PKY-2013.06.30-10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For Quarterly Period Ended June 30, 2013
 
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 incorporation of organization)
 
(IRS Employer Identification No.)

Bank of America Center, Suite 2400
390 North Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)

(407) 650-0593
Registrant's telephone number, including area code

(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 þ  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 þ 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 þ
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 þ

68,572,111 shares of Common Stock, $.001 par value, were outstanding at August 1, 2013.

 
 
 
 
 


PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2013

 
 
Page
 
 
 
 
Forward-Looking Statements
 
 
 
Part I. Financial Information
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II. Other Information
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Signatures
 
 

2
Table of Contents

Forward-Looking Statements

Certain statements in this Form 10-Q that are not in the present or past tense or discuss the Company's expectations (including the use of the words anticipate, believe, forecast, intends, expects, project, or similar expressions) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events.  Examples of forward-looking statements include projected capital resources, projected profitability and portfolio performance, estimates of market rental rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions or other transactions, the expected operating performance of anticipated near-term acquisitions and descriptions relating to these expectations, including without limitation, the anticipated net operating income yield.  Forward-looking statements involve risks and uncertainties (some of which are beyond our control) and are subject to change based upon various factors including, but not limited to, the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of our properties for rental purposes; the amount and growth of our expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in our geographic markets;  defaults or non-renewal of leases; risks associated with joint venture partners; the risks associated with the ownership of real property, including risks related to natural disasters; risks associated with property acquisitions; the failure to acquire or sell properties as and when anticipated; termination of property management contracts; the bankruptcy or insolvency of companies for which we provide property management services or the sale of these properties; the outcome of claims and litigation involving or affecting us; the ability to satisfy conditions necessary to close pending transactions; our failure to maintain our status as real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code; and other risks and uncertainties detailed from time to time in our SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, our business, financial condition, liquidity, cash flows and results could differ materially from those expressed in any forward-looking statement. Any forward-looking statements speak only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes.


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

 
June 30
 
December 31
 
2013
 
2012

(Unaudited)
 
 
Assets
 
 
 
Real estate related investments:
 
 
 
Office and parking properties
$
1,952,276

 
$
1,762,566

Accumulated depreciation
(223,184
)
 
(199,849
)
 
1,729,092

 
1,562,717

Land available for sale
250

 
250

 
1,729,342

 
1,562,967

Receivables and other assets
155,743

 
124,691

Intangible assets, net
120,704

 
118,097

Assets held for sale
9,831

 
—

Management contracts, net
15,437

 
19,000

Cash and cash equivalents
30,241

 
81,856

Total assets
$
2,061,298

 
$
1,906,611

 
 
 
 
Liabilities
 

 
 

Notes payable to banks
$
313,000

 
$
262,000

Mortgage notes payable
724,090

 
605,889

Accounts payable and other liabilities
87,856

 
82,716

Liabilities related to assets held for sale
325

 
—

Total liabilities
1,125,271

 
950,605

 
 
 
 
Equity
 

 
 

Parkway Properties, Inc. stockholders' equity:
 

 
 

8.00% Series D Preferred Stock,  $.001 par value, 5,421,296 shares authorized, issued and outstanding in 2012
—

 
128,942

Common stock, $.001 par value, 120,000,000 and 114,578,704 shares authorized in 2013 and 2012, respectively, and 68,572,111 and 56,138,209 shares issued and outstanding in 2013 and 2012, respectively
69

 
56

Additional paid-in capital
1,097,788

 
907,254

Accumulated other comprehensive loss
(814
)
 
(4,425
)
Accumulated deficit
(375,138
)
 
(337,813
)
Total Parkway Properties, Inc. stockholders' equity
721,905

 
694,014

Noncontrolling interests
214,122

 
261,992

Total equity
936,027

 
956,006

Total liabilities and equity
$
2,061,298

 
$
1,906,611










See notes to consolidated financial statements.

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PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
Income from office and parking properties
$
71,598

 
$
48,655

 
$
138,781

 
$
93,135

Management company income
4,480

 
4,973

 
8,832

 
10,405

Total revenues
76,078

 
53,628

 
147,613

 
103,540

Expenses and other


 
 
 
 

 
 

Property operating expense
28,259

 
18,940

 
53,573

 
36,607

Depreciation and amortization
31,471

 
19,106

 
60,764

 
36,566

Change in fair value of contingent consideration
—

 
—

 
—

 
216

Management company expenses
4,591

 
4,226

 
8,981

 
8,760

General and administrative
4,690

 
3,918

 
8,905

 
7,517

Acquisition costs
511

 
506

 
1,646

 
1,332

Total expenses and other
69,522

 
46,696

 
133,869

 
90,998

Operating income
6,556

 
6,932

 
13,744

 
12,542

Other income and expenses


 
 
 
 

 
 

Interest and other income
82

 
44

 
185

 
141

Interest expense
(11,304
)
 
(8,536
)
 
(21,774
)
 
(17,780
)
Loss before income taxes
(4,666
)
 
(1,560
)
 
(7,845
)
 
(5,097
)
Income tax benefit (expense)
384

 
11

 
891

 
(150
)
Loss from continuing operations
(4,282
)
 
(1,549
)
 
(6,954
)
 
(5,247
)
Discontinued operations:


 
 
 
 

 
 

Income (loss) from discontinued operations
(4,387
)
 
(374
)
 
(4,682
)
 
3,076

Gain on sale of real estate from discontinued operations
—

 
3,197

 
542

 
8,772

Total discontinued operations
(4,387
)
 
2,823

 
(4,140
)
 
11,848

Net income (loss)
(8,669
)
 
1,274

 
(11,094
)
 
6,601

Net loss attributable to noncontrolling interest – real estate partnerships
1,049

 
1,426

 
2,304

 
893

Net (income) loss attributable to noncontrolling interests – unit holders
—

 
73

 
2

 
(16
)
Net income (loss) for Parkway Properties, Inc.
(7,620
)
 
2,773

 
(8,788
)
 
7,478

Dividends on preferred stock
(722
)
 
(2,710
)
 
(3,433
)
 
(5,421
)
Dividends on convertible preferred stock
—

 
(1,011
)
 
—

 
(1,011
)
Dividends on preferred stock redemption
(6,604
)
 
—

 
(6,604
)
 
—

Net income (loss) attributable to common stockholders
$
(14,946
)
 
$
(948
)
 
$
(18,825
)
 
$
1,046

 
 
 
 
 
 
 
 
Net income (loss)
$
(8,669
)
 
$
1,274

 
$
(11,094
)
 
$
6,601

Change in fair value of interest rate swaps
(8,093
)
 
(1,048
)
 
(9,339
)
 
(966
)
Comprehensive income (loss)
(16,762
)
 
226

 
(20,433
)
 
5,635

Comprehensive (income) loss attributable to noncontrolling interests
(1,579
)
 
3,945

 
(3,422
)
 
3,131

Comprehensive income (loss) attributable to common stockholders
$
(18,341
)
 
$
4,171

 
$
(23,855
)
 
$
8,766

Net income (loss) per common share attributable to Parkway Properties, Inc.:


 
 
 
 

 
 

Basic and Diluted:


 
 
 
 

 
 

Loss from continuing operations attributable to Parkway Properties, Inc.
$
(0.16
)
 
$
(0.15
)
 
$
(0.23
)
 
$
(0.31
)
Discontinued operations
(0.06
)
 
0.11

 
(0.07
)
 
0.36

Basic and diluted net income (loss) attributable to Parkway Properties, Inc.
$
(0.22
)
 
$
(0.04
)
 
$
(0.30
)
 
$
0.05

Weighted average shares outstanding:


 
 
 
 

 
 

Basic
68,526

 
23,440

 
62,720

 
22,504

Diluted
68,526

 
23,440

 
62,720

 
22,504

Amounts attributable to Parkway Properties, Inc. common stockholders:


 
 
 
 

 
 

    Loss from continuing operations attributable to Parkway Properties, Inc.
$
(10,516
)
 
$
(3,449
)
 
$
(14,655
)
 
$
(7,128
)
    Discontinued operations
(4,430
)
 
2,501

 
(4,170
)
 
8,174

Net income (loss) attributable to common stockholders
$
(14,946
)
 
$
(948
)
 
$
(18,825
)
 
$
1,046

See notes to consolidated financial statements.

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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
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2012
$
128,942

 
$
56

 
$
907,254

 
$
(4,425
)
 
$
(337,813
)
 
$
261,992

 
$
956,006

Net loss
—

 
—

 
—

 
—

 
(8,788
)
 
(2,306
)
 
$
(11,094
)
Change in fair value of interest rate swaps
—

 
—

 
—

 
3,611

 
—

 
5,728

 
9,339

Common dividends declared-$0.30 per share
—

 
—

 
—

 
—

 
(18,500
)
 
—

 
(18,500
)
Preferred dividends declared-$1.00 per share
—

 
—

 
—

 
—

 
(3,433
)
 
—

 
(3,433
)
Original issue costs - preferred stock redemption
—

 
—

 
—

 
—

 
(6,604
)
 
—

 
(6,604
)
Share-based compensation
—

 
—

 
1,321

 
—

 
—

 
—

 
1,321

11,432 shares issued in lieu of Director's fees
—

 
—

 
220

 
—

 
—

 
—

 
220

Issuance of 12,650,000 shares of common stock
—

 
13

 
208,722

 
—

 
—

 
—

 
208,735

Issuance of 11,611 shares issued pursuant to TPG
Management Services Agreement
—

 
—

 
200

 
—

 
—

 
—

 
200

Buyback of 2,275 shares to satisfy tax withholding obligation in connection with the vesting of restricted stock
—

 
—

 
(35
)
 
—

 
—

 
—

 
(35
)
Series D Preferred Stock redemption
(128,942
)
 
—

 
—

 
—

 
—

 
—

 
(128,942
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(13,840
)
 
(13,840
)
Purchase of noncontrolling interest's share of office properties owned by Parkway Properties Office Fund II, L.P.
—

 
—

 
(19,894
)
 
—

 
—

 
(37,452
)
 
(57,346
)
Balance at June 30, 2013
$
—

 
$
69

 
$
1,097,788

 
$
(814
)
 
$
(375,138
)
 
$
214,122

 
$
936,027


















See notes to consolidated financial statements.

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

 
Six Months Ended 
 June 30
 
2013
 
2012
 
(Unaudited)
Operating activities
 
 
 
Net income (loss)
$
(11,094
)
 
$
6,601

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
60,764

 
36,566

Depreciation and amortization – discontinued operations
479

 
1,539

Amortization of above market leases
1,572

 
2,323

Amortization of below market leases – discontinued operations
—

 
(38
)
Amortization of loan costs
1,145

 
1,030

Share-based compensation expense
1,321

 
204

Deferred income tax benefit
(1,135
)
 
(478
)
Gain on sale of real estate investments
(542
)
 
(8,772
)
Non-cash impairment loss on real estate-discontinued operations
4,600

 
—

Equity in loss of unconsolidated joint ventures-discontinued operations
—

 
19

Change in fair value of contingent consideration
—

 
216

Increase in deferred leasing costs
(3,991
)
 
(4,710
)
Changes in operating assets and liabilities:
 

 
 

Change in receivables and other assets
(22,914
)
 
1,087

Change in accounts payable and other liabilities
9,511

 
(3,267
)
Net cash provided by operating activities
39,716

 
32,320

Investing activities
 

 
 

Proceeds from mortgage loan
—

 
1,500

Distributions from unconsolidated joint ventures
—

 
120

Investment in real estate
(225,754
)
 
(378,693
)
Proceeds from sale of real estate
2,966

 
110,816

Improvements to real estate
(15,819
)
 
(13,931
)
Net cash used in investing activities
(238,607
)
 
(280,188
)
Financing activities
 

 
 

Principal payments on mortgage notes payable
(59,800
)
 
(20,256
)
Proceeds from mortgage notes payable
178,000

 
73,500

Proceeds from bank borrowings
309,804

 
133,989

Payments on bank borrowings
(258,804
)
 
(155,044
)
Debt financing costs
(2,495
)
 
(2,215
)
Purchase of Company stock
(35
)
 
(113
)
Dividends paid on common stock
(18,660
)
 
(3,711
)
Dividends paid on convertible preferred stock
—

 
(1,011
)
Dividends paid on preferred stock
(3,433
)
 
(8,132
)
Contributions from noncontrolling interest partners
—

 
3,447

Distributions to noncontrolling interest partners
(70,703
)
 
(615
)
Redemption of preferred stock
(135,532
)
 
—

Proceeds from stock offerings, net of transaction costs
208,934

 
186,100

Net cash provided by financing activities
147,276

 
205,939

Change in cash and cash equivalents
(51,615
)
 
(41,929
)
Cash and cash equivalents at beginning of period
81,856

 
75,183

Cash and cash equivalents at end of period
$
30,241

 
$
33,254

See notes to consolidated financial statements.

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Parkway Properties, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2013

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.  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 consolidated 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 three months and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.  The financial statements should be read in conjunction with the 2012 annual report and the notes thereto.

The balance sheet at December 31, 2012 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 February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-2, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income", which requires disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income.  The disclosure requirements are effective for the Company on January 1, 2013, and the Company does not expect the guidance to have a material impact on its 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 deferred incentive share units were exercised or converted into common stock that then shared in the earnings of Parkway.


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

 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
     Basic and diluted net income (loss) attributable to common stockholders
$
(14,946
)
 
$
(948
)
 
$
(18,825
)
 
$
1,046

Basic weighted average shares
68,526

 
23,440

 
62,720

 
22,504

Dilutive weighted average shares
68,526

 
23,440

 
62,720

 
22,504

     Diluted net income (loss) per share attributable to Parkway Properties, Inc.
$
(0.22
)
 
$
(0.04
)
 
$
(0.30
)
 
$
0.05


 
The computation of diluted EPS for the three months and six months ended June 30, 2013 and 2012 did not include the effect of employee stock options, deferred incentive share units, and restricted shares as their inclusion would have been anti-dilutive. Terms and conditions of these awards are described in Note I.

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
 
2013
 
2012
 
(in thousands)
Supplemental cash flow information:
 
 
 
   Cash paid for interest
$
19,939

 
$
19,689

   Cash paid for income taxes
76

 
1,120

Supplemental schedule of non-cash investing and financing activity:
 

 
 

   Mortgage note payable transferred to purchaser
—

 
(224,498
)
   Stock options, profits interest units, restricted shares and deferred incentive share units issued
(287
)
 
(654
)
   Shares issued pursuant to TPG Management Services Agreement
200

 
75

   Shares issued in lieu of Director's fees
220

 
263

   Operating partnership unit converted to common stock
—

 
15,112


Note D – Acquisitions

On January 17, 2013, the Company purchased Tower Place 200, a 258,000 square foot office tower located in the Buckhead submarket of Atlanta, Georgia, for a gross purchase price of $56.3 million.  The purchase of Tower Place 200 was financed with borrowings under the Company's senior unsecured revolving credit facility.  The building is unencumbered by debt and the Company does not plan to place secured financing on the property at this time.

