Parkway Buys Thomas Properties for $1.2B

By Barbra Murray, Contributing Editor

Frost Bank Tower, Austin

Parkway Properties Inc. and Thomas Properties Group Inc. will soon become one. The two office real estate companies have entered into a merger agreement calling for Thomas Properties to merge with and into Parkway. The $1.2 billion stock-for-stock transaction will leave Parkway shareholders with a 75 percent ownership stake and Thomas shareholders with the remaining 25 percent interest.

“It is another step in a long transitioning process for the new leadership at Parkway,” Richard Anderson, analyst with BMO Capital Markets Corp., told Commercial Property Executive. A new management team took shape at Parkway in the fourth quarter of 2011, with an eye toward, among other things, creating long-term value for shareholders as the leading owner of high-quality assets in higher growth submarkets in the Sunbelt, as noted in the company’s strategic plan overview.

As is usually the case with a merger, there are many parts to the Parkway-Thomas agreement. Per the financials of the deal, Thomas shareholders will come into possession of 0.3822 shares of newly issued Parkway common stock in exchange for each share of Thomas common stock at an implied price of $6.26 per share. Additionally, Parkway will assume roughly $752 million of Thomas’ pro rata share of in-place secured debt. On the asset side of the arrangement, Parkway will ultimately takeover Thomas’ ownership interest in seven premier office assets totaling 4.9 million square feet in target markets in Texas.

The portfolio that will become part of the merged entity includes two assets in Houston: the approximately 1.5 million-square-foot CityWestPlace and the 980,000-square-foot San Felipe Plaza, both of which are currently owned in a Thomas joint venture with The California State Teachers’ Retirement System that is expected to be liquidated later this month.  The remainder of the collection will give Parkway the opportunity to fulfill its goal of expanding into the Austin market– and to do it with a splash in one fell swoop. The largest of the Austin properties is the 535,000-square-foot Frost Bank Tower, followed by One Congress Plaza, One American Center, 300 West 6th Street and San Jacinto Center, which account for an additional  an extra 1.9 million square feet. The seven Houston and Austin office destinations are not only top-notch, well-located properties; with an average occupancy level of 90 percent, they are also well leased.

“Austin has long been on [new leadership’s] hit list of markets and this transaction begins to check off that box, albeit at the expense of a meaningful uptick in its exposure to secured debt,” Anderson said. “We have a high degree of confidence in the PKY team and expect them to execute well on this as they have in past investments aimed at revamping the portfolio and balance sheet.”

The seven remaining operating properties that Thomas currently owns will have a different fate. Brandywine Realty Trust has agreed to acquire substantially all of Thomas’ interest in two assets in Philadelphia for $332 million and another property and contiguous land parcel in Austin for $51 million. A property held in the CalSTRS joint venture will go to CalSTRS following the liquidation and the remaining three assets will be liquidated before or soon after the merger.

Of course, the merger has an upside for Thomas, too. “We are big believers in Parkway’s long-term growth strategy of gaining critical mass with high-quality assets in targeted submarkets throughout the Sunbelt,” James Thomas, president & CEO of Thomas Properties, said in a prepared statement. “This combination of Thomas Properties and Parkway delivers to our stockholders increased scale, improved liquidity, a strengthened balance sheet and the tax advantages of a REIT structure.”

The Parkway and Thomas boards of directors have given the green light for the merger, and assuming the stockholders give their approval, the unification of the two companies will likely close by the end of the fourth quarter of 2013. It’s a big deal.

“Consolidation activity has become front and center in the U.S. commercial real estate industry and this is another example of that,” Anderson added. “Possibly an indicator of a slowly improving economy and the potential positive implications of that on the office sector, which remains depressed in many markets from peak levels 6 to 7 years ago. For companies with access to capital and a willingness to take on calculated risks, the Thomas deal appears a good fit.  It is also a function of the company’s unique circumstances considering Parkway’s specific interest in the Houston and Austin markets. Parkway is a company that has been more active than most given the transitional nature of the story. This isn’t a universally appealing transaction.”