EX-99.1 16 d233152dex991.htm INFORMATION STATEMENT OF PARKWAY, INC., PRELIMINARY AND SUBJECT TO COMPLETION Information Statement of Parkway, Inc., preliminary and subject to completion
Table of Contents

Exhibit 99.1

 

LOGO

                    , 2016

Dear Cousins Properties Incorporated Stockholder:

We are pleased to inform you that on                     , 2016, the board of directors of Cousins Properties Incorporated, a Georgia corporation (“Cousins”), declared a distribution of the outstanding shares of common stock of Parkway, Inc., a Maryland corporation (“New Parkway”), which will be an independent, publicly traded real estate investment trust (“REIT”) that will hold the Houston Business (as hereinafter defined) and certain other assets. The distribution of the shares of New Parkway is subject to the satisfaction of certain conditions, including the consummation of the Merger (as hereinafter defined).

The distribution of shares of New Parkway common stock and limited voting stock (collectively, the “Distribution”) has been declared in connection with the agreement and plan of merger, dated as of April 28, 2016 (as amended from time to time, the “Merger Agreement”), by and among Parkway, Parkway Properties LP (“Parkway LP”), Cousins and Clinic Sub Inc., a wholly owned subsidiary of Cousins. Pursuant to the Merger Agreement, Parkway will merge with and into Clinic Sub Inc. (the “Merger”), with Clinic Sub Inc. continuing as the surviving corporation of the Merger. In connection with the Merger, each Parkway common stockholder will have the right to receive 1.63 newly issued shares of Cousins common stock, par value $1 per share (the “exchange ratio”), for each share of Parkway common stock, par value $.001 per share, that they own immediately prior to the effective time of the Merger, and each Parkway limited voting stockholder will have the right to receive 1.63 newly issued shares of Cousins limited voting preferred stock, par value $1 per share, for each share of Parkway limited voting stock, par value $.001 per share, that they own immediately prior to the effective time of the Merger.

Immediately following the effective time of the Merger, Cousins will effect a reorganization, on the terms and subject to the conditions of the Merger Agreement, pursuant to which Cousins will separate certain assets from the remainder of the combined businesses (the “Separation”). Following the Separation and the Distribution, New Parkway will be an independent, publicly traded REIT, with a portfolio of five Class A office assets totaling 8.7 million rentable square feet in the Galleria, Greenway and Westchase submarkets of Houston, Texas (the “Houston Business”). In addition, New Parkway will provide fee-based real estate services through wholly owned subsidiaries of New Parkway, which in total managed or leased approximately 2.7 million square feet for third-party owners as of June 30, 2016, and will own certain other assets previously owned by Parkway.

In connection with the Separation, Cousins and Parkway will reorganize the combined businesses of Cousins and Parkway through a series of transactions (the “UPREIT Reorganization”) such that, after the completion of the Merger, the Separation, the UPREIT Reorganization and the Distribution, each of Cousins and New Parkway will operate as an umbrella partnership real estate investment trust (“UPREIT”).

In addition, each limited partner of Parkway LP will continue to be entitled, prior to the effective time of the Merger, to redeem or exchange its limited partnership interests in Parkway LP, for shares of Parkway common stock, pursuant to the terms of the second amended and restated partnership agreement of Parkway LP, which will be amended pursuant to the terms of the Merger Agreement. If partnership interests are so redeemed or exchanged prior to the effective time of the Merger, the shares of Parkway common stock will in turn be converted into the right to receive a number of newly issued shares of Cousins common stock in the Merger equal to the exchange ratio, upon the terms and subject to the conditions of the Merger Agreement. Each limited partner of Parkway LP that does not elect to redeem or exchange its partnership interests for shares of Parkway


Table of Contents

common stock in connection with the Merger will retain its limited partnership interests in Parkway LP and receive pro rata limited partnership interests in the operating partnership of Cousins LP in connection with the Separation, the UPREIT Reorganization and the Distribution.

The Merger Agreement and the transactions contemplated thereby, including the Merger, were approved by Cousins stockholders on August 23, 2016 and Parkway stockholders on August 23, 2016.

We believe that this transaction will unlock the value of the Houston Business. New Parkway is expected to be the largest owner of Class A office assets in Houston, Texas. New Parkway will have a dedicated, experienced and proven management team, which will focus on growing New Parkway’s businesses and increasing value for New Parkway stockholders. We expect that this transaction will also allow Cousins to focus on the acquisition, development, ownership and management of Class A office assets in high-growth urban Sun Belt markets, while maintaining a targeted, asset-specific approach to investing.

The Distribution is expected to occur on                     , 2016, the business day following the closing of the Merger, or if the closing of the Merger occurs on a later date, the business day following such date, by way of a pro rata special dividend to Cousins stockholders, who will include legacy Parkway common stockholders and limited voting stockholders. Holders of shares of Cousins common stock or limited voting preferred stock will be entitled to receive one share of New Parkway common stock or limited voting stock, respectively, for every eight shares of Cousins common stock or limited voting preferred stock held by such stockholder as of the close of business on                     , 2016, the record date of the Distribution, or if the closing of the Merger does not occur on                     , 2016, the close of business on the date the Merger closes. We expect that the Distribution will be treated, for U.S. federal income tax purposes, as a taxable distribution to Cousins stockholders, who will include legacy Parkway common stockholders and limited voting stockholders, equal to the fair market value of the distributed New Parkway common stock and limited voting stock on the date of the Distribution. Cousins will not distribute any fractional shares of New Parkway. Cousins common stockholders, including legacy Parkway common stockholders, will receive cash in lieu of any fractional shares of New Parkway common stock that would have been received after application of the distribution ratio described above.

Cousins stockholders and Parkway stockholders are not required to approve the Distribution, and you are not required to take any action to receive your shares of New Parkway common stock or limited voting stock. Following the Merger and the Distribution, you will own shares in both Cousins and New Parkway. The number of shares of Cousins stock that you own prior to the Distribution will not change as a result of the Distribution. Cousins common stock will continue to trade on the New York Stock Exchange under the symbol “CUZ.” New Parkway expects to have its common stock authorized for listing on the New York Stock Exchange under the symbol “PKY.”

We have prepared the enclosed information statement, which is being mailed to all holders of shares of Cousins common stock and Parkway common and limited voting stock that are expected to receive shares of New Parkway common stock and limited voting stock in the Distribution. The information statement describes the Distribution in detail and contains important information about New Parkway, its business, financial condition and operations. We urge you to read the information statement carefully.

We want to thank you for your continued support of Cousins, and we look forward to your future support of New Parkway.

 

Sincerely,
LAWRENCE L. GELLERSTEDT III
President and Chief Executive Officer
Cousins Properties Incorporated


Table of Contents

LOGO

                    , 2016

Dear Future Parkway, Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, Parkway, Inc., a Maryland corporation (“New Parkway”). Following the distribution of all of the shares of New Parkway common stock and limited voting stock by Cousins Properties Incorporated, our company will be an independent, publicly traded, self-managed real estate investment trust (“REIT”) that will own and operate high-quality office properties located in attractive submarkets in Houston, Texas. New Parkway is expected to be the largest owner of Class A office assets in Houston, with a portfolio of five Class A assets, comprising 19 buildings and 8.7 million rentable square feet, representing significant operational scale and a specific geographic focus. In addition, New Parkway will own certain other assets previously owned by Parkway Properties, Inc. and will provide fee-based real estate services through wholly owned subsidiaries of New Parkway, which in total managed or leased approximately 2.7 million square feet of rentable space, as of June 30, 2016, for third-party owners.

We believe that Houston is positioned for economic recovery, and we initially intend to focus on unlocking value within our existing portfolio through active and creative leasing strategies, focused asset management and targeted redevelopment and asset repositioning. We expect that these strategies will strengthen our position as a leading office landlord in Houston. We also believe that our management team’s extensive experience and proven track record in office real estate, as well as its in-depth market knowledge and long-standing relationships with local, regional and national industry participants, will enable us to successfully execute our business strategy and generate attractive risk-adjusted returns and long-term value for our stockholders.

As a “pure-play” Houston real estate company, our operational and geographical focus will produce business efficiencies, and we believe we will be well-positioned to unlock the embedded growth and value opportunities within our current portfolio. We also believe that our patient, prudent and disciplined approach to new investments will drive the expansion of our business. We intend to maintain a conservative balance sheet that we believe will provide resources and flexibility to support both internal and external growth, and as a publicly traded REIT, we will have the ability to create a capital structure tailored to our strategic goals. New Parkway expects to have its common stock authorized for listing on the New York Stock Exchange under the symbol “PKY.”

We invite you to learn more about New Parkway by carefully reviewing the enclosed information statement, which describes the distribution of New Parkway stock in detail and contains important information about New Parkway, our business, financial condition and results of operations, as well as certain risks related to our business. The information statement also explains how you will receive your shares of New Parkway common stock. We look forward to your support as a stockholder of New Parkway.

 

Sincerely,
JAMES R. HEISTAND
President and Chief Executive Officer
Parkway, Inc.


Table of Contents

Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 2016

INFORMATION STATEMENT

Parkway, Inc.

 

 

This information statement is being furnished in connection with the distribution by Cousins Properties Incorporated, a Georgia corporation (“Cousins”), to its common stockholders, including legacy common stockholders of Parkway Properties, Inc., a Maryland corporation (“Parkway”), as of the close of business on                     , 2016, of all of the outstanding shares of common stock of Parkway, Inc., a Maryland corporation (“New Parkway”), which will be, immediately prior to the Distribution (as hereinafter defined), a wholly owned subsidiary of Cousins, and the distribution by Cousins to its limited voting preferred stockholders, consisting of legacy Parkway limited voting stockholders, as of the close of business on                     , 2016, of all of the outstanding shares of limited voting stock of New Parkway.

The distribution of shares of our common stock and limited voting stock (collectively, the “Distribution”) is expected to occur on the business day following the closing of the merger of Parkway with and into Clinic Sub Inc., a wholly owned subsidiary of Cousins (the “Merger”), pursuant to the agreement and plan of merger, dated as of April 28, 2016 (as amended or supplemented from time to time, the “Merger Agreement”), by and among Cousins, Parkway, Parkway Properties LP, a Delaware limited partnership (“Parkway LP”) and Clinic Sub Inc. At the effective time of the Merger, subject to the terms and conditions of the Merger Agreement, each share of Parkway common stock will be converted into the right to receive 1.63 newly issued shares of Cousins common stock (the “exchange ratio”), and each share of Parkway limited voting stock will be converted into the right to receive 1.63 newly issued shares of Cousins limited voting preferred stock, having terms materially unchanged from the terms of the Parkway limited voting stock.

Immediately following the effective time of the Merger, Cousins will effect a reorganization, subject to the terms and conditions of the Merger Agreement, pursuant to which Cousins will separate certain assets from the remainder of the combined businesses of Cousins and Parkway (the “Separation”). Following the Separation, we will own five Class A office assets totaling 8.7 million rentable square feet in the Galleria, Greenway and Westchase submarkets of Houston, Texas (the “Houston Business”). In addition, we will provide fee-based real estate services through our wholly owned subsidiaries, which in total managed or leased approximately 2.7 million square feet for third-party owners as of June 30, 2016 (the “Third-Party Services Business”) and will own certain other assets previously owned by Parkway (collectively with the Houston Business and the Third-Party Services Business, “New Parkway’s businesses”).

In connection with the Separation, Cousins and Parkway will reorganize the combined businesses of Cousins and Parkway through a series of transactions (the “UPREIT Reorganization”), such that, after the completion of the Merger, the Separation, the UPREIT Reorganization and the Distribution, we and Cousins will each operate prospectively as an umbrella partnership real estate investment trust (“UPREIT”).

In addition, each limited partner of Parkway LP will continue to be entitled, prior to the effective time of the Merger, to redeem or exchange its partnership interests in Parkway LP for shares of Parkway common stock pursuant to the terms of the second amended and restated partnership agreement of Parkway LP (the “Parkway LP agreement”), which will be amended pursuant to the terms of the Merger Agreement. If partnership interests are so redeemed or exchanged prior to the effective time of the Merger, the shares of Parkway common stock will in turn be converted into the right to receive a number of newly issued shares of Cousins common stock in the Merger equal to the exchange ratio, upon the terms and subject to the conditions of the Merger Agreement. Each limited partner of Parkway LP that does not redeem or exchange its partnership interests for shares of Parkway common stock in connection with the Merger will retain its limited partnership interests in Parkway LP and receive pro rata limited partnership interests in the operating partnership of Cousins LP in connection with the Separation, the UPREIT Reorganization and the Distribution.

The Distribution will be conducted pursuant to the terms of the Merger Agreement and a separation, distribution and transition services agreement, whose material terms are specified in Exhibit C of the Merger Agreement (the “Separation and Distribution Agreement”). The Distribution is subject to certain conditions, described under the heading “The Separation, the UPREIT Reorganization and the Distribution.”

We expect that the shares of New Parkway common stock and limited voting stock will be distributed by Cousins to Cousins stockholders, including legacy Parkway common stockholders and limited voting stockholders, on                     , 2016, the business day following the closing of the Merger or if the closing of the Merger occurs on a later date, the business day following such date (the “Distribution date”). In the Distribution, Cousins will distribute all of the outstanding shares of New Parkway common stock and limited voting stock on a pro rata basis to Cousins common stockholders and limited voting preferred stockholders, respectively, including legacy Parkway common stockholders and limited voting stockholders, in a transaction that is expected to be a taxable distribution for U.S. federal income tax purposes. For every eight shares of Cousins common stock or limited voting preferred stock held of record by Cousins stockholders as of the close of business on                     , 2016, or if the closing of the Merger does not occur on                     , 2016, the close of business on the date the Merger closes, the record date for the Distribution, such stockholder will receive one share of New Parkway common stock or limited voting stock, respectively, meaning that legacy holders of Parkway common stock or limited voting stock who continue to hold the Cousins shares they received in the Merger will receive one share of New Parkway common or limited voting stock, respectively, for every 4.91 shares of Parkway common stock or limited voting stock they owned prior to the effective time of the Merger. Cousins will not distribute any fractional shares of New Parkway. Cousins common stockholders, including legacy Parkway common stockholders, will receive cash in lieu of any fractional shares of New Parkway common stock that would have been received after application of the distribution ratio described above. Legacy Cousins common stockholders will own approximately 53% of the New Parkway common stock and legacy Parkway common stockholders will own approximately 47% of the New Parkway common stock.

As discussed under “The Separation, the UPREIT Reorganization and the Distribution—Trading Before the Distribution Date,” if you sell your shares of Cousins common stock (including Cousins common stock received in the Merger) in the “regular-way” market beginning approximately one week before the record date and up to and through the Distribution date, you also will be selling your right to receive shares of New Parkway common stock in connection with the Distribution. However, if you sell your shares of Cousins common stock (including Cousins common stock received in the Merger) in the “ex-distribution” market during the same period, you will retain your right to receive shares of New Parkway common stock in connection with the Distribution. Similarly, if you sell your shares of Parkway common stock or limited voting stock before the effective time of the Merger, you also will be selling your right to receive shares of New Parkway common stock or limited voting stock, as applicable, in connection with the Distribution.

There is no current trading market for New Parkway common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop approximately one week before the record date for the Distribution, and we expect “regular-way” trading of New Parkway common stock to begin on the first trading day following the completion of the Distribution. Our common stock has been authorized for listing on the New York Stock Exchange (the “NYSE”) under the symbol “PKY,” subject to official notice of distribution. There is no current trading market for New Parkway limited voting stock, and we do not expect that New Parkway limited voting stock will be listed on any exchange.

We intend to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Distribution and ending on December 31, 2016. Shares of our stock will be subject to limitations on ownership and transfer that are primarily intended to assist us in qualifying as a REIT. Our Articles of Amendment and Restatement (the “New Parkway Articles”) will contain certain restrictions relating to the ownership and transfer of our common stock, including, subject to certain exceptions, a 9.8% limit, in value or by number of shares, whichever is more restrictive, on the ownership of outstanding shares of our common stock and a 9.8% limit, in value, on the ownership of shares of all classes and series of our outstanding stock. For more information, see “Description of Our Capital Stock—Restriction on Transfer and Ownership of Shares of New Parkway Common Stock.”

Immediately following the Distribution, we expect to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and, as such, are allowed to provide in this information statement more limited disclosure than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we may also take advantage of certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), and the Investor Protection and Securities Reform Act of 2010, for limited periods.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors ” beginning on page 33.

Neither the U.S. Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is                     , 2016.

This information statement was first mailed to Cousins and Parkway stockholders on or about                     , 2016.


Table of Contents

TABLE OF CONTENTS

 

     Page  

INFORMATION STATEMENT SUMMARY

     1   

QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION

     12   

SUMMARY HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

     23   

SUMMARY HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

     26   

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     29   

RISK FACTORS

     33   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     63   

THE SEPARATION, THE UPREIT REORGANIZATION AND THE DISTRIBUTION

     65   

DIVIDEND POLICY

     83   

CAPITALIZATION

     84   

SELECTED HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

     85   

SELECTED HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

     87   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     89   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     101   

BUSINESS AND PROPERTIES

     123   

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     135   

MANAGEMENT

     140   

EXECUTIVE AND DIRECTOR COMPENSATION

     149   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     167   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     170   

DESCRIPTION OF MATERIAL INDEBTEDNESS

     174   

DESCRIPTION OF OUR CAPITAL STOCK

     176   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     189   

SHARES ELIGIBLE FOR FUTURE SALE

     220   

PARTNERSHIP AGREEMENT

     222   

WHERE YOU CAN FIND MORE INFORMATION

     232   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

i


Table of Contents

Presentation of Information

Unless the context otherwise requires, references in this information statement to “New Parkway,” “our company,” “the company,” “us,” “our” and “we” refer to Parkway, Inc., a Maryland corporation, and its consolidated subsidiaries, including Parkway Operating Partnership LP and its general partner. References to “New Parkway LP” or “our operating partnership” refer exclusively to Parkway Operating Partnership LP, a Delaware limited partnership of which New Parkway is a limited partner and Parkway Properties General Partners, Inc., a wholly owned subsidiary of New Parkway, is the general partner. Following the Separation, New Parkway LP will function as the operating partnership of New Parkway. References to “Parkway GP” or the “general partner” refer exclusively to Parkway Properties General Partners, Inc., a Delaware corporation.

References to the “Merger” refer exclusively to the merger of Parkway with and into Clinic Sub Inc., a wholly owned subsidiary of Cousins. References to New Parkway’s historical business and operations refer to the business and operations in Houston, Texas of each of Cousins and Parkway, as operated by each of Cousins and Parkway, and the Third-Party Services Business and certain other assets of Parkway prior to the Merger, as operated by Parkway, that will be transferred to New Parkway in connection with the Separation.

Unless the context otherwise requires, references in this information statement to “Cousins” refer to Cousins Properties Incorporated, a Georgia corporation, and its consolidated subsidiaries, including Cousins Properties LP (“Cousins LP”) following the Merger and UPREIT Reorganization, and references to “Parkway” refer to Parkway Properties, Inc., a Maryland corporation, and its consolidated subsidiaries, including Parkway Properties LP (“Parkway LP”). Except as otherwise indicated or unless the context otherwise requires, all references to New Parkway per share data assume a distribution ratio of one share of New Parkway common stock, par value $0.001 per share (“New Parkway common stock”), for every eight shares of Cousins common stock, par value $1 per share, and one share of New Parkway limited voting stock, par value $0.001 per share (“New Parkway limited voting stock”), for every eight shares of Cousins limited voting preferred stock, par value $1 per share (the “Distribution Ratio”).

As used herein, all references to “customers” of New Parkway refer to tenants who have entered into lease agreements with New Parkway’s subsidiaries.

 

ii


Table of Contents

INFORMATION STATEMENT SUMMARY

The following is a summary of material information discussed in this information statement. This summary may not contain all of the details concerning the Separation, the Distribution or other information that may be important to you. To better understand the Separation, the Distribution and New Parkway’s businesses and financial position, you should carefully review this entire information statement. Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement assumes the completion of all of the transactions referred to in this information statement in connection with the Separation and the Distribution. Following the Separation and the Distribution, we will conduct our business as a traditional UPREIT, in which our properties will be owned and operated by our operating partnership, New Parkway LP, through subsidiary limited partnerships, limited liability companies or other legal entities. We own and control 100% of the sole general partner of New Parkway LP and own, directly and indirectly, 98% of the limited partnership units in New Parkway LP. In the future, we may issue common operating partnership units of New Parkway LP (“OP units”) or preferred operating partnership units of New Parkway LP (“preferred units”) in connection with acquisitions of properties or for financing, compensation or other reasons.

This information statement discusses the Houston Business and the Third-Party Services Business, as if the Houston Business and Third-Party Services Business were New Parkway’s businesses for all historical periods described. References in this information statement to New Parkway’s historical assets, liabilities, businesses or activities are generally intended to refer to the historical assets, liabilities, businesses or activities of the transferred businesses as the businesses were conducted as part of Cousins and its subsidiaries and Parkway and its subsidiaries prior to the Merger.

Our Company

We are a self-managed office REIT, engaged in the ownership, acquisition, development and leasing of Class A office assets focused on attractive Houston, Texas submarkets. Upon completion of the Separation, our portfolio will consist of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing geographic focus and significant operational scale and efficiencies. We believe that the creation of a geographically focused REIT with a strong balance sheet and targeted internal value-creation opportunities will generate attractive risk-adjusted returns for our stockholders while providing a platform for external growth opportunities over the longer term.

Our mission will be to own and operate high-quality office properties located in attractive submarkets in Houston, with a primary focus on unlocking value within our existing portfolio through implementing active and creative leasing strategies, leveraging our scale to increase pricing power in lease and vendor negotiations and targeting redevelopment and asset repositioning opportunities. We expect to maintain a conservative balance sheet with low leverage and ample liquidity, which we expect will allow us to access multiple sources of capital. We believe that this strategy will support both our internal growth initiatives and our patient and disciplined approach to pursuing new investment opportunities at the appropriate times. We believe this strategy, combined with our highly experienced management team that has a successful history of operating a publicly traded REIT, significant expertise in the Houston, Texas office sector and extensive relationships with industry participants, positions us for long-term external and internal growth.

Competitive Strengths

Accomplished management team with a demonstrated track record of acquiring, operating and repositioning assets and managing a public office REIT. Our management team, led by Mr. James R. Heistand, will have extensive experience in the office real estate industry, including in the operations, leasing, acquisition, development and disposition of office assets through all stages of the real estate cycle, and has a proven track

 



 

1


Table of Contents

record of executing business strategies and delivering strong results for stockholders. Since joining Parkway in the fourth quarter of 2011 through June 30, 2016, our management team has acquired $3.9 billion of high-quality, Class A office assets and disposed of approximately $2.6 billion of non-core assets resulting in approximately $290.0 million of net gains. During this time, our management team also realized significant portfolio-wide operational improvements as evidenced by a 47.6% increase in average in-place rents and an increase in the leased percentage of the portfolio from 85.7% to 90.5%.

Houston focus with local and regional expertise. We will focus initially on owning and operating office properties in Houston, Texas, which is a region we believe is well-positioned for economic recovery. We believe our position as a “pure-play” Houston real estate company allows us to have a targeted focus on property performance that otherwise could be diluted in a company with more geographically diverse holdings. Additionally, our management and property-level teams have in-depth knowledge of the Houston real estate market and an extensive network of long-standing relationships with leading local and regional industry participants that we believe will drive our ability to identify and capitalize on internal and external value-creation opportunities and attractive acquisition opportunities as well as identify opportunities with potential joint venture partners, as such opportunities arise from time to time, which may include preliminary conceptual discussions prior to the closing of the Merger.

High-quality portfolio of Class A office assets concentrated in desirable, resilient Houston submarkets. We will own five Class A assets comprising 19 buildings and totaling approximately 8.7 million square feet in the Greenway, Galleria and Westchase submarkets, which are among the most desirable submarkets in Houston. We expect to be the largest landlord in each of these submarkets, owning 72% of the Class A office inventory in Greenway, 18% in Galleria, and 17% in Westchase based on square footage as of June 30, 2016.

High-quality, creditworthy customer base with limited near-term lease maturities. Our diversified customer base generally consists of high-quality and creditworthy customers. As of June 30, 2016, nearly 47% of our customers based on annual base rent had investment grade credit ratings from major credit rating agencies. Further, with a weighted average remaining lease term of approximately six years as of June 30, 2016, our portfolio will have limited near-term lease maturities, which we believe will provide stable cash flows with minimal decline in contractual revenue over the next several years.

Flexible and conservative capital structure. We believe our flexible and conservative capital structure will provide us with an advantage over many of our private and public competitors. Upon completion of the Distribution, we will have limited near-term debt maturities, approximately $197 million in cash and cash equivalents and up to $100 million of additional liquidity, all of which will provide financial flexibility, support ongoing capital improvement needs and reinforce our business and growth strategies of unlocking the value in our portfolio through leasing and asset repositioning.

Business and Growth Strategies

Maximize cash flow growth and value through proactive asset management and leasing. We believe we are well-positioned to drive growth in cash flow and maximize the value of our portfolio with proactive, creative and aggressive leasing and asset management. We also believe that we will be able to leverage our broad existing customer relationships, leading market position and deep financial flexibility to attract new, high-quality customers, increase occupancy over the long-term and maximize customer retention rates at our properties.

Focus on unlocking value through repositioning and redeveloping existing properties. We expect that our management team will devote attention to internal value-creating investment opportunities that are intended to

 



 

2


Table of Contents

generate attractive growth in revenues and cash flow, enhancing the value of our portfolio. Specifically, we expect to leverage our real estate expertise to reposition and redevelop our existing properties, as well as properties that we may acquire in the future, with the objective of increasing occupancy, rental rates and risk-adjusted returns on our invested capital.

Maintain a conservative, flexible balance sheet with adequate liquidity to fund near-term growth opportunities. We will maintain a conservative capital structure that will provide resources and flexibility to position our company for both internal and external growth. We will focus on maintaining sufficient liquidity with minimal short-term debt maturities, allowing us to pursue value enhancement strategies within our portfolio and to support acquisition activities as they may arise from time to time. Initially, we expect to maintain a mix of property-level secured indebtedness as well as corporate debt secured by a pool of assets.

Pursue acquisitions with a patient, prudent approach. While our initial focus will be to unlock internal embedded growth in our existing portfolio, we intend to take advantage of current and future market dislocation in Houston to capitalize on emerging acquisition opportunities within our current submarkets as well as other Houston submarkets, if such assets meet our investment criteria.

Our Portfolio

Our portfolio will consist of five Class A office assets located in the Galleria, Greenway and Westchase submarkets in Houston, Texas, comprising 19 buildings and totaling approximately 8.7 million rentable square feet. As of June 30, 2016, our portfolio had an occupancy rate of 86.5%.

The following table sets forth the occupancy rates by property for our portfolio as of June 30, 2016:

 

Office Property

   Ownership
Interest
    Total Rentable
Square Feet
(in thousands)
     Occupancy
%
    Weighted Average
Rental Rate per
Rentable Square
Foot
     % of Leases
Expiring in
2016(1)
    Year Built  

Phoenix Tower

     100     630         79.0   $ 18.24         1.0     1984   

CityWestPlace

     100     1,473         77.5     24.58         5.1     1993-2001   

San Felipe Plaza

     100     980         84.4     22.72         1.7     1984   

Greenway Plaza

     100     4,347         89.1     16.32         2.3     1969-1981   

Post Oak Central

     100     1,280         93.3     18.60         2.6     1974-1980   
    

 

 

    

 

 

   

 

 

    

 

 

   
       8,710         86.5   $ 18.76         2.7  

 

(1) The percentage of leases expiring in 2016 represents the ratio of square feet under leases expiring in 2016 divided by total rentable square feet.