On March 7, 2013, the Company purchased two office complexes totaling 1.0 million square feet located in the Deerwood submarket of Jacksonville, Florida (the "Deerwood Portfolio") for a gross purchase price of $130.0 million.  The purchase of these properties was financed with a mortgage loan secured by the properties in the aggregate amount of $84.5 million and borrowings under the Company's senior unsecured revolving credit facility. The mortgage loan has a maturity date of April 1, 2023 and a fixed interest rate of 3.9%.

On March 25, 2013, the Company purchased its co-investor's 70% interest in three office properties totaling 788,000
square feet located in the Westshore submarket of Tampa, Florida ("Tampa Fund II Assets").  The Tampa Fund II Assets were owned by Parkway Properties Office Fund II, L.P. ("Fund II").  The Company's purchase price for its co-investor's 70% interest in the Tampa Fund II Assets was $97.5 million.  Simultaneously with closing, the Company assumed $40.7 million of existing mortgage indebtedness that is secured by the properties, which represents its co-investor's 70% share of the approximately $58.1 million of existing mortgage indebtedness.  The three office properties include Corporate Center IV at International Plaza, Cypress Center I, II and III, and The Pointe. The Tampa Fund II Assets' office properties and associated mortgage loans were previously

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included in the Company's consolidated balance sheets and statements of operations and comprehensive income (loss).  Therefore, the Company's purchase of its co-investor's share in these office properties will not impact the Company's overall financial position.

On June 3, 2013, the Company purchased an approximate 75% equity method interest in the US Airways Building, a 225,000 square foot office property located in the Tempe submarket of Phoenix, Arizona, for a purchase price of $41.8 million, which is accounted for in office and parking properties on the Company's consolidated balance sheets at June 30, 2013.  At closing, an affiliate of the Company issued a $13.9 million mortgage loan to the buyer, a wholly owned subsidiary, and an affiliate of US Airways, which is secured by the building. The mortgage loan carries a fixed interest rate of 3.0% and matures in December 2016. In accordance with GAAP, the Company's share of this loan and its related principal and interest payments have been eliminated in the Company's consolidated financial statements. This nine-story Class A office building is adjacent to Parkway's Hayden Ferry Lakeside and Tempe Gateway assets and shares a parking garage with Tempe Gateway.  The property is the headquarters for US Airways, which has leased 100% of the building through April 2024.  US Airways has a termination option on December 31, 2016 or December 31, 2021 with 12 months prior notice.  US Airways is also the owner of the remaining approximate 25% in the building.  

The allocation of purchase price related to intangible assets and liabilities and weighted average amortization period (in years) for each class of asset or liability for Tower Place 200, the Deerwood Portfolio and the US Airways Building is as follows (in thousands, except weighted average life):

 
Amount
 
Weighted
Average Life
Land
$
36,815

 
N/A
Buildings and garages
148,206

 
40
Tenant improvements
18,455

 
6
Lease commissions
8,272

 
6
Lease in place value
18,075

 
5
Above market leases
2,936

 
4
Below market leases
(5,735
)
 
7

The allocation of purchase price for the US Airways Building was preliminary at June 30, 2013 due to the timing of the acquisition.

The unaudited pro forma effect on the Company's results of operations for the purchase of Tower Place 200, the Deerwood Portfolio, the Tampa Fund II assets and the US Airways Building as if the purchase had occurred on January 1, 2012 is as follows (in thousands, except per share data):

 
Three Months Ended June 30
 
Six Months Ended 
 June 30
 
2013
 
2012
 
2013
 
2012
Revenues
$
77,178

 
$
60,687

 
$
153,653

 
$
117,742

Net income (loss) attributable to common stockholders
$
(14,489
)
 
$
(406
)
 
$
(18,074
)
 
$
2,891

Basic net income (loss) attributable to common stockholders
$
(0.21
)
 
$
(0.02
)
 
$
(0.29
)
 
$
0.13

Diluted net income (loss) attributable to common stockholders
$
(0.21
)
 
$
(0.02
)
 
$
(0.29
)
 
$
0.13


On April 26, 2013, the Company entered into a purchase and sale agreement to acquire Lincoln Place, a 140,000 square foot office building located in the South Beach submarket of Miami, Florida.  Lincoln Place is comprised of 111,000 square feet of office space and 29,000 square feet of retail space on the ground floor, with a five-story garage adjacent to the property. The property is currently 100% leased to LNR Corporation through June 2021 with no renewal or early termination option. Parkway is under contract to acquire Lincoln Place in exchange for the assumption of the existing secured first mortgage, which has a current outstanding balance of approximately $49.6 million, a fixed interest rate of 5.9% and a maturity date of June 11, 2016, and the issuance of 900,000 shares of operating partnership units. Based on Parkway's closing stock price of $17.78 per share on August 1, 2013, the implied purchase price would be approximately $65.6 million.  Closing is expected to occur by the end of the third quarter 2013, subject to customary closing conditions.

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Table of Contents


For details regarding dispositions during the six months ended June 30, 2013, please see Note E – Discontinued Operations.

Note E – Discontinued Operations

All current and prior period income from the following office property dispositions and properties held for sale is included in discontinued operations for the three months and six months ended June 30, 2013 and 2012 (in thousands).

Office Property
 
Location
 
Square
Feet
 
Date of
Sale
 
Net Sales
Price
 
Net Book
Value of
Real Estate
 
Gain
(Loss)
on Sale
2012 Dispositions (1):
 
 
 
 
 
 
 
 
 
 
 
 
Falls Pointe
 
Atlanta, GA
 
107

 
1/6/2012
 
$
5,824

 
$
4,467

 
$
1,357

111 East Wacker
 
Chicago, IL
 
1,013

 
1/9/2012
 
153,240

 
153,237

 
3

Renaissance Center
 
Memphis, TN
 
189

 
3/1/2012
 
27,661

 
24,629

 
3,032

Overlook II
 
Atlanta, GA
 
260

 
4/30/2012
 
29,467

 
28,689

 
778

Wink Building
 
New Orleans, LA
 
32

 
6/8/2012
 
705

 
803

 
(98
)
Ashford/Peachtree
 
Atlanta, GA
 
321

 
7/1/2012
 
29,440

 
28,148

 
1,292

Non-Core Assets
 
Various
 
1,932

 
Various
 
125,486

 
122,157

 
3,329

Sugar Grove
 
Houston, TX
 
124

 
10/23/2012
 
10,303

 
7,057

 
3,246

 
 
 
 
3,978

 
 
 
$
382,126

 
$
369,187

 
$
12,939

2013 Disposition (2):
 
 
 
 

 
 
 
 

 
 

 
 

Atrium at Stoneridge
 
Columbia, SC
 
108

 
3/20/2013
 
$
2,966

 
$
2,424

 
$
542

 
 
 
 
108

 
 
 
$
2,966

 
$
2,424

 
$
542

 
 
 
 
 
 
 
 
 
 
 
 
 
Office Property
 
Location
 
Square
Feet
 
Date of
Sale
 
Gross Sales Price
 
 
 
 
Properties Held for Sale at June 30, 2013 (3)
 
 
 
 
 
 
 
 
 
 
Waterstone
 
Atlanta, GA
 
93

 
7/10/2013
 
$
3,400

 
 
 
 
Meridian
 
Atlanta, GA
 
97

 
7/10/2013
 
6,800

 
 
 
 
 
 
 
 
190

 
 
 
$
10,200

 
 
 
 

(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2012 was $12.9 million, of which $8.1 million was our proportionate share.
(2) Total gain on the sale of real estate in discontinued operations recognized during the six months ended June 30, 2013 was $542,000.
(3) Gains and losses on assets held for sale are expected to be finalized upon sale and reflected in the nine months ended September 30, 2013 financial statements.

On March 20, 2013, the Company sold Atrium at Stoneridge, a 108,000 square foot office property located in Columbia, South Carolina, for a gross sales price of $3.1 million and recorded a gain of $542,000 during first quarter 2013.  The Company received $3.0 million in net proceeds from the sale, which was used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.

On July 10, 2013, the Company sold two office properties, Waterstone and Meridian, totaling 190,000 square feet located in Atlanta, Georgia, for a gross sales price of $10.2 million and recorded an impairment loss of $4.6 million during the second quarter of 2013 related to the sale of these assets. The Company received $9.5 million in net proceeds from the sale, which was used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility.

On July 17, 2013, the Company sold Bank of America Plaza, a 436,000 square foot office property located in Nashville, Tennessee, for a gross sales price of $42.8 million and expects to record a gain of approximately $11.9 million during the third quarter of 2013. The Company received $40.8 million in net proceeds from the sale, which was used to reduce amounts outstanding under the Company's revolving credit facilities.

    





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At June 30, 2013, assets and liabilities related to assets held for sale represented two properties, Waterstone and Meridian, totaling 190,000 square feet located in Atlanta, Georgia that were sold on July 10, 2013. The major classes of assets and liabilities classified as held for sale at June 30, 2013 are as follows (in thousands):

 
 
June 30, 2013
Balance Sheet:
 
 
Investment property
 
$
9,285

Accumulated depreciation
 
—

Office property held for sale
 
9,285

Rents receivable and other assets
 
546

Total assets held for sale
 
$
9,831

 
 
 
Accounts payable and other liabilities
 
$
325

Total liabilities related to assets held for sale
 
$
325



The amount of revenues and expenses for the office properties reported in discontinued operations for the three months and six months ended June 30, 2013 and 2012 is as follows (in thousands):
 
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
 
2013
 
2012
 
2013
 
2012
Statement of Operations:
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Income from office and parking properties
 
$
621

 
$
4,141

 
$
1,149

 
$
14,883

 
 
621

 
4,141

 
1,149

 
14,883

Expenses
 
 

 
 

 
 

 
 

Office and parking properties:
 
 

 
 

 
 

 
 

Operating expense
 
203

 
2,325

 
750

 
6,845

Management company expense
 
(5
)
 
86

 
2

 
238

Interest expense
 
—

 
1,587

 
—

 
3,378

Non-cash adjustment for interest rate swap
 
—

 
(77
)
 
—

 
(215
)
Impairment loss
 
4,600

 
—

 
4,600

 
—

Depreciation and amortization
 
210

 
594

 
479

 
1,561

 
 
5,008

 
4,515

 
5,831

 
11,807

Income (loss) from discontinued operations
 
(4,387
)
 
(374
)
 
(4,682
)
 
3,076

Gain on sale of real estate from discontinued operations
 
—

 
3,197

 
542

 
8,772

Total discontinued operations per Statement
of Operations
 
(4,387
)
 
2,823

 
(4,140
)
 
11,848

Net income attributable to noncontrolling
    interest from discontinued operations
 
(43
)
 
(322
)
 
(30
)
 
(3,674
)
Total discontinued operations-Parkway's share
 
$
(4,430
)
 
$
2,501

 
$
(4,170
)
 
$
8,174


Note F – 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 December 31, 2012, the contracts were valued by an independent appraiser at $19.0 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 six months ended June 30, 2013, the Company recorded amortization expense of $3.6 million on the management contracts.  At June 30, 2013, management contracts, net of accumulated amortization totaled $15.4 million.

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Note G - Capital and Financing Transactions

Notes Payable to Banks

At June 30, 2013, the Company had $68.0 million outstanding under its senior unsecured revolving credit facilities and had $245.0 million outstanding under its unsecured term loans.  The Company was in compliance with all loan covenants under its revolving credit facilities and term loans.

Credit Facilities
 
Lender
 
Interest Rate
 
Maturity
 
Outstanding Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility (1)
 
PNC Bank
 
—

 
3/29/2016
 
$
—

$215.0 Million Unsecured Revolving Credit Facility (1)
 
Wells Fargo
 
1.8
%
 
3/29/2016
 
68,000

$125.0 Million Unsecured Term Loan (2)
 
Key Bank
 
2.2
%
 
9/27/2017
 
125,000

$120.0 Million Unsecured Term Loan (3)
 
Wells Fargo
 
3.1
%
 
6/11/2018
 
120,000

 
 
 
 
2.4
%
 
 
 
$
313,000


(1)
The interest rate on the credit facilities is based on LIBOR plus an applicable margin of 160 basis point to 235 basis points, depending upon overall Company leverage as defined in the loan agreements for the Company's credit facilities, with the current rate set at 160 basis points.  Additionally, the Company pays fees on the unused portion of the credit facilities ranging between 25 and 35 basis points based upon usage of the aggregate commitment, with the current rate set at 35 basis points.
(2)
The interest rate on the term loan is based on LIBOR plus an applicable margin of 150 to 230 basis points depending on overall Company leverage (with the current rate set at 150 basis points).  On September 28, 2012, the Company executed two floating-to-fixed interest rate swaps totaling $125 million, locking LIBOR at 0.7% for five years which was effective October 1, 2012.
(3)
The interest rate on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on overall Company leverage (with the current rate set at 145 basis points). On June 12, 2013, the Company executed a floating-to-fixed interest rate swap totaling $120 million, locking LIBOR at 1.6% for five years.

On June 12, 2013, the Company entered into a term loan agreement for a $120 million unsecured term loan. The term loan has a maturity date of June 11, 2018, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million. Interest on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on overall Company leverage (with the current rate set at 145 basis points). The term loan has substantially the same operating and financial covenants as required by the Company's $215 million unsecured revolving credit facility. Wells Fargo Bank, National Association, acted as Administrative Agent and lender. The Company also executed a floating-to-fixed interest rate swap totaling $120.0 million, locking LIBOR at 1.6% for five years and resulting in an effective initial interest rate of 3.1%. The term loan had an outstanding balance of $120.0 million at June 30, 2013.

Mortgage Notes Payable

Mortgage notes payable at June 30, 2013 totaled $724.1 million, with an average interest rate of 5.1% and were secured by office properties.

