What a difference two years can make.
In February 2020, office real estate investment trust Columbia Property Trust acquired Normandy Real Estate Management and its various vehicles for around $100 million. Just over two years later, the three funds Normandy had managed, as well as two separately managed accounts and related third-party management contracts, have been handed back to one of Normandy’s co-founders, Jeffrey Gronning, through a spinout from CPT.
The new firm, called Cannon Hill Capital Partners, will be led by Gronning, Eric Rubin and Melissa Cosgrove Donohoe, all of whom are former executives of both CPT and Normandy. The three executives will be part of a 50-person team joining Cannon Hill from CPT.
The short duration of the investment came down to one main factor: CPT’s own acquisition by four funds managed by Pacific Investment Management Company in September last year. The privatization of CPT by PIMCO for $3.9 billion – of which $1.3 billion was equity – meant there was little need for the investment management capabilities that made CPT want to buy Normandy in the first place. CPT retained the development expertise also brought over in the deal.
“It became clear to me that the investment management business was not core or strategic to what PIMCO was trying to accomplish,” Gronning told PERE.
Two of Normandy’s funds – Real Estate Fund III and Real Estate Fund IV – remain in the process of winding down, as both were raised pre-pandemic. The third fund, Normandy Opportunity Zone Fund, was raised and deployed in the last couple of years, Cosgrove Donohoe said.
Because of the relatively small interest – CPT paid $13.5 million in cash and another $86.5 million in convertible preferred units issued at $26.50 per share for 2 percent of each of the funds – the sale was seen not as a divesture of assets but a sale of a line of business, Nelson Mills, CPT chief executive officer, told PERE. Mills added that CPT could have kept Normandy after being bought by PIMCO, but it made more sense to concentrate on the properties it owned outright.
“I believe that being focused on the main business, where 98 percent of our value is, seemed to make more sense,” Mills said.
A sale spurred by the pandemic
When CPT bought Normandy, the REIT had not yet considered selling itself. The pandemic, however, changed the calculus for CPT. At the end of 2019, the REIT was trading at $16.47 per share, according to Netcials, an online stock report provider. By the end of Q1 2020, the daily price had dropped to $11.34, reaching a nadir of $8.86 during Q3 2020. While it somewhat rebounded over the following year, CPT’s stock price would not return to its pre-pandemic level until PIMCO paid $19.30 per share, a 27 percent premium at the time, in September 2021.
The precipitous fall was due to CPT’s focus on office, one of the worst-faring sectors in the pandemic. Being taken private was a good thing, Mills said, adding that shares were trading below their underlying asset value for most of the pandemic, making it difficult to raise additional capital. The REIT held 18 assets at the time of the sale, some of which are partly owned with Allianz Real Estate via a joint venture that first formed in 2017.
In Normandy’s funds, three New York office properties remain under the purview of both firms: Terminal Warehouse, 101 Franklin and 799 Broadway. CPT holds either a majority stake or an even 50/50 stake in all three properties. When those assets are wound down in the next few years, both firms said they could work together again on projects, although no concrete plans exist currently.
With Normandy’s funds not fitting into PIMCO’s future plans, the three founding partners knew it was time to go their own way. “For us, it yielded an opportunity to unwind what we had done a couple of years before,” Gronning said. “[We could] start a new independent company that we control and have the opportunity to go out and grow.”
Almost all of the staff that came over to the new firm – around three quarters of which were original Normandy employees – were already working on the assets still held in the Normandy funds and other accounts. That portfolio encompasses around $4 billion in gross asset value and 11 million square feet of office, life sciences and residential properties.
Across the Normandy vehicles, the new firm also assumes around 40 institutional relationships, as well as a couple of hundred high-net-worth clients from whom to raise new capital in due course. The group has not raised a new fund since Normandy was sold to CPT, but Gronning said he would not consider Cannon Hill to be a first-time fund manager.
“We’re a new name but not a new company. We’re not a start-up,” Gronning said.