 



 

3


Table of Contents

Top 20 Customers

As of June 30, 2016, our top 20 customers (identified by industry) based on annualized rent were as follows:

 

Customer (identified by industry)

   Expiration Date    Occupied Square
Footage
(in thousands)
     Annualized
Rental Revenue
(in thousands)(1)
     Percentage of
Total
Annualized
Rental Revenue
 

Energy

   2016, 2026      956       $ 14,006         10.3

Energy

   2016, 2032      582         13,994         10.3

Energy

   2019      524         9,328         6.9

Finance

   2023      391         6,525         4.8

Energy

   2023      176         4,378         3.2

Technology

   2026      216         3,708         2.7

Energy

   2023      255         3,494         2.6

Finance

   2016, 2019      190         3,358         2.5

Energy

   2017, 2025      167         3,251         2.4

Energy

   2023      209         3,006         2.2

Energy

   2018      130         2,361         1.7

Energy

   2020      135         2,156         1.6

Finance

   2021      92         1,910         1.4

Finance

   2025      87         1,713         1.3

Energy

   2018, 2021      87         1,513         1.1

Energy

   2016, 2022      83         1,397         1.0

Energy

   2017      76         1,289         0.9

Energy

   2020      71         1,270         0.9

Insurance

   2016, 2017      84         1,265         0.9

Energy

   2024      99         1,188         0.9

 

(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

The Separation, the UPREIT Reorganization and the Distribution

On April 28, 2016, Cousins, Parkway, Parkway LP and Clinic Sub Inc. entered into the Merger Agreement, pursuant to which Parkway will merge with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins. Upon consummation of the Merger, we initially will become a wholly owned subsidiary of Cousins. The Merger Agreement also specifies the material terms of the separation of New Parkway’s businesses from the remainder of Cousins’ businesses in the Separation and the UPREIT Reorganization, which will be consummated immediately after the effective time of the Merger, followed by the Distribution on the next business day. Thereafter, our company and Cousins will be two independent, publicly traded companies. Cousins and our company will each operate prospectively as UPREITs.

Cousins expects that the Merger will close in the fourth quarter of 2016, upon the satisfaction or waiver of all conditions to closing set forth in the Merger Agreement. The Distribution is expected to occur on                     , 2016, the business day following the closing of the Merger, or if the closing of the Merger occurs on a later date, the business day following such date, by way of a special dividend to Cousins stockholders, who will include legacy Parkway common stockholders and limited voting stockholders. In the Distribution, each Cousins common stockholder (including legacy Parkway common stockholders) will be entitled to receive one share of New Parkway common stock for every eight shares of Cousins common stock held at the close of business on the record date, and each Cousins limited voting stockholder (consisting of legacy Parkway limited voting stockholders) will be entitled to receive one share of New Parkway limited voting stock for every eight

 



 

4


Table of Contents

shares of Cousins limited voting preferred stock held at the close of business on the record date. Cousins stockholders and Parkway stockholders will not be required to make any payment to surrender or exchange their Cousins common stock or Parkway common stock or limited voting stock, except as may be required to exchange any certificated Parkway shares in the Merger, or to take any other action to receive their shares of New Parkway common stock or limited voting stock in the Distribution. The Distribution of New Parkway common stock and limited voting stock as described in this information statement is subject to the satisfaction or waiver of certain conditions, including consummation of the Merger, the Separation and the UPREIT Reorganization.

Following consummation of the Merger, the Separation, the UPREIT Reorganization and the Distribution, holders of Cousins stock (including legacy holders of Parkway stock) immediately prior to the Merger will hold the following:

 

    each Cousins common stockholder immediately prior to the effective time of the Merger will continue to hold the shares of Cousins common stock held immediately prior to the effective time of the Merger and one share of New Parkway common stock for every eight shares of Cousins common stock held immediately prior to the effective time of the Merger;

 

    each legacy Parkway common stockholder immediately prior to the effective time of the Merger will hold 1.63 shares of Cousins common stock for each share of Parkway common stock held immediately prior to the Merger and one share of New Parkway common stock for every 4.91 shares of Parkway common stock held immediately prior to the effective time of the Merger;

 

    each legacy Parkway limited voting stockholder immediately prior to the effective time of the Merger will hold 1.63 shares of Cousins limited voting preferred stock for each share of Parkway limited voting stock held immediately prior to the Merger and one share of New Parkway limited voting stock for every 4.91 shares of Parkway limited voting stock held immediately prior to the effective time of the Merger; and

 

    legacy Cousins common stockholders will own approximately 53% of the New Parkway common stock, and legacy Parkway common stockholders will own approximately 47% of the New Parkway common stock. Legacy holders of Parkway limited voting stock will own 100% of New Parkway’s limited voting stock.

The foregoing assumes that the holder does not transfer any shares after the effective time of the Merger but prior to the effectiveness of the Distribution. For more information, see “The Separation, the UPREIT Reorganization and Distribution—Trading Before the Distribution Date.”

Structure and Formation of New Parkway Prior to New Parkway’s Distribution

We were formed on June 3, 2016 in Maryland as a wholly owned subsidiary of Parkway. Following the Distribution, we will operate as an independent UPREIT, meaning that a subsidiary partnership of ours, New Parkway LP, will own and operate New Parkway’s businesses. In order for us to operate as an UPREIT, immediately after the effective time of the Merger, Cousins and Parkway will consummate the Separation and the UPREIT Reorganization to separate the Houston Business, the Third-Party Services Business and certain other assets such that these businesses and assets are owned and operated by New Parkway LP.

The following transactions, among others, are expected to occur immediately following the effective time of the Merger in advance of the Distribution:

 

    Cousins and Parkway will complete the Separation and the UPREIT Reorganization;

 

    as a result of the Separation and the UPREIT Reorganization, we will own five assets in Houston, Texas subject to approximately $454.1 million of existing secured property-level indebtedness, based on principal balances as of June 30, 2016;

 



 

5


Table of Contents
    immediately following the effective time of the Merger, Parkway LP is expected to hold an approximate 47.5% common partnership interest in New Parkway LP;

 

    immediately following the effective time of the Merger, we are expected to hold, directly and through our ownership of the general partner, an approximate 95.9% common partnership interest in Parkway LP;

 

    immediately following the effective time of the Merger, we are expected to hold, directly and indirectly through our ownership of the general partner and our interest in Parkway LP, an approximate 98% common partnership interest in New Parkway LP;

 

    as a result of the Merger, the Separation and the UPREIT Reorganization, the limited partners of Parkway LP, who held in the aggregate 4.1% of the limited partnership units of Parkway LP immediately prior to the effective time of the Merger, will retain their limited partnership units in Parkway LP and will receive pro rata partnership units of Cousins LP to the extent that such limited partners did not elect to redeem their limited partnership units of Parkway LP for shares of Parkway common stock prior to the effective time of the Merger;

 

    Cousins, or a subsidiary of Cousins, will contribute $5 million to us in exchange for shares of Series A non-voting preferred stock, par value $0.001 per share, of New Parkway (the “Non-Voting Preferred Stock”), with a liquidation preference of $5 million and a dividend of 8.00% per annum, payable quarterly. We will hold $5 million of preferred units in Parkway LP, which in turn will hold $5 million of preferred units of New Parkway LP. The terms of such preferred units will be substantially identical to the terms of the Non-Voting Preferred Stock received by Cousins, which will be held by Cousins, or a subsidiary of Cousins. The issuance of the $5 million of Non-Voting Preferred Stock was negotiated between the parties to satisfy the parties’ overall business and economic objectives, including the intended tax treatment of the Distribution. The issuances of preferred units are meant to preserve the economics of the UPREIT structure;

 

    to provide us with additional liquidity, and to provide funds for repayment of certain Cousins debt (including Parkway’s existing credit facilities), New Parkway LP expects to enter into a $350 million term loan facility (the “New Parkway Term Loan”) and a $100 million revolving credit facility (the “New Parkway Revolving Credit Facility,” and, together with the New Parkway Term Loan, the “New Parkway Credit Facilities”). Of the $350 million borrowed under the New Parkway Term Loan, $200 million will be distributed to the partners of New Parkway LP who in turn will, directly or indirectly, contribute the funds to Cousins LP, which will use the funds to fund a portion of the repayment of approximately $550 million outstanding under Parkway’s existing credit facilities. New Parkway LP will retain the remaining $150 million as working capital. In total, New Parkway expects to have approximately $804.1 million in outstanding indebtedness upon completion of the Separation. For more information, see “Description of Material Indebtedness—New Parkway Credit Facilities”;

 

    Cousins and Parkway will separate their respective liabilities as set forth in the Separation and Distribution Agreement; and

 

    in addition to the Separation and Distribution Agreement, as of or prior to the effective time of the Merger, we and Cousins will enter into a tax matters agreement (the “Tax Matters Agreement”) and an employee matters agreement (the “Employee Matters Agreement”).

The New Parkway Articles provide for four classes of stock: common stock, limited voting stock, preferred stock and Non-Voting Preferred Stock. On the business day following the closing of the Merger, subject to satisfaction of the conditions to the Distribution, Cousins will effect the distribution of New Parkway common stock and limited voting stock to Cousins common stockholders (including legacy Parkway common stockholders) and Cousins limited voting preferred stockholders (including legacy Parkway limited voting stockholders) as of the close of business on the record date as described above under “—The Separation, the UPREIT Reorganization and the Distribution—Background.”

 



 

6


Table of Contents

Ownership Structure

The simplified structure of each of Cousins and Parkway prior to the Merger is set forth below.

 

 

LOGO

 



 

7


Table of Contents

The simplified structure of each of Cousins and New Parkway following the Merger, the UPREIT Reorganization and the Distribution is set forth below.

 

LOGO

New Parkway’s Post-Distribution Relationship with Cousins

We will enter into a Separation and Distribution Agreement with Cousins as of or prior to the effective time of the Merger. In addition, as of or prior to the effective time of the Merger, we will enter into various other agreements to effect the Separation, the UPREIT Reorganization and the Distribution, which will provide a framework for our post-Distribution relationship with Cousins, such as the Tax Matters Agreement and the Employee Matters Agreement. For more information, see “Certain Relationships and Related Person Transactions.” These agreements will provide for the allocation between us and Cousins of Cousins’ assets, liabilities and obligations (including its investments, property, employee, benefits and tax-related assets and liabilities), in each case after giving effect to the Merger, attributable to periods prior to, at and after the Distribution, and will govern certain relationships between us and Cousins after the Distribution.

In advance of the Distribution, each party will use commercially reasonable efforts to obtain any third-party consents required to effect the separation of liabilities contemplated by the Separation and Distribution Agreement. To the extent that a party is unable to obtain a release from a guarantee or other obligation that is contemplated to be assigned to the other party, the party benefitting from the guarantee or obligation will indemnify and hold harmless the other party from any liability arising from such guarantee or obligation, and will not renew or extend the term of, increase obligations under, or transfer, the applicable obligation or liability.

 



 

8


Table of Contents

For additional information regarding the Separation and Distribution Agreement and other transaction agreements, please refer to the sections entitled “Risk Factors—Risks Related to the Separation, the UPREIT Reorganization and the Distribution” beginning on page 47 and “Certain Relationships and Related Person Transactions.”

Reasons for the Separation, UPREIT Reorganization and Distribution

The Cousins and Parkway boards of directors believe that the Separation, the UPREIT Reorganization and the Distribution are in the best interests of Cousins, Parkway and their respective stockholders for a number of reasons, including the following:

 

    Create two separate, focused companies executing distinct business strategies. Historically, Cousins has focused on investing in Class A office assets located in high-growth Sun Belt markets. By separating the Houston Business into a stand-alone REIT, investors will have the opportunity to invest in two separate companies, each with dedicated management teams focusing on distinct business strategies.

 

    Allow Cousins’ management to focus on its expanded portfolio, while enabling our management to unlock the value of our geographically specific portfolio. The Separation will allow Cousins’ management to focus on its expanded portfolio and presence in high-growth Sun Belt markets and will enable our management team to focus on unlocking value within our existing Houston, Texas portfolio through, among other things, active and creative leasing strategies. We believe that our focus on one geographic location, combined with our strong balance sheet, market knowledge and customer and industry relationships, will allow us to more effectively execute our growth strategies.

 

    Provide an opportunity for our dedicated and experienced management team to implement and execute our growth strategy. Separating the Houston Business from the remainder of Cousins’ business, and providing a dedicated and experienced management team and other key personnel to operate the Houston Business will allow our management team to devote their full focus and attention to our assets, which will allow these assets to realize their full potential.

 

    Enhance investor transparency and better highlight Cousins’ and our attributes. The Separation will enable potential investors and the financial community to evaluate us and Cousins separately and better assess the distinctive merits, performance and future prospects of each business. Additionally, the Separation will allow individual investors to better control their asset allocation decisions, providing investors the opportunity to invest in a well-capitalized REIT that is positioned to take advantage of a recovery in the energy sector.

The Cousins board of directors and the Parkway board of directors also considered a number of potentially negative factors in evaluating the Separation and the Distribution, and concluded that the potential benefits of the Separation, the UPREIT Reorganization and the Distribution outweighed these factors. For more information, see “The Separation, the UPREIT Reorganization and the Distribution—Reasons for the Separation, the UPREIT Reorganization and the Distribution.”

Agreements to be Entered into in Connection with the Merger, the Separation, the UPREIT Reorganization and the Distribution

Agreement with the TPG Parties

At the effective time of the Merger, we will will enter into a stockholders agreement (the “New Parkway Stockholders Agreement”) with TPG VI Pantera Holdings, L.P. (“TPG Pantera”) and TPG VI Management, LLC (“TPG Management,” and together with TPG Pantera, the “TPG Parties”) pursuant to which, among other things,

 



 

9


Table of Contents

TPG Pantera will have the right to nominate two directors to the New Parkway board of directors for so long as TPG Pantera (together with its affiliates, other than non-private equity portfolio companies of TPG Pantera) beneficially owns at least 5% of New Parkway common stock (or up to three directors if they beneficially own at least 30% of New Parkway common stock) and one director to the New Parkway board of directors for so long as TPG Pantera (together with its affiliates, other than non-private equity portfolio companies of TPG Pantera) own at least 2.5% of New Parkway common stock. The agreement will also grant the TPG Parties certain consent rights and registration and preemptive rights. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.”

Agreement with Mr. James A. Thomas

Concurrently with the execution of the Merger Agreement, Parkway and Parkway LP entered into a letter agreement (the “Thomas Letter Agreement”) with the chairman of the Parkway board of directors, Mr. James A. Thomas, and certain unitholders of Parkway LP who are affiliated with Mr. Thomas (together with Mr. Thomas, the “Thomas Parties”). The Thomas Letter Agreement supplements and amends an existing letter agreement among the parties relating to certain governance rights of Mr. Thomas, certain tax protection arrangements, and registration rights. The Thomas Letter Agreement will be binding on us and the successor to Parkway LP following the Merger and the Distribution, and, in general, will not be binding upon Cousins, Cousins LP or any of their subsidiaries. For more information, see “Certain Relationships and Related Person Transactions—Agreement with Mr. James A. Thomas.”

Corporate Information

We were formed on June 3, 2016 in Maryland as a wholly owned subsidiary of Parkway. Prior to the contribution of New Parkway’s businesses to us, which will occur in connection with the Separation and the UPREIT Reorganization immediately following the effective time of the Merger, we will have no operations and no assets other than nominal cash from our initial capitalization. The address of our principal executive office is Parkway, Inc., Bank of America Center, 390 North Orange Avenue, Suite 2400, Orlando, Florida 32801. Our telephone number is (407) 650-0593.

Commencing shortly prior to the Distribution, we will also maintain an Internet website at www.pky.com. Our website and the information contained therein or connected thereto will not be deemed to be incorporated by reference herein, and you should not rely on any such information in making an investment decision.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to stockholders of Cousins (including legacy Parkway stockholders) who will receive New Parkway stock in the Distribution. It is not and should not be construed as an inducement or encouragement to buy or sell any of New Parkway’s securities. The information contained in this information statement is believed by us to be accurate as of the date set forth on its cover. Changes may occur after that date and neither we nor Cousins will update the information except in the normal course of our and its respective disclosure obligations and practices.

 



 

10


Table of Contents

Risks Associated with New Parkway’s Businesses and the Separation, the UPREIT Reorganization and the Distribution

An investment in New Parkway common stock is subject to a number of risks, including risks relating to the Separation, the UPREIT Reorganization and the Distribution. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors,” beginning on page 33 for a more thorough description of these and other risks, including the risk that:

 

    the conditions of our primary markets affect our operations. All of our properties are located in Houston, Texas and are affected by the economic cycles and risks inherent in this market, including the continuing effects of the downturn in the energy industry;

 

    our business could be adversely affected by a decline in commodity prices, especially the price of crude oil;

 

    we derive 47% of our revenues from customers in the energy sector, which subjects us to more risk than if we were broadly diversified;

 

    we face risks associated with the acquisition, development and redevelopment of properties;

 

    we face a wide range of competition, including competition for acquisitions and competition in the leasing market, that could affect our ability to operate profitably;

 

    our performance is subject to risks inherent in owning real estate;

 

    if we lose our key management personnel, we may not be able to successfully manage our business and achieve our objectives;

 

    some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations;

 

    we will have a debt burden that could materially adversely affect our future operations, and we may incur additional indebtedness in the future;

 

    covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial position or results of operations;

 

    we have no operating history as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results;

 

    the Distribution will be treated as a taxable distribution to Cousins stockholders for U.S. federal income tax purposes. An amount equal to the fair market value of our common stock received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Cousins (including gain recognized by Cousins in connection with the Separation and Distribution), with the excess treated as a nontaxable return of capital to the extent of your tax basis in your shares of Cousins common stock and any remaining excess treated as capital gain;

 

    after the Separation, certain of our directors and executive officers may have actual or potential conflicts of interest because of their previous or continuing equity interest in, or positions at, Cousins;

 

    the risk that we could incur a corporate tax liability if we were to sell the Houston assets previously owned by Parkway prior to 2019;

 

    we may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect our business; and

 

    if we do not qualify to be taxed as a REIT, or if we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face substantial tax liability, which would substantially reduce funds available for distribution to our stockholders.

 



 

11


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION

 

What is New Parkway and why is Cousins separating New Parkway’s businesses and distributing New Parkway’s shares?

New Parkway was formed primarily to hold the combined Houston, Texas businesses of Cousins and Parkway and the Third-Party Services Business of Parkway after the Merger and the Distribution. The Separation of New Parkway from Cousins and the Distribution of shares of New Parkway common stock and limited voting stock will enable New Parkway and Cousins to focus on their respective operations and respond more efficiently to the unique challenges of their respective businesses. New Parkway and Cousins expect that the Separation and the Distribution will result in the enhanced long-term performance of each business. For more information, see “The Separation, the UPREIT Reorganization and the Distribution—Background” and “The Separation, the UPREIT Reorganization and the Distribution—Reasons for the Separation, the UPREIT Reorganization and the Distribution.”

 

Why am I receiving this document?

You are receiving this document because you are a holder of shares of Cousins common stock or may be a holder of Cousins common stock or limited voting preferred stock following the Merger. If you are a holder of Cousins common stock as of the close of business on             , 2016, or if the closing of the Merger does not occur on                     , 2016, the close of business on the date the Merger closes, which is the record date for the Distribution, you will be entitled to receive one share of New Parkway common stock for every eight shares of Cousins common stock that you hold at the close of business on such date. In addition, if you are a holder of Cousins limited voting preferred stock as of the close of business on the record date, you will be entitled to receive one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock that you hold at the close of business on such date. The Distribution is expected to occur on the business day following the closing of the Merger.

 

What is the Separation of New Parkway from Cousins?

Immediately following the effective time of the Merger, Cousins will effect a reorganization, subject to the terms and subject to the conditions of the Merger Agreement and the Separation and Distribution Agreement, pursuant to which Cousins will effect the Separation of the combined business in Houston, Texas of Cousins and Parkway. Following the Separation, New Parkway will own the Houston Business, the Third-Party Services Business and certain other assets previously owned by Parkway. New Parkway’s portfolio will consist of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing significant operational scale and geographic focus.

 

  By separating the Houston Business into a stand-alone REIT, investors will have the opportunity to invest in two separate companies with dedicated management teams focused on distinct business strategies.

 



 

12


Table of Contents

What is the UPREIT Reorganization?

In connection with the Merger and the Separation, Cousins and Parkway will reorganize their combined businesses through the UPREIT Reorganization such that, after the completion of the Distribution, both Cousins and New Parkway will operate as UPREITs. This means that an operating partnership of each company will hold substantially all of the properties, conduct substantially all of the business and generate substantially all of the revenues of each company.

 

  Parkway currently operates as an UPREIT through its operating partnership, Parkway LP. Pursuant to the Separation and the UPREIT Reorganization, New Parkway LP will become the operating partnership of New Parkway, through which New Parkway will operate substantially all of its business after the Distribution.

 

What assets will New Parkway own following the Separation and the UPREIT Reorganization?

New Parkway will own the Houston Business, consisting of the combined Houston, Texas assets of Cousins and Parkway, including five Class A office assets totaling 8.7 million rentable square feet in the Galleria, Greenway and Westchase submarkets of Houston, Texas. In addition, New Parkway will provide fee-based real estate services for third-party owners through the Third-Party Services Business and will own certain other assets previously owned by Parkway.

 

What is the Distribution and how will the Distribution work?

To accomplish the Distribution, Cousins will distribute all of the outstanding shares of New Parkway common stock to Cousins common stockholders and all of the outstanding shares of New Parkway limited voting stock to Cousins limited voting preferred stockholders, each on a pro rata basis. Each Cousins common stockholder, including legacy Parkway stockholders, will be entitled to receive one share of New Parkway common stock for every eight shares of Cousins common stock held at the close of business on the record date, and each Cousins limited voting preferred stockholder will be entitled to receive one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock held at the close of business on the record date.

 

What is the record date for the Distribution?

The record date for the Distribution is             , 2016, or if the closing date of the Merger is not                     , 2016, the close of business on the date the Merger closes.

 

When will the Distribution occur?

It is expected that all of the shares of New Parkway common stock and all of the shares of New Parkway limited voting stock will be distributed by Cousins on             , 2016, the business day following the closing of the Merger, or if the closing of the Merger occurs on a later date, the business day following such date, to holders of record of Cousins common stock and Cousins limited voting preferred stock, respectively, at the close of business on the record date.

 

What do Cousins stockholders need to do to participate in the Distribution?

Stockholders of Cousins as of the record date will not be required to take any action to receive shares of New Parkway common stock in the Distribution, except actions as may be required to exchange any

 



 

13


Table of Contents
 

certificated Parkway shares in the Merger. No stockholder approval of the Distribution is required and you are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of Cousins common stock or Parkway common stock or take any other action to receive your shares of New Parkway common stock, except actions as may be required to exchange any certificated Parkway shares in the Merger. Please do not send in your Cousins stock certificates or Parkway stock certificates until after the Merger is completed. The Distribution will not affect the number of outstanding shares of Cousins common stock or any rights of Cousins stockholders, although it will affect the market value of each outstanding share of Cousins common stock.

 

What do legacy Parkway stockholders need to do to participate in the Distribution?

After the Merger is completed, if you held certificates representing Parkway common stock or limited voting stock immediately prior to the effective time of the Merger, American Stock Transfer & Trust Company, LLC (“AST”), the exchange agent, will send you a letter of transmittal and instructions for exchanging your shares of Parkway common stock or Parkway limited voting stock for the merger consideration of 1.63 shares of Cousins common stock or Cousins limited voting preferred stock, as applicable. Upon surrender of the certificates for cancellation along with the executed letter of transmittal and other required documents described in the instructions, a holder of shares of Parkway common stock or limited voting stock, as applicable, will receive the merger consideration of 1.63 shares of Cousins common stock or limited voting preferred stock, as applicable, for every share of Parkway common stock or limited voting stock, as applicable, held immediately prior to the effective time of the Merger, as well as one share of New Parkway common stock or limited voting stock, as applicable, for every 4.91 shares of Parkway common stock or limited voting stock, as applicable, held immediately prior to the effective time of the Merger.

 

  Holders of shares of Parkway common stock and Parkway limited voting stock in book-entry form immediately prior to the effective time of the Merger will not be required to take any action to receive shares of New Parkway common stock in the Distribution.

 

How will shares of New Parkway common stock and shares of New Parkway limited voting stock be issued?

You will receive shares of New Parkway common stock or shares of New Parkway limited voting stock, as applicable, through the same channels that you currently use, or will use after the Merger, to hold or trade shares of Cousins common stock and Cousins limited voting preferred stock, whether through a brokerage account, 401(k) plan or other channels. Receipt of shares of New Parkway common stock will be documented for you in the same manner that you typically receive stockholder updates, such as monthly broker statements and 401(k) statements.

 

 

If you own shares of Cousins common stock or Cousins limited voting preferred stock as of the close of business on the record date,

 



 

14


Table of Contents
 

including shares in certificated form, Cousins, with the assistance of AST, the settlement and distribution agent, will electronically distribute shares of New Parkway common stock to you or to your brokerage firm on your behalf in book-entry form. AST will mail to you a book-entry account statement that reflects your shares of New Parkway common stock or limited voting stock, or your bank or brokerage firm will credit your account for the shares.

 

How many New Parkway shares will I receive in the Distribution?

For every eight shares of Cousins common stock held of record by you as of the close of business on the record date, you will receive one share of New Parkway common stock. For every eight shares of Cousins limited voting preferred stock held of record by you as of the close of business on the record date, you will receive one share of New Parkway limited voting stock. As a result, each legacy Parkway common stockholder who continues to hold the Cousins shares received in the Merger will receive one share of New Parkway common stock for every 4.91 shares of Parkway common stock held immediately prior to the effective time of the Merger, and each legacy Parkway limited voting stockholder will receive one share of New Parkway limited voting stock for every 4.91 shares of Parkway limited voting stock held immediately prior to the effective time of the Merger. Cousins will not distribute any fractional shares of New Parkway. Cousins common stockholders, including legacy Parkway common stockholders, will receive cash in lieu of any fractional shares of New Parkway common stock that would have been received after application of the Distribution Ratio.

Based on approximately 210.2 million shares of Cousins common stock and 111.8 million shares of Parkway common stock outstanding as of September 16, 2016, and approximately 1.3 million shares of Cousins common stock to be issued in the Merger from the settlement and assumption of Parkway equity-based awards, a total of approximately 49.2 million shares of New Parkway common stock will be distributed. Based on approximately 4.2 million shares of Parkway limited voting stock outstanding as of September 16, 2016, a total of approximately 0.9 million shares of New Parkway limited voting stock will be distributed.

 

Will New Parkway issue fractional shares of its common stock in the distribution?

No. New Parkway will not issue fractional shares of its common stock in the distribution. Fractional shares that Cousins common stockholders, including legacy Parkway common stockholders, would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those stockholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

 



 

15


Table of Contents

Will I be taxed on the shares of New Parkway common stock that I receive in the Distribution?

