In its second transaction this month, Rithm Capital took steps to further diversify its business, this time buying office property real estate investment trust Paramount Group for $1.6 billion.
It will pay $6.60 for each Paramount share, funding by cash and liquidity from the balance sheets of both companies. The company also spoke of potential opportunities for co-investors to participate in the transaction.
Rithm is the parent of mortgage lender Newrez, which on several occasions has discussed doing an initial public offering of its common stock, going as far as filing a confidential registration statement
But during its second quarter earnings call, Rithm management temporarily shelved the idea yet again.
How active a buyer is Rithm
Instead, Rithm has been an asset purchaser, buying over $1 billion of residential transition loans in July from an undisclosed seller and a month later, $1 billion in home renovation loans from fintech Upgrade.
Earlier this month, it signed a deal to buy Crestline Management, an alternative investment company which also operates an insurer and reinsurer.
It was two years ago that Rithm engaged in a contentious battle to buy another asset manager, Sculptor Capital Management.
Rithm has been waiting for this type of deal for a long time, Michael Nierenberg, chief executive, said on a post-announcement conference call.
“We have avoided the downturn in the real estate market, particularly in the office sector,” Nierenberg said, noting that currently Class A properties are in demand.
How the FOMC move affects this latest buy
The Federal Open Market reduction in short-term rates is also a plus, as commercial real-estate financing is more tied to those movements, versus residential mortgages, which price off the 10-year Treasury.
Lower rates should lead to cap rate compression, he said, referring to the expected rate of return on a real estate investment property. This gets calculated based on dividing the net operating income by the asset value.
“Our entry point on this deal and these assets are as follows: it would cost us roughly 30% — we’re entering at 30% of what it would cost to replace these assets,” Nierenberg said.
The valuation of these assets is roughly 40% of the pre-pandemic levels, which gives Rithm the ability to generate outsized returns for its investors, he continued.
What is Rithm’s relationship with Greenbarn
Rithm has an investment management affiliate for its commercial real estate activities, Greenbarn, which it founded in 2022, along with David Welsh and David Schonbraun, the latter company’s managing partners. It deployed $700 million of equity representing $3 billion of assets in 13 deals.
“Rithm looks forward to working with the employees of Paramount, leveraging our Greenbarn partners…to continue building out our world-class operating and investment manager,” said Nierenberg.
Paramount owns properties in New York and San Francisco.
Martin Bussmann, lead independent director of Paramount, called Rithm an ideal partner who offers it the financial scale needed to improve its fundamental operating performance.
“After an extensive process and evaluation of a range of strategic alternatives, we are pleased to have reached this agreement which will deliver immediate, full and fair value to our shareholders,” Bussmann said in the Rithm press release.
