Cousins, TIER REITS to Merge in $7.8B All-Stock Deal

Danny Ismail, Analyst, Green Street Advisors

Nearly three years ago when Cousins Properties announced its plan to merge with Parkway Properties in a $2 billion deal, the Atlanta-based REIT’s executives said it would create the “premier urban Sun Belt office REIT.” Now Cousins is growing again by gobbling up one of its rivals—Dallas-based TIER REIT—in an all-stock transaction that will create a combined $7.8 billion company they say will be “the preeminent Sun Belt office REIT.”

“The company will own an unmatched portfolio of trophy office properties in the premier submarkets of Atlanta, Austin, Charlotte, Dallas, Phoenix and Tampa,” Colin Connolly, Cousins president & CEO, said in a prepared statement.

Cousins has a portfolio of 15.3 million square feet and the combined company will have 21 million square feet of Class A office space. The deal also includes TIER REIT’s 620,000-square-foot development pipeline and 2.1 million-square-foot land bank, much of it in The Domain, the booming live-work-play community known as Austin’s second downtown on the city’s northwest side. The combined Cousins company will have nearly 2 million square feet in its development pipeline and 3.5 million in its land bank once the merger is completed. Connolly called attention to those important TIER assets during a Monday conference call with analysts citing TIER’s “fantastic land bank with well-located office development pads in Austin and Dallas as well as a great site in Buckhead Atlanta.”

“This transaction will be transformative for both companies,” Scott Fordham, TIER CEO, said in a prepared statement. “The alignment of high-quality properties and common geographic footprint in our respective portfolios will offer shareholders the opportunity to benefit from a truly differentiated Sun Belt focused office platform. In addition, with an enhanced balance sheet, our shareholders will be able to benefit from further value creation in Austin, Dallas and Atlanta with TIER’s pipeline of over 5 million square feet of development and redevelopment opportunities.”

Leadership and organization

Once the merger is complete, Fordham will join the Cousins’ Board of Directors along with an additional unnamed TIER Board of Directors member. Larry Gellerstedt, Cousins’ executive chairman of the Board of Directors will serve as executive director of the Board of Directors of the combined company. Connolly will continue as president & CEO and Cousin’s existing senior management team will lead the combined company with Connolly.

The company’s headquarters will be in Atlanta and the company will retain the Cousins name and CUZ ticker symbol on the NYSE.

The terms of the definitive merger agreement call for Cousins to issue 2.98 share of newly issued common stock in exchange for each share of TIER stock. Upon closing, Cousins and TIER stockholders will own approximately 72 percent and 28 percent of the combined company’s stock, respectively.  While the merger plan has been approved by the boards of directors of both REITs, it needs approval of Cousins and TIER stockholders. The deal is expected to close in the third quarter.

Morgan Stanley is exclusive financial advisor and Wachtell, Lipton, Rosen & Katz is acting as legal counsel to Cousins. J.P. Morgan Securities LLC is exclusive financial advisor and Goodwin Procter LLP is acting as legal counsel to TIER.

‘Highly Complementary Portfolio’

Connolly and others noted the combination of the two office REITS would create a “highly complementary portfolio.” Cousins’ 15.3 million-square-foot portfolio breaks down to: 41 percent Atlanta; 20 percent Charlotte, N.C.; 18 percent Austin, Texas; 12 percent Phoenix; and 9 percent Tampa, Fla., holdings. TIER’s 5.8 million-square-foot portfolio has 43 percent Austin, Texas, holdings; 22 percent Dallas/Fort Worth; 16 percent Houston; 16 percent Charlotte, N.C.; and 4 percent other, which is likely the 386,000-square-foot Woodcrest office park in Cherry Hill, N.J., which could be sold once the companies merge. When combined, the new Cousins will have a much more balanced footprint with Atlanta holdings at 31 percent; Austin, 24 percent; Charlotte, 19 percent; Phoenix, 9 percent; Tampa, 7 percent; Dallas-Fort Worth, 5 percent; Houston 4 percent; and other, 1 percent.

 It was clear during the Monday conference call that the Austin assets—both existing and those in the land bank and development pipeline—were an important part of the decision to merge with TIER.

“The transaction enhances our geographic mix as we will grow in Austin, one of the best performing markets in the nation, while balancing our Atlanta exposure without selling high-quality assets,” Connolly said during the conference call. “The merger creates a strategic foothold in the best submarkets of Dallas.”

He also noted that the deal will give Cousins a 21 percent market share in Austin’s central business district and 28 percent in The Domain.

“If you look at the crown jewel of the TIER portfolio, it would be the Austin assets,” Danny Ismail, an analyst with real estate research firm Green Street Advisors, told Commercial Property Executive.

Noting that Texas capital has become a “real tech hub in the Sunbelt attracting the likes of Apple, Google and Facebook,” Ismail said that has resulted in rent growth and demographic change that has been “really positive for office growth and office landlords.”

Ismail said there are “some pretty clear synergies between the geographic overlap between the two REITs.”

“The majority of the assets are well located in healthy Sun Belt markets,” he said.

Ismail expects the combined company to eventually sell non-core assets like the New Jersey property and possibly BriarLake Plaza, an 835,000-square-foot property in Houston’s Westchase office submarket that has two trophy office buildings.

“Houston is no longer a long-term hold for them,” he told CPE.

Connolly said during the conference call that the company would take some time to re-evaluate the TIER and existing Cousins assets before making any disposition decisions. But he did acknowledge Houston will likely be included in discussions of non-core assets. For now, he said, he is comfortable with the Houston market because “it represents just 4 percent of the overall combined company.”

Cousins has made one move now, however, calling off its plan to market its Atlanta medical office complex, Meridian Mark, until they can assess all the assets in the combined portfolio.

Image courtesy of Green Street Advisors