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Parkway Properties, Inc. (NYSE:PKY)

Merger with Thomas Properties Group Conference Call

September 05, 2013 8:30 AM ET

Executives

Jeremy R. Dorsett – Executive Vice President, General Counsel and Company Secretary

James R. Heistand – President, Director and Chief Executive Officer

James A. Thomas – President and Chief Executive Officer-Thomas Properties Group

David R. O'Reilly – Executive Vice President, Chief Investment Officer and Chief Financial Officer

Michael Jayson Lipsey – Executive Vice President and Chief Operating Officer

Analysts

Brendan C. Maiorana – Wells Fargo Securities LLC

Rich C. Anderson – BMO Capital Markets

Andrew Schaffer – Sandler O'Neill & Partners, L.P.

Jordan Sadler – KeyBanc Capital Markets

Craig Mailman – KeyBanc Capital Markets

Bruce G. Garrison – Chilton Capital Management LLC

Operator

Greetings, welcome to the Parkway Properties Incorporated Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeremy Dorsett, Executive Vice President and General Counsel. Thank you, Mr. Dorsett, you may begin.

Jeremy R. Dorsett

Good morning everyone and thank you for joining us. With me today here are Jim Heistand, President and Chief Executive Officer of Parkway; David O’Reilly, Chief Financial Officer and Chief Investment Officer; Jayson Lipsey, our Chief Operating Officer; as well as Jim Thomas, the Chairman, President and Chief Executive Officer of Thomas Properties.

Before we begin, I’d like to direct you to our website at pky.com, where you can download a copy of this press release and the presentation related to the transaction that we’re going to cover today.

Certain statements contained in the presentation that are not in the present tense or to discuss, the Company’s expectations or forward-looking statements within the meaning of the Federal Securities Laws. Although we believe that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, we can give no assurance that those expectations can be achieved. Please see our forward-looking statement disclaimer in the press release for factors that could cause material differences between forward-looking statements and actual results.

In addition in connection with the proposed merger transaction, we expect to file with the SEC a Registration Statement on Form S-4 that will include a joined proxy statement of Parkway and Thomas that also constitutes a prospectus of Parkway. Parkway and Thomas also plan to file other relevant documents to the SEC regarding the proposed transaction. Investors are urged to read the joint proxy statement prospectus and other relevant documents filed with the SEC when they become available because they will contain important information.

With that said, I will now turn the call over to Jim Heistand.

James R. Heistand

Good morning everyone. We apologize for the short notice, but we are very excited to speak with you today regarding our agreement to merge with Thomas Properties in a Stock-for-Stock Transaction valued at approximately $1.2 billion. I would like to start our call with a review of our strategic plan and the key accomplishments we have made over the past couple of years. I would then discuss in detail what our stated investment strategy has been and how this transaction is consistent with that strategy.

David will discuss the details of the transaction and the value creation opportunities that’s inherent in this acquisition and our approach to unlocking that value. Jayson will then provide an overview of the properties we will be acquiring and their respective markets.

Since this new management team came together in late 2001, we made a significant amount of progress of executing our strategic plan. As shown on Slide 6, our strategy has been to create long-term value for our shareholders by realizing leasing and operational efficiencies, increasing our cash flow, unlocking of the embedded value within our existing portfolio, all while maintaining a conservative and flexible balance sheet.

Slide 7 highlights some of the key achievements that show our execution of this plan. We have substantially repositioned our portfolio and significantly improved the quality of our assets. Since January 2011, we have acquired over $1.6 billion of high-quality assets in our targeted submarkets. Our occupancy in-place rents and NOI margins have greatly improved due to the strong leasing activity that we’ve seen at our properties. And throughout our growth, we have maintained a conservative and flexible balance sheet by taking advantage of attractive opportunities to raise both unsecured debt and private and public equity.

All of these accomplishments have led to higher cash flows to the company which has resulted in 100% increase in our quarterly dividend payments since May of 2012. We believe this deal is a continuation of the significant progress we have made.

Slide 8 highlights the five primary reasons we are pursuing this transaction, each of which fits perfectly within our strategic plan. First, this transaction represents a continued execution of our plan to purchase high-quality assets within targeted Sunbelt markets. Houston and Austin continued to create jobs faster than the broader U.S. economy. The submarkets within these properties are located are among the best performing submarkets within their respective markets. And the 4.8 million square feet of assets we will own in Houston and Austin following the transaction will be among the finest assets in our portfolio.

Second, we believe we are purchasing the Houston and Austin assets at very compelling values. With occupancy at 90%, we are acquiring the portfolio at an implied cap rate of 6% on a cash basis and over 8% on a GAAP basis. There is also a blend of core and core-plus investments that will complement our existing portfolio and the applied pricing for these assets is below our estimated replacement costs.

