10-K 1 f10kpkyinc2012.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o 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
(I.R.S. Employer
of incorporation or organization)
Identification No.)


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


Registrant's telephone number:  (407) 650-0593
Registrant's website: www.pky.com
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 Par Value
8.00% Series D Cumulative Redeemable Preferred Stock $.001 Par Value
New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes S No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes S No

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.   S Yes o 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).
S Yes  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   S  

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 definition of "large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o  Accelerated filer S  Non-accelerated filer o  Smaller reporting company o
(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).
 o Yes S No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, at June 30, 2012 was $293.6 million.


The number of shares outstanding in the registrant's class of common stock at March 1, 2013 was 56,110,959.


DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant's Proxy Statement for the 2013 Annual Meeting of Stockholders are incorporated by reference into Part III.

Page 1 of 113

PARKWAY PROPERTIES, INC.


TABLE OF CONTENTS

 
 
Page
 
 
 
PART I.
 
 
Item 1.
Business
5
Item 1A.
Risk Factors
8
Item 1B.
Unresolved Staff Comments
22
Item 2.
Properties
23
Item 3.
Legal Proceedings
30
Item 4.
Mine Safety Disclosures
30
 
 
 
PART II.
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
 
 
of Equity Securities
31
Item 6.
Selected Financial Data
34
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
35
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
64
Item 8.
Financial Statements and Supplementary Data
64
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
105
Item 9A.
Controls and Procedures
105
Item 9B.
Other Information
107
 
 
 
PART III.
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
107
Item 11.
Executive Compensation
107
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
107
Item 13.
Certain Relationships and Related Transactions, and Director Independence
108
Item 14.
Principal Accountant Fees and Services
108
 
 
 
PART IV.
 
 
Item 15.
Exhibits and Financial Statement Schedules
108
 
 
 
SIGNATURES
 
Authorized Signatures
113
Page 2 of 113

 
Forward-Looking Statements
Certain sections of this of this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). 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.  We caution investors that any forward-looking statements presented in this Annual Report on Form 10-K are based on management's beliefs and assumptions made by, and information currently available to, management. When used, the words "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result" and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
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;

·
competition in the leasing market;

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

·
oversupply of office properties in our geographic markets;

·
the amount and growth of our expenses;

·
tenant financial difficulties and general economic conditions, including increasing 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;

·
illiquidity of real estate;

·
derivation of a significant portion of our revenue from a small number of assets;

·
termination or non-renewal 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;

·
compliance with environmental and other regulations, including real estate and zoning laws;

·
our inability to obtain financing;

·
our inability to use net operating loss carryforwards; and

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·
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. 
A discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K. 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. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. 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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PART I
ITEM I. Business

As used herein, the terms "we," "us," "our" "Parkway" and the "Company" refer to Parkway Properties, Inc., a Maryland corporation, individually or together with its subsidiaries, including Parkway Properties LP, a Delaware limited partnership, and our predecessors.  The term "operating partnership" refers to Parkway Properties LP, individually or together with its subsidiaries. Unless otherwise indicated, all references to square feet represent net rentable area.

Overview

We are a self-administered real estate investment trust ("REIT") specializing in the ownership of quality office properties in higher growth submarkets in the Sunbelt region of the United States.  We owned or had an interest in 43 office properties located in nine states with an aggregate of approximately 11.9 million square feet of leasable space at January 1, 2013.  Part I. Item 2. "Properties – Office Buildings" includes a complete listing of properties by market.  We offer fee-based real estate services through wholly owned subsidiaries, which in total managed and/or leased approximately 10.8 million square feet for third-party property owners at January 1, 2013.

Administration

We were formed as a corporation under the laws of the State of Maryland in 1996 and elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1997. We generally perform commercial real estate leasing, management and acquisition services on an in-house basis.  As of December 31, 2012, we had 286 employees.  Our principal executive office is located at 390 North Orange Avenue, Suite 2400, Orlando, FL 32801 and our telephone number is (407) 650-0593.  In addition, we have regional offices in Jackson, MS and Jacksonville, FL.

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 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 temant 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.

Joint Ventures and Partnerships

Investing in wholly owned properties is 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 or to address unusual operational risks.  Under the terms of these joint ventures and partnerships, where applicable, we will seek to manage all phases of the investment cycle including acquisition, financing, operations, leasing and dispositions, and we expect to receive fees for providing these services.
 
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At December 31, 2012, 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 is a 30% investor, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, first mortgage debt.  Fund II currently owns 13 properties totaling 4.2 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia. In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Lakeside III, IV and V, which consists of a 2,500 space parking garage, a 21,000 square foot office property and a vacant parcel of development land, all adjacent to Fund II's Hayden Ferry Lakeside I and Hayden Ferry Lakeside II office properties in Phoenix.

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.

Third-Party Management

We benefit from a fully integrated management infrastructure, provided by our wholly owned subsidiaries (collectively, our "management companies").  As of January 1, 2013, our management companies managed and/or leased properties containing an aggregate of approximately 22.6 million net rentable square feet, of which approximately 11.8 million net rentable square feet related to properties owned fully or partially by us and approximately 10.8 million net rentable square feet related to properties owned by third parties.

Financing Strategy

Our financing strategy is to maintain a strong and flexible financial position by limiting our debt to a prudent level.  We monitor a number of leverage and other financial metrics defined in our senior unsecured revolving credit facility and unsecured term loan, which includes but is not limited to our total debt to total asset value.  In addition, we also monitor interest, fixed charge and modified fixed charge coverage ratios as well as the net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple.  Other traditional measures of leverage are also monitored.  Management believes all of the leverage and other financial metrics it monitors, including those discussed above, provide useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments with current income.  We seek to maintain over the long-term a net debt to EBITDA multiple of between 5.5 and 6.5 times.

We intend to finance future growth and future maturing debt with the most advantageous source of capital when available, while also maintaining our variable interest rate exposure at a prudent level.  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.  Sources of capital may include selling common or preferred equity through public offerings or private placements.

We may, in appropriate circumstances, acquire one or more properties in exchange for our equity securities.  We have no set policy as to the amount or percentage of our assets that may be invested in any specific property.  Rather than a specific policy, we evaluate each property in terms of whether and to what extent the property meets
our investment criteria and strategic objectives. The strategies and policies set forth above were determined and are subject to review by our Board of Directors, which may change such strategies or policies based upon their evaluation of the state of the real estate market, the performance of our assets, capital and credit market conditions, and other relevant factors.

Capital Allocation

Capital allocation receives constant review by management and our Board of Directors, which considers many factors including the capital markets, our weighted average cost of capital, buying criteria, the real estate market and management of the risk associated with the rate of return.  We examine all aspects of each type of investment, whether it is fee simple, a joint venture or a mortgage loan receivable, including but not limited to the estimated discount to replacement cost, current yield, and the leveraged and unleveraged internal rate of return.

Page 6 of 113

Segment Reporting

Our primary business is the ownership and operation of office properties. We account for each office property or groups of related office properties as an individual operating segment.  We have aggregated our individual operating segments into a single reporting segment due to the fact that the individual operating segments have similar operating and economic characteristics, such as being leased by the square foot, sharing the same primary operating expenses and ancillary revenue opportunities and being cyclical in the economic performance based on current supply and demand conditions.  The individual operating segments are also similar in that revenues are derived from the leasing of office space to tenants and each office property is managed and operated consistently in accordance with our standard operating procedures.  The range and type of tenant uses of our properties is similar throughout our portfolio regardless of location or class of building and the needs and priorities of our tenants do not vary widely from building to building.  Therefore, our management responsibilities do not vary widely from location to location based on the size of the building, geographic location or class.

Regulation/Environmental

We believe that our properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. We are not aware of any environmental condition that we believe would have a material adverse effect on our capital expenditures, earnings or competitive position (before consideration of any potential insurance coverage). Nevertheless, it is possible that there are material environmental conditions and liabilities of which we are unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations or future interpretations of existing requirements will not impose any material environmental liability or (ii) the current environmental condition of our properties has not been or will not be affected by tenants and occupants of our properties, by the condition of properties in the vicinity of our properties or by third parties.

