Rithm Capital Strikes $1.6B Deal To Acquire Office REIT Paramount

A publicly traded mortgage lender is set to acquire an owner of New York City and San Francisco office towers that has been beset by underperformance and leadership controversy.

Rithm Capital has agreed to acquire Paramount Group, a publicly traded REIT that controls more than 13M SF across 17 assets in the hubs of U.S. finance and technology, the companies announced Wednesday morning.

Rithm would pay $1.6B in cash and other liquidity, acquiring the REIT at a price of $6.60 per share, according to a release. It plans to bring in third-party capital and limited partners, CEO and President Michael Nierenberg said on a call with investors Wednesday morning.

“I now have a lot of new real estate friends,” he said. “There’s been a ton of incoming calls from folks that want to be part of this.”

The Wall Street Journal first reported that the two sides were close to a deal on Tuesday afternoon.

Paramount, founded in 1978 and run by longtime CEO and Chairman Albert Behler, disclosed to investors in May that it was exploring strategic alternatives. Blackstone and its Manhattan office REIT rivals SL Green and Vornado were among the reported bidders on the REIT.

Its stock was trading at $7.39 per share after markets closed Tuesday, up more than 4% on the day and nearly 50% this year, as investors expected it to be sold at a premium. It was trading below $4 per share in April.

Shares in Paramount, which trades on the New York Stock Exchange under the ticker PGRE, were down more than 11% in premarket trading on Wednesday to $6.55.

New York-based Rithm is a publicly traded asset manager run by Nierenberg with a focus on residential mortgage loans and roughly $100B under management. A former Fortress Investment Group subsidiary, it had a market capitalization of $6.5B at the close of trading on Tuesday, and its stock lost more than 2.5% of its value after news of its possible deal for Paramount broke.

Nierenberg said on the call that Rithm has been patient with regard to commercial real estate investing, but he cited steep discounts in value, estimating paying up to 30% below replacement cost.

Rithm's acquisition signals increasing investor interest for quality office buildings in Manhattan and San Francisco, according to a Green Street analysis reported by the WSJ.

“It could be a very good diversification play, as we've been very big in the single-family residential space,” Nierenberg said, adding that the deal is a “dislocated recovery play.”

Paramount has not benefited from the recovery. It has been shrouded in controversy since it revealed in March that it made $4M in previously undisclosed payments to Behler and his wife's businesses and toward personal expenses during a three-year period, Crain’s New York Business first reported.

The company disclosed in July that it was being investigated by the Securities and Exchange Commission for conflicts of interest and executive compensation disclosures. Its chief financial officer and general counsel left the company this spring.

Behler has also been a source of frustration for shareholders, who have bristled at his above-average compensation while the company's returns haven't kept pace with other Manhattan office landlords, according to the WSJ. 

The CEO and chairman wasn't quoted in Wednesday's press release.

“We are incredibly proud of the high-quality portfolio we’ve built and believe strongly in its intrinsic value,” Paramount lead independent director Martin Bussmann said in a statement. “Together, the Board and management team have found an ideal partner in Rithm, which offers the financial scale needed to improve our fundamental operating performance.”

According to its earnings report, Paramount's portfolio was 85.4% occupied at the end of the second quarter, down from 86.2% three months earlier.

The price is far lower than the REIT could have garnered just a few years ago. One of Paramount's largest shareholders, Monarch Alternative Capital, offered $12 per share, or $2.6B, to buy Paramount Group in February 2022. Paramount's board rejected that offer a month later.

In November 2020, Bow Street LLC offered between $9.50 and $10 per share to acquire Paramount. The REIT's board rejected that proposal within two weeks.

Evercore ISI analyst Steve Sakwa called the price of the Rithm takeover deal “disappointing” and indicated that Paramount's shareholders might reject it, Crain's New York Business reported.

UPDATE, SEPT. 17, 8:35 A.M. ET: This story was updated after the two sides announced a deal had been agreed to.

UPDATE, SEPT. 17, 4 P.M. ET: This story has been updated with additional background.