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EXCEL - IDEA: XBRL DOCUMENT - PARKWAY PROPERTIES INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 RGH 906 CERTIFICATION - PARKWAY PROPERTIES INCexhibit322.htm
EX-32.1 - EXHIBIT 32.1 SGR 906 CERTIFICATION - PARKWAY PROPERTIES INCexhibit321.htm
EX-31.1 - EXHIBIT 31.1 SGR CERTIFICATION - PARKWAY PROPERTIES INCexhibit311.htm
EX-10.9 - FIRST AMENDMENT TO CREDIT AGREEMENT - PARKWAY PROPERTIES INCexhibit109.htm
EX-31.2 - EXHIBIT 31.2 RGH CERTIFICATION - PARKWAY PROPERTIES INCexhibit312.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

 
FORM 10-Q

R
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2011
 
or
  £
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from                           to                      

Commission File Number 1-11533

Parkway Properties, Inc.
(Exact name of registrant as specified in its charter)

Maryland
 
74-2123597
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
   

One Jackson Place Suite 1000
188 East Capitol Street
 
P.O. Box 24647
Jackson, Mississippi 39225-4647
(Address of principal executive offices) (Zip Code)

 
Registrant’s telephone number, including area code (601) 948-4091
 
Registrant’s web site www.pky.com

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £
   
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No R

22,118,817 shares of Common Stock, $.001 par value, were outstanding at August 1, 2011.


 
 

 

PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2011

   
 
Page
Part I. Financial Information
Item 1.
 
Financial Statements
 
       
   
Consolidated Balance Sheets, June 30, 2011 and December 31, 2010
3
       
   
Consolidated Statements of Operations for the Three Months and Six Months Ended
 
   
June 30, 2011 and 2010
4
       
   
Consolidated Statement of Changes in Equity for the Six Months Ended
 
   
June 30, 2011
6
       
   
Consolidated Statements of Cash Flows for the Six Months Ended
 
   
June 30, 2011 and 2010
7
       
   
Notes to Consolidated Financial Statements
8
       
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
46
       
Item 4.
 
Controls and Procedures
46
       
       
Part II. Other Information
       
       
Item 1.
 
Legal Proceedings
46
       
Item 1A.
 
Risk Factors
46
       
Item 6.
 
Exhibits
47
       
       
Signatures
       
Authorized Signatures
48


 
2

 



PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)

    June 30      December
    2011      2010
     (Unaudited)      
Assets
         
Real estate related investments:
         
Office and parking properties
$
2,077,583 
 
$
1,755,310 
Land held for development
 
609 
   
609 
Accumulated depreciation
 
(358,934)
   
(366,152)
   
1,719,258 
   
1,389,767 
           
Land available for sale
 
 750 
   
750 
Mortgage loans
 
10,735 
   
10,336 
Investment in unconsolidated joint ventures
 
1,807 
   
2,892 
   
1,732,550 
   
1,403,745 
           
Receivables and other assets
 
154,079 
   
129,638 
Intangible assets, net
 
118,101 
   
50,629 
Management contracts, net
 
51,581 
   
Cash and cash equivalents
 
33,377 
   
19,670 
 
$
2,089,688 
 
$
1,603,682 
   
 
     
   
 
     
Liabilities
 
 
     
Notes payable to banks
$
166,217 
 
$
110,839 
Mortgage notes payable
 
959,539 
   
773,535 
Accounts payable and other liabilities
 
126,356 
   
98,818 
   
1,252,112 
   
983,192 
           
           
Equity
         
Parkway Properties, Inc. stockholders’ equity:
         
8.00% Series D Preferred stock,  $.001 par value, 5,421,296 and
     4,374,896  shares authorized, issued and outstanding in
     2011 and 2010, respectively
 
128,942 
   
102,787 
Common stock, $.001 par value, 64,578,704 and 65,625,104 shares authorized in 2011 and
2010, respectively, 22,120,948 and 21,923,610 shares issued and outstanding in 2011 and
2010, respectively
 
22 
   
22 
Common stock held in trust, at cost, 12,070 and
     58,134 shares in 2011 and 2010, respectively
 
(309)
   
(1,896)
Additional paid-in capital
 
517,016 
   
516,167 
Accumulated other comprehensive loss
 
(3,187)
   
(3,003)
Accumulated deficit
 
(152,335)
   
(127,575)
Total Parkway Properties, Inc. stockholders’ equity
 
490,149 
   
486,502 
Noncontrolling interest - real estate partnerships
 
347,427 
   
133,988 
Total equity
 
837,576 
   
620,490 
 
$
2,089,688 
 
$
1,603,682 






See notes to consolidated financial statements.

 
3

 

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 

 
    Three Months Ended
   June 30 
    (unaudited)
   
2011
   
2010
  Revenues          
  Income from office and parking properties
$
 68,385 
 
$
54,396 
  Management company income  
3,532 
   
336 
       Total revenues  
71,917 
   
54,732 
           
  Expenses          
  Property operating expenses  
30,328 
   
25,604 
  Depreciation and amortization  
26,521 
   
19,614 
  Impairment loss on real estate  
1,700 
   
  Management company expenses  
3,202 
   
641 
  General and administrative  
1,671 
   
1,612 
  Acquisition costs  
14,380 
   
  Total expenses  
77,802 
   
47,471 
           
  Operating income (loss)  
(5,885)
   
7,261 
           
  Other income and expenses          
  Interest and other income  
438 
   
365 
  Equity in earnings of unconsolidated joint ventures  
44 
   
87 
  Interest expense  
(14,871)
   
(12,563)
           
  Loss before income taxes  
(20,274)
   
(4,850)
  Income tax expense  
(224)
   
(100)
  Loss from continuing operations  
(20,498)
   
(4,950)
  Discontinued operations:          
       Income from discontinued operations  
606 
   
653 
       Gain on sale of real estate from discontinued operations  
4,292 
   
8,518 
  Total discontinued operations  
4,898 
   
9,171 
           
  Net income (loss)  
(15,600)
   
4,221 
  Net loss attributable to noncontrolling interest – real estate partnerships  
3,371 
   
2,638 
           
  Net income (loss) for Parkway Properties, Inc.  
(12,229)
   
6,859 
  Dividends on preferred stock  
(2,444)
   
(1,200)
  Net income (loss) attributable to common stockholders
$
(14,673)
 
$
5,659 
           
  Net income (loss) per common share attributable to Parkway Properties, Inc.:          
  Basic:          
       Loss from continuing operations attributable to Parkway Properties, Inc.
$
(0.91)
 
$
(0.17)
       Discontinued operations  
0.23 
   
0.43 
       Basic net income (loss) attributable to Parkway Properties, Inc.
$
(0.68)
 
$
0.26 
  Diluted:          
       Loss from continuing operations attributable to Parkway Properties, Inc.
$
(0.91)
 
$
(0.17)
       Discontinued operations  
0.23 
   
0.43 
       Diluted net income (loss) attributable to Parkway Properties, Inc.
$
(0.68)
 
$
0.26 
           
  Weighted average shares outstanding:          
  Basic  
21,489 
   
21,410 
  Diluted  
21,489 
   
21,410 








See notes to consolidated financial statements.

 
4

 

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
Six Months Ended
 June 30
   
2011
   
2010
   
(Unaudited)
Revenues
         
Income from office and parking properties
$
128,478 
 
$
115,778 
Management company income
 
3,870 
   
746 
Total revenues
 
132,348 
   
116,524 
           
Expenses
         
Property operating expenses
 
57,415 
   
52,536 
Depreciation and amortization
 
49,606 
   
40,324 
Impairment loss on real estate
 
1,700 
   
Management company expenses
 
4,079 
   
1,385 
General and administrative
 
3,478 
   
3,603 
Acquisition costs
 
16,729 
   
Total expenses
 
133,007 
   
97,848 
           
Operating income (loss)
 
(659)
   
18,676 
           
Other income and expenses
         
Interest and other income
 
762 
   
750 
Equity in earnings of unconsolidated joint ventures
 
79 
   
192 
Interest expense
 
(28,512)
   
(25,117)
           
Loss before income taxes
 
(28,330)
   
(5,499)
Income tax expense
 
(224)
   
(117)
Loss from continuing operations
 
(28,554)
   
(5,616)
     Discontinued operations:
         
          Income from discontinued operations
 
872 
   
1,275 
          Gain on sale of real estate from discontinued operations
 
4,292 
   
8,518 
Total discontinued operations
 
5,164 
   
9,793 
           
Net income (loss)
 
(23,390)
   
4,177 
Net loss attributable to noncontrolling interest – real estate partnerships
 
6,566 
   
5,225 
           
Net income (loss) for Parkway Properties, Inc.
 
(16,824)
   
9,402 
Dividends on preferred stock
 
(4,631)
   
(2,400)
Net income (loss) attributable to common stockholders
$
(21,455)
 
$
7,002 
           
Net income (loss) per common share attributable to Parkway Properties, Inc.:
         
Basic:
         
     Loss from continuing operations attributable to Parkway Properties, Inc.
$
(1.24)
 
$
(0.13)
     Discontinued operations
 
0.24 
   
0.46 
     Basic net income (loss) attributable to Parkway Properties, Inc.
$
(1.00)
 
$
0.33 
Diluted:
         
     Loss from continuing operations attributable to Parkway Properties, Inc.
$
(1.24)
 
$
(0.13)
     Discontinued operations
 
0.24 
   
0.46 
     Diluted net income (loss) attributable to Parkway Properties, Inc.
$
(1.00)
 
$
0.33 
           
Weighted average shares outstanding:
         
Basic
 
21,483 
   
21,400 
Diluted
 
21,483 
   
21,400 




See notes to consolidated financial statements.


 
5

 

 
 
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share and per share data)
(Unaudited)

   
Parkway Properties, Inc. Stockholders
           
   
Preferred
Stock
   
Common
Stock
   
Common
Stock Held
in Trust
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Noncontrolling
Interest –
Real Estate
Partnerships
   
Total
Equity
Balance at December 31, 2010
$
102,787 
 
$
22 
 
$
(1,896)
 
$
516,167 
 
$
(3,003)
 
$
(127,575)
 
$
133,988 
 
$
620,490 
Comprehensive loss
                                             
Net loss
 
   
   
   
   
   
(16,824)
   
(6,566)
   
(23,390)
Change in fair value of interest rate swaps
 
   
   
   
   
(184)
   
   
(2,251)
   
(2,435)
Total comprehensive loss
 
   
   
   
   
   
   
   
(25,825)
Common dividends declared - $0.15 per share
 
   
   
   
   
   
(3,305)
   
   
(3,305)
Preferred dividends declared - $1.00 per share
 
   
   
   
   
   
(4,631)
   
   
(4,631)
Share-based compensation
 
   
   
   
888 
   
   
   
   
888 
Issuance of 1,046,400 shares of 8.0% Series D Preferred stock
 
26,155 
   
   
   
   
   
   
   
26,155 
15,027 shares issued in lieu of Directors’ fees
 
   
   
   
272 
   
   
   
   
272 
Issuance costs for shelf registration
 
   
   
   
(12)
   
   
   
   
(12)
16,688 and 11 shares withheld to      satisfy tax withholding obligation in connection with the vesting of restricted stock and deferred incentive share units, respectively
 
   
   
   
(299)
   
   
   
 
 
 
 
   
 
 
 
 
(299)
Distribution of 48,125 shares of common stock from deferred compensation plan
 
   
   
1,625 
   
   
   
   
   
1,625 
Contribution of 2,061 shares of common stock to deferred compensation plan
 
   
   
(38)
   
   
   
   
   
(38)
Contribution of capital by noncontrolling interest
 
   
   
   
   
   
   
251,168 
   
251,168 
Distribution of capital to noncontrolling interest
 
   
   
   
   
   
   
(28,912)
   
 
(28,912)
Balance at June 30, 2011
$
128,942 
 
$
22 
 
$
(309)
 
$
517,016 
 
$
(3,187)
 
$
(152,335)
 
$
347,427 
 
$
837,576 






 


See notes to consolidated financial statements.

 
6

 

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

     
Six Months Ended
     
June 30
   
2011
   
2010
     
(Unaudited)
Operating activities
         
Net income (loss)
$
(23,390)
 
$
4,177 
Adjustments to reconcile net income (loss) to cash provided by operating activities:
         
Depreciation and amortization
 
49,606 
   
40,324 
Depreciation and amortization – discontinued operations
 
2,410 
   
3,928 
Amortization of above (below) market leases
 
(554)
   
(419)
Amortization of above (below) market leases – discontinued operations
 
210 
   
438 
Amortization of loan costs
 
1,007 
   
924 
Amortization of mortgage loan discount
 
(400)
   
(342)
Share-based compensation expense
 
888 
   
391 
Operating distributions from unconsolidated joint ventures
 
507 
   
Non-cash impairment loss on real estate
 
1,700 
   
Gain on sale of real estate investments
 
(4,292)
   
(8,518)
Equity in earnings of unconsolidated joint ventures
 
(79)
   
(192)
Increase in deferred leasing costs
 
(8,487)
   
(2,742)
Changes in operating assets and liabilities:
         
Change in receivables and other assets
 
(8,947)
   
(5,667)
Change in accounts payable and other liabilities
 
228 
   
(1,612)
           
Cash provided by operating activities
 
10,407 
   
30,690 
           
Investing activities
         
Distributions from unconsolidated joint ventures
 
135 
   
Investment in real estate
 
(488,279)
   
Investment in other assets
 
(3,500)
   
Investment in management company
 
(32,400)
   
Proceeds from sale of real estate
 
156,546 
   
4,758 
Improvements to real estate
 
(19,161)
   
(15,579)
           
Cash used in investing activities
 
(386,659)
   
(10,821)
           
Financing activities
         
Principal payments on mortgage notes payable
 
(101,233)
   
(94,982)
Proceeds from mortgage notes payable
 
200,013 
   
58,000 
Proceeds from bank borrowings
 
219,671 
   
63,674 
Payments on bank borrowings
 
(164,293)
   
(39,532)
Debt financing costs
 
(4,654)
   
(737)
Purchase of Company stock
 
(299)
   
(677)
Dividends paid on common stock
 
(3,270)
   
(3,224)
Dividends paid on preferred stock
 
(4,375)
   
(2,400)
Contributions from noncontrolling interest partners
 
251,168 
   
Distributions to noncontrolling interest partners
 
(28,912)
   
Proceeds from stock offering
 
26,143 
   
(14)
           
Cash provided by (used in) financing activities
 
389,959 
   
(19,892)
           
Change in cash and cash equivalents
 
13,707 
   
(23)
           
Cash and cash equivalents at beginning of period
 
19,670 
   
20,697 
           
Cash and cash equivalents at end of period
$
33,377 
 
$
20,674 





See notes to consolidated financial statements.

 
7

 

Parkway Properties, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

Note A – Basis of Presentation

The consolidated financial statements include the accounts of Parkway Properties, Inc. (“Parkway” or “the Company”), its wholly-owned subsidiaries and joint ventures in which the Company has a controlling interest.  The other partners’ equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the consolidated financial statements.  Parkway also consolidates subsidiaries where the entity is a variable interest entity (“VIE”) and Parkway is the primary beneficiary and has the power to direct the activities of the VIE and has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits from the VIE that could be potentially significant to the VIE.  At June 30, 2011 and December 31, 2010, Parkway did not have any VIEs that required consolidation.  All significant intercompany transactions and accounts have been eliminated in the accompanying financial statements.

The Company also consolidates certain joint ventures where it exercises significant control over major operating and management decisions, or where the Company is the sole general partner and the limited partners do not possess kick-out rights or other substantive participating rights.  The equity method of accounting is used for those joint ventures that do not meet the criteria for consolidation and where Parkway exercises significant influence but does not control these joint ventures.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements.

The accompanying unaudited condensed financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.  The financial statements should be read in conjunction with the 2010 annual report and the notes thereto.

The balance sheet at December 31, 2010 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income”, which modifies reporting requirements for comprehensive income in order to increase the prominence of items reported in other comprehensive income in the financial statements.  ASU 2011-05 requires presentation of either a single continuous statement of comprehensive income or two separate, but consecutive statements in which the first statement presents net income and its components followed by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income.  The requirements of ASU 2011-05 will be effective for interim and annual periods beginning after December 15, 2011.  The Company is currently evaluating the impact of ASU 2011-05 on the Company’s consolidated financial statements.

The Company has evaluated all subsequent events through the issuance date of the financial statements.

Note B – Net Income (Loss) Per Common Share

Basic earnings per share (“EPS”) are computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. In arriving at net income (loss) attributable to common stockholders, preferred stock dividends are deducted.  Diluted EPS reflects the potential dilution that could occur if share equivalents such as employee stock options, restricted shares and

 
8

 

deferred incentive share units were exercised or converted into common stock that then shared in the earnings of Parkway.

