Details On The $2B Surprise Cousins/Parkway Merger

In what may be the biggest commercial real estate shock of 2016, Cousins Properties is paving over Parkway Properties for $2B—and getting out of the Houston market to boot.

Word came down Friday morning that Cousins was buying Parkway in a stock-for-stock transaction valued at $1.9B. Cousins assumes control of Parkway's assets, but is carving out its Houston office properties, merging them with Parkway's Houston portfolio and creating an entirely new publicly traded REIT called HoustonCo, that will be headed by Parkway CEO Jim Heistand. The now-larger Cousins will continue to be headed by Larry Gellerstedt (pictured).

During a call with investment analysts today, Larry says the transaction will make Cousins the “premier urban Sun Belt office REIT,” and the combined companies will see a yield of $18M/year in combined cost savings initially. Parkway as an entity will disappear, and instead will be taking Cousins' two Houston assets—the 4.4M SF, 10-building Greenway Plaza and the 1.3M SF Post Oak Central—into its HoustonCo fold. Through Parkway, HoustonCo also now controls Phoenix Tower, San Felipe Plaza and the nearly 1.5M SF CityWestPlace (here). Cousins, through the acquisition of Parkway's portfolio, now enters the Tampa and Orlando markets, as well as beefs up its presence significantly in Atlanta, Austin and Charlotte with average in-place rents at $31/SF.

Jim (on left with Parkway's Mike Fransen) says the move to split out the Houston assets for both companies—particularly at a time when the Houston economy is spiraling downward as a result of the energy sector crash—is for more transparency to investors. HoustonCo will be the single-largest Class-A office owner in Houston following its establishment, with staggered lease expirations and creditworthy tenants that officials hope will buffer properties' performance through the downturn. On average, leases in Houston have six years left of term.

Here's what else we learned on that investor call:

• Neither company is prevented from investing beyond its current borders. In other words, both Cousins and HoustonCo could, in theory, buy assets in markets where the other competes (although both Larry and Jim say there are no immediate plans for such a move).
• This specific arrangement was more favorable to both Parkway and Cousins in addressing growing investor concerns about the Houston market. It prevents HoustonCo from having to directly divest of assets at a price that Jim says wouldn't represent their true value.
• All of Parkway's senior management will be going to the new company.
• Cousins gets a dominant office role in the hot Buckhead office market in Metro Atlanta overnight, with five major assets, including 3344 Peachtree (here), Tower Place 200, Capital City Plaza and One and Two Buckhead Plaza totaling some 3M SF.