Yes. The distribution of shares of New Parkway common stock in the Distribution will be treated as a taxable distribution to Cousins common stockholders, including legacy Parkway stockholders, for U.S. federal income tax purposes. An amount equal to the fair market value of the shares of New Parkway common stock received by you in the Distribution will generally be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Cousins (including gain recognized by Cousins in connection with the Separation and the Distribution), with the excess treated first as a non-taxable return of capital to the extent of your tax basis in Cousins common stock and any remaining excess treated as capital gain.

 

  Although Cousins will be ascribing a value to the shares of New Parkway common stock in the Distribution for tax purposes, this valuation is not binding on the United States Internal Revenue Service (the “IRS”) or any other tax authority. These tax authorities could ascribe a higher valuation to those shares, particularly if shares of New Parkway common stock trade at prices significantly above the value ascribed to those shares by Cousins in the period following the Distribution. Such higher valuation may cause a larger reduction in the tax basis of your Cousins shares or may cause you to recognize additional dividend or capital gain income.

 

  Cousins will not be able to advise you of the amount of earnings and profits of Cousins until after the end of the calendar year in which the Distribution occurs. However, Cousins anticipates that it will recognize a substantial amount of capital gain for U.S. federal income tax purposes in connection with the Separation that will have the effect of substantially increasing its earnings and profits for the year in which the Distribution occurs.

 

  The particular consequences of the Distribution to each Cousins stockholder (including legacy Parkway stockholders) depend on such holder’s particular facts and circumstances, and thus you are urged to consult your tax advisor to understand fully the consequences to you of the Distribution. For more information, see “Material U.S. Federal Income Tax Consequences—Material U.S. Federal Income Tax Consequences of the Distribution to U.S. Stockholders.”

 

How will the Distribution affect my tax basis and holding period in shares of Cousins common stock?

Your tax basis in shares of Cousins common stock held at the time of the Distribution will be reduced (but not below zero) to the extent the fair market value of shares of New Parkway common stock distributed by Cousins to you in the Distribution exceeds your ratable share of Cousins’ current and accumulated earnings and profits. Your holding period for such Cousins shares will not be affected by the Distribution. See “Material U.S. Federal Income Tax Consequences—Material U.S. Federal Income Tax Consequences of the Distribution to U.S. Stockholders.”

 



 

16


Table of Contents

What will my tax basis and holding period be for shares of New Parkway common stock that I receive in the Distribution?

Your tax basis in shares of New Parkway common stock received in the Distribution will equal the fair market value of such shares on the Distribution date. Your holding period for such shares will begin the day after the Distribution date. See “Material U.S. Federal Income Tax Consequences—Material U.S. Federal Income Tax Consequences of the Distribution to U.S. Stockholders.”

 

  You should consult your tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What are the conditions to the Distribution?

The Distribution is subject to a number of conditions, including, among others:

 

    the consummation of the Merger, the Separation and the UPREIT Reorganization;

 

    the execution of a credit agreement for, and satisfaction of conditions to, borrowing under the New Parkway Credit Facilities, and the distribution of $200 million of funds borrowed under the New Parkway Term Loan to the partners of New Parkway LP, who in turn will, directly or indirectly, contribute the funds to Cousins LP;

 

    the receipt of an opinion from an independent appraisal firm to the Cousins board of directors confirming the solvency and surplus of Cousins and New Parkway after the Distribution that is in form and substance acceptable to Cousins in its sole discretion;

 

    the SEC declaring effective the registration statement of which this information statement forms a part, with no stop order in effect with respect thereto, and no proceeding for such purpose pending before, or threatened by, the SEC;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation, the UPREIT Reorganization, the Distribution or any of the related transactions shall be in effect;

 

    the acceptance for listing on the NYSE of the New Parkway common stock to be distributed, subject to official notice of distribution; and

 

    the execution of ancillary agreements, including the Tax Matters Agreement and the Employee Matters Agreement.

 

  Cousins and New Parkway cannot assure you that any or all of these conditions will be met. For a complete discussion of all of the conditions to the Distribution, please refer to “The Separation, the UPREIT Reorganization and the Distribution—The Separation and Distribution Agreement—Conditions to the Distribution.”

 



 

17


Table of Contents

What is the expected date of completion of the Distribution?

The completion and timing of the Distribution are dependent upon a number of conditions, including the conditions listed above. It is expected that the shares of New Parkway common stock and shares of New Parkway limited voting stock will be distributed by Cousins on             , 2016, the business day following the closing of the Merger, or if the closing of the Merger does not occur on                 , 2016, the close of business on the date the Merger closes, to the holders of record of shares of Cousins common stock and Cousins limited voting preferred stock respectively, at the close of business on the record date. However, no assurance can be provided as to the timing of the Distribution or that all conditions to the Distribution will be met.

 

What if I want to sell my Cousins common stock or my New Parkway common stock?

If you would like to sell your Cousins common stock or New Parkway common stock, you should consult with your financial advisors, such as your broker, bank or tax advisor.

 

What is “regular-way” and “ex-distribution” trading of Cousins stock?

Beginning shortly before the record date and continuing up to and through the Distribution date, it is expected that there will be two markets in Cousins common stock: a “regular-way” market and an “ex-distribution” market.

 

  Shares of Cousins common stock that trade on the “regular-way” market will trade with an entitlement to shares of New Parkway common stock distributed in the Distribution. Shares of Cousins common stock that trade on the “ex-distribution” market will trade without an entitlement to shares of New Parkway common stock distributed pursuant to the Distribution.

 

  If you decide to sell any Cousins common stock before the Distribution date, you should make sure your broker, bank or other nominee understands whether you want to sell your Cousins common stock with or without your entitlement to shares of New Parkway common stock in the Distribution.

 

  There will not be an “ex-distribution” market for shares of Parkway common stock or Parkway limited voting stock.

 

What will happen if I sell my shares of Parkway common or limited voting stock before the Distribution date?

If you sell your shares of Parkway common stock before the effective time of the Merger, you will also be selling your right to receive shares of New Parkway common stock in the Distribution and your right to receive the merger consideration in the Merger.

 

Will the shares of New Parkway common stock or limited voting stock be listed on an exchange?

New Parkway’s common stock has been authorized for listing on the NYSE under the symbol “PKY,” subject to official notice of distribution. New Parkway anticipates that trading in shares of its common stock will begin on a “when-issued” basis approximately one week before the record date and will continue up to and through the Distribution date and that “regular-way” trading in New Parkway common stock will begin on the first trading day following the completion of the Distribution. If trading begins on a “when-issued”

 



 

18


Table of Contents
 

basis, you may purchase or sell New Parkway common stock up to and through the Distribution date, but your transaction will not settle until after the Distribution date. New Parkway cannot predict the trading prices for its common stock before, on or after the Distribution date.

 

  New Parkway does not intend to list the New Parkway limited voting stock on an exchange.

 

What will happen to the listing of Cousins common stock?

Cousins common stock will continue to trade on the NYSE after the Distribution.

 

Will the number of shares of Cousins common stock that I own change as a result of the Distribution?

No. The number of shares of Cousins common stock that you own will not change as a result of the Distribution.

 

Will the Distribution affect the market price of my shares of Cousins stock?

Yes. As a result of the Distribution, Cousins expects the trading price of shares of Cousins common stock immediately following the Distribution to be lower than the “regular-way” trading price of such shares immediately prior to the Distribution because the trading price of shares of Cousins common stock will no longer reflect the value of New Parkway’s businesses. Cousins believes that, over time following the Distribution, assuming the same market conditions and the realization of the expected benefits of the Separation, the UPREIT Reorganization and the Distribution, shares of Cousins common stock and New Parkway common stock should have a higher aggregate market value as compared to the market value of shares of Cousins common stock if the Separation, the UPREIT Reorganization and the Distribution did not occur. There can be no assurance, however, that such a higher aggregate market value will be achieved. This means, for example, that the combined trading prices of one share of Cousins common stock and one share of New Parkway common stock after the Distribution may be equal to, greater than, or less than the trading price of one share of Cousins common stock before the Distribution.

 

What is a REIT?

New Parkway intends to qualify and elect to be taxed as a REIT under Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with New Parkway’s short taxable year commencing on the day prior to the Distribution and ending December 31, 2016. As a REIT, New Parkway generally will not be subject to U.S. federal income tax on REIT taxable income that it distributes to its stockholders. A company’s qualification as a REIT depends on its ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares. New Parkway believes that, immediately prior to the Distribution, it will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that its intended manner of operation will

 



 

19


Table of Contents
 

enable it to meet the requirements for qualification and taxation as a REIT. New Parkway anticipates that distributions it makes to its stockholders generally will be taxable to its stockholders as ordinary income, although a portion of the distributions may be designated by New Parkway as qualified dividend income or capital gain or may constitute a return of capital. For a more complete discussion of the U.S. federal income taxation of REITs and the tax treatment of distributions to stockholders of New Parkway, please refer to “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and its Stockholders.”

 

Why will New Parkway be structured as an UPREIT following the Distribution?

The Cousins and Parkway boards of directors believe that the UPREIT structure, by which New Parkway will own substantially all of its assets and conduct substantially all of its operations through an operating partnership following completion of the Distribution, will give New Parkway greater flexibility to acquire assets using a tax-deferred acquisition currency.

 

What debt will New Parkway have after the Separation?

Immediately following the Separation, New Parkway expects to have $804.1 million of indebtedness. New Parkway will acquire its properties subject to approximately $454.1 million of existing secured property-level indebtedness, based on principal balances at June 30, 2016.

 

  To provide additional liquidity to New Parkway following the Distribution, and to provide funds for repayment of certain Cousins debt, New Parkway LP expects to enter into the New Parkway Credit Facilities and initially borrow $350 million. Of the $350 million borrowed under the New Parkway Term Loan, $200 million will be distributed to the partners of New Parkway LP who in turn will, directly or indirectly, contribute the funds to Cousins LP, which will use the funds to fund a portion of the repayment of approximately $550 million outstanding under Parkway’s existing credit facilities. New Parkway LP will retain the remaining $150 million as working capital.

 

What will New Parkway’s relationship be with Cousins following the Distribution?

New Parkway and Cousins will be independent companies following the Distribution. As of or prior to the effective time of the Merger, New Parkway will enter into the Separation and Distribution Agreement with Cousins. In addition, as of or prior to the effective time of the Merger, New Parkway will enter into various other agreements to effect the Separation, the UPREIT Reorganization and the Distribution and provide a framework for its relationship with Cousins after the Separation, such as the Tax Matters Agreement and the Employee Matters Agreement.

 

  For additional information regarding the Separation and Distribution Agreement and other transaction agreements, please refer to the sections entitled “Risk Factors—Risks Related to the Separation, the UPREIT Reorganization and the Distribution” and “Certain Relationships and Related Person Transactions.”

 



 

20


Table of Contents

Who will manage New Parkway after the Distribution?

New Parkway’s management team includes experienced members of Parkway’s management team who have a detailed understanding of New Parkway’s properties and assets. Mr. Heistand is New Parkway’s President and Chief Executive Officer and also a member of New Parkway’s board of directors, and Messrs. M. Jayson Lipsey, Scott E. Francis and Jason A. Bates, current executive officers of Parkway, serve as New Parkway’s Executive Vice Presidents. None of the senior leadership team of New Parkway will hold positions with Cousins following the Distribution. For more information regarding New Parkway’s management, please refer to “Management.”

 

Are there risks associated with owning shares of New Parkway common stock?

Yes. Ownership of shares of New Parkway common stock is subject to both general and specific risks related to New Parkway’s business, the industry in which it operates, its ongoing contractual relationships with Cousins and its status as a separate, publicly traded company. Ownership of New Parkway common stock is also subject to risks relating to the Separation and the UPREIT Reorganization. These risks are described in the “Risk Factors” section of this information statement beginning on page 33. You are encouraged to read that section carefully.

 

Does New Parkway plan to pay dividends?

New Parkway generally intends over time to pay dividends in an amount at least equal to the amount that will allow New Parkway to qualify as a REIT and to avoid current entity level U.S. federal income taxes. To qualify as a REIT, New Parkway must distribute to its stockholders an amount at least equal to:

 

  1. 90% of its REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  2. 90% of the excess of its net income from foreclosure property over the tax imposed on such income by the Code; less

 

  3. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and its Stockholders.”

 

 

Dividends paid by New Parkway will be authorized and determined by New Parkway’s board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Dividend Policy.” New Parkway may pay dividends from sources other than cash flow from operations or funds from operations (“FFO”), which may reduce the amount of capital available for operations, may have negative tax implications, and may have a negative effect on the value of your shares under certain conditions. New Parkway cannot assure you that its dividend policy

 



 

21


Table of Contents

will remain the same in the future, or that any estimated dividends will be made or sustained.

 

Who will be the distribution agent for the New Parkway common stock?

The distribution agent for the New Parkway common stock will be AST. For questions relating to the transfer or mechanics of the Distribution, you should contact:

 

  American Stock Transfer & Trust Company, LLC

 

  548 Briana Lane

 

 

  Hudson, Wisconsin 54016

 

 

  (800) 937-5449

 

 

  www.amstock.com

 

Who will be the transfer agent for New Parkway common stock?

The transfer agent for the New Parkway common stock will be AST.

 

Where can I find more information about Cousins and New Parkway?

Before the Distribution, if you have any questions relating to Cousins’ business performance, you should contact:

 

  Cousins Properties Incorporated

 

 

  191 Peachtree Street NE, Suite 500

 

 

  Atlanta, Georgia 30303

 

 

  Attention: Investor Relations

 

 

  (404) 407-1000

 

 

  http://cousinsproperties.com/content/investor-relations

 

  After the Distribution, New Parkway stockholders who have any questions relating to New Parkway’s business performance should contact New Parkway at:

 

  Parkway, Inc.

 

 

  Bank of America Center

 

 

  390 North Orange Avenue, Suite 2400

 

 

  Orlando, Florida 32801

 

 

  Attention: Investor Relations

 

 

  (407) 259-0251
 
 
 
 

 

  www.pky.com

 

  The New Parkway investor website will be operational as of the date of the Distribution.

 

  The websites of Cousins and New Parkway are not incorporated by reference into this information statement.

 



 

22


Table of Contents

SUMMARY HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

The following tables set forth the summary historical combined financial data of the portion of the Houston Business currently owned by Parkway, the Third-Party Services Business, and certain other assets owned by subsidiaries of Parkway (collectively, “Parkway Houston”), which was carved out from the financial information of Parkway. The summary historical financial data set forth below as of December 31, 2015, 2014 and 2013, and for the years ended December 2015, 2014 and 2013 has been derived from Parkway Houston’s audited combined financial statements, which are included elsewhere in this information statement. The income statement data for the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Parkway Houston’s unaudited interim combined financial statements included elsewhere in this information statement. Parkway Houston’s unaudited interim combined financial statements as of June 30, 2016 and for the six months ended June 30, 2016 were prepared on the same basis as Parkway Houston’s audited combined financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 and, in the opinion of management, include all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly Parkway Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

The summary historical combined financial data set forth below does not indicate results expected for any future periods. The summary historical combined financial data is qualified in its entirety by, and should be read in conjunction with, “Selected Historical Combined Financial Data—Parkway Houston,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Parkway Houston’s combined financial statements and related notes thereto included elsewhere in this information statement.

 

    Six Months Ended
June 30,
    Year Ended December 31,  
    2016     2015     2015     2014     2013  
    (unaudited)                    

Income Statement Data (in thousands):

         

Total revenues

  $ 58,371      $ 67,239      $ 129,461      $ 163,697      $ 38,491   

Depreciation and amortization

    (21,005     (26,628     (55,570     (64,012     (10,465

Other operating expenses

    (31,266     (41,445     (72,203     (106,760     (40,038
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    6,100        (834     1,688        (7,075     (12,012

Interest and other income

    131        122        246        244        1,663   

Gain on extinguishment of debt

    154        —          —          —          —     

Interest expense

    (6,955     (8,076     (16,088     (16,252     (3,296

Income tax (expense) benefit

    (760     (361     (1,635     180        1,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (1,330     (9,149     (15,789     (22,903     (12,369

Net (income) loss attributable to noncontrolling interests

    —          7        7        (148     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Parkway Houston

  $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow Data (in thousands):

         

Operating activities

  $ (130   $ (508   $ 12,856      $ 3,192      $ 3,599   

Investing activities

    (10,885     (9,330     (46,421     (4,360     (623

Financing activities

    7,027        13,603        37,534        (1,264     4,793   

Other Financial Data (in thousands):

         

FFO

  $ 19,675      $ 17,486      $ 39,788      $ 40,961      $ (1,904

EBITDA

    27,390        25,923        57,511        57,033        116   

NOI

    29,412        29,287        63,122        68,316        11,846   

 



 

23


Table of Contents
     As of
June 30,
2016
     As of December 31,  
      2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Total real estate related investments, net

   $ 749,406       $ 752,653       $ 738,846       $ 757,848   

Total assets

     855,294         865,731         866,496         903,165   

Mortgage notes payable, net

     278,352         396,901         407,211         414,656   

Total liabilities

     323,546         456,665         485,535         503,130   

Parkway equity

     531,748         409,066         380,053         396,985   

Noncontrolling interests

     —           —           908         3,050   

Funds From Operations (“FFO”)

Parkway Houston’s management believes that FFO is an appropriate measure of performance for a REIT and computes this measure in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO (including any guidance that NAREIT releases with respect to the definition). FFO is defined by NAREIT as net income (computed in accordance with United States generally accepted accounting principles (“GAAP”)), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate under GAAP, plus depreciation and amortization related to depreciable real estate. Further, Parkway Houston does not adjust FFO to eliminate the effects of non-recurring charges. Parkway Houston believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. Parkway Houston believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs by the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Parkway Houston may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. FFO does not represent cash generated from operating activities in accordance with GAAP and is not an indication of cash available to fund cash needs. FFO should not be considered an alternative to net income as an indicator of its operating performance or as an alternative to cash flow as a measure of liquidity.

The following table reconciles net loss attributable to Parkway Houston to FFO for the six months ended June 30, 2016 and 2015 and for the years ended December 31, 2015, 2014 and 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO

   $ 19,675      $ 17,486      $ 39,788      $ 40,961      $ (1,904
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

24


Table of Contents

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

Parkway Houston believes that using EBITDA as a non-GAAP financial measure helps investors and its management analyze its ability to service debt and pay cash distributions. Parkway Houston defines EBITDA as net loss attributable to Parkway Houston before interest expense, income tax expense (benefit) and depreciation and amortization.

The following table reconciles net loss attributable to Parkway Houston to EBITDA for the six months ended June 30, 2016 and 2015 and for the years ended December 31, 2015, 2014, and 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Interest expense

     6,955        8,076        16,088        16,252        3,296   

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   

Income tax expense (benefit)

     760        361        1,635        (180     (1,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 27,390      $ 25,923      $ 57,511      $ 57,033      $ 116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Operating Income (“NOI”)

Parkway Houston defines NOI as income from office properties less property operating expenses. Parkway Houston considers NOI to be a useful performance measure to investors and management because it reflects the revenues and expenses directly associated with owning and operating its properties and the impact to operations from trends in occupancy rates, rental rates and operating costs not otherwise reflected in net income.

The following table reconciles net loss attributable to Parkway Houston to NOI for the six months ended June 30, 2016 and 2015 and for the years ended December 31, 2015, 2014 and 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Interest expense

     6,955        8,076        16,088        16,252        3,296   

Gain on extinguishment of debt

     (154     —          —          —          —     

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   

Management company expenses

     2,006        5,574        9,362        27,038        23,638   

Income tax expense (benefit)

     760        361        1,635        (180     (1,276

General and administrative

     2,893        3,187        6,336        6,917        7,267   

Sale of condominium units

     —          (9,836     (11,063     (16,554     —     

Cost of sales—condominium units

     —          10,091        11,120        13,199        14   

Net income (loss) attributable to noncontrolling interests

     —          (7     (7     148        —     

Impairment loss on management contracts

     —          —          —          4,750        —     

Management company income

     (2,592     (5,523     (9,891     (23,971     (17,526

Interest and other income

     (131     (122     (246     (244     (1,663
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOI

   $ 29,412      $ 29,287      $ 63,122      $ 68,316      $ 11,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

25


Table of Contents

SUMMARY HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

The following tables set forth the summary historical combined financial and other data of the portion of the Houston Business currently owned by Cousins (“Cousins Houston”), which was carved out from the financial information of Cousins. The summary historical combined financial data set forth below as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 has been derived from Cousins Houston’s audited combined financial statements, which are included elsewhere in this information statement. The income statement data for each of the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Cousins Houston’s unaudited interim combined financial statements included elsewhere in this information statement. The summary historical combined financial data as of December 31, 2013 was derived from financial information not included in this information statement. Cousins Houston’s unaudited interim combined financial statements as of June 30, 2016 and 2015 and for the six months ended June 30, 2016 and 2015 were prepared on the same basis as Cousins Houston’s audited combined financial statements as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 and, in the opinion of management, include all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly Cousins Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

The summary historical combined financial data set forth below does not indicate results expected for any future periods. The summary historical combined financial data is qualified in its entirety by, and should be read in conjunction with, “Selected Historical Combined Financial Data—Cousins Houston,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—New Parkway” and Cousins Houston’s combined financial statements and related notes thereto included elsewhere in this information statement.

 

    

 

Six Months Ended
June 30,

    Year Ended December 31,     Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
     2016     2015     2015     2014    
     (unaudited)                    

Income Statement Data (in thousands):

          

Rental property revenues

   $ 87,696      $ 88,594      $ 177,890      $ 184,536      $ 72,696   

Other revenues

     288        87        —          31        11   

Rental property operating expenses

     (37,202     (38,043     (74,162     (79,625     (31,759

General and administrative expenses

     (4,976     (3,425     (6,328     (7,347     (3,793

Depreciation and amortization

     (31,168     (33,095     (63,791     (77,760     (29,146

Interest expense

     (3,939     (4,012     (7,988     (8,127     (2,618

Acquisition and related costs

     —          —          —          —          (3,858
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,699      $ 10,106      $ 25,621      $ 11,708      $ 1,533   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

         As of June 30,          As of December 31,  
     2016      2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Operating properties, net

   $ 1,080,969       $ 1,086,451       $ 1,077,290       $ 1,087,181   

Total assets

     1,181,692         1,188,236         1,188,355         1,220,551   

Note payable

     179,302         180,937         184,097         187,120   

Total liabilities

     250,235         271,364         278,558         283,604   

Equity

     931,457         916,872         909,797         936,947   

 



 

26


Table of Contents
   

 

Six Months Ended
June 30,

   

 

Year Ended December 31,

    Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
    2016     2015           2015             2014          
    (unaudited)                    

Cash Flow Data (in thousands):

         

Operating activities

  $ 17,012      $ 14,486      $ 76,395      $ 80,220      $ 41,770   

Investing activities

    (18,112 )     (26,709 )     (55,085 )     (37,478 )     (1,164,245 )

Financing activities

    2,162        11,539        (21,885 )     (42,058 )     1,122,475   

Other Financial Data (in thousands) (unaudited):

         

FFO

  $ 41,867      $ 43,201      $ 89,412      $ 89,468      $ 30,679   

EBITDA

    45,806        47,213        97,400        97,595        33,297   

NOI

    50,494        50,551        103,728        104,911        40,937   

Funds from Operations (FFO)

Cousins Houston’s management believes that FFO is an appropriate measure of performance for a REIT and computes this measure in accordance with the NAREIT definition of FFO (including any guidance that NAREIT releases with respect to the definition). FFO is defined by NAREIT as net income (computed in accordance with GAAP), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate under GAAP, plus depreciation and amortization related to depreciable real estate. Further, Cousins Houston does not adjust FFO to eliminate the effects of non-recurring charges. Cousins Houston believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. Cousins Houston believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs by the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Cousins Houston may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. FFO does not represent cash generated from operating activities in accordance with GAAP and is not an indication of cash available to fund cash needs. FFO should not be considered an alternative to net income as an indicator of its operating performance or as an alternative to cash flow as a measure of liquidity.

The following table reconciles net income to FFO of Cousins Houston for the six months ended June 30, 2016 and 2015, the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

    

 

Six Months Ended
June 30, 

    

 

Year Ended December 31,

     Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
     2016      2015            2015                  2014           
     (unaudited)      (unaudited)      (unaudited)  

Net income

   $ 10,699       $ 10,106       $ 25,621       $ 11,708       $ 1,533   

Depreciation and amortization

     31,168         33,095         63,791         77,760         29,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FFO

   $ 41,867       $ 43,201       $ 89,412       $ 89,468       $ 30,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 



 

27


Table of Contents

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Cousins Houston believes that using EBITDA as a non-GAAP financial measure helps investors and its management analyze its ability to service debt and pay cash distributions. Cousins Houston defines EBITDA as net income before interest expense and depreciation and amortization.

The following table reconciles net income to EBITDA of Cousins Houston for the six months ended June 30, 2016 and 2015, for the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

    

 

Six Months Ended
June 30,

     Year Ended December 31,      Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
     2016      2015            2015                  2014           
     (unaudited)      (unaudited)      (unaudited)  

Net income

   $ 10,699       $ 10,106       $ 25,621       $ 11,708       $ 1,533   

Interest expense

     3,939         4,012         7,988         8,127         2,618   

Depreciation and amortization

     31,168         33,095         63,791         77,760         29,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 45,806       $ 47,213       $ 97,400       $ 97,595       $ 33,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Operating Income (NOI)

Cousins Houston defines NOI as rental property revenues less rental property operating expenses. Cousins Houston considers NOI to be a useful performance measure to investors and management because it reflects the revenues and expenses directly associated with owning and operating its properties and the impact to operations from trends in occupancy rates, rental rates and operating costs not otherwise reflected in net income.

The following table reconciles net income to NOI of Cousins Houston for the six months ended June 30, 2016 and 2015, for the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

    

 

Six Months Ended
June 30,

    Year Ended December 31,     Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
     2016     2015           2015                  2014          
     (unaudited)     (unaudited)     (unaudited)  

Net income

   $ 10,699      $ 10,106      $ 25,621       $ 11,708      $ 1,533   

Other income

     (288     (87     —           (31     (11

General and administrative expenses

     4,976        3,425        6,328         7,347        3,793   

Depreciation and amortization

     31,168        33,095        63,791         77,760        29,146   

Interest expense

     3,939        4,012        7,988         8,127        2,618   

Acquisition and related expenses

     —          —          —           —          3,858   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NOI

   $ 50,494      $ 50,551      $ 103,728       $ 104,911      $ 40,937   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 



 

28


Table of Contents

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT S

The following tables show summary unaudited pro forma combined financial information about our combined financial condition and operating results after giving effect to the Merger, Separation, UPREIT Reorganization and the Distribution. The Merger will be accounted for as a “purchase,” as that term is used under GAAP, for accounting and financial reporting purposes. The unaudited pro forma combined balance sheet data gives effect to the Separation as if it had occurred on June 30, 2016. The unaudited pro forma combined statements of operations data gives effect to the Separation as if it had occurred on January 1, 2015. The summary unaudited pro forma combined financial information set forth below has been derived from, is qualified in its entirety by and should be read in conjunction with (i) the more detailed unaudited pro forma combined financial statements, including the notes thereto, appearing elsewhere in this information statement and (ii) the combined financial statements and related notes thereto of each of Cousins Houston and Parkway Houston for the year ended December 31, 2015 and the six months ended June 30, 2016 appearing elsewhere in this information statement. For more information, see “Unaudited Pro Forma Combined Financial Statements” and “Where You Can Find More Information.”