Insurance

We, or in certain instances, tenants at our properties, carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage and umbrella liability coverage on all of our properties and wind, flood and hurricane coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate.  Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets, and we believe our properties are adequately insured.  We do not carry insurance for generally uninsured losses, including, but not limited to, losses caused by riots, war or acts of God. In the opinion of our management, our properties are adequately insured.

Competition

We compete with a considerable number of other real estate companies, financial institutions, pension funds, private partnerships, individual investors and others when attempting to acquire and lease office space in the markets in which we own properties.  Principal factors of competition in our business are the quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator of quality office properties in the relevant market.  Our ability to compete also depends on, among other factors, trends in the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, taxes and governmental regulations and legislation.

Available Information

We make available free of charge on the "Investors" page of our web site, www.pky.com, our filed and furnished reports on Form 10-K, 10-Q and 8-K and all amendments thereto, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.  The information on our website is not and should not be considered part of this Annual Report and is not incorporated by reference in this document.

Our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee of our Board of Directors are available on the "Investors" page of our web site.  Copies of these documents are also available free of charge in print upon written request addressed to Investor Relations, Parkway Properties, Inc., 390 North Orange Avenue, Suite 2400, Orlando, Florida 32801.
 

 
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ITEM 1A.                          Risk Factors.

In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors.  Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on our financial condition and the performance of our business.
Risks Related to Our Properties and Business
We face risks associated with our recent and future property acquisitions.
Since January 1, 2012, we have acquired nine office properties totaling over 3.4 million square feet of office space, increasing the total square footage of our portfolio by approximately 24%.  In addition, we intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could further increase our size and result in further alterations to our capital structure.  Our acquisition activities and their success are subject to the following risks:
·
acquisition agreements contain and will likely contain conditions to closing, including completion of due diligence investigations to our satisfaction or other conditions that are not within our control, which may not be satisfied;
·
we may be unable to finance acquisitions on favorable terms or at all;
·
acquired properties may fail to perform as expected;
·
the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;
·
we may not be able to obtain adequate insurance coverage for new properties;
·
acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market and a limited number of established business relationships in the area; and
·
we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, to the transferor with respect to unknown liabilities, including liabilities for clean-up of undisclosed environmental contamination.  As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.
Our business and operating results could be negatively affected if we are unable to integrate our recent and future acquisitions successfully.
Integration of acquisitions involves a number of significant risks, including the diversion of management's attention to the assimilation of the operations of the acquired businesses or assets; difficulties in the integration of operations and systems; the inability to realize potential operating synergies; difficulties in the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and challenges in retaining the customers of the combined businesses.  Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated operating expenses and depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential impairment charges, assumed litigation and unknown liabilities.  If we are unable to successfully integrate our recent and future acquisitions in a timely and cost-effective manner, our operating results could be negatively affected.
Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.
We plan to continue to acquire properties as we are presented with attractive opportunities.  We may face competition for acquisition opportunities from other investors and this competition may adversely affect us by subjecting us to the following risks:
 
Page 8 of 113

·
an inability to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, sovereign wealth funds, pension trusts, partnerships and individual investors; and
·
an increase in the purchase price for such acquisition property in the event we are able to acquire such desired property.
TPG VI Pantera Holdings, L.P. is a significant stockholder and may have conflicts of interest with us in the future.
As of December 31, 2012, TPG VI Pantera Holdings, L.P. ("TPG Pantera") owned approximately 42.1% of our issued and outstanding common stock. As a result, TPG Pantera is our largest single stockholder, while no other stockholder is permitted to own more than 9.8% of our common stock, except as approved by our board of directors pursuant to the terms of our charter. In addition, so long as TPG Pantera owns at least 10% of our issued and outstanding common stock, TPG Pantera has a pre-emptive right to participate in our future equity issuances, subject to certain conditions. This concentration of ownership in one stockholder could potentially be disadvantageous to other stockholders' interests. In addition, if TPG Pantera were to sell or otherwise transfer all or a large percentage of its holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities.
The interests of TPG Pantera and its affiliates may differ from the interests of our other stockholders in material respects. For example, TPG Pantera and its affiliates may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. TPG Pantera and its affiliates are in the business of making or advising on investments in companies and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
Our stockholders agreement with TPG Pantera and TPG VI Management, LLC grants TPG Pantera certain rights that may restrain our ability to take various actions in the future.
In connection with TPG Pantera's May 2012 investment in us, we entered into a stockholders agreement with TPG Pantera and TPG VI Management, LLC, an affiliate of TPG Pantera (collectively, the "TPG Entities"), pursuant to which we granted TPG Pantera certain rights that may restrain our ability to take various actions in the future. Under the stockholders agreement, as amended, we have agreed to maintain a nine member board of directors, and TPG Pantera will have the right to nominate a specified number of directors to the board and to have a specified number of such directors appointed to each committee of the board of directors for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 5%. TPG Pantera will be entitled to nominate to the board (i) four directors if TPG Pantera's ownership percentage of our common stock is at least 25% and it continues to own at least 90% of the shares of our common stock that it owned as of the completion of our underwritten public offering in December 2012 (the "2012 offering"), which is approximately 21.2 million shares, (ii) three directors if TPG Pantera's ownership percentage is at least 20% but less than 25% and it continues to own at least 70% of the shares of our common stock that it owned as of the completion of the 2012 offering, which is approximately 16.5 million shares, (iii) two directors if TPG Pantera's ownership percentage is at least 15% but less than 20%, and (iv) one director if TPG Pantera's ownership percentage is at least 5% but less than 15%. In addition, we have agreed to constitute each of our board committees as a four member committee and (i) for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 22.5%, TPG Pantera has the right to have two of its nominated directors appointed to each committee of the board, and (ii) for so long as TPG Pantera's ownership percentage is equal to or greater than 5% but less than 22.5%, TPG Pantera will have the right to have one of its nominated directors appointed to each committee of the board.
Pursuant to the terms of the stockholders agreement, TPG Pantera also will have the right to consent to certain actions related to our corporate existence and governance, including any change in the rights and responsibilities of either the investment committee of the board or the compensation committee of the board, for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 22.5%, other than in connection with any change in control.
 
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In addition, for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 5%, other than in connection with any change in control of us, the rights and responsibilities of the investment committee of the board will include (i) except for certain permitted issuances relating to outstanding rights to purchase or acquire our capital stock, compensation arrangements and acquisition transactions, any sale or issuance of any capital stock or other security, (ii) any incurrence of indebtedness with a principal amount greater than $20 million, and (iii) any other matters over which the investment committee currently has approval authority, including without limitation material asset acquisitions and dispositions. During such period, the rights and responsibilities of the compensation committee of the board will include (i) the hiring or termination of any our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or Chief Investment Officer, or any material change in any of the duties of any such executive officer, and (ii) any approval of future compensation arrangements for such officers. During such period, the board may not approve such matters without the affirmative approval of the investment committee or the compensation committee, as applicable.
Our performance is subject to risks inherent in owning real estate investments.
Our investments are generally made in office properties.  We are, therefore, generally subject to risks incidental to the ownership of real estate.  These risks include:
·
changes in supply of or demand for office properties or tenants for such properties in areas in which we own buildings;
·
the ongoing need for capital improvements;
·
increased operating costs, which may not necessarily be offset by increased rents, including insurance premiums, utilities and real estate taxes, due to inflation and other factors;
·
changes in tax, real estate and zoning laws;
·
changes in governmental rules and fiscal policies;
·
inability of tenants to pay rent;
·
existence and quality of competition, such as the attractiveness of our properties as compared to our competitors' properties based on considerations such as convenience of location, rental rates, amenities and safety record; and
·
civil unrest, acts of war, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses), and other factors beyond our control.
Should any of these events occur, our financial condition and results of operations could be adversely affected.
The economic conditions of our primary markets affect our operations.
Substantially all of our properties are located in the Southeastern and Southwestern United States and, therefore, our financial condition and ability to make distributions to our stockholders is linked to economic conditions in these
 markets as well as the market for office space generally in these markets.  A downturn in these markets, particularly increases in unemployment, may adversely affect our financial condition and results of operations.