On February 21, 2013, the Company obtained an $80.0 million first mortgage secured by Phoenix Tower, a 629,000 square foot office property located in the Greenway Plaza submarket of Houston, Texas.  The mortgage loan bears interest at a fixed rate of 3.9% and matures on March 1, 2023.  Payments of interest only are due on the loan for two years, after which the principal amount of the loan begins amortizing over a 25-year period until maturity.  The loan is pre-payable after March 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage loan contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 7, 2013, simultaneous with the purchase of the Deerwood Portfolio, the Company obtained an $84.5 million first mortgage, which is secured by the office properties in the portfolio.  The mortgage bears interest at a fixed rate of 3.9% and matures on April 1, 2023.  Payments of interest only are due on the loan for three years, after which the principal amount of the loan begins amortizing over a 30-year period until maturity.  The loan is pre-payable after May 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

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Table of Contents


On March 25, 2013, simultaneous with the purchase of its co-investor's 70% interest in the Tampa Fund II assets, the Company assumed $40.7 million of existing first mortgages that are secured by the properties, which represents its co-investor's 70% share of the approximately $58.1 million of the existing first mortgage indebtedness.

On May 31, 2013, the Company modified the existing $22.5 million first mortgage secured by Corporate Center Four at International Plaza ("Corporate Center Four"), a 250,000 square foot office property located in the Westshore submarket of Tampa, Florida. The modified first mortgage has a principal balance of $36.0 million, a weighted average fixed interest rate of 4.6%, an initial 24-month interest only period and a maturity date of April 8, 2019. In conjunction with the modification, the Company executed a floating-to-fixed interest rate swap fixing the interest rate on the additional $13.5 million in loan proceeds at 3.3%.

On June 3, 2013, in connection with the purchase of the US Airways Building, an affiliate of the Company issued a $13.9 million mortgage loan to its wholly owned subsidiary and an affiliate of US Airways which is secured by the US Airways Building, a 225,000 square foot office building located in the Tempe submarket of Phoenix, Arizona. The mortgage carries a fixed interest rate of 3.0% and matures on December 31, 2016. In accordance with GAAP, the Company's share of this loan and its related principal and interest payments have been eliminated in the Company's consolidated financial statements.    

On June 12, 2013, the Company repaid two first mortgages totaling $55.0 million which were secured by Cypress Center, a 286,000 square foot office complex in Tampa, Florida, and NASCAR Plaza, a 394,000 square foot office property in Charlotte, North Carolina. The two mortgages had a weighted average interest rate of 3.6% and were scheduled to mature in 2016. The Company repaid the mortgage loans using proceeds from its $120.0 million unsecured term loan.

On June 28, 2013, the Company modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The loan modification eliminates quarterly principal payments of $625,000.  As a result of the modification, loan payments are now interest-only through February 2015.  The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  The Company entered into a floating-to-fixed interest rate swap which fixed LIBOR on the original loan at 1.5% through January 2018.  Effective August 1, 2013, the Company entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry I, IV and V.

Interest Rate Swaps

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 $125.0 million unsecured term loan, $120.0 million unsecured term loan and the debt secured by 245 Riverside, Corporate Center Four, Bank of America Center, Two Ravinia, Hayden Ferry I, and Hayden Ferry II.  These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.























14
Table of Contents

The Company's interest rate hedge contracts at June 30, 2013, and 2012 are summarized as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
Asset (Liability)
Type of
 
Balance Sheet
 
Notional
 
Maturity
 
 
 
Fixed
 
June 30
Hedge
 
Location
 
Amount
 
Date
 
Reference Rate
 
Rate
 
2013
 
2012
Swap
 
Accounts payable
and other liabilities
 
$
12,088

 
11/18/2015
 
1-month LIBOR
 
4.1
%
 
$
—

 
$
(642
)
Swap
 
Receivables and
other assets
 
$
50,000

 
9/27/2017
 
1-month LIBOR
 
2.2
%
 
972

 
—

Swap
 
Receivables and
other assets
 
$
75,000

 
9/27/2017
 
1-month LIBOR
 
2.2
%
 
1,409

 
—

Swap
 
Accounts payable
and other liabilities
 
$
33,875

 
11/18/2017
 
1-month LIBOR
 
4.7
%
 
(2,171
)
 
(3,359
)
Swap
 
Accounts payable
and other liabilities
 
$
625

 
1/25/2018
 
1-month LIBOR
 
4.9
%
 
(29
)
 
—

Swap
 
Accounts payable
and other liabilities
 
$
22,000

 
1/25/2018
 
1-month LIBOR
 
4.5
%
 
(1,178
)
 
(1,912
)
Swap
 
Accounts payable
and other liabilities
 
$
46,875

 
1/25/2018
 
1-month LIBOR
 
4.7
%
 
(411
)
 
(1,344
)
Swap
 
Accounts payable
and other liabilities
 
$
120,000

 
6/11/2018
 
1-month LIBOR
 
3.1
%
 
(1,216
)
 
—

Swap
 
Accounts payable
and other liabilities
 
$
9,250

 
9/30/2018
 
1-month LIBOR
 
5.2
%
 
(793
)
 
(1,241
)
Swap
 
Accounts payable
and other liabilities
 
$
22,500

 
10/8/2018
 
1-month LIBOR
 
5.4
%
 
(2,077
)
 
(3,204
)
Swap
 
Receivables and
other assets
 
$
13,500

 
10/8/2018
 
1-month LIBOR
 
3.3
%
 
74

 
—

Swap
 
Accounts payable
and other liabilities
 
$
22,100

 
11/18/2018
 
1-month LIBOR
 
5.0
%
 
(1,626
)
 
(2,654
)
 
 
 
 
 

 
 
 
 
 
 

 
$
(7,046
)
 
$
(14,356
)

On March 25, 2013, in connection with the purchase of its co-investor's interest in the Tampa Fund II Assets, the Company assumed the remaining 70% of two interest rate swaps, which have a total notional amount of $34.6 million.

One May 31, 2013, the Company executed a floating-to-fixed interest rate swap for a notional amount of $13.5 million, associated with the first mortgage secured by Corporate Center Four in Tampa, Florida, that fixes LIBOR at 3.3% through October 8, 2018.

On June 12, 2013, the Company also executed a floating-to-fixed interest rate swap for a notional amount of $120.0 million, associated with its 120,000,000 $120.0 million term loan that fixes LIBOR at 1.6% for five years, which resulted in an initial all-in interest rate of 3.1%. The interest rate swap matures June 11, 2018.

On June 28, 2013, the Company modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The loan modification eliminates quarterly principal payments of $625,000.  As a result of the modification, loan payments are now interest-only through February 2015.  The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  The Company entered into a floating-to-fixed interest rate swap which fixed LIBOR on the original loan at 1.5% through January 2018.  Effective August 1, 2013, the Company entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry I and Hayden Ferry III, IV and V.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's investments and borrowings.


15
Table of Contents


Cash Flow Hedges of Interest Rate Risk

The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. See Note J - Fair Values of Financial Instruments, for the fair value of the Company's derivative financial instruments as well as their classification on the Company's consolidated balance sheets as of June 30, 2013 and December 31, 2012.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next twelve months, the Company estimates that an additional $5.5 million will be reclassified as an increase to interest expense. During the three and six months ended June 30, 2013 the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were a loss of $386,000.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
    
The tables below present the effect of the Company's derivative financial instruments on the Company's consolidated statements of operations and comprehensive income (loss) for the three months and six months ended June 30, 2013 and June 30, 2012 (in thousands):
 
Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps and Caps)
Three Months Ended
Six Months Ended
June 30, 2013
June 30, 2012
June 30, 2013
June 30, 2012
Amount of gain (loss) recognized in other comprehensive income on derivative
5,992

274

6,481

(3,220
)
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense
(1,143
)
(882
)
(2,810
)
(1,832
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
(386
)
—

(386
)
—


Credit risk-related Contingent Features

The Company has entered into agreements with each of its derivative counterparties that provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, the Company could also be declared in default on its derivative obligations.

As of June 30, 2013, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $10.1 million. As of June 30, 2013, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $10.1 million at June 30, 2013.


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Table of Contents

Note H – Noncontrolling Interests

Real Estate Partnerships

The Company has an interest in one joint venture that is included in its consolidated financial statements. Information relating to this consolidated joint venture as of June 30, 2013 is detailed below.

Joint Venture Entity and Property Name
 
Location
 
Parkway's Ownership %
 
Square Feet
(In thousands)
Fund II
 
 
 
 
 
 
Hayden Ferry Lakeside I
 
Phoenix, AZ
 
30.0%
 
203

Hayden Ferry Lakeside II
 
Phoenix, AZ
 
30.0%
 
299

Hayden Ferry Lakeside III, IV and V
 
Phoenix, AZ
 
30.0%
 
21

245 Riverside
 
Jacksonville, FL
 
30.0%
 
136

Bank of America Center
 
Orlando, FL
 
30.0%
 
421

Lakewood II
 
Atlanta, GA
 
30.0%
 
123

3344 Peachtree
 
Atlanta, GA
 
33.0%
 
484

Two Ravinia
 
Atlanta, GA
 
30.0%
 
438

Carmel Crossing
 
Charlotte, NC
 
30.0%
 
326

Two Liberty Place
 
Philadelphia, PA
 
19.0%
 
941

Total Fund II
 
 
 
27.4%
 
3,392


Fund II, a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012.  Fund II was structured with Teacher Retirement System of Texas ("TRST") as a 70% investor and Parkway as a 30% investor in the fund, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Fund II currently owns 10 properties totaling 3.4 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando and Philadelphia.  In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Lakeside III, IV and V, a 2,500 space parking garage, a 21,000 square foot office property and a vacant parcel of development land, all adjacent to Hayden Ferry Lakeside I and Hayden Ferry Lakeside II in Phoenix.

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash is distributed by Fund II 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.  The term of Fund II is seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the Company's discretion.

Noncontrolling interest - real estate partnerships represents the other partner's proportionate share of equity in the partnership discussed above at March 31, 2013. Income is allocated to noncontrolling interest based on the weighted average percentage ownership during the year.

On March 25, 2013, the Company purchased its co-investor's 70% interest in the Tampa Fund II Assets.  See Note D - Acquisitions.


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

The Company grants share-based awards under the Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan (the “2013 Equity Plan”). The Company's Board of Directors (the “Board”) adopted the 2013 Equity Plan on December 19, 2012, and the Company's stockholders approved the 2013 Equity Plan on May 16, 2013. The 2013 Equity Plan replaced the Parkway Properties, Inc. 2010 Omnibus Equity Incentive Plan, as amended (the “2010 Equity Plan”), upon stockholder approval of the 2013 Equity Plan, although outstanding awards granted under the 2010 Equity Plan continue to be governed by the 2010 Equity Plan.

Except with respect to awards granted to non-employee directors, the Compensation Committee of the Board (the “Committee”) administers the 2013 Equity Plan. The 2013 Equity Plan authorizes the Committee or the Board, where applicable, to grant stock options (including incentive stock options and nonstatutory stock options), stock appreciation rights, restricted shares, restricted share units (“RSUs”), dividend equivalent rights, profits interest units (“LTIP units”) and other share-based awards. The Company's employees, non-employee directors and consultants or advisors are eligible to receive awards under the

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2013 Equity Plan. The aggregate number of shares of the Company's common stock available for awards pursuant to the Plan is 3,250,000, including a maximum of 2,000,000 shares that may be granted pursuant to stock options or stock appreciation rights and a maximum of 1,250,000 shares that may be granted pursuant to other awards.

Through June 30, 2013, the Company has granted stock options, LTIP units and RSUs (including time-vesting RSUs and performance-vesting RSUs) under the 2013 Equity Plan. As of June 30, 2013, the Company has restricted shares and deferred incentive share units outstanding under the 2010 Equity Plan. The Company has also previously awarded long-term equity incentive awards and long-term cash incentives.

Compensation expense, net of estimated forfeitures, for service-based awards is recognized over the expected vesting period. The total compensation expense for the long-term equity incentive awards is based upon the fair value of the shares on the grant date, adjusted for estimated forfeitures. Time-vesting restricted shares, RSUs and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway's common shares (NYSE: PKY) as of the date of grant. The grant date fair value for awards that are subject to performance-based vesting and market conditions, including LTIP units, performance-vesting RSUs, and long-term equity incentive awards, is determined using a simulation pricing model developed to specifically accommodate the unique features of the awards. The total compensation expense for stock options is estimated based on the fair value of the options as of the date of grant using the Black-Scholes-Merton model.
Long-Term Equity Incentives

At June 30, 2013, a total of 1,850,000 shares underlying stock options had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The stock options are valued at $7.7 million, which equates to an average price per share of $4.17. At June 30, 2013, a total of 115,350 time-vesting RSUs had been granted to officers of the Company and remain outstanding. The time-vesting RSUs are valued at $2.2 million, which equates to an average price per share of $19.25. Each stock option and time-vesting RSU award will vest in increments of 25% per year on each of the first, second, third and fourth anniversaries of the grant date, subject to the grantee's continued service.

At June 30, 2013, a total of 114,443 LTIP units had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The LTIP units are valued at $1.2 million, which equates to an average price per share of $10.60. At June 30, 2013, a total of 58,597 performance-vesting RSUs had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The performance-vesting RSUs are valued at $615,000, which equates to an average price per share of $10.50. Each LTIP unit and performance-vesting RSU will vest based on the attainment of total stockholder return targets during the performance period running from March 2, 2013 to March 1, 2016, subject to the grantee's continued service. 

The Company began expensing the grants of stock options, LTIP units and time-vesting and performance-vesting RSUs upon stockholder approval of the 2013 Equity Plan on May 16, 2013.

At June 30, 2013, a total of 32,581 restricted shares had been granted to officers of the Company and remain outstanding under the 2010 Equity Plan. The restricted shares vest ratably over four years from the date of grant. The restricted shares are valued at $482,000, which equates to an average price per share of $14.78. At June 30, 2013, a total of 17,235 deferred incentive share units had been granted to officers of the Company and remain outstanding under the 2010 Equity Plan. The deferred incentive share units are valued at $356,000, which equates to an average price per share of $20.66. The deferred incentive share units vest ratably overfour years from the date of grant.

Total compensation expense related to stock options, LTIP units, RSUs, restricted shares and deferred incentive units of $1.3 million and $204,000 was recognized during the six months ended June 30, 2013 and 2012, respectively. Total compensation expense related to non-vested awards not yet recognized was $11.3 million at June 30, 2013. The weighted average period over which this expense is expected to be recognized is approximately two years.