The computation of diluted EPS is as follows (in thousands, except per share data):

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
   
2011
   
2010
   
2011
   
2010
Numerator:
                     
     Basic and diluted net income (loss)
          attributable to common stockholders
 
$
(14,673)
 
$
5,659 
 
$
(21,455)
 
$
7,002 
                       
     Basic weighted average shares
 
21,489 
   
21,410 
   
21,483 
   
21,400 
     Dilutive weighted average shares
 
21,489 
   
21,410 
   
21,483 
   
21,400 
     Diluted net income (loss) per share attributable to
          Parkway Properties, Inc.
 
$
 
(0.68)
 
 
$
 
0.26 
 
 
$
 
(1.00)
 
 
$
 
0.33 

The computation of diluted EPS for the three months and six months ended June 30, 2011 and 2010 did not include the effect of employee stock options, deferred incentive share units and restricted shares because their inclusion would have been anti-dilutive.

Note C – Supplemental Cash Flow Information and Schedule of Non-Cash Investing and Financing Activity

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 
Six Months Ended
June 30
 
   
 
2011
 
2010
 
 
(in thousands)
Supplemental cash flow information:
           
Cash paid for interest
$
27,870 
 
$
26,719 
 
Supplemental schedule of non-cash investing and financing activity:
           
Mortgage note payable transferred to purchaser
 
   
(8,666)
 
Mortgage loan issued to purchaser
 
   
(1,500)
 
Contingent consideration related to the contribution of the Management Company
 
31,000 
   
 
Restricted shares and deferred incentive share units issued (forfeited)
 
2,251 
   
(598)
 
Mortgage loan assumed in purchase
 
87,225 
   
 
Shares issued in lieu of Directors’ fees
 
272 
   
285 
 

Note D – Acquisitions & Dispositions

On January 21, 2011, the Company and Parkway Properties Office Fund II, LP (“Fund II”) acquired the office and retail portion of 3344 Peachtree located in the Buckhead submarket of Atlanta for $167.3 million.  3344 Peachtree contains approximately 484,000 square feet of office and retail space and includes an adjacent eleven-story parking structure.  Funds II’s investment in the property totaled $160.0 million, with Parkway funding the remaining $7.3 million.  Due to Parkway’s additional investment, the Company’s effective ownership in the property is 33.03%.  An additional $2.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  Simultaneous with closing, Fund II assumed the $89.6 million existing non-recourse first mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase.  Parkway’s equity contribution in the investment is $25.5 million and was initially funded through availability under the Company’s credit facility.

On February 4, 2011, the Company purchased its partner’s 50% interest in the Wink-Parkway Partnership (“Wink JV”) for $250,000.  The Wink JV was established for the purpose of owning the Wink

 
9

 

Building, a 32,000 square foot office property in New Orleans, Louisiana.  Upon completing the purchase of its partner’s interest, Parkway now owns 100% of the Wink Building.

On March 31, 2011, Fund II purchased 245 Riverside located in the central business district of Jacksonville, Florida for $18.5 million.  245 Riverside contains approximately 135,000 square feet of office space.  An additional $1.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  In connection with the purchase, Fund II placed a $9.3 million non-recourse first mortgage loan secured by the property with an initial thirty-six month interest only period and a maturity date of March 31, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.3% through September 30, 2018.  Parkway’s equity contribution of $2.8 million was funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.

On April 8, 2011, Fund II purchased Corporate Center Four at International Plaza (“Corporate Center Four”) located in Westshore submarket of Tampa, Florida for $45.0 million.  Corporate Center Four contains approximately 250,000 square feet of office space.  An additional $5.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  In connection with the purchase, Fund II placed a $22.5 million non-recourse mortgage loan with an initial thirty-six month interest only period and a maturity date of April 8, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.4% through October 8, 2018.  Parkway’s equity contribution of $6.8 million was funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office property in Chicago, Illinois, for a gross sales price of $162.2 million.  At closing, the Company repaid the $84.6 million first mortgage secured by the property that was scheduled to mature in July 2011.  Parkway received net cash proceeds after repayment of the mortgage loan of $74.0 million, which were used to reduce amounts outstanding under the Company’s credit facility.  The Company recognized a gain on extinguishment of debt of $302,000, which is classified as income from discontinued operations and a gain on the sale of real estate from discontinued operations of $4.3 million during the second quarter of 2011.

On May 18, 2011, Fund II completed the closing of its purchase of four additional office properties for $316.5 million.  The four properties include Two Liberty Place in Philadelphia, Two Ravinia Drive in Atlanta, Bank of America Center in Orlando, and Cypress Center I, II and III (“Cypress Center”) in Tampa.  The properties contain approximately 2.1 million square feet of office space, and an additional $20.9 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  An existing institutional investor in Two Liberty Place retained an 11% ownership in the property.  Parkway’s pro rata share of Two Liberty Place is 19% and Parkway’s partner in Fund II owns the remaining 70% interest.  Fund II acquired 100% of the remaining three assets, with Parkway’s ownership at 30%.  In connection with the purchases, Fund II placed separate non-recourse mortgage loans on each property totaling $158.3 million with a weighted average interest rate of 4.99%, initial thirty-six month interest only periods, and maturity dates ranging from May 2016 to June 2019.  Parkway’s equity contribution of $37.6 million was initially funded through availability under the Company’s credit facility.

On June 30, 2011, Fund II purchased Hayden Ferry Lakeside I (“Hayden Ferry I”) located in the Tempe submarket of Phoenix, Arizona, for $39.4 million.  Hayden Ferry I contains approximately 203,000 square feet of office space.  An additional $4.3 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  Fund II obtained a $22.0 million non-recourse mortgage loan with a fixed interest rate of 4.5%, an initial thirty-six month interest only period, and a maturity date of July 25, 2018.  Parkway's equity contribution of $5.2 million was initially funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.  Following the purchase of Hayden Ferry I, the total amount invested by Fund II is approximately $640.4 million, or 85.4% of the Fund’s investment capacity.

 
10

 

The allocation of purchase price allocated to intangible assets and liabilities and weighted average amortization period (in years) for each class of asset or liability for 3344 Peachtree, 245 Riverside, Corporate Center Four, Two Liberty Place, Two Ravinia Drive, Bank of America Center, Cypress Center and Hayden Ferry I is as follows (in thousands, except weighted average life):
 
 
 

 
       
 
Amount
 
Weighted
Average Life
Land
$
78,028
 
N/A
Buildings
 
367,048
 
40
Tenant improvements
 
43,284
 
6
Lease commissions
 
26,228
 
6
Lease in place value
 
43,878
 
6
Above market leases
 
28,984
 
7
Below market leases
 
(5,387)
 
12 
Other
 
2,388
 
7
Mortgage assumed
 
(87,225)
 
7

The allocation of purchase price for all properties except 3344 Peachtree and 245 Riverside was preliminary at June 30, 2011.

On May 18, 2011, the Company closed on the agreement with Eola Capital, LLC (“Eola”) in which Eola contributed its Property Management Company (the “Management Company”) to Parkway.  Eola’s principals contributed the Management Company to Parkway for initial consideration of $32.4 million in cash and Eola’s principals have the opportunity to earn (i) up to 1.574 million units of limited partnership interest in Parkway’s operating partnership (“OP Units”) through an earn-out arrangement and (ii) up to 226,000 additional OP Units through an earn-up arrangement.  To the extent earned, all OP Units are redeemable for shares of Parkway common stock on a one-for-one basis.  Earn-out and earn-up consideration is contingent upon the achievement by the Management Company of targeted annual gross fee revenue and/or share price levels during an initial period for the balance of 2011 after closing and a second period for the full calendar year 2012.  Parkway also has protections against fee income loss in the form of a provision requiring specific payments to Parkway in the event of certain terminations of existing management contracts and a non-compete agreement with regard to the existing management contracts of the Management Company.  The Management Company was contributed to a wholly-owned taxable REIT subsidiary and therefore, the Company began incurring income tax expenses upon closing of the agreement.  The Management Company currently manages assets totaling approximately 11.2 million square feet.  Parkway funded the cash consideration for the Management Company contribution with operating cash flow, proceeds from the disposition of office properties, proceeds from an equity issuance and amounts available under the Company’s credit facilities.

The unaudited pro forma effect on the Company’s results of operations for the purchase of 3344 Peachtree, 245 Riverside, Corporate Center Four, Two Liberty Place, Two Ravinia Drive, Bank of America Center, Cypress Center, Hayden Ferry I and the Management Company as if the purchase had occurred on January 1, 2010 is as follows (in thousands, except per share data):
 
 

 
     Three Months Ended      Six Months Ended
     June 30      June 30
   
2011
   
2010
   
2011
   
2010
Revenues
$
82,134 
 
$
80,174 
 
$
174,035 
 
$
167,402 
Net income (loss) attributable to
common stockholders
 
$
(8,947)
 
 
$
2,891 
 
 
$
(13,592)
 
 
$
4,393 
Basic net income (loss) attributable to
common stockholders
 
$
(0.42)
 
 
$
0.14 
 
 
$
(0.63)
 
 
$
0.21 
Diluted net income (loss) attributable to
common stockholders
 
$
(0.42)
 
 
$
0.13 
 
 
$
(0.63)
 
 
$
0.20 

On July 6, 2011, RubiconPark II, LLC, sold Maitland 200 for a gross sale price of $23.0 million.  Maitland 200 is a 204,000 square foot office property located in the Maitland submarket of Orlando.  The $16.9

 
11

 

million mortgage loan secured by the property was repaid upon closing.  Parkway owned a 20% interest in the property and received a priority distribution after the repayment of secured debt of approximately $2.8 million, which was used to reduce amounts outstanding under the Company’s credit facility.  The Company estimates that it will recognize a gain on the sale of approximately $690,000 during the third quarter of 2011.  Parkway Realty Services, LLC, a subsidiary of the Company, will continue to provide management services and receive management fee income for the property.

On July 19, 2011, the Company sold Greenbrier Towers I & II for a gross sale price of $16.7 million.  The two office properties total 172,000 square feet and are located in the Greenbrier area of Chesapeake, Virginia, also known as Hampton Roads and the sale represents the final exit of the market.  The properties were unencumbered with debt at the time of the sale.  Parkway received approximately $16.1 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's credit facility.  The Company classified the property as held for sale and estimates that it will record a gain on the sale of real estate of approximately $1.2 million during the third quarter of 2011.

Subsequent to June 30, 2011, the Company was under contract to sell, with buyer earnest money deposits non-refundable, an additional 380,000 square feet of wholly-owned office properties located in Columbia, South Carolina and Richmond, Virginia.  The asset sales are subject to customary closing requirements, and the Company expects that these sales will be completed in the third quarter 2011.  The Company recorded a non-cash impairment loss of $1.7 million related to a non-core office property targeted for sale in Columbia, South Carolina.  As a result, the Company estimated that the fair value of this property was less than its carrying value at June 30, 2011.  Therefore, an impairment loss was recognized on this property during the second quarter of 2011.

Note E – Discontinued Operations

All current and prior period income from the following office property dispositions is included in discontinued operations for the three months and six months ended June 30, 2011 and 2010 (in thousands).

Office Property
 
Location
 
Square
Feet
 
Date of
Sale
   
Net Sales
Price
   
Net Book
Value of
Real Estate
   
Gain on
Sale
One Park Ten
 
Houston, Texas
 
163 
 
04/15/10
 
$
14,924 
 
$
6,406 
 
$
8,518 
2010  Dispositions
     
163 
     
$
14,924 
 
$
6,406 
 
$
8,518 
                               
233 North Michigan
 
Chicago, Illinois
 
1,070 
 
05/11/11
 
$
156,546 
 
$
152,254 
 
$
4,292 
2011 Dispositions
     
1,070 
     
$
156,546 
 
$
152,254 
 
$
4,292 

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office building in Chicago, Illinois, for gross proceeds of $162.2 million and recorded a gain on the sale of $4.3 million.  Accordingly, income from 233 North Michigan has been classified as discontinued operations for all current and prior periods presented.



 



 
12

 

The amount of revenue and expense for these two office properties reported in discontinued operations for the three months and six months ended June 30, 2011 and 2010 is as follows (in thousands):

 
Three Months ended
June 30
   
Six Months Ended
June 30
 
2011
 
2010
   
2011
 
2010
Income statement:
               
Revenues
                 
Income from office and parking properties
$ 3,261   $ 7,876     $ 10,348   $ 16,263
    3,261     7,876       10,348     16,263
                         
Expenses
                       
Office and parking properties:
                       
Operating expense
  1,880     4,044       5,803     8,478
Interest expense
  180     1,283       1,263     2,582
Depreciation and amortization
  595     1,896       2,410     3,928
    2,655     7,223       9,476     14,988
                         
Income from discontinued operations
  606     653       872     1,275
Gain on sale of real estate from discontinued operations
  4,292     8,518       4,292     8,518
Total discontinued operations
$ 4,898   $ 9,171     $ 5,164   $ 9,793

Note F – Mortgage Loans

The Company owns the B participation piece (the “B piece”) of a first mortgage secured by an 844,000 square foot office building in Dallas, Texas known as 2100 Ross at an original cost of $6.9 million.  The B piece was originated by Wachovia Bank, N.A., a Wells Fargo Company, and has a face value of $10.0 million and a stated coupon rate of 6.065%. Upon maturity in May 2012, the Company will receive a principal payment of $10.0 million, which produces a yield to maturity of 15.6%.  The carrying amount of the mortgage loan was $9.2 million at June 30, 2011.

During the second quarter, the borrower entered into default on the mortgage secured by 2100 Ross, including the B piece held by the Company.  At this time, the Company views its investment in the B piece as recoverable and intends to pursue its rights under various loan agreements.

In connection with the sale of One Park Ten, the Company seller-financed a $1.5 million note receivable that bears interest at 7.25% per annum on an interest-only basis through maturity in June 2012.  The carrying amount of the mortgage loan was $1.5 million at June 30, 2011.

Note G – Investment in Unconsolidated Joint Ventures

In addition to the 69 office and parking properties included in the consolidated financial statements, the Company is also invested in two unconsolidated joint ventures with unrelated investors. These investments are accounted for using the equity method of accounting, as Parkway does not control any of these joint ventures.  Accordingly, the assets and liabilities of the joint ventures are not included on Parkway’s consolidated balance sheets at June 30, 2011 and December 31, 2010. Information relating to these unconsolidated joint ventures is detailed below (in thousands).

           
Parkway’s
   
     
Ownership
Square
Percentage
Joint Venture Entity
Property Name
Location
Interest
Feet
Leased
Parkway Joint Venture, LLC (“Jackson JV”)
UBS Building/River Oaks
Jackson, MS
20.0%
167 
83.8%
RubiconPark II, LLC (“Maitland JV”)
Maitland 200
Orlando, FL
20.0%
205 
95.7%
       
372 
90.4%

Cash distributions from unconsolidated joint ventures are made to each partner based on their percentage of ownership in each entity.  Cash distributions made to partners in joint ventures where the percentage of debt assumed is disproportionate to the ownership percentage in the venture is distributed based on

 
13

 

each partner’s share of cash available for distribution before debt service, based on their ownership percentage, less the partner’s share of debt service based on the percentage of debt assumed by each partner.

Parkway provides management, construction and leasing services for all of the unconsolidated joint ventures and receives market based fees for these services.  The Company recognizes its share of fees earned from unconsolidated joint ventures in management company income.

At June 30, 2011 and December 31, 2010, the Company’s investment in unconsolidated joint ventures was $1.8 million or 0.1% of total assets and $2.9 million or 0.2% of total assets, respectively.

On February 4, 2011, the Company purchased its partner’s 50% interest in the Wink JV for $250,000.  The Wink JV was established for the purpose of owning the Wink Building, a 32,000 square foot office property in New Orleans, Louisiana.  Upon completing the purchase of its partner’s interest, Parkway now owns 100% of the Wink Building.

On July 6, 2011, RubiconPark II, LLC, sold Maitland 200 for a gross sale price of $23.0 million.  Maitland 200 is a 204,000 square foot office property located in the Maitland submarket of Orlando.  The $16.9 million mortgage loan secured by the property was repaid upon closing.  Parkway owned a 20% interest in the property and received a priority distribution after the repayment of secured debt of approximately $2.8 million, which was used to reduce amounts outstanding under the Company’s credit facility.  The Company estimates that it will recognize a gain on the sale of approximately $690,000 during the third quarter of 2011.  Parkway Realty Services, LLC, a subsidiary of the Company, will continue to provide management services and receive management fee income for the property.