If recent adverse global market and economic conditions worsen or do not fully recover, our business, financial condition and results of operations could be adversely affected.
In the U.S., market and economic conditions continue to be challenging with tighter credit conditions and modest growth.  Although the U.S. economy has emerged from the recent recession and economic data reflects a stabilization of the economy and credit markets, the cost and availability of credit and the commercial real estate market generally may be adversely affected by persistent high levels of unemployment, insufficient consumer demand or confidence, the impacts of "sequestration" under the Budget Control Act of 2011 or other changes in the U.S. federal budgetary process, the on-going European sovereign debt crisis, changes in regulatory environments and other macro-economic factors.  If current economic conditions deteriorate, business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio.  The timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels.  Additionally, deteriorating economic conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. No assurances can be given that the current economic conditions will continue to improve, and if the economic recovery slows or stalls, our ability to lease our properties and increase or maintain rental rates may be effected, which would have a material adverse effect on our business, financial condition and results of operations.
 
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We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to our existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our financial condition and results of operations.
Each year, we compete with a number of other owners and operators of office properties to renew leases with our existing tenants and to attract new tenants.  To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new tenants, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we historically have.  In addition, the economic downturn of the last several years has led to increased competition for credit worthy tenants and we may have difficulty competing with competitors who have purchased properties at depressed prices because our competitor's lower cost basis in their properties may allow them to offer space at reduced rental rates.
If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants upon expiration of their existing leases.  Even if our tenants renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures.  If we are unable to renew leases or re-let space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions, or other costs increase, our financial condition and results of operations could be adversely affected.
An oversupply of space in our markets would typically cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all.
Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, Chicago, Boston, San Francisco and Los Angeles.  As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our properties.  Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our results of operations.
Tenant defaults could adversely affect our operations.
The majority of our revenues and income come from rental income from real property.  As such, our revenues and income could be adversely affected if a significant number of our tenants defaulted under their lease obligations.  Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors' rights and remedies available to real property owners to collect delinquent rents.  If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant.  We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises.  If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant.  A tenant's default on its obligations to us could adversely affect our financial condition and results of operations.
Some of our leases provide tenants with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations.

Certain of our leases permit our tenants to terminate their leases as to all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee.  To the extent that our tenants exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third party tenants.
Our expenses may remain constant or increase, even if our revenues decrease, causing our results of operations to be adversely affected.
Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inflexible and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a tenant fails to pay rent or other circumstances cause a reduction in property revenues.  As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which would adversely affect our results of operations.
 
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Illiquidity of real estate may limit our ability to vary our portfolio.
Real estate investments are relatively illiquid.  Our ability to vary our portfolio by selling properties and buying new ones in response to changes in economic and other conditions may therefore be limited.  In addition, the Internal Revenue Code limits our ability to sell our properties by imposing a penalty tax of 100% on the gain derived from prohibited transactions, which are defined as sales of property held primarily for sale to tenants in the ordinary course of a trade or business.  The frequency of sales and the holding period of the property sold are two primary factors in determining whether the property sold fits within this definition.  These considerations may limit our opportunities to sell our properties.  If we must sell an investment, we cannot assure you that we will be able to dispose of the investment in the time period we desire or that the sales price of the investment will recoup or exceed our cost for the investment, or that the penalty tax would not be assessed.
We rely on three properties for a significant portion of our revenue.

As of December 31, 2012, three of our properties, Hearst Tower, Phoenix Tower and NASCAR Plaza, together accounted for approximately 23% of our portfolio's annualized base rent, and no other property accounted for more than approximately 6% of our portfolio's annualized base rent. Our revenue and cash available for distribution to our stockholders would be materially and adversely affected if these properties were materially damaged or destroyed. Additionally, our revenue and cash available for distribution to our stockholders would be materially adversely affected if tenants at these properties experienced a downturn in their business, which could weaken their financial condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy.

Our joint venture investments could be adversely affected by the capital markets, our lack of sole decision-making authority, our reliance on joint venture partner's financial condition and any disputes that may arise between us and our joint venture partners.
We have in the past co-invested, and may in the future co-invest, with third parties through partnerships, joint ventures or other structures, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, co-tenancy or other entity. Therefore, we may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures.  In addition, investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including potential deadlocks in making major decisions, restrictions on our ability to exit the joint venture, reliance on our joint venture partners and the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions, thus exposing us to liabilities in excess of our share of the investment.  The funding of our capital contributions may be dependent on proceeds from asset sales, credit facility advances and/or sales of equity securities.  Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives.  We may in specific circumstances be liable for the actions of our joint venture partners.   In addition, any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase our expenses.
We and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations.
We and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Failure to comply with these requirements could subject us to governmental fines or private litigant damage awards.  In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us to incur significant expenditures.   We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will develop. In addition, as a current or former owner or operator of real property, we may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on or emanating from such property, including investigation and cleanup costs; natural resource damages; third-party liability for cleanup costs, personal injury or property damage; and costs or losses arising from property use restrictions. Cleanup liabilities are often imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. Moreover, buildings and other improvements on our properties may contain asbestos-containing material or could have indoor air quality concerns (e.g., from mold), which may subject us to costs, damages and other liabilities including cleanup and personal injury liabilities. The foregoing could adversely affect occupancy and our ability to develop, sell or borrow against any affected property and could require us to make significant unanticipated expenditures that would adversely impact our business, financial condition and results of operations.
 
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We may be adversely affected by laws, regulations or other issues related to climate change.
If we become subject to laws or regulations related to climate change, our business, results of operations and financial condition could be impacted adversely.  The federal government has enacted, and some of the states and localities in which we operate may enact certain climate change laws and regulations or have begun regulating carbon footprints and greenhouse gas emissions.  Although these laws and regulations have not had any known material adverse effects on our business to date, they could result in substantial compliance costs, retrofit costs and construction costs, including monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment.  Furthermore, our reputation could be negatively affected if we violate climate change laws or regulations.  We cannot predict how future laws and regulations, or future interpretations of current laws and regulations, related to climate change will affect our business, results of operations and financial condition.   Lastly, the potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic circumstances in areas in which we operate.  These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures.  These impacts may adversely affect our business, financial condition and results of operations.
Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.
Our properties must comply with the Americans with Disabilities Act ("ADA"), to the extent that our properties are public accommodations as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. If one or more of our properties is not in compliance with the ADA or other legislation, then we may be required to incur additional costs to bring the property into compliance with the ADA or similar state or local laws. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA or other legislation, our business, financial condition and results of operations could be adversely affected.
Our third-party management and leasing agreements are subject to the risk of termination and non-renewal.
Our third party management and leasing agreements are subject to the risk of possible termination under certain circumstances, including our failure to perform as required under these agreements and to the risk of non-renewal by the property owner upon expiration or renewal on terms less favorable to us than the current terms.  Many of the management and leasing agreements that expire or are contractually terminable prior to December 31, 2013 will automatically renew if written notice is not received by us prior to the termination date.  If management and leasing agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease and our financial condition and results of operations could be adversely affected.
Our third-party property management business may subject us to certain liabilities.

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

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

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We are required to maintain certain licenses to conduct our third-party property management business.

