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Cousins, Parkway saved from 'Houston purgatory,' analyst says


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Cousins, Parkway saved from 'Houston purgatory,' analyst says

Initialreaction to the planned Cousins PropertiesInc.-Parkway PropertiesInc. mergerhas been positive in part because of how it, along with the simultaneous REIT spinoff,addresses the problem of Houston.

"Ithink people generally are going to recognize it as a good thing to do," Stifelanalyst John Guinee said in an interview. "The Houston market in most peoples'mind was heading for overbuilding in 2013, back when oil was $100 a barrel. Andwhat happened is all the product still got delivered even though oil went down tothe high $20s- to $40-a-barrel range. People are perceiving that the Houston officemarket recovery is not five to 10 months or five to 10 quarters. It's more fiveto 10 years."

Guineesaid both Cousins and Parkway had, before the merger deal manifested, somethingof a "Houston purgatory" in store. The performance of their respectiveportfolios would have been dragged down by their exposure to the energy-heavy officemarket, which has struggled and is expected to continue struggling as a result ofoil price volatility.

"Whatthey're doing is they're isolating the purgatory," he said. "It's theright thing to do. It wasn't cheap, but it was probably a smart way to solve theproblem."

On anApril 29 conference related to the deal, Guineeexpressed doubt about the projected G&A cost savings, which he later clarifiedin the interview:

"He[Parkway President and CEO Jim Heistand] runs the company at $35 million to $38million, and all of a sudden he can run the company at $12 million to $15 million,in one market versus seven," he said. "It doesn't cost $25 million tobe in those extra markets."

In aMay 1 research note, Guinee cited "numerous conversations with real estatebrokers and private market investors" in his assessment of the Houston market.He valued Parkway, based on the implied $16.87-per-share transaction price as ofApril 29, at a 6.2% implied NOI cap rate.

"Clearly,PKY shareholders did not give the real estate away," the analyst said, reaffirmingboth Cousins and Parkway at "hold."

MizuhoSecurities USA Inc. analyst Richard Anderson does not cover Cousins, but he downgradedParkway to "neutral" from "buy" in a May 2 research note.

"While we realize PKY's desire to sell was no secret,a takeout has been central to our theme and a key reason from our upgrade in November2015 in light of the disposition success the company had been achieving," Andersonsaid in the note.

Anderson called the HoustonCo spinoff a "clever way"to deal with the "roadblock" of Houston, and he thinks HoustonCo is "setup to succeed" with Jim Heistand and other Parkway executives at the helm.

"[I]n our view, with $2.2 billion of gross assets … modestnear-term lease expirations, $150mm of liquidity out of the gate, and low leverage(4.5x debt/EBITDA), HoustonCo will present as a direct proxy on the oil industry.… The market will initially determine the spin's value, but nothing is forever,and that goes for the oil industry as well," he said.

In his initial write-up of the deal on April 29, Anderson putthe cap rate on the merger, based on the companies' April 28 closing stock prices,at 6.6%.

Over the 12-month period leading up to the deal announcement,Cousins outperformed the SNL U.S. REIT Office index with a one-year total returnof 8.9%, compared to the index's return of -0.8%. Parkway, meanwhile, underperformedthe index, with a total return of -3.4%.

Prior to the merger announcement, both companies traded at deeperdiscounts to NAV than the SNL US REIT Office index. As of April 28, Cousins tradedat an 11.7% discount, while Parkway traded at a 13.3% discount.

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