The Company’s share of debt related to its unconsolidated joint venture is the same as its ownership percentage in the venture.  The terms related to Parkway’s share of unconsolidated joint venture mortgage debt are summarized below for June 30, 2011 and December 31, 2010 (in thousands):

 
Parkway’s
   
Monthly
   
Loan
   
Loan
 
Type of
Interest
 
Share
   
Debt
   
Balance
   
Balance
Description
Debt Service
Rate
Maturity
of Debt
   
Service
   
6/30/11
   
12/31/10
Jackson JV
Amortizing
5.84%
07/01/15
20.00%
 
$
12 
 
$
2,457 
 
$
2,474 
           
$
12 
 
$
2,457 
 
$
2,474 
                   
5.84%
   
5.84%

Parkway's share of the scheduled principal payments on mortgage debt at June 30, 2011, for the unconsolidated joint ventures for each of the next five years through maturity are as follows (in thousands):

Schedule of Mortgage Maturities by Year:
 
Jackson
JV
                     2011 (remaining six months)
$
17 
                     2012
 
37 
                     2013
 
39 
                     2014
 
41 
                     2015
 
2,323 
 
$
2,457 

Note H – Management Contracts

During the second quarter of 2011, as part of the Company’s combination with Eola, Parkway purchased the management contracts associated with Eola’s property management business.  At the purchase date, the contracts were valued by an independent appraiser at $52.0 million.  The value of the management contracts is based on the sum of the present value of future cash flows attributable to the management contracts, in addition to the value of tax savings as a result of the amortization of intangible assets.  During the second quarter of 2011, the Company recorded amortization expense of $419,000 on the management contracts.  Also, in conjunction with the valuation of the management company, the Company recorded $11.4 million of goodwill.  At June 30, 2011, the allocation of purchase price is still preliminary.

 
14

 

Note I - Capital and Financing Transactions

At June 30, 2011, the Company had a total of $166.2 million outstanding under its credit facilities (collectively, the “Credit Facility”) and was in compliance with all loan covenants under each credit facility.  The interest rate on the Company’s credit facility is based on LIBOR plus 275 to 350 basis points depending on the Company’s overall leverage, with the current rate set at LIBOR plus 350 basis points.  Additionally, the Company pays fees on the unused portion of the Company’s credit facility ranging between 40 and 50 basis points based upon usage of the aggregate commitment, with the current rate set at 40 basis points.

Mortgage notes payable at June 30, 2011 totaled $959.5 million with an average interest rate of 5.8% and were secured by office properties.

On January 31, 2011, the Company closed a new $190.0 million unsecured revolving credit facility and a new $10.0 million unsecured working capital revolving credit facility.  The new credit facilities have an initial term of three years and replaced the existing unsecured revolving credit facility, term loan and working capital facility that were scheduled to mature on April 27, 2011.  The Company had a $100.0 million interest rate swap associated with the credit facilities that expired March 31, 2011, and locked LIBOR at 3.635%.  Wells Fargo Securities and JP Morgan Securities LLC acted as Joint Lead Arrangers and Joint Book Runners on the unsecured revolving credit facility.  In addition, Wells Fargo Bank, N.A. acted as Administration Agent and JPMorgan Chase Bank, N.A. acted as Syndication Agent.  Other participating lenders include PNC Bank, N.A., Bank of America, N.A., US Bank, N.A., Trustmark National Bank, and BancorpSouth Bank.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

On January 21, 2011, in connection with its purchase of 3344 Peachtree in Atlanta, Georgia, Fund II assumed the $89.6 million existing non-recourse first mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase.

On February 18, 2011, Fund II obtained a $10.0 million mortgage loan secured by Carmel Crossing, a 326,000 square foot office complex in Charlotte, North Carolina.  The mortgage loan has a fixed rate of 5.5% and is interest only through maturity at March 10, 2020.  Parkway received $2.4 million in net proceeds from the loan, which represents its 30% equity investment in the property.  The proceeds were used to reduce amounts outstanding under the Company’s credit facility.

On March 31, 2011, Fund II obtained a $9.3 million mortgage loan secured by 245 Riverside, a 135,000 square foot office property in Jacksonville, Florida.  The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of March 31, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.3% through September 30, 2018.

On April 8, 2011, Fund II obtained a $22.5 million mortgage loan secured by Corporate Center Four, a 250,000 square foot office property in Tampa, Florida.  The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of April 8, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.4% through October 8, 2018.

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office property located in the central business district of Chicago, for a gross sale price of $162.2 million.  At closing, the Company repaid the $84.6 million non-recourse mortgage loan secured by the property that was scheduled to mature in July 2011.  Parkway received net cash proceeds after the repayment of the mortgage loan of approximately $74 million, which were used to reduce amounts outstanding under the Company’s credit facility.  The Company recognized a gain on extinguishment of debt of $302,000 during the second quarter of 2011, which is recorded in income from discontinued operations.

On May 18, 2011, Fund II obtained the following mortgage loans in connection with the purchase of four office properties:

·  
A $12.1 million non-recourse mortgage loan secured by Cypress Center, a 286,000 square foot office complex in the Westshore submarket of Tampa, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2016. Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.1% through November 18, 2015.

 
15

 
 
·  
A $33.9 million non-recourse mortgage loan secured by Bank of America Center, a 421,000 square foot office property in the central business district of Orlando, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2018.  Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.7% through November 18, 2017.

·  
A $22.1 million non-recourse mortgage loan secured by Two Ravinia Drive, a 438,000 square foot office property located in the Central Perimeter submarket of Atlanta, Georgia.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 20, 2019.  Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.99% through November 18, 2018.

·  
A $90.2 million non-recourse mortgage loan secured by Two Liberty Place, a 941,000 square foot office property located in the central business district of Philadelphia, Pennsylvania.  The mortgage loan has a fixed rate of 5.2% and a maturity date of June 10, 2019.

On May 18, 2011, the Company issued 1.0 million additional shares of its 8.0% Series D Cumulative Redeemable Preferred Stock to an institutional investor at a price of $25.00 per share, equating to a yield of 8.0%.  The Series D Preferred Stock has a $25.00 liquidation value per share and is redeemable at the option of the Company at any time upon proper notice.  The Company used the net proceeds of approximately $26.2 million to fund the combination with Eola and the Company’s share of equity contributions to purchase Fund II office properties.

On June 1, 2011, the Company repaid a $9.9 million non-recourse mortgage loan secured by Forum I, a 163,000 square foot office property in Memphis, Tennessee.  The mortgage loan had a fixed interest rate of 5.3%.  The Company repaid the mortgage loan using available proceeds under the credit facility.

On June 1, 2011, the Company elected not to pay a $8.5 million non-recourse mortgage loan secured by the Wells Fargo Building, a 136,000 square foot office building in Houston.  This mortgage loan had a fixed interest rate of 4.4%.  The Company is currently in default on this mortgage and is in discussions with the lender.  The Company evaluated this building and determined that no impairment loss should be recorded at June 30, 2011.

On June 30, 2011, Fund II acquired Hayden Ferry I located in the Tempe submarket of Phoenix for $39.4 million.  In connection with the purchase, on July 25, 2011, Fund II placed a $22 million non-recourse mortgage loan with a fixed interest rate of 4.5%, an initial thirty-six month interest only period, and a maturity date of July 25, 2018.  Parkway’s equity contribution of $5.2 million was initially funded through availability under the Company’s credit facility.

 



 
16

 

Note J - Noncontrolling Interest - Real Estate Partnerships

The Company has an interest in two joint ventures that are included in its consolidated financial statements. Information relating to these consolidated joint ventures is detailed below.

 
Parkway’s
 
Square Feet
Joint Venture Entity and Property Name
 
Location
 
Ownership %
 
(In thousands)
Parkway Properties Office Fund, LP
           
Desert Ridge Corporate Center
 
Phoenix, AZ
 
26.50%
 
293
Maitland 100
 
Orlando, FL
 
25.00%
 
128
555 Winderley
 
Orlando, FL
 
25.00%
 
102
Gateway Center
 
Orlando, FL
 
25.00%
 
229
BellSouth Building
 
Jacksonville, FL
 
25.00%
 
92
Centurion Centre
 
Jacksonville, FL
 
25.00%
 
88
100 Ashford Center
 
Atlanta, GA
 
25.00%
 
160
Peachtree Ridge
 
Atlanta, GA
 
25.00%
 
161
Overlook II
 
Atlanta, GA
 
25.00%
 
260
U.S. Cellular Plaza
 
Chicago, IL
 
40.00%
 
610
Chatham Centre
 
Schaumburg, IL
 
25.00%
 
206
Renaissance Center
 
Memphis, TN
 
25.00%
 
190
1401 Enclave Parkway
 
Houston, TX
 
25.00%
 
209
Total Parkway Properties Office Fund, LP
         
2,728
             
Parkway Properties Office Fund II, LP
           
    Hayden Ferry Lakeside I
 
Phoenix, AZ
 
30.00%
 
203
    245 Riverside
 
Jacksonville, FL
 
30.00%
 
135
    Bank of America Center
 
Orlando, FL
 
30.00%
 
421
    Corporate Center Four at International Plaza
 
Tampa, FL
 
30.00%
 
250
    Cypress Center I - III
 
Tampa, FL
 
30.00%
 
286
    Falls Pointe
 
Atlanta, GA
 
30.00%
 
107
    Lakewood II
 
Atlanta, GA
 
30.00%
 
128
    3344 Peachtree
 
Atlanta, GA
 
33.03%
 
485
    Two Ravinia
 
Atlanta, GA
 
30.00%
 
438
    Carmel Crossing
 
Charlotte, NC
 
30.00%
 
326
    Two Liberty Place
 
Philadelphia, PA
 
19.00%
 
941
Total Parkway Properties Office Fund II, LP
         
3,720
             
Total Consolidated Joint Ventures
         
6,448

Parkway serves as the general partner of Parkway Properties Office Fund, LP (“Fund I”) and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash distributions from the fund are made to each joint venture partner based on their percentage of ownership in the fund.  Because Parkway is the sole general partner and has the authority to make major decisions on behalf of the fund, Parkway is considered to have a controlling interest.  Accordingly, Parkway is required to consolidate the fund in its consolidated financial statements. At February 15, 2008, Fund I was fully invested.

In 2008, Parkway formed Fund II, a $750.0 million discretionary fund with the Teacher Retirement System of Texas (“TRST”), for the purpose of acquiring high-quality multi-tenant office properties.  TRST is a 70% investor, and Parkway is a 30% investor in the fund, which, when fully funded, will be capitalized with approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway’s share of the equity contribution for the fund will be $112.5 million and will be funded with operating cash flow, proceeds from asset sales, issuance of equity securities and/or advances on the credit facility as needed on a temporary basis.  Fund II targets acquisitions in the core markets of Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, and Ft. Lauderdale, as well as other growth markets to be determined at Parkway’s discretion.  As of June 30, 2011, Fund II included investments in eleven office properties totaling $640.4 million which represents 85.4% of the fund’s $750.0 million investment capacity.

An existing institutional investor in Two Liberty Place retained an 11% ownership in the property.  Parkway’s pro rata share of Two Liberty Place is 19% and Parkway’s partner in Fund II owns the remaining 70% interest.

Parkway serves as the general partner of Fund II and provides asset management, property management, and leasing and construction management services to the fund for which it is paid market-based

 
17

 

fees.  Parkway exclusively represents the fund in making acquisitions within the target markets and within certain predefined criteria.  Parkway may continue to make fee-simple acquisitions in markets outside of the target markets, acquire properties within the target markets that do not meet the fund’s specific criteria or sell any currently owned properties.  Because Parkway is the sole general partner and has the authority to make major decisions on behalf of the fund, Parkway is considered to have a controlling interest.  Accordingly, Parkway is required to consolidate the fund in its consolidated financial statements.

Noncontrolling interest - real estate partnerships represents the other partners’ proportionate share of equity in the partnerships discussed above at June 30, 2011.

Note K - Share-Based and Long-Term Compensation Plans

Effective May 1, 2010, the stockholders of the Company approved Parkway’s 2010 Omnibus Equity Incentive Plan (the “2010 Equity Plan”) that authorized the grant of up to 600,000 equity based awards to employees and directors of the Company. The 2010 Equity Plan replaces the Company’s 2003 Equity Incentive Plan and the 2001 Non-Employee Directors Equity Compensation Plan.  At present, it is Parkway’s intention to grant restricted shares and/or deferred incentive share units instead of stock options although the 2010 Equity Plan authorizes various forms of incentive awards, including options.  The 2010 Equity Plan has a ten-year term.

Compensation expense, including estimated forfeitures, for service-based awards is recognized over the expected vesting period.  The total compensation expense for the long-term equity incentive awards granted under the FOCUS Plan is based upon the fair value of the shares on the grant date, adjusted for estimated forfeitures.  Time-based restricted shares and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway common shares (NYSE ticker symbol, PKY) as of the date of grant.  The grant date fair value for awards that are subject to market conditions is determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

Restricted shares and deferred incentive share units are forfeited if an employee leaves the Company before the vesting date except in the case of the employee’s death or permanent disability or upon termination following a change of control.  Shares and/or units that are forfeited become available for future grant under the 2010 Equity Plan.

Compensation expense related to restricted shares and deferred incentive share units of $888,000 and $391,000 was recognized for the six months ended June 30, 2011 and 2010, respectively.  Total compensation expense related to nonvested awards not yet recognized was $4.2 million at June 30, 2011.  The weighted average period over which the expense is expected to be recognized is approximately 2.5 years.

On January 9, 2011, 25,935 restricted shares vested and were issued to officers of the Company due to the achievement of performance goals established in 2009 by the Board of Directors.

On January 12, 2011, 27,125 restricted shares vested and were issued to officers of the Company.  These shares were granted in January 2007 and vested four years from the grant date.

On January 14, 2011, the Board of Directors approved 55,623 FOCUS Plan long-term equity incentive awards to officers of the Company.  The long-term equity incentive awards are valued at $736,000 which equates to an average price per share of $13.23 and consist of 25,620 time-based awards, 16,883 market condition awards subject to an absolute total return goal, and 13,120 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On May 12, 2011, the Company’s Board of Directors, upon the recommendation of the Compensation Committee, approved the Parkway Properties, Inc. 2011 Employee Inducement Award Plan (the “2011 Inducement Plan”).  The 2011 Inducement Plan is substantively similar to the Company’s 2010 Omnibus Equity Incentive Plan, approved by the Company’s stockholders on May 13, 2010, however the potential awards under the 2011 Inducement Plan are limited to shares of restricted stock and restricted share units to new employees of the Company as a result of the Company’s combination with Eola.

 
18

 

On May 18, 2011, the Board of Directors approved 63,241 FOCUS Plan long-term equity incentive awards to new officers of the Company.  The long-term equity incentive awards are valued at $577,000 which equates to an average price per share of $9.12 and consist of 11,384 time-based awards, 29,091 market condition awards subject to an absolute total return goal, and 22,766 market condition awards subject to a relative total return goal.  The Company also awarded 17,530 deferred incentive share units to approximately 136 other former employees of Eola who became employees of the Company effective May 18, 2011.  These shares will be accounted for as equity-classified awards.

Also on May 18, 2011, the Board of Directors approved 68,802 FOCUS Plan long-term equity incentive awards to new officers of the Company effective June 1, 2011.  The long-term equity incentive awards are valued at $628,000 which equates to an average price per share of $9.13 and consist of 12,384 time-based awards, 31,649 market condition awards subject to an absolute total return goal, and 24,769 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On June 20, 2011, the Board of Directors approved 8,705 FOCUS Plan long-term equity incentive awards to officers of the Company.  The long-term equity incentive awards are valued at $68,000 which equates to an average price per share of $7.81 and consist of 534 time-based awards, 4,584 market condition awards subject to an absolute total return goal, and 3,587 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On July 1, 2011, 6,345 restricted shares vested and were issued to officers of the Company.  These shares were granted in July 2010 and vested one year from the grant date.

The time-based awards granted as part of the FOCUS plan will vest ratably over four years from the date the shares are granted.  The market condition awards granted as part of the FOCUS Plan are contingent on the Company meeting goals for compounded annual total return to stockholders (“TRS”) over the three year period beginning July 1, 2010.  The market condition goals are based upon (i) the Company’s absolute compounded annual TRS; and (ii) the Company’s absolute compounded annual TRS relative to the compounded annual return of the MSCI US REIT (“RMS”) Index calculated on a gross basis, as follows:

 
Threshold
Target
Maximum
Absolute Return Goal
10%
12%
14%
Relative Return Goal
RMS + 100 bps
RMS + 200 bps
RMS + 300 bps

With respect to the absolute return goal, 15% of the award is earned if the Company achieves threshold performance and a cumulative 60% is earned for target performance.  With respect to the relative return goal, 20% of the award is earned if the Company achieves threshold performance and a cumulative 55% is earned for target performance.  In each case, 100% of the award is earned if the Company achieves maximum performance or better.  To the extent actually earned, the market condition awards will vest 50% on each of July 15, 2013 and 2014.

