A unit of Oaktree Capital Group LLC (OAK:US), the world’s biggest distressed-debt investor, bought 40 office buildings for $240 million from a real estate investment trust that’s selling assets to repay shareholders.
The properties, located in eight U.S. states, have 3.4 million square feet (315,900 square meters) of space and are 90 percent leased to Wells Fargo & Co. (WFC:US), which uses them for regional operations and data centers, Los Angeles-based Oaktree said today in a statement. Its partner in the purchase is National Financial Realty Inc., a closely held Los Angeles firm that rents space to banking tenants.
The seller is First States Investors B LP, an affiliate of Newport Beach, California-based KBS REIT I, a nontraded REIT that completed a share sale in 2008, said Vincent Pellerito, president and chief executive officer of National Financial Realty. KBS said a year ago that it was selling assets to pay down debt and return money to investors.
KBS realized a gain of about $26 million on the sale after fees and expenses, said David Snyder, chief financial officer of the REIT’s day-to-day manager, KBS Capital Advisors, also based in Newport Beach. The properties were transferred to KBS to satisfy loan obligations in late 2011, and KBS isn’t a long-term holder of those types of bank buildings, he said.
“No one would choose to sell these assets with an 11-year lease to Wells Fargo if they didn’t have to,” Pellerito said in a telephone interview. The $240 million price equates to about $71 per square foot, below the $200 to $300 per square foot, excluding land, that the properties would cost to develop today, Pellerito said. “That’s really cheap.”
The purchase price per square foot is mainly attributable to the in-place rents being below market and reflects Wells Fargo’s right to vacate, without penalty, as much as 234,000 square feet in 2017 within the properties or in combination with other real estate, Snyder said.
Ten of the buildings account for about 2.8 million square feet and are located in the central business districts of cities including Philadelphia, Atlanta and Raleigh and Winston-Salem, North Carolina.
“These aren’t some ancillary buildings,” Pellerito said.
KBS REIT I suspended shareholder distributions in March 2012, according to a filing with the U.S. Securities and Exchange Commission.
The Oaktree group’s purchase was done at a capitalization rate of about 7.5 percent, Pellerito said. A cap rate, a measure of yield for the real estate industry, is net operating income divided by purchase price. When commercial-property values peaked in 2007, some Manhattan office buildings sold for cap rates of less than 5 percent.
The acquisition “is another example of Oaktree’s commitment to relationship-based transactions with well- positioned strategic operating partners like NFR, in addition to lenders and borrowers in need of capital solutions,” John Brady, managing director and head of global real estate for Oaktree, said in the statement.
Oaktree provided a majority of the equity for the purchase, said Pellerito, declining to provide additional details of the financing.
The properties are in the Carolinas, Pennsylvania, Georgia, Virginia, Florida, New Jersey and Maryland. Eight of the buildings, with 1.2 million square feet, are in North Carolina, according to the statement.
National Financial Realty was formed in 2006 by Pellerito. It owns about 142 properties with more than 8.1 million square feet throughout the U.S., according to the statement.
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