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A summary of the Company's stock options, LTIP units, RSUs, restricted shares and deferred incentive share unit activity for the six months ended June 30, 2013 is as follows:

 
Restricted Shares
 
Deferred Incentive Share Units
 
Stock Options
 
Restricted Stock Units
 
LTIP Units
 
# of Shares
 
Weighted
Average
Grant-Date
Fair Value
 
# of
Share Units
 
Weighted
Average
Grant-Date
Fair Value
 
# of Options
 
Weighted
Average
Grant-Date
Fair Value

# of Stock Units
 
Weighted
Average
Grant-Date
Fair Value
 
# of LTIP Units
 
Weighted
Average
Grant-Date
Fair Value
Balance at 12/31/12
281,233

 
$
8.34

 
17,760

 
$
25.61

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Granted
—

 
—

 
—

 
—

 
1,850,000

 
4.17

 
173,947

 
16.30

 
114,443

 
10.60

Vested
(11,786
)
 
15.14

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Forfeited
(236,866
)
 
7.11

 
(525
)
 
N/M*

 
—

 
—

 
—

 
—

 
—

 
—

Balance at 06/30/13
32,581

 
$
14.78

 
17,235

 
$
20.66

 
1,850,000

 
$
4.17

 
173,947

 
$
16.30

 
114,443

 
$
10.60

*N/M-Not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

On July 8, 2013, the Board of Directors approved the grant of 100,000 LTIP units and 100,000 time-vesting RSUs to Mr. Heistand, the Company's President and Chief Executive Officer. Each time-vesting RSU will vest in increments of 33% per year on each of the first, second and third anniversaries of the grant date, subject to the officer's continued service. Each LTIP unit will vest based on the attainment of total stockholder return targets during the performance period running from July 8, 2013 to July 7, 2016, subject to the Mr. Heistand's continued service. 
The Committee previously approved long-term equity incentive awards to executive officers of the Company consisting of, in part, performance-based awards subject to both an absolute and relative total return goal. The performance-based awards vested contingent on the Company meeting goals for compounded annual total return to stockholders (“TRTS”) set by the Committee over the three-year performance period beginning July 1, 2010. The performance goals were based upon the Company's (i) absolute compounded annual TRTS and (ii) absolute compounded annual TRTS relative to the compounded annual return of the MSCI US REIT (“RMS”) Index calculated on a gross basis. As of June 30, 2013, which was the end of the performance period, the Company did not achieve the performance goals and the performance-based awards did not vest.
Long-Term Cash Incentive Plan

The Company previously adopted a long-term cash incentive plan that was designed to reward officers of the Company based on significant outperformance over the three-year performance period beginning July 1, 2010. The performance goals were based upon the Company's (i)  absolute compounded annual TRTS and (ii) absolute compounded annual TRTS relative to the compounded annual return of the RMS Index calculated on a gross basis. As of June 30, 2013, the Company did not achieve the performance goals of the long-term cash incentive plan and no cash payments were made to officers of the Company under the long-term cash incentive plan.

Note J - 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.  ASC 820 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).  A summary of the carrying amount and fair value of the Company's financial assets and liabilities as of June 30, 2013 and December 31, 2012 are as follows (in thousands):


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As of June 30, 2013
 
As of December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
30,241

 
$
30,241

 
$
81,856

 
$
81,856

Interest rate swap agreements
2,455

 
2,455

 
—

 
—

Financial Liabilities:
 

 
 

 
 

 
 

Mortgage notes payable
$
724,090

 
$
665,446

 
$
605,890

 
$
623,604

Notes payable to banks
313,000

 
314,834

 
262,000

 
254,215

Interest rate swap agreements
9,501

 
9,501

 
16,237

 
16,237


The methods and assumptions used to estimate fair value for each class of financial asset or liability are discussed below:

Cash and cash equivalents:  The carrying amounts for cash and cash equivalents approximate fair value.

Mortgage notes payable:  The fair value of 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.  This information is considered a Level 2 input as defined by ASC 820.

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.  This information is considered a Level 2 input as defined by ASC 820.

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.

Note K – Income Taxes
The Company qualifies and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").  The Company will generally not be subject to federal income tax to the extent that it distributes its taxable income to the Company's stockholders, and as long as Parkway satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.

The Company has elected to treat certain consolidated subsidiaries as taxable REIT subsidiaries, which are tax paying entities for income tax purposes and are taxed separately from the Company.  Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal and state income tax at regular corporate tax rates.

Parkway's provision for income taxes for the six months ended June 30, 2013 and 2012, was $244,000 and $628,000, respectively, of current federal and state income tax expense resulting from taxable REIT subsidiary income.

In connection with the contribution of the Eola management company to the Company, the Company recorded a deferred tax liability representing differences between the tax basis and GAAP basis of the acquired assets and liabilities (primarily related to the management company contracts) multiplied by the effective tax rate.  The Company was required to record these deferred tax liabilities as a result of the management company becoming a C corporation at the time it was acquired.  The Company's net deferred tax liabilities as of June 30, 2013 and December 31, 2012, were $824,000 and $2.0 million, respectively.

Note L – Other Matters

On March 25, 2013, the Company completed an underwritten public offering of 11.0 million shares of its common stock, plus an additional 1.65 million shares of its common stock issued and sold pursuant to the exercise of the underwriters' option to purchase additional shares in full, at the public offering price of $17.25 per share.  The net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $209.0 million.  The Company used the net proceeds of the common stock offering to redeem in full all of its outstanding 8.00% Series D Cumulative Redeemable Preferred Stock and will use remaining net proceeds to fund potential acquisition opportunities, to repay amounts outstanding from time to time under its senior unsecured revolving credit facility and/or for general corporate purposes.

On April 25, 2013, the Company redeemed all of its outstanding 8.00% Series D Cumulative Redeemable Preferred Stock.  The Company paid $136.3 million to redeem the preferred shares and incurred a charge during the second quarter 2013

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of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

On July 1, 2013, the Company announced the closure of its Jackson, Mississippi office. The Jackson, Mississippi office is being closed due to the Company's plan to consolidate its support functions, including accounting, tax, human resources and information technology, in Florida. The Company expects that the total pre-tax charge to earnings will be approximately $3.7 million and will be incurred in the third quarter of 2013.

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

We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT") specializing in the acquisition, ownership and management of quality office properties in high-growth submarkets in the Sunbelt region of the United States.  At July 1, 2013, we owned or had an interest in 46 office properties located in eight states with an aggregate of approximately 13.3 million square feet of leasable space.  We offer fee-based real estate services through our wholly owned subsidiaries, which in total managed and/or leased approximately 11.8 million square feet for third-party property owners at July 1, 2013.  Unless otherwise indicated, all references to square feet represent net rentable area.

Business Objective and Operating Strategies

Our business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets through operations, acquisitions and capital recycling, while maintaining a conservative and flexible balance sheet. We intend to achieve this objective by executing on the following business and growth strategies:

•
Create Value as the Leading Owner of Quality Assets in Core Submarkets. Our investment strategy is to pursue attractive returns by focusing primarily on owning high-quality office buildings and portfolios that are well-located and competitively positioned within central business district and urban infill locations within our core submarkets in the Sunbelt region of the United States.   In these submarkets, we seek to maintain a portfolio that consists of core, core-plus, and value-add investment opportunities.  Further, we intend to pursue an efficient capital allocation strategy that maximizes the returns on our invested capital.  This may include selectively disposing of properties when we believe returns have been maximized and redeploying capital into acquisitions or other opportunities.

•
Maximize Cash Flow by Continuing to Enhance the Operating Performance of Each Property.  We provide property management and leasing services to our portfolio, actively managing our properties and leveraging our tenant relationships to improve operating performance, maximize long-term cash flow and enhance stockholder value.  We seek to attain a favorable customer retention rate by providing outstanding property management and customer service programs responsive to the varying needs of our diverse tenant base.  We also employ a judicious prioritization of capital projects to focus on projects that enhance the value of our property through increased rental rates, occupancy, service delivery, or enhanced reversion value.

•
Realize Leasing and Operational Efficiencies and Gain Local Advantage.  We concentrate our real estate portfolio in submarkets where we believe that we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies.  We believe that strengthening our local presence and leveraging our extensive market relationships will yield superior market information and service delivery and facilitate additional investment opportunities to create long-term stockholder value.

Occupancy.  Our revenues are dependent on the occupancy of our office buildings.  At July 1, 2013, occupancy of our office portfolio was 89.9% compared to 88.7% at April 1, 2013 and 87.4% at July 1, 2012.  Not included in the July 1, 2013 occupancy rate is the impact of 19 signed leases totaling 94,000 square feet expected to take occupancy between now and the first quarter of 2014, of which the majority will commence during the second and third quarters of 2013.  Including these signed leases, our portfolio was 90.6% leased at July 1, 2013.  Our average occupancy for the three months and six months ended June 30, 2013, was 89.0% and 88.5%, respectively.

During the second quarter of 2013, 32 leases were renewed totaling 399,000 rentable square feet at an average annual rental rate per square foot of $29.18, representing a 6.5% rate decrease as compared to expiring rental rates, and at an average cost of $4.35 per square foot per year of the lease term. During the six months ended June 30, 2013, 71 renewal leases were signed

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totaling 753,000 rentable square feet at an average annual rental rate per square foot of $27.41, representing a 1.2% rate decrease as compared to expiring rental rates, and at an average cost of $3.43 per square foot per year of the lease term.

During the second quarter of 2013, 17 expansion leases were signed totaling 84,000 rentable square feet at an average annual rental rate per square foot of $28.46 and at an average cost of $5.13 per square foot per year of the lease term. During the six months ended June 30, 2013, 32 expansion leases were signed totaling 170,000 rentable square feet at an average annual rental rate per square foot of $26.96 and an average cost of $5.23 per square foot per year of the lease term.

During the second quarter of 2013, 24 new leases were signed totaling 95,000 rentable square feet at an average annual rental rate per square foot of $23.39 and at an average cost of $6.04 per square foot per year of the term. During the six months ended June 30, 2013, 41 new leases were signed totaling 156,000 square feet at an average rent per square foot of $22.92 and at an average cost of $6.18 per square foot per year of the term.

Rental Rates.  An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates.  Inversely, a decrease in vacancy rates in a market or at a specific property has the effect of increasing market rental rates.  Our leases typically have three to seven year terms, though we do enter into leases with terms that are either shorter or longer than that typical range from time to time.  As leases expire, we seek to replace existing leases with new leases at the current market rental rate.  For our properties owned as of July 1, 2013, management estimates that we have approximately $0.11 per square foot in annual rental rate embedded growth in our office property leases.  Embedded growth is defined as the difference between the weighted average in-place cash rents including operating expense reimbursements and the weighted average estimated market rental rate.

Customer Retention.  Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs.  Our customer retention rate was 84.7% for the quarter ended June 30, 2013, as compared to 78.2% for the quarter ended March 31, 2013, and 63.2% for the quarter ended June 30, 2012. For six months ended June 30, 2013 our customer retention rate was 81.5%, as compared to 56.4% for the same period of 2012.

Joint Ventures and Partnerships

Management views investing in wholly owned properties as the highest priority of our capital allocation.  However, we may selectively pursue joint ventures if we determine that such a structure will allow us to reduce anticipated risks related to a property or portfolio, limit concentration of rental revenue from a particular market or building or address unusual operational risks.  To the extent we enter into joint ventures and partnerships, we will seek to manage all phases of the investment cycle including acquisition, financing, operations, leasing and dispositions, and we will seek to receive fees for providing these services.

At June 30, 2013, we had one partnership structured as a discretionary fund.  Parkway Properties Office Fund II, L.P. ("Fund II"), a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012.  Fund II was structured with Teacher Retirement System of Texas ("TRST") as a 70% investor and our operating partnership as a 30% investor, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Fund II currently owns 10 properties totaling 3.4 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando and Philadelphia. In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Lakeside III, IV and V, all adjacent to Hayden Ferry Lakeside I and Hayden Ferry Lakeside II office properties in Phoenix.

On March 25, 2013, we purchased our co-investor's 70% interest in three office properties totaling 788,000 square feet located in the Westshore submarket of Tampa, Florida ("Tampa Fund II Assets").  The Tampa Fund II Assets were owned by Parkway Properties Office Fund II, L.P. ("Fund II").  The purchase price for our co-investor's 70% interest in the Tampa Fund II Assets was $97.5 million.  Simultaneously with closing, we assumed $40.7 million of existing mortgage indebtedness that is secured by the properties, which represents our co-investor's 70% share of the approximately $58.1 million of existing mortgage indebtedness.  The three office properties include Corporate Center IV at International Plaza, Cypress Center I, II and III, and The Pointe.  The Tampa Fund II Assets' office properties and associated mortgage loans were previously included in the Company's consolidated balance sheets and statements of operations and comprehensive income (loss).  Therefore, the Company's purchase of its co-investor's share in these office properties will not impact the Company's overall financial position.

We serve as the general partner of Fund II and provide asset management, property management, leasing and construction management services to the fund, for which we are paid market-based fees.  Cash is distributed by Fund II 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 us.  The term of Fund II is seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at our discretion.

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Financial Condition

Comparison of the six months ended June 30, 2013 compared to the year ended December 31, 2012 .

Assets. In 2013, we have continued the execution of our strategy of operating and acquiring office properties as well as disposing of non-core assets that no longer meet our investment criteria or for which a disposition would maximize value.  During the six months ended June 30, 2013, total assets increased $154.7 million or 8.1% as compared to the year ended December 31, 2012.  The primary reason for the increase is due to the purchase of four office properties during the six months ended June 30, 2013, partially offset by the disposition of one office property.

Acquisitions and Improvements.  Our investment in office properties increased $166.4 million net of depreciation to a carrying amount of $1.7 billion at June 30, 2013 and consisted of 46 office properties.  The primary reason for the increase in office properties relates to the purchase of four office properties.

During the six months ended June 30, 2013, we purchased four office properties and our co-investor's interest in three additional office properties as follows (in thousands):
 
Office Property
 
 
 
 
Location
 
 
 
Type of
Ownership
 
Ownership
Share
 
Square
Feet
 
 
 
Date
Purchased
 
Gross
Purchase
Price
Tower Place 200
 
Atlanta, GA
 
Wholly owned
 
100.0
%
 
258

 
1/17/2013
 
$
56,250

Deerwood Portfolio (1)
 
Jacksonville, FL
 
Wholly owned
 
100.0
%
 
1,019

 
3/7/2013
 
130,000

Tampa Fund II Assets (2)
 
Tampa, FL
 
Wholly owned
 
100.0
%
 
788

 
3/25/2013
 
97,524

US Airways
 
Phoenix, AZ
 
Joint Venture
 
74.58
%
 
225

 
6/3/2013
 
41,750

 
 
 
 
 
 
 

 
2,290

 
 
 
$
325,524


(1)
We purchased two office complexes (collectively, the "Deerwood Portfolio") totaling 1.0 million square feet located in the Deerwood submarket of Jacksonville, Florida.
(2)
We purchased our co-investor's interest of Corporate Center IV at International Plaza, Cypress Center I, II and III and The Pointe for $97.5 million, which represents our co-investor's 70% interest in these office properties.  The Tampa Fund II Assets' office properties and associated mortgage loans were previously included in the Company's consolidated balance sheets and statements of operations and comprehensive income (loss).  Therefore, the Company's purchase of its co-investor's share in these office properties will not impact the Company's overall financial position.

