Description

Summary

We believe that at current levels, Chambers Street Properties (“CSG” or “the Company”) represents a compelling investment opportunity with an asymmetric risk/reward profile. CSG operates a high quality real estate investment platform comprised of strategic, well-located assets leased by a diverse group of blue-chip corporate tenants and managed by well-regarded and tenured executives. Having completed a quiet public listing in May 2013 and with only one quarter reported as a public company, CSG remains underinvested as legacy retail owners have monetized their holdings while institutional investors have yet to get involved similar to SRC, which was written up on August 20^th. A number of near/medium-term catalysts will increase the Company’s profile among institutional investors and drive the stock price well in excess of its original listing price of $10.00 per share, while investors clip a 50 cent (and increasing) dividend.

Business Description

The Company invests in commercial real estate properties and enters into long-term lease agreements with corporations. Effectively, CSG provides an alternative form of financing to corporations who have a strategic business need for office (58% of CSG’s current acquisition cost), warehouse/distribution (38%) or retail (3%) space, but prefer to free-up capital for other uses. CSG earns a steady stream of rent payments from its corporate tenants whereby, as a REIT, it can deploy its cash flow tax efficiently to investors in the form of a regular monthly dividend.

CSG currently has equity interest in a portfolio of 129 commercial real estate properties representing $3.3 billion in acquisition cost, having acquired approximately 85% of the Company’s portfolio since the second half of 2008 (e.g. post the credit bubble). Based on acquisition cost and including the Company’s share in unconsolidated properties via joint ventures, approximately 79% of the Company’s properties are leased by a single-tenant, the vast majority of which are contracted as triple-net leases; meaning that the tenant is solely responsible for all operating costs of the property including taxes, maintenance and insurance. The remaining 21% of properties are occupied by multiple tenants and are generally not structured as triple-net leases. CSG has a weighted average remaining lease term of 7.1 years, with 91% of leases expiring after 2015. The Company’s portfolio is currently 96% leased based on rentable square feet.   Its largest tenant is Amazon, which represents 7.7% of the portfolio’s annualized base rent.

History

CSG was founded in July 2004 as a non-traded REIT under the name CB Richard Ellis Realty Trust. In October 2006, the Company completed its initial public offering as a non-traded REIT and has since raised upwards of $2.4 billion in equity capital from retail investors through third-party investment advisors. In March 2012, the Company’s Board of Trustees decided to internalize the management function, citing that an internalization would provide cost savings and better position the Company to pursue a liquidity event. The Company’s external advisor, CBRE Advisors LLC, did not earn an internalization fee. The Company also changed its name to Chambers Street Properties to signify its separation from the CBRE Group.

On May 21, 2013, the Company listed its 247 million shares on the NYSE at $10.00 per share. CSG did not raise new equity capital and the listing was not broadly marketed. In addition to providing liquidity for its legacy shareholders (the listed shares were not subject to a lock-up period), management believed the listing would provide access to a broader range of capital sources. Upon listing its shares, CSG commenced a modified Dutch tender offer wherein it purchased 12.3 million shares at $10.10. Due to profit-taking of the Company’s retail shareholders, the tender offer was 6x oversubscribed and the stock price has since languished; still trading below the tender price.

Operating Structure

CSG operates as an UPRIET, wherein the Company acts as the sole general partner to CSP Operating Partnership, LP. The Company effectively owns 99.9% of CSP Operating Partnership, LP in the form of Class A units and makes real estate investments through subsidiaries of the Operating Partnership. The remaining 0.1% of Class A units in the Operating Partnership is owned by CBRE REIT Holdings LLC (comprised of current and former management), which also owns Class B units in the Operating Partnership.

The Company’s public listing caused a mandatory redemption of the Class B units, entitling holders of the Class B units to a one-time payment, in cash or shares at the election of the Company’s Board, equal to 15% of CSG’s market capitalization above a threshold amount. The market capitalization used in this calculation is based on CSG’s average share price over a 30-day period from October 19, 2013 through November 17, 2013, multiplied by its outstanding shares. The Company has disclosed that the threshold amount will be approximately $10.13 per share (representing the Company’s total capital contributions made to the Operating Partnership, plus a 7% annual, uncompounded return), multiplied by its outstanding shares. Importantly, if the Company’s stock price does not exceed, on average, $10.13 during the course of this 30-day window, then the Class B shares will expire worthless.