The brokerage of real estate leasing transactions and property management require us to maintain licenses in various jurisdictions in which we operate and to comply with particular regulations. If we fail to maintain our licenses or conduct regulated activities without a license or in contravention of applicable regulations, we may be required to pay fines or return commissions. As a licensed real estate service provider and advisor in various jurisdictions, we may be subject to various due diligence, disclosure, standard-of-care, anti-money laundering and other obligations in the jurisdictions in which we operate. Failure to fulfill these obligations could subject us to litigation from parties who leased properties we brokered or managed. We could become subject to claims by participants in real estate sales or other services claiming that we did not fulfill our obligations as a service provider or broker. This may include claims with respect to conflicts of interest where we are acting, or are perceived to be acting, for two or more clients with potentially contrary interests.

Uninsured and underinsured losses may adversely affect our operations.
We, or in certain instances, tenants at our properties,  carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage and umbrella liability coverage on all of our properties and wind, flood and hurricane coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate.  Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets, and we believe our properties are adequately insured.  We do not carry insurance for generally uninsured losses, including, but not limited to losses caused by riots, war or acts of God.  In the event of substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property.  In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties.  Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed.  Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property.
We may be subject to litigation, which could have a material adverse effect on our financial condition.
We may be subject to litigation, including claims relating to our assets and operations that are otherwise in the ordinary course of business.  Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we may not be insured against.  We generally intend to vigorously defend ourselves against such claims. However, we cannot be certain of the ultimate outcomes of claims that may be asserted.  Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, would adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make quarterly distributions to our stockholders.  Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our financial condition and results of operations, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
If we are unable to satisfy the regulatory requirements of the Sarbanes-Oxley Act of 2002, or if our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the trading price of our common stock.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations.  Although management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time.  Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in the trading price of our common stock, or otherwise materially adversely affect our business, reputation, results of operations, financial condition, or liquidity.
 
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We depend on key personnel, each of whom would be difficult to replace.
Our continued success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, James R. Heistand, our President and Chief Executive Officer, who would be difficult to replace.  We cannot provide any assurance that he will remain employed by us.  Our ability to retain Mr. Heistand, or to attract a suitable replacement should he leave, is dependent on the competitive nature of the employment market.  The loss of services of Mr. Heistand could adversely affect our results of operations and slow our future growth.

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

We currently have both fixed and variable rate indebtedness and may incur additional indebtedness in the future, including borrowings under our credit facilities, to finance possible acquisitions and for general corporate purposes.  As a result, we are and expect to be subject to the risks normally associated with debt financing including:
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that interest rates may rise;
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that our cash flow will be insufficient to make required payments of principal and interest;
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that we will be unable to refinance some or all of our debt;
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that any refinancing will not be on terms as favorable as those of our existing debt;
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that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines;
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that debt service obligations will reduce funds available for distribution to our stockholders;
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that any default on our debt, due to noncompliance with financial covenants or otherwise, could result in acceleration of those obligations; and
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that we may be unable to refinance or repay the debt as it becomes due.
An increase in interest rates would reduce our net income and funds from operations.  We may not be able to refinance or repay debt as it becomes due which may force us to refinance or to incur additional indebtedness at higher rates and additional cost or, in the extreme case, to sell assets or seek protection from our creditors under applicable law.
A lack of any limitation on our debt could result in our becoming more highly leveraged.
Our governing documents do not limit the amount of indebtedness we may incur.  Accordingly, our board of directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT.  We might become more highly leveraged as a result, and our financial condition, results of operations and cash available for distribution to stockholders might be negatively affected, and the risk of default on our indebtedness could increase.
The cost and terms of mortgage financings may render the sale or financing of a property difficult or unattractive.
The sale of a property subject to a mortgage may trigger pre-payment penalties, yield maintenance payments or make-whole payments to the lender, which would reduce the amount of gain or increase our loss on the sale of a property and could make the sale of a property less likely.  Certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as "balloon payments."  There is no assurance that we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial condition and results of operations.
Financial covenants could adversely affect our ability to conduct our business.
Our senior unsecured revolving credit facility and unsecured term loan contain restrictions on the amount of debt we may incur and other restrictions and requirements on our operations. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declaration of defaults under and acceleration of any related indebtedness, which would result in adverse consequences to our financial condition. Our senior unsecured revolving credit facility and unsecured term loan also contain cross-default provisions that give the lenders the right to declare a default if we are in default under other loans in excess of certain amounts. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which would have a material adverse effect on our business, financial condition and results of operations.
 
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Failure to hedge effectively against interest rate changes may adversely affect results of operations.
The interest rate hedge instruments we use to manage some of our exposure to interest rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements.  Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We depend on external sources of capital that are outside of our control, which may affect our ability to pursue strategic opportunities, refinance or repay our indebtedness and make distributions to our stockholders.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain.  Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs from income from operations.  As a result, when we engage in the development or acquisition of new properties or expansion or redevelopment of existing properties, we will continue to rely on third-party sources of capital, including lines of credit, collateralized or unsecured debt (both construction financing and permanent debt), and equity issuances.  Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market's view of the quality of our assets, the market's perception of our growth potential, our current debt levels and our current and expected future earnings.  There can be no assurance that we will be able to obtain the financing necessary to fund our current or new developments or project expansions or our acquisition activities on terms favorable to us or at all.  If we are unable to obtain a sufficient level of third party financing to fund our capital needs, our results of operations, financial condition and ability to make distributions to our stockholders may be adversely affected.
We may amend our investment strategy and business policies without your approval.
Our board of directors may change our investment strategy or any of our guidelines, financing strategy or leverage policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile.  A change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. These changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.
Our ability to use our net operating loss carryforwards is limited.

As of December 31, 2012, we had net operating losses, or NOLs, of approximately $160.7 million for U.S. federal income tax purposes. These NOLs will expire at various times between 2018 and 2032. We have undergone an "ownership change" for purposes of Section 382 of the Code. An ownership change is, as a general matter, triggered by sales or acquisitions of our stock in excess of 50% on a cumulative basis during a three-year period by persons owning five percent or more of our total equity value. As a result of this ownership change, and subject to certain exceptions, we generally may utilize only approximately $2.8 million of our NOLs carryforwards derived prior to the ownership change to reduce our REIT taxable income (and therefore our distribution requirement) for a given taxable year. In addition, if we experience an additional ownership change during any subsequent three-year period, our future ability to utilize our NOLs may become further limited.

Risks Related to our Status as a REIT
Loss of our tax status as a real estate investment trust would have significant adverse consequences to us and the value of our securities.
We believe that we qualify for taxation as a REIT for federal income tax purposes, and we plan to operate so that we can continue to meet the requirements for taxation as a REIT.  To qualify as a REIT we must satisfy numerous requirements (some on an annual and quarterly basis) established under the highly technical and complex provisions of the Internal Revenue Code ("Code") applicable to REITs, which include:
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maintaining ownership of specified minimum levels of real estate related assets;
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generating specified minimum levels of real estate related income;
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maintaining certain diversity of ownership requirements with respect to our shares; and
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distributing at least 90% of our taxable income on an annual basis.
The distribution requirement noted above could adversely affect our ability to use earnings for improvements or acquisitions because funds distributed to stockholders will not be available for capital improvements to existing properties or for acquiring additional properties.
Only limited judicial and administrative interpretations exist of the REIT rules.  In addition, qualification as a REIT involves the determination of various factual matters and circumstances not entirely within our control.
If we fail to qualify as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates.  In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which we failed to qualify.  This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the year or years involved.  In addition, we would no longer be required to make distributions to our stockholders.  To the extent that distributions to stockholders had been made based on our qualifying as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the applicable tax.
As a REIT, we have been and will continue to be subject to certain federal, state and local taxes on our income and property.
If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe that our operating partnership is properly treated as a partnership for federal income tax purposes. As a partnership, our operating partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, its share of our operating partnership's income. We cannot assure you, however, that the Internal Revenue Service, or the IRS, will not challenge the status of our operating partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnerships to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which could reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
REIT distribution requirements could adversely affect our ability to execute our business plan or cause us to finance our needs during unfavorable market conditions.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with generally accepted accounting principles ("GAAP"). In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, we may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income could cause us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our common stock as part of a distribution in which stockholders may elect to receive our common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect our business, financial condition and results of operations.
 
