID days,” he told the analysts. “When you look today, [Class] A office is in demand. People are back to work.”
Drawing from his own firm’s experience, Nierenberg noted Rithm has been seeking to expand in Manhattan and finding it difficult to secure prime office space.
Rithm, which has an integrated investment platform spanning across asset-based finance, lending across residential and commercial real estate, mortgage servicing rights and structured credit, plans to use the acquisition as a springboard to build out its commercial real estate and asset management platform and expand its owner-operator model. Through subsidiaries like Newrez, Genesis Capital and Sculptor Capital Management, Rithm has established an owner-operator model capable of sourcing, financing and managing debt and equity investments to drive value for shareholders and investors.
Strategic alternatives review
Seeds of this potential sale were planted in May, when Paramount announced its board of directors had initiated a review of strategic alternatives to maximize shareholder value. The review came amid shareholders’ concerns over the company’s performance and management, including certain executives’ high compensation. In July, Paramount stated it was under investigation by the Securities and Exchange Commission related to compensation, conflicts of interest and other issues.
There were several rounds of bidding for Paramount and its assets from some top CRE industry names including Vornado, SL Green, Empire State Realty and Blackstone, according to The Real Deal. The final round apparently came down to Rithm and DivcoWest, which was partnering with Dubai-based Saray Capital, TRD reported.
Asked if there was a chance the Paramount shareholders could reject the Rithm bid, Burzinski told CPE it was possible but unlikely.
“You had a fully marketed deal where you started from nothing, you generated interest and you whittled it down from that point. So, presumably anyone who wanted [Paramount] for a given price already gave their best and final offer,” he said.
Advisors for both firms
UBS Investment Bank and Citigroup Global markets Inc. are acting as financial advisors to Rithm. Skadden, Arps, Slate, Meagher & Flom LLP is serving as the firm’s legal counsel and Newmark Group and Eastdil Secured LLC are Rithm’s real estate advisors.
BofA Securities is acting as exclusive financial advisor to Paramount. Latham & Watkins LLP is Paramount’s legal counsel.
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