The FOCUS Plan also includes a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010.  The performance goals for actual payment under the long-term cash incentive will require the Company to (i) achieve an absolute compounded annual TRS that exceeds 14% AND (ii) achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 500 basis points.  Notwithstanding the above goals, in the event the Company achieves an absolute compounded annual TRS that exceeds 19%, then the Company must achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 600 basis points.  The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRS achieved by the Company.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual TRS that approximates 23%, provided that the absolute compounded annual TRS exceeds the compounded annual return of the RMS by at least 600 basis points.  The total compensation expense for the long-term cash incentive awards granted under the FOCUS Plan is based upon the fair market value of the award on the grant date and adjusted as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on the Company’s consolidated balance sheets.  The grant date  and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

 
19

 


A summary of the Company’s restricted shares and deferred incentive share unit activity for the six months ended June 30, 2011 is as follows:

     
Weighted
     
Weighted
     
Average
 
Deferred
 
Average
 
Restricted
 
Grant-Date
 
Incentive
 
Grant-Date
 
Shares
 
Fair Value
 
Share Units
 
Fair Value
Balance at 12/31/10
479,930 
 
 $
12.81 
 
15,640 
 
 $
25.71 
Issued
196,371 
 
10.23 
 
17,010 
 
16.37 
Vested
(53,060)
 
34.47 
 
(30)
 
52.36 
Forfeited
-  
 
 
(1,390)
 
26.15 
Balance at 06/30/11
623,241 
 
 $
10.15 
 
31,230 
 
 $
20.58 

Note L - Fair Values of Financial Instruments

FASB Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities.  The Codification requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

Cash and cash equivalents

The carrying amounts for cash and cash equivalents approximated fair value at June 30, 2011 and December 31, 2010.

Mortgage loan receivable

The Company owns the B participation piece (the “B piece”) of a first mortgage secured by an 844,000 square foot office building in Dallas, Texas known as 2100 Ross, and the carrying amount of the mortgage loan was approximately $9.2 million and $8.8 million at June 30, 2011 and December 31, 2010, respectively.  In connection with the sale of One Park Ten, the Company seller-financed a $1.5 million note receivable, and the carrying amount of the note was $1.5 million at June 30, 2011 and December 31, 2010.  The carrying amount of each mortgage loan approximated fair value at June 30, 2011 and December 31, 2010.

Mortgage notes payable

The fair value of the mortgage notes payable is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.  The aggregate fair value of the mortgage notes payable at June 30, 2011 was $876.3 million as compared to its carrying amount of $959.5 million.  The aggregate fair value of the mortgage notes payable at December 31, 2010 was $734.6 million as compared to its carrying amount of $773.5 million.

Notes payable to banks

The fair value of the Company’s notes payable to banks is estimated by discounting expected cash flows at current market rates.  The aggregate fair value of the notes payable to banks at June 30, 2011 was $149.7 million as compared to its carrying amount of $166.2 million.  The aggregate fair value of the notes payable to banks at December 31, 2010 was $109.6 million as compared to its carrying amount of $110.8 million.

 
20

 

Interest rate swap agreements

The fair value of the interest rate swaps is determined by estimating the expected cash flows over the life of the swap using the mid-market rate and price environment as of the last trading day of the reporting period.  This information is considered a Level 2 input as defined by ASC 820.  The aggregate fair value liability of the interest rate swaps at June 30, 2011 and December 31, 2011 was $5.4 million and $3.0 million, respectively.

Note M – Litigation

As previously disclosed, J. Mitchell Collins, the Company's former Chief Financial Officer, has brought and threatened claims against the Company relating to the termination of his employment with the Company.  There have been no significant changes in the litigation by Mr. Collins since the filing of the Company's Form 10-K for the year ended December 31, 2010, and management continues to believe that the final outcome of the litigation by Mr. Collins will not have a material adverse effect on the Company's financial statements.  In early April 2011, the Company filed an injunction action against Mr. Collins, Parkway Properties, Inc. v. J. Mitchell Collins, Madison County (MS) No. 2011-340-G, seeking a permanent injunction forbidding Mr. Collins to assume an anonymous or false identity to communicate any accusation against the Company.

Note N - Segment Information
 

Parkway’s primary business is the ownership and operation of office properties.  The Company accounts for each office property or groups of related office properties as an individual operating segment.  Parkway has aggregated its individual operating segments into a single reporting segment due to the fact that the individual operating segments have similar operating and economic characteristics.

The Company believes that the individual operating segments exhibit similar economic characteristics such as being leased by the square foot, sharing the same primary operating expenses and ancillary revenue opportunities and being cyclical in the economic performance based on current supply and demand conditions.  The individual operating segments are also similar in that revenues are derived from the leasing of office space to customers and each office property is managed and operated consistently in accordance with Parkway’s standard operating procedures.  The range and type of customer uses of our properties is similar throughout our portfolio regardless of location or class of building and the needs and priorities of our customers do not vary from building to building. Therefore,  Parkway’s management responsibilities do not vary from location to location based on the size of the building, geographic location or class.

The management of the Company evaluates the performance of the reportable office segment based on funds from operations attributable to common stockholders (“FFO”).  Management believes that FFO is an appropriate measure of performance for equity REITs and computes this measure in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO.  Funds from operations is defined by NAREIT as net income (computed in accordance with GAAP), excluding gains or losses from sales of property and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive the Company’s pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, the Company does not adjust FFO to eliminate the effects of non-recurring charges.  The Company 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 real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP.  The Company believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Parkway may not
 
21

 

be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. Funds from operations do not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds from operations should not be considered an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow as a measure of liquidity.


 
22

 

The following is a reconciliation of FFO and net income (loss) attributable to common stockholders for office properties and total consolidated entities for the three months ended June 30, 2011 and 2010.  Amounts presented as “Unallocated and Other” represent primarily income and expense associated with providing management services, corporate general and administration expense, interest expense on the Company’s credit facility and preferred dividends.

 
At or for the three months ended
   
At or for the three months ended
 
June 30, 2011
   
June 30, 2010
 
Office
   
Unallocated
         
Office
   
Unallocated
     
 
Properties
   
and Other
   
Consolidated
   
Properties
   
and Other
   
Consolidated
         (in thousands)                  (in thousands)      
 
(Unaudited)
 
Income from office and parking properties (a)
 
$
68,385 
 
$
 
$
68,385 
 
$
54,396 
 
$
 
$
54,396 
Management company income
 
   
3,532 
   
3,532 
   
   
336 
   
336 
Property operating expenses (b)
 
(30,328)
   
   
(30,328)
   
(25,604)
   
   
(25,604)
Depreciation and amortization
 
(26,521)
   
   
(26,521)
   
(19,614)
   
   
(19,614)
Management company expenses
 
   
(3,202)
   
(3,202)
   
   
(641)
   
(641)
Income tax expense
 
   
(224)
   
(224)
   
   
(100)
   
(100)
General and administrative expenses
 
   
(1,671)
   
(1,671)
   
   
(1,612)
   
(1,612)
Acquisition costs
 
(1,819)
   
(12,561)
   
(14,380)
   
   
   
Other income
 
   
438 
   
438 
   
   
365 
   
365 
Equity in earnings of unconsolidated joint ventures
 
44 
   
   
44 
   
87 
   
   
87 
Interest expense (c)
 
(13,196)
   
(1,675)
   
(14,871)
   
(11,015)
   
(1,548)
   
(12,563)
Adjustment for noncontrolling interest-real estate partnerships
 
3,371 
   
   
3,371 
   
2,638 
   
   
2,638 
Income from discontinued operations
 
606 
   
   
606 
   
653 
   
   
653 
Gain on sale of real estate from discontinued operations
 
4,292 
   
   
4,292 
   
8,518 
   
   
8,518 
Impairment loss on real estate
 
(1,700)
   
   
(1,700)
   
   
   
Dividends on preferred stock
 
   
(2,444)
   
(2,444)
   
   
(1,200)
   
(1,200)
Net income (loss) attributable to common stockholders
 
3,134 
   
(17,807)
   
(14,673)
   
10,059 
   
(4,400)
   
5,659 
                                   
Depreciation and amortization
 
26,521 
   
   
26,521 
   
19,614 
   
   
19,614 
Depreciation and amortization – discontinued operations
 
595 
   
   
595 
   
1,896 
   
   
1,896 
Depreciation and amortization noncontrolling interest – real estate partnerships
 
(8,214)
   
   
(8,214)
   
(4,480)
   
   
(4,480)
Adjustment for depreciation and amortization-unconsolidated joint ventures
 
72 
 
 
   
72 
   
85 
   
   
85 
Gain on sale of real estate from discontinued operations
 
(4,292)
   
   
(4,292)
   
(8,518)
   
   
(8,518)
Funds from operations available to common stockholders
$
17,816 
 
$
(17,807)
 
$
 
$
18,656 
 
$
(4,400)
 
$
14,256 
                                   
Capital expenditures (d)
$
18,153 
 
$
 
$
18,153 
 
$
12,121 
 
$
 
$
12,121 

(a)
Included in income from office and parking properties are rental revenues, customer reimbursements, parking income and other income.

(b)
Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.

(c)
Interest expense for office properties represents interest expense on property secured mortgage debt.  It does not include interest expense on the Company’s unsecured line of credit, which is included in “Unallocated and Other”.

(d)
Capital expenditures include building improvements, tenant improvements and deferred leasing costs.




 
23

 

The following is a reconciliation of FFO and net income (loss) attributable to common stockholders for office properties and total consolidated entities for the six months ended June 30, 2011 and 2010.  Amounts presented as “Unallocated and Other” represent primarily income and expense associated with providing management services, corporate general and administration expense, interest expense on the Company’s credit facility and preferred dividends.

 
At or for the six months ended
   
At or for the six months ended
 
June 30, 2011
   
June 30, 2010
 
Office
   
Unallocated
         
Office
   
Unallocated
     
 
Properties
   
and Other
   
Consolidated
   
Properties
   
and Other
   
Consolidated
 
(in thousands)
 
(in thousands)
 
(Unaudited)
 
Income from office and parking properties (a)
 
$
128,478 
 
$
 
$
128,478 
 
$
115,778 
 
$
 
$
115,778 
Management company income
 
   
3,870 
   
3,870 
   
   
746 
   
746 
Property operating expenses (b)
 
(57,415)
   
   
(57,415)
   
(52,536)
   
   
(52,536)
Depreciation and amortization
 
(49,606)
   
   
(49,606)
   
(40,324)
   
   
(40,324)
Management company expenses
 
   
(4,079)
   
(4,079)
   
   
(1,385)
   
(1,385)
Income tax expense
 
   
(224)
   
(224)
   
   
(117)
   
(117)
General and administrative expenses
 
   
(3,478)
   
(3,478)
   
   
(3,603)
   
(3,603)
Acquisition costs
 
(2,764)
   
(13,965)
   
(16,729)
   
   
   
Other income
 
   
762 
   
762 
   
   
750 
   
750 
Equity in earnings of unconsolidated joint ventures
 
79 
   
   
79 
   
192 
   
   
192 
Interest expense (c)
 
(24,731)
   
(3,781)
   
(28,512)
   
(22,034)
   
(3,083)
   
(25,117)
Adjustment for noncontrolling interest-real estate partnerships
 
6,566 
   
   
6,566 
   
5,225 
   
   
5,225 
Income from discontinued operations
 
872 
   
   
872 
   
1,275 
   
   
1,275 
Gain on sale of real estate from discontinued operations
 
4,292 
   
   
4,292 
   
8,518 
   
   
8,518 
Impairment loss on real estate
 
(1,700)
   
   
(1,700)
   
-
   
   
Dividends on preferred stock
 
   
(4,631)
   
(4,631)
   
   
(2,400)
   
(2,400)
Net income (loss) available to common stockholders
 
4,071 
   
(25,526)
   
(21,455)
   
16,094 
   
(9,092)
   
7,002 
                                   
Depreciation and amortization
 
49,606 
   
   
49,606 
   
40,324 
   
   
40,324 
Depreciation and amortization – discontinued operations
 
2,410 
   
   
2,410 
   
3,928 
   
   
3,928 
Depreciation and amortization noncontrolling interest – real estate partnerships
 
(13,777)
   
   
(13,777)
   
(8,826)
   
   
(8,826)
Adjustment for depreciation and amortization-unconsolidated joint ventures
 
160 
 
 
   
160 
   
168 
   
   
168 
Gain on sale of real estate from discontinued operations
 
(4,292)
   
   
(4,292)
   
(8,518)
   
   
(8,518)
Funds from operations available to common stockholders
$
38,178 
 
$
(25,526)
 
$
12,652 
 
$
43,170 
 
$
(9,092)
 
$
34,078 
                                   
Total assets
$
2,005,796 
 
$
83,892 
 
$
2,089,688 
 
$
1,572,923 
 
$
13,262 
 
$
1,586,185 
                                   
Office and parking properties
$
1,719,258 
 
$
 
$
1,719,258 
 
$
1,378,637 
 
$
 
$
1,378,637 
Investment in unconsolidated joint ventures
 
$
1,807 
 
$
 
$
1,807 
 
$
2,731 
 
$
 
$
2,731 
Capital expenditures (d)
$
27,648 
 
$
 
$
27,648 
 
$
18,231 
 
$
 
$
18,231 

(a)
Included in income from office and parking properties are rental revenues, customer reimbursements, parking income and other income.

(b)
Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.

(c)
Interest expense for office properties represents interest expense on property secured mortgage debt.  It does not include interest expense on the Company’s unsecured line of credit, which is included in “Unallocated and Other”.

(d)
Capital expenditures include building improvements, tenant improvements and deferred leasing costs.


 
24

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Parkway is a self-administered and self-managed REIT specializing in the acquisition, operations, leasing and ownership of office properties.  At July 1, 2011, Parkway owned or had an interest in 71 office properties located in 12 states with an aggregate of approximately 15.3 million square feet of leasable space. Included in the portfolio are 27 properties totaling 6.8 million square feet that are owned jointly with other investors, representing 44.6% of the portfolio.  With the discretionary funds and/or partnerships, the Company receives fees for asset management, property management, leasing and construction management services and potentially receives incentive fees upon sale if certain investment targets are achieved.  Increasing the number of co-investments, and consequently the related fee income, is part of the Company’s strategy to transform itself to an operator-owner versus an owner-operator.  The strategy capitalizes on the Company’s strength in providing excellent service in the operation and acquisition of office properties for investment clients in addition to its direct ownership of real estate assets.  Fee-based real estate services are offered through wholly owned subsidiaries of the Company, which in total manage and/or lease approximately 13.0 million square feet for third party owners.  The Company generates revenue primarily by leasing office space to its customers and providing management and leasing services to third party office property owners (including joint venture interests).  The primary drivers behind Parkway’s revenues are occupancy, rental rates and customer retention.

Occupancy. Parkway’s revenues are dependent on the occupancy of its office buildings. At July 1, 2011, occupancy of Parkway’s office portfolio was 84.6% compared to 83.8% at April 1, 2011 and 85.4% at July 1, 2010.  Not included in the July 1, 2011 occupancy rate are 32 signed leases totaling 197,000 square feet, which will take occupancy between now and the second quarter of 2012.  Including these leases the Company’s portfolio was 85.8% leased at July 15, 2011.  Parkway currently anticipates an average annual occupancy range of approximately 83.5% to 85% during 2011 for its office properties.  In May 2011, the Company signed an 11 year and six month lease for approximately 135,000 square feet that would backfill nearly 60% of the 230,000 square foot Health Care Services Corporation (“BCBS”) lease that was scheduled to expire in March 2012, at the 111 East Wacker office building in Chicago, Illinois.  To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases.  These include the Broker Bill of Rights, a short-form service agreement and customer advocacy programs, which the Company believes are models in the industry and have helped the Company maintain occupancy at a premium above the national occupancy rate of approximately 83.8%.

During the second quarter 2011, 70 leases were renewed totaling 337,000 rentable square feet at an average rent per square foot of $19.34, representing a 15.5% rate decrease, and at an average cost of $1.88 per square foot per year of the lease term.  During the six months ending June 30, 2011, 128 leases were renewed totaling 724,000 rentable square feet at an average rent per square foot of $18.89, representing a 10.5% decrease, and at an average cost of $1.97 per square foot per year of the lease term.

During the second quarter 2011, 15 expansion leases were signed totaling 26,000 rentable square feet at an average rent per square foot of $18.52 and at an average cost of $3.55 per square foot per year of the lease term.  During the six months ending June 30, 2011, 28 expansion leases were signed totaling 76,000 rentable square feet at an average rent per square foot of $21.06 and at an average cost of $3.78 per square foot per year of the lease term.

During the second quarter 2011, 43 new leases were signed totaling 339,000 rentable square feet at an average rent per square foot of $23.48 and at an average cost of $4.88 per square foot per year of the term.  During the six months ending June 30, 2011, 79 new leases were signed on 500,000 rentable square feet at an average rent per square foot of $21.89 and at an average cost of $4.96 per square foot per year of the lease term.

Rental Rates. An increase in vacancy rates has the effect of reducing market rental rates and vice versa. Parkway’s leases typically have three to seven year terms.  As leases expire, the Company replaces the existing leases with new leases at the current market rental rate.  At July 1, 2011, Parkway had $1.14 per square foot in rental rate embedded loss in its office property leases.  Embedded loss is defined as the difference between the weighted average in place cash rents and the weighted average market rental rate.