Third, we will continue our strategy of gaining critical mass and targeted high-growth submarkets. The transaction will double the size of our Houston portfolio and significantly improve the quality of our assets located there. The two assets are located in the highly desirable Galleria and Westchase submarkets. With the addition of CityWestPlace to our portfolio, we will own approximately 25% of the Class A office inventory in the Westchase submarket. We will also achieve our goal of expanding into Austin which arguably is the finest collection of high-quality Class A assets in the city all of which are located in the central business district. The portfolio property represents approximately 40% of the Class A office inventory in the office CBD.

Fourth, we expect limited integration risk associated with this transaction given our overlapping markets. There will be no changes to our current management team and we expect to achieve significant potential cost savings with only a minimal amount of increase to our current recurring G&A expense.

And fifth, we will continue to maintain a conservative and flexible balance sheet following the transaction. Our projected net debt to EBITDA following the transaction is approximately 6.5 times and we expect our portfolio to naturally delever over time as our EBITDA increases due to our announced contractual leasing activity and we will continue to recycle assets where we can achieve the maximized value for those assets.

We work hard in the front-end of this transaction to make this a smooth transition for our current shareholders. And we believe this is another step towards executing the same strategy we’ve been operating under over the past couple of years.

Before I turn the call over to David O’Reilly for more details on the transaction, I'd like to introduce Mr. Jim Thomas, Chairman and CEO of Thomas Properties who would like to say a few words. Jim?

James A. Thomas

Thank you, Jim. Jim, we are at Thomas Properties Group very excited about this merger with Parkway. It is for us a continuation of what we have been trying to achieve, it increases, accelerates the strategic plan that we have and fits right into the strategic plan that Parkway has. We spent a lot of time looking at the possible merger with Parkway. I personally visited over 90% in value of the assets of Parkway, spent lot of time with Parkway management, was very impressed. I think that the management has a great vision for the future. We believe that this combination will lead to a domination of the Sunbelt being the largest REIT in the Sunbelt region.

So as I say, we’d looked at this transaction upside and down and we became absolutely convinced that this was the best way to increase our shareholders value in the near and long-term. So we are very excited about it and we are looking forward to working with Jim and his team to execute on the strategy which has been so successful in the past and we think with the combination of the Thomas Property Group assets it will only enhance what Jim and his team have been trying to accomplish.

James R. Heistand

Well, thank you Jim for those kind words. I am going to turn that over now to David to give more specifics on the transaction.

David O'Reilly

I am going to focus for a minute on Slides 9 and 10 to provide some of the key details related to the transaction. Under the merger agreement, Parkway will acquire all the issued and outstanding shares of Thomas Properties based on a fixed exchange ratio of 0.3822 shares of Parkway stocks for each share of Thomas Properties stock.

This structure results in an implied offer price of $6.26 per share of Thomas Properties stocks which is a 9.8% premium to their closing price yesterday. The merger agreement has been unanimously approved by both Parkway’s and Thomas Properties Board of Directors and is expected to close by the end of the year, subject to shareholder approval from both companies.

Furthermore, this strategic merger will add another highly experienced real estate executive in Jim Thomas, President, Chairman, and Chief Executive Officer of Thomas Properties to our Board of Directors where he will now serve as Parkway's Chairman.

As shown on Slide 10, there are several key components of the transaction I want to highlight for new, all of which are expected to occur prior to or shortly after closing. First, as previously announced by Thomas Properties, their joint venture with CalSTRS is expected to be liquidated by the end of September. This joint venture owns one asset in Los Angeles and two assets in Houston.

The liquidation of this joint venture will cause City National Plaza located in Los Angeles to be distributed to CalSTRS and San Felipe Plaza and CityWestPlace located in Houston to be distributed to Thomas Properties.

In essence, by the time the transaction closes, Parkway will own 100% of the two Houston assets and the Los Angeles assets will no longer be included in Thomas Properties portfolio.

Second, Parkway has agreed to provide a bridge loan totaling up to $80 million to Thomas Properties to help fund the required equity contribution related to the liquidation of this joint venture. The bridge loan will initially earn a fixed annual interest rate of 6% and will be funded on the anticipated liquidation date of the TPGI/CalSTRS joint venture, so we expect it to be in late September.

The annual interest rate on the bridge loan will increase to 8% on the six-month anniversary of funding and to 12% on the12-month anniversary of funding. If the merger is not consummated, the bridge loan will mature on January 15, 2015. With that said, this one will be repaid and eliminated upon closing the merger.

The third component I’d like to highlight is the planned sales of certain assets in Thomas Properties current portfolio. Parkway has separately reached an agreement with Brandywine Realty Trust for Brandywine to redeem substantially all Thomas Properties' ownership interest in two office properties located in Philadelphia known as One & Two Commerce Square, based on an agreed property value of $332 million. These sales will close concurrent with the merger closing.

Additionally, Parkway has agreed to sell Four Points Centre, an adjacent land parcel located in the Northwest suburbs of Austin, Texas to Brandywine. This transaction is subject to the successful completion of due diligence by Brandywine and other customary closing conditions.