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Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income, property or net worth, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. Any of these taxes would decrease cash available for the payment of our debt obligations and distributions to stockholders. Our taxable REIT subsidiary ("TRS"), will be subject to U.S. federal corporate income tax on its net taxable income.
Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or contribute to a TRS otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. In addition, we may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain attractive investments.
The requirements necessary to maintain our REIT status limit our ability to earn fee income at the REIT level, which causes us to conduct fee-generating activities through a TRS.
The REIT provisions of the Code limits our ability to earn additional management fee and other fee income from joint ventures and third parties.  Our aggregate gross income from fees and certain other non-qualifying sources cannot exceed 5% of our annual gross income.  As a result, our ability to increase the amount of fee income we earn at the REIT level is limited and, therefore, we conduct fee-generating activities through a TRS.  Any fee income we earn through a TRS would is subject to federal, state, and local income tax at regular corporate rates, which would reduce our cash available for distribution to stockholders.
Our ownership of TRSs will be limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the rules applicable to TRSs limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions involving a TRS that are not conducted on an arm's length basis.
Our TRS will pay U.S. federal, state and local income tax on its taxable income. The after-tax net income of our TRSs will be available for distribution to us but generally is not required to be distributed. We anticipate that the aggregate value of the stock and securities of our TRS will be less than 25% of the value of our total assets (including the stock and securities of our TRS). Furthermore, we will monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with the ownership limitations applicable to TRSs. We will scrutinize all of our transactions involving our TRS to ensure that they are entered into on arm's length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation discussed above or avoid application of the 100% excise tax discussed above.
 
Page 18 of 113

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates is 20% for taxable years beginning after 2012.  Dividends payable by REITs, however, generally are not eligible for the reduced rates and will continue to be subject to tax at rates applicable to ordinary income.  Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our stock.
The tax imposed on REITs engaging in "prohibited transactions" may limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.
A REIT's net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to tenants in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to tenants in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
There is a risk of changes in the tax law applicable to real estate investment trusts.
Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted.  Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.
Risks Associated with our Stock
Limitations on the ownership of our common stock may preclude the acquisition or change of control of our Company.
Certain provisions contained in our charter and bylaws and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control.  Provisions of our charter are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our capital stock that might jeopardize REIT qualification.  Among other things, these provisions provide that, if a transfer of our stock or a change in our capital structure would result in (1) any person (as defined in the charter) directly or indirectly acquiring beneficial ownership of more than 9.8% (in value or in number, whichever is more restrictive) of our outstanding equity stock excluding Excess Stock, (2) our outstanding shares being constructively or beneficially owned by fewer than 100 persons, or (3) our being "closely held" within the meaning of Section 856(h) of the Code, then:
·
any proposed transfer will be void from the beginning and we will not recognize such transfer;
·
we may institute legal proceedings to enjoin such transfer;
·
we will have the right to redeem the shares proposed to be transferred; and/or
·
the shares proposed to be transferred will be automatically converted into and exchanged for shares of a separate class of stock, the Excess Stock.
Excess Stock has no dividend or voting rights but holders of Excess Stock do have certain rights in the event of our liquidation, dissolution or winding up.  Our charter provides that we will hold the Excess Stock as trustee for the person or persons to whom the shares are ultimately transferred, until the time that the shares are retransferred to a person or persons in whose hands the shares would not be Excess Stock and certain price-related restrictions are satisfied.  These provisions may have an anti-takeover effect by discouraging tender offers or purchases of large blocks of stock, thereby limiting the opportunity for stockholders to receive a premium for their shares over then-prevailing market prices.  Under the terms of our charter, our Board of Directors has the authority to waive these ownership restrictions.
 
Page 19 of 113

Furthermore, under our charter, our Board of Directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the Board of Directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders' best interests.
Maryland business statutes may limit the ability of a third party to acquire control of us.
Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations.  The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition.  Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director.  Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.
The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met.  An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation.
Market interest rates may have an effect on the value of our common stock.
One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher dividend yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.
Our common stock is ranked junior to our series D preferred stock.
Our common stock is ranked junior to our 8.00% Series D Cumulative Redeemable Preferred Stock, $0.001 par value per share, or our series D preferred stock, with respect to dividends and upon dissolution. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. We may in the future attempt to increase our capital resources by making additional offerings of equity securities, including additional classes or series of preferred stock, which would likely have preferences with respect to dividends or upon dissolution that are senior to our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offering. Thus, our common stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.
 
Page 20 of 113

The number of shares of our common stock available for future issuance or sale could adversely affect the per share trading price of our common stock and may be dilutive to current stockholders.
Our charter authorizes our Board of Directors to, among other things, issue additional shares of capital stock without stockholder approval.  We cannot predict whether future issuances or sales of shares of our common stock or the availability of shares for resale in the open market will decrease the per share trading price per share of our common stock. The issuance of substantial numbers of shares of our common stock in the public market, or upon exchange of common units of limited partnership interests in our operating partnership, or the perception that such issuances might occur, could adversely affect the per share trading price of our common stock. In addition, any such issuance could dilute our existing stockholders' interests in our company.  The per share trading price of our common stock may decline significantly upon the sale of shares of our common stock pursuant to registration rights granted to the TPG Entities in connection with TPG Pantera's investment in us in May 2012. In particular, we have entered into a stockholders agreement with the TPG Entities pursuant to which the TPG Entities may at any time after June 5, 2013 (i) make up to three demands for registration and (ii) include the common stock they hold in any registration statement we file on account of any of our other security holders. The shares of common stock that may be registered on behalf of the TPG Entities, as described above, represent approximately 42.1% of our issued and outstanding common stock as of December 31, 2012. As a result, a substantial number of shares may be sold pursuant to the registration rights granted to the TPG Entities. The sale of such shares by the TPG Entities, or the perception that such a sale may occur, could materially and adversely affect the per share trading price of our common stock and could dilute our existing stockholders' interests in our company.
The exchange of common units for common stock, the issuance of our common stock or common units in connection with future property, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the per share trading price of our common stock. In addition, we may issue shares of our common stock or grant options, deferred incentive share units, restricted shares or other equity-based awards exercisable for or convertible or exchangeable into shares of our common stock under our recently adopted 2013 Omnibus Equity Incentive Plan. Future issuances of shares of our common stock may be dilutive to existing stockholders.  
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the per share trading price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing our operating partnership to issue such debt securities), including medium-term notes, senior or subordinated notes and additional classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock or preferred units of partnership interest in our operating partnership and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Other than the TPG Entities, holders of our common stock are not entitled to preemptive rights or other protections against dilution. Any shares of preferred stock or preferred units that we issue in the future could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.
Our ability to pay dividends is limited by the requirements of Maryland law.
Our ability to pay dividends on our common stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus, unless the corporation's charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our common stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise (and the terms of our series D preferred stock do not so provide otherwise), the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock (including our series D preferred stock) then outstanding, if any, with preferences upon dissolution senior to those of our common stock.
 