 
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Customer Retention. Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs.  Parkway estimates that it costs five to six times more to replace an existing customer with a new one than to retain the customer. In making this estimate, Parkway takes into account the sum of revenue lost during downtime on the space plus leasing costs, which rise as market vacancies increase.  Therefore, Parkway focuses a great amount of energy on customer retention.  Parkway’s operating philosophy is based on the premise that it is in the customer retention business. Parkway seeks to retain its customers by continually focusing on operations at its office properties.  The Company believes in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders.  Over the past ten years, Parkway maintained an average customer retention rate of approximately 69%.  Parkway’s customer retention rate was 65.7% for the quarter ending June 30, 2011, as compared to 48.1% for the quarter ending March 31, 2011, and 69.7% for the quarter ending June 30, 2010.  Parkway’s customer retention rate for the six months ended June 30, 2011 and 2010 was 54.9% and 61.8%, respectively.

Strategic Planning.  Parkway is a focused office REIT with a hands-on, service-oriented approach, a disciplined capital allocation program and willingness to recycle assets.  However, Parkway continues to focus on the Company’s strategy of transforming itself to an operator-owner from an owner-operator, as well as maximizing total return to Parkway’s stockholders.  To show Parkway’s commitment to this goal, the Company’s newest strategic plan is centered on a goal of achieving a 12% compounded annual total return to the Company’s stockholders over a three-year period.  This plan is known as the FOCUS Plan (the “Plan”), which began July 1, 2010 and will extend three full years through June 30, 2013.  The goals of the Plan are as follows:

·  
Fund and Fund-Like Investments.  The Company believes that fund and fund-like investments have the highest priority of the Company’s capital allocation, because it gives Parkway’s stockholders the highest risk adjusted return as measured by internal rate of return, capitalization rate and accretion per share.

·  
Operator-Owner.  The Company plans to make a full transformation to an operator-owner, with the goal of being a majority operator/owner by the end of the Plan.  This has been a goal for several years and will continue to be a core strategy as Parkway seeks to increase fee income and maximize its return on equity and accretion per share.  Additionally, the Company will continue to expand PRS, which offers expert real estate management guidance, professional property management services and strategic marketing and leasing services aimed at increasing net operating income and maximizing profit upon exit.

·  
Capital Allocation Discipline.  The Company’s overall capital structure goal is to achieve a net debt to gross asset value ratio of 50%, as determined by using a capitalization rate of 8.5%, and a net debt to EBITDA multiple of 6.5 times or less.  Beyond the balance sheet, capital allocation refers to the Company’s goal to exit non-core markets through the continuation of its Asset Recycling program.  Most of the properties identified for sale are smaller assets or assets located in smaller markets where Parkway does not have a significant presence.  By the end of the Plan, the Company’s goal is to be invested in larger, higher-quality properties located in higher-rent growth markets through fund and fund-like investments.  The Company will continue to seek to maintain discipline as it relates to managing the balance sheet and the acquisition and disposition of assets.

·  
Uncompromising Focus on Operations.  Parkway believes that its uncompromising focus on operations is what sets it apart from other office property owners.  An important goal of the Plan is to move decision-making authority to the regional office level.  The Company’s market leaders already have the responsibility of setting rents, increasing net operating income margins and maintaining a consistent standard of operations and will be given more profit and loss responsibility and investment authority going forward.  It is important that  we know our markets, which is best achieved when Parkway’s people live and work within the market.  An integral part of the Plan is a program referred to as “We Know…City.”  These three words imply that Parkway employees know more than just how to manage real estate, but that they have a deep understanding of a city’s history, economics, infrastructure, politics and much more.  By truly knowing the cities where the Company is invested, we are better positioned for leasing, active asset management, recruitment and investments.

 
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·  
Shareholder Returns.  All of the previously mentioned goals funnel to the ultimate goal of the FOCUS Plan, which is to maximize total return to Parkway’s stockholders.  The Company has set a goal of achieving a 12% annual compounded total return to its shareholders for the three-year period starting July 1, 2010.

Discretionary Funds. On July 6, 2005, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $500.0 million discretionary fund, known as Parkway Properties Office Fund I, LP (“Fund I”), with Ohio Public Employee Retirement System (“Ohio PERS”) for the purpose of acquiring high-quality multi-tenant office properties. Ohio PERS is a 75% investor and Parkway is a 25% investor in the fund, which is capitalized with approximately $200.0 million of equity capital and $300.0 million of non-recourse, fixed-rate first mortgage debt. At February 15, 2008, Fund I was fully invested.

Fund I targeted properties with an anticipated leveraged internal rate of return of greater than 11%. Parkway serves as the general partner of the fund and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees. After each partner has received a 10% annual cumulative preferred return and a return of invested capital, 60% will be distributed to Ohio PERS and 40% to Parkway.  The term of Fund I will be seven years until February 2015, with provisions to extend the term for two additional one-year periods.

On May 14, 2008, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $750.0 million discretionary fund, known as Parkway Properties Office Fund II, LP (“Fund II”), with Teacher Retirement System of Texas (“TRST”) for the purpose of acquiring high-quality multi-tenant office properties.  TRST is a 70% investor and Parkway is a 30% investor in the fund, which will be capitalized with approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway’s share of the equity contribution for the fund will be $112.5 million and will be funded with operating cash flows, proceeds from asset sales, issuance of equity securities and/or advances on the credit facility as needed on a temporary basis.  Fund II targets acquisitions in the core markets of Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, and Ft. Lauderdale, as well as other growth markets to be determined at Parkway’s discretion.

Fund II targets properties with an anticipated leveraged internal rate of return of greater than 10%.  Parkway serves as the general partner of the fund and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned.  Thereafter, 56% will be distributed to TRST and 44% to Parkway.  Parkway has four years, or through May 2012, to identify and acquire properties (the “Investment Period”), with funds contributed as needed to close acquisitions.  Parkway will exclusively represent the fund in making acquisitions within the target markets and acquisitions with certain predefined criteria.  Parkway will not be prohibited from making fee-simple or joint venture acquisitions in markets outside of the target markets, acquiring properties within the target markets that do not meet Fund II’s specific criteria or selling a full or partial interest in currently owned properties.  The term of Fund II will be seven years from the expiration of the Investment Period, with provisions to extend the term for two additional one-year periods at the discretion of Parkway.  Following the purchase of Hayden Ferry I, Fund II had remaining investment capacity of $109.6 million of which $16.4 million represents Parkway’s remaining equity contribution that would be due in connection with additional investments in office properties.
 
Financial Condition

Comments are for the balance sheet dated June 30, 2011 compared to the balance sheet dated December 31, 2010.

Office and Parking Properties. In 2011, Parkway continued the execution of its strategy of operating and acquiring office properties as well as liquidating non-core assets that no longer meet the Company’s investment criteria or the Company has determined value will be maximized by selling.  During the six months ended June 30, 2011, total assets increased $486.0 million or 30.3%.

 
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Acquisitions and Improvements.  Parkway's investment in office and parking properties increased $329.5 million net of depreciation to a carrying amount of $1.7 billion at June 30, 2011 and consisted of 69 office and parking properties.  The primary reason for the increase in office and parking properties relates to the purchase of nine office properties offset by the sale of one office property and a non-cash impairment loss recognized during the second quarter of 2011.

On January 21, 2011, the Company and Fund II acquired the office and retail portion of 3344 Peachtree located in the Buckhead submarket of Atlanta for $167.3 million.  3344 Peachtree contains approximately 484,000 square feet of office and retail space and includes an adjacent eleven-story parking structure.  Fund II’s investment in the property totaled $160.0 million, with Parkway funding the remaining $7.3 million.  Due to Parkway’s additional investment, the Company’s effective ownership in the property is 33.03%. An additional $2.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  Simultaneous with closing, Fund II assumed the $89.6 million existing non-recourse mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with Generally Accepted Accounting Principles (“GAAP”), the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase. Parkway's equity contribution in the investment is $25.5 million and was initially funded through borrowings under the Company's credit facility.

On February 4, 2011, the Company purchased its partner’s 50% interest in the Wink-Parkway Partnership (“Wink JV”) for $250,000.  The Wink JV was established for the purpose of owning the Wink Building, a 32,000 square foot office property in New Orleans, Louisiana.  Upon completing the purchase of its partner’s interest, Parkway now owns 100% of the Wink Building.

On March 31, 2011, Fund II purchased 245 Riverside located in the central business district of Jacksonville, Florida for $18.5 million.  245 Riverside contains approximately 135,000 square feet of office space.  An additional $1.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  In connection with the purchase, Fund II placed a $9.3 million non-recourse mortgage loan secured by the property with an initial thirty-six month interest only period and a maturity date of March 31, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.3% through September 30, 2018.  Parkway’s equity contribution of $2.8 million was funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.

On April 8, 2011, Fund II purchased Corporate Center Four at International Plaza (“Corporate Center Four”) located in the Westshore submarket of Tampa, Florida for $45.0 million.  Corporate Center Four contains approximately 250,000 square feet of office space.  An additional $5.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the two years of ownership.  In connection with the purchase, Fund II placed a $22.5 million non-recourse mortgage loan secured by the property with an initial thirty-six month interest only period and a maturity date of April 8, 2019.  The mortgage loan has a stated rate of LIBOR plus 200 basis points.  In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.4% through October 8, 2018.  Parkway’s equity contribution of $6.8 million was funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.

On May 18, 2011, Fund II completed the closing of its purchase of four additional office properties for $316.5 million.  The four properties include Two Liberty Place in Philadelphia, Two Ravinia Drive in Atlanta, Bank of America Center in Orlando, and Cypress Center I, II and III (“Cypress Center”) in Tampa.  The properties contain approximately 2.1 million square feet of office space, and an additional $20.9 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  An existing institutional investor in Two Liberty Place retained an 11% ownership in the property.  Parkway’s pro rata share of Two Liberty Place is 19% and Parkway’s partner in Fund II owns the remaining 70% interest.  Fund II acquired 100% of the remaining three assets, with Parkway’s ownership at 30%.  In connection with the purchases, Fund II placed separate non-recourse mortgage loans on each property totaling $158.3 million with a weighted average interest rate of 4.99%, initial thirty-six month interest only periods, and maturity dates ranging from May 2016 to June 2019. Parkway’s equity contribution of $37.6 million was initially funded through availability under the Company’s credit facility.


 
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On May 18, 2011, the Company closed on the agreement with Eola Capital, LLC (“Eola”) in which Eola would contribute its Property Management Company (the “Management Company”) to Parkway.  Eola’s principals contributed the Management Company to Parkway for initial consideration of $32.4 million in cash and Eola’s principals have the opportunity to earn (i) up to 1.574 million units of limited partnership interest in Parkway’s operating partnership (“OP Units”) through an earn-out arrangement and (ii) up to 226,000 additional OP Units through an earn-up arrangement.  To the extent earned, all OP Units are redeemable for shares of Parkway common stock on a one-for-one basis.  Earn-out and earn-up consideration is contingent upon the achievement by the Management Company of targeted annual gross fee revenue and/or share price levels during an initial period for the balance of 2011 after closing and a second period for the full calendar year 2012.  Parkway also has protections against fee income loss in the form of a provision requiring specific payments to Parkway in the event of certain terminations of existing management contracts and a non-compete agreement with regard to the existing management contracts of the Management Company.  The Management Company was contributed to a wholly-owned taxable REIT subsidiary and therefore, the Company began incurring income tax expenses upon closing of the agreement.  The Management Company currently manages assets totaling approximately 11.2 million square feet and produced annual gross fee revenue of approximately $21.0 million during 2010.  Parkway funded the cash consideration for the Management Company contribution with operating cash flow, proceeds from the disposition of office properties, proceeds from equity issuance and amounts available under the Company’s credit facility.

On June 30, 2011, Fund II purchased Hayden Ferry I located in the Tempe submarket of Phoenix, Arizona, for $39.4 million.  Hayden Ferry I contains approximately 203,000 square feet of office space.  An additional $4.3 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.    Fund II obtained a $22.0 million non-recourse mortgage loan with a fixed interest rate of 4.5%, an initial thirty-six month interest only period, and a maturity date of July 25, 2018.  Parkway's equity contribution in the investment once the first mortgage is in place is expected to be $5.2 million, which will be funded through availability under the Company’s credit facility.  Parkway’s effective ownership interest in this asset is 30%.   Following the purchase of Hayden Ferry I, the total amount invested by Fund II is approximately $640.4 million or 85.4% of the fund’s investment capacity.

During the six months ending June 30, 2011, the Company capitalized building improvements of $19.2 million and recorded depreciation expense of $38.0 million related to its office and parking properties.

Dispositions

During the quarter ended June 30, 2011, Parkway sold one office property as follows (in thousands):

Office Property
 
Location
 
Square
Feet
 
Date of
Sale
   
Gross Sales
Price
   
Gain
233 North Michigan(1)
 
Chicago, IL
 
1,070
 
05/11/11
 
$
162,202
 
 
$
 
4,292

(1)  
In accordance with GAAP, the gain on sale of real estate and all current and prior period income from this property has been classified as discontinued operations.

On July 19, 2011, the Company sold Greenbrier Towers I & II for a gross sale price of $16.7 million.  The two office properties total 172,000 square feet and are located in the Greenbrier area of Chesapeake, Virginia, also known as Hampton Roads and the sale represents the final exit of the market.  The properties were unencumbered with debt at the time of the sale.  Parkway received approximately $16.1 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's credit facility.  The Company classified the property as held for sale and estimates that it will record a gain on the sale of real estate of $1.2 million during the third quarter of 2011.

Subsequent to June 30, 2011, the Company was under contract to sell, with buyer earnest money deposits non-refundable, an additional 380,000 square feet of wholly-owned office properties located

 
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in Columbia, South Carolina and Richmond, Virginia.  The asset sales are subject to customary final closing requirements and due diligence documentation, and the Company expects that these sales will be completed in the third quarter 2011.  The Company recorded a non-cash impairment loss of $1.7 million related to the non-core office property targeted for sale in Columbia, South Carolina, which is under contract to sell.  As a result, the Company estimated that the fair value of these assets was less than the associated carrying value at June 30, 2011.

Investment in Unconsolidated Joint Ventures.  Investments in unconsolidated joint ventures decreased $1.1 million or 37.5% during the six months ended June 30, 2011.  The decrease is primarily due to Parkway’s purchase of its partner’s 50% interest in the Wink JV and distributions received from two unconsolidated joint ventures.

On July 6, 2011, RubiconPark II, LLC, sold Maitland 200 for a gross sale price of $23.0 million.  Maitland 200 is a 204,000 square foot office property located in the Maitland submarket of Orlando.  The $16.9 million mortgage loan secured by the property was repaid upon closing.  Parkway owned a 20% interest in the property and received a priority distribution after the repayment of secured debt of approximately $2.8 million, which was used to reduce amounts outstanding under the Company’s credit facility.  The Company estimates that it will recognize a gain on the sale of approximately $690,000 during the third quarter of 2011.  Parkway Realty Services, LLC, a subsidiary of the Company, will continue to provide management services and receive fee income for the property.

Receivables and Other Assets.  For the six months ended June 30, 2011, receivables and other assets increased $24.4 million or 18.9%.  The net increase is primarily due to an increase in lease costs related to the purchase price allocation of eight office properties.

Intangible Assets, Net. For the six months ended June 30, 2011, intangible assets net of related amortization increased $67.5 million or 133.3% and was primarily due to the purchase of eight office properties as well as $11.4 million of goodwill recorded for the period in connection with the combination with Eola.

Management Contracts, Net.  For the six months ended June 30, 2011, management contracts increased $51.6 million due to the combination with Eola.

During the second quarter of 2011, as part of the Company’s combination with Eola, Parkway purchased the management contracts associated with Eola’s property management business.  At the purchase date, the contracts were valued by an independent appraiser at $52.0 million.  During the second quarter of 2011, the Company recorded amortization expense of $419,000 on the management contracts.  Also, in conjunction with the valuation of the management company, the Company recorded $11.4 million of goodwill.

Cash and Cash Equivalents.  Cash and cash equivalents increased $13.7 million or 69.7% during the six months ended June 30, 2011 and is primarily due to equity contributions from Fund II’s limited partners for the purchase of office properties.  Parkway’s proportionate share of cash and cash equivalents at June 30, 2011 and December 31, 2010 was $13.9 million and $9.7 million, respectively.

Notes Payable to Banks. Notes payable to banks increased $55.4 million or 50.0% during the six months ended June 30, 2011. At June 30, 2011, notes payable to banks totaled $166.2 million and the net increase is attributable to advances under the Credit Facilities to make investments in and improvements to office properties.

