James Heistand

ORLANDO—In a $1.2 billion deal, Parkway Properties and Thomas Properties Group are merging. Parkway is acquiring Thomas in a stock-for-stock transaction that could close by the end of the fourth quarter.

The acquisition gives Parkway ownership interest in Thomas assets, including two office properties in Houston and five office properties in Austin. Parkway may take ownership of three assets in Northern Virginia.

Parkway also has separately reached an agreement with Brandywine Realty Trust to sell substantially all of Thomas’ ownership interest in two Philadelphia office properties known as Commerce Square for $332 million. Parkway will also sell Thomas’ Four Points Centre and a contiguous land parcel located in Austin to Brandywine for $51 million.

Parkway is holding Thomas’ class A office properties in target submarkets within desirable, high-growth Sunbelt cities. The assets Parkway will hold are currently 90% occupied. After strategic dispositions, Parkway will hold Thomas commercial real estate assets worth $866 million, or about $266 per square foot.

“Parkway will be adding a portfolio of seven, high-quality assets totaling 4.9 million square feet, each located in one of Parkway’s targeted submarkets,” says James R. Heistand, president and CEO of Parkway. “This transaction will significantly expand and upgrade our presence in Houston and simultaneously will allow us to fulfill our stated strategy of expanding into the Austin market. We continue to believe that our markets are in the early stages of recovery, and this transaction will give us an attractive basis with potential opportunity to create additional value through occupancy gains and rental rate growth.”

Parkway intends to assume about $752 million of Thomas’ pro rata share of in-place secured debt, which will be reduced to about $530 million after the dispositions. Parkway also intends to provide Thomas a bridge loan totaling up to $80 million to partially fund its required net equity contribution connected to liquidating its joint venture with The California State Teachers’ Retirement System.

“Our board believes that the combination with Parkway, based upon our relative net asset values, will maximize value for our shareholders, both in the near and long term,” says James A. Thomas, president and CEO of Thomas, who will become chairman of Parkway’s board of directors, and Parkway’s board of directors. “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. 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.”

Parkway says the transaction will increase its total portfolio square footage by about 39%. Parkway will more than double the size of its Houston portfolio with high-quality assets, and achieve its stated strategy of expanding into Austin, with all of the Austin assets consolidated in the targeted CBD submarket.

“This transaction continues Parkway’s progress in upgrading our portfolio while maintaining a conservative and flexible balance sheet,” says David R. O’Reilly, executive vice president and CFO of Parkway. “Given the cost synergies we expect to achieve, we expect the transaction to be accretive to our Funds From Operations in 2014 and beyond, and we believe there is potential to create additional value through embedded rent growth via in-place rents that are below market, occupancy gains and overall market rental rate growth as these targeted submarkets continue through the recovery phase of this real estate cycle. In addition, we believe that our expected contemporaneous asset sales to Brandywine will preserve our strong balance sheet and support our future growth.”