On April 26, 2013, we entered into a purchase and sale agreement to acquire Lincoln Place, a 140,000 square foot office building located in the South Beach submarket of Miami, Florida.  Lincoln Place is comprised of 111,000 square feet of office space and 29,000 square feet of retail space on the ground floor, with a five-story garage adjacent to the property. The property is currently 100% leased to LNR Corporation through June 2021 with no renewal or early termination option. Parkway is under contract to acquire Lincoln Place in exchange for the assumption of the existing secured first mortgage, which has a current outstanding balance of approximately $49.6 million, a fixed interest rate of 5.9% and a maturity date of June 11, 2016, and the issuance of 900,000 shares of operating partnership units. Based on our closing stock price of $17.78 per share on August 1, 2013, the implied purchase price would be approximately $65.6 million.  Closing is expected to occur by the end of the third quarter 2013, subject to customary closing conditions.

During the six months ended June 30, 2013, we capitalized building improvements of $15.8 million and recorded depreciation expense of $36.1 million related to our office properties.

Dispositions.  During the six months ended June 30, 2013, we completed the sale of Atrium at Stoneridge, a 108,000 square foot office property in Columbia, South Carolina, for a gross sales price of $3.1 million and recorded a gain of $542,000 during first quarter 2013.  We received $3.0 million in net proceeds from the sale, which was used to reduce amounts outstanding under our senior unsecured revolving credit facility. For a complete discussion on dispositions subsequent to June 30, 2013, please reference “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Discontinued Operations.”

Receivables and Other Assets. For the six months ended June 30, 2013, receivables and other assets increased $31.1 million or 24.9%. The net increase is primarily due to an increase in straight line rent receivable balances, related to one large

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lease renewal, office property purchases during the fourth quarter of 2012 and the first quarter of 2013, as well as an increase in capitalized lease costs and escrow deposits related to the purchase of four office properties during the first quarter of 2013.

Intangible Assets, Net. For the six months ended June 30, 2013, intangible assets net of related amortization increased $2.6 million or 2.2% due to the purchase of four office properties.

Management Contracts, Net.  For the six months ended June 30, 2013, management contracts, net of related amortization decreased $3.6 million or 18.8% as a result of amortization recorded during the period.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $51.6 million or 63.1% during the six months ended June 30, 2013 primarily due to cash used to fund acquisitions and prepay two mortgage loans during the period, offset by proceeds received from our March 2013 underwritten public offering of common stock and the placement of our $120.0 million unsecured term loan.  Our proportionate share of cash and cash equivalents at June 30, 2013 and December 31, 2012 was $16.2 million and $56.0 million, respectively.

Assets Held for Sale and Liabilities Related to Assets Held for Sale. For the six months ended June 30, 2013, assets held for sale increased $9.8 million and liabilities related to assets held for sale increased $325,000. For a complete discussion of assets and liabilities held for sale, please reference “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Discontinued Operations.”

Notes Payable to Banks. Notes payable to banks increased $51.0 million or 19.5% during the six months ended June 30, 2013.  At June 30, 2013, notes payable to banks totaled $313.0 million and the net increase was attributable to borrowings used to redeem our Series D Cumulative Redeemable Preferred Stock (the "Series D preferred stock"), fund acquisitions and prepay two mortgage loans during the period offset by proceeds received from our March 2013 underwritten public common stock offering.

On June 12, 2013, we entered into a term loan agreement for a $120.0 million unsecured term loan. The term loan has a maturity date of June 11, 2018. Interest on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on our overall leverage (with the current rate set at 145 basis points). The term loan has substantially the same operating and financial covenants as required by our $215 million unsecured revolving credit facility. Wells Fargo Bank, National Association, acted as Administrative Agent and lender. We also executed a floating-to-fixed interest rate swap totaling $120.0 million, locking LIBOR at 3.1% for five years and resulting in an effective initial interest rate of 3.1%. The term loan had an outstanding balance of $120.0 million at June 30, 2013.

Mortgage Notes Payable. During the six months ended June 30, 2013, mortgage notes payable increased $118.2 million or 19.5% due to the following (in thousands):

 
Increase (Decrease)
Placement of mortgage debt on Phoenix Tower
$
80,000

Placement of mortgage debt on the Deerwood Portfolio
84,500

Modification of mortgage debt on Corporate Center Four
13,500

Principal paid on early extinguishment of debt
(55,015
)
Scheduled principal payments
(4,785
)
 
$
118,200



On February 21, 2013, we obtained an $80.0 million first mortgage secured by Phoenix Tower, a 629,000 square foot office property located in the Greenway Plaza submarket of Houston, Texas.  The mortgage loan bears interest at a fixed rate of 3.9% and matures on March 1, 2023.  Payments of interest only are due on the loan for two years, after which the principal amount of the loan begins amortizing over a 25-year period until maturity.  The loan is pre-payable after March 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage loan contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 7, 2013, simultaneously with the purchase of the Deerwood Portfolio, we obtained an $84.5 million first mortgage, which is secured by the office properties in the portfolio.  The mortgage bears interest at a fixed rate of 3.9% and matures

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on April 1, 2023.  Payments of interest only are due on the loan for three years, after which the principal amount of the loan begins amortizing over a 30-year period until maturity.  The loan is pre-payable after May 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 25, 2013, simultaneously with the purchase of our co-investor's interest of the Tampa Fund II Assets, we assumed $40.7 million of existing first mortgages that are secured by the properties, which represents our co-investor's 70% share of the approximately $58.1 million of the existing first mortgages.

On May 31, 2013, we modified the existing $22.5 million first mortgage secured by Corporate Center Four at International Plaza ("Corporate Center Four"), a 250,000 square foot office property located in the Westshore submarket of Tampa, Florida. The modified first mortgage carries a principal balance of $36.0 million, a weighted average fixed interest rate of 4.6%, an initial 24-month interest only period and a maturity date of April 8, 2019. In conjunction with the modification, we executed a floating-to-fixed interest rate swap fixing the interest rate on the additional $13.5 million in loan proceeds at 3.3%.

On June 3, 2013, in connection with the purchase of the US Airways Building, one of our affiliates issued a $13.9 million mortgage loan to its wholly owned subsidiary and an affiliate of US Airways which is secured by the US Airways building, a 225,000 square foot office building located in the Tempe submarket of Phoenix, Arizona. The mortgage carries a fixed interest rate of 3.0% and matures on December 31, 2016. In accordance with GAAP, our share of this loan and its related principal and interest payments have been eliminated in our consolidated financial statements.    

On June 12, 2013, we repaid two first mortgages totaling $55.0 million which were secured by Cypress Center, a 286,000 square foot office complex in Tampa, Florida, and NASCAR Plaza, a 394,000 square foot office property in Charlotte, North Carolina. The two mortgages had a weighted average interest rate of 3.6% and were scheduled to mature in 2016. We repaid the mortgage loans using proceeds from our $120.0 million unsecured term loan.

On June 28, 2013, we modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The loan modification eliminates quarterly principal payments of $625,000.  As a result of the modification, loan payments are now interest-only through February 2015.  The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  We entered into a floating-to-fixed interest rate swap which fixed LIBOR on the original loan at 1.5% through January 2018.  Effective August 1, 2013, we entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry I, IV and V.

We expect 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.  We monitor a number of leverage and other financial metrics defined in the loan agreements for our senior unsecured revolving credit facility and working capital unsecured credit facility, which include but are not limited to our total debt to total asset value ratio.  In addition, we monitor interest, fixed charge and modified fixed charge coverage ratios as well 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 net debt to EBITDA multiple is computed by comparing our share of net debt to EBITDA for the current quarter as annualized and adjusted pro forma for any completed investment activity. We believe all of the leverage and other financial metrics we monitor, including those discussed above, provide useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments.

Accounts Payable and Other Liabilities.  For the six months ended June 30, 2013, accounts payable and other liabilities increased $5.1 million or 6.2% primarily due to an increase in below market lease value liabilities associated with the purchase of four office properties during the first quarter of 2013 and an increase in property tax payable, offset by a decrease in the valuation of interest rate swaps.









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Equity. Total equity decreased $20.0 million or 2.1% during the six months ended June 30, 2013, as a result of the following (in thousands):

 
Increase (Decrease)
 
(Unaudited)
Net loss attributable to Parkway Properties, Inc.
$
(8,788
)
Net loss attributable to noncontrolling interests
(2,306
)
Net loss
(11,094
)
Change in market value of interest rate swaps
9,339

Common stock dividends declared
(18,500
)
Preferred stock dividends declared
(3,433
)
Original issue costs - preferred stock redemption
(6,604
)
Share-based compensation
1,321

Shares issued in lieu of Director's fees
220

Issuance of common stock
208,735

Shares issued pursuant to TPG Management Services Agreement
200

Shares withheld to satisfy tax withholding obligation on vesting of restricted stock
(35
)
Series D Preferred stock redemption
(128,942
)
Distribution of capital by noncontrolling interest
(13,840
)
Purchase of noncontrolling interests of office properties owned by Parkway Properties Office Fund II, LP
(57,346
)
 
$
(19,979
)

On March 25, 2013, we completed an underwritten public offering of 11.0 million shares of our common stock, plus an additional 1.65 million shares of our common stock issued and sold pursuant to the exercise of the underwriters' option to purchase additional shares in full, at the public offering price of $17.25 per share.  The net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $209.0 million.  We used the net proceeds of the common stock offering to redeem in full all of our outstanding Series D preferred stock and will use the remaining net proceeds to fund potential acquisition opportunities, to repay amounts outstanding from time to time under our senior unsecured revolving credit facility and/or for general corporate purposes.

On April 25, 2013, we redeemed all of our outstanding Series D preferred stock.  We paid $136.3 million to redeem the preferred shares and incurred a charge during the second quarter of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

Shelf Registration Statement.  We have a universal shelf registration statement on Form S-3 (No. 333-189132) that was declared effective by the Securities and Exchange Commission on June 24, 2013.  We may offer an indeterminate number or amount, as the case may be, of (i) shares of common stock, par value $0.001 per share; (ii) shares of preferred stock, par value $0.001 per share; (iii) depository shares representing our preferred stock; and (iv) warrants to purchase common stock, preferred stock or depository shares representing preferred stock; and (v) rights to purchase our common stock, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, at an aggregate public offering price not to exceed $1.0 billion.  As of June 30, 2013, we had $1.0 billion of securities available for issuance under the registration statement.



Results of Operations

Comparison of the three months and six months ended June 30, 2013 to the three months and six months ended June 30, 2012.

Net loss attributable to common stockholders. Net loss attributable to common stockholders for the three months ended June 30, 2013 was $14.9 million as compared to net loss attributable to common stockholders of $948,000 for the three months ended June 30, 2012.  The increase in net loss attributable to common stockholders for the three months ended June 30, 2013 compared to the same period in 2012 in the amount of $14.0 million is primarily attributable to a decrease in gains on the sale of real estate from discontinued operations recognized during the three months ended June 30, 2013, a $4.6 million non-cash impairment loss related to the sale of two office buildings in Atlanta, Georgia and a $6.6 million charge related to the redemption of our Series D preferred stock, offset by the purchase of five wholly owned office properties during the fourth quarter of 2012 and four wholly owned office properties and our partner's interest in three properties during 2013. Net loss attributable to common

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stockholders for six months ended June 30, 2013, was $18.8 million as compared to net income attributable to common stockholders of $1.0 million for six months ended June 30, 2012. The decrease in net income attributable to common stockholders for the six months ended June 30, 2013 compared to the same period in 2012 in the amount of $19.9 million is primarily attributable to a decrease in gains on the sale of real estate from discontinued operations recognized during the six months ended June 30, 2013, a $4.6 million non-cash impairment loss related to the sale of two office buildings in Atlanta, Georgia and a $6.6 million charge related to the redemption of our Series D preferred stock, offset by the purchase of five wholly owned office properties during the fourth quarter of 2012 and four wholly owned office properties and our partner's interest in three properties during the six months ended June 30, 2013.  The change in income (loss) from discontinued operations as well as other variances for income and expense items that comprise net income (loss) attributable to common stockholders is discussed in detail below.

Office Properties. The analysis below includes changes attributable to same-store properties and acquisitions of office properties.  Same-store properties are consolidated properties that we owned for the current and prior year reporting periods, excluding properties classified as discontinued operations.  During the six months ended June 30, 2013, we classified as discontinued operations three properties totaling 298,000 square feet, which were sold during the first quarter of 2013 and third quarter 2013.  At June 30, 2013, same-store properties consisted of 33 properties comprising 8.7 million square feet.

The following table represents revenue from office properties for the three months and six months ended June 30, 2013 and 2012 (in thousands):

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
Increase (Decrease)
 
%
Change
 
2013
 
2012
 
Increase
 
%
Change
Revenue from office properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store properties
$
46,048

 
$
46,490

 
$
(442
)
 
(1.0
)%
 
$
89,022

 
$
88,508

 
$
514

 
0.6
%
Properties acquired
25,550

 
2,165

 
23,385

 
*N/M

 
49,759

 
4,627

 
45,132

 
*N/M

Total revenue from office properties
$
71,598

 
$
48,655

 
$
22,943

 
47.2
 %
 
$
138,781

 
$
93,135

 
$
45,646

 
49.0
%
*N/M – Not Meaningful
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 

Revenue from office properties for same-store properties decreased $442,000 or 1.0% for the three months ended June 30, 2013 as compared to the same period for 2012 due to a decrease in revenue associated with pass through expenses, off set by an increase in average same-store occupancy during the three months ended June 30, 2013 as compared to the same period for 2012. Revenue from office properties for same-store properties increased $514,000 or 0.6% for the six months ended June 30, 2013 as compared to the same period for 2012.  The primary reason for the increase is due to an increase in average same-store occupancy during the six months ended June 30, 2013, compared to the same period for 2012.