The summary unaudited pro forma combined financial information set forth below is presented for illustrative purposes only and is not necessarily indicative of the combined operating results or financial position that would have occurred if such transactions had been consummated on the dates and in accordance with the assumptions described herein, nor is it necessarily indicative of our future operating results or financial position. The unaudited pro forma combined financial statements do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

 



 

29


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF JUNE 30, 2016

(in thousands, except share data)

(Unaudited)

 

Assets

  

Real estate related investments:

  

Office properties, net

   $ 1,731,777   

Cash and cash equivalents

     197,336   

Receivables and other assets

     59,172   

Intangible assets, net

     125,600   
  

 

 

 

Total assets

   $ 2,113,885   
  

 

 

 

Liabilities

  

Mortgage notes payable, net

   $ 457,457   

Notes payable to banks, net

     346,675   

Accounts payable and other liabilities

     58,552   

Below market leases, net

     58,402   
  

 

 

 

Total liabilities

     921,086   
  

 

 

 

Equity

  

Stockholders’ equity:

  

Common stock $0.001 par value, 49,209,589 shares pro forma

     49   

Limited voting stock $0.001 par value, 858,420 shares pro forma

     1   

Non-voting preferred stock, $100,000 liquidation preference, 50 shares pro forma

     5,000   

Additional paid-in capital

     1,164,557   
  

 

 

 

Total stockholders’ equity

     1,169,607   

Noncontrolling interests

     23,192   
  

 

 

 

Total equity

     1,192,799   
  

 

 

 

Total liabilities and equity

   $ 2,113,885   
  

 

 

 

 



 

30


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(In thousands, except per share data)

(Unaudited)

 

Revenues

  

Income from office properties

   $ 144,499   

Management company income

     2,592   
  

 

 

 

Total revenues

     147,091   
  

 

 

 

Expenses

  

Property operating expenses

     63,569   

Management company expenses

     2,006   

Depreciation and amortization

     45,366   

General and administrative

     7,869   
  

 

 

 

Total expenses

     118,810   
  

 

 

 

Operating income

     28,281   

Other income and expenses

  

Interest and other income

     296   

Interest expense

     (16,277
  

 

 

 

Income before income taxes

     12,300   

Income tax expense

     (760
  

 

 

 

Net income

     11,540   

Net income attributable to noncontrolling interests

     (228
  

 

 

 

Net income attributable to controlling interests

     11,312   

Dividends on preferred stock

     (200
  

 

 

 

Net income attributable to common stockholders

   $ 11,112   
  

 

 

 

Weighted average shares outstanding—basic

     49,210   
  

 

 

 

Weighted average shares outstanding—diluted

     50,188   
  

 

 

 

Basic and diluted earnings per share

   $ 0.23   
  

 

 

 

 



 

31


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2015

(In thousands, except per share data)

(Unaudited)

 

Revenues

  

Income from office properties

   $ 276,861   

Management company income

     9,891   

Sale of condominium units

     11,063   
  

 

 

 

Total revenues

     297,815   
  

 

 

 

Expenses

  

Property operating expenses

     119,547   

Management company expenses

     9,362   

Cost of sales—condominium units

     11,120   

Depreciation and amortization

     93,253   

General and administrative

     12,664   
  

 

 

 

Total expenses

     245,946   
  

 

 

 

Operating income

     51,869   

Other income and expenses

  

Interest and other income

     1   

Interest expense

     (31,861
  

 

 

 

Income before income taxes

     20,009   

Income tax expense

     (1,635
  

 

 

 

Net income

     18,374   

Net income attributable to noncontrolling interests

     (344
  

 

 

 

Net income attributable to controlling interests

     18,030   

Dividends on preferred stock

     (400
  

 

 

 

Net income attributable to common stockholders

   $ 17,630   
  

 

 

 

Weighted average shares outstanding—basic

     49,210   
  

 

 

 

Weighted average shares outstanding—diluted

     50,188   
  

 

 

 

Basic and diluted earnings per share

   $ 0.36   
  

 

 

 

 



 

32


Table of Contents

RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating our company and our common stock. Any of the following risks could materially and adversely affect our business, results of operations and financial condition.

Risks Related to Our Properties and Business

If global market and economic conditions deteriorate, our business, financial condition and results of operations could be materially adversely affected.

Weak economic conditions generally, sustained uncertainty about global economic conditions, a tightening of credit markets, business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio. Additionally, these factors and conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. No assurances can be given regarding such macroeconomic factors or conditions, and our ability to lease our properties and increase or maintain rental rates may be negatively impacted, which may have a material adverse effect on our business, financial condition and results of operations.

The conditions of our market affect our business, financial condition and results of operations.

All of our properties are located in Houston, Texas. Therefore, our business, financial condition, results of operations and ability to pay dividends to our stockholders are directly linked to economic conditions in Houston generally, as well as the market for office space in Houston. An economic downturn in Houston, particularly increases in unemployment and customer bankruptcies, may materially adversely affect our business, financial condition and results of operations.

Additionally, as a result of the geographic concentration of our properties in Houston, we are particularly susceptible to adverse weather conditions that threaten southern and coastal states, such as hurricanes and flooding. A single catastrophe or destructive weather event may have a material adverse effect on our business, financial condition and results of operations.

Our business could be materially adversely affected by a decline in commodity prices, particularly a decline in the price of crude oil.

The Houston market is economically dependent on the petroleum industry. A key economic variable that affects the petroleum industry is the price of crude oil, which can be influenced by general economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries, weather-related damage and disruptions, competing fuel prices and geopolitical risk. If the Houston market faces significant exposure to fluctuations in global crude oil prices, particularly for extended periods of time, or oil prices remain at historically low levels, the Houston market may experience business layoffs, downsizing, consolidations, industry slowdowns and other similar factors. These potential risks to our customers in Houston could negatively impact commercial real estate fundamentals and result in lower occupancy, an increased market for sublease space, lower rental rates and declining values in our real estate portfolio in Houston, which may have a material adverse effect on our business, financial condition and results of operations.

We derive a significant portion of our revenues from customers in the energy sector, which will subject us to more risk than if we were broadly diversified.

As of June 30, 2016, approximately 47% of our revenues were derived from customers in the energy sector. Our customers in the energy sector may be negatively impacted by changes in the supply and demand for crude oil, natural gas and other energy commodities, exploration, production and other capital expenditures related to

 

33


Table of Contents

the energy projects, government regulation and other risks related to commodity prices described in the risk factor entitled “—Our business could be adversely affected by a decline in commodity prices.” The occurrence of any of these events that have a negative impact on the energy sector would have a much larger adverse effect on our revenues than they would if we had a more diversified customer base, which may have a material adverse effect on our business, financial condition and results of operations.

Our performance is subject to risks inherent in owning real estate investments.

We are generally subject to risks incidental to the ownership of real estate. These risks include:

 

    changes in supply of or demand for office properties in our market or sub-markets;

 

    competition for customers in our market or sub-markets;

 

    the ongoing need for capital improvements;

 

    increased operating costs, which may not necessarily be offset by increased rents, including insurance premiums, utilities and real estate taxes, due to inflation and other factors;

 

    changes in tax, real estate and zoning laws;

 

    changes in governmental rules and fiscal policies;

 

    inability of customers to pay rent;

 

    competition from the development of new office space in our market or sub-markets and the quality of competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record; and

 

    civil unrest, acts of war, terrorism, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses) and other factors beyond our control.

Should any of the foregoing occur, it may have a material adverse effect on our business, financial condition and results of operations.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to our existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our business, financial condition and results of operations.

We compete with a number of other owners and operators of office properties to renew leases with our existing customers and to attract new customers. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new customers, heightened competition may require us to give rent concessions or provide customer improvements to a greater extent than we otherwise would have. In addition, the economic downturn of the last several years has led to increased competition for creditworthy customers and we may have difficulty competing with competitors who have purchased properties at depressed prices, because our competitors’ lower cost basis in such properties may allow them to offer space to customers at reduced rental rates.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge, or may not be able to increase rates to market rates, in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased customer improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital

 

34


Table of Contents

expenditures. Our inability to renew leases or re-let space in a reasonable time, a decline in rental rates or an increase in customer improvement, leasing commissions, or other costs may have a material adverse effect on our business, financial condition and results of operations.

An oversupply of office space in our market could cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all.

Undeveloped land in the Houston market is generally more readily available and less expensive per square foot than in markets such as New York City, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, it may be easier for our competitors to construct new buildings that would compete with our properties than it would be if we operated in higher barrier-to-entry markets. Any oversupply of office space in our market could result in lower occupancy and rental rates in our portfolio, which may have a material adverse effect on our business, financial condition and results of operations.

Customer defaults may have a material adverse effect on our business, financial condition and results of operations.

The majority of our revenues and income comes from rental income from real property. As such, our business, financial condition and results of operations could be adversely affected if our customers default on their lease obligations. Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents. If a customer becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the customer promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that customer. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a customer becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the customer. A customer’s default on its obligations may have a material adverse effect on our business, financial condition and results of operations.

Some of our leases provide customers with the right to terminate their leases early, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our leases permit our customers to terminate their leases as to all or a portion of their leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee. To the extent that our customers exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third-party customers. If our customers elect to terminate their leases early, it may have a material adverse effect on our business, financial condition and results of operations.

Our expenses may remain constant or increase, even if our revenues decrease, which may have a material adverse effect on our business, financial condition and results of operations.

Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inelastic and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a customer fails to pay rent or other circumstances cause a reduction in property revenues. As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which may have a material adverse effect on our business, financial condition and results of operations.

Our property taxes could increase due to a change in property tax rates or a reassessment, which could impact our cash flows.

Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change

 

35


Table of Contents

or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase, our financial condition, results of operations, cash flows, trading price of our common stock and our ability to satisfy our principal and interest obligations and to pay dividends to our stockholders could be adversely affected, which may have a material adverse effect on our business, financial condition and results of operations.

Illiquidity of real estate may limit our ability to vary our portfolio.

Real estate investments are relatively illiquid. Our ability to vary our portfolio by selling properties and buying new properties in response to changes in economic and other conditions may therefore be limited. In addition, the Code limits our ability to sell our properties by imposing a penalty tax of 100% on the gain derived from prohibited transactions, which are generally defined as sales or other dispositions of property (other than foreclosure property) held primarily for sale in the ordinary course of a trade or business. The frequency of sales and the holding period of the property sold are two primary factors in determining whether the property sold fits within this definition. These considerations may limit our ability to sell our properties. If we must sell an investment, we cannot assure you that we will be able to dispose of the investment in the time period we desire or that the sales price of the investment will recoup or exceed our cost for the investment, or that the penalty tax would not be assessed, each of which may have a material adverse effect on our business, financial condition and results of operations.

Our portfolio is concentrated in five assets and, as a result, any adverse changes impacting any one of our properties may have a material adverse effect on our business, financial condition and results of operations.

As of June 30, 2016, four of our five assets, CityWestPlace, Greenway Plaza, Post Oak Central and San Felipe Plaza, each accounted for more than 10% of our assets on a consolidated basis. Our revenue and funds available for distribution to our stockholders would be materially and adversely affected if any of these properties were materially damaged or destroyed. Additionally, our revenue and funds available for distribution to our stockholders would be materially adversely affected if customers at any of these properties experienced a downturn in their business, which could weaken their financial condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy. The significance of these properties in our portfolio means that any adverse change at any of these properties may have a material adverse effect on our business, financial condition and results of operations.

Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.

We may acquire properties if we are presented with an attractive opportunity to do so. We may face competition for such acquisition opportunities from other investors, and such competition may adversely affect us by subjecting us to the following risks:

 

    an inability to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, sovereign wealth funds, pension trusts, partnerships and individual investors; and

 

    an increase in the purchase price for such acquisition property in the event we are able to acquire such desired property.

Accordingly, competition for acquisitions may limit our opportunities to grow our business following the Distribution, which may have a material adverse effect on our business, financial condition and results of operations.

 

36


Table of Contents

We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

We may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our operating partnership. These transactions can result in stockholder dilution. This acquisition structure can have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require (and in the case of our properties, requires) that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions, which may have a material adverse effect on our business, financial condition and results of operations.

We may face risks associated with future property acquisitions.

From time to time, we may pursue the acquisition of properties or portfolios of properties, including large portfolios that could further increase our size and result in changes to our capital structure. Our acquisition activities and their success are subject to the following risks:

 

    acquisition agreements contain conditions to closing, which may include completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied;

 

    necessary financing for such acquisitions may not be available on favorable terms or at all;

 

    acquisition, development or redevelopment projects may require the consent of third parties, such as anchor customers, mortgage lenders and joint venture partners, and such consents may be withheld;

 

    the diversion of management’s attention to the assimilation of the operations of the acquired businesses or assets;

 

    acquired properties may fail to perform as expected;

 

    difficulties in the integration of operations and systems and the inability to realize potential operating synergies;

 

    difficulties in the assimilation and retention of the personnel of the acquired companies;

 

    challenges in retaining the customers of the combined businesses;

 

    the actual costs of repositioning acquired properties may be higher than our estimates;

 

    adequate insurance coverage for new properties may not be available on favorable terms or at all;

 

    future acquisitions may result in unanticipated expenses or charges to earnings, including unanticipated operating expenses and depreciation or amortization expenses over the life of any assets acquired;

 

    we may not achieve the expected benefits of future acquisitions;

 

    acquired properties may be located in new markets where we face risks associated with incomplete knowledge or understanding of the local market and a limited number of established business relationships in the area;

 

    accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and

 

    acquired properties may be subject to liabilities and we may not have any recourse, or only limited recourse, to the transferor with respect to unknown liabilities, including liabilities for cleanup of undisclosed environmental contamination or non-compliance with environmental laws. As a result, if a claim were asserted against us based upon ownership of such properties, we might be required to pay a substantial sum, either in settlements or in damages, which could adversely affect our cash flow.

 

37


Table of Contents

Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We may be unable to develop new properties successfully, which could materially adversely affect our results of operations due to unexpected costs, delays and other contingencies.

From time to time, we may acquire unimproved real property for development purposes as market conditions warrant, with a joint venture partner or otherwise. In addition to the risks associated with the ownership of real estate investments in general, and investments in joint ventures specifically, there are significant risks associated with our development activities, including the following:

 

    delays in obtaining, or an inability to obtain, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in completion delays and increased development costs;

 

    incurrence of development costs for a property that exceed original estimates due to increased materials, labor or other costs, changes in development plans or unforeseen environmental conditions, which could make completion of the property more costly or uneconomical;

 

    abandonment of contemplated development projects or projects in which we have started development, and the failure to recover expenses and costs incurred through the time of abandonment which could result in significant expenses;

 

    risk of loss of periodic progress payments or advances to builders prior to completion;

 

    termination of leases by customers due to completion delays;

 

    failure to achieve expected occupancy levels, as the lease-up of space at our development projects may be slower than estimated; and

 

    other risks related to the lease-up of newly constructed properties.

In addition, we also rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing to a purchase price at the time we acquire unimproved real property. If our projections are inaccurate, including due to any of the risks described above, we may overestimate the purchase price for a property and be unable to charge rents that compensate us for our increased costs, which may have a material adverse effect on our business, financial condition and results of operations.

We may co-invest in joint ventures with third parties. Any future joint venture investments could be adversely affected by the capital markets, lack of sole decision-making authority, reliance on joint venture partners’ financial condition and any disputes that may arise between us and our joint venture partners.

We may co-invest with third parties through partnerships, joint ventures or other structures in which we acquire noncontrolling interests in, or share responsibility for, managing the affairs of a property, partnership, co-tenancy or other entity. We, Parkway and Cousins may market minority interests in certain of our properties prior to the effective time of the Merger. If we enter into any such joint venture or similar ownership structure, we may not be in a position to exercise sole decision-making authority regarding the properties owned through such joint ventures or similar ownership structure. In addition, investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including potential deadlocks in making major decisions, restrictions on our ability to exit the joint venture, reliance on joint venture partners and the possibility that a joint venture partner might become bankrupt or fail to fund its share of required capital contributions, thus exposing us to liabilities in excess of our share of the joint venture or jeopardizing our REIT status. The funding of our capital contributions to such joint ventures may be dependent on proceeds from asset sales, credit facility advances or sales of equity securities. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary

 

38


Table of Contents

to its policies or objectives. We may, in specific circumstances, be liable for the actions of its joint venture partners. In addition, any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase its expenses. Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We, our customers and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations.

We, our customers and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Failure to comply with these requirements could subject us, or our customers, to governmental fines or private litigant damage awards. In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us, or our customers, to incur significant expenditures. We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will develop. Environmental noncompliance liability also could impact a customer’s ability to make rental payments to us. Furthermore, our reputation could be negatively affected if we violate environmental laws or regulations, which may have a material adverse effect on our business, financial condition and results of operations.

In addition, as a current or former owner or operator of real property, we may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on, under or emanating from such property, including investigation and cleanup costs, natural resource damages, third-party liability for cleanup costs, personal injury or property damage and costs or losses arising from property use restrictions. In particular, some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on, adjacent to or near sites upon which others, including former owners or customers of our properties, have engaged, or may in the future engage, in activities that have released or may have released petroleum products or other hazardous or toxic substances. Cleanup liabilities are often imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. The presence of hazardous substances also may result in use restrictions on impacted properties or result in liens on contaminated sites in favor of the government for damages it incurs to address contamination. We also may be liable for the costs of removal or remediation of hazardous substances or waste disposal or treatment facilities if we arranged for disposal or treatment of hazardous substances at such facilities, whether or not we own such facilities. Moreover, buildings and other improvements on our properties may contain asbestos-containing material or other hazardous building materials or could have indoor air quality concerns (e.g., from airborne contaminants such as mold), which may subject us to costs, damages and other liabilities including abatement cleanup, personal injury, and property damage liabilities. The foregoing could adversely affect occupancy and our ability to develop, sell or borrow against any affected property and could require us to make significant unanticipated expenditures that may have a material adverse effect on our business, financial condition and results of operations.

We may be materially adversely affected by laws, regulations or other issues related to climate change.

If we become subject to laws or regulations related to climate change, our business, financial condition and results of operations could be materially adversely affected. The federal government has enacted, and Houston or the state of Texas may enact, certain climate change laws and regulations which may, among other things, regulate “carbon footprints” and greenhouse gas emissions. Such laws and regulations could result in substantial compliance costs, retrofit costs and construction costs, including monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment. Furthermore, our reputation could be negatively affected if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future interpretations of current laws and regulations related to climate change will affect our

 

39


Table of Contents

business, financial condition and results of operations. Additionally, the potential physical impacts of climate change on our operations are highly uncertain and would be particular to Houston. These may include changes in rainfall and storm patterns and intensity, water shortages, changing sea levels and changing temperatures. These impacts may have a material adverse effect on our business, financial condition and results of operations.

Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.

Our properties must comply with the Americans with Disabilities Act (the “ADA”) and any equivalent state or local laws, to the extent that our properties are public accommodations as defined under such laws. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. If one or more of our properties is not in compliance with the ADA or any equivalent state or local laws, we may be required to incur additional costs to bring such property into compliance with the ADA or similar state or local laws. Noncompliance with the ADA or similar state and local laws could also result in the imposition of fines or an award of damages to private litigants. We cannot predict the ultimate amount of the cost of compliance with the ADA or any equivalent state or local laws. If we incur substantial costs to comply with the ADA or any equivalent state or local laws, it may have a material adverse effect on our business, financial condition and results of operations.

Our third-party management agreements are subject to the risk of termination and non-renewal.

Our third-party management agreements are subject to the risk of possible termination under certain circumstances, including our failure to perform as required under these agreements, and to the risk of non-renewal by the property owner upon expiration or renewal of such management agreements on terms less favorable to us than the terms of current management agreements. If management agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease which may have a material adverse effect on our business, financial condition and results of operations.

Our Third-Party Services Business may subject us to certain liabilities.

We may hire and supervise third-party contractors to provide construction, engineering and various other services for properties we are managing on behalf of third-party clients. Depending upon (1) the terms of our contracts with third-party clients, which, for example, may place us in the position of a principal rather than an agent, or (2) the responsibilities we assume or are legally deemed to have assumed in the course of a client engagement (whether or not memorialized in a contract), we may be subjected to, or become liable for, claims for construction defects, negligent performance of work or other similar actions by third parties we do not control. Adverse outcomes of property management disputes or litigation could negatively impact our business, financial condition and results of operations, particularly if we have not limited in our contracts the extent of damages to which we may be liable for the consequences of our actions, or if our liabilities exceed the amounts of the commercial third-party insurance that we carry. Moreover, our clients may seek to hold us accountable for the actions of contractors because of our role as property manager, even if we have technically disclaimed liability as a legal matter, in which case we may find it commercially prudent to participate in a financial settlement for purposes of preserving the client relationship.

Acting as a principal may also mean that we pay a contractor before we have been reimbursed by the client, which exposes us to additional risks of collection from the client in the event of an intervening bankruptcy or insolvency of the client. The reverse can occur as well, where a contractor that we have paid files for bankruptcy or commits fraud before completing a project for which we have paid it in part or in full. As part of our project management business, we are responsible for managing the various contractors required for a project, including general contractors, in order to ensure that the cost of a project does not exceed the contract price and that the project is completed on time. In the event that one of the other contractors on the project does not or cannot perform as a result of bankruptcy or for any other reason, we may be responsible for cost overruns as well as the consequences for late delivery. In the event that we have not accurately estimated our own costs of providing

 

40


Table of Contents

services under warranted or guaranteed cost contracts, we may lose money on such contracts until such time as we can legally terminate them, which may have a material adverse effect on our business, financial condition and results of operations.

We are required to maintain certain licenses to conduct our Third-Party Services Business.

Our Third-Party Services Business, which involves the brokerage of real estate leasing transactions and property management, requires us to maintain licenses in various jurisdictions in which we operate and to comply with particular regulations in such jurisdictions. If we fail to maintain our licenses or conduct regulated activities without a license or in contravention of applicable regulations, we may be required to pay fines or return commissions, which may have a material adverse effect on our business, financial condition and results of operations.

As a licensed real estate service provider and advisor in various jurisdictions, we may be subject to various due diligence, disclosure, standard-of-care, anti-money laundering and other obligations in the jurisdictions in which we operate our Third-Party Services Business. Failure to fulfill these obligations could subject us to litigation from parties who leased properties we brokered or managed. We could become subject to claims by participants in real estate sales or other services claiming that we did not fulfill our obligations as a service provider or broker. This may include claims with respect to conflicts of interest where we are acting, or are perceived to be acting, for two or more clients with potentially contrary interests. Any such claims may have a material adverse effect on our business, financial condition and results of operations

Our assets may be subject to impairment charges.

We will regularly review our real estate assets for impairment, and based on these reviews, we may record impairment losses that have a material adverse effect on our business, financial condition and results of operations. Negative or uncertain market and economic conditions, as well as market volatility, increase the likelihood of incurring impairment losses. Such impairment losses may have a material adverse effect on our business, financial condition and results of operations.

Uninsured and underinsured losses may adversely affect our operations.

We, or in certain instances, customers at our properties, carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage, environmental and umbrella liability coverage on all of our properties. We also carry wind and flood coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate. Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement cost basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. However, we may be subject to certain types of losses that are generally uninsured losses, including, but not limited to losses caused by riots, war or acts of God. In the event of substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property, which may have a material adverse effect on our business, financial condition and results of operations.

We may be subject to litigation, which could have a material adverse effect on our financial condition.

We may be subject to litigation, including claims related to our assets and operations that are otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially

 

41


Table of Contents

significant judgments against us, some of which we may not be insured against. While we generally intend to vigorously defend ourselves against such claims, we cannot be certain of the ultimate outcomes of claims that may be asserted against us. Unfavorable resolution of such litigation may result in our having to pay significant fines, judgments, or settlements, which, if uninsured—or if the fines, judgments and settlements exceed insured levels—would adversely impact our earnings and cash flows, thereby negatively impacting our ability to service debt and pay dividends to our stockholders, which may have a material adverse effect on our business, financial condition and results of operations. Certain litigation, or the resolution of certain litigation, may affect the availability or cost of some of our insurance coverage, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and directors, each of which may have a material adverse effect on our business, financial condition and results of operations.

Our business could be materially adversely affected by security breaches through cyber-attacks, cyber intrusions or otherwise.

We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization and other significant disruptions of our information technology networks and related systems. These risks include operational interruptions, private data exposure and damage to our relationships with our customers, among other things. There can be no assurance that our efforts to maintain the security and integrity of our information technology networks and related systems will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways that may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to satisfy the regulatory requirements of the Sarbanes-Oxley Act, or if our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the trading price of our common stock.

As a public company, we will become subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act and the Dodd-Frank Act and will be required to prepare our financial statements in accordance with the rules and regulations promulgated by the SEC. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. Although management will continue to review the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all of our control objectives. If we are not able to comply with these and other requirements in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of shares of our common stock could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which may have a material adverse effect on our business, financial condition and results of operations.

The success of our business following the Distribution depends on retaining officers and employees.

Our continued success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, Mr. James R. Heistand, our President and Chief Executive Officer, who would be difficult to replace. Although Parkway extended its employment agreement with Mr. Heistand, which will be assigned to and assumed by New Parkway pursuant to the Employee Matters Agreement in connection with the Distribution, in July 2016 in order to provide for an additional nine-month term, we cannot provide any assurance that Mr. Heistand will remain employed by us. Our ability to retain Mr. Heistand, or to attract a suitable replacement should he leave, is dependent on the competitive nature of the employment market. The loss of services of Mr. Heistand or other key personnel may have a material adverse effect on our business, financial condition and results of operations.

 

42


Table of Contents

Additionally, our success after the Distribution will depend in part upon our ability to retain key employees of Cousins and Parkway. Key employees may depart either before or after the Distribution because of issues relating to the uncertainty and difficulty of the Merger, the Separation, the UPREIT Reorganization or a desire not to remain with us following the Distribution. Accordingly, no assurance can be given that following the Distribution, we will be able to retain key employees, which may have a material adverse effect on our business, financial condition and results of operations.

We have a significant amount of indebtedness and may need to incur more in the future.

Immediately following the Distribution, we expect to have approximately $804.1 million of total outstanding indebtedness. In addition, in connection with executing our business strategies going forward, we expect to continue to evaluate the possibility of acquiring additional properties and making strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for us, including:

 

    hindering our ability to adjust to changing market, industry or economic conditions;

 

    limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions or emerging businesses;

 

    limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses;

 

    making us more vulnerable to economic or industry downturns, including interest rate increases; and

 

    placing us at a competitive disadvantage compared to less leveraged competitors.

Moreover, to respond to competitive challenges, we may be required to raise substantial additional capital to execute our business strategy. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. If we are able to obtain additional financing, our credit ratings could be further adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our obligations under our indebtedness, which may have a material adverse effect on our business, financial condition and results of operations.

We have existing debt and refinancing risks that could affect our cost of operations.

