Parkway Sees $200M Equity Investment, Purchases 972 KSF Charlotte Office Tower for $250M

By Gail Kalinoski, Contributing Editor

Aided by a $200 million equity investment from private investment firm TPG, Parkway Properties Inc. completed its purchase of Hearst Tower, a 46-story, 972,000-square-foot office tower in downtown Charlotte, N.C., for $250 million.

At $257 per square foot, the amount Parkway paid for the 10-year-old building represents a significant discount to replacement cost. The building, which has a trading floor used by Bank of America as well as a 1,400-space parking garage and retail space, is 94 percent leased. There are no material expirations until 2017 and Bank of America is entering into a new lease for 322,000 square feet in the base of the building through March 2022 as part of the transaction. The property is expected to generate cash net operating income of about $17.5 million in the first year of ownership. Parkway is financing the acquisition with the TPG investment and borrowings from the company’s credit facility. However, it plans to obtain financing on the property to use as capital for future investments.

Parkway also announced that it had completed the sale of The Pinnacle at Jackson Place and Parking at Jackson Place in Jackson, Miss., for $29.5 million.  The Orlando, Fla.-based REIT had said that it was in the process of selling the Jackson properties in early April, when it announced the sale of 12 non-core assets. Those properties five in Richmond, Va.; four in Memphis, Tenn., and three in Jackson generated net proceeds of $88.1 million.  With that sale, Parkway had sold all its Richmond assets and had only one property in Memphis, the Morgan Keegan Tower, a 21-story, 337,000-square-foot office building in the CBD.

The dispositions are part of the REIT’s plans to transform its business and focus on office properties in growing SunBelt markets and submarkets.

We spent much of last year repositioning our portfolio. We sold close to $800 million of assets and acquired $720 million, not including Hearst Tower, David O’Reilly, Parkway’s executive vice president, chief investment officer and interim chief financial officer, told Commercial Property Executive. Through 2011 and early 2012 it’s been a portfolio recycling exercise and getting out of those non-core markets and focusing on the core markets. During that time, we also substantially deleveraged our balance sheet.

The core markets Parkway is targeting where it owns assets are Buckhead in Atlanta; Jacksonville, Tampa and Orlando in Florida; Houston; Phoenix and Charlotte. It is also seeking to acquire properties in two new markets Miami and Austin, Texas, O’Reilly said.

Parkway is getting out of Chicago, Richmond, Jackson and Memphis. In January, Parkway sold 111 East Wacker, a 1 million-square-foot office building in downtown Chicago that was 80.5 percent occupied for a gross sales price of $150.6 million.

We are pleased to have completed these important steps in the evolution of Parkway as we continue to position ourselves for long-term growth. We remain firmly committed to improving operations and cash flow, and on pursuing new acquisitions to grow the company, said Jim Heistand, Parkway’s president & CEO. With TPG’s financial commitment and strategic partnership, we will continue to take advantage of attractive opportunities such as Hearst Tower, as we strive to become one of the leading owners of high-quality office properties in select submarkets throughout the fast-growing Sunbelt region.

TPG now owns approximately 43 percent of the company. Parkway has issued TPG 4.3 million shares, or approximately $48.4 million of common stock and about 13.5 million shares, with an initial liquidation value of $151.6 million, of newly-created, non-voting Series E Cumulative Redeemable Convertible Preferred Stock.

O’Reilly said that even with the dispositions and debt reduction, Parkway needed incremental capital to go back out into aggressive growth mode.

TPG viewed this and we view this as a long-term partnership, O’Reilly added.

Parkway’s high-quality office portfolio, which is concentrated in attractive Sunbelt markets, provides a unique investment opportunity. Hearst Tower is a great example of the type of investments Parkway’s talented management team will seek to identify and secure in the future, said Avi Banyasz, a partner at TPG.

As a result of its investment, TPG gets four board of director seats at the company. Banyasz and partner Kelvin Davis along with Adam Metz, a TPG senior advisor, have been appointed to the board. A fourth appointment will be named in the future. Those board members leaving are Daniel P. Friedman, Michael J. Lipsey, Leland R. Speed and Troy A. Stovall.

Parkway now owns or has an interest in 42 office properties in 10 states with a total of approximately 10.7 million square feet of space. Wholly owned subsidiaries also provide fee-based real estate services and manage or lease approximately 12.2 million square of space for third-party owners.

TPG was founded in 1992 and has $15.5 billion in assets under management and 17 offices in 10 countries including the United States, China, Australia, Russia, Brazil, Japan and India. It has committed more than $1 billion in equity to real estate investments in recent years.