And finally, there are three assets located in Northern Virginia, currently owned by Thomas Properties that are under special service to all of our sites and are expected to be sold shortly before or shortly after closing.

The following Slide on Page 11 shows the pro forma portfolio that Parkway will be acquiring as a result of these key components. The only assets Parkway will hold after the completion of the transactions are the two assets in Houston and five assets in downtown Austin. Parkway will have a 100% equity interest in the two Houston assets and will own 33% of the Austin assets, which are held in a joint venture with CalSTRS owning 50% of the interest and Madison International with 17%.

As we announced this morning, the implied value of the transaction is approximately $1.2 billion as shown on page 12. After adjusting for the asset sales that are expected to occur simultaneously or shortly after closing, the adjusted transaction value is approximately $1 billion and the underlying value of the operating real estate we will be acquiring is approximately $866 million.

We expect to achieve significant recurring G&A cost savings as a result of the transaction with only minimal increases, the Parkway’s existing recurring G&A expense estimated to be between $1.5 million and $2 million. Assuming we achieve these synergies, we expect that the transaction will be approximately $0.13 to $0.18 accretive to our projected 2014 funds from operations.

Slide 13 of the presentation shows the sources and uses related to the transaction. The implied equity market capitalization for the transaction is approximately $381 million and Parkway will be assuming approximately $530 million of Thomas Properties share. Initially, Parkway will fund a $75 million bridge loan to Thomas Properties using proceeds from our existing line of credit. Once the merger closes, the bridge loan will be repaid and the transaction cost will be funded using proceeds from the planned asset sales and approximately $28 million in cash from Thomas Properties balance sheet.

The net result of all these transactions is that our line of credit balance will remain unchanged. This can be more clearly seen on the following slides, which shows our pro forma capitalization table broken out based on the acquisition of Thomas Properties and the planned asset sales. This table on page 14 shows the various transactions that will take place between now and the closing of the merger including the funding of the $75 million bridge loan using our credit facility, the additional debt in cash we will be assuming from Thomas Properties, the proceeds from the planned asset sales and the resulting pro forma capitalization table.

As indicated on this table, our line of credit balance will increase to approximately $113 million temporarily until the asset sales are completed at or shortly after the closing of the merger at which point our balance will be reduced back to approximately $18 million.

We are estimating that our pro forma net debt to EBITDA following the completion of all assets sales to be approximately 6.5 times. We expected over time this leverage metric will improve and we will naturally delever as a significant leasing progress we have accomplished this year starts to flow through our trailing EBITDA. We also plan to continue to develop certain assets over time where we believe we have maximized the value of those assets, which will help to reduce our rates.

Turning to Slide 15, this shows our pro forma debt maturity schedule. Following the transaction, we will continue to have nominal debt maturities until 2016. We will continue to have a well set debt maturity schedule. Note that the pro forma drawn credit facility is expected to be nominal. With this transaction, we will have an increase in the amount of our secured debts, but we view this as a modest drawback compared to the positive upside that we believe exists as a result of this transaction.

Slide 16 shows the continued improvement to our market exposure following the transaction. The portfolio we will be acquiring was more than double the size of our portfolio in Houston, and we will achieve our goal of expanding into Austin. Following the transaction, 34% of pro rata square footage will be located in Houston with another 6% located in the Austin CBD. Note, our exposure to non-core markets continues to decline only 4% of our pro rata square footage.

The following Slide on Page 17 shows our pro forma top tenant list. As a result of the transaction, we will have a broader and more diversified tenant base with new high credit tenants added to our top tenant list such as BMC Software, Halliburton and Statoil.

Now that we’ve covered the transaction structure, sources and uses and pro forma capitalization, I want to spend just a bit of time to focus on the bricks and mortar of this deal, and why at its core, this is an incredibly compelling real estate transaction.

Turning to page 18, let’s take a minute and walk through the real estate metrics of the deal and how we look at the value creation that we believe exists within the assets we are acquiring. Ultimately, we will be acquiring a portfolio of seven assets with an average implied purchase price of approximately $266 per square foot. The combined occupancy of this portfolio is 90% and we estimate that the 2014 cap rate is approximately 6% on a cash basis and over 8% on a GAAP basis.

Based on our underwriting of the assets, we also expect to achieve an unleveraged IRR greater than 9% for the blended portfolio. We’ve broken out the implied valuation of the two portfolios that illustrate where we see opportunities to create additional value.

In addition to the potential of the increased value through occupancy gains and overall market rental rate growth, we believe there is an opportunity to create significant value with the in-place rents that are well below current market rates.

We will be acquiring San Felipe Plaza for approximately $246 per square foot with current occupancy of 87% and market rental rates on a triple net basis of $25 per square foot. We believe there is potential upside of this property on several fronts including occupancy gains, mark-to-market of in-place rents and overall market rent growth.

We will be acquiring CityWestPlace for approximately $250 per square foot with market asking rates of $29 per square foot on a triple net basis. This property is already well leased, but in-place rents are approximately 30% below current market rates for this property.