On January 31, 2011, the Company closed a new $190.0 million unsecured revolving credit facility and a new $10.0 million unsecured working capital revolving credit facility (the “Credit Facility”). The new credit facilities have an initial term of three years and replaced the existing unsecured revolving credit facility, term loan and working capital facility that were scheduled to mature on April 27, 2011.  The Company had a $100.0 million interest rate swap associated with the credit facilities that expired March 31, 2011, locking LIBOR at 3.635%.  The interest rate on the Company’s credit facility is based on LIBOR plus 275 to 350 basis points depending on the Company’s overall leverage with the current rate set at LIBOR plus 350 basis points.  Additionally, the Company pays fees on the unused portion of the Company’s credit facility ranging between 40 and 50 basis points based upon usage of the aggregate commitment, with the current rate set at 40 basis points.  Wells Fargo Securities and JP Morgan Securities LLC acted as Joint Lead Arrangers and Joint Book Runners on the unsecured revolving credit facility. In addition, Wells Fargo Bank, N.A. acted as Administration Agent and JPMorgan Chase Bank, N.A. acted as Syndication Agent. Other participating lenders include PNC Bank, N.A., Bank of America, N.A., US Bank, N.A., Trustmark National Bank, and BancorpSouth Bank. The working capital revolving credit facility was provided solely by PNC Bank, N.A.

 
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Mortgage Notes Payable. During the six months ended June 30, 2011, mortgage notes payable increased $186.0 million or 24.1% and is due to the placement of non-recourse mortgage loans on seven Fund II properties totaling $200.0 million and the assumption of the $87.2 million non-recourse mortgage loan related to the purchase of 3344 Peachtree, offset by the payoff of two mortgage loans and scheduled principal payments of $16.6 million.

On January 21, 2011, in connection with its purchase of 3344 Peachtree in Atlanta, Georgia, Fund II assumed the $89.6 million existing non-recourse first mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the fair value of the instrument based on a market interest rate of 5.25% on the date of purchase.

On February 18, 2011, Fund II obtained a $10.0 million non-recourse mortgage loan secured by Carmel Crossing, a 326,000 square foot office complex in Charlotte, North Carolina.  The mortgage loan has a fixed rate of 5.5% and is interest only through maturity at March 10, 2020. Parkway received $2.4 million in net proceeds from the loan, which represents its 30% equity investment in the property.  The proceeds were used to reduce amounts outstanding under the Company’s credit facility.

On March 31, 2011, Fund II obtained a $9.3 million non-recourse mortgage loan secured by 245 Riverside, a 135,000 square foot office property in Jacksonville, Florida.  The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of March 31, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.3% through September 30, 2018.

On April 8, 2011, Fund II obtained a $22.5 million non-recourse mortgage loan secured by Corporate Center Four, a 250,000 square foot office property in Tampa, Florida.  The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of April 8, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.4% through October 8, 2018.

On May 11, 2011, in connection with the sale of 233 North Michigan, Parkway repaid the $84.6 million non-recourse mortgage loan that was scheduled to mature in July 2011.  The Company recognized a gain on extinguishment of debt of $302,000 during the second quarter of 2011, which is recorded in income from discontinued operations.

On May 18, 2011, Fund II obtained the following mortgage loans in connection with the purchase of four office properties:

·  
A $12.1 million non-recourse mortgage loan secured by Cypress Center, a 286,000 square foot office complex in the Westshore submarket of Tampa, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2016.  Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.1% through November 18, 2015.

·  
A $33.9 million non-recourse mortgage loan secured by Bank of America Center, a 421,000 square foot office property in the central business district of Orlando, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2018.  Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.7% through November 18, 2017.

·  
A $22.1 million non-recourse mortgage loan secured by Two Ravinia Drive, a 438,000 square foot office property located in the Central Perimeter submarket of Atlanta, Georgia.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 20, 2019.  Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.99% through November 18, 2018.

 
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·  
A $90.2 million non-recourse mortgage loan secured by Two Liberty Place, a 941,000 square foot office property located in the central business district of Philadelphia, Pennsylvania.  The mortgage loan has a fixed rate of 5.2% and a maturity date of June 10, 2019.

On June 1, 2011, the Company repaid a $9.9 million non-recourse mortgage loan secured by Forum I, a 163,000 square foot office property in Memphis, Tennessee.  The mortgage loan had a fixed interest rate of 5.3%.  The Company repaid the mortgage loan using available proceeds under the credit facility.

On June 1, 2011, the Company elected not to repay a $8.5 million non-recourse mortgage loan secured by the Wells Fargo Building, a 136,000 square foot office building in Houston.  This mortgage loan has a fixed interest rate of 4.4%.  The Company is currently in default on this mortgage and is in discussions with the lender.  The Company evaluated this building and determined that no impairment loss should be recorded at June 30, 2011.

On July 25, 2011, Fund II obtained a $22.0 million non-recourse mortgage loan secured by Hayden Ferry I, a 203,000 square foot office property located in Tempe submarket of Phoenix, Arizona.  The mortgage loan has a fixed rate of 4.5%, an initial thirty-six month interest only period, and a maturity date of July 25, 2018.

The Company expects to continue seeking primarily fixed-rate, non-recourse mortgage financing with maturities from five to ten years typically amortizing over 25 to 30 years on select office building investments as additional capital is needed.  The Company monitors a number of leverage and other financial metrics defined in the loan agreements for the Company’s unsecured credit facility and working capital unsecured credit facility, which include the Company’s total debt to total asset value.  In addition, the Company monitors interest, fixed charge and modified fixed charge coverage ratios as well as the net debt to gross asset value ratio and the net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio is computed by comparing cash interest accrued and preferred dividends paid to EBITDA.  The debt to EBITDA multiple is computed by comparing Parkway’s share of total debt to EBITDA computed for a trailing 12-month period adjusted for any investment activity. Management believes all of the leverage and other financial metrics it monitors, including those discussed above, provide useful information on total debt levels as well as the Company’s ability to cover interest, principal and/or preferred dividend payments with current income.  The Company targets a net debt to gross asset value of 50% or less and a net debt to EBITDA multiple of 6.5 times or less.

Preferred Stock.  On May 18, 2011, the Company issued approximately 1.0 million additional shares of its 8.0% Series D Cumulative Redeemable Preferred Stock to an institutional investor at a price of $25.00 per share, equating to a yield of 8.0%.  The Series D Preferred Stock has a $25.00 liquidation value per share and is redeemable at the option of the Company at any time upon proper notice.  The Company used the net proceeds of approximately $26.2 million to fund the combination with Eola and the Company’s share of equity contributions to purchase Fund II office properties.

Shelf Registration Statement.  The Company has a universal shelf registration statement on Form S-3 (No. 333-156050) that was declared effective by the Securities and Exchange Commission on December 30, 2008.  The Company may offer from time to time in one or more series or classes (i) shares of common stock, par value $.001 per share; (ii) shares of preferred stock, par value $.001 per share; and (iii) warrants to purchase preferred stock or common stock.  As of August 1, 2011, the Company had approximately $141.2 million of securities available for issuance under the registration statement, including $75 million of common stock that may be issued in an at-the-market offering pursuant to Equity Distribution Agreements with four sales agents.

 
32

 

The reconciliation of net income (loss) for Parkway Properties, Inc. to EBITDA and the computation of the Company’s proportionate share of interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple is as follows for the six months ended June 30, 2011 and 2010 (in thousands):

   
Six Months Ended
   
June 30
 
 
2011
   
2010
   
(Unaudited)
Net income (loss) for Parkway Properties, Inc.
$
(16,824)
 
$
9,402 
Adjustments to net income (loss) for Parkway Properties, Inc.:
         
Interest expense
 
29,070 
   
26,586 
Amortization of financing costs
 
1,007 
   
924 
(Gain) Loss on early extinguishment of debt
 
(302)
   
189 
Acquisition costs
 
15,089 
   
Depreciation and amortization
 
52,016 
   
44,252 
Amortization of share-based compensation
 
888 
   
391 
Gain on sale of real estate
 
(4,292)
   
(8,518)
Non-cash impairment loss on real estate
 
1,700 
   
Tax expense
 
224 
   
117 
EBITDA adjustments - unconsolidated joint ventures
 
232 
   
241 
EBITDA adjustments - noncontrolling interest in real estate partnerships
 
(22,450)
   
(15,049)
EBITDA (1)
$
56,358 
 
$
58,535 
           
Interest coverage ratio:
         
EBITDA
$
56,358 
 
$
58,535 
Interest expense:
         
Interest expense
$
29,070 
 
$
26,586 
Interest expense - unconsolidated joint ventures
 
72 
   
73 
Interest expense - noncontrolling interest in real estate partnerships
 
(8,498)
   
(6,084)
Total interest expense
$
20,644 
 
$
20,575 
Interest coverage ratio
 
2.73 
   
2.84 
           
Fixed charge coverage ratio:
         
EBITDA
$
56,358 
 
$
58,535 
Fixed charges:
         
Interest expense
$
20,644 
 
$
20,575 
Preferred dividends
 
4,631 
   
2,400 
Principal payments (excluding early extinguishment of debt)
 
6,687 
   
7,194 
Principal payments - unconsolidated joint ventures
 
17 
   
16 
Principal payments - noncontrolling interest in real estate partnerships
 
(1,233)
   
(573)
Total fixed charges
$
30,746 
 
$
29,612 
Fixed charge coverage ratio
 
1.83 
   
1.98 
           
Modified fixed charge coverage ratio:
         
EBITDA
$
56,358 
 
$
58,535 
Modified fixed charges:
         
Interest expense
$
20,644 
 
$
20,575 
Preferred dividends
 
4,631 
   
2,400 
Total modified fixed charges
$
25,275 
 
$
22,975 
Modified fixed charge coverage ratio
 
2.23 
   
2.55 
           
Net Debt to EBITDA multiple:
         
EBITDA - trailing 12 months
$
110,178 
 
$
116,439 
Adjustment to annualize investing activities
 
6,903 
   
Adjusted EBITDA - trailing 12 months
$
117,081 
 
$
116,439 
Mortgage notes payable
$
959,539 
 
$
807,052 
Notes payable to banks
 
166,217 
   
124,142 
Adjustments for unconsolidated joint ventures
 
2,457 
   
2,491 
Adjustments for noncontrolling interest in real estate partnerships
 
(418,949)
   
(212,396)
Parkway’s share of total debt
 
709,264 
   
721,289 
Less:  Parkway’s share of cash
 
(13,888)
   
(10,006)
Parkway’s share of net debt
$
695,376 
 
$
711,283 
Net Debt to EBITDA multiple
 
5.94 
   
6.11 

(1) Parkway defines EBITDA, a non-GAAP financial measure, as net income before interest, income taxes, depreciation, amortization, acquisition costs, gains or losses on early extinguishment of debt and other gains and losses. EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.

 
33

 

The Company believes that EBITDA helps investors and Parkway’s management analyze the Company’s ability to service debt and pay cash distributions.  However, the material limitations associated with using EBITDA as a non-GAAP financial measure compared to cash flows provided by operating, investing and financing activities are that EBITDA does not reflect the Company’s historical cash expenditures or future cash requirements for working capital, capital expenditures or the cash required to make interest and principal payments on the Company’s outstanding debt.  Although EBITDA has limitations as an analytical tool, the Company compensates for the limitations by using EBITDA only to supplement GAAP financial measures.  Additionally, the Company believes that investors should consider EBITDA in conjunction with net income and the other required GAAP measures of its performance and liquidity to improve their understanding of Parkway’s operating results and liquidity.

Parkway views EBITDA primarily as a liquidity measure and, as such, the GAAP financial measure most directly comparable to it is cash flows provided by operating activities.  Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income, or cash flows provided by operating, investing and financing activities prepared in accordance with GAAP.  The following table reconciles EBITDA to cash flows provided by operating activities for the six months ended June 30, 2011 and 2010 (in thousands):

      Six Months Ended
      June 30
   
2011
   
2010
      (Unaudited)
Cash flows provided by operating activities
$
10,407 
 
$
30,690 
Amortization of (above) below market leases
 
344 
   
(19)
Amortization of mortgage loan discount
 
400 
   
342 
Operating distributions from unconsolidated joint ventures
 
(507)
   
Interest expense
 
29,070 
   
26,586 
Gain (loss) on early extinguishment of debt
 
(302)
   
189 
Acquisition costs
 
15,089 
   
Tax expense
 
224 
   
117 
Change in deferred leasing costs
 
8,487 
   
2,742 
Change in receivables and other assets
 
8,947 
   
5,667 
Change in accounts payable and other liabilities
 
(228)
   
1,612 
Adjustments for noncontrolling interests
 
(15,884)
   
(9,824)
Adjustments for unconsolidated joint ventures
 
311 
   
433 
EBITDA
$
56,358 
 
$
58,535 


 
34

 

Equity. Total equity increased $217.1 million or 35.0% during the six months ended June 30, 2011, as a result of the following (in thousands):

 
Increase
 
(Decrease)
 
(Unaudited)
Net loss attributable to Parkway Properties, Inc.
 $
(16,824)
Net loss attributable to noncontrolling interests
(6,566)
Net loss
(23,390)
Change in market value of interest rate swaps
(2,435)
Comprehensive loss
(25,825)
Common stock dividends declared
(3,305)
Preferred stock dividends declared
(4,631)
Share-based compensation
888 
Issuance of 8.0% Series D Preferred stock
26,155 
Shares issued in lieu of Directors’ fees
272 
Issuance costs for shelf registration
(12)
Shares withheld to satisfy tax withholding obligation on vesting of restricted
 
    stock and deferred incentive share units
(299)
Net shares distributed from deferred compensation plan
1,625 
Net shares contributed to deferred compensation plan
(38)
Contribution of capital by noncontrolling interest
251,168 
Distribution of capital to noncontrolling interest
(28,912)
 
 $
217,086 

Results of Operations

Comments are for the three months and six months ended June 30, 2011 compared to the three months and  six months ended June 30, 2010.

Net loss attributable to common stockholders for the three months ended June 30, 2011 was $14.7 million ($0.68 per basic common share) as compared to net income attributable to common stockholders of $5.7 million ($0.26 per basic common share) for the three months ended June 30, 2010.  Net loss attributable to common stockholders for the six months ended June 30, 2011 was $21.5 million ($1.00 per basic common share) as compared to net income attributable to common stockholders of $7.0 million ($0.33 per basic common share) for the six months ended June 30, 2010.  The primary reason for the decrease in net income attributable to common stockholders for the six months ended June 30, 2011 compared to the same period for 2010 is an increase in depreciation and amortization of $9.3 million, a decrease in gains on sales of real estate of $4.2 million and a $1.7 million impairment loss recognized during the six months ended June 30, 2011.  Acquisition costs of $14.4 million and $16.7 million associated with the Eola contribution of the Management Company and Fund II office investments were included in net loss attributable to common stockholders for the three months and six months ended June 30, 2011, respectively.  A discussion of other variances for income and expense items that comprise net income (loss) attributable to common stockholders is discussed in detail below.

Office and Parking Properties. The analysis below includes changes attributable to same-store properties and dispositions of office properties.  Same-store properties are consolidated properties that the Company owned for the current and prior year reporting periods, excluding properties classified as discontinued operations.  On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office building in Chicago, Illinois, for gross proceeds of $162.2 million.  Therefore, 233 North Michigan was no longer considered a same-store property during the second quarter of 2011 as it was classified as discontinued operations.  At June 30, 2011, same-store properties consisted of 61 properties comprising 11.8 million square feet.

 
35

 

The following table represents revenue from office and parking properties for the three months and six months ended June 30, 2011 and 2010 (in thousands):

                                     
 
Three Months Ended June 30
 
Six Months Ended June 30
           
Increase
%
           
Increase
%
   
2011
 
2010
 
(Decrease)
Change
   
2011
 
2010
 
(Decrease)
Change
Revenue from office and parking properties:
                             
Same-store properties
$
56,370 
$
54,442 
$
1,928 
3.5%
 
$
113,149 
$
115,826 
$
(2,677)
-2.3%
Properties acquired
 
12,015 
 
 
12,015 
N/M*
   
15,329 
 
 
15,329 
N/M*
Properties disposed
 
 
(46)
 
46 
N/M*
   
 
(48)
 
48 
N/M*
Total revenue from office and parking properties
$
68,385 
$
54,396 
$
13,989 
25.7%
 
$
128,478 
$
115,778 
$
12,700 
11.0%
*N/M – not meaningful
                             

Revenue from office and parking properties for same-store properties increased $1.9 million or 3.5% for the three months ended June 30, 2011, compared to the same period for 2010.  The primary reason for the increase is due to revenues from same-store properties previously held in unconsolidated joint ventures which are now included in the Company’s consolidated financial statements as a result of Fund II purchasing the assets, offset by a decrease in rental income associated with a 1.6% reduction in same-store average occupancy for the six months ended June 30, 2011, as compared to the same period of the prior year.  Revenue from office and parking properties for same-store properties decreased $2.7 million or 2.3% for the six months ended June 30, 2011, compared to the same period for 2010.  The primary reason for the decrease is due to a decrease in lease termination fee income partially offset by revenue from properties previously held in unconsolidated joint ventures which are now included in the Company’s consolidated financial statements as a result of Fund II purchasing the assets.

