CXP: Boutique Office Landlord Reviewing Strategic Alternatives

Columbia Property Trust (CXP) is currently reviewing strategic alternatives following receipt of an unsolicited $19.50/share buyout offer. A favorable outcome should deliver $21/share. The stock could drop to around $16 if there’s no deal.

Company Background

CXP has a concentrated portfolio of high quality properties in New York City (53% of assets), San Francisco(29%), and Washington(15%). The location and style of its buildings appeal to creative and knowledge based businesses such as technology, media, and design companies. An example is the Terminal Warehouse, a unique 125-year old building in West Chelsea with tenants including Uber Technologies (Uber office tour). Another example is the nearly completed 799 Broadway in Greenwich Village where asking rents are reportedly up to $200/sf.

The NYC and San Francisco office markets are out of favor with investors due to concerns about the long-term impact of remote work. The total return for CXP shares over the past 5 years has been negative, but better than most peers with high NYC exposure:

CXP’s valuation is in line with peers:

CXP’s cash flow and NAV should rise over the next 2-3 years from completion of current development projects:

Additional information is available from the company’s Annual Report, Investor Presentation, and 1Q21 Financial Supplement.

History of Arkhouse Offer

CXP disclosed (PREC filed 3/15/21) that it received a notice from Arkhouse Equities on 12/1/20 that it intended to nominate six directors for election at the next Annual Meeting and that Arkhouse believed CXP’s undervaluation made it an attractive acquisition target. Arkhouse disclosed that it owned 2000 CXP shares acquired in November.

On March 18 2021 Arkhouse issued a press release and public letter to CXP’s Board of Directors. Arkhouse Partners is a New York City real estate private equity firm founded in 2015 by a former Director of Operations at the Sapir Organization. The other members of the bidder group are the Sapir Organization, a large family controlled NYC real estate business, and 8F Group, a global private equity firm based in Singapore.

On March 19 2021 Arkhouse filed a proxy for election of its 6 nominees to the Board. Arkhouse explained:

On April 8 2021 CXP announced the engagement of advisors to evaluate strategic alternatives.

On April 29 2021 CXP disclosed that Arkhouse had withdrawn its nominees.

During CXP’s 1Q21 conference call on 4/29, management made several brief comments about the strategic review:

Investment Considerations

Analysts have not been enthusiastic about CXP (1 BUY and 3 HOLD ratings) due to an expected dip in occupancy and earnings this year caused by a few lease expirations. However I believe there will be significant interest from potential bidders in the strategic review. Buyers hope to get a bargain from the current year earnings drop and weak sentiment about NYC office. Will they be willing to bid high enough to convince the Board to approve a sale?

Prior to COVID, CXP suggested that its Net Asset Value based on applying a 5% cap rate to 4Q19 NOI was $26.27/share with an additional $2.40/share from rents that would commence in 2020.

Office Property transaction volumes have been light, but surveys suggest that cap rates have expanded slightly since then.

Updating CXP’s calculation for current financial inputs and a 5.33% cap rate suggests NAVPS is now about $23.17, close to the the current average analyst estimate of $22.47.

CXP’s 7/16 closing price of $17.17 implies a cap rate of 6.4% is priced into the shares. CXP serves the strongest part of the current office market, unique environments that represent and reinforce company culture for employees and clients. CXP has no problem assets. The Directors probably believe that Arkhouse’s $19.50 bid would deprive shareholders of the fair value of their investment. The stock often traded above that level in 2018-2019. I believe there will be significant interest from buyers willing to bet that valuation is depressed by cyclical factors that will ease over 2-3 years. Management suggests that current development projects could boost annual NOI by $40mm. That could potentially raise NAVPS by $6.40 at a 5.33% cap rate. I believe that a $21 bid would successfully deliver an attractive immediate premium to CXP shareholders while also leaving asset appreciation potential for the acquiror over a multi-year horizon.

Arkhouse claimed that it’s bidder group held 3.3% of CXP’s shares in March. The company does not have any other activist shareholders who might apply pressure to the Board. Ownership at 3/31/21:

CXP shares outperformed the average of its peer group by about 10 points since the Arkhouse bid was announced:

I believe it’s a low risk investment at this level. If there’s no deal then the share price may drop about 10% and then perform in line with NYC peers. But there’s also a good possibility that a sale at a price around $21 gets announced within a few months. A long-term investment at the current price earns an above average dividend yield of 4.9%, buys a high quality portfolio at an implied cap rate of 6.4%, and participates in appreciation generated by the development pipeline.

Disclosures and Notes

At the time of publication the author held a long position in Columbia Property Trust.  The author does not make any recommendation regarding investment in Columbia or any other company.  Investors should verify any facts in the article they deem relevant to their own decisions about any investments.

Columbia the cat was adopted! Columbia Property Trust deserves the same.

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