The entire Austin portfolio has been acquired at a blended price of $313 per square foot. The average occupancy of this high-quality portfolio is only 85% and in-place rents are approximately 23% below current market rents, both of which present a significant amount of growth potential within these assets.

As Jim stated before, we believe this transaction fits perfectly within our stated strategy of gaining a critical math with high quality assets in targeted sell markets throughout the Sunbelt. As a result of this transaction, we will be acquiring a portfolio of seven high-quality assets at a very attractive basis. Our markets are in the early stages of the recovery cycle and we believe there is an opportunity to create additional value with this portfolio of assets.

I will now turn the call over to Jayson to provide more detail on the properties we will be acquiring.

Michael Jayson Lipsey

Thanks David. As Jim previously mentioned, this transaction enables us to acquire outstanding portfolios in Houston and Austin, Texas. Let me begin by discussing Houston where we are purchasing San Felipe Plaza and CityWestPlace.

As shown on Slide 21, Houston continues to be one of the strongest office markets of the United States. Employment in Houston is higher than never before. This city added over 111,000 new jobs in the first six months of this year. Overall, Houston occupancy increased by 2.2% over the past year and is at the highest level since 2008. Year-to-date net absorption has exceeded 1.6 million square feet and the overall market vacancy is currently 6.9% for Class A space.

At Galleria submarket, where San Felipe Plaza is located has a Class A vacancy of 7.3% and the Westchase submarket where CityWestPlace is located has a Class A vacancy rate of only 2.5%.

Slides 22 and 23 provide property statistics and investment highlights for the two Houston assets.

San Felipe Plaza is a premier Class A LEED Gold certified landmark office tower located in the Galleria submarket. The office tower contains more than 980,000 square feet of office space and is the second tallest building outside of downtown Houston and has spectacular views in all directions. The property was built in 1984 and has efficient 22,000 square foot workplace.

San Felipe Plaza is currently 87% occupied and we believe there is a significant opportunity to create value for these assets through leasing as well as the mark-to-market of existing rents which are well below current market rental rates. The property is also home to a number of high credit tenants including ENSCO, Raymond James, and Alliant Insurance.

CityWestPlace is a premier four building office complex located on the Sam Houston Tollway in the Westchase submarket. Two of the buildings are LEED certified and each of the four building has its own parking garage as well as onsite access to three first class restaurants, conferencing facilities, fitness centers and several outdoor recreation amenities. This complex is home to such prestigious tenants as Halliburton, BMC Software and Statoil among others.

Turning to Austin, we will be acquiring the portfolio of five high quality Class AA assets, all located in the central business district. As highlighted on Slide 24, the Austin market has been one of the fastest growing cities in the United States. According to Bloomberg, Austin is America’s number one boom town. It’s benefited significantly from growth and advanced manufacturing, clean energy and life science sectors, but especially from the technology sector.

At the end of the second quarter, Austin vacancy fell 240 basis points year-over-year and the rental rates continue to show healthy growth. Within the central business districts specifically, rental rates for the Class A assets have increased more than 9% over the past year to a current average asking rate of $41.76. Vacancy rates have also steadily declined to a current rate of 11.4%. The property details for each of the Austin assets are show on Slide 25.

With these investments, Parkway will control approximately 40% of the entire Class A office supply in the central business district. The assets have a blended occupancy of 85% providing significant potential upside for leasing and the in-place rents are also below current market rents for each property as David highlighted earlier.

I’d like to highlight two specific building in Austin for you. First, Frost Bank Tower is the premier asset in downtown Austin and is often the focal point of the city with its striking architectural design. The property was built in 2003, totals over 535,000 square feet, is rated LEED Gold and is currently 94.8% occupied. The property bodes an excellent tenancy and includes Frost Bank and DLA Piper.

Second, 300 West 6th Street was built in 2001, it totals over 454,000 square feet, is rated LEED Gold and is currently 89.9% occupied. The property has a distinctive barrel-vaulted roof, making the building a landmark on the Austin skyline. The 23-storied building also showcases 360 degree views of the city from a sufficient [indiscernible]. The rental includes Facebook, Cirrus Logic, and Green Mountain Energy.

The addition of the Houston and Austin assets significantly improve our portfolio and we are excited about the prospect of integrating these properties on to our operating platform. Given our strong local leadership in Texas, we believe our operating strategy will enable us to create value within this portfolio and that our increasing scale will facilitate greater operational efficiency.

I will now turn the call over to Jim for some closing remarks.

James R. Heistand

Thanks Jayson. First of all, there are number of people that I’d like to thank that have helped us get to this point. Our board and management team has worked very hard over an extended period of time and often had to get very creative to make this transaction fit, making it the right fit for Parkway. Thank you for your diligence, your commitment to the deal and your support throughout the process.

I’d also like to thank Jim Thomas and his team at Thomas Properties for their continued efforts to pull this together. I look forward to working with Jim on our Board and we continue to make the progress we have made at Parkway. And I want to thank Jerry Sweeney and his team at Brandywine for their cooperation and creativity facilitating this transaction. It’s truly a rate opportunity to see three public companies come together to find a solution to a transaction such as this that benefits all.