The following table represents property operating expenses for the three months and six months ended June 30, 2011 and 2010 (in thousands):

                                       
 
Three Months Ended June 30
   
Six Months Ended June 30
           
Increase
 
%
           
Increase
%
   
2011
 
2010
 
(Decrease)
 
Change
   
2011
 
2010
 
(Decrease)
Change
Expense from office and parking properties:
                               
Same-store properties
$
26,111 
$
25,641 
$
 
469 
 
1.8%
 
$
52,314 
$
52,571 
$
(257)
 
-0.5%
Properties acquired
 
4,193 
 
 
4,193 
 
N/M*
   
4,961 
 
 
4,962 
N/M*
Properties disposed
 
24 
 
(37)
 
62 
 
-167.6%
   
140 
 
(35)
 
174 
N/M*
Total expense from office and parking properties
 
$
30,328 
 
$
25,604 
 
$
 
4,724 
 
18.5%
 
 
$
57,415 
 
$
52,536 
 
$
4,879 
 
 
9.3%
*N/M – not meaningful
                               

Property operating expenses for same-store properties increased $469,000 for the three months ended June 30, 2011, compared to the same period of 2010.  The primary reason for the increase is due to expenses from properties previously held in unconsolidated joint ventures which are included in the Company’s consolidated financial statements as a result of Fund II purchasing the assets, offset by a decrease in ad valorem taxes.  Property operating expenses for same-store properties decreased $257,000 for the six months ended June 30, 2011, compared to the same period of 2010.  The primary reason for the decrease is due to a decrease in ad valorem taxes partially offset by expenses from properties previously held in unconsolidated joint ventures which are now included in the Company’s consolidated financial statements as a result of Fund II purchasing the assets.

Depreciation and amortization expense attributable to office and parking properties increased $6.9 million and $9.3 million for the three months and six months ended June 30, 2011, compared to the same period for 2010, respectively.  The primary reason for the increase is due to the purchase of four office properties during 2010 and nine office properties during 2011.

 
36

 

Share-Based Compensation Expense. Compensation expense related to restricted shares and deferred incentive share units of $888,000 and $391,000 was recognized for the six months ended June 30, 2011 and 2010, respectively.  Total compensation expense related to nonvested awards not yet recognized was $4.2 million at June 30, 2011.  The weighted average period over which the expense is expected to be recognized is approximately 2.5 years.  For the remainder of 2011, the Company expects to recognize approximately $1.1 million of additional compensation expense on nonvested awards.

On January 9, 2011, 25,935 restricted shares vested and were issued to officers of the Company due to the achievement of performance goals established in 2009 by the Board of Directors.

On January 12, 2011, 27,125 restricted shares vested and were issued to officers of the Company.  These shares were granted in January 2007 and vested four years from the grant date.

On January 14, 2011, the Board of Directors approved 55,623 FOCUS Plan long-term equity incentive awards to officers of the Company.  The long-term equity incentive awards are valued at $736,000 which equates to an average price per share of $13.23 and consist of 25,620 time-based awards, 16,883 market condition awards subject to an absolute total return goal, and 13,120 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On May 18, 2011, the Board of Directors approved 63,241 FOCUS Plan long-term equity incentive awards to new officers of the Company.  The long-term equity incentive awards are valued at $577,000 which equates to an average price per share of $9.12 and consist of 11,384 time-based awards, 29,091 market condition awards subject to an absolute total return goal, and 22,766 market condition awards subject to a relative total return goal.  The Company also awarded 17,530 deferred incentive share units to approximately 136 other former employees of Eola who became employees of the Company effective May 18, 2011.  These shares will be accounted for as equity-classified awards.

Also on May 18, 2011, the Board of Directors approved 68,802 FOCUS Plan long-term equity incentive awards to new officers of the Company effective June 1, 2011.  The long-term equity incentive awards are valued at $628,000 which equates to an average price per share of $9.13 and consist of 12,384 time-based awards, 31,649 market condition awards subject to an absolute total return goal, and 24,769 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On June 20, 2011, the Board of Directors approved 8,705 FOCUS Plan long-term equity incentive awards to officers of the Company.  The long-term equity incentive awards are valued at $68,000 which equates to an average price per share of $7.81 and consist of 534 time-based awards, 4,584 market condition awards subject to an absolute total return goal, and 3,587 market condition awards subject to a relative total return goal.  These shares will be accounted for as equity-classified awards.

On July 1, 2011, 6,345 restricted shares vested and were issued to officers of the Company.  These shares were granted in July 2010 and vested one year from the grant date.

The time-based awards granted as part of the FOCUS Plan will vest ratably over four years from the date the shares were granted.  The market condition awards granted as part of the FOCUS Plan are contingent on the Company meeting goals for compounded annual total return to stockholders (“TRS”) over the three year period beginning July 1, 2010.  The market condition goals are based upon (i) the Company’s absolute compounded annual TRS; and (ii) the Company’s absolute compounded annual TRS relative to the compounded annual return of the MSCI US REIT (“RMS”) Index calculated on a gross basis, as follows:

 
Threshold
Target
Maximum
Absolute Return Goal
10%
12%
14%
Relative Return Goal
RMS + 100 bps
RMS + 200 bps
RMS + 300 bps

With respect to the absolute return goal, 15% of the award is earned if the Company achieves threshold performance and a cumulative 60% is earned for target performance.  With respect to the relative return goal, 20% of the award is earned if the Company achieves threshold performance and a cumulative 55% is earned for target performance. In each case, 100% of the award is earned if the Company achieves maximum performance or better. To the extent actually earned, the market condition awards will vest 50% on each of July 15, 2013 and 2014.

 
37

 

 
The total compensation expense for the long-term equity incentive awards granted under the FOCUS Plan is based upon the fair value of the shares on the grant date, adjusted for estimated forfeitures.  The grant date fair value for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

The FOCUS Plan also includes a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010.  The performance goals for actual payment under the long-term cash incentive will require the Company to (i) achieve an absolute compounded annual TRS that exceeds 14% AND (ii) achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 500 basis points.  Notwithstanding the above goals, in the event the Company achieves an absolute compounded annual TRS that exceeds 19%, then the Company must achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 600 basis points.  The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRS achieved by the Company.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual TRS that approximates 23%, provided that the absolute compounded annual TRS exceeds the compounded annual return of the RMS by at least 600 basis points.  The total compensation expense for the long-term cash incentive awards granted under the FOCUS Plan is based upon the estimated fair value of the award on the grant date and adjusted as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on the Company’s consolidated balance sheets.  The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

Acquisition Costs.  During the three months and six months ended June 30, 2011, the Company incurred $14.4 million and $16.7 million, respectively, in acquisition costs related to the contribution of Eola’s management company to Parkway that closed during the second quarter of 2011 and the purchase of eight Fund II office properties.  Parkway’s proportionate share of acquisition costs for the three months and six months ended June 30, 2011 was $13.4 million and $15.1 million, respectively.

Impairment Loss on Real Estate. During the second quarter of 2011,  the Company recorded non-cash impairment losses of $1.7 million related to a non-core office property targeted for sale in Columbia, South Carolina.  The Company has been actively marketing this asset for sale and is under contract, with an earnest deposit at risk, to sell the asset during the third quarter of 2011.  As a result, the Company estimated that the fair value of this property was less than its carrying value at June 30, 2011.  Therefore, an impairment loss was recognized on this property during the second quarter of 2011.

Interest Expense. Interest expense, including amortization of deferred financing costs, increased $2.3 million or 18.4% and $3.4 million or 13.5% for the three and six months ended June 30, 2011, respectively, compared to the same period of 2010,  and is comprised of the following (in thousands):

         Three Months Ended June 30          Six Months Ended June 30
           
Increase
%
           
Increase
%
   
2011
 
2010
 
(Decrease)
Change
   
2011
 
2010
 
(Decrease)
Change
Interest expense:
                             
Mortgage interest expense
$
12,968 
$
10,817 
$
2,151 
19.9%
 
$
24,298 
$
21,564 
$
2,734 
12.7%
Credit facility interest expense
 
1,382 
 
1,352 
 
30 
2.2%
   
3,234 
 
2,621 
 
613 
23.4%
Loss on early extinguishment of debt
 
 
 
0.0%
   
 
53 
 
(53)
-100.0%
Mortgage loan cost amortization
 
228 
 
198 
 
30 
15.2%
   
433 
 
416 
 
17 
4.1%
Credit facility cost amortization
 
293 
 
196 
 
97 
49.5%
   
547 
 
463 
 
84 
18.1%
Total interest expense
$
14,871 
$
12,563 
$
2,308 
18.4%
 
$
28,512 
$
25,117 
$
3,395 
13.5%

Mortgage interest expense increased $2.2 million and $2.7 million for the three months and six months ended June 30, 2011, compared to the same period for 2010, respectively, and is primarily due to new loans obtained or assumed during 2011 and 2010.

 
38

 

Credit facility interest expense increased $30,000 and $613,000 for the three months and six months ended June 30, 2011, respectively, compared to the same period of 2010, and is due to an increase in average borrowings of $21.3 million.  The increase in average borrowings is due to advances on the credit facility to fund improvements to real estate and the Company’s share of equity contributions to purchase office properties through Fund II.

Discontinued Operations. Discontinued operations is comprised of the following  for the three and six months ended June 30, 2011 and 2010 (in thousands):

   
Three Months Ended June 30
   
Six Months Ended June 30
           
Increase
%
           
Increase
%
   
2011
 
2010
 
(Decrease)
Change
   
2011
 
2010
 
(Decrease)
Change
Discontinued operations:
                             
Income from discontinued operations
 
$
606 
 
$
653 
 
$
 
(47)
 
-7.2%
 
 
$
872 
 
$
1,275 
 
$
 
 (403)
 
-31.6%
Gain on sale of real estate from discontinued operations
 
4,292 
 
8,518 
 
 
(4,226)
 
-49.6%
   
4,292 
 
8,518 
 
 
(4,226)
 
-49.6%
Total discontinued operations
 
$
4,898 
 
$
9,171 
 
$
 
(4,273)
 
-46.6%
 
 
$
5,164 
 
$
9,793 
 
$
 
(4,629)
 
-47.3%

All current and prior period income from the following office property dispositions is included in discontinued operations for the three and six months ended June 30, 2010 and 2011 (in thousands).

Office Property
 
Location
 
Square
Feet
 
Date of
Sale
   
Net Sales
Price
   
Net Book
Value of
Real Estate
   
Gain on
Sale
One Park Ten
 
Houston, Texas
 
163 
 
04/15/10
 
$
14,924
 
$
6,406 
 
$
8,518 
2010  Dispositions
     
163 
     
$
14,924
 
$
6,406 
 
$
8,518 
                               
233 North Michigan
 
Chicago, Illinois
 
1,070 
 
05/11/11
 
$
156,546
 
$
152,254 
 
$
4,292 
2011 Dispositions
     
1,070 
     
$
156,546
 
$
152,254 
 
$
4,292 

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office building in Chicago, Illinois, for gross proceeds of $162.2 million and recorded a gain on the sale of $4.3 million.  Accordingly, income from 233 North Michigan has been classified as discontinued operations for all current and prior periods presented.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income”, which modifies reporting requirements for comprehensive income in order to increase the prominence of items reported in other comprehensive income in the financial statements.  ASU 2011-05 requires presentation of either a single continuous statement of comprehensive income or two separate, but consecutive statements in which the first statement presents net income and its components followed by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income.  The requirements of ASU 2011-05 will be effective for interim and annual periods beginning after December 15, 2011.  The Company is currently evaluating the impact of ASU 2011-05 on the Company’s consolidated financial statements.

Liquidity and Capital Resources

Statement of Cash Flows.  Cash and cash equivalents were $33.4 million and $20.7 million at June 30, 2011 and 2010, respectively.  Cash provided by operating activities was $10.4 million and $30.7 million for the six months ended June 30, 2011 and 2010, respectively.  The decrease in cash flows from operating activities of $20.3 million is primarily attributable to increased deferred leasing costs and acquisition costs paid during the period related to the Company’s combination with Eola and purchase of eight Fund II office properties.

 
39

 

Cash used in investing activities for the six months ended June 30, 2011 and 2010 was $386.7 million and $10.8 million, respectively.  The increase in cash used in investing activities of $375.8 million is primarily due to the purchases of office properties in 2011 and the contribution of Eola Management Company, offset by proceeds from the sale of 233 North Michigan.

Cash provided by financing activities for the six months ended June 30, 2011 were $390.0 million compared to cash used in financing activities of  $19.9 million, for the same period of 2010.  The increase in cash flows provided by financing activities of $409.9 million is primarily attributable to additional bank borrowings, long-term financing and contributions from non-controlling interest partners to purchase office properties and proceeds from the issuance of preferred stock.

Liquidity. The Company plans to continue pursuing the acquisition of additional investments that meet the Company’s investment criteria and intends to use operating cash flow, proceeds from the refinancing of mortgages, proceeds from the sale of non-core assets, proceeds from the sale of portions of owned assets through joint ventures, possible sales of securities, cash balances and the Company’s credit facilities to fund those acquisitions.

The Company’s cash flows are exposed to interest rate changes primarily as a result of its credit facility used to maintain liquidity and fund capital expenditures and expansion of the Company’s real estate investment portfolio and operations.  The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs.  To achieve its objectives, the Company borrows at fixed rates, but also utilizes an unsecured revolving credit facility.

At June 30, 2011, the Company had a total of $166.2 million outstanding under the following credit facilities (in thousands):

       
Interest
       
Outstanding
Credit Facilities
 
Lender
 
Rate
 
Maturity
   
Balance
$10 Million Unsecured Working Capital Revolving Credit Facility (1)
 
PNC Bank
 
3.4%
 
01/31/14
 
$
2,217 
$190.0 Million Unsecured Revolving Credit Facility (1)
 
Wells Fargo
 
3.7%
 
01/31/14
   
164,000 
       
3.7%
     
$
166,217 

(1) The interest rate on the credit facilities is based on LIBOR plus 275 to 350 basis points, depending upon overall Company leverage, with the current rate set at 350 basis points.  Additionally, the Company pays fees on the unused portion of the credit facilities ranging between 40 and 50 basis points based upon usage of the aggregate commitment, with the current rate set at 40 basis points.

On January 31, 2011, the Company closed a new $190.0 million unsecured revolving credit facility and a new $10.0 million unsecured working capital revolving credit facility.  The new credit facilities have an initial term of three years and replaced the existing unsecured revolving credit facility, term loan and working capital facility that were scheduled to mature on April 27, 2011.  The Company had a $100.0 million interest rate swap associated with the credit facilities that expired March 31, 2011, and locked LIBOR at 3.635%.  Wells Fargo Securities and JP Morgan Securities LLC acted as Joint Lead Arrangers and Joint Book Runners on the unsecured revolving credit facility.  In addition, Wells Fargo Bank, N.A. acted as Administration Agent and JPMorgan Chase Bank, N.A. acted as Syndication Agent.  Other participating lenders include PNC Bank, N.A., Bank of America, N.A., US Bank, N.A., Trustmark National Bank, and BancorpSouth Bank.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

The Company has entered into interest rate swap agreements.  The Company designated the swaps as cash flow hedges of the variable interest rates on the Company’s borrowings under the Wells Fargo unsecured revolving credit facility, a portion of the debt secured by the Pinnacle at Jackson Place and the debt secured by 245 Riverside, Corporate Center Four, Cypress Center, Bank of America Plaza, and Two Ravinia.  These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive income (loss).

 
40

 

The Company’s interest rate hedge contracts at June 30, 2011 and 2010 are summarized as follows (in thousands):

                Fair Market Value
                Liability
Type of
Balance Sheet
 
Notional
Maturity
 
Fixed
   June 30
Hedge
Location
 
Amount
Date
Reference Rate
Rate
 
2011
 
2010
 
Swap
Accounts payable
and other liabilities
 
 
$
100,000 
03/31/11
1-month LIBOR
4.785 %
 
 
$
 
 
$
(2,366)
Swap
Accounts payable
and other liabilities
 
$
23,500 
12/01/14
1-month LIBOR
5.800 %
 
(2,222)
 
(2,274)
Swap
Accounts payable
and other liabilities
 
$
12,087 
11/18/15
1-month LIBOR
4.060 %
 
(225)
 
Swap
Accounts payable
and other liabilities
 
$
33,875 
11/18/17
1-month LIBOR
4.740 %
 
(797)
 
Swap
Accounts payable and other liabilities
 
$
9,250 
09/30/18
1-month LIBOR
5.245 %
 
(420)
 
Swap
Accounts payable and other liabilities
 
$
22,500 
10/08/18
1-month LIBOR
5.372 %
 
(1,209)
 
Swap
Accounts payable
and other liabilities
 
$
22,100 
11/18/18
1-month LIBOR
4.990 %
 
(565)
 
             
$
 (5,438)
$
(4,640)

On March 31, 2011, Fund II entered into an interest rate swap with the lender of the loan secured by 245 Riverside in Jacksonville, Florida, for a $9.3 million notional amount that fixes the interest rate at 5.3% through September 30, 2018.  The Company designated the swap as a cash flow hedge of the variable interest rate associated with the mortgage loan.