Following the Distribution, we expect to have both fixed and variable rate indebtedness and may incur additional indebtedness in the future, including borrowings under our New Parkway Credit Facilities, to finance possible acquisitions and for general corporate purposes. As a result, we are, and expect to be, subject to the risks normally associated with debt financing including:

 

    that interest rates may rise;

 

    that our cash flow will be insufficient to make required payments of principal and interest;

 

    that we will be unable to refinance some or all of our debt;

 

    that any refinancing will not be on terms as favorable as those of our existing debt;

 

    that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines;

 

    that debt service obligations will reduce funds available for distribution to our stockholders;

 

    that any default on our debt, due to noncompliance with financial covenants or otherwise, could result in acceleration of those obligations;

 

    that we may be unable to refinance or repay the debt as it becomes due; and

 

    that if our degree of leverage is viewed unfavorably by lenders or potential joint venture partners, it could affect our ability to obtain additional financing.

 

43


Table of Contents

If we are unable to repay or refinance our indebtedness as it becomes due, we may need to sell assets or to seek protection from our creditors under applicable law, which may have a material adverse effect on our business, financial condition and results of operations.

Our governing documents do not limit the amount of indebtedness we may incur and we may become more highly leveraged.

The New Parkway Articles and New Parkway Bylaws (as hereinafter defined) do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may permit us to incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We might become more highly leveraged as a result, and our financial condition, results of operations and funds available for distribution to stockholders might be negatively affected, and the risk of default on our indebtedness could increase, which may have a material adverse effect on our business, financial condition and results of operations.

The cost and terms of mortgage financings may render the sale or financing of a property difficult or unattractive.

The sale of a property subject to a mortgage loan may trigger pre-payment penalties, yield maintenance payments or make-whole payments to the lender, which would reduce the amount of gain or increase our loss on the sale of a property and could make the sale of a property less likely. Certain of our mortgage loans will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.” There is no assurance that we will be able to refinance such balloon payments upon the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial condition and results of operations. Additionally, at the time a loan matures, the property may be worth less than the loan amount and, as a result, we may determine not to refinance the loan and permit foreclosure, generating a loss. Any such losses may have a material adverse effect on our business, financial condition and results of operations.

Financial covenants could materially adversely affect our ability to conduct our business.

Pursuant to the commitment letter Parkway entered into in connection with the Merger Agreement, certain lenders have agreed to provide us the New Parkway Credit Facilities. The credit agreement governing the New Parkway Credit Facilities is expected to contain restrictions on the amount of debt we may incur and other restrictions and requirements on its operations. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declarations of default under, and acceleration of, any related indebtedness, which would result in adverse consequences to our financial condition. The New Parkway Credit Facilities are expected to contain cross-default provisions that give the lenders the right to declare a default if we are in default resulting in (or permitting the) acceleration of other debt under other loans in excess of certain amounts. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which may have a material adverse effect on our business, financial condition and results of operations.

Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties (or portions thereof).

 

44


Table of Contents

For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan generally would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to satisfy the distribution requirements applicable to REITs under the Code. Foreclosures could also trigger our tax indemnification obligations under the terms of our agreements with certain continuing investors with respect to sales of certain properties, which may have a material adverse effect on our business, financial condition and results of operations.

Failure to hedge effectively against interest rate changes may have a material adverse effect on our business, financial condition and results of operations.

The interest rate hedge instruments we may use to manage some of our exposure to interest rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements. Failure to hedge effectively against such interest rate changes may have a material adverse effect on our business, financial condition and results of operations.

We depend on external sources of capital that are outside of our control, which may affect our ability to pursue strategic opportunities, refinance or repay our indebtedness and make distributions to our stockholders.

In order to qualify to be taxed as a REIT, we generally must distribute annually at least 90% of our “REIT taxable income,” subject to certain adjustments and excluding any net capital gain, to our stockholders. Because of this distribution requirement, it is not likely that we will be able to fund all future capital needs from income from operations. As a result, when we engage in the development or acquisition of new properties or expansion or redevelopment of existing properties, we will continue to rely on third-party sources of capital, including lines of credit, collateralized or unsecured debt (both construction financing and permanent debt) and equity issuances. Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market’s view of the quality of our assets, the market’s perception of our growth potential, our current debt levels and our current and expected future earnings. There can be no assurance that we will be able to obtain the financing necessary to fund our current or new developments or project expansions or our acquisition activities on terms favorable to us or at all. If we are unable to obtain a sufficient level of third-party financing to fund our capital needs, our ability to make distributions to our stockholders may be adversely affected which may have a material adverse effect on our business, financial condition and results of operations.

We may amend our investment strategy and business policies without stockholder approval.

Our board of directors may change our investment strategy or any of our investment guidelines, financing strategy or leverage policies with respect to investments, developments, acquisitions, growth, operations, indebtedness, capitalization and dividends at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. Such a change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, among other risks. These changes could adversely affect our ability to pay dividends to our stockholders, and may have a material adverse effect on our business, financial condition and results of operations.

TPG Pantera will be a significant stockholder and may have conflicts of interest with us in the future.

Immediately following the Distribution, it is expected that TPG Pantera and TPG Management, will own approximately 9.80% of our issued and outstanding common stock. The TPG Parties will have certain registration rights and so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of our issued and outstanding common stock, the TPG Parties will have preemptive rights to participate in our future equity issuances, subject to certain conditions. This

 

45


Table of Contents

concentration of ownership in one group of stockholders could potentially be disadvantageous to other stockholders’ interests. If the TPG Parties were to sell or otherwise transfer all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.”

Additionally, the interests of the TPG Parties may differ from the interests of our other stockholders in material respects. For example, the TPG Parties may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in the TPG Parties’ judgment, could enhance their other equity investments, even though such transactions might involve risks to us. The TPG Parties are in the business of making or advising on investments in companies and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business. The TPG Parties may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us, which may have a material adverse effect on our business, financial condition and results of operations.

The New Parkway Stockholders Agreement with the TPG Parties grants TPG Pantera certain rights that may restrain our ability to take various actions in the future.

In connection with the Merger Agreement, we entered into the New Parkway Stockholders Agreement, pursuant to which we granted TPG Pantera certain board rights that could allow TPG Pantera to influence our board of directors. Under the New Parkway Stockholders Agreement, we have agreed, at the effective time of the Merger, to have a seven-member board of directors. We have granted TPG Pantera the right to nominate a specified number of directors to our board of directors and to have a specified number of such directors appointed to the compensation committee of our board of directors (the “Compensation Committee”) and the investment committee of our board of directors (the “Investment Committee”) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5.0% of the outstanding shares of our common stock. In addition, we have agreed to constitute the Investment Committee as a four-member committee and for so long as TPG Pantera beneficially owns at least 2.5% of our common stock but less than 5.0% of our common stock, TPG Pantera will have the right to have at least one of its designees to our board of directors appointed to each of the Investment Committee and the Compensation Committee. Pursuant to the terms of the New Parkway Stockholders Agreement, so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of the outstanding shares of New Parkway common stock, other than in connection with any change in control of us, TPG Pantera also will have the right to consent to any change in the size or rights and responsibilities of either our Investment Committee or the Compensation Committee and to certain other matters described below under the caption “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.” The ability of TPG Pantera to influence our board of directors may have a material adverse effect on our business, financial condition and results of operations.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder and may have interests that differ from our other stockholders.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder on a fully diluted basis. Mr. Thomas, and certain other holders of units of Parkway LP that are affiliated with him, have entered into the Thomas Letter Agreement with Parkway and Parkway LP that provides, among other things, that Parkway will cause Mr. Thomas to be appointed as our chairman and that Parkway will modify certain existing tax protection agreements in favor of Mr. Thomas. While, as our director, Mr. Thomas has a fiduciary duty to us and our stockholders, Mr. Thomas’ interests may differ from the interests of our other stockholders and, given his significant ownership in us, he may influence opportunities that have an effect on our business, financial condition and results of operations. For more information, see “Certain Relationships and Related Person Transactions—Agreement with Mr. James A. Thomas.”

 

46


Table of Contents

Risks Related to the Separation, the UPREIT Reorganization and the Distribution

Following the Distribution, our business and operating results could be negatively affected if we are unable to successfully integrate the Houston businesses of Cousins and Parkway.

The Merger involves the combination of two companies which currently operate as independent public companies. The Separation, the UPREIT Reorganization and the Distribution involve the separation, reorganization and distribution of the assets of two companies that currently operate as independent public companies. Each of Cousins and Parkway will be required to devote significant management attention and resources to the Separation, the UPREIT Reorganization and the Distribution. Potential difficulties we, Cousins or Parkway may encounter in the integration process or in the Separation, the UPREIT Reorganization and the Distribution include the following:

 

    lost sales and customers as a result of certain customers of either of Cousins or Parkway deciding not to do business with us;

 

    difficulties in the integration of operations and systems of the Houston businesses of Cousins and Parkway;

 

    the inability to realize potential operating synergies;

 

    the failure by us, Cousins or Parkway to retain key employees of either of Cousins or Parkway;

 

    the complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases;

 

    accounting, regulatory or compliance issues that could arise, including internal control over financial reporting;

 

    potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger, the Separation, the UPREIT Reorganization and the Distribution; and

 

    challenges in retaining the customers of each of Cousins and Parkway prior to the effective time of the Merger.

For all these reasons, you should be aware that it is possible that the integration process or the Separation, the UPREIT Reorganization and the Distribution could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the Separation, the UPREIT Reorganization and the Distribution, which may have a material adverse effect on our business, financial condition and results of operations.

We have no operating history as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about our business in this information statement refers to Cousins’ portion of the Houston Business as operated and integrated with Parkway’s portion of the Houston Business. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of Cousins and Parkway. Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented, or those that we will achieve in the future. Factors which could cause our results to materially differ from those reflected in such historical and pro forma financial information and which may adversely impact our ability to achieve similar results in the future may include, but are not limited to, the following:

 

    the financial results in this information statement do not reflect all of the expenses we will incur as a public company;

 

47


Table of Contents
    prior to the Separation, the UPREIT Reorganization and the Distribution, our business has been operated by Parkway and Cousins as part of their respective corporate organizations. We will need to make investments to replicate or outsource from other providers certain facilities, systems, infrastructure, and personnel to which we will no longer have access after the Distribution, which will be costly;

 

    after the Distribution, we will be unable to use Parkway’s and Cousins’ economies of scope and scale in procuring various goods and services and in maintaining vendor and customer relationships. Although we will enter into the Separation and Distribution Agreement, which provides for certain transition-related arrangements between us and Cousins, these arrangements may not fully capture the benefits we have previously enjoyed as a result of our business being integrated within the businesses of Parkway and Cousins and may result in us paying higher charges than in the past for necessary services;

 

    prior to the Separation, the UPREIT Reorganization and the Distribution, our working capital requirements and capital for our general corporate purposes, including acquisitions, research and development, and capital expenditures, have been satisfied as part of the corporation-wide cash management policies of Cousins and Parkway. Following the Distribution, while we have secured commitments for the New Parkway Credit Facilities, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may not be on terms as favorable to those obtained by Cousins or Parkway, and the cost of capital for our business may be higher than Cousins’ or Parkway’s cost of capital prior to the Separation, the UPREIT Reorganization and the Distribution, which may have a material adverse effect on our business, financial condition and results of operations; and

 

    our cost structure, management, financing and business operations will be significantly different as a result of operating as an independent public company. These changes will result in increased costs, including, but not limited to, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of our status as an independent company. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, please see “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data—Parkway Houston,” “Selected Historical Combined Financial Data—Cousins Houston,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this information statement.

Cousins may fail to perform under various transaction agreements that will be executed as part of the Separation, the UPREIT Reorganization and the Distribution, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

As of or prior to the effective time of the Merger, we will enter into agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Distribution including the Separation and Distribution Agreement, the Tax Matters Agreement and the Employee Matters Agreement. Certain of these agreements will provide for the performance of services by each company for the benefit of the other for a period of time after the Distribution. We will rely on Cousins to satisfy its performance and payment obligations under such agreements. If Cousins is unable to satisfy such obligations, including its indemnification obligations, we could incur operational difficulties or losses, which may have a material adverse effect on our business, financial condition and results of operations.

If we do not have in place similar agreements with other providers of these services when the transaction agreements terminate and we are not able to provide these services internally, we may not be able to operate our

 

48


Table of Contents

business effectively and our profitability may decline, which may have a material adverse effect on our business, financial condition and results of operations. For more information, see “Certain Relationships and Related Person Transactions.”

The Distribution will not qualify for tax-free treatment and will be treated as a taxable distribution to you for U.S. federal income tax purposes.

The distribution of shares of New Parkway common stock will not qualify for tax-deferred treatment and will be treated as a taxable distribution to Cousins stockholders for U.S. federal income tax purposes. An amount equal to the fair market value of the shares of New Parkway common stock received by you on the Distribution date in the Distribution will generally be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Cousins (including gain recognized by Cousins in connection with the Separation and the Distribution), with the excess treated first as a non-taxable return of capital to the extent of your tax basis in Cousins common stock and any remaining excess treated as capital gain. Your tax basis in shares of Cousins common stock held at the time of the Distribution will be reduced (but not below zero) to the extent the fair market value of shares of New Parkway common stock distributed by Cousins to you in the Distribution exceeds your ratable share of Cousins’ current and accumulated earnings and profits. Your holding period for such Cousins shares will not be affected by the Distribution. Cousins will not be able to advise you of the amount of earnings and profits of Cousins until after the end of the calendar year in which the Distribution occurs. However, Cousins anticipates that it will recognize a substantial amount of capital gain for U.S. federal income tax purposes in connection with the Separation that will have the effect of substantially increasing its earnings and profits for the year in which the Distribution occurs. In addition, Cousins or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the Distribution payable to non-U.S. stockholders, and any such withholding would be satisfied by Cousins or such agent by withholding and selling a portion of the shares of New Parkway common stock that otherwise would be distributable to non-U.S. stockholders or by withholding from other property held in the non-U.S. stockholder’s account with the withholding agent.

Although Cousins will be ascribing a value to the shares of New Parkway common stock in the Distribution for tax purposes, this valuation is not binding on the IRS or any other tax authority. These tax authorities could ascribe a higher valuation to those shares, particularly if shares of New Parkway common stock trade at prices significantly above the value ascribed to those shares by Cousins in the period following the Distribution. Such a higher valuation may cause a larger reduction in the tax basis of your Cousins shares or may cause you to recognize additional dividend or capital gain income. You should consult your own tax advisor as to the particular consequences of the Distribution to you.

Cousins could incur a corporate tax liability in connection with the Separation.

Cousins anticipates that it will recognize a significant amount of gain for U.S. federal income tax purposes in connection with the Separation. However, Cousins anticipates that most of the gain it recognizes in connection with the Separation will be able to be offset, for U.S. federal income tax purposes, with net operating losses of Parkway that it will succeed to in the Merger, such that most of such gain will not be subject to U.S. federal income tax, but there can be no assurance that the IRS will not contend, perhaps successfully, that some or all of those losses are not available to offset such gain. If the IRS were successful in making such contention, Cousins could incur a significant corporate income tax liability in connection with the Separation, the UPREIT Reorganization and the Distribution, which may have a material adverse effect on Cousins’ business, financial condition and results of operations.

Potential indemnification liabilities owed to Cousins pursuant to the Separation and Distribution Agreement may have a material adverse effect on our business, financial condition and results of operations.

The Separation and Distribution Agreement provides for, among other things, the principal corporate transactions required to effect the Separation, the UPREIT Reorganization and the Distribution, certain

 

49


Table of Contents

conditions to the Separation, the UPREIT Reorganization and the Distribution and provisions governing our relationship with Cousins with respect to and following the Distribution. Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist related to our business activities, whether incurred prior to or after the Distribution, as well as certain obligations of Cousins that we will assume pursuant to the Separation and Distribution Agreement. If we are required to indemnify Cousins under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities, which may have a material adverse effect on our business, financial condition and results of operations.

Cousins or Parkway may not be able to transfer their interests in certain properties in the Separation and the UPREIT Reorganization pursuant to certain agreements, due to the need to obtain the consent of third parties.

The co-owned nature of some of Cousins’ and Parkway’s properties, along with certain covenants and other restrictions contained in debt agreements secured by certain of Cousins’ and Parkway’s properties, may require Cousins or Parkway to obtain co-venturer or lender consent in order to transfer such properties to us in the Separation and the UPREIT Reorganization. There is no assurance that Cousins or Parkway, as applicable, will be able to obtain such consents on terms that it determines to be reasonable, or at all. Failure to obtain such consents could require Cousins to retain properties subject to these consents, which may have a material adverse effect on our business, financial condition and results of operations.

After the Distribution, certain of our directors may have actual or potential conflicts of interest because of their previous or continuing equity interests in, or positions at, Cousins.

Certain of our directors will be persons who are or have served as directors of Cousins or who may own Cousins common stock or other equity awards. Following the Distribution, even though our board of directors will consist of a majority of independent directors, we expect that certain of our directors will continue to have a financial interest in Cousins common stock. Continued ownership of Cousins common stock and equity awards could create, or appear to create, potential conflicts of interest, which may have a material adverse effect on our business, financial condition and results of operations.

We may not achieve some or all of the expected benefits of the Separation, the UPREIT Reorganization and the Distribution, and the Separation, the UPREIT Reorganization and the Distribution may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, the UPREIT Reorganization and the Distribution, or such benefits may be delayed due to a variety of circumstances, not all of which may be under our control.

We may not achieve the anticipated benefits of the Separation, the UPREIT Reorganization and the Distribution for a variety of reasons, including, among others: (i) diversion of management’s attention from operating and growing our business; (ii) disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, which could adversely affect our ability to maintain relationships with customers; (iii) increased susceptibility to market fluctuations and other adverse events following the Separation, the UPREIT Reorganization and the Distribution; and (iv) lack of diversification in our business, compared to Parkway’s or Cousins’ businesses prior to the Separation, the UPREIT Reorganization and the Distribution. Failure to achieve some or all of the benefits expected to result from the Separation, the UPREIT Reorganization and the Distribution, or a delay in realizing such benefits, may have a material adverse effect on our business, financial condition and results of operations.

 

50


Table of Contents

Our agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Distribution involve conflicts of interest, and we may have received better terms from unaffiliated third parties than the terms we will receive in these agreements.

Because the Separation, the UPREIT Reorganization and the Distribution involve the combination and division of certain of Parkway’s and Cousins’ existing businesses into two independent companies, we expect to enter into certain agreements with Cousins to provide a framework for our relationship with Cousins following the Separation, the UPREIT Reorganization and the Distribution, including the Separation and Distribution Agreement, the Tax Matters Agreement and the Employee Matters Agreement. The terms of these agreements will be determined while portions of our business are still owned by Cousins and Parkway and are being negotiated by persons who are employees, officers or directors of Parkway, Cousins or their respective subsidiaries, or who expect to be employees, officers or directors of Cousins following the effective time of the Merger, and, accordingly, may have conflicts of interest. For example, during the period in which the terms of these agreements are being negotiated, our board of directors is not independent of Parkway or Cousins. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties, which may have a material adverse effect on our business, financial condition and results of operations.

No vote of the Parkway or Cousins stockholders is required in connection with the Separation, the UPREIT Reorganization or the Distribution, so stockholder recourse is limited to divestiture.

No vote of the Parkway or Cousins stockholders is required in connection with the Separation, the UPREIT Reorganization and the Distribution. Accordingly, if the Distribution occurs and you do not want to receive New Parkway common stock in the Distribution, your only recourse will be to divest your shares of Parkway or Cousins common stock either prior to the effective time of the Merger or, with respect to Cousins stockholders only, the record date for the Distribution.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain pre-Distribution liabilities and liabilities related to Cousins’ assets. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities, or that Cousins’ ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Cousins retains, and there can be no assurance that Cousins will be able to fully satisfy its indemnification obligations to us. Moreover, even if we ultimately succeed in recovering from Cousins any amounts for which we were held liable by such third parties, any indemnification received may be insufficient to fully offset the financial impact of such liabilities or we may be temporarily required to bear these losses while seeking recovery from Cousins, which may have a material adverse effect on our business, financial condition and results of operations.

Substantial sales of our common stock may occur in connection with the Distribution, which could cause our share price to decline.

The common stock that Cousins intends to distribute to its stockholders generally may be sold immediately in the public market. Upon completion of the Distribution, we expect that we will have an aggregate of approximately 49.2 million shares of common stock issued and outstanding, based on the number of issued and outstanding shares of Cousins common stock as of the record date. Shares of New Parkway common stock following the Distribution will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended, (the “Securities Act”) unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.

Although we have no actual knowledge of any plan or intention on the part of any of our 5% or greater stockholders to sell their shares of New Parkway common stock following the Distribution, it is possible that

 

51


Table of Contents

some of our large stockholders will sell our common stock that they receive in the Distribution. For example, our stockholders may sell our common stock because our concentration in Houston, Texas, our business profile or our market capitalization as an independent company does not fit their investment objectives, or because shares of our common stock are not included in certain indices after the Distribution. A portion of Cousins common stock is held by index funds, and if we are not included in these indices at the time of the Distribution, these index funds may be required to sell our shares. The sales of significant amounts of our common stock, or the perception in the market that this may occur, may result in the lowering of the market price of our shares, which may have a material adverse effect on our business, financial condition and results of operations.

The New Parkway Credit Facilities may limit our ability to pay dividends on our common stock, including repurchasing shares of our common stock.

Under the credit agreement governing the New Parkway Credit Facilities, our dividends may not exceed the greater of (1) 90% of our funds from operations, and (2) the amount required for us to qualify and maintain our status as a REIT. Other permitted dividends include, among other things, the amount required for us to avoid the imposition of income and excise taxes. Any inability to pay dividends may negatively impact our REIT status or could cause stockholders to sell shares of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

The combined post-Distribution value of Cousins common stock and our common stock may not equal or exceed the value of Cousins common stock prior to the Distribution, and the price of our common stock may be volatile or may decline.

The market price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside of our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These fluctuations in the stock market may adversely affect the market price of our common stock. Among the factors that could affect the market price of our common stock are:

 

    actual or anticipated quarterly fluctuations in our business, financial condition and operating results;

 

    changes in revenues or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;

 

    the ability of our customers to pay rent to us and meet their other obligations to us under current lease terms;

 

    our ability to re-lease spaces as leases expire;

 

    our ability to refinance our indebtedness as it matures;

 

    any changes in our dividend policy;

 

    any future issuances of equity securities;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    general market conditions and, in particular, developments related to market conditions for the real estate industry; and

 

    domestic and international economic factors unrelated to our performance.

Additionally, we cannot assure you that the combined trading prices of Cousins common stock and our common stock after the Distribution will be equal to or greater than the trading price of Cousins common stock prior to the Distribution. Until the market has fully evaluated the combined businesses of Cousins and Parkway without the Houston Business, the price at which Cousins common stock trades may fluctuate more significantly

 

52


Table of Contents

than might otherwise be typical, even with other market conditions, including general volatility, held constant. Similarly, until the market has fully evaluated our business as a stand-alone entity, the prices at which shares of our common stock trade may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. The increased volatility of our stock price following the Distribution may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Status as a REIT

Failure to qualify to be taxed as a REIT, or failure to remain qualified as a REIT, would cause us to be subject to U.S. federal income tax as a regular corporation and could cause us to face substantial tax liability, which would substantially reduce funds available for distributions to our stockholders.

We intend to qualify and elect to be taxed as a REIT beginning with our short taxable year commencing on the day prior to the Distribution and ending December 31, 2016. In connection with the Separation, we expect to receive an opinion from Hogan Lovells US LLP that, commencing with our short taxable year ending December 31, 2016, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and our proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for our short taxable year ending December 31, 2016 and subsequent taxable years. You should be aware that Hogan Lovells US LLP’s opinion is based upon customary assumptions, will be conditioned upon certain representations made by us and Cousins as to factual matters, including representations regarding the nature of our and Cousins’ assets and the conduct of our and Cousins’ business, is not binding upon the IRS or any court, and speaks as of the date issued. In addition, Hogan Lovells US LLP’s opinion will be based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, both the validity of Hogan Lovells US LLP’s opinion and our qualification as a REIT will depend upon our ability to meet on a continuing basis, through actual annual operating results, certain asset, income, organizational, distribution, stockholder ownership and other requirements set forth in the U.S. federal tax laws. Hogan Lovells US LLP will not review our compliance with those tests on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or more of our investments may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements or that the IRS will not contend that our investments violate the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would face serious tax consequences that would substantially reduce the funds available for distributions to our stockholders because:

 

    we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

    we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and

 

    unless we were entitled to relief under certain U.S. federal income tax laws, we would not be able to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we were to fail to qualify as a REIT, we would no longer be required to make distributions. Any corporate tax liability imposed as a result of our failure to qualify as a REIT could be substantial and would reduce the amount of funds available for distribution to our stockholders. As a result of all these factors, our failure to qualify as a REIT could adversely affect the value of, and trading prices for, our common stock, and could have a material adverse effect on our business, financial condition and results of operations. See “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and its Stockholders” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

 

53


Table of Contents

If either Cousins or Parkway failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, we would be prevented from electing to qualify as a REIT for several years.

We believe that from the time of our formation until the issuance of the Non-Voting Preferred Stock to Cousins, or a subsidiary of Cousins, we will be a “qualified REIT subsidiary” of Cousins. Under applicable Treasury Regulations, if either Cousins or Parkway failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, unless Cousins’ or Parkway’s failure was or is subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Cousins or Parkway failed to qualify. Failure to qualify as a REIT would have a material adverse effect on our business, financial condition and results of operations.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify, and remain qualified, for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. For more information, see “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and Its Stockholders.” For example, in order to meet the REIT qualification requirements, we may hold some of our assets or conduct certain of our activities through one or more taxable REIT subsidiaries (“TRSs”) or other subsidiary corporations that will be subject to federal, state and local corporate-level income taxes as regular C corporations. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes would decrease funds available for distribution to stockholders, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, for U.S. federal income tax purposes, if a REIT acquires property from a C corporation in a transaction in which gain is not required to be recognized for tax purposes and sells such property within a specified number of years after such acquisition, the REIT will be subject to corporate income tax on the gain that would have been recognized had the property been sold in a taxable transaction at the time of the acquisition (referred to as “sting tax gain”). Parkway acquired properties in December 2013 from a C corporation that are subject to these rules. Cousins will transfer these properties to New Parkway in the Separation. The parties have structured the Separation in a manner intended to cause Cousins to recognize the “sting tax gain,” and to preclude New Parkway from having to recognize “sting tax gain” with respect to these properties if they were to be sold by New Parkway prior to January 2019. There can be no assurance, however, that if these properties were to be sold by New Parkway prior to January 2019 that New Parkway would not also be subject to the corporate income tax on the “sting tax gain” associated with those properties. If the IRS were to assert that position successfully, then New Parkway could incur a significant corporate income tax liability if it were to sell these former Parkway properties prior to January 2019.

Failure to make required distributions would subject us to federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT (and assuming that certain other requirements are also satisfied), we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. If we become subject to a federal corporate income tax, it could have a material adverse effect on our business, financial condition and results of operations.

 

54


Table of Contents

REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

To satisfy the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of cash and the recognition of taxable income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT, which could have a material adverse effect on our business, financial condition and results of operations.

Our ownership of our TRS, and any other TRSs we form, will be subject to limitations and our transactions with our TRS, and any other TRSs we form, will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an arm’s-length rent. We will monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% (20% for taxable years beginning after December 31, 2017) TRS limitation or to avoid application of the 100% excise tax. The limitations and taxes imposed on TRSs could have a material adverse effect on our business, financial condition and results of operations

Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries, and no more than 25% of the value of our total assets can be represented by nonqualified publicly offered REIT debt instruments. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or contribute to a TRS otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and funds available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain

 

55


Table of Contents

attractive investments, which could have a material adverse effect on our business, financial condition and results of operations.