In summary, we believe this transaction is another steps towards achieving our goal of creating a long-term value for our shareholders, as the leading owner of high-quality assets and high growth submarkets through the Sunbelt. This transaction continues the portfolio repositioning we have accomplished over the past year and half and the assets we are acquiring improve the quality of our portfolio, expand our presence in high growth submarkets and create a path for additional value creation by leveraging our existing operational platform.

With that I will turn the call back to the operator to take any questions anybody may have.

Question-and-Answer Session

Operator

We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from the line of Brendan Maiorana of Wells Fargo. Please go ahead with your question.

Brendan C. Maiorana – Wells Fargo Securities LLC

Thanks. Good morning, congratulations guys.

James R. Heistand

Good morning.

Brendan C. Maiorana – Wells Fargo Securities LLC

Hey, so a couple of detailed financial questions for David, maybe just to start. First, is there a fee income that’s associated with the JV, with CalSTRS on the Austin portion of the portfolio and if so what’s the magnitude of that and how should we think about it?

David R. O'Reilly

There is fee income Brendan. It is a modest amount as that joint venture has a limited amount of property management fee and asset management fee that comes from it. It is in the order of magnitude of about $7 million a year.

Brendan C. Maiorana – Wells Fargo Securities LLC

$7 million, okay, so $7 million to PKY?

David R. O'Reilly

Yes.

Brendan C. Maiorana – Wells Fargo Securities LLC

Okay. And I assume that’s not in the NOI yield that you provided?

David R. O'Reilly

No. We haven’t had fees into an NOI to calculate the cap rate. We focus purely on the real estate NOI.

Brendan C. Maiorana – Wells Fargo Securities LLC

Okay. So if I look at – I am just trying to get sort of the cash yield of the transaction layering on the G&A increase, which I guess is, call it $2 million, and then the transaction costs, which are around $50 million. So the sort of implied value of the real estate is little over $900 million. I gather the NOI less G&A is about $50 million, is kind of $52 million, 6% cap rate, $2 million of G&A and then add back $5 million of net fees or so. Is that kind of the way to think about it?

James R. Heistand

I think that’s a fair assessment, Brendan.

Brendan C. Maiorana – Wells Fargo Securities LLC

Okay. So it’s probably, as you guys stated, $0.15 or so accretive to FFO and it’s maybe about neutral on an AFFO basis initially before you kind of get the lease up and the increase in rents.

James R. Heistand

I think we – our expectation is that it would be flat to modestly positive on an AFFO or FAD basis and we typically report our numbers [on a supplemental way it can vary] [ph]. As we kind of believe, we said, we look at annualizing transactions. While we are mindful of the first year’s accretion dilution from both an FFO and FAD standpoint and we think that this transaction is positive of both those metrics.

The real goal up here is to buy assets where we can drive any of the – an increase to long-term value to our shareholders to any of the appreciation in cash flow appreciation over a longer period of time, and as kind of the lease-up in mark-to-market takes hold in these assets those numbers rose significantly over time. So I think your point is spot on.

Brendan C. Maiorana – Wells Fargo Securities LLC

Okay, great. That’s helpful. And then just last question, I’ll yield the floor, that 9% un-levered IRR number as I just kind of did some back of the envelope math, I have a little bit of trouble getting up to that number. Can you may be just provide a little bit of color on what the near-term roll looks like to achieve some of that mark-to-market and then your expectations for where you think you can get occupancy in this portfolio over the next couple of years.

Michael Jayson Lipsey

Yes, Brendan I’ll speak first to kind of the roll profile and where we think we can create value. I think we’re expecting probably about a third of the portfolio that’s fairly evenly distributed the roll over the next three years, and as Dave mentioned in his prepared remarks, our view is that there is a significant mark-to-market at many of the properties.

I think in terms of where we can create occupancy gains, clearly our opportunities as we view them are at San Felipe Plaza in Houston which is in the Galleria submarket which is a very strong submarket right now, as well as within the Austin portfolio. And so I think that between sort of incremental lease-up as well as our continued efforts to roll rates to markets that’s where – those are our two opportunities. And I think operationally we view this increased scale as a means to continue to grow a more efficient operating platform. So I think there will be marginal benefit there as well.

Brendan C. Maiorana – Wells Fargo Securities LLC

Okay, great. All right, thanks.

James R. Heistand

Thanks, Brendan.

Operator

Thank you. Our next question is from the line of Rich Anderson of BMO Capital Markets. Please proceed with your question.

Rich C. Anderson – BMO Capital Markets

Thanks. Good morning, and congrats. Can you mention or give us any color on the cost of the acquired or the assumed debt and what the opportunities might be there to refinance in the future?