On April 8, 2011, Fund II entered into an interest rate swap with the lender of the loan secured by Corporate Center Four in Tampa, Florida, for a $22.5 million notional amount that fixes the interest rate at 5.4% through October 8, 2018.  The Company designated the swap as a cash flow hedge of the variable interest rate associated with the mortgage loan.

On May 18, 2011, Fund II entered into three interest rate swaps with lenders of the loans secured by the following properties:

·  
Cypress Center in Tampa, Florida, for a $12.1 million notional amount that fixes the interest rate at 4.06% through November 18, 2015.

·  
Bank of America Center in Orlando, Florida, for a $33.9 million notional amount that fixes the interest rate at 4.74% through November 18, 2017.

·  
Two Ravinia in Atlanta, Georgia, for a $22.1 million notional amount that fixes the interest rate at 4.99% through November 18, 2018.

The Company designated these swaps as cash flow hedges of the variable interest rates associated with the mortgage loans.

On May 18, 2011, the Company issued approximately 1.0 million additional shares of its 8.0% Series D Cumulative Redeemable Preferred Stock to an institutional investor at a price of $25.00 per share, equating to a yield of 8.0%.  The Series D Preferred Stock has a $25.00 liquidation value per share and is redeemable at the option of the Company at any time upon proper notice.  The Company used the net proceeds of approximately $26.2 million to fund the combination with Eola and the Company’s share of equity contributions to purchase Fund II office properties.

 
41

 

At June 30, 2011, the Company had $959.5 million in mortgage notes payable with an average interest rate of 5.8% secured by office properties and $166.2 million drawn under the Company’s unsecured credit facility.  Parkway’s pro rata share of unconsolidated joint venture debt was $2.5 million with an average interest rate of 5.8% at June 30, 2011.

The Company monitors a number of leverage and other financial metrics, including the net debt to total asset value ratio, as defined in the loan agreements for the Company’s credit facility.  In addition, the Company also monitors interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA. The interest coverage ratio for the six months ended June 30, 2011 and 2010 was 2.73 and 2.84 times, respectively.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The fixed charge coverage ratio for the six months ended June 30, 2011 and 2010 was 1.83 and 1.98 times, respectively.  The modified fixed charge coverage ratio is computed by comparing the cash interest accrued and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio for the six months ended June 30, 2011 and 2010 was 2.23 and 2.55 times, respectively.  The net debt to EBITDA multiple is computed by comparing Parkway’s share of net debt to EBITDA for a trailing 12-month period, as adjusted for investing activities.  The net debt to EBITDA multiple for the six months ended June 30, 2011 and 2010 was 5.94 and 6.11 times, respectively.  Management believes various leverage and other financial metrics it monitors provide useful information on total debt levels as well as the Company’s ability to cover interest, principal and/or preferred dividend payments.

The table below presents the principal payments due and weighted average interest rates for the mortgage notes payable at June 30, 2011 (in thousands).

   
Total
         
Recurring
   
Mortgage
   
Balloon
   
Principal
   
Maturities
   
Payments
   
Amortization
Schedule of Mortgage Maturities by Years:
               
2011*
$
13,841 
 
$
8,484 
 
$
5,357 
2012
 
59,366 
   
48,408 
   
10,958 
2013
 
11,449 
   
   
11,449 
2014
 
12,794 
   
   
12,794 
2015
 
41,508 
   
26,891 
   
14,617 
2016
 
414,542 
   
405,334 
   
9,208 
Thereafter
 
406,039 
   
390,030 
   
16,009 
Total
$
959,539 
 
$
879,147 
 
$
80,392 
Fair value at 06/30/11
$
876,281 
           
*Remaining six months

On January 21, 2011, in connection with its purchase of 3344 Peachtree in Atlanta, Georgia, Fund II assumed the $89.6 million existing non-recourse mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%.  In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase.

On February 18, 2011, Fund II obtained a $10.0 million non-recourse mortgage loan secured by Carmel Crossing, a 326,000 square foot office complex in Charlotte, North Carolina.  The mortgage loan has a fixed rate of 5.5% and is interest only through maturity at March 10, 2020. Parkway received $2.4 million in net proceeds from the loan, which represents its 30% equity investment in the property.  The proceeds were used to reduce amounts outstanding under the Company’s credit facility.

On March 31, 2011, Fund II obtained a $9.3 million non-recourse mortgage loan secured by 245 Riverside, a 135,000 square foot office property in Jacksonville, Florida.  The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of March 31, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.3% through September 30, 2018.

 
42

 

On April 8, 2011, Fund II obtained a $22.5 million non-recourse mortgage loan secured by Corporate Center Four, a 250,000 square foot office property in Tampa, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of April 8, 2019.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.4% through October 8, 2018.

On May 11, 2011, the Company sold 233 North Michigan, a 1.1 million square foot office property located in the central business district of Chicago, for a gross sale price of $162.2 million.  At closing, the Company repaid the $84.6 million non-recourse mortgage loan secured by the property that was scheduled to mature in July 2011.

On May 18, 2011, Fund II obtained the following mortgage loans in connection with the purchase of four office properties:

·  
A $12.1 million non-recourse mortgage loan secured by Cypress Center, a 286,000 square foot office complex in the Westshore submarket of Tampa, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2016.  Upon obtaining the mortgage, the fund entered into an interest rate swap that fixes the interest rate at 4.1% through November 18, 2015.

·  
A $33.9 million non-recourse mortgage loan secured by Bank of America Center, a 421,000 square foot office property in the central business district of Orlando, Florida.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2018.  Upon obtaining the mortgage, the fund entered into an interest rate swap that fixes the interest rate at 4.7% through November 18, 2017.

·  
A $22.1 million non-recourse mortgage loan secured by Two Ravinia Drive, a 438,000 square foot office property located in the Central Perimeter submarket of Atlanta, Georgia.  The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 20, 2019.  Upon obtaining the mortgage, the fund entered into an interest rate swap that fixes the interest rate at 4.99% through November 18, 2018.

·  
A $90.2 million non-recourse mortgage loan secured by Two Liberty Place, a 941,000 square foot office property located in the central business district of Philadelphia, Pennsylvania.  The mortgage loan has a fixed rate of 5.2% with a maturity of June 10, 2019.

On June 1, 2011, the Company repaid a $9.9 million non-recourse mortgage loan secured by Forum I, a 163,000 square foot office property in Memphis, Tennessee.  The mortgage loan had a fixed interest rate of 5.3%.  The Company repaid the mortgage loan using available proceeds under the credit facility.

On July 25, 2011, Fund II obtained a $22.0 million non-recourse, first mortgage secured by Hayden Ferry I, a 203,000 square foot office property located in Tempe submarket of Phoenix, Arizona.  The mortgage loan has a fixed rate of 4.5% with a maturity of July 25, 2018.

The Company presently has plans to make recurring capital expenditures to its office properties in 2011 of approximately $50.0 to $53.0 million on a consolidated basis, with approximately $38.0 to $41.0 million representing Parkway’s proportionate share of recurring capital improvements.  During the six months ended June 30, 2011, the Company incurred $21.7 million in recurring capital expenditures on a consolidated basis, with $17.8 million representing Parkway’s proportionate share.  These costs include tenant improvements, leasing costs and recurring building improvements.  Additionally, the Company plans to make improvements related to upgrades on properties acquired in recent years that were anticipated at the time of purchase and major renovations that are nonrecurring in nature to office properties in 2011 of approximately 18.0 to $19.0 million with approximately $6.0 to $7.0 million representing Parkway’s proportionate share.  During the six months ended June 30, 2011, the Company incurred $5.9 million related to upgrades and major renovations, with $1.9 million representing Parkway’s proportionate share.  All such improvements are expected to be financed by cash flow from the properties, capital expenditure escrow accounts, advances from the Company’s credit facility and contributions from partners.

 
43

 

The Company anticipates that its current cash balance, operating cash flows, contributions from partners and borrowings (including borrowings under the working capital credit facilities) will be adequate to pay the Company’s (i) operating and administrative expenses, (ii) debt service obligations, (iii) distributions to stockholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties, both in the short and long term.  In addition, the Company may use proceeds from sales of assets, sales of equity securities and borrowings to fund property acquisitions and pay debts as they mature.

Contractual Obligations

See information appearing under the caption “Financial Condition - Notes Payable to Banks and Mortgage Notes Payable” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of changes in long-term debt since December 31, 2010.

Funds From Operations

Management believes that funds from operations attributable to common stockholders (“FFO”) is an appropriate measure of performance for equity REITs and computes this measure in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO. Funds from operations is defined by NAREIT as net income (computed in accordance with GAAP), excluding gains or losses from sales of property and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive the Company’s pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, the Company does not adjust FFO to eliminate the effects of non-recurring charges.  The Company 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 real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. The Company believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Parkway may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. Funds from operations do not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds from operations should not be considered an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow as a measure of liquidity.

 



 
44

 

The following table presents a reconciliation of the Company’s net income (loss) for Parkway Properties, Inc. to FFO for the six months ended June 30, 2011 and 2010 (in thousands):

   
Six Months Ended
   
June 30
   
2011
   
2010
Net income (loss) for Parkway Properties, Inc.
$
(16,824)
 
$
9,402 
Adjustments to derive funds from operations:
         
Depreciation and amortization
 
49,606 
   
40,324 
Depreciation and amortization – discontinued operations
 
2,410 
   
3,928 
Noncontrolling interest depreciation and amortization
 
(13,777)
   
(8,826)
Adjustments for unconsolidated joint ventures
 
160 
   
168 
Preferred dividends
 
(4,631)
   
(2,400)
Gain on sale of real estate – discontinued operations
 
(4,292)
   
(8,518)
Funds from operations attributable to common stockholders (1)
$
12,652 
 
$
34,078 

(1)
Funds from operations attributable to common stockholders for the six months ended June 30, 2011 and 2010 include the following items (in thousands):
 
 
      Six Months Ended
    June 30
   
2011
   
2010
Gain (loss) on extinguishment of debt
$
302 
 
$
(189)
Non-cash impairment loss
 
(1,700)
   
Acquisition costs – combination
 
(13,965)
   
Acquisition costs – office property acquisitions
 
(1,124)
   
Expenses related to litigation
 
(44)
   
(545)
Non-recurring lease termination fee income
 
3,758 
   
6,445 

Inflation

Inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company’s geographic areas of operation.  Additionally, most of the leases require the customers to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes, utilities and insurance, thereby reducing the Company’s exposure to increases in operating expenses resulting from inflation.  The Company’s leases typically have three to seven year terms, which may enable the Company to replace existing leases with new leases at market base rent, which may be higher or lower than the existing lease rate.

Forward-Looking Statements

In addition to historical information, certain sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those that are not in the present or past tense, that discuss the Company’s beliefs, expectations (including the use of the words anticipate, believe, forecast, intends, expects, project or similar expressions) or intentions or those pertaining to the Company’s projected capital improvements, expected sources of financing, expectations as to the timing of acquisitions or dispositions, and descriptions relating to these expectations. Forward-looking statements involve numerous risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties, among others discussed herein and in the Company’s filings under the Securities Exchange Act of 1934, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: changes in the real estate industry and in the performance of the financial markets; the demand for and market acceptance of the Company’s properties for rental purposes; the amount and growth of the Company’s expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in those areas where the Company
owns properties; risks associated with joint venture partners; the risks associated with the ownership and development of real property; the failure to acquire or sell properties as and when anticipated; termination of property management contracts; the bankruptcy or insolvency of companies for which Eola or Parkway provide

 
45

 

property management services, the ability of Parkway to integrate the business of Eola and unanticipated costs in connection with such integration, the outcome of claims and litigation involving or affecting the Company; failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters, changes in real estate and zoning laws increases in real property tax rates and the outcome of claims and litigation involving or affecting the Company. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-Q and in the Company’s filings under the Securities Exchange Act of 1934. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as the date hereof.  New risks and uncertainties arise over time, and it is not possible for the Company to predict the occurrence or the manner in which they may affect Parkway.  The Company assumes no obligation to update forward-looking statements, except as may be required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See information appearing under the caption “Liquidity” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that at the end of the Company’s most recent fiscal quarter, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

During the period covered by this report, the Company reviewed its internal controls, and there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note M to the Consolidated Financial Statements included herein is incorporated by reference.

 
Item 1A. Risk Factors

Apart from risk factors disclosed below, please refer to Item 1A-Risk Factors, in the 2010 Annual Report on Form 10-K and the Form 10-Q for the quarter ended March 31, 2011, for a full description of risk factors previously disclosed.

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

Our third party management and leasing agreements, including but not limited to those acquired through our recent combination with Eola Capital LLC and certain of its affiliates, 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 on terms less favorable to us than the current terms.  We estimate that management and leasing agreements representing approximately one third of Eola's 2010 gross fee revenues expire or are contractually terminable within the twelve month period following closing.  If management and leasing agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease and the market price of our common stock may be adversely affected.

 
46

 

 
While a portion of the purchase consideration we paid for the Eola third party management business is subject to an earn out arrangement based primarily on the gross fee revenues from the third party management business during the approximately 18 months following closing, we also paid approximately $32.4 million in cash at the closing.  If management and leasing agreements are terminated, or not renewed, and consequently the revenues from the management business decline, we will not be entitled to any refund of the cash amounts paid by us at closing.  We can provide no assurance that any of our management and leasing agreements will be renewed upon the expiration of the current term or otherwise will not be terminated.

Our business and operating results could be negatively affected if we are unable to integrate acquisitions successfully.

Integration of acquisitions involves a number of significant risks, including the diversion of management's attention to the assimilation of the operations of the acquired businesses or assets, difficulties in the integration of operations and systems; the inability to realize potential operating synergies; difficulties in the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and challenges in retaining the customers of the combined businesses.  Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated operating expenses and depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential impairment charges, assumed litigation and unknown liabilities.  If we are unable to successfully integrate our recent and future acquisitions in a timely and cost-effective manner, our operating results could be negatively affected.

Item 6. Exhibits

2.1           Contribution Agreement dated as of April 10, 2011 by and among Eola Capital LLC, Eola Office Partners LLC, Banyan Street Office Holdings LLC, and the members that are parties thereto on one hand, and Parkway Properties, Inc. and Parkway Properties LP on the other hand (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed April 14, 2011).
 
2.2           Purchase and Sale Agreement dated as of May 5, 2011 by and between Parkway 233 North Michigan, LLC, a Delaware limited liability company, Parkway Properties, LP, a Delaware limited partnership and HUB Properties Trust, a Maryland real estate investment trust (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed May 9, 2011).
 
3           Articles Supplementary, dated May 16, 2011, reclassifying and designating an additional 1,046,400 shares of 8.00% Series D Cumulative Redeemable Preferred Stock, par value $0.001 per share (incorporated by reference to Exhibit 3 to the Company’s Form 8-K filed May 18, 2011).
 
10           Material Contracts (*Denotes management contract or compensatory plan or arrangement):
 
10.1           Master Transaction Agreement dated as of April 10, 2011 by and among Eola Capital LLC, Eola Office Partners LLC, the individuals listed on the signature pages thereto on one hand and Parkway Properties, Inc. and Parkway Properties LP on the other hand (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 14, 2011).
 
10.2           Lock Up and Voting Agreement dated as of April 10, 2011 by and among the holders listed on the signature pages thereto, Parkway Properties, Inc. and Parkway Properties LP (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed April 14, 2011).
 
10.3           First Amendment to Limited Partnership Agreement of Parkway Properties Office Fund II, LP dated April 10, 2011 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed April 14, 2011).
 
10.4           Amendment to Exhibit A dated May 18, 2011 of the Amended and Restated Agreement of Limited
 

 
47

 

Partnership of Parkway Properties LP (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 18, 2011).
 
10.5*           Parkway Properties, Inc. 2011 Employee Inducement Award Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 18, 2011).
 
10.6*           Form of Inducement Award Agreement for FOCUS Plan Time-Based Awards (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed May 18, 2011).
 
10.7*           Form of Inducement Award Agreement for FOCUS Plan Performance-Based Awards (Absolute Return Goal) (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed May 18, 2011).
 
10.8*           Form of Inducement Award Agreement for FOCUS Plan Performance-Based Awards (Relative Return Goal) (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed May 18, 2011).
 
10.9           First Amendment to Credit Agreement by and among Parkway Properties LP, a Delaware limited partnership; Parkway Properties, Inc., a Maryland corporation; Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Bookrunners; Wells Fargo Bank, N.A., as Administration Agent; JPMorgan Chase Bank, N.A., as Syndication Agent; PNC Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A., as Documentation Agents; and the Lenders dated July 6, 2011.
 
31.1           Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2           Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1           Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2           Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101           The following materials from Parkway Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language):  (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statement of changes in equity, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements, tagged as block of text.**
 

 
**  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   PARKWAY PROPERTIES, INC  
       
Date:  August 5, 2011
By:
/s/ Mandy M. Pope  
    Executive Vice President and  
    Chief Accounting Officer  
       


 
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