Gramercy Property Trust (NYSE:GPT) and TPG Real Estate announced they have partnered to form Strategic Office Partners, a new investment platform to acquire up to $1 billion in single-tenant net-lease office assets in high-growth U.S. metros over the next three years.
To seed the platform, New York City-based Gramercy sold a 75% stake in six office properties to TPG for $187.5 million, or $191 per square foot. The buildings encompass nearly 1 million square feet and are located in Nashville, Minneapolis. Westlake Village, CA in the Los Angeles market; Dublin, CA, in the East San Francisco Bay Area and San Diego’s Sorrento Mesa submarket.
Gramercy and TPG have committed a combined $400 million to the new venture, funded initially with a $200 million non-recourse credit facility from Morgan Stanley along with equity contributed by the companies. TPG Real Estate will hold a 25% interest in the equity partnership.
The properties in the six-asset office sale are occupied by single corporate users with an average lease tenure of more than 11 years, the companies said in a release. Half the assets have been occupied by the original tenant since construction and the portfolio has an average remaining lease term weighted by square footage of 3.6 years.
Mixed Views On Office Exposure
Dovetailing with the announcement, Fitch Ratings this week assigned its first-ever investment-grade rating to Gramercy, an initial issuer default rating of BBB with a stable outlook, based on the REIT’s solid credit metrics and consistent cash flow growth from its largely single-tenant, triple-net leased portfolio.
The ratings agency noted, however, that those strengths are tempered by Gramercy’s “less established” access to unsecured debt capital and its increased exposure to office due to the TPG partnership.
“Fitch views such heightened office exposure less favorably, due in part to increased uncertainty surrounding suburban office, and employee densification tempering office demand at the margin,” the rating agency said.
However, Mitch Germain and Peter Lunenburg, analysts with JMP Securities, said in a note to investors that they don’t see the new joint venture with TPG, a respected private-equity investor, as a deviation away from Gramercy’s core strategy of culling office exposure and redeploying capital into the industrial sector.
The execution on disposition of non-core assets, totaling a higher-than-expected $1.4 billion so far in 2016 including the TPG sale, is “nothing short of stellar,” the analysts said.
TPG Real Estate is an affiliate of TPG Capital (formerly Texas Pacific Group,) one of the largest private equity investment firms globally. Its other major investments in the real estate sector include backing the merger of the former DTZ and Cushman Wakefield, as well as investments in Catellus, Evergreen Industrial Properties, Mission West Properties and Parkway Properties.
“We see a compelling investment opportunity in the office net lease sector and believe that this portfolio of high-quality assets in strong growth markets is poised to benefit from positive fundamental trends,” Avi Banyasz, partner co-head of TPG Real Estate, said in a statement.
Gramercy President Ben Harris said the company will seek to leverage its asset management experience from managing its own portfolio and the portfolios of third-party clients to enhance the value of properties acquired through the new investment platform.
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