The following table represents property operating expenses for the three months and six months ended June 30, 2013 and 2012 (in thousands):

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
Increase
 
%
Change
 
2013
 
2012
 
Increase
 
%
Change
Expense from office properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store properties
$
19,091

 
$
18,203

 
$
888

 
4.9
%
 
$
36,432

 
$
34,995

 
$
1,437

 
4.1
%
Properties acquired
9,168

 
737

 
8,431

 
*N/M

 
17,141

 
1,612

 
15,529

 
*N/M

Total expense from office properties
$
28,259

 
$
18,940

 
$
9,319

 
49.2
%
 
$
53,573

 
$
36,607

 
$
16,966

 
46.3
%
*N/M – Not Meaningful
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 

Property operating exenses for same-store properties increased $888,000 or 4.9% for the three months ended June 30, 2013 as compared to the same period for 2012 due to an increase in repairs and maintenance, bad debt expense and ad valorem taxes. Property operating expenses for same-store properties increased $1.4 million or 4.1% for the six months ended June 30, compared to the same period of 2012.  The primary reason for the increase is due to an increase in repair and maintenance, bad debt expense and ad valorem taxes.

Depreciation and Amortization.  Depreciation and amortization expense attributable to office properties increased $12.4 million and $24.2 million for the three months and six months ended June 30, 2013, compared to the same periods for 2012, respectively.  The primary reason for the increase is due to the purchase of five office properties during the fourth quarter of 2012 and four office properties during the six months ended June 30, 2013.

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Management Company Income and Expenses.  Management company income decreased $493,000 and $1.6 million for the three months and six months ended June 30, 2013 compared to the same periods of 2012, respectively. The primary reason for the decrease in management company income for the three months and six months ended June 30, 2013 is due to management contracts terminated during 2012 and 2013. Management company expenses increased $365,000 and $221,000 for the three months and six months ended June 30, 2013 compared to the same periods of 2012, respectively.  The primary reason for the increase in management company expenses for the three months and six months ended June 30, 2013 is due to an increase in personnel costs.

Acquisition Costs.  During the three months ended June 30, 2013, we incurred $511,000 in acquisition costs compared to $506,000 for the same period in 2012. Our proportionate share of acquisition costs for the three months ended June 30, 2013 and 2012 was $515,000 and $510,000, respectively. During the six months ended June 30, 2013, we incurred $1.6 million in acquisition costs compared to $1.3 million for the same period in 2012.   The primary reason for the increase is due to the purchase of four office properties during the six months ended June 30, 2013 as compared to the purchase of three office properties for the same period of 2012.  Our proportionate share of acquisition costs for the six months ended June 30, 2013 and 2012 was $1.6 million and $750,000, respectively.

Share-Based Compensation Expense. Compensation expense related to stock options, profits interest units (LTIPs), restricted shares and deferred incentive share units of $1.2 million and $47,000 was recognized for the three months ended June 30, 2013 and 2012, respectively.  Compensation expense related to stock options, profits interest units (LTIPs), restricted shares and deferred incentive share units of $1.3 million and $204,000 was recognized for the six months ended June 30, 2013 and 2012, respectively.  The primary reason for the increase in share-based compensation expense for the three months and six months ended June 30, 2013 is due to the additional expense associated with new grants under our 2013 Omnibus Equity Incentive Plan. This expense is included in general and administrative expenses on our consolidated statements of operations and comprehensive income (loss).  Total compensation expense related to non-vested awards not yet recognized was $11.3 million at June 30, 2013. The weighted average period over which the expense is expected to be recognized is approximately two years.

Interest Expense. Interest expense from continuing operations, including amortization of deferred financing costs, increased $2.8 million or 32.4% and $4.0 million or 22.5% for the three months and six months ended June 30, 2013, compared to the same period of 2012, respectively, and is comprised of the following (in thousands):

 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage interest expense
$
9,593

 
$
7,635

 
$
1,958

 
25.6
%
 
$
18,266

 
$
15,226

 
$
3,040

 
20.0
 %
 
Credit facility interest expense
1,106

 
435

 
671

 
154.3
%
 
2,422

 
1,409

 
1,013

 
71.9
 %
 
(Gain) loss on early extinguishment of debt
(58
)
 
—

 
(58
)
 
—
%
 
(58
)
 
190

 
(248
)
 
(130.5
)%
 
Mortgage loan cost amortization
264

 
174

 
90

 
51.7
%
 
438

 
341

 
97

 
28.4
 %
 
Credit facility cost amortization
399

 
292

 
107

 
36.6
%
 
706

 
614

 
92

 
15.0
 %
 
Total interest expense
$
11,304

 
$
8,536

 
$
2,768

 
32.4
%
 
$
21,774

 
$
17,780

 
$
3,994

 
22.5
 %
 

Mortgage interest expense increased $2.0 million and $3.0 million for the three months and six months ended June 30, 2013 compared to the same period for 2012, respectively, and is primarily due to mortgage loans placed or assumed from June 2012 through June 30, 2013 in connection with acquisitions of office properties during the same period.

Credit facility interest expense increased $671,000 and $1.0 million for the three months and six months ended June 30, 2013 compared to the same periods of 2012, respectively.  The increase is due to an increase in year-to-date average borrowings of $149.6 million offset by a decrease in the weighted average interest rate on average borrowings of 73 basis points. The increase in average borrowings is primarily due to the placement of a $125.0 million term loan in September 2012, the placement of a $120.0 million term loan in June 2013 and borrowings under our unsecured revolving credit facility to purchase office properties during 2012 and 2013 and to fund the redemption of our Series D Preferred stock, offset by repayment of borrowings under our unsecured revolving credit facility from proceeds of our underwritten public common stock offerings during December 2012 and March 2013 and sales of office properties.




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Discontinued Operations.  Discontinued operations is comprised of the following for the three months and six months ended June 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
 
2013
 
2012
 
2013
 
2012
Statement of Operations:
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Income from office and parking properties
 
$
621

 
$
4,141

 
$
1,149

 
$
14,883

 
 
621

 
4,141

 
1,149

 
14,883

Expenses
 
 
 
 
 
 
 
 
Office and parking properties:
 
 
 
 
 
 
 
 
Operating expense
 
203

 
2,325

 
750

 
6,845

Management company expense
 
(5
)
 
86

 
2

 
238

Impairment loss on real estate
 
4,600

 
—

 
4,600

 
—

Interest expense
 
—

 
1,587

 
—

 
3,378

Non-cash adjustment for interest rate swap
 
—

 
(77
)
 
—

 
(215
)
Depreciation and amortization
 
210

 
594

 
479

 
1,561

 
 
5,008

 
4,515

 
5,831

 
11,807

Income (loss) from discontinued operations
 
(4,387
)
 
(374
)
 
(4,682
)
 
3,076

Gain on sale of real estate from discontinued operations
 
—

 
3,197

 
542

 
8,772

Total discontinued operations per Statement
of Operations
 
(4,387
)
 
2,823

 
(4,140
)
 
11,848

Net income attributable to noncontrolling
    interest from discontinued operations
 
(43
)
 
(322
)
 
(30
)
 
(3,674
)
Total discontinued operations-Parkway's share
 
$
(4,430
)
 
$
2,501

 
$
(4,170
)
 
$
8,174


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, 2013 and 2012 (in thousands):
Office Property
 
Location
 
Square
Feet
 
Date of
Sale
 
Net Sales
Price
 
Net Book
Value of
Real Estate
 
Gain
(Loss)
on Sale
2012 Dispositions (1):
 
 
 
 
 
 
 
 
 
 
 
 
Falls Pointe
 
Atlanta, GA
 
107

 
1/6/2012
 
$
5,824

 
$
4,467

 
$
1,357

111 East Wacker
 
Chicago, IL
 
1,013

 
1/9/2012
 
153,240

 
153,237

 
3

Renaissance Center
 
Memphis, TN
 
189

 
3/1/2012
 
27,661

 
24,629

 
3,032

Overlook II
 
Atlanta, GA
 
260

 
4/30/2012
 
29,467

 
28,689

 
778

Wink Building
 
New Orleans, LA
 
32

 
6/8/2012
 
705

 
803

 
(98
)
Ashford/Peachtree
 
Atlanta, GA
 
321

 
7/1/2012
 
29,440

 
28,148

 
1,292

Non-Core Assets
 
Various
 
1,932

 
Various
 
125,486

 
122,157

 
3,329

Sugar Grove
 
Houston, TX
 
124

 
10/23/2012
 
10,303

 
7,057

 
3,246

 
 
 
 
3,978

 
 
 
$
382,126

 
$
369,187

 
$
12,939

2013 Disposition (2):
 
 
 
 

 
 
 
 

 
 

 
 

Atrium at Stoneridge
 
Columbia, SC
 
108

 
3/20/2013
 
$
2,966

 
$
2,424

 
$
542

 
 
 
 
108

 
 
 
$
2,966

 
$
2,424

 
$
542

 
 
 
 
 
 
 
 
 
 
 
 
 
Office Property
 
Location
 
Square
Feet
 
Date of
Sale
 
Gross Sales Price
 
 
 
 
Properties Held for Sale at June 30, 2013 (3)
 
 
 
 
 
 
 
 
 
 
Waterstone
 
Atlanta, GA
 
93

 
7/10/2013
 
$
3,400

 
 
 
 
Meridian
 
Atlanta, GA
 
97

 
7/10/2013
 
6,800

 
 
 
 
 
 
 
 
190

 
 
 
$
10,200

 
 
 
 

(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2012 was $12.9 million, of which $8.1 million was our proportionate share.

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Table of Contents

(2) Total gain on the sale of real estate in discontinued operations recognized during the six months ended June 30, 2013 was $542,000.
(3) Gains and losses on assets held for sale are expected to be finalized upon sale and reflected in the nine months ended September 30, 2013 financial statements.

On March 20, 2013, we sold Atrium at Stoneridge, a 108,000 square foot office property located in Columbia, South Carolina, for a gross sales price of $3.1 million and recorded a gain of $542,000 during the first quarter 2013.  We received $3.0 million in net proceeds from the sale, which was used to reduce amounts outstanding under our senior unsecured revolving credit facility.

On July 10, 2013, we sold two office properties, Waterstone and Meridian, totaling 190,000 square feet located in Atlanta, Georgia, for a gross sales price of $10.2 million and recorded a loss of $4.6 million during the second quarter of 2013. We received $9.5 million in net proceeds from the sale, which was used to reduce amounts outstanding under our senior unsecured revolving credit facility.

On July 17, 2013, we sold Bank of America Plaza, a 436,000 square foot office property located in Nashville, Tennessee, for a gross sales price of $42.8 million and expect to record a gain of approximately $11.9 million during the third quarter of 2013. We received $40.8 million in net proceeds from the sale, which was used to reduce amounts outstanding under our revolving credit facilities.

At June 30, 2013, assets and liabilities related to assets held for sale represented two properties, Waterstone and Meridian, totaling 190,000 square feet located in Atlanta, Georgia that were sold on July 10, 2013. The major classes of assets and liabilities classified as held for sale at June 30, 2013 are as follows (in thousands):

 
 
June 30, 2013
Balance Sheet:
 
 
Investment property
 
$
9,285,000

Accumulated depreciation
 
—

Office property held for sale
 
9,285,000

Rents receivable and other assets
 
546,000

Total assets held for sale
 
$
9,831,000

 
 
 
Accounts payable and other liabilities
 
$
325,000

Total liabilities related to assets held for sale
 
$
325,000


Income Taxes.  The analysis below reflects changes to the components of income tax (expense) benefit for the three months and six months ended June 30, 2013 and 2012 (in thousands):

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
Decrease
(Increase)
 
% Change
 
2013
 
2012
 
Decrease
 
% Change
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal
$
(153
)
 
$
(192
)
 
$
39

 
(20.3
)%
 
$
(203
)
 
$
(542
)
 
$
339

 
(62.5
)%
State
(31
)
 
(30
)
 
(1
)
 
3.3
 %
 
(41
)
 
(86
)
 
45

 
(52.3
)%
Total current
$
(184
)
 
$
(222
)
 
$
38

 
(17.1
)%
 
$
(244
)
 
$
(628
)
 
$
384

 
(61.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
Increase
 
% Change
 
2013
 
2012
 
Increase
 
% Change
Deferred:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal
$
480

 
$
197

 
$
283

 
143.7
 %
 
$
959

 
$
404

 
$
555

 
137.4
 %
State
88

 
36

 
52

 
144.4
 %
 
176

 
74

 
102

 
137.8
 %
Total deferred
$
568

 
$
233

 
$
335

 
143.8
 %
 
$
1,135

 
$
478

 
$
657

 
137.4
 %
Total income tax benefit (expense)
$
384

 
$
11

 
$
373

 
3,390.9
 %
 
$
891

 
$
(150
)
 
$
1,041

 
(694.0
)%


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Table of Contents

Current income tax expense decreased $38,000 for the three months ended June 30, 2013, compared to the same period of 2012. Current income tax expense decreased $384,000 for the six months ended June 30, 2013, compared to the same period of 2012.  The decrease is directly attributable to the decrease in management company income for the three months and six months ended June 30, 2013.  Deferred income tax benefit increased $335,000 and $657,000 for the three months and six months ended June 30, 2013 compared to the same period of 2012, respectively.  The increase is directly attributable to the management contract impairment recognized during the fourth quarter of 2012.  At June 30, 2013, the deferred tax liability associated with the management contracts totaled $824,000.


Liquidity and Capital Resources

General

Our principal short-term and long-term liquidity needs include:

•
funding operating and administrative expenses;
•
meeting debt service and debt maturity obligations;
•
funding normal repair and maintenance expenses at our properties;
•
funding capital improvements;
•
acquiring additional investments that meet our investment criteria; and
•
funding distributions to stockholders.

We may fund these liquidity needs by drawing on multiple sources, including the following:

•
our current cash balance;
•
our operating cash flows;
•
borrowings (including borrowing availability under our senior unsecured revolving credit facility);
•
proceeds from the placement of new mortgage loans and refinancing of existing mortgage loans;
•
proceeds from the sale of assets and the sale of portions of owned assets through Fund II; and
•
the possible sale of equity or debt securities.

Our short-term liquidity needs include funding operation and administrative expenses, normal repair and maintenance expenses at our properties, capital improvements and distributions to stockholders.  We anticipate using our current cash balance, our operating cash flows and borrowings (including borrowing availability under our senior unsecured revolving credit facility) to meet our short-term liquidity needs.

Our long-term liquidity needs include payment of the principal amount of our long-term debt as it matures, significant capital expenditures that may need to be made at our properties and acquiring additional assets that meet our investment criteria.  We anticipate using proceeds from the placement of new mortgage loans and refinancing of existing mortgage loans, proceeds from the sale of assets and the portions of owned assets through joint ventures and the possible sale of equity or debt securities to meet our long-term liquidity needs.  We anticipate that these funding sources will be adequate to meet our liquidity needs.

Cash.