Page 21 of 113

We may change our dividend policy.
Future distributions will be declared and paid at the discretion of our Board of Directors and the amount and timing of distributions will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code, and such other factors as the our Board of Directors deems relevant.  Our Board of Directors may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods.
Our senior unsecured revolving credit facility prohibits us from repurchasing shares of our common stock and may limit our ability to pay dividends on our common stock.
Our senior unsecured revolving credit facility, which matures in March 2016, prohibits us from repurchasing any shares of our stock, including our common stock, during the term of the senior unsecured revolving credit facility. Under the unsecured revolving credit facility, our distributions may not exceed the greater of (i) 90% of our funds from operations, (ii) the amount required for us to qualify and maintain our status as a REIT or (iii) the amount required for us to avoid the imposition of income and excise taxes. As a result, if we do not generate sufficient funds from operations (as defined in our senior unsecured revolving credit facility) during the 12 months preceding any common stock dividend payment date, we would not be able to pay dividends to our common stockholders consistent with our past practice without causing a default under our senior unsecured revolving credit facility. In the event of such a default, we would be unable to borrow under our senior unsecured revolving credit facility, and any amounts we have borrowed thereunder could become due and payable.
The price of our common stock may be volatile and may decline.
The market price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control.  In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies.  These fluctuations in the stock market may adversely affect the market price of our common stock.  Among the factors that could affect the market price of our common stock are:
·
actual or anticipated quarterly fluctuations in our operating results and financial condition;
·
changes in revenues or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;
·
the ability of our tenants to pay rent to us and meet their other obligations to us under current lease terms;
·
our ability to re-lease spaces as leases expire;
·
our ability to refinance our indebtedness as it matures;
·
any changes in our distribution policy;
·
any future issuances of equity securities;
·
strategic actions by us or our competitors, such as acquisitions or restructurings;
·
general market conditions and, in particular, developments related to market conditions for the real estate industry; and
·
domestic and international economic factors unrelated to our performance.
ITEM 1B.                          Unresolved Staff Comments.

None.
 
 
Page 22 of 113

 
ITEM 2.                  Properties.

General

We operate and invest principally in quality office properties in higher growth submarkets in the Sunbelt region of the United States.  At January 1, 2013, we owned or had an interest in 43 office properties, including interests held through Fund II, comprising approximately 11.9 million square feet of office space located in nine states.

Office Buildings

Other than as discussed under "Item 1. Business", we intend to hold and operate our portfolio of office buildings for investment purposes.  We do not currently have any program for the renovation or improvement of any of our office buildings, except as called for under new leases or the renewal of existing leases and improvements necessary to upgrade recent acquisitions to our operating standards.  All such improvements are expected to be financed by cash flow from the portfolio of office properties, capital expenditure escrow accounts or advances on our unsecured credit facilities.

Recent and Pending Acquisitions

During the year ended December 31, 2012, we purchased nine office properties as follows (in thousands):
 
 
Office Property
 
 
 
Location
 
 
Type of
Ownership
 
 
Ownership
Share
 
 
Square
Feet
 
 
Date
Purchased
 
Gross
Purchase
Price
 
 
 
 
 
 
 
The Pointe
Tampa, FL
Fund II
30.0%
252 
01/11/12
$
46,900 
Hayden Ferry Lakeside II
Phoenix, AZ
Fund II
30.0%
300 
02/10/12
 
86,000 
Hearst Tower
Charlotte, NC
Wholly owned
100.0%
973 
06/06/12
 
250,000 
Hayden Ferry Lakeside III, IV and V
Phoenix, AZ
Fund II
30.0%
21 
08/31/12
 
18,200 
Westshore Corporate Center
Tampa, FL
Wholly owned
100.0%
170 
11/15/12
 
22,691 
525 North Tryon
Charlotte, NC
Wholly owned
100.0%
402 
12/06/12
 
47,350 
Phoenix Tower
Houston, TX
Wholly owned
100.0%
626 
12/20/12
 
123,750 
Tempe Gateway
Phoenix, AZ
Wholly owned
100.0%
251 
12/21/12
 
66,100 
NASCAR Plaza
Charlotte, NC
Wholly owned
100.0%
395 
12/31/12
 
99,999 
 
 
 
 
 
 
 
 
 
 
 
 
3,390 
 
$
760,990 

We generally financed these acquisitions through availability under our senior unsecured revolving credit facilities.  However, in the case of Hearst Tower we also used proceeds received from the investment in us by TPG Pantera, and in the case of Westshore Corporate Center and NASCAR Plaza we also assumed the existing non-recourse first mortgage on the property.

The Company purchased these nine assets at an estimated weighted average capitalization rate of 6.8%.  The Company computes the estimated capitalization rate by dividing cash net operating income excluding rent concessions for the first year of ownership by the gross purchase price.  The Company defines cash net operating income as property specific revenues (rental revenue, property expense recoveries and other revenue) less property specific expenses (personnel, real estate taxes, insurance, repairs and maintenance and other property expenses).

On January 17, 2013, we purchased Tower Place 200, a 260,000 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 on our unsecured credit facilities.  The building is unencumbered by debt and we do not plan to place secured financing on the property at this time.

On January 21, 2013, we entered into a purchase and sale agreement to acquire a portfolio of eight office properties totaling 1.0 million square feet located in the Deerwood submarket of Jacksonville, Florida for a gross purchase price of $130 million.  We will own 100% of the portfolio and plan to place secured first financing on the properties, simultaneous with closing, totaling approximately 65% of the gross purchase price.  Closing is expected to occur by the end of the first quarter 2013 and is subject to customary closing conditions, including completion of satisfactory due diligence.  We intend to fund our share of equity using borrowings from our senior unsecured revolving credit facility.
 
Page 23 of 113

Dispositions

During the year ended December 31, 2012, we completed the following dispositions as part of our strategic objective of becoming a leading owner of high-quality office assets in higher-growth markets in the Sunbelt region of the United States.  During the year ended December 31, 2012, we sold the following properties as follows (in thousands):

 
 
 
 
 
Gross
 
 
 
 
Square
Date of
Sales
 
Gain (Loss)
Office Property
 
Location
Feet
Sale
Price
 
on Sale
Falls Pointe
 
Atlanta, GA
107
01/06/12
$
6,000 
 
$
1,357 
111 East Wacker
 
Chicago, IL
1,013
01/09/12
 
150,600 
 
 
Renaissance Center
 
Memphis, TN
189
03/01/12
 
27,650 
 
 
3,033 
Non-Core Assets
 
Various
1,745
Various
 
139,500 
 
 
3,700 
Overlook II
 
Atlanta, GA
260
04/30/12
 
29,350 
 
 
777 
Wink
 
New Orleans, LA
32
06/08/12
 
765 
 
 
(98)
Ashford Center/
Peachtree Ridge
 
Atlanta, GA
321
07/01/12
 
29,850 
 
 
1,292 
111 Capitol Building
 
Jackson, MS
187
09/06/12
 
8,200 
 
 
(371)
Sugar Grove
 
Houston, TX
124
10/23/12
 
11,425 
 
 
3,246 
 
 
 
 
 
 
 
 
 
 
Total 2012
 
 
3,978
 
$
403,340 
 
$
12,939 

We entered into an agreement to sell the 13 office properties, totaling 2.7 million square feet, owned by Parkway Properties Office Fund, L.P. ("Fund I") to our existing partner in the fund for a gross sales price of $344.3 million, of which $97.4 million was our share.  As of December 31, 2011, we had completed the sale of nine of these 13 assets. As of July 1, 2012, we had completed the sale of the remaining four Fund I assets.  We received approximately $14.2 million in net proceeds from the sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under our credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was our share.

Additionally, during the year ended December 31, 2012, we completed the sale of 15 properties included in our strategic sale of a portfolio of non-core assets and the sale of 111 Capitol Building for a gross sales price of $147.7 million, generating net proceeds of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was our share.  The 15 assets that were sold included five assets in Richmond, Virginia, four assets in Memphis, Tennessee and six assets in Jackson, Mississippi.

We completed the sale of four additional assets during the year ended December 31, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, Illinois, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, Sugar Grove, a 124,000 square foot office property in Houston, Texas, and Falls Pointe, a 107,000 square foot office property located in Atlanta, Georgia owned by Fund II, for an aggregate gross sales price of $168.8 million.  We received approximately $14.8 million in aggregate net proceeds from these sales, which were used to reduce amounts outstanding under our revolving credit facility.   In connection with the sale of 111 East Wacker, the buyer assumed the existing $147.9 million mortgage loan upon sale.

