Thursday, October 13, 2016

Interview with Workspace Property's Roger Thomas -The Bold Contrarian Play for Liberty's Suburban Office Portfolios

By Randyl Drummer Costar
Workspace Property Trust this week closed one of the largest suburban office portfolio acquisitions of the year, acquiring 108 office and flex buildings and 26.7 acres of land in five markets from Liberty Property Trust.

The $969 million purchase with partners Safanad, a Dubai-based global principal investment firm; and affiliates of diversified investment firm Square Mile Capital Management LLC is WPT's second major transaction with Liberty Property and expands Workspace's holdings to 149 properties totaling 10 million square feet.

In the last year, Workplace Property Trust, led by former Mack-Cali Realty executives Tom Rizk and Roger Thomas, have so far amassed more than $1.2 billion in assets as part of its strategic plan to build a pure-play portfolio of suburban office properties in what they consider strategic locations.

Most investors continue to funnel capital into urban core office submarkets following millennial workers flocking into urban areas offering a "live, work and play" environment. However, somewhat under tha radar, U.S. suburban office markets have improved occupancy and rent growth significantly in the later stages of the economic recovery.

WPT President and Chief Operating Officer Roger Thomas proudly touted the firm's contrarian investment philosophy in an interview with CoStar this week.

CoStar:Why are you bullish on suburban properties at a time when most other investors continue to shy away from the segment?

Thomas:We've heard all the predictions - that there’s been a demographic shift and that all millennials want to live in the urban core and all employers are going to chase them and therefore the suburbs are dead or dying. We've seen Wall Street and the analyst community push the big institutional players like Liberty and Brandywine Realty Trust to get out or pare down their suburban office holdings. But suburban office is simply too big and important a component of the office market to simply go away.

We believe that the prediction of the death of the suburbs is greatly exaggerated. The desire of millennials to live and work in urban cores is true, to a point. They're young and before they have kids, it’s very exciting to live in an urban environment. But it’s only true to a point. Not all millennials want to live in the urban core, and not all employers want to be there.

We see the trend of the millennials living downtown to be part of a cycle. It may be a little bit longer of a cycle, but we think they will go through it and return to the suburbs when they start families, just as generations of adults before them have done. When we saw the pressure on the large institutional owners like Liberty to shed their suburban holdings, with no one else coming into the space to pick up the slack, that’s when Tom and I saw the opportunity. We see the disconnect.

What types of suburban assets meet your acquisition criteria?

When the market recovered in the mid-1990s (in the previous cycle), it lifted all property types, including suburban office. Almost all the suburban markets did really well across the board. (However,) we don’t think that will be the case this time around. While we think there’s a bit of a demographic shift, there will be haves and have-not properties.

The type of product we’re looking for are well-located properties close-in to the city, in communities with a 24/7 lifestyle lots of food and retail options, and good public and highway transportation infrastructure.

What we’re not looking for are those one-off assets, the corporate headquarters white elephants that are far flung out in the middle of nowhere, where you have to drive 10 minutes just to find lunch.

Can you give us a little background on how the mega-transactions with Liberty Property played out?

The $245 million acquisition of Liberty’s Horsham, PA portfolio was our first deal out of the box, closing last December. Having been in the public sphere through Mack-Cali and others, we know most of the players. Liberty had been shopping the Horsham portfolio, but it was not widely circulated, and we connected with them. The portfolio fit what we were looking for. It has maintained occupancy of 85% or above, for the most part, over the last 10 years.

Soon after that deal closed, in the beginning of 2016, we started talking again with Liberty, which was still in the middle of its disposition program of $1 billion in assets. We were impressed with the properties (in the second portfolio), which were well-leased and did not have a ton of deferred maintenance.

While there were understandable challenges putting together and executing such a sizable portfolio in the most recent transaction, all of the main players, including JPMorgan, Safanad, Square Mile and Liberty, worked well and cooperatively together to get to the finish. We hope to build on those relationships and take full advantage of the disconnect in the capital markets and our contrarian philosophy before the market tide shifts. Which we think is imminent.

At what point did Safanad come into the deal? Did you court them earlier for the Horsham portfolio as well?

Yes. We're very friendly with Safanad, particularly Vin Pica, their managing partner for North America. But it was a contrarian play and our first deal out of the box. So I think they were a little skittish about that and took a pass.

Once we closed that first deal, we went back to them again with the most recent Liberty portfolio and they were more interested. After we had the transaction tied up and structured with Liberty, we started working with Safanad. We started discussions around April, shortly after signing a non-binding term sheet with Liberty at the end of March.

Do you expect to broaden your search for suburban assets to other states or regions? Any markets or regions you’re not immediately interested in shopping for assets?

Some suburban markets may be a little too far along in the evolution of their recovery. Cap rates are bid way down and prices are pretty high. There are so many opportunities in other good markets that we may not chase the more expensive deals. We want to broaden our footprint and we don’t believe we’re limited to any geographic area.

I think the slowest suburban markets to recover may be those around New York City like Westchester County and New Jersey. They might present new opportunities. I think a market like Denver is almost too far along in its recovery; the cap rates are so low there.

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