You may be restricted from acquiring or transferring certain amounts of New Parkway common stock.

The stock ownership restrictions of the Code for REITs and the stock ownership limit in the New Parkway Articles may inhibit market activity in our capital stock and restrict our business combination opportunities.

In order to qualify as a REIT for each of our taxable years after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each of our taxable years after 2016. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.

The New Parkway Articles, with certain exceptions, authorize our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, the New Parkway Articles generally prohibit any person (other than a person who has been granted an exception) from actually or constructively owning more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or more than 9.8% of the aggregate of the outstanding shares of our preferred stock by value or by number of shares, whichever is more restrictive. The New Parkway Articles grant Cousins and certain of its affiliates exemptions from these ownership limits with respect to Cousins’ ownership of the Non-Voting Preferred Stock and Cousins’ ownership of all of our capital stock prior to the Distribution. The New Parkway Articles also permit exceptions to be made for stockholders provided our board of directors determines such exceptions will not jeopardize our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

We may pay taxable dividends on New Parkway common stock in common stock and cash, in which case stockholders may sell shares of New Parkway common stock to pay tax on such dividends, placing downward pressure on the market price of New Parkway common stock.

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in shares as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS issued a revenue procedure creating a temporary safe harbor that authorized publicly traded REITs to make elective cash/share dividends, but that temporary safe harbor has expired. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends would be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S.

 

56


Table of Contents

stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay taxable dividends using both our common stock and cash, although we may choose to do so in the future.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends treated as qualified dividend income, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, income that we generate from derivatives or other transactions that we enter into to manage the risk of interest rate changes with respect to borrowings made, or to be made, to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% and 95% gross income requirements applicable to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transactions as a hedge, the income from such transactions is likely to be treated as non-qualifying income for purposes of both the 75% and 95% gross income tests. As a result of these rules, we may be required to limit the use of hedging techniques that might otherwise be advantageous, or implement those hedges through a TRS. This could increase the cost of our hedging activities because any such TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates or other changes than we would otherwise incur. In addition, losses in any TRS will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income in the TRS, which could have a material adverse effect on our business, financial condition and results of operations.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

The New Parkway Articles provide that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have a material adverse effect on our total return to our stockholders, or on our business, financial condition and results of operations.

We may be subject to adverse legislative, administrative, or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. Any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation, could have a material adverse effect on our business, financial condition and results of operations.

 

57


Table of Contents

The prohibited transactions tax may limit our ability to dispose of our assets, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of property. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some or all of our future dispositions may not qualify for that safe harbor. We intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our assets or may conduct such sales through a TRS, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to an Investment in Our Common Stock

Limitations on the ownership of our common stock and other provisions of the New Parkway Articles may preclude the acquisition or change of control of our Company.

Certain provisions contained in the New Parkway Articles and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control. Provisions of the New Parkway Articles are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our capital stock that might jeopardize our REIT qualification. Among other things, unless exempted by our board of directors, no person may actually or constructively own more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding shares of our preferred stock by value or by number of shares, whichever is more restrictive. The New Parkway Articles grant Cousins and certain of its affiliates exemptions from these ownership limits with respect to Cousins’ ownership of the Non-Voting Preferred Stock and Cousins’ ownership of all of our capital stock prior to the Distribution. Our board of directors may, in its sole discretion, grant other exemptions to the stock ownership limits, subject to such conditions and the receipt by our board of directors of certain representations and undertakings.

In addition to these ownership limits, the New Parkway Articles also prohibit any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, shares of our capital stock that would result in us being “closely held” under Section 856(h) of the Code, (b) transferring our capital stock if such transfer would result in our stock being owned by fewer than 100 persons (determined without reference to any rules of attribution), (c) beneficially or constructively owning shares of our capital stock to the extent such ownership would result in us owning (directly or indirectly) an interest in a tenant if the income derived by us from that tenant for our taxable year during which such determination is being made would reasonably be expected to equal or exceed the lesser of one percent of our gross income or an amount that would cause us to fail to satisfy any of the REIT gross income requirements and (d) beneficially or constructively owning shares of our capital stock that would cause us otherwise to fail to qualify as a REIT. If any transfer of our shares of stock occurs which, if effective, would result in any person beneficially or constructively owning shares of stock in excess, or in violation, of the above transfer or ownership limitations, (such person, a prohibited owner), then that number of shares of stock, the beneficial or constructive ownership of which otherwise would cause such person to violate the transfer or ownership limitations (rounded up to the nearest whole share), will be automatically transferred to a charitable trust for the exclusive benefit of a charitable beneficiary, and the prohibited owner will not acquire any rights in such shares. If the transfer to the charitable

 

58


Table of Contents

trust would not be effective for any reason to prevent the violation of the above transfer or ownership limitations, then the transfer of that number of shares of our capital stock that otherwise would cause any person to violate the above limitations will be void. The prohibited owner will not benefit economically from ownership of any shares of our capital stock held in the charitable trust, will have no rights to dividends or other distributions and will not possess any rights to vote or other rights attributable to the shares of our capital stock held in the charitable trust.

Generally, the ownership limits imposed under the Code are based upon direct or indirect ownership by “individuals,” but only during the last half of a taxable year. The ownership limits contained in the New Parkway Articles are based upon direct or indirect ownership at any time by any “person,” which term includes entities. These ownership limitations in new Parkway Articles are common in REIT governing documents and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, the ownership limits on our common stock also might delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

Furthermore, under the New Parkway Articles, our board of directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as our board of directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests, which could have a material adverse effect on our business, financial condition and results of operations.

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for New Parkway common stock or that our stockholders otherwise believe to be in their best interest.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of New Parkway common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10 percent or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of our then outstanding voting shares at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an “interested shareholder,” and thereafter impose fair price and/or supermajority and stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by the MGCL, we have elected to opt out of the business combination and control share provisions of the MGCL. However, we cannot assure you that our board of directors will not opt to be subject to such business combination and control share provisions of the MGCL in the future.

 

59


Table of Contents

Subtitle 8 of Title 3 of the MGCL, known as the Maryland Unsolicited Takeover Act, permits the board of directors of a Maryland corporation, without stockholder approval and regardless of what is currently provided in the corporation’s charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of the corporation’s common stock with the opportunity to realize a premium over the then current market price. We have elected to opt out of the Maryland Unsolicited Takeover Act and cannot opt back in without obtaining stockholder approval in advance.

Market interest rates may have an effect on the value of our common stock.

One of the factors that will influence the price of our common stock following the Distribution will be its dividend yield, or the dividend per share as a percentage of the price of our common stock, relative to market interest rates. An increase in market interest rates, which are currently at historically low levels, may lead prospective purchasers of our common stock to expect a higher dividend yield, and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. If market interest rates increase and we are unable to increase our dividend in response, including due to an increase in borrowing costs, insufficient funds available for distribution or otherwise, investors may seek alternative investments with a higher dividend yield, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease as market interest rates increase, which may have a material adverse effect on our business, financial condition and results of operations.

The number of shares of our common stock available for future issuance or sale could adversely affect the per share trading price of our common stock and may be dilutive to current stockholders.

The New Parkway Articles authorize our board of directors to, among other things, issue a certain amount of additional shares of our common stock without stockholder approval. We cannot predict whether future issuances or sales of shares of our common stock, or the availability of shares for resale in the open market, will decrease the per share trading price of our common stock. The issuance of a substantial number of shares of our common stock in the open market or the issuance of a substantial number of shares of our common stock upon the exchange of OP units, or the perception that such issuances might occur, could adversely affect the per share trading price of our common stock. In addition, any such issuance could dilute our existing stockholders’ interests in our company. In addition, prior to the completion of the Distribution, we intend to adopt an equity compensation plan, and we may issue shares of our common stock or grant equity incentive awards exercisable for or convertible or exchangeable into shares of our common stock under the plan. Future issuances of shares of our common stock may be dilutive to existing stockholders, which may have a material adverse effect on our business, financial condition and results of operations.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or preferred equity securities which may be senior to our common stock for purposes of dividends or upon liquidation, may materially adversely affect the per share trading price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing New Parkway LP to issue such debt securities), including medium-term notes, senior or subordinated notes and additional classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock or preferred units and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution of such assets to holders of our common stock. Additionally, any convertible or exchangeable securities that we may issue in the future may have rights, preferences and privileges more favorable than those of our common stock, and may result in dilution to owners of our common stock. Other than TPG Pantera’s rights pursuant to the New Parkway Stockholders Agreement, holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our non-

 

60


Table of Contents

voting preferred stock has a preference on liquidating distributions and a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Any shares of preferred stock or preferred units that we issue in the future could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Any such future offerings may reduce the per share trading price of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

Our ability to pay dividends is limited by the requirements of Maryland law.

Our ability to pay dividends on our common stock is limited by Maryland law. Under the MGCL, a Maryland corporation generally may not make a dividend if, after giving effect to the dividend, the corporation would not be able to pay its debts as such debts become due in the ordinary course of business or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the dividend. Accordingly, we generally may not make a dividend on our common stock if, after giving effect to the dividend, we would not be able to pay our debts as they become due in the ordinary course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences upon dissolution senior to those of our common stock. If we are unable to pay dividends, or our ability to pay dividends is limited, investors may seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

We may change our dividend policy.

Future dividends will be declared and paid at the discretion of our board of directors, and the amount and timing of dividends will depend upon cash generated by operating activities, our business, financial condition, results of operations, capital requirements, annual distribution requirements under the REIT provisions of the Code, and such other factors as our board of directors deems relevant. Our board of directors may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods. Any reduction in our dividends may cause investors to seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

If we qualify to be an “emerging growth company,” we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We expect to be classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, we are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (3) comply with any new requirements adopted by the

 

61


Table of Contents

Public Company Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (5) provide certain disclosure regarding executive compensation required of larger public companies or (6) hold stockholder advisory votes on executive compensation. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We do not intend to take advantage of such extended transition period.

 

62


Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials we and Cousins have filed or will file with the SEC contain, or will contain, forward-looking statements. Certain statements that are not in the present or past tense or that discuss our expectations (including any use of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “might,” “outlook,” “project,” “should” or similar expressions) are intended to identify such forward-looking statements, which generally are not historical in nature. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements.

Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such factors include, but are not limited to:

 

    Cousins’ inability or failure to perform under the various transaction agreements effecting the Separation, the UPREIT Reorganization and the Distribution;

 

    our lack of operating history as an independent company;

 

    conditions associated with our primary market, including an oversupply of office space, customer financial difficulties and general economic conditions;

 

    that certain of our properties represent a significant portion of our revenues and costs;

 

    that the Distribution will not qualify for tax-free treatment;

 

    our ability to meet mortgage debt obligations on certain of our properties;

 

    the availability of refinancing current debt obligations;

 

    potential co-investments with third-parties;

 

    changes in any credit rating we may subsequently obtain;

 

    changes in the real estate industry and in performance of the financial markets and interest rates and our ability to effectively hedge against interest rate changes;

 

    the actual or perceived impact of global and economic conditions;

 

    declines in commodity prices, which may negatively impact the Houston, Texas market;

 

    the concentration of our customers in the energy sector;

 

    the demand for and market acceptance of our properties for rental purposes;

 

    our ability to enter into new leases or renewal leases on favorable terms;

 

    the potential for termination of existing leases pursuant to customer termination rights;

 

    the amount, growth and relative inelasticity of our expenses;

 

    risks associated with the ownership and development of real property;

 

    termination of property management contracts;

 

    the bankruptcy or insolvency of companies for which we provide property management services or the sale of these properties;

 

    the outcome of claims and litigation involving or affecting the company;

 

    the ability to satisfy conditions necessary to close pending transactions and the ability to successfully integrate pending transactions;

 

63


Table of Contents
    applicable regulatory changes;

 

    risks associated with acquisitions, including the integration of the combined businesses of Parkway and Cousins;

 

    risks associated with the fact that our historical and pro forma financial information may not be a reliable indicator of our future results;

 

    risks associated with achieving expected synergies or cost savings;

 

    risks associated with the potential volatility of our common stock; and

 

    other risks and uncertainties detailed from time to time in our SEC filings.

Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes.

Other factors that could cause actual results or events to differ materially from those anticipated include the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In particular, information included under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties,” and “The Separation, the UPREIT Reorganization and the Distribution” contain forward-looking statements.

 

64


Table of Contents

THE SEPARATION, THE UPREIT REORGANIZATION AND THE DISTRIBUTION

Background

On April 28, 2016, Cousins, Parkway, Parkway LP and Clinic Sub Inc. entered into the Merger Agreement, pursuant to which Parkway will merge with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins. Pursuant to the Merger Agreement, at the effective time of the Merger, each share of Parkway common stock will be converted into the right to receive 1.63 newly issued shares of Cousins common stock, and each share of Parkway limited voting stock will be converted into the right to receive 1.63 newly issued shares of Cousins limited voting preferred stock, having terms materially unchanged from the terms of the Parkway limited voting stock. Upon consummation of the Merger, we will initially be a wholly owned subsidiary of Cousins. Immediately after the effective time of the Merger, New Parkway’s businesses will be separated from the remainder of Cousins’ businesses through the Separation and the UPREIT Reorganization. On the business day following the closing of the Merger, subject to the satisfaction or waiver of the conditions to the Distribution, all of the outstanding shares of New Parkway common stock and New Parkway limited voting stock will be distributed pro rata to the holders of Cousins common stock and Cousins limited voting preferred stock, respectively, including legacy Parkway common stockholders and limited voting stockholders.

On August 23, 2016, the Parkway stockholders voted affirmatively to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. On August 23, 2016, the Cousins stockholders voted affirmatively to approve the issuance of shares of Cousins common stock in connection with the Merger and an amendment to the Restated and Amended Articles of Incorporation of Cousins to authorize additional shares of Cousins common stock (the “Cousins Articles Amendment”). The Cousins Articles Amendment will be filed with the Georgia Secretary of State and become effective on the closing of the Merger.

On             , 2016, the Cousins board of directors approved the distribution of all of the issued and outstanding shares of New Parkway common stock and limited voting stock at a ratio of one share of New Parkway common stock for every eight shares of Cousins common stock held as of the close of business on the record date of             , 2016, or if the closing of the Merger does not occur on                     , 2016, the close of business on the date the Merger closes, and one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock held as of the close of business on the record date.

Following the Distribution, we and Cousins will be two independent, publicly traded REITs, and each company will operate prospectively as an UPREIT.

Cousins expects that the Merger will close on             , 2016, subject to the satisfaction or waiver of all conditions to closing set forth in the Merger Agreement. On             , 2016, the business day following the closing of the Merger, or if the closing of the Merger occurs on a later date, the business day following such date, each Cousins common stockholder (including legacy Parkway common stockholders) will be entitled to receive one share of New Parkway common stock for every eight shares of Cousins common stock held at the close of business on the record date, and each Cousins limited voting preferred stockholder (consisting of legacy Parkway limited voting stockholders) will be entitled to receive one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock held at the close of business on the record date. Cousins will not distribute any fractional shares of New Parkway. Cousins stockholders, including legacy Parkway common stockholders, will receive cash in lieu of any fractional shares of New Parkway common stock that would have been received after application of the Distribution Ratio described above.

Cousins and Parkway stockholders will not be required to make any payment, surrender or exchange their Cousins common stock or limited voting preferred stock or Parkway common stock or limited voting stock, or take any other action to receive their shares of New Parkway common stock or limited voting stock in the Distribution, except as may be required to exchange any certificated Parkway shares in the Merger. The Distribution of New Parkway common stock and limited voting stock as described in this information statement is subject to the satisfaction or waiver of certain conditions, including consummation of the Merger, the

 

65


Table of Contents

Separation and the UPREIT Reorganization. For a more detailed description of these conditions, please refer to the section entitled “The Separation and Distribution Agreement—Conditions to the Distribution.”

Upon completion of the Merger and the Distribution, we estimate that legacy Cousins common stockholders will own approximately 53% of the common stock of each of Cousins and New Parkway, and legacy Parkway stockholders will own approximately 47% of the common stock of each of Cousins and New Parkway. Legacy holders of Parkway limited voting stock will own 100% of each of Cousins limited voting preferred stock and New Parkway limited voting stock.

Reasons for the Separation, the UPREIT Reorganization and the Distribution

The Cousins and Parkway boards of directors believe that the Separation, the UPREIT Reorganization and the Distribution are in the best interests of Cousins, Parkway and their respective stockholders for a number of reasons, including the following:

 

    Create two separate, focused companies executing distinct business strategies. Historically, Cousins has focused on investing in Class A office assets located in high-growth Sun Belt markets, such as Atlanta, Georgia, Austin, Texas and Charlotte, North Carolina. By separating the Houston Business into a stand-alone REIT, investors will have the opportunity to invest in two separate companies with dedicated management teams focused on distinct business strategies.

 

    Allow Cousins’ management to focus on its expanded portfolio, while enabling our management to unlock the value of our geographically specific portfolio. The Separation will allow Cousins’ management to focus on its expanded portfolio and presence in high-growth Sun Belt markets, such as Atlanta, Austin, Phoenix, Arizona, and Charlotte. Similarly, the Separation will enable our management team to focus on unlocking value within our existing Houston, Texas portfolio through active and creative leasing strategies, the leveraging of pricing power in lease and vendor negotiations and targeted redevelopment and asset repositioning of our current portfolio. We believe that our focus on one geographic location, combined with our strong balance sheet, market knowledge and customer and industry relationships, will allow us to more effectively execute our growth strategies.

 

    Provide an opportunity for our dedicated and experienced management team to implement and execute our growth strategy. We will have a dedicated and experienced executive management team focused on the performance of our assets and value-creation opportunities. Separating the Houston Business from the remainder of Cousins’ business, and providing an experienced management team and other key personnel to operate the Houston Business will allow our management team to devote their full focus and attention to our assets, which will allow these assets to realize their full potential.

 

    Enhance investor transparency and better highlight Cousins’ and our attributes. The Separation will enable potential investors and the financial community to evaluate Cousins and us separately, and to assess the merits, performance and future prospects of each business. Additionally, the Separation will allow individual investors to better control their asset allocation decisions, and provide investors the opportunity to invest in a well-capitalized REIT that is positioned to take advantage of a recovery in the energy sector.

The Cousins board of directors and the Parkway board of directors also considered a number of potentially negative factors in evaluating the Separation and the Distribution, including the following:

 

    Increase in certain costs and liabilities. Certain costs and liabilities of Cousins will have an increased impact on us as a stand-alone company, and we and Cousins will separately bear certain costs, such as the costs associated with being a public company.

 

   

One-time costs of the Separation. Each of Cousins and us will incur costs in connection with our transition to being a separate, stand-alone public company, that may include accounting, tax, legal and

 

66


Table of Contents
 

other professional services costs and costs to separate information systems. As of April 28, 2016, the Parkway board of directors and the Cousins board of directors estimated that approximately $85 million in costs would be incurred in connection with the transaction, including the Merger, the Separation, the UPREIT Reorganization and the Distribution.

 

    Inability to realize anticipated benefits of the Separation. We may not achieve the anticipated benefits of the Separation for a variety of reasons, including: (i) following the Separation, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Cousins or Parkway; and (ii) following the Separation, New Parkway’s businesses will be less diversified than Cousins’ and Parkway’s businesses prior to the Separation.

 

    Taxability of the Distribution. The Distribution is expected to be treated as a taxable distribution to Cousins common stockholders for U.S. federal income tax purposes.

The Cousins board of directors and the Parkway board of directors concluded that the potential benefits of the Separation outweighed these factors. For more information, see “Risk Factors” beginning on page 33.

Ownership Structure

The simplified structure of each of Cousins and Parkway prior to the Merger is set forth below.

 

 

LOGO

 

67


Table of Contents

The simplified structure of each of Cousins and New Parkway following the Merger, the UPREIT Reorganization and the Distribution is set forth below.

 

LOGO

Structure and Formation of New Parkway Prior to New Parkway’s Distribution

We were formed as a Maryland corporation on June 3, 2016, and, prior to the effective time of the Merger, will be a wholly owned subsidiary of Parkway. Immediately following the effective time of the Merger, we, Cousins and Parkway will consummate the Separation and the UPREIT Reorganization to separate the Houston Business and Third-Party Services Business of Cousins and Parkway, such that ownership of New Parkway’s businesses will be consolidated within us and our subsidiaries. Following the Distribution, we, through our operating partnership, New Parkway LP, will own and operate the Houston Business, the Third-Party Services Business and certain other assets previously owned by Parkway.

Following the Separation and the UPREIT Reorganization, New Parkway LP will function as our operating partnership. The assets and liabilities associated with New Parkway’s businesses will be held by our operating partnership, of which Parkway GP will be the general partner and hold a 1% direct general partner interest, Parkway LP will hold an approximate 47.5% limited partner interest and we will hold a direct 51.5% limited partner interest. In the Separation and the UPREIT Reorganization, the ownership of the Houston-based real properties of each of Cousins and Parkway will be transferred to New Parkway LP, and ownership of the Third-Party Services Business and the indirect minority ownership interest in 2121 Market Street Associates LLC will be transferred to New Parkway (or its subsidiaries). Additionally, in the Separation and the UPREIT Reorganization, the ownership of the other combined assets of Cousins and Parkway, other than the Houston-based real properties and other assets comprising New Parkway’s businesses, will be transferred to a limited partnership subsidiary of Cousins and retained by Cousins following the Distribution.

 

68


Table of Contents

Prior to the Separation and the UPREIT Reorganization, each party will use commercially reasonable efforts to obtain any third-party consents required to effect the separation of assets and liabilities contemplated by the Separation and Distribution Agreement. To the extent that a party is unable to obtain a release from a guarantee or other obligation that is contemplated to be assigned to the other party, the party benefitting from the guarantee or obligation will indemnify and hold harmless the other party from any liability arising from such guarantee or obligation, and will not renew or extend the term of, increase obligations under, decrease any rights under, or transfer, the applicable obligation or liability.

The following transactions, among others, are expected to occur immediately following the effective time of the Merger, in advance of the Distribution:

 

    Cousins and Parkway will have taken all actions necessary to complete the Separation and the UPREIT Reorganization, including but not limited to the following steps:

 

    Parkway and Parkway LP will have organized two new Delaware limited partnerships, Cousins LP and New Parkway LP, each of which initially is wholly owned by Parkway as the initial general partner and Parkway LP as the initial limited partner and have partnership agreements with provisions that are customary for UPREIT partnerships.

 

    Parkway will have formed New Parkway as a wholly owned Maryland corporation.

 

    On the business day immediately before the effective time of the Merger, Parkway LP will contribute its non-Houston properties and certain other assets specified in the Separation and Distribution Agreement (as hereinafter defined) to Cousins LP in exchange for interests in Cousins LP, and retain its interest in the assets related to the Houston Business. In addition, Cousins LP will enter into agreements of accession to the guaranties with respect to and will assume the liabilities under Parkway LP’s existing credit facilities.

 

    Immediately following the effective time of the Merger, Parkway LP will then distribute all of the interests of Cousins LP that it received from these contributions ratably to its partners. Parkway GP will distribute the Cousins LP interests that it receives to Merger Sub, which will be the sole stockholder of Parkway GP following the effective time of the Merger. Clinic Sub Inc. will distribute to Cousins, which is its sole stockholder, all of its general partner interest in Cousins LP.

 

    Parkway LP will then contribute its assets related to the Houston Business, including entities that own direct or indirect ownership interests in CityWestPlace, Phoenix Tower and San Felipe Plaza, direct and indirect ownership in Eola Office Partners LLC and the direct and indirect minority ownership interest of Parkway LP in 2121 Market Street Associates, L.P., to New Parkway LP, and Cousins will contribute its assets related to the Houston Business, including its direct and indirect ownership interests in Greenway Plaza and Post Oak Central, to New Parkway LP (other than a fractional interest in certain entities, which Cousins will contribute to New Parkway) in exchange for limited partner interests in New Parkway LP. Cousins will then contribute its limited partner interests in New Parkway LP to New Parkway, and Clinic Sub Inc. will contribute to New Parkway its limited partner interests in Parkway LP and its stock of Parkway GP.

 

   

New Parkway LP will enter into the New Parkway Credit Facilities for aggregate availability of $350 million, and subject to satisfaction of the conditions thereto, New Parkway LP will draw $350 million. Through a series of transactions, New Parkway LP will distribute pro rata portions of $200 million of the $350 million draw to each of Parkway LP, Parkway GP (which subsequently will distribute such proceeds to New Parkway, its sole stockholder), and New Parkway (which New Parkway will subsequently distribute, along with the cash received from Parkway GP and Parkway LP, to Clinic Sub Inc., its sole stockholder, which will distribute the cash to Cousins, its sole stockholder). Parkway LP will distribute its pro rata share of the $200 million in loan proceeds ratably to its partners, if each of its other partners agrees to cause its share of the distributed cash to be contributed to Cousins LP in exchange for units of Cousins LP; if a limited

 

69


Table of Contents
 

partner of Parkway LP does not agree to contribute its share of the distributed cash to Cousins LP, Parkway LP will use a portion of its pro rata share of the $200 million to redeem Parkway LP units held by New Parkway and each other partner that agrees to cause its share of distributed cash to be contributed to Cousins LP in exchange for units of Cousins LP, at a redemption price based upon the Parkway Partnership Agreement.

 

    Limited partners of Parkway LP who received cash in the above step will contribute such cash to Cousins LP, in exchange for units of Cousins LP.

 

    In addition to the $150 million retained from the $350 million draw described above, New Parkway will have retained $42.4 million in cash from its contributions of assets described above.

 

    Through a series of transactions, which will occur following the distribution to Parkway LP of its pro rata portion of the $200 million distribution described in the prior paragraph but prior to the distribution of the remaining portion of such $200 million, Cousins LP will contribute $5 million to New Parkway in exchange for Non-Voting Preferred Stock (with aggregate liquidation preference of $5 million and bearing a market-rate dividend), New Parkway will contribute $5 million to Parkway LP in exchange for preferred limited partner units of Parkway LP (with aggregate liquidation preference of $5 million and bearing a market dividend rate), and Parkway LP will contribute $5 million to New Parkway LP in exchange for preferred limited partner units of New Parkway LP (with aggregate liquidation preference of $5 million and bearing a market-rate dividend). Clinic Sub Inc. will contribute its general partner interest in New Parkway LP to Parkway GP. The issuance of the $5 million of Non-Voting Preferred Stock was negotiated between the parties to satisfy the parties’ overall business and economic objectives, including the intended tax treatment of the Distribution. The issuances of preferred units are meant to preserve the economics of the UPREIT structure. Subsidiaries of Cousins will contribute the fractional interests that Cousins retained in certain entities, as described above, to New Parkway.

 

    New Parkway will elect to be taxed as a REIT for federal income tax purposes beginning with its taxable year commencing on the day prior to the Distribution and ending on December 31, 2016.

 

    Cousins will contribute to Cousins LP its non-Houston assets (including the portion of the $200 million of loan proceeds that it received through Clinic Sub Inc. in the pro rata distribution, as described above), in exchange for units of Cousins LP. Other limited partners of Parkway LP will continue as limited partners of Cousins LP.

 

    Cousins LP will then repay, or cause to be repaid, Parkway’s existing credit facilities in an amount of approximately $550 million.