David R. O'Reilly

Rich, the debt that’s in place has – it’s mostly fixed rate longer term debt with rates between 5 and 6 that have significant or meaningful cost associated with the prepayment. So I wouldn’t guide you to expect any sort of meaningful refinance of that in the near-term. On an NPV basis, we just don’t think that that’s appropriate.

The Austin debt across the portfolio is about $209 million [a share] [ph] at a blended rate just over 6 about 6.4. And then CityWestPlace has two pieces of debt; one at about $818 million, just over 6% and one at $94 million at 5% even and both of those, they have maturities of 2016 and 2020 respectively. So there’s not a lot of near-term kind of upside in the refinance [inaudible] for this cash flow.

Michael Jayson Lipsey

I think 2016 would be the nearest term, Rich, that we could be - do some refinancing on.

Rich C. Anderson – BMO Capital Markets

Okay. Lot of steps to this transaction of course. Are there any that are conditioned to the closing of the merger?

James R. Heistand

All of the transactions with Brandywine, so the sale of One and Two Commerce in Philadelphia as well as the contract to sell Four Points and the adjacent land in Austin are subject to [inaudible] close.

Rich C. Anderson – BMO Capital Markets

Meaning they have to happen for the merger with Thomas to close.

James R. Heistand

No, no, just exactly the opposite. The merger needs to happen…

Rich C. Anderson – BMO Capital Markets

The opposite .

James R. Heistand

…for those to be closed.

Rich C. Anderson – BMO Capital Markets

okay. Is there any longer term strategy – what is the longer strategy to reduce your exposure to secured debt and also maybe reduce the Houston exposure down some, I mean where are your comfort zones in those two metrics and when do you get to them, how long the credit time?

James R. Heistand

Rich, I think you [inaudible]. For all of this entire management team and our Board and everyone that we’re talking to about evaluating this transaction, we saw an incredible amount of positive things that we enumerated in our prepared remarks for the deal. If there was a one minor potential downside, I think we said, we are going to be increasing our percentage of secured debt relative to unsecured debt in a meaningful way, which will I think slow our process as we march towards an investment grade rating.

With that said, it’s not at an uncomfortable level. I feel like we do have the ability that as these debts mature and as we continue to – hopefully continue to grow and find more assets we can balance that with more unsecured financing. I’ll turn it over to Jayson to speak towards the other question you have.

Michael Jayson Lipsey

Well, Rich, I think one of the things that we’re very excited about is the way this upgrades our portfolio in Houston. I think Phoenix Tower was a very big step in terms of starting the transition of our Houston portfolio and this is certainly another major step in that direction. I think as we’ve been trying to balance maintaining the efficient operating platform in that market in measured, disposition strategy our scale there has created a potential challenge to that. With this acquisition, I think it will enable us to maintain our efficiency and also start a process of disposing some of those more legacy Parkway assets and that are a good fit to our investment strategy longer.

Rich C. Anderson – BMO Capital Markets

Jayson, what are you comfortable with for Houston as a percentage of the portfolio that getting back closer to 20% or how would you comment on that?

Michael Jayson Lipsey

Well, I think we look at our portfolio as in the context of the broader Houston market. And so, while Houston makes us a sizable component of our company portfolio, I think we feel very comfortable as it relates to our exposure to that market in general. So yeah, I don’t think we’re thinking of it in terms of the percentage of our portfolio as much as just making sure we maximize our potential to create value with our portfolio there. And I think it’s our view that in some of our legacy assets there, we’ve done a very good job of creating value and that some of those are just contracts.

James R. Heistand

Yeah, Rich also I think as we’re evaluating things going forward. There will be other acquisitions in other markets that will balance things out. However, it’s still our goal and these submarkets where we have properties in, but as to the extent we can aggregate in those submarkets, think a little bit more of a dominant share we intend to do so. So what you probably could see is adding some more assets in those submarkets where we just – these assets are coming in, disposing of some of the other ones and the submarkets that really don’t fit the long-term strategy as well as other acquisitions in other markets throughout the portfolio.

David R. O'Reilly

Yes, Rich, little over a year ago we announced first, how we were a little bit over 25% in Charlotte and today we’re now 14%. So I think a lot of that is just a function of where we’re going to grow next, where those natural asset dispositions are. But with that said, having 34% or roughly a third of the company in the market as large and as vibrant as Houston doesn’t give the team concern today, correct.

Rich C. Anderson – BMO Capital Markets

And on that point, any idea or any chance that you might unwind or can you unwind the Austin joint venture at some point?

James R. Heistand

Well, I think, Rich, just like we’ve done with extra features over time. I mean to the extent there’s an opportunity to increase our ownership at appropriate pricing levels. We’d be excited about doing that. As it sits right now it’s a great entry for us to get into that market. We have five buildings, all within walking distance to each other. We think we can operate very efficiently there, increase the margins, and then depending upon what our products will do in the future, we’ll have reset the facility and it’s totally in the balance sheet to take advantage if it occurs.

Rich C. Anderson – BMO Capital Markets

And then, last question for Jayson. Any bulky lease explorations in any of the seven acquired assets they have to contend with?

