A $50 million private stock sale by Thomas Properties Group has sparked a surge in the company’s share price and moved it toward its goal of becoming a real estate investment trust.
The downtown L.A. real estate firm announced May 30 that Madison International Realty in New York would purchase about 8.7 million shares for $5.75 each. The price represented a 42 percent premium over the share price before the announcement.
Investors were pleased. The stock was the third biggest gainer on the LABJ Stock Index last week with a price jump of 15 percent. (See page 30.)
Thomas owns 22 properties and manages five others in Sacramento; Los Angeles; Philadelphia; Houston; northern Virginia; and Austin, Texas. It holds trophy properties in Los Angeles, including City National Plaza at 515 S. Flower St. and 800 S. Hope St. Another big holding is Campus El Segundo, a 46-acre project near Los Angeles International Airport.
Madison, which specializes in providing liquidity and recapitalization funds for real estate companies, will get a director on Thomas’ board. Also, Madison will receive a two-year lockup provision, which gives it a preferred position to take over the company. Under the agreement, Madison would have first right to buy shares from largest shareholder and Chairman James Thomas, and other inside shareholders.
If Thomas becomes a REIT, it would no longer pay corporate taxes as long as it distributed at least 90 percent of its taxable earnings to shareholders in the form of dividends.
Mitchell Germain, senior analyst at JMP Securities in New York, said the private placement was a smart move by Thomas. If the company had gone to the open market, the shares would have sold for less, he believes.
“For Thomas Properties it’s a huge win,” Germain said. “This allowed them to raise a pretty substantial amount of money at a premium. It negates concerns about their ability to fund new projects going forward.”
David Loeb, senior research analyst at Robert W. Baird & Co. in Milwaukee, believes the deal shows Thomas can secure money from institutional investors.
“We view the above-market pricing as a sign that Madison sees substantial upside in the shares,” Loeb wrote in a note to investors May 30. “We view the deal positively as it opens the door for more access to capital to fund growth initiatives, which is a major step in attaining REIT status, the company’s ultimate goal.”
Loeb expects the proceeds from the offering will be used for property acquisitions in Los Angeles, San Francisco, San Diego, Austin and Houston. Germain believes the company will focus on Houston and downtown Los Angeles.
“I look at those the markets where Thomas’ cost of capital and knowledge of the market will help make them competitive,” he said. “I don’t see them as a player in West Los Angeles or San Francisco, where you have more private equity and REIT investors that have lower costs of capital.”
Diana Laing, chief financial officer at Thomas, said the private placement will give Madison about 15 percent of Thomas’ outstanding shares. When added to its previous holdings, Madison will own nearly 20 percent of the company. That makes Madison the largest shareholder except for Chief Executive James Thomas, who will own about 27 percent after the deal concludes.
Laing said that the company’s goal is to become a REIT.
“There are institutional investors that invest in REITs to fund growth and we could potentially access that capital,” she said.
Baird analyst Loeb gives Thomas a “market outperform” rating and raised his target price to $7 a share from $6.
“We are still in the early stages of Thomas’ transformational efforts, which keeps us positive on the shares,” he said in his note to investors. “Progress has been ahead of expectations, and value creation is expected through asset sales, acquisitions, leverage reduction and improved scale and trading liquidity.”