Investment Thesis

CSG operates a high quality real estate investment platform comprised of strategic, well-located assets leased by a diverse group of corporate tenants and managed by well-regarded and tenured executives:

• High quality and well-located real estate properties: The Company’s property portfolio is comprised of recently-built (10 year average life) and well-maintained office and industrial properties with particular strategic importance to corporate tenants. The Company focuses on acquiring office properties near thriving residential areas, as well as industrial warehouse properties located near key highways and ports. Further, CSG has acquired approximately 85% of its properties, as measured by acquisition cost, following the second half of 2008 (e.g. post the credit bubble) with a keen focus on acquiring assets below replacement cost
• Well-diversified investment grade tenant base: CSG’s ten largest tenants (including Amazon, Barclays, ConAgra Foods, among others) represent 30% of rent, and eight of these ten have an S&P investment grade credit rating. The Company’s single largest tenant, Amazon, represents 7% of rent. CSG leases space to companies involved in 25 distinct industries, with financial services, its largest single industry concentration, representing 14% of rent
• Experienced, conservative and aligned management team: The management team, led by CEO Jack Cuneo, has a strong track record and reputation in the industry. Moreover, Cuneo has experience working with both the Company’s COO and CFO reaching back to the 1980s at Merrill Lynch’s real estate investment banking group. Management has operated the business with prudence, as reflected in CSG’s moderate leverage ratios (43% net debt / total capitalization) and dividend payout ratio (82% of 2014 AFFO). Finally, each of the CEO, COO and CFO has shown confidence in the Company’s prospects by recently acquiring shares in the open market

Despite the Company’s merits, CSG is attractively valued on both an absolute and relative basis across a number of metrics at its current share price. The Company’s equity yields 5.3% on its dividend, payable monthly, compared to an average dividend yield of 4.9% for net lease peers National Retail Properties (NNN), Realty Income (O) and W.P. Carey (WPC). On a cap rate basis, CSG trades at 6.7% compared to an average 5.4% for the peer group. As a multiple of 2014 AFFO, CSG trades at 15.5x compared to an average 16.5x for the peer group. Finally, as a multiple of book value (less net debt), CSG trades at 1.2x compared to 1.9x for the peer group (WPC adjusted to exclude its asset management business).

This high quality business is available at a discount due to a transition in its shareholder base from retail to institutional owners. As exemplified by the 6x oversubscription of its Dutch tender offer, retail owners are eager to monetize what in some cases may have been a seven-year investment (since the Company’s initial equity raise in October 2006), while their investment advisors are incentivized by high fees to turnover their book. At the same time, having completed a quiet listing and with only one quarter as a public company, CSG has flown under the radar of institutional investors. This is about to change due to a number of near/medium-term catalysts:

• Conservative 2013 guidance: Unlike other net lease companies, management guidance does not incorporate an expectation for new acquisitions completed through the year. That said, management expects to complete $350-400 million in acquisitions during the year, setting itself up to exceed expectations in the upcoming quarters
• Index inclusion, REIT-dedicated interest and expanded sell-side coverage: CSG is yet to be added to a key index for REIT-dedicated institutional investors, the MSCI US REIT Index. The Company is well-positioned and expects to be added to the index in mid-November 2013. As CSG becomes investible for the REIT-dedicated crowd, the Company should benefit from demand for broader Wall Street coverage beyond the current universe of two small banks
• Attainment of investment grade credit rating: Management believes it is well-positioned to attain an investment grade credit rating by next year, which would lower its borrowing cost and further increase its profile among institutional investors. The Company’s leverage metrics compare favorably to other net lease companies that recently attained investment grade status, such as American Realty Capital Properties (ARCP)
• Management equity partcipation:  CSG’s public listing has triggered a mandatory redemption of management’s Class B units, entitling the holders to 15% of CSG’s common equity above a threshold of approximately $10.13 per share, measured as an average over the 30-day period between October 19, 2013 and November 17, 2013. Therefore, though the proverbial clock is ticking, management is incentivized to increase the share price over the near-term as the Class B units expire worthless if the stock price does not exceed the $10.13 threshold, on average, during the 30-day window.

Another possible catalysts include a takeout by one of the other recent private-public REITs, as there has been tremendous M&A activity in the space (e.g., ARCP’s recently announced merger with Cole)...while being an acquiror themselves would not necessarily be negative, depending on the deal.

Investment Risks

• Interest rates: In a rising interest rate environment CSG is susceptible to higher borrowing costs; mitigated by annual rent bumps built into approximately 85% of lease agreements
• Lease expirations: CSG is responsible for operating costs of un-leased properties; mitigated by the Company’s active tenant relations program to engage on lease renewals 18 months in advance
• Leverage: Like most publicly-traded triple-net REITs, CSG retains decent leverage, though not at the same levels as some of its peers.

Catalyst