Cash and cash equivalents were $30.2 million and $33.3 million at June 30, 2013 and 2012, respectively.  Cash flows provided by operating activities for the six months ended June 30, 2013 and 2012 were $39.7 million and $32.3 million, respectively.  The decrease in cash flows from operating activities of $7.4 million is primarily attributable to a decrease in gains on sale of real estate.

Cash used in investing activities was $238.6 million and $280.2 million for the six months ended June 30, 2013 and 2012, respectively.  The decrease in cash used by investing activities of $41.6 million is primarily due to a decrease in investments in real estate partially offset by a decrease in proceeds from the sale of real estate.

Cash provided by financing activities was $147.3 million for the six months ended June 30, 2013 compared to cash used in financing activities of $205.9 million for the six months ended June 30, 2012.  The decrease in cash provided by financing activities of $58.7 million is primarily attributable to the redemption of our Series D preferred stock, distributions to non-controlling interests for the purchase of our co-investor's 70% interest in the Tampa Fund II Assets and the early extinguishment of two mortgage loans offset by net proceeds of our March 2013 underwritten public common stock offering, proceeds from the placement

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of our $120 million term and an increase in mortgage loan proceeds due to the placement of non-recourse mortgage loans secured by two office properties.

Indebtedness.

Notes Payable to Banks.  At June 30, 2013, we had $68.0 million outstanding under our senior unsecured revolving credit facilities and had $245.0 million outstanding under our unsecured term loans.

 
 
  
 
Interest
 
 
 
Outstanding
Credit Facilities
 
Lender
 
Rate
 
Maturity
 
Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility (1)
 
PNC Bank
 
—
%
 
3/29/2016
 
$
—

$215.0 Million Unsecured Revolving Credit Facility (1)
 
Wells Fargo
 
1.8
%
 
3/29/2016
 
68,000

$125.0 Million Unsecured Term Loan (2)
 
Key Bank
 
2.2
%
 
9/27/2017
 
125,000

$120.0 Million Unsecured Term Loan (3)
 
Wells Fargo
 
3.1
%
 
6/11/2018
 
120,000

 
 
 
 
2.4
%
 
 
 
$
313,000


(1)
The interest rate on the credit facilities is based on LIBOR plus an applicable margin of 160 to 235 basis points, depending upon our overall leverage as defined in the loan agreements for our credit facilities, with the current rate set at 160 basis points.  Additionally, we pay fees on the unused portion of the credit facilities ranging between 25 and 35 basis points based upon usage of the aggregate commitment, with the current rate set at 35 basis points.
(2)
The interest rate on the term loan is based on LIBOR plus an applicable margin of 150 to 230 basis points, depending on our overall leverage (with the current rate set at 150 basis points).  On September 28, 2012, we executed two floating-to-fixed interest rate swaps totaling $125 million, locking LIBOR at 0.7% for five years which was effective October 1, 2012.
(3)
The interest rate on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on our overall leverage (with the current rate set at 145 basis points). On June 12, 2013, we executed a floating-to-fixed interest rate swap totaling $120 million, locking LIBOR at 1.6% for five years.

On June 12, 2013, we entered into a term loan agreement for a $120 million unsecured term loan. The term loan has a maturity date of June 11, 2018. Interest on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on our overall leverage (with the current rate set at 145 basis points). The term loan has substantially the same operating and financial covenants as required by our $215 million unsecured revolving credit facility. Wells Fargo Bank, National Association, acted as Administrative Agent and lender. We also executed a floating-to-fixed interest rate swap totaling $120.0 million, locking LIBOR at 3.1% for five years and resulting in an effective initial interest rate of 1.6%. The term loan had an outstanding balance of $120.0 million at June 30, 2013.

We monitor a number of leverage and other financial metrics including, but not limited to, total debt to total asset value ratio, as defined in the loan agreements for our senior unsecured revolving credit facility and working capital unsecured credit facility.  In addition, we also monitor 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, 2013 and 2012 was 4.1 and 3.4 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, 2013 and 2012 was 2.8 and 1.9 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, 2013 and 2012 was 3.3 and 2.2 times, respectively.  The net debt to EBITDA multiple is computed by comparing our share of net debt to EBITDA for the current quarter, as annualized and adjusted pro forma for any completed investment activity.  The net debt to EBITDA multiple for the six months ended June 30, 2013 and 2012 was 6.2 and 4.7 times, respectively.  We believe various leverage and other financial metrics we monitor provide useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments.

Mortgage Notes Payable.  At June 30, 2013, we had $724.1 million in mortgage notes payable secured by office properties, with a weighted average interest rate of 5.1%.

The table below presents the principal payments due and weighted average interest rates for total mortgage notes payable at June 30, 2013 (in thousands).


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Weighted
Average
Interest Rate
 
Total
Mortgage
Maturities
 
Balloon
Payments
 
Recurring
Principal
Amortization
Schedule of Mortgage Maturities by Years:
 
 
 
 
 
 
 
 
2013*
 
5.1
%
 
$
3,587

 
$
—

 
$
3,587

2014
 
5.1
%
 
7,964

 
—

 
7,964

2015
 
5.1
%
 
26,262

 
14,051

 
12,211

2016
 
4.9
%
 
96,302

 
83,339

 
12,963

2017
 
4.7
%
 
120,830

 
107,907

 
12,923

2018
 
4.7
%
 
106,701

 
91,550

 
15,151

Thereafter
 
4.0
%
 
362,444

 
340,462

 
21,982

Total
 
5.1
%

$
724,090

 
$
637,309



$
86,781

Fair value at June 30, 2013
 
 
 
$
665,446

 
 

765,934

 
*Remaining six months
 
 

 
 

 
 
 

 

On February 21, 2013, we obtained an $80.0 million first mortgage secured by Phoenix Tower, a 629,000 square foot office property located in the Greenway Plaza submarket of Houston, Texas.  The mortgage loan bears interest at a fixed rate of 3.9% and matures on March 1, 2023.  Payments of interest only are due on the loan for two years, after which the principal amount of the loan begins amortizing over a 25-year period until maturity.  The loan is pre-payable after March 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage loan contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 7, 2013, simultaneously with the purchase of the Deerwood Portfolio, we obtained an $84.5 million first mortgage, which is secured by the office properties in the portfolio.  The mortgage bears interest at a fixed rate of 3.9% and matures on April 1, 2023.  Payments of interest only are due on the loan for three years, after which the principal amount of the loan begins amortizing over a 30-year period until maturity.  The loan is pre-payable after May 1, 2015, but any such prepayment is subject to a yield maintenance premium.  The agreement governing the mortgage contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 25, 2013, simultaneously with the purchase of its partner's share of the Tampa Fund II Assets, we assumed $40.7 million of existing first mortgages that are secured by the properties, which represents our partner's 70% share of the approximately $58.1 million of the existing first mortgages.

On May 31, 2013, we modified the existing $22.5 million first mortgage secured by Corporate Center Four at International Plaza ("Corporate Center Four"), a 250,000 square foot office property located in the Westshore submarket of Tampa, Florida. The modified first mortgage carries a principal balance of $36.0 million, a weighted average fixed interest rate of 4.6%, an initial 24-month interest only period and a maturity date of April 8, 2019. In conjunction with the modification, we executed a floating-to-fixed interest rate swap fixing the interest rate on the additional $13.5 million in loan proceeds at 3.3%.

On June 3, 2013, in connection with the purchase of the US Airways Building, one of our affiliates issued a $13.9 million mortgage loan to its wholly owned subsidiary and an affiliate of US Airways which is secured by the US Airways Building, a 225,000 square foot office building located in the Tempe submarket of Phoenix, Arizona. The mortgage carries a fixed interest rate of 3.0% and matures on December 31, 2016. In accordance with GAAP, our share of this loan and its related principal and interest payments have been eliminated in our consolidated financial statements.
    
On June 12, 2013, we repaid two first mortgages totaling $55.0 million which were secured by Cypress Center, a 286,000 square foot office complex in Tampa, Florida and NASCAR Plaza, a 394,000 square foot office property in Charlotte, North Carolina. The two mortgages had a weighted average interest rate of 3.6% and were schedule to mature in 2016. We repaid the mortgage loans using proceeds from our $120.0 million unsecured term loan.

On June 28, 2013, we modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The loan modification eliminates quarterly principal payments of $625,000.  As a result of the modification, loan payments are now interest-only through February 2015.  The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  We entered into a floating-to-fixed interest rate swap which

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fixed LIBOR on the original loan at 1.5% through January 2018.  Effective August 1, 2013, we entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry I, IV and V.

Market Risk

Our cash flows are exposed to interest rate changes primarily as a result of our senior unsecured revolving credit facility and term loans which have a floating interest rate tied to LIBOR. Our interest rate risk management objective is to appropriately limit the impact of interest rate changes on cash flows and to lower our overall borrowing costs. To achieve our objectives, we borrow at fixed rates when possible.  In addition, we entered into and will from time to time enter into interest rate swap agreements.  However, interest rate swap agreements and other hedging arrangements may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor our obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition.

We designated the swaps as cash flow hedges of the variable interest rates on our $125.0 million unsecured term loan and $120.0 million unsecured term loan, as well as the debt secured by 245 Riverside, Corporate Center IV at International Plaza, Bank of America Center, Two Ravinia, Hayden Ferry I and Hayden Ferry II.  These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.

Our interest rate hedge contracts at June 30, 2013, and 2012 are summarized as follows (in thousands):

 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
Asset (Liability)
Type of
 
Balance Sheet
 
Notional
 
Maturity
 
 
 
Fixed
 
June 30
Hedge
 
Location
 
Amount
 
Date
 
Reference Rate
 
Rate
 
2013
 
2012
Swap
 
Accounts payable
and other liabilities
 
$
12,088

 
11/18/2015
 
1-month LIBOR
 
4.1
%
 
$
—

 
$
(642
)
Swap
 
Receivables and
other assets
 
50,000

 
9/27/2017
 
1-month LIBOR
 
2.2
%
 
972

 
—

Swap
 
Receivables and
other assets
 
75,000

 
9/27/2017
 
1-month LIBOR
 
2.2
%
 
1,409

 
—

Swap
 
Accounts payable
and other liabilities
 
33,875

 
11/18/2017
 
1-month LIBOR
 
4.7
%
 
(2,171
)
 
(3,359
)
Swap
 
Accounts payable
and other liabilities
 
625

 
1/25/2018
 
1-month LIBOR
 
4.9
%
 
(29
)
 
—

Swap
 
Accounts payable
and other liabilities
 
22,000

 
1/25/2018
 
1-month LIBOR
 
4.5
%
 
(1,178
)
 
(1,912
)
Swap
 
Accounts payable
and other liabilities
 
46,875

 
1/25/2018
 
1-month LIBOR
 
4.7
%
 
(411
)
 
(1,344
)
Swap
 
Accounts payable
and other liabilities
 
120,000

 
6/11/2018
 
1-month LIBOR
 
3.1
%
 
(1,216
)
 
—

Swap
 
Accounts payable
and other liabilities
 
9,250

 
9/30/2018
 
1-month LIBOR
 
5.2
%
 
(793
)
 
(1,241
)
Swap
 
Accounts payable
and other liabilities
 
22,500

 
10/8/2018
 
1-month LIBOR
 
5.4
%
 
(2,077
)
 
(3,204
)
Swap
 
Receivables and
other assets
 
13,500

 
10/8/2018
 
1-month LIBOR
 
3.3
%
 
74

 
—

Swap
 
Accounts payable
and other liabilities
 
22,100

 
11/18/2018
 
1-month LIBOR
 
5.0
%
 
(1,626
)
 
(2,654
)
 
 
 
 
 

 
 
 
 
 
 

 
$
(7,046
)
 
$
(14,356
)

On March 25, 2013, in connection with the purchase of our co-investor's interest in the Tampa Fund II Assets, we assumed the remaining 70% of two interest rate swaps, which have a total notional amount of $34.6 million.

One May 31, 2013, we executed a floating-to-fixed interest rate swap for a notional amount of $13.5 million, associated with first mortgage secured by Corporate Center Four in Tampa, Florida, that fixes LIBOR at 3.3% through October 8, 2018.

On June 12, 2013, we also executed a floating-to-fixed interest rate swap for a notional amount of $120.0 million, associated with its $120.0 million term loan that fixes LIBOR at 1.6% for five years, which resulted in an effective initial interest rate of 3.1%. The interest rate swap matures June 11, 2018.

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On June 28, 2013, we modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The loan modification eliminates quarterly principal payments of $625,000.  As a result of the modification, loan payments are now interest-only through February 2015.  The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  We entered into a floating-to-fixed interest rate swap which fixed LIBOR on the original loan at 1.5% through January 2018.  Effective August 1, 2013, we entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry I, IV and V.

Risk Management Objective of Using Derivatives

We are exposed to certain risk arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of its core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and its known or expected cash payments principally related to our investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve our receipt of variable-rate amounts from a counterparty in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified to earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. See Note J - Fair Values of Financial Instruments, for the fair value of our derivative financial instruments as well as their classification on our consolidated balance sheets as of June 30, 2013 and December 31, 2012.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $5.5 million will be reclassified as an increase to interest expense. During the three months and six months ended June 30, 2013, we accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were a loss of $386,000.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of our derivative financial instruments on the Consolidated Statement of Operations for the three months and six months ended June 30, 2013 and June 30, 2012 (dollar amounts in thousand):
Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps and Caps)
Three Months Ended
Six Months Ended
June 30, 2013
June 30, 2012
June 30, 2013
June 30, 2012
Amount of gain (loss) recognized in other comprehensive income on derivative
5,992

274

6,481

(3,220
)
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense
(1,143
)
(882
)
(2,810
)
(1,832
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
(386
)
—

(386
)
—


Credit risk-related Contingent Features

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We have entered into agreements with each of our derivative counterparties that provide that if we default or are capable of being declared in default on any of its indebtedness, then we could also be declared in default on its derivative obligations.

As of June 30, 2013, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $10.1 million. As of June 30, 2013, we had not posted any collateral related to these agreements and were not in breach of any agreement provisions. If we had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $10.1 million at June 30, 2013.

Equity

We also have a universal shelf registration statement on Form S-3 (No. 333-189132) that was declared effective by the Securities and Exchange Commission on June 24, 2013.  We may offer an indeterminate number or amount, as the case may be, of (i) shares of common stock, par value $0.001 per share; (ii) shares of preferred stock, par value $0.001 per share; (iii) depository shares representing our preferred stock; and (iv) warrants to purchase common stock, preferred stock or depository shares representing preferred stock; and (v) rights to purchase our common stock, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, at an aggregate public offering price not to exceed $1.0 billion.  As of June 30, 2013, we had $1.0 billion of securities available for issuance under the registration statement.