 

    Clinic Sub Inc. will distribute to Cousins, its sole stockholder, 100% of the common stock of New Parkway, 100% of the New Parkway limited voting stock, the general partner interest in Cousins LP and all of the units of Cousins LP that Clinic Sub Inc. received in the foregoing distributions from Parkway LP and Parkway GP.

 

    as a result of the Merger, the Separation and the UPREIT Reorganization, we will own five assets in Houston, Texas, subject to approximately $454.1 million of existing secured property-level indebtedness, based on principal balances as of June 30, 2016;

 

    immediately following the effective time of the Merger, Parkway LP is expected to hold a 47.5% common partnership interest in New Parkway LP;

 

    immediately following the effective time of the Merger, we are expected to hold, directly and through our ownership of the general partner, a 95.9% common partnership interest in Parkway LP;

 

    immediately following the effective time of the Merger, we are expected to hold, directly and through our ownership of Parkway GP and our interest in Parkway LP, a 98% common partnership interest in New Parkway LP;

 

70


Table of Contents
    as a result of the Merger, the Separation and the UPREIT Reorganization, the limited partners of Parkway LP, who held in the aggregate 4.1% of the limited partnership units of Parkway LP immediately prior to the effective time of the Merger, will retain their limited partnership units in Parkway LP and will receive pro rata partnership units of Cousins Properties LP to the extent that such limited partners did not elect to redeem their limited partnership units of Parkway LP for shares of Parkway common stock prior to the effective time of the Merger; and

 

    in addition to the Separation and Distribution Agreement, as of or prior to the effective time of the Merger, we and Cousins will enter into the Tax Matters Agreement and the Employee Matters Agreement.

The New Parkway Articles provide for four classes of stock: common stock, limited voting stock, preferred stock and the Non-Voting Preferred Stock to be issued to Cousins. On the business day following the closing of the Merger, subject to satisfaction of the conditions to the Distribution, Cousins will effect the distribution of New Parkway common stock and limited voting stock to Cousins stockholders (including legacy Parkway stockholders) as of the close of business on the record date as described above under “—Background.”

The Separation and Distribution Agreement

The following discussion summarizes the material provisions of the Separation and Distribution Agreement. The Separation and Distribution Agreement sets forth, among other things, our agreements with Cousins regarding the principal transactions necessary to separate us from Cousins. It also sets forth other agreements that govern certain aspects of our relationship with Cousins after the Distribution date.

Transfer of Assets and Assumption of Liabilities

The Separation and Distribution Agreement provides for the Separation and UPREIT Reorganization, and identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned to each of us and Cousins as part of the Separation, and it provides for when and how these transfers, assumptions and assignments will occur. In particular, the Separation and Distribution Agreement provides, among other things, that subject to the terms and conditions contained therein:

 

    certain assets related to our businesses (the “New Parkway Assets”) will be retained by New Parkway or one of New Parkway’s subsidiaries or transferred to New Parkway or one of New Parkway’s subsidiaries, including:

 

    $150 million of unrestricted cash proceeds from the New Parkway Credit Facilities;

 

    all issued capital stock or other equity interests in subsidiaries, joint ventures, partnerships or similar entities that primarily relate to the Houston Business, as well as the Third-Party Services Business and Parkway’s minority interest in 2121 Market Street Associates, L.P.;

 

    all right, title and interest (whether as owner, mortgagee or holder of a security interest) in real properties located in Houston, Texas. Following the UPREIT Reorganization and the Distribution, New Parkway will own interests in the following operational properties;

 

    CityWestPlace

 

    Greenway Plaza

 

    Phoenix Tower

 

    Post Oak Central

 

    San Felipe Plaza

 

    all other assets primarily related to the Houston Business, including all furniture, buildings, fixtures, equipment, easements and other appurtenances located at the Houston real properties;

 

71


Table of Contents
    all third-party vendor contracts for information technology, human resources, financial, legal and public affairs services primarily used by the Houston Business;

 

    the third party management contracts to which Eola Office Partners, LLC is a party and the third party management contract to which PKY Masters Properties Group, L.P. is a party;

 

    all of the intellectual property relating to New Parkway’s businesses;

 

    all contracts entered into in the name of, or expressly on behalf of, any of New Parkway’s businesses;

 

    all permits used primarily in the Houston Business;

 

    all books and records, wherever located, primarily related to the Houston Business;

 

    all accounts receivable, rights, claims, demands, causes of action, judgments, decrees, property tax appeals and rights to indemnify or contribution in favor of Cousins that are primarily related to the Houston Business; and

 

    other assets mutually agreed by the parties prior to the Distribution;

 

    certain liabilities related to New Parkway’s businesses or the New Parkway Assets (collectively, the “New Parkway Liabilities”) will be retained by or transferred to New Parkway or one of New Parkway’s subsidiaries, including:

 

    the New Parkway Credit Facilities;

 

    all liabilities relating to New Parkway’s businesses;

 

    all liabilities (including environmental liabilities) relating to underlying circumstances or facts existing, or events occurring, prior to the Distribution, to the extent relating to the Houston Business, us or the New Parkway Assets;

 

    all guarantees and indemnitees in respect of any of the New Parkway Assets or New Parkway Liabilities;

 

    all third-party claims to the extent relating to the Houston Business and the New Parkway Assets;

 

    30% of any liabilities arising from any third-party claims related to the Merger Agreement or the transactions contemplated thereby;

 

    30% of any liabilities related to breaches of fiduciary duties and violations of securities law relating to events before the Distribution;

 

    all insurance charges related to the Houston Business and New Parkway Assets;

 

    liabilities under certain tax protection agreements and related documents listed on the confidential Parkway disclosure letter;

 

    liabilities and obligations arising under the Registration Rights Agreement dated as of October 13, 2004, among Thomas Properties Group, Inc. (“TPGI”), Thomas Properties Group, L.P. (“TPG LP”) and certain other investors named therein; and

 

    other liabilities mutually agreed upon by the parties prior to the Distribution; and

 

   

all of the assets and liabilities (including whether accrued, contingent, or otherwise) other than the New Parkway Assets and New Parkway Liabilities, including such assets other than the New Parkway Assets (the “Cousins Assets”) and such liabilities other than the New Parkway Liabilities (the “Cousins Liabilities”), will be retained by or transferred to Cousins or one of its subsidiaries. Following the UPREIT Reorganization and the Distribution, assuming certain asset sales are consummated in

 

72


Table of Contents
 

accordance with the Merger Agreement, Cousins will own interests in the following operational properties:

 

    Colorado Tower

 

    816 Congress Avenue

 

    Research Park V

 

    Northpark Town Center

 

    191 Peachtree Tower

 

    Promenade

 

    The American Cancer Society Center

 

    Terminus 100

 

    Terminus 200

 

    Meridian Mark Plaza

 

    Emory Point University Hospital Midtown Medical Office Tower

 

    Fifth Third Center

 

    Gateway Village

 

    Emory Point Apartments (Phase I)

 

    Emory Point Retail (Phase I)

 

    Emory Point Retail (Phase II)

 

    Emory Point Apartments (Phase II)

 

    Hayden Ferry Lakeside I

 

    Hayden Ferry Lakeside II

 

    Hayden Ferry Lakeside III

 

    Tempe Gateway

 

    Corporate Center I

 

    Corporate Center II

 

    Corporate Center III

 

    Corporate Center IV

 

    Harborview Plaza

 

    The Pointe

 

    Courvoisier Center

 

    Citrus Center

 

    Bank of America Center

 

    One Orlando Centre

 

    3350 Peachtree

 

    3348 Peachtree

 

73


Table of Contents
    3344 Peachtree

 

    The Forum at West Place

 

    One Buckhead Plaza

 

    Two Buckhead Plaza

 

    Hearst Tower

 

    NASCAR Plaza

 

    One Congress Plaza

 

    San Jacinto Center

 

    US Airways Building

Information in this information statement with respect to the assets and liabilities of the parties following the Distribution is presented based on the allocation of such assets and liabilities pursuant to the Separation and Distribution Agreement, unless the context otherwise indicates.

Cash Assets

The Separation and Distribution Agreement provides that, prior to the Distribution and in connection with the Separation and UPREIT Reorganization, New Parkway will retain $42.4 million in cash. Within five business days following the Distribution, Cousins will pay New Parkway a cash amount equal to a ratable portion of the October 2016 rent actually collected with respect to the New Parkway Assets, less cash on hand at New Parkway or any of its subsidiaries in excess of $42.4 million, which the parties will true up (including any collections of October rent received after the Distribution) following the end of the month in which the Distribution occurs. This payment and the retained amount will be deemed paid in full satisfaction of all rights pertaining to any cash or cash equivalents related to or reserved for the Houston Business, and no other New Parkway Assets, cash or cash equivalents shall be payable or deliverable to us pertaining to cash or cash equivalents.

Commercially Reasonable Efforts

The Separation and Distribution Agreement provides that the parties will use commercially reasonable efforts to take or cause to be taken all actions, and do or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary to consummate and make effective the Separation, the UPREIT Reorganization and the Distribution, including causing the conditions precedent to the Distribution to be satisfied, obtaining and making all necessary approvals and filings, obtaining third party consents, and executing any other necessary instruments.

The Distribution

The Separation and Distribution Agreement governs the rights and obligations of the parties regarding the Distribution following the completion of the Separation and the UPREIT Reorganization. On the Distribution date, Cousins will distribute to its common stockholders (including legacy Parkway common stockholders) that held shares of Cousins common as of the record date all of the issued and outstanding shares of New Parkway common stock based on the Distribution Ratio. Cousins will also distribute, to the holders of its limited voting preferred stock (consisting of legacy Parkway limited voting stockholders) that held shares of Cousins limited voting preferred stock as of the record date, all of the shares of New Parkway limited voting stock based on the Distribution Ratio.

Conditions to the Distribution

The Separation and Distribution Agreement provides that the Distribution is subject to the satisfaction (or waiver by Cousins) of certain conditions, including:

 

    the consummation of the Merger, the Separation and the UPREIT Reorganization;

 

74


Table of Contents
    the execution of a credit agreement by us and the Lenders (as defined below) for, and the satisfaction of conditions to borrowing under, the New Parkway Credit Facilities, and the distribution of $200 million of funds borrowed under the New Parkway Term Loan to the partners of New Parkway LP, which in turn will, directly or indirectly, contribute such funds to Cousins LP;

 

    the receipt of an opinion from an independent appraisal firm to the Cousins board of directors confirming the solvency and surplus of Cousins and New Parkway after the Distribution that is in form and substance acceptable to Cousins in its sole discretion;

 

    the SEC declaring effective the registration statement of which this information statement forms a part, with no stop order in effect with respect thereto, and no proceeding for such purpose pending before, or threatened by, the SEC;

 

    the mailing of this information statement;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation, the UPREIT Reorganization, the Distribution or any of the related transactions shall be in effect;

 

    the New Parkway common stock to be distributed shall have been approved for listing on the NYSE, subject to official notice of distribution; and

 

    the execution of ancillary agreements by us and Cousins, including the Tax Matters Agreement and the Employee Matters Agreement.

Release of Claims

Neither party will be liable to the other for indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages, other than with respect to a third-party claim. Each of us and Cousins will also release the other party and its directors, officers, employees, agents and equity holders from all liabilities related to the releasing party’s business or assets owned by such party after the Distribution, liabilities arising from or in connection with the Separation and UPREIT Reorganization, all liabilities arising from, or in connection with, the provision of any of the Transition Services (as hereinafter defined), including the provision of information and liabilities arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the effective time of the Distribution, other than certain specified liabilities, including without limitation liabilities arising out of the agreements among the parties with respect to the Merger, the Separation, the UPREIT Reorganization and the Distribution, liabilities allocated pursuant to such agreements and liabilities in connection with material misstatements or omissions from disclosure documents, among others. Neither party will make any claim against the other or such directors, officers, employees, agents or equity holders with respect to any such liability. The foregoing in no way limits the rights of the parties under the Merger Agreement.

Indemnification

In the Separation and Distribution Agreement, we agree to indemnify, defend and hold harmless Cousins, each of its affiliates and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

 

    the New Parkway Liabilities and our failure to pay any New Parkway Liabilities in accordance with their terms;

 

    third-party claims relating to the Houston Business or New Parkway Assets;

 

    our breach of the Separation and Distribution Agreement or any ancillary agreement;

 

    guarantees, credit support arrangements or similar undertakings for the benefit of us by Cousins;

 

    any liabilities arising from, or in connection with, the provision of any of the Transition Services, including the provision of information;

 

    any untrue statement of material fact or omission in the registration statement to which this information statement is a part (other than statements explicitly made by Cousins, which will be limited to those specified on a schedule to the Separation and Distribution Agreement); and

 

75


Table of Contents
    any untrue statement of material fact or omission with respect to certain specified statements made in New Parkway’s name in the joint proxy statement/prospectus filed with respect to the Merger or any other disclosure document filed by Cousins.

Cousins agrees to indemnify, defend and hold harmless, us and each of our affiliates and each of our and our affiliates’ respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from:

 

    all Cousins Liabilities and the failure of Cousins to pay any Cousins Liabilities in accordance with their terms;

 

    third-party claims relating to the Cousins Assets;

 

    the breach by Cousins of the Separation and Distribution Agreement or any ancillary agreement;

 

    guarantees, credit support arrangements or similar undertakings for the benefit of Cousins by us;

 

    any liabilities arising from, or in connection with, the provision of any of the Transition Services, including the provision of information;

 

    any untrue statement of material fact or omission in the registration statement to which this information statement is a part, to the extent such statement is explicitly made by Cousins (which will be limited to those specified on a schedule to the Separation and Distribution Agreement); and

 

    any untrue statement of material fact or omission in the joint proxy statement/prospectus filed with respect to the Merger or any other disclosure document filed by Cousins, other than the specified statements of New Parkway referred to above.

Neither we nor Cousins will be liable to the other for indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages, other than liability with respect to a third-party claim.

Insurance

The Separation and Distribution Agreement provides that, at or prior to the effective time of the Distribution, Parkway will terminate coverage under its existing property insurance policies with respect to the Cousins Assets that it previously owned and will terminate its existing liability insurance policies with respect to the Cousins Liabilities to which it previously was subject. The Separation and Distribution Agreement further provides that Cousins will cause these assets and liabilities to be covered by existing or new property insurance policies of Cousins and that New Parkway will cause the New Parkway Assets and New Parkway Liabilities to be covered by existing or new property insurance policies of New Parkway. The Separation and Distribution Agreement also contains procedures for asserting claims for losses arising prior to the Separation and the Distribution under the policies that covered the property in question at the applicable time.

Dispute Resolution

The Separation and Distribution Agreement contains provisions that govern, except as otherwise provided in any ancillary agreement, the resolution of disputes, controversies or claims that may arise between us and Cousins related to the Separation, UPREIT Reorganization or Distribution by arbitration, if they are unable to be resolved first through good-faith negotiation by the parties.

Non-Solicit

Pursuant to the Merger Agreement, prior to the closing of the Merger, neither Cousins, Parkway nor any of their respective subsidiaries may, directly or indirectly, solicit for employment, employ or cause to leave the employ of the other party any individual designated in such party’s confidential disclosure letter to the Merger Agreement, including with respect to certain employees of Parkway expected to become our employees.

Pursuant to the Separation and Distribution Agreement, for a period of two years after the closing of the Merger, neither we nor Cousins, nor any of our or Cousins’ subsidiaries may, directly or indirectly, solicit for employment, employ or cause to leave the employ of the other party such designated individuals.

 

76


Table of Contents

Both agreements provide exceptions for a party to make general solicitations for employment not specifically directed at the other party, its subsidiaries, affiliates or any of its employees, and hiring any person who responds to such solicitations or to solicit for employment, hire or employ any person referred to it by a third-party recruiter who has not been engaged for the purpose of specifically recruiting, nor been given instructions to recruit specifically, such designated individuals.

Segregation of Accounts

We and Cousins will use commercially reasonable efforts to separate and de-link any common bank or brokerage accounts between us, and any outstanding checks issued or payments initiated prior to the effective time of the Merger will be honored after the effective time of the Merger by the party then owning the account on which the check is drawn or the payment was initiated. The parties will cooperate to pay over any amounts received rightfully owed to the other party, subject to regulatory compliance.

Novation

We and Cousins will use commercially reasonable efforts to obtain any consent or amendment required to novate or assign all liabilities to the appropriate party, based on the separation of liabilities described above. Additionally, each party will use commercially reasonable efforts to have the other party removed as the guarantor or obligor (and to remove any security interest over such other party’s assets serving as collateral) with respect to any obligations or liabilities of such party. To the extent the release or removal cannot be obtained, the party benefiting from the guarantee or obligation will indemnify and hold harmless the other from any liability arising from such guarantee or obligation, and will not renew or extend the term of, increase any obligations under, or transfer, the applicable obligation or liability.

Transition Services

The Separation and Distribution Agreement provides for the following transition services (collectively, the “Transition Services”):

 

    Until such time as we file our report on Form 10-K for the year ended December 31, 2016, Cousins shall reasonably cooperate, and shall use commercially reasonable efforts to cause Cousins’ independent accounting firm to reasonably cooperate, in the preparation of our filings with the SEC.

 

    We shall provide Cousins with reasonable access to Parkway’s email accounts, so that Cousins may fully migrate the historical emails of Parkway employees.

 

    Until the one-year anniversary of the effective time of the Distribution, Cousins shall provide us with reasonable access to information related to the Houston assets contributed by Cousins to us contained on the “Yardi Systems” accounts of Cousins or any of its subsidiaries.

 

    From and after the effective time of the Distribution, until such time as each of we and Cousins have filed each of our Annual Reports on Form 10-K for the year ended December 31, 2016, each of we and Cousins will reasonably cooperate and assist one another in providing all information necessary to accurately record the Merger, the Separation and the Distribution in each of our financial statements in accordance with GAAP.

Mortgage Debt

We and Cousins will acquire properties previously owned by the other party, subject to existing mortgage debt. Each party will use commercially reasonable efforts to have the other party released from all debt documents, including guarantees, relating to properties no longer owned by such other party.

 

77


Table of Contents

Financing

At the effective time of the Merger, we will cause New Parkway LP to borrow $350 million under the New Parkway Credit Facilities, and, in the Separation and the UPREIT Reorganization, a pro rata portion of $200 million will be distributed through us to Clinic Sub Inc., which Clinic Sub Inc. shall distribute to Cousins. Cousins will then contribute such pro rata portion of $200 million to Cousins LP, and the limited partners of Parkway LP who received a portion of the $200 million will contribute the remainder of such $200 million to Cousins LP, which will use the funds to repay a portion of approximately $550 million outstanding under Parkway’s existing credit facilities. We, through New Parkway LP, will retain $150 million of unrestricted cash.

Intellectual Property

Cousins shall retain all rights to intellectual property of Cousins immediately prior to the Distribution, including the “Cousins” name and all related intellectual property, including Internet domain names and the “CUZ” ticker symbol. We shall retain all rights to the “Parkway” name and all related intellectual property, including Internet domain names and the “PKY” ticker symbol.

Information Sharing

We and Cousins will use commercially reasonable efforts after the Distribution to share with the other party all information relating to matters prior to the Distribution, and such other party’s assets held by the disclosing party. The parties will agree on records retention policies and will keep copies of all historic records and agreements to support future diligence and audits. The Separation and Distribution Agreement will include a customary confidentiality agreement.

Other Matters

Other matters governed by the Separation and Distribution Agreement include access to financial and other information, confidentiality, access to and provision of records, cooperation between the parties as to valuation, accounting, financial reporting and information technology matters following the Distribution and treatment of outstanding guarantees and similar credit support.

Amendments

No provision of the Separation and Distribution Agreement may be amended or modified except by a written instrument signed by us and Cousins.

Related Agreements

Tax Matters Agreement

As of or prior to the effective time of the Merger, we and Cousins will enter into a Tax Matters Agreement that will address the following:

 

    preparation and filing of tax returns;

 

    apportionment of taxes among us and Cousins;

 

    refunds, tax attributes and deductions;

 

    conduct of tax proceedings; and

 

    the intended federal income tax characterization of the Separation, the UPREIT Reorganization and the Distribution and the agreed upon reporting thereof.

Employee Matters Agreement

We, Cousins and Parkway will enter into the Employee Matters Agreement in connection with the Distribution to allocate liabilities and responsibilities relating to certain employment matters, employee compensation and benefits plans and programs, and other related matters.

 

78


Table of Contents

Generally, we will assume all liabilities under employee benefit plans that we establish and that we assume from Parkway, all liabilities relating to our employees who transfer from Parkway regardless of when incurred (except to extent covered by insurance maintained by Cousins), and all liabilities relating to our employees who transfer from Cousins if incurred following the Distribution. Cousins will assume or retain all liabilities under Cousins’ and Parkway’s employee benefit plans, all liabilities relating to our employees who transfer from Cousins if incurred prior to the Distribution, and all liabilities with respect to current and former employees of Cousins and Parkway who do not transfer to us. While the Employee Matters Agreement will generally provide that our employees will no longer participate in the employee benefit plans sponsored or maintained by Cousins or Parkway as of the Distribution, the Employee Matters Agreement will permit continued coverage in certain health and welfare plans through the end of the month in which the Distribution occurs and will provide for our reimbursement of Cousins for certain costs incurred with such continued coverage.

Pursuant to the Employee Matters Agreement, we will assume certain employee benefit plans and agreements of Cousins or Parkway, including the employment agreements of Messrs. Heistand, Lipsey, Francis and Bates, Parkway’s defined contribution profit-sharing plan with a salary deferral feature under Section 401(k) of the Code, and certain health and welfare plans. For one year following the Distribution, each of our employees

who transfer from Cousins or Parkway will receive at least the same base compensation, annual bonus and long-term incentive award opportunities no less favorable than provided to our similarly-situated employees, severance benefits under our new separation pay plan, and other compensation and employee benefits substantially comparable in the aggregate to those provided to our similarly-situated employees.

The Employee Matters Agreement will also describe the treatment of outstanding equity awards (as further described in the section entitled “Executive and Director Compensation—Effects of the Separation, the UPREIT Reorganization and the Distribution on Outstanding Cousins Equity-Based Compensation Awards”) and certain other outstanding cash incentive and commission awards.

In addition, the Employee Matters Agreement will set forth the general principles relating to employee matters, including the sharing of employee information, tax reporting and withholding obligations and cooperation, the provision of employee service credit and credit for certain deductibles, and the non-duplication or acceleration of benefits.

When and How You Will Receive the Distribution

With the assistance of AST, Cousins expects to distribute New Parkway common stock and limited voting stock on             , 2016, or if the closing of the Merger occurs on a later date, the business day following such date, to all holders of shares of outstanding Cousins common stock and Cousins limited voting preferred stock as of the close of business on             , 2016, the record date, or if the closing of the Merger does not occur on             , 2016, the close of business on the date the Merger closes. AST currently serves as the transfer agent and registrar for Cousins common stock and will serve as the settlement and distribution agent in connection with the Distribution. Thereafter, AST will serve as the transfer agent and registrar for New Parkway common stock. If you own shares of Cousins common stock or Cousins limited voting preferred stock as of the close of business on the record date, the shares of New Parkway common stock or limited voting stock, as applicable, that you are entitled to receive in the Distribution will be issued electronically, as of the Distribution date, to you in book-entry form or to your bank or brokerage firm on your behalf. If you are a registered holder, AST will then mail you a direct registration account statement that reflects your shares of New Parkway common stock or limited voting stock, as applicable. If you hold your shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares. Book-entry form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in this Distribution. If you sell shares of Cousins common stock in the “regular-way” market up to and including the Distribution date, you will be selling your right to receive shares of New Parkway common stock on such shares of Cousins common stock in the Distribution. If you sell shares of Parkway common stock or limited voting stock up to and including the Distribution date, you will be selling your right to receive shares of New Parkway common stock and limited voting stock in the Distribution.

 

79


Table of Contents

Commencing on or shortly after the Distribution date, if you hold physical share certificates that represent your Cousins common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of New Parkway common stock that have been registered in book-entry form in your name.

Most Cousins stockholders and Parkway stockholders hold their shares of Cousins common stock or Parkway common or limited voting stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold shares of Cousins common stock or Parkway common or limited voting stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of New Parkway common stock or limited voting stock, as applicable, that you are entitled to receive in the Distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

Transferability of Shares You Receive

Shares of New Parkway common stock distributed in connection with the Distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with us, which may include certain of our executive officers, directors or principal stockholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of our common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

The Number of Shares of New Parkway Common Stock You Will Receive

For every eight shares of Cousins common stock that you own as of the close of business on the record date for the Distribution, you will receive one share of New Parkway common stock.

Cousins will not distribute any fractional shares of New Parkway common stock to its stockholders. Instead, if you are a registered holder, AST will aggregate fractional shares into whole shares, sell the whole shares in the open market on the Distribution date and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales based on the closing price on the Distribution date, pro rata to each holder based on the fractional share such holder would otherwise be entitled to receive in the Distribution. AST, in its sole discretion, without any influence by Cousins or New Parkway, will determine when, how, through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by AST will not be an affiliate of either Cousins or New Parkway. Neither New Parkway nor Cousins will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on any payments made in lieu of fractional shares.

The aggregate net cash proceeds of these sales will be taxable for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences—Cash in Lieu of Fractional Shares of New Parkway Common Stock” for an explanation of the material U.S. federal income tax consequences of the distribution.

The Number of Shares of New Parkway Limited Voting Stock You Will Receive

For every eight shares of Cousins limited voting preferred stock that you own as of the close of business on the record date for the Distribution, you will receive one share of New Parkway limited voting stock. Cousins will not distribute any fractional shares of New Parkway limited voting stock to its stockholders.

 

80


Table of Contents

Results of the Distribution

After the Distribution, we will be an independent, publicly traded REIT. The actual number of shares to be distributed will be determined at the close of business on             , 2016, the record date for the Distribution, and will reflect any exercise of Cousins or Parkway stock options and acceleration of vesting of Cousins or Parkway RSUs between the date the Cousins board of directors declares the Distribution and the record date for the Distribution. The Distribution will not affect the number of outstanding shares of Cousins common stock or any rights of Cousins stockholders.

As of or prior to the effective time of the Merger, we will enter into the Separation and Distribution Agreement with Cousins and will enter into other agreements with Cousins as of or prior to the effective time of the Merger to effect the Separation, the UPREIT Reorganization and the Distribution. These agreements will provide a framework for our relationship with Cousins after the Separation, the UPREIT Reorganization and the Distribution. Additionally, these agreements will allocate between us and Cousins the assets, liabilities and obligations of Cousins and Parkway (including intellectual property, and tax-related assets and liabilities) that are attributable to periods prior to the Distribution. For a more detailed description of these agreements, see “Certain Relationships and Related Person Transactions.”

Market for New Parkway Common Stock

There is currently no public trading market for New Parkway common stock. Our common stock has been authorized for listing on the NYSE under the symbol “PKY,” subject to official notice of distribution. We have not and will not set the initial price of our common stock. The initial price will be established by the public markets. There is no current trading market for New Parkway limited voting stock and we do not expect that New Parkway limited voting stock will be listed on any exchange.

We cannot predict the price at which our common stock will trade after the Distribution. In fact, the combined trading prices, after the Distribution, of the shares of New Parkway common stock that each Cousins stockholder will receive in the Distribution and the Cousins common stock held at the record date may not equal the “regular-way” trading price of a share of Cousins stock immediately prior to the Distribution. The price at which New Parkway common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for New Parkway common stock will be determined in the public markets and may be influenced by many factors.