Michael Jayson Lipsey

There are a couple Rich, specifically there is one in particular that we’re focused on in Houston, but to the Thomas team’s credit they’ve done a very good job of lining up, I think some very good opportunity. So we’re very focused on working with them to ensure that we are successful in executing some of the potential deals we have in pipeline.

Rich C. Anderson – BMO Capital Markets

Great. Thank you for taking my question.

James R. Heistand

Thanks, Rich.

Operator

Thank you. The next question is from the line of Andrew Schaffer with Sandler O'Neill. Please proceed with your question.

Andrew Schaffer – Sandler O'Neill & Partners, L.P.

Thank you. So presumably you guys were underwriting this transaction as well as the Greenway Plaza deal. And so, are we kind of looking on to close both these deals or you’re kind of thinking one or the other?

James R. Heistand

We’re pretty excited with the ones that we got, yes, we answered that way. Let me say this. I think we’ve told the market, we look at a lot of things. I think at the end of the day the quality and the location of a portfolio that Jim Thomas has assembled, I think in terms of our view that has good a portfolio that we could add to our existing portfolio that we can. So I think while we looked at a lot of things, and yes, there is certainly one successful and we’re very pleased that this portfolio. We think it’s the best of any things we project.

Andrew Schaffer – Sandler O'Neill & Partners, L.P.

I’ll now kind of regards to additional transactions, integration of this deal. Would you guys kind of confuse or itself on hold until the end of 4Q a deal close and you feel comfortable with capture of the synergies?

David R. O'Reilly

Look, I think we’ve always said, if opportunities that are compelling present themselves, I mean our goal is to find those opportunities. If they happen to arise in between and if I’m just closing we’ll start to take advantage of them. I mean I don’t want to have them sit on the sidelines if we think it’s the right time to be acquiring the market.

Andrew Schaffer – Sandler O'Neill & Partners, L.P.

That makes sense. Thanks. That’s it for me.

James R. Heistand

Thank you.

Operator

Our next question comes from the line of Craig Mailman of KeyBanc. Please proceed with your question.

Jordan Sadler – KeyBanc Capital Markets

Good morning. It’s Jordan Sadler here with Criag. First question, regarding the overall financing of the transaction, I’m curious, Jim or David maybe just your thoughts on issuing equity here. I’m not exactly clear on your view of NAV, but it does seem to be at a discount to NAV, and obviously you’re paying NAV for the TPGI portfolio, and I’m just curious how about the justification there in terms of the issuance of equity vis-à-vis the opportunity.

David R. O'Reilly

Well, it’s not locked on asset we’re issuing equity and I’ll make two quick points on that directly, and there is going to be very similar comments to what I think you would have heard I’ve said last June at this time when we announced the large equity offering with TPG, our subsequent equity offering in the fourth quarter last year, first quarter this year that any time we issue equity we are very mindful that that equity that we issue is a valuable piece of our capital structure.

And to the extent we’re selling equity below NAV, we need to make sure that we’re going to create value that more than offset that NAV dilution. We believe that this transaction provides that opportunity offers and that crystallizes that opportunity. It’s our ability to create value in the Houston and Austin assets with a tremendous opportunity for our shareholders.

Now, the earlier comment I would add to that is that we have viewed this transaction and we have looked at this and on an exchange ratio basis, on an NAV to NAV transaction, and yes, while we’re trading here today we’re not thrilled and we don’t think that it is appropriate relative to our internal view of NAV. We also think that we are getting a compelling valuation for what we’re acquiring, and the acquired purchase price we have today, so looking at Houston portfolio we had approximately $250 a foot, that on average gets to $26 to $27 net rent is a compelling value proposition, and absolutely worth the short-term NAV issuing the shares in the combination.

Jordan Sadler – KeyBanc Capital Markets

Okay, that’s helpful. Speaking of TPG, what is their equity interest you diluted down to on a pro forma basis and does that affect their board positions?

James R. Heistand

Approximately 0.8 gets diluted down to approximately 25% and it will not impact their board representation. We’ll be adding one more board seat to accommodate Jim Thomas, so they add that nine board seat required in accommodation of the existing TPG shareholder agreement. Did you remember from the last time we spoke about that agreement TPG ownership limitations are much lower to the extent that they are naturally diluted rather than selling, and since they are not selling shares and continue to hold the same number of shares that they have always held, their representations will now be there 4/9, 4/10 on the board.

Jordan Sadler – KeyBanc Capital Markets

Okay. And what was the rationale of the Four Points sale to Brandywine, I get the Commerce Square obviously but the often pieces are little less obvious.

James R. Heistand

Well I think that there is a development components list? It’s one building in the suburban market. We don’t have other assets in the suburbs and I think that obviously Brandywine has other suburban assets, so it really fits that profile better for them than us. That wasn’t like we wanted to particularly aggregate in that particular submarkets, and as you know, that’s our goal. If we’re going to go in the submarket, we want to gain sale and we didn’t view that long-term is having sale in that particular suburban submarket.