We may issue equity securities from time to time, including units issued by our operating partnership in connection with property acquisitions, as management may determine necessary or appropriate to satisfy our liquidity needs, taking into consideration market conditions, our stock price, the cost and availability of other sources of liquidity and any other relevant factors.

On March 25, 2013, we completed an underwritten public offering of 11.0 million shares of our common stock, plus an additional 1.65 million shares of our common stock issued and sold pursuant to the exercise of the underwriters' option to purchase additional shares in full, at the public offering price of $17.25 per share.  The net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $209.0 million.  We used the net proceeds of the stock offering to redeem in full all of our outstanding Series D preferred stock and will use remaining net proceeds to fund potential acquisition opportunities, to repay amounts outstanding from time to time under our senior unsecured revolving credit facility and/or for general corporate purposes.

On April 25, 2013, we redeemed all of our outstanding Series D preferred stock using proceeds from our March 2013 underwritten public offering of common stock.  We paid $136.3 million to redeem the preferred shares and incurred a charge during the second quarter of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

Capital Expenditures

During the six months ended June 30, 2013, we incurred $8.2 million in recurring capital expenditures on a consolidated basis, with $6.8 million representing our share of such expenditures.  These costs include tenant improvements, leasing costs and recurring building improvements. During the six months ended June 30, 2013, we incurred $11.6 million 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, with $7.8 million representing our share of such expenditures.  All such improvements were financed with cash flow from the properties, capital expenditure escrow accounts, borrowings under our senior unsecured revolving credit facility and contributions from joint venture partners.

Dividends

In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to the sum of:

•
90% of our "REIT taxable income" (computed without regard to the dividends paid deduction and our net capital gain) and
•
90% of the net income (after tax), if any, from foreclosure property, minus
•
the sum of certain items of noncash income over 5% of our REIT taxable income.


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We have made and intend to continue to make timely distributions sufficient to satisfy the annual distribution requirements. It is possible, however, that we, from time to time, may not have sufficient cash or liquid assets to meet the distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses in arriving at our taxable income, or if the amount of nondeductible expenses such as principal amortization or capital expenditures exceeds the amount of noncash deductions. In the event that such timing differences occur, in order to meet the distribution requirements, we may arrange for short term, or possibly long term, borrowing to permit the payment of required dividends. If the amount of nondeductible expenses exceeds noncash deductions, we may refinance our indebtedness to reduce principal payments and may borrow funds for capital expenditures.

During the six months ended June 30, 2013, we paid $18.5 million in dividends to our common stockholders and $3.4 million to our Series D preferred stockholders. These dividends were funded with cash flow from the properties, proceeds from the sales of properties, proceeds from the issuance of common stock or borrowings on our credit facility.


Contractual Obligations

See information appearing under the caption "Financial Condition – Comparison of the three months ended March 31, 2013 to the year ended December 31, 2012 – Notes Payable to Banks" and "Financial Condition – Comparison of the three months ended March 31, 2013 to the year ended December 31, 2012 – 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, 2012.

Critical Accounting Policies and Estimates

Our investments are generally made in office properties.  Therefore, we are generally subject to risks incidental to the ownership of real estate.  Some of these risks include changes in supply or demand for office properties or customers for such properties in an area in which we have buildings; changes in real estate tax rates; and changes in federal income tax, real estate and zoning laws.  Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements.  Our Consolidated Financial Statements include the accounts of Parkway Properties, Inc., our majority owned subsidiaries and joint ventures in which we have a controlling interest. We also consolidate subsidiaries where the entity is a variable interest entity and we are the primary beneficiary.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period.  Actual results could differ from our estimates.

The accounting policies and estimates used in the preparation of our Consolidated Financial Statements are more fully described in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.  However, certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our Consolidated Financial Statements.

We consider critical accounting policies and estimates to be those used in the determination of the reported amounts and disclosure related to the following:

(1)  Revenue recognition;
(2)  Impairment or disposal of long-lived assets;
(3)  Depreciable lives applied to real estate and improvements to real estate; and
(4)  Initial recognition, measurement and allocation of the cost of real estate acquired.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income", which requires disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income.  The disclosure requirements are effective with respect to us on January 1, 2013, and we do not expect the guidance to have a material impact on our consolidated financial statements.

Funds From Operations ("FFO")


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Management believes that FFO is an appropriate measure of performance for equity REITs and computes this measure in accordance with the NAREIT definition of FFO (including any guidance that NAREIT releases with respect to the definition).  Funds from operations is defined by NAREIT as net income (computed in accordance with GAAP), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive our pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, we do not adjust FFO to eliminate the effects of non-recurring charges.  We believe that FFO is a meaningful supplemental measure of our 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.  We believe 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 us 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 our operating performance or as an alternative to cash flow as a measure of liquidity.

The following table presents a reconciliation of our net income (loss) for Parkway Properties, Inc. to FFO for the six months ended June 30, 2013 and 2012 (in thousands):

 
Six Months Ended
 
June 30
 
2013
 
2012
Net income (loss) for Parkway Properties, Inc.
$
(8,788
)
 
$
7,478

Adjustments to derive funds from operations:
 

 
 

Depreciation and amortization
60,764

 
36,566

Depreciation and amortization – discontinued operations
479

 
1,539

Noncontrolling interest depreciation and amortization
(14,230
)
 
(16,176
)
Adjustments for unconsolidated joint ventures – discontinued operations
—

 
22

Noncontrolling interest – unit holders
(2
)
 
16

Preferred dividends
(3,433
)
 
(5,421
)
Convertible preferred dividends
—

 
(1,011
)
Dividends on preferred stock redemption
(6,604
)
 
—

Impairment loss on depreciable real estate
4,600

 
—

Gain on sale of real estate (Parkway's share)
(542
)
 
(4,934
)
Funds from operations attributable to common stockholders (1)
$
32,244

 
$
18,079


(1)
Funds from operations attributable to common stockholders for the six months ended June 30, 2013 and 2012 include the following items at our proportionate ownership share (in thousands):
 
Six Months Ended
 
June 30
 
2013
 
2012
Loss on extinguishment of debt
$
(572
)
 
$
(779
)
Acquisition costs
(1,645
)
 
(758
)
Non-recurring lease termination fee income
195

 
1,231

Change in fair value of contingent consideration
—

 
(216
)
Non-cash adjustment for interest rate swap
630

 
215

Realignment expenses
(460
)
 
(1,203
)

EBITDA

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We believe that using EBITDA as a non-GAAP financial measure helps investors and our management analyze our 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 our historical cash expenditures or future cash requirements for working capital, capital expenditures or the cash required to make interest and principal payments on our outstanding debt.  Although EBITDA has limitations as an analytical tool, we compensate for the limitations by only using EBITDA to supplement GAAP financial measures.  Additionally, we believe that investors should consider EBITDA in conjunction with net income and the other required GAAP measures of our performance and liquidity to improve their understanding of our operating results and liquidity.

We view 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 cash flows provided by operating activities to EBITDA for the six months ended June 30, 2013 and 2012 (in thousands):

 
Six Months Ended
 
June 30
 
2013
 
2012
 
(Unaudited)
Cash flows provided by operating activities
$
39,716

 
$
32,320

Amortization of above market leases
(1,572
)
 
(2,285
)
Interest rate swap adjustment
—

 
(215
)
Interest expense
20,688

 
19,067

Prepayment expenses - early extinguishment of debt
572

 
—

Loss on early extinguishment of debt
(630
)
 
1,025

Acquisition costs (Parkway's share)
1,645

 
758

Tax expense - current
244

 
628

Change in deferred leasing costs
3,991

 
4,710

Change in receivables and other assets
22,913

 
(1,087
)
Change in accounts payable and other liabilities
(9,511
)
 
3,267

Adjustments for noncontrolling interests
(18,330
)
 
(19,753
)
Adjustments for unconsolidated joint ventures
—

 
37

EBITDA
$
59,726

 
$
38,472


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Table of Contents

The reconciliation of net income (loss) for Parkway Properties, Inc. to EBITDA and the computation of our 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, 2013 and 2012 (in thousands):
 
Six Months Ended
 
June 30
 
2013
 
2012
 
(Unaudited)
Net income (loss) for Parkway Properties, Inc.
(8,788
)
 
7,478

Adjustments to net income (loss) for Parkway Properties, Inc.:
 

 
 

Interest expense
20,688

 
19,067

Interest expense - prepayment expense
572

 
 
Amortization of financing costs
1,144

 
1,029

Non-cash adjustment for interest rate swap – discontinued operations
—

 
(215
)
(Gain) loss on early extinguishment of debt
(630
)
 
1,025

Acquisition costs (Parkway's share)
1,645

 
758

Depreciation and amortization
61,243

 
38,105

Amortization of share-based compensation
1,321

 
204

Gain on sale of real estate (Parkway's share)
(542
)
 
(4,934
)
Impairment loss on office properties
4,600

 
—

Change in fair value of contingent consideration
—

 
216

Tax expense (benefit)
(891
)
 
150

EBITDA adjustments - unconsolidated joint ventures
—

 
58

EBITDA adjustments - noncontrolling interest in real estate partnerships
(20,636
)
 
(24,469
)
EBITDA (1)
$
59,726

 
$
38,472

Interest coverage ratio:
 

 
 

EBITDA
$
59,726

 
$
38,472

Interest expense:
 

 
 

Interest expense
20,688

 
$
19,067

Interest expense - unconsolidated joint ventures
—

 
21

Interest expense - noncontrolling interest in real estate partnerships
(6,263
)
 
(7,847
)
Total interest expense
$
14,425

 
$
11,241

Interest coverage ratio
4.1

 
3.4

Fixed charge coverage ratio:
 

 
 

EBITDA
$
59,726

 
$
38,472

Fixed charges:
 

 
 

Interest expense
$
14,401

 
$
11,241

Preferred dividends
3,433

 
6,432

Principal payments (excluding early extinguishment of debt)
4,785

 
3,981

Principal payments - unconsolidated joint ventures
—

 
6

Principal payments - noncontrolling interest in real estate partnerships
(1,339
)
 
(1,107
)
Total fixed charges
$
21,280

 
$
20,553

Fixed charge coverage ratio
2.8

 
1.9

Modified fixed charge coverage ratio:
 

 
 

EBITDA
$
59,726

 
$
38,472

Modified fixed charges:
 

 
 

Interest expense
$
14,401

 
$
11,241

Preferred dividends
3,433

 
6,432

Total modified fixed charges
$
17,834

 
$
17,673

Modified fixed charge coverage ratio
3.3

 
2.2

Net Debt to EBITDA multiple:
 

 
 

Annualized EBITDA (2)
$
127,910

 
$
81,297

Parkway's share of total debt:
 

 
 

Mortgage notes payable
$
724,090

 
$
551,564

Mortgage notes payable-held for sale
—

 
29,597

Notes payable to banks
313,000

 
111,267

Adjustments for non-controlling interest in real estate partnerships
(230,213
)
 
(295,740
)
Parkway's share of total debt
806,877

 
396,688

Less:  Parkway's share of cash
(16,248
)
 
(12,669
)
Parkway's share of net debt
$
790,629

 
$
384,019

Net Debt to EBITDA multiple
6.2

 
4.7


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Table of Contents

(1)
We define 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, other gains and losses and fair value adjustments.  EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.
(2)
Annualized EBITDA includes the implied annualized impact of any acquisition or disposition activity during the period.

Inflation

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

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures at June 30, 2013.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at June 30, 2013.  There were no changes in our internal control over financial reporting during the second quarter of 2013 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

We may be unable to effectively consolidate our accounting and other support functions and may incur additional unanticipated charges.

                We have announced plans to close our Jackson, Mississippi office by December 31, 2013 in order to consolidate our support functions, including accounting, tax, human resources and information technology, in Florida.  However, we may not be able to effectively consolidate our accounting and other support functions in our Florida offices and we may not achieve the level of cost savings and other benefits we expect to realize as a result of the consolidation. Although as of July 3, 2013 we expected to incur approximately $3.7 million in transition-related charges in the third quarter of 2013, we may incur additional charges that we did not anticipate.  Changes in the amount, timing and nature of the charges related to this consolidation could have a material adverse effect on our results of operations.

For a discussion of other potential risks and uncertainties, please refer to Item 1A - Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On June 26, 2013, we issued 7,388 shares of common stock to TPG VI Management, LLC as payment of a monitoring fee pursuant to the Management Services Agreement dated June 5, 2012, which we entered into in connection with the 2012 investment transaction with TPG IV Pantera Holdings, L.P.  The common stock was issued in a transaction that was not registered under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act.

Item 3.  Defaults Upon Senior Securities

None.


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Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits
3.1

Articles Supplementary Reclassifying 5,421,296 Shares of Series D Cumulative Redeemable Preferred Stock into Common Stock (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed May 30, 2013.
 
 
10.1

Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed May 21, 2013).
 
 
10.2

Form of Profits Interest Units (LTIP Units) Agreement under the 2013 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed May 21, 2013).
 
 
10.3

Form of Restricted Stock Unit Agreement - Performance Vesting under the 2013 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed May 21, 2013).
 
 
10.4

Form of Restricted Stock Unit Agreement - Time Vesting under the 2013 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed May 21, 2013).
 
 
10.5

Form of Stock Option Award Agreement under the 2013 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Form 8-K filed May 21, 2013).
 
 
10.6

Term Loan Agreement by and among Parkway Properties, LP, Parkway Properties, Inc. and Wells Fargo Bank, National Association as Administrative Agent and lender, dated June 12, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 17, 2013).
 
 
10.7

Guaranty dated as of June 12, 2013 by the Company and certain subsidiaries of the Company party thereto in favor of Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed June 17, 2013).
 
 
10.8

Third Amendment to Amended and Restated Credit Agreement by and among Parkway Properties LP, Parkway Properties, Inc., Wells Fargo Bank, National Association as Administrative Agent and lenders party thereto, dated June 12, 2013 (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed June 17, 2013).
 
 
10.9

Amendment to Term Loan Agreement by and among Parkway Properties LP, Parkway Properties, Inc., Key Bank National Association as Administrative Agent and lenders party thereto, dated June 12, 2013 (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed June 17, 2013).
 
 
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, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of operations and comprehensive income, (iii) consolidated statement of changes in equity, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.**

** 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.

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Table of Contents

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.



DATE: August 5, 2013
  PARKWAY PROPERTIES, INC.

  BY: /s/ O. Darryl Waltman
  O. Darryl Waltman
  Senior Vice President and
  Chief Accounting Officer

43