Deal Reporter
Parkway Properties (NYSE:PKY) is expected to pursue a sale or major divestiture in light of a stock that trades at a persistent discount to the REIT’s net asset value, three sector advisors said.
The most likely bidders would be peer office REITs such as Highwoods Properties (NYSE:HIW), Piedmont Office Realty Trust (NYSE:PDM), and Cousins Properties, several other sector advisors said.
The Orlando, Florida-based office REIT has explored potential deals in the past that have included discussions of potential mergers with at least some of those REITs, two advisors said was their understanding.
Representatives for Parkway did not respond to requests for comment.
Any of the three REITs above would likely take an interest in Parkway due to similarities in the quality and type of the companies’ real estate and significant geographic overlap, the advisors added.
Parkway may also consider divesting its Texas properties, said one of the first three sector advisors, which comprise about 30% of its portfolio by square footage, according to Parkway’s most recent 10-K.
Parkway’s major investor, TPG Capital, which owns about 20% of its stock and has several members on the board, may also be ready to see the company put up for sale, said one of the first three sector advisors.
The private equity firm enjoyed a successful run with Parkway, injecting capital in 2012 when the stock was trading at about USD 10 per share, but may wish to cash out now that Parkway has been on a steady downward slide from its 2014 high of about USD 21 per share, he explained. The stock currently trades around USD 17 per share.
The REIT, which has about 23% exposure to the Houston, has suffered a persistent discount to net asset value, partly because the collapse in oil prices last year slammed the city’s real estate market, said two of the advisors.
The performance of Parkway’s stock price may also result from a weaker-than-expected rebound in office properties, especially outside of the urban core, a different sector advisor said.
Despite headwinds from cheap oil, the company’s Houston exposure may be seen as an asset to potential acquirers wishing to bulk up on holdings in a major urban center that may be excessively discounted in the public markets, one of the sector advisors said.
At a panel during NAREIT’s annual REIT Week conference, CEO David O’Reilly described prices in many of Parkway’s other core markets as “expensive” and anticipated a slowdown in additional acquisitions.
He added that the company could benefit from selling properties but that “we don’t have that many assets to sell that aren’t core strategic assets … so if I wanted to dispose of more it I probably would have to think about exiting a city.”
O’Reilly also noted that he considers the stock “way undervalued relative to our assets” and that “everything is on the table” when considering ways to realize that value.
In the year following the injection of USD 200m in capital from TPG, Parkway purchased nearly USD 1bn in office assets and merged with private real estate firm EOLA Capital, which took over management of the REIT following the merger.
The company’s portfolio has seen about 90% turnover since the new management came in.
In September 2013, Parkway acquired Thomas Properties, a publicly traded real estate company, in a stock-for-stock transaction valued at about USD 1bn, according to Green Street Advisors, a real estate research firm.