Jordan Sadler – KeyBanc Capital Markets

That’s helpful, I think Craig has one as well.

Craig Mailman – KeyBanc Capital Markets

Hey guys, on the residential project, Murano, what happens with that?

James R. Heistand

Everybody, all the management team at Parkway gets a free condo.

Craig Mailman – KeyBanc Capital Markets

All the 33 of you?

James R. Heistand

I’ll get two.

David R. O'Reilly

This is a corporate merger, so all of the other assets and liabilities including the condo project known as Murano, the additional land, the adjacent CityWestPlace in Houston, the asset under special servicing that will be opening shortly, that is only be coming over with Parkway.

I think that we have taken a very conservative underwriting through the disposition of those assets and given how many sales have occurred, the velocity of what we’ve been seen both historically reported and what we can create here as a function of our confidential discussions with Thomas. We feel confident that we’re going to be able to perpetuate and finalize the sales of those condos over the next few years.

James R. Heistand

And also don’t forget this, we also have that additional land next to CityWest as well to.

Craig Mailman – KeyBanc Capital Markets

Okay so that is just not material you guys didn’t mention it in the release. And then secondly, the third-party managed assets that Thomas has right now, do you guys just continue with management contracts on that or did the owners, are they able to avoid those?

David R. O'Reilly

Those are 30 day terminable contracts, so they could avoid them anyway, one of those change the control or not or one with the existing joint venture partners of Thomas, and that’s international team CalSTRS, we’ll be talking to build the third-party owners as well about hopefully transitioning that third-party to us.

With that said, as we’ve said in the past, while we do have these third-party management business, it is not this goal and desire this team to grow that fee income overtime as the company continues to grow with owned assets and owned real estate, our NOI growth and our percentage of EBITDA that’s driven by [indiscernible] continues to decrease as a percentage over time.

Craig Mailman – KeyBanc Capital Markets

So in your accretion of 40 numbers, do you guys have any of that fee income stream, is it material or…

James R. Heistand

The only fee income statement included in our projection are those fees that are contractual from the Austin joint venture. There is no third-party fee income stream included in any of our projection.

Craig Mailman – KeyBanc Capital Markets

Okay. And then just one last one on G&A. The $1.5 million to $2 million, what’s that related to? What are you guys able to synergize basically?

James R. Heistand

We would like to add a regional managing director in the Austin market. We are going to need some incremental back office accounting support. We’re going to have a incremental director and what we want to be safe rather than priority make sure that we have an approved stake on all of the potential cost that maybe out there.

Craig Mailman – KeyBanc Capital Markets

Great. Thank you guys.

James R. Heistand

Thanks.

Operator

Thank you. We’re nearing the end of our allotted question-and-answer session. We have time for one final question. The question is from the line of Bruce Garrison of Chilton Capital. Please proceed with your question.

Bruce G. Garrison – Chilton Capital Management LLC

Thank you. Jim, I can congratulate you personally because I’m familiar with both the assets in Houston and in Austin, know well and I think it’s a major upgrade to your portfolio here and this is unpaid advertisement, but the – go ahead.

James R. Heistand

We believe Jim Thomas did a great job of assembling a high quality portfolio within Thomas Properties.

Bruce G. Garrison – Chilton Capital Management LLC

Explain again the joint venture in Austin and particularly I missed the other owner other than Madison. And who is in control of those assets on a property management basis and do you envision any issues with respect to spending money on those assets since you’re having to deal with two other partners?

James R. Heistand

Specifically as to the ownership of CalSTRS [ph] Bruce, I’d say that 50% of the equity is owned by CalSTRS, 17% is Madison International and the remaining 33% will be Parkway. Parkway by acquiring Thomas Properties interest in that joint venture will be the managing member and control the property management. Still most third party joint ventures, there is regaining the business plan. There is the ability to reach according to that plan and I would say that the partners are all very well capitalized entities that are highly motivated to continue to invest capital so we felt that they can see all of the existing rights to market and maximize value for their respective investors.

Michael Jayson Lipsey

And I would say also, I think that they’ve been very happy with the operation and performance of the Thomas Properties teams that’s in place there right now.

Bruce G. Garrison – Chilton Capital Management LLC

And will that team from the basis or the core for your new Austin office?

James R. Heistand

I think so. We spend a lot of time, Bruce sort of working with the teams, working at the properties and I’ve been generally very impressed with their people. And so I think that you’re spot on. The existing local teams are going to form the base of our operating teams in those markets.

Bruce G. Garrison – Chilton Capital Management LLC

Okay, very good. Thank you and congratulations again.

James R. Heistand

Thanks, Bruce. Well, again I apologize for the short notice and it was early morning release and not that much time for everybody to get a chance, but as you can imagine there is a substantial amount of work every single, night and day to achieve this, and again let me thank Jim Thomas, Jerry Sweeney for helping us get this done and thank you all for participating and we’ll be talking soon.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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