Page 24 of 113


The following table sets forth certain information about office properties which the Company owned or had an interest in at January 1, 2013:

Market and Property
Number
Of
Properties (1)
Parkway's
Ownership
Interest
Total Net
Rentable
Square
Feet
Occupancy
Percentage
Weighted Avg.
Gross
Rental Rate Per
Net Rentable
Square Foot(2)
% of
Leases
Expiring
In
2013(3)
Year Built/
Renovated
PHOENIX, AZ
 
 
 
 
 
 
 
Squaw Peak I & II
 
100.0%
290 
92.3%
$
22.61 
0.1%
1999/2000
Mesa Corporate Center
 
100.0%
105 
93.7%
$
20.60 
0.4%
2000
Tempe Gateway
 
100.0%
251 
77.0%
$
23.87 
0.0%
2009
Hayden Ferry Lakeside I
 
30.0%
203 
82.8%
$
28.55 
0.0%
2002
Hayden Ferry Lakeside II
 
30.0%
300 
96.2%
$
30.81 
0.1%
2007
Hayden Ferry Lakeside III - V
 
30.0%
21 
40.7%
$
29.70 
0.0%
2007
 
68.7%
1,170 
87.6%
$
26.00 
0.6%
 
 
 
 
 
 
 
 
 
FT. LAUDERDALE, FL
 
 
 
 
 
 
 
Hillsboro V
 
100.0%
116 
77.7%
$
24.14 
0.1%
1985
Hillsboro I-IV
 
100.0%
100 
63.4%
$
17.57 
0.1%
1985
 
100.0%
216 
71.1%
$
21.43 
0.2%
 
 
 
 
 
 
 
 
 
JACKSONVILLE, FL
 
 
 
 
 
 
 
SteinMart Building
 
100.0%
196 
96.6%
$
20.82 
0.1%
1985
Riverplace South
 
100.0%
106 
92.0%
$
19.59 
0.3%
1981
245 Riverside
 
30.0%
136 
84.1%
$
22.30 
0.0%
2003
 
78.3%
438 
91.6%
$
20.94 
0.4%
 
 
 
 
 
 
 
 
 
TAMPA, FL
 
 
 
 
 
 
 
Westshore Corporate Center (4)
 
100.0%
170 
77.7%
$
24.05 
0.2%
1988
Corporate Center Four at International Plaza (4)
 
30.0%
250 
87.8%
$
31.85 
0.0%
2008
Cypress Center I, II & III
 
30.0%
286 
96.1%
$
19.65 
0.2%
1982
The Pointe
 
30.0%
252 
90.6%
$
25.97 
0.3%
1982
 
42.4%
958 
89.2%
$
25.15 
0.7%
 
 
 
 
 
 
 
 
 
ORLANDO, FL
 
 
 
 
 
 
 
Citrus Center
 
100.0%
261 
81.5%
$
23.89 
0.1%
1971
Bank of America Center
 
30.0%
421 
83.4%
$
27.17 
0.8%
1987
 
56.8%
682 
82.6%
$
25.93 
0.9%
 
 
 
 
 
 
 
 
 
ATLANTA, GA
 
 
 
 
 
 
 
Waterstone
 
100.0%
93 
48.2%
$
20.24 
0.1%
1987
Meridian
 
100.0%
97 
74.7%
$
21.62 
0.0%
1985
Peachtree Dunwoody
 
100.0%
370 
62.0%
$
20.36 
0.2%
1976/1980
Capital City Plaza
 
100.0%
409 
79.3%
$
28.89 
0.3%
1989
3344 Peachtree
 
33.0%
485 
97.3%
$
35.14 
0.2%
1986
Lakewood II
 
30.0%
124 
73.5%
$
16.36 
0.0%
2008
Two Ravinia Drive
 
30.0%
438 
80.8%
$
18.16 
0.3%
1987
 
64.4%
2,016 
78.8%
$
25.83 
1.1%
 
 
 
 
 
 
 
 
 
JACKSON, MS
 
 
 
 
 
 
 
City Centre
 
100.0%
266 
87.5%
$
14.99 
0.1%
1987
 
100.0%
266 
87.5%
$
14.99 
0.1%
 
 
 
 
 
 
 
 
 
CHARLOTTE, NC
 
 
 
 
 
 
 
Hearst Tower
 
100.0%
973 
94.6%
$
28.62 
0.9%
2002
525 North Tryon
 
100.0%
402 
72.8%
$
19.17 
0.1%
1998
NASCAR Plaza (4)
 
100.0%
395 
87.5%
$
23.95 
0.1%
2009
Carmel Crossing
 
30.0%
326 
88.4%
$
18.14 
0.5%
1995
 
89.1%
2,096 
88.1%
$
24.61 
1.6%
 
 
 
 
 
 
 
 
 
PHILADELPHIA, PA
 
 
 
 
 
 
 
Two Liberty Place
 
19.0%
941 
99.1%
$
28.50 
0.0%
1990
 
19.0%
941 
99.1%
$
28.50 
0.0%
 
 
 
 
 
 
 
 
 
COLUMBIA, SC
 
 
 
 
 
 
 
Atrium at Stoneridge
 
100.0%
108 
63.7%
$
16.14 
0.1%
1986
 
100.0%
108 
63.7%
$
16.14 
0.1%
 
 
 
 
 
 
 
 
 
MEMPHIS, TN
 
 
 
 
 
 
 
Morgan Keegan Tower
 
100.0%
337 
93.4%
$
19.79 
0.2%
1985
 
100.0%
337 
93.4%
$
19.79 
0.2%
 
 
 
 
 
 
 
 
 
NASHVILLE, TN
 
 
 
 
 
 
 
Bank of America Plaza
 
100.0%
436 
93.1%
$
19.82 
0.4%
1977
 
100.0%
436 
93.1%
$
19.82 
0.4%
`
 
 
 
 
 
 
 
 
 
HOUSTON, TX
 
 
 
 
 
 
 
 
400 Northbelt
 
100.0%
231 
96.8%
$
16.23 
0.8%
1982
Woodbranch
 
100.0%
109 
96.9%
$
20.16 
0.1%
1982
Honeywell
 
100.0%
157 
96.7%
$
24.31 
0.0%
1983
Schlumberger
 
100.0%
155 
100.0%
$
17.04 
0.0%
1983
One Commerce Green
 
100.0%
341 
100.0%
$
22.54 
0.0%
1983
Comerica Bank Building
 
100.0%
194 
92.0%
$
21.93 
0.3%
1983
 
 
 
 
 
 
 
 
 
 
 
Page 25 of 113

 
 
 
 
 
 
 
 
 
Market and Property
Number
Of
Properties (1)
Parkway's
Ownership
Interest
Total Net
Rentable
Square
Feet
Occupancy
Percentage
Weighted Avg.
Gross
Rental Rate Per
Net Rentable
Square Foot(2)
% of
Leases
Expiring
In
2013(3)
Year Built/
Renovated
550 Greens Parkway
 
100.0%
72 
100.0%
$
21.79 
0.0%
1999
5300 Memorial
 
100.0%
154 
95.8%
$
24.58 
0.3%
1982
Town & Country
 
100.0%
148 
94.8%
$
21.81 
0.2%
1982
Phoenix Tower
 
100.0%
626 
83.6%
$
25.71 
0.4%
1984/2011
 
10 
100.0%
2,187 
93.1%
$
22.27 
2.1%
 
 
 
 
 
 
 
 
 
 
Total Properties as of January 1, 2013
43 
74.5%
11,851 
88.0%
$
24.15 
8.6%
 

(1)
Our core properties include 40 properties comprising 11.1 million net rentable square feet and include 27 office properties owned directly and 13 office properties owned through Fund II.  The non-strategic properties include three properties comprising 711,000 square feet as of January 1, 2013, which include properties in non-strategic markets such as Columbia, South Carolina; Jackson, Mississippi; and Memphis, Tennessee.  See Note F – Noncontrolling Interest – Real Estate Partnerships, to the consolidated financial statements for additional information on properties owned through Fund II.
(2)
Weighted average expiring gross rental rate is the weighted average current rental rate, which also includes $2.19 per square foot of escalations for operating expenses.  These rates do not reflect any future increases in contractual rent or projections with respect to expense reimbursements.
(3)
The percentage of leases expiring in 2013 represents the ratio of square feet under leases expiring in 2013 divided by total net rentable square feet.
(4)
These properties are subject to ground leases.  See Note B – Investments in Office Properties, to the consolidated financial statements for additional information on these ground leases.