Trading Before the Distribution Date

Beginning as early as two trading days before the record date and continuing up to and including the Distribution date, Cousins expects that there will be two markets for shares of Cousins common stock: a “regular-way” market and an “ex-distribution” market. Shares of Cousins common stock that trade on the “regular-way” market will trade with an entitlement to shares of New Parkway common stock distributed in the Distribution. Shares of Cousins common stock that trade on the “ex-distribution” market will trade without an entitlement to shares of New Parkway common stock distributed pursuant to the Distribution. Therefore, if you sell your shares of Cousins common stock in the “regular-way” market up to and including through the Distribution date, you will be selling your right to receive shares of New Parkway common stock in the Distribution. If you own shares of Cousins common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the Distribution date, you will receive the shares of New Parkway common stock that you are entitled to receive pursuant to your ownership of shares of Cousins common stock as of the record date.

Up to and including the effective time of the Merger, shares of Parkway common stock will trade only on a “regular-way” basis and there will be no “ex-distribution” trading market. The shares of Parkway common stock that trade in the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution, as well as the right to receive merger consideration in the Merger, subject to the terms and conditions of the Merger Agreement. Therefore, if you sell your shares of Parkway common stock on the NYSE on or before the effective time of the Merger, you will also be selling your right to receive shares of New Parkway common stock in the Distribution, as well as your right to receive the merger consideration.

 

81


Table of Contents

Furthermore, beginning approximately one week before the record date and continuing up to and including the Distribution date, New Parkway expects that there will be a “when-issued” market for its common stock. “When-issued” trading refers to a sale or purchase made conditionally, because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for New Parkway common stock that will be distributed to holders of Cousins common stock (including legacy holders of Parkway common stock) on the Distribution date. If you owned shares of Cousins common stock at the close of business on the record date, you would be entitled to New Parkway common stock distributed pursuant to the Distribution. With respect to Cousins stockholders, you may trade this entitlement to New Parkway common stock, without the Cousins common stock you own, on the “when-issued” market. On the first trading day following the Distribution date, “when-issued” trading with respect to New Parkway common stock will end, and “regular-way” trading will begin.

You should consult your bank, broker, nominee or other advisor before selling your shares to be sure you understand the effects of the NYSE trading procedures described above.

Conditions to the Distribution

Cousins has announced that the Distribution will be effective at 12:01 a.m., Eastern time, on             , 2016, which is the Distribution date, provided that certain conditions shall have been satisfied (or waived by Cousins in its sole discretion), including:

 

    the consummation of the Merger, the Separation and the UPREIT Reorganization;

 

    the execution of a credit agreement by us and the Lenders (as defined below) for, and the satisfaction of conditions to, borrowing under the New Parkway Credit Facilities, and the distribution of $200 million of funds borrowed under the New Parkway Term Loan to the partners of New Parkway LP, which in turn will, directly or indirectly, contribute such funds to Cousins LP;

 

    the receipt of an opinion from an independent appraisal firm to the Cousins board of directors confirming the solvency and surplus of Cousins and New Parkway after the Distribution that is in form and substance acceptable to Cousins in its sole discretion;

 

    the SEC declaring effective the registration statement of which this information statement forms a part, with no stop order in effect with respect thereto, and no proceeding for such purpose pending before, or threatened by, the SEC;

 

    the mailing of this information statement;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation, the UPREIT Reorganization, the Distribution or any of the related transactions shall be in effect;

 

    the New Parkway common stock to be distributed shall have been accepted for listing on the NYSE, subject to official notice of distribution; and

 

    the execution of ancillary agreements by Cousins and New Parkway, including the Tax Matters Agreement and the Employee Matters Agreement.

Cousins does not intend to notify its stockholders of any modifications to the terms of the Separation, the UPREIT Reorganization or the Distribution that, in the judgment of its board of directors, are not material. For example, the Cousins board of directors might consider material such matters as significant changes to the Distribution Ratio, the assets to be contributed or the liabilities to be assumed in the Separation and the UPREIT Reorganization. To the extent that the Cousins board of directors determines that any modifications by Cousins materially change the material terms of the Distribution, Cousins will notify Cousins stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to this information statement.

 

82


Table of Contents

DIVIDEND POLICY

We are a newly formed company that has not commenced operations, and as a result, we have not paid any dividends as of the date of this information statement. We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Distribution. We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  (1) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  (2) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  (3) any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and Its Stockholders.”

We cannot assure you that our dividend policy will remain the same in the future, or that any estimated dividends will be made or sustained. Dividends made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, funds from operations and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, the annual REIT distribution requirements and such other factors as our board of directors deems relevant. For more information regarding risk factors that could materially and adversely affect our ability to pay dividends, see “Risk Factors” beginning on page 33.

Our dividends may be funded from a variety of sources. In particular, we expect that, initially, our dividends may exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our anticipated revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends. In addition, the New Parkway Articles allow us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock.

For a discussion of the tax treatment of distributions to holders of our common stock, please refer to “Material U.S. Federal Income Tax Consequences—Taxation of New Parkway and Its Stockholders.”

 

83


Table of Contents

CAPITALIZATION

The following table sets forth New Parkway’s capitalization as of June 30, 2016 on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in New Parkway’s pro forma financial information, assuming a Distribution Ratio of one share of New Parkway common stock for every eight shares of Cousins common stock, and one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock. The information below is not necessarily indicative of what New Parkway’s capitalization would have been had the Separation, Distribution and related financing transactions been completed as of June 30, 2016. In addition, it is not indicative of New Parkway’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and New Parkway’s unaudited combined financial statements and notes included elsewhere in this information statement.

 

     As of June 30, 2016  
(in thousands)    Cousins
Houston
Historical
     Parkway
Houston
Historical
     Pro Forma
Adjustments
     Pro Forma  

Cash and cash equivalents

   $ 1,171       $ 7,973       $ 188,192       $ 197,336   

Debt:

           

Notes payable to banks, net

     —           —           346,675         346,675   

Mortgage notes payable, net

     179,302         278,352         (197      457,457   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

     179,302         278,352         346,478         804,132   

New Parkway Equity:

           

Cousins Houston

     931,457         —           (931,457      —     

Parkway Houston

     —           531,748         (531,748      —     

Common Stock

     —           —           49         49   

Limited Voting stock

     —           —           1         1   

Additional paid in capital

     —           —           1,164,557         1,164,557   

Non-Voting Preferred Stock

     —           —           5,000         5,000   

Noncontrolling Interest

     —           —           23,192         23,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Capitalization

   $ 1,110,759       $ 810,100       $ 76,072       $ 1,996,931   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

84


Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

The following table sets forth the selected historical combined financial data of Parkway Houston, which was carved out from the financial information of Parkway as described below. The selected historical financial data set forth below as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2015, 2014 and 2013 has been derived from Parkway Houston’s audited combined financial statements, which are included elsewhere in this information statement. The income statement data for each of the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Parkway Houston’s unaudited interim combined financial statements included elsewhere in this information statement. Parkway Houston’s unaudited interim combined financial statements as of June 30, 2016 and for the six months ended June 30, 2016 were prepared on the same basis as Parkway Houston’s audited combined financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 and, in the opinion of management, include all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly Parkway Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

Parkway Houston’s combined financial statements were carved out from the financial information of Parkway at a carrying value reflective of such historical cost in such Parkway records. Parkway Houston’s historical financial results reflect charges for certain corporate expenses which include, but are not limited to, costs related to property management, accounting, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganization. Costs of the services were allocated based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly Parkway Houston’s percentage of Parkway’s square footage. Parkway Houston believes these charges are reasonable; however, these results may not reflect what Parkway Houston’s expenses would have been had Parkway Houston been operating as a separate, stand-alone public company. The historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Parkway Houston had been an independent, stand-alone entity during the periods shown. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—New Parkway—Basis of Presentation.”

The historical combined financial data set forth below does not indicate results expected for any future periods. The selected historical combined financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—New Parkway” and Parkway Houston’s combined financial statements and related notes thereto included elsewhere in this information statement.

 

85


Table of Contents
     Six Months ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)                    

Income Statement Data (in thousands):

          

Revenues

          

Income from office properties

   $ 55,779      $ 51,880      $ 108,507      $ 123,172      $ 20,965   

Management company income

     2,592        5,523        9,891        23,971        17,526   

Sale of condominium units

     —          9,836        11,063        16,554        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     58,371        67,239        129,461        163,697        38,491   

Expenses and other

          

Property operating expenses

     26,367        22,593        45,385        54,856        9,119   

Management company expenses

     2,006        5,574        9,362        27,038        23,638   

Cost of sales—condominium units

     —          10,091        11,120        13,199        14   

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   

Impairment loss on management contracts

     —          —          —          4,750        —     

General and administrative

     2,893        3,187        6,336        6,917        7,267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other

     52,271        68,073        127,773        170,772        50,503   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     6,100        (834     1,688        (7,075     (12,012

Other income and expenses

          

Interest and other income

     131        122        246        244        1,663   

Gain on extinguishment of debt

     154        —          —          —          —     

Interest expense

     (6,955     (8,076     (16,088     (16,252     (3,296
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (570     (8,788     (14,154     (23,083     (13,645

Income tax benefit (expense)

     (760     (361     (1,635     180        1,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (1,330     (9,149     (15,789     (22,903     (12,369

Net (income) loss attributable to noncontrolling interests

     —          7        7        (148     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of
June 30,
2016
    

As of December 31,

 
        2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Total real estate related investments, net

   $ 749,406       $ 752,653       $ 738,846       $ 757,848   

Total assets

     855,294         865,731         866,496         903,165   

Mortgage notes payable, net

     278,352         396,901         407,211         414,656   

Total liabilities

     323,546         456,665         485,535         503,130   

Parkway equity

     531,748         409,066         380,053         396,985   

Noncontrolling interests

     —           —           908         3,050   

 

86


Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

The following table sets forth the selected historical combined financial data of Cousins Houston, which was carved out from the financial information of Cousins as described below. The selected historical combined financial data set forth below as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 has been derived from Cousins Houston’s audited combined financial statements, which are included elsewhere in this information statement. The income statement data for each of the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Cousins Houston’s unaudited interim combined financial statements included elsewhere in this information statement. The selected historical combined financial data as of December 31, 2013 was derived from financial information not included in this information statement. Cousins Houston’s unaudited interim combined financial statements as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 were prepared on the same basis as Cousins Houston’s audited combined financial statements as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014, and for the period from February 7, 2013 (date of inception) to December 31, 2013, and, in the opinion of management, include all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly Cousins Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

Cousins Houston’s combined financial statements were carved out from Cousins’ financial information based on historical cost. The historical financial results for Cousins Houston include certain allocated corporate costs, which we believe are reasonable. These costs were incurred by Cousins and estimated to be applicable to Cousins Houston based on proportionate leasable square footage. Such costs do not necessarily reflect what the actual costs would have been if Cousins Houston were operating as a separate stand-alone public company. These costs are discussed further in “Note 3—Related Party Transactions” of the combined financial statements of Cousins Houston for the year ended December 31, 2015 and the six months ended June 30, 2016, included elsewhere in this information statement. The selected historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Cousins Houston had been an independent, stand-alone entity during the periods shown.

The selected historical combined financial data set forth below do not indicate results expected for any future periods. The selected historical combined financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—New Parkway” and Cousins Houston’s combined financial statements and related notes thereto included elsewhere in this information statement.

 

87


Table of Contents
    

 

 

Six Months Ended

June 30,

    Year Ended December 31,     Period from
February 7,
2013 (date of
inception) to
December 31,
2013
 
     2016     2015     2015     2014    
     (unaudited)                    

Income Statement (in thousands):

          

Rental property revenues

   $ 87,696      $ 88,594      $ 177,890      $ 184,536      $ 72,696   

Other revenues

     288        87        —          31        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     87,984        88,681        177,890        184,567        72,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rental property operating expenses

     (37,202     (38,043     (74,162 )     (79,625     (31,759 )

General and administrative expenses

     (4,976     (3,425     (6,328 )     (7,347     (3,793 )

Depreciation and amortization

     (31,168     (33,095     (63,791 )     (77,760     (29,146 )

Interest expense

     (3,939     (4,012     (7,988 )     (8,127     (2,618 )

Acquisition and related costs

     —          —          —          —          (3,858 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (77,285   $ (78,575   $ (152,269 )   $ (172,859   $ (71,174 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,699      $ 10,106      $ 25,621      $ 11,708      $ 1,533   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          

 

     As of
June 30,
2016
     As of December 31,  
        2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Operating properties, net

   $ 1,080,969       $ 1,086,451       $ 1,077,290       $ 1,087,181   

Total assets

     1,181,692         1,188,236         1,188,355         1,220,551   

Note payable

     179,302         180,937         184,097         187,120   

Total liabilities

     250,235         271,364         278,558         283,604   

Equity

     931,457         916,872         909,797         936,947   

 

88


Table of Contents

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

As of and for the Six Months Ended June 30, 2016 and for the Year Ended December 31, 2015

On April 28, 2016, Cousins, Parkway, Parkway LP and Clinic Sub Inc. entered into the Merger Agreement, pursuant to which Parkway will merge with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins. Pursuant to the Merger Agreement, at the effective time of the Merger, each share of Parkway common stock will be converted into the right to receive 1.63 newly issued shares of Cousins common stock, and each share of Parkway limited voting stock will be converted into the right to receive 1.63 newly issued shares of Cousins limited voting preferred stock, having terms materially unchanged from the terms of the Parkway limited voting stock. Upon consummation of the Merger, we will initially be a wholly owned subsidiary of Cousins. Immediately after the effective time of the Merger, New Parkway’s businesses will be separated from the remainder of Cousins’ businesses through the Separation and the UPREIT Reorganization. On the business day following the closing of the Merger, subject to the satisfaction or waiver of the conditions to the Distribution, all of the outstanding shares of New Parkway common stock and New Parkway limited voting stock will be distributed pro rata to the holders of Cousins common stock and Cousins limited voting preferred stock, respectively, including legacy Parkway common and limited voting stockholders. The following unaudited pro forma combined financial statements assume a Distribution Ratio of one share of New Parkway common stock for every eight shares of Cousins common stock and one share of New Parkway limited voting stock for every eight shares of Cousins limited voting preferred stock.

The following unaudited pro forma combined financial statements as of and for the six months ended June 30, 2016 and for the year ended December 31, 2015 have been derived from the historical combined financial statements of Cousins Houston and Parkway Houston included elsewhere in this information statement.

The following unaudited pro forma combined financial statements give effect to the following:

 

    the Merger, the Separation, the UPREIT Reorganization, the Distribution and the Distribution Ratio;

 

    our anticipated post-Separation capital structure which includes proceeds from the $350.0 million New Parkway Term Loan, $150.0 million of which New Parkway LP will retain; and

 

    Cousins’, or a subsidiary of Cousins, contribution of $5 million to New Parkway in exchange for shares of Non-Voting Preferred Stock.

The unaudited pro forma combined balance sheet assumes the Separation and the related transactions occurred on June 30, 2016. The unaudited pro forma combined statements of operations presented for the six months ended June 30, 2016, and for the year ended December 31, 2015, assume the Separation, and the related transactions occurred on January 1, 2015. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to the Separation, the Distribution, and for purposes of the statements of operations, are expected to have a continuing impact on our business. Our unaudited pro forma combined financial statements and explanatory notes present how our financial statements may have appeared had we completed the above transactions as of the dates noted above.

The Merger will be accounted for as a “purchase,” as that term is used under GAAP, for accounting and financial reporting purposes. Under purchase accounting, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Parkway as of the effective time of the Merger will be recorded at their respective fair values and added to the assets and liabilities of Cousins. Any excess of purchase price over the fair values is recorded by Cousins as goodwill. The separation of the assets and liabilities related to New Parkway’s businesses from the remainder of Cousins’ businesses in the Separation and the UPREIT Reorganization will be at Cousins’ carryover basis after adjusting the Parkway Houston assets and liabilities to fair value. As a result, future financial statements of New Parkway will initially reflect carryover basis for Cousins Houston and fair value basis for Parkway Houston.

 

89


Table of Contents

The following unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to our unaudited pro forma combined financial statements. The unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2015 or as of June 30, 2016, as the case may be. The unaudited pro forma combined financial statements also do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

The unaudited pro forma combined financial statements do not indicate results expected for any future period. The unaudited pro forma combined financial statements are derived from and should be read in conjunction with the historical combined financial statements and accompanying notes of Parkway Houston and Cousins Houston appearing elsewhere in this information statement.

 

90


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF JUNE 30, 2016

(in thousands, except share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
     Parkway
Houston
Historical
     Adjustments          Total  

Assets

             

Real estate related investments:

             

Office properties, net

   $ 1,080,969       $ 749,406       $ (98,598   A    $ 1,731,777   

Cash and cash equivalents

     1,171         7,973         188,192      B      197,336   

Receivables and other assets

     35,107         78,275         (54,210   C      59,172   

Intangible assets, net

     64,445         19,640         41,515      A      125,600   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total assets

   $ 1,181,692       $ 855,294       $ 76,899         $ 2,113,885   
  

 

 

    

 

 

    

 

 

      

 

 

 

Liabilities

             

Mortgage notes payable, net

   $ 179,302       $ 278,352       $ (197   D    $ 457,457   

Notes payable to banks, net

     —           —           346,675      B      346,675   

Accounts payable and other liabilities

     32,927         25,625         —             58,552   

Below market leases, net

     38,006         19,569         827      A      58,402   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities

     250,235         323,546         347,305           921,086   
  

 

 

    

 

 

    

 

 

      

 

 

 

Equity

             

Stockholders’ equity:

             

Common stock $0.001 par value, 49,209,589 shares pro forma

     —           —           49      E      49   

Limited voting stock $0.001 par value, 858,420 shares pro forma

     —           —           1      E      1   

Non-voting preferred stock, $100,000 liquidation preference, 50 shares pro forma

     —           —           5,000      F      5,000   

Cousins Houston

     931,457         —           (931,457   G      —     

Parkway Houston

     —           531,748         (531,748   G      —     

Additional paid-in capital

     —           —           1,164,557      G      1,164,557   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total stockholders’ equity

     931,457         531,748         (293,598        1,169,607   
  

 

 

    

 

 

    

 

 

      

 

 

 

Noncontrolling interests

     —           —           23,192      H      23,192   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total equity

     931,457         531,748         (270,406        1,192,799   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities and equity

   $ 1,181,692       $ 855,294       $ 76,899         $ 2,113,885   
  

 

 

    

 

 

    

 

 

      

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

91


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(In thousands, except per share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
    Parkway
Houston
Historical
    Adjustments          Total  

Revenues

           

Income from office properties

   $ 87,696      $ 55,779      $ 1,024      a    $ 144,499   

Management company income

     —          2,592        —             2,592   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     87,696        58,371        1,024           147,091   
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses

           

Property operating expenses

     37,202        26,367        —             63,569   

Management company expenses

     —          2,006        —             2,006   

Depreciation and amortization

     31,168        21,005        (6,807 )    b      45,366   

General and administrative

     4,976        2,893        —        c      7,869   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     73,346        52,271        (6,807        118,810   
  

 

 

   

 

 

   

 

 

      

 

 

 

Operating income

     14,350        6,100        7,831           28,281   

Other income and expenses

           

Interest and other income

     288        131        (123 )    d      296   

Gain on extinguishment of debt

     —          154        (154 )    e      —     

Interest expense

     (3,939     (6,955     (5,383 )    f      (16,277
  

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     10,699        (570     2,171           12,300   

Income tax expense

     —          (760     —             (760
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     10,699        (1,330     2,171           11,540   

Net (income) attributable to noncontrolling interests

     —          —          (228   g      (228
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     10,699        (1,330     1,943           11,312   

Dividends on preferred stock

     —          —          (200 )    h      (200
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ 10,699      $ (1,330   $ 1,743         $ 11,112   
  

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

         i      49,210   
           

 

 

 

Weighted average shares outstanding—diluted

         i      50,188   
           

 

 

 

Basic and diluted earnings per share

            $ 0.23   
           

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

92


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2015

(In thousands, except per share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
    Parkway
Houston
Historical
    Adjustments            Total  

Revenues

           

Income from office properties

   $ 177,890      $ 108,507      $ (9,536     a       $ 276,861   

Management company income

     —          9,891        —             9,891   

Sale of condominium units

     —          11,063        —             11,063   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     177,890        129,461        (9,536        297,815   
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses

           

Property operating expenses

     74,162        45,385        —             119,547   

Management company expenses

     —          9,362        —             9,362   

Cost of sales - condominium units

     —          11,120        —             11,120   

Depreciation and amortization

     63,791        55,570        (26,108     b         93,253   

General and administrative

     6,328        6,336        —          c         12,664   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     144,281        127,773        (26,108        245,946   
  

 

 

   

 

 

   

 

 

      

 

 

 

Operating income

     33,609        1,688        16,572           51,869   

Other income and expenses

           

Interest and other income

     —          246        (245     d         1   

Interest expense

     (7,988     (16,088     (7,785     f         (31,861
  

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     25,621        (14,154     8,542           20,009   

Income tax expense

     —          (1,635     —             (1,635
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     25,621        (15,789     8,542           18,374   

Net (income) loss attributable to noncontrolling interests

     —          7        (351     g         (344
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     25,621        (15,782     8,191           18,030   

Dividends on preferred stock

     —          —          (400     h         (400
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ 25,621      $ (15,782   $ 7,791         $ 17,630   
  

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

           i         49,210   
           

 

 

 

Weighted average shares outstanding—diluted

           i         50,188   
           

 

 

 

Basic and diluted earnings per share

            $ 0.36   
           

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

93


Table of Contents

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Adjustments to the Unaudited Pro Forma Combined Balance Sheet

The unaudited pro forma combined balance sheet as of June 30, 2016 reflects the following adjustments:

 

A. Office properties, net, intangible assets, net, and below market leases, net

The preliminary fair market value is based on a valuation prepared by Cousins with the assistance of a third-party valuation advisor. The Merger adjustments reflected in the unaudited pro forma combined balance sheet for net office properties, net intangible assets and net below market leases represent the differences between the fair market value of Parkway Houston acquired in connection with the Merger and Parkway’s historical balances for Parkway Houston, which are presented as follows (in thousands):

 

     As of June 30, 2016  
     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
     Adjustments
as a Result of
Merger
 

Office properties, net

   $ 749,406       $ 650,808       $ (98,598

Intangible assets, net

     19,640         61,155         41,515   

Below market leases, net

     (19,569      (20,396      (827

Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate. The fair value of land included in office properties, net, is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and tenant improvements, included in office properties, net, are based upon current market replacement costs and other relevant market rate information. The fair value of the below market leases, net of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. The fair value of acquired in-place leases, included in intangibles, net, is derived based on assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period.

 

B. Cash and cash equivalents and notes payable to banks, net

In connection with the Merger and the Distribution, Parkway has entered into a debt commitment letter pursuant to which Wells Fargo Bank, National Association, Bank of America, N.A. and JPMorgan Chase Bank, N.A. have agreed to provide to New Parkway LP a senior secured term loan facility in an aggregate principal amount of up to $350 million, and a senior secured revolving credit facility in an aggregate principal amount of $100 million. Per the terms of the commitment letter, the New Parkway Credit Facilities are assumed to have a term of three years. Following the effective time of the Merger, but prior to the Distribution, the New Parkway Term Loan will be funded. The proceeds of the New Parkway Term Loan will be used to fund a $200 million distribution to the partners of New Parkway LP, who will in turn cause such funds to be contributed to Cousins LP, which will use the funds to repay a portion of approximately $550 million outstanding under Parkway’s existing credit facilities. The remaining $150 million of proceeds from the New Parkway Term Loan will be retained by New Parkway LP under the New Parkway Credit Facilities following consummation of the Distribution. These remaining proceeds from the New Parkway Term Loan and future proceeds from the

 

94


Table of Contents

Houston Revolving Credit Facility will be used for general corporate purposes of New Parkway following the Distribution. Additionally, Cousins, or a subsidiary of Cousins, will contribute $5 million to New Parkway in exchange for shares of Non-Voting Preferred Stock with a liquidation preference of $5 million, a cumulative dividend of 8.00% per annum per share and limited voting rights as set forth in the New Parkway Articles.

Additionally, the adjustments to the cash and cash equivalents includes approximately $42.4 million of cash that will be retained by New Parkway pursuant to the terms of the Separation and Distribution Agreement.

The adjustment to notes payable to banks, net in the unaudited pro forma combined balance sheet comprises the following as of June 30, 2016 (in thousands):

 

     As of
June 30,
2016
 

New Parkway Term Loan

   $ 350,000   

New Parkway Credit Facilities deferred financing costs

     (3,325
  

 

 

 

Total

   $ 346,675   
  

 

 

 

 

C. Receivables and other assets

The straight-lining of rents pursuant to the underlying leases associated with the real estate acquired in connection with the Separation will commence at the effective time of the Separation; therefore, the balance of deferred rent of $23.8 million included on Parkway Houston’s historical balance sheet has been eliminated.

The investment in ACP Peachtree Center Manager, LLC, which is included in Parkway Houston’s historical financial statements, will be retained by Cousins in connection with the Merger and Separation, therefore the balance of $3.5 million included on Parkway’s historical balance sheet has been eliminated.

Lease commissions will be adjusted to reflect the fair market value for Parkway Houston. The fair value of leasing commissions is based upon current market replacement costs and other relevant market information.

The adjustment to receivables and other assets in the unaudited pro forma combined balance sheet comprises the following as of June 30, 2016 (in thousands):

 

     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
     Adjustments
as a Result of
Merger
 

Straight-line rent

   $ 23,783       $ —         $ (23,783

Lease commissions, net

     42,424         15,497         (26,927

Investment in ACP Peachtree

     3,500         —           (3,500
        

 

 

 
         $ (54,210
        

 

 

 

 

D. Mortgage notes payable, net

Represents the adjustment to reflect the premium on mortgage notes payable, net to fair value (in thousands):

 

     As of June 30, 2016  
     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
Assumed Debt
     Adjustments
as a Result of
Merger
 

Premium on notes payables

   $ (4,266    $ (4,069    $ (197

 

95


Table of Contents

The fair values of mortgage notes payable, net assumed in connection with the Merger were based on discounted cash flow analysis using the current market borrowing rates for similar types of borrowing arrangements as of the measurement dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

 

E. Common stock and limited voting stock

Represents the issuance of one share of New Parkway common stock or Parkway limited voting stock for every eight shares of Cousins common stock or Cousins limited voting preferred stock, respectively, on the business day following the effective time of the Merger, pursuant to which each Parkway common stockholder will receive 1.63 newly issued shares of Cousins common stock or Cousins limited voting preferred stock for each share of Parkway common stock or Parkway limited voting stock, respectively (in thousands, except per share data and exchange ratio):

 

     As of June 30,
2016
 

Outstanding shares of Parkway common stock—historical basis

     111,735   

Parkway equity-based awards converted in Parkway common stock

     847   
  

 

 

 

Outstanding shares of Parkway common stock

     112,582   

Exchange Ratio

     1.63   
  

 

 

 

Shares of Cousins common stock to be issued—pro forma basis

     183,509   

Outstanding shares of Cousins common stock—historical basis

     210,170   
  

 

 

 

Total shares to be issued at Merger

     393,679