It is not every day that a real estate manager sells itself to another firm, only to spin out of that company less than three years later.
That is exactly what happened when Columbia Property Trust recently sold back the stakes it purchased in Normandy Real Estate Partners’ series of funds to a new firm started by former executives of Normandy. In launching Cannon Hill Partners, Jeff Gronning, co-founder of Normandy, along with execs Eric Rubin and Melissa Cosgrove Donohoe, bring over from CPT a staff of over 50 – half of which are former Normandy employees – and the original stakes in three funds: Normandy Real Estate Fund III and IV, as well as the Normandy Opportunity Zone Fund.
The office-focused real estate investment trust completed its acquisition of Normandy in January 2020, two months before pandemic-induced lockdowns threw the future of office into question. After that, CPT’s stock began to fall precipitously, reaching a nadir of $8.86 a share during Q3 2020. Although the stock price began to rebound, the damage done made it ripe for a takeover.
Pacific Investment Management Company stepped in during 2021 and by year-end had closed on a deal to buy the REIT for $3.9 billion. But it became apparent the strategic plans CPT had for Normandy no longer aligned with the direction of the company. Now that it was part of one of the world’s largest investment managers, CPT no longer had a need for Normandy’s investment management capabilities, which had been a key driver behind the original sale.
The events were difficult to anticipate. In January 2020, no one could have predicted that a pandemic was about to fundamentally change the office sector forever. Still, Normandy can serve as a cautionary example of how a key aspect of a seller’s due diligence on the buyer should be the likelihood of the buyer itself being sold. Hindsight is always 20-20, of course, but there were warning signs that CPT was a potential takeover target years before it bought Normandy. These included the fact that CPT was a midsized REIT and had “spotty” past financial performance, as highlighted in a 2015 report.
The pandemic then went on to precipitate the sale of CPT. But even if the deal had not occurred so soon after Normandy’s sale to CPT, the lack of strategic alignment between Normandy and CPT under new ownership – and the subsequent spinout of the new firm – would still have been possible consequences from the transaction.
Although this situation is unusual, it is not necessarily a one-off. Indeed, CPT is not the only recent example of a buyer that was acquired shortly after making its own acquisition. Singapore-based ARA Asset Management was sold to Hong Kong’s ESR earlier this year, less than two years after the former purchased a majority stake in LOGOS. That deal underscores the fact that one cannot make quick assumptions about who is a potential buyer or seller. ARA, after all, had nearly three times the AUM of ESR at the time of the deal announcement.
Greater scrutiny by the seller of the buyer is all the more important considering 2021 was a record year for real estate M&A and activity shows no signs of slowing down this year. With the possible exception of a few top-tier players, no firm is off limits as a potential acquisition target.