The following table sets forth scheduled lease expirations for properties owned at January 1, 2013, assuming no customer exercises renewal options:

 
 
Net
 
Annualized
 
Weighted Avg
 
 
Rentable
Percent of
Rental
Percent of
Expiring Gross
Year of
Number
Square Feet
Total Net
Amount
Annualized
Rental Rate Per
Lease
of
Expiring
Rentable
Expiring (1)
Rental Amount
Net Rentable
Expiration
Leases
(in thousands)
Square Feet
(in thousands)
Expiring
Square Foot (2)
2013
176 
1,018 
8.6%
$
23,699 
9.4%
$
23.28 
2014
143 
1,168 
9.9%
 
27,420 
10.9%
 
23.48 
2015
161 
975 
8.2%
 
21,561 
8.6%
 
22.11 
2016
129 
1,954 
16.5%
 
44,423 
17.7%
 
22.73 
2017
120 
1,538 
13.0%
 
35,515 
14.1%
 
23.09 
2018
67 
879 
7.4%
 
21,580 
8.6%
 
24.56 
2019
25 
767 
6.5%
 
21,344 
8.5%
 
27.84 
2020
17 
290 
2.5%
 
7,899 
3.1%
 
27.23 
2021
15 
597 
5.0%
 
15,401 
6.1%
 
25.81 
2022
17 
740 
6.2%
 
19,950 
7.9%
 
26.96 
2023 & Later
14 
498 
4.2%
 
12,911 
5.1%
 
25.92 
 
884 
10,424 
88.0%
$
251,703 
100.0%
$
24.15 

(1) Annualized rental amount expiring is defined as net rentable square feet expiring multiplied by the weighted average expiring annual rental rate per net rentable square foot.
(2) Weighted average expiring gross rental rate is the weighted average current rental rate, which also includes $2.19 per square foot of escalations for operating expenses.  These rates do not reflect any future increases in contractual rent or projections with respect to expense reimbursements.

Page 26 of 113


Top 20 Customers (based on rental revenue)

At January 1, 2013, our office properties were leased to 884 customers, which are in a wide variety of industries including banking, insurance, professional services (including legal, accounting, and consulting), energy, financial services and telecommunications.  Our largest and 20 largest customers accounted for 8.5% and 42.3%, respectively, of our annualized rental revenue.  The following table sets forth information concerning the 20 largest customers of the properties owned directly or through joint ventures as of January 1, 2013 (in thousands, except number of properties and footnotes):

Customer
No. of
Props.
Square Footage Expiring
 
Leased
Square
Feet (1)
Annualized
Rental
Revenue (1)
 
Percentage of Total Annualized Rental Revenue
2013
2014
2015
2016
2017
2018
Thereafter
 
Bank of America, NA (2)
5
61 
10 
124 
194 
322 
711 
$
15,238 
 
8.5%
Blue Cross Blue Shield of Georgia, Inc. (3)
1
199 
199 
5,783 
 
3.2%
Raymond James & Associates (4)
3
10 
240 
19 
269 
5,046 
 
2.8%
Hearst Communications
1
181 
181 
5,022 
 
2.8%
Nabors Industries
1
220
220 
4,744 
 
2.7%
K & L Gates (5)
1
49 
109 
158 
4,307 
 
2.4%
NASCAR
1
13 
139 
152 
3,810 
 
2.1%
Honeywell (6)
1
12 
116 
128 
3,169 
 
1.8%
Chiquita Brands, L.L.C.
1
138 
138 
3,031 
 
1.7%
Southwestern Energy Company (7)
2
118 
118 
2,857 
 
1.6%
General Services Administration(GSA) (8)
9
77 
53 
57 
190 
2,707 
 
1.5%
Schlumberger (9)
1
155 
155 
2,647 
 
1.5%
Permian Mud Service, Inc.
1
105 
105 
2,643 
 
1.5%
PricewaterhouseCoopers, LLP
1
70 
70 
2,563 
 
1.4%
Louisiana Pacific
1
20 
85 
110 
2,490 
 
1.4%
Connecticut General Life Insurance Company (CIGNA)
1
463 
463 
2,346 
 
1.3%
Stein Mart, Inc.
1
109 
109 
2,334 
 
1.3%
Allstate Insurance Company (10)
2
66 
69 
1,824 
 
1.0%
Forman Perry Watkins Krutz & Tardy (11)
1
129 
129 
1,687 
 
0.9%
Worley Parson Group, Inc.
1
51 
51 
1,460 
 
0.8%
 
 
210 
305 
198 
944 
542 
158 
1,368 
3,725 
75,708 
 
42.3%
Total Rentable Square Footage (1)
11,851 
 
 
 
Total Annualized Rental Revenue (1)
 $
178,837 
 
 
 
 
(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square foot, multiplied by the number of square feet leased by the customer.  Annualized rent for customers in joint ventures is calculated based on our ownership interest.  However, leased square feet and total rentable square footage represents 100% of square feet leased and owned through direct ownership or through joint ventures.
(2)
Bank of America (Hearst Tower in Charlotte) has the option to cancel 64,462 square feet in May 2017 with 18 months written notice.  Bank of America (Bank of America Plaza in Nashville) has the option to cancel 123,710 square feet in October 2014 with 12 months notice.
 (3)
Blue Cross Blue Shield of Georgia (Capital City Plaza in Atlanta) has the option to cancel 59,222 square feet in January 2016 or January 2018 with nine months written notice.  Additionally, the lease provides the option to cancel an additional 29,610 square feet in January 2018 with nine months written notice.
(4)
Raymond James & Associates (Morgan Keegan Tower in Memphis) has the option to cancel 3,197 square feet with four (4) months written notice.
(5)
K & L Gates LLP (Hearst Tower in Charlotte) has a cancellation option in September 2024 with 12 months prior written notice.
 (6)
Honeywell (Honeywell Building in Houston) has a cancellation option in December 2014 with 12 months notice.
(7)
Southwest Energy Company (One Commerce Green and 550 Greens Parkway in Houston) has a cancellation option in February 2015, 2016, 2017 and 2018, each with 12 months written notice.
(8)
General Services Administration ("GSA") (Meridian Building in Atlanta) has an option to cancel 16,778 square feet effective February of 2015 with 90 days written notice.    The GSA (Bank of America Center-Orlando) has an option to cancel 12,341 square feet effective October 2013 and 34,182 square feet effective June 2018, both with 120 days written notice.  The GSA (Carmel Crossing-Davie Building - Charlotte) has an option to cancel 21,384 square feet effective September 2014 with 90 days written notice.
(9)
Schlumberger Technology (Schlumberger Building in Houston) has a cancellation option in June 2015 with 12 months notice.
(10)
Allstate Insurance Company (Tempe Gateway in Phoenix) has a cancellation option in August 2020 with 12 months written notice.
(11)
Forman, Perry, Watkins, Krutz & Tardy (City Centre in Jackson) has certain cancellation rights pending changes in partnership structure.
Page 27 of 113


Significant Properties

We have one property, Hearst Tower, whose book value at December 31, 2012, exceeded ten percent of total assets.

Hearst Tower is a 46-story office property located in the central business district in Charlotte, North Carolina. We acquired fee simple title to Hearst Tower in June 2012.  The building was constructed in 2002 and includes 973,000 rentable square feet of office space.  Hearst Tower's major customers include a banking entity, a media company, and businesses that provide legal, accounting and other financial services.  The building was 94.6% occupied at January 1, 2013, with an average effective annual rental rate per square foot of $28.62.  For the year-ended December 31, 2012, average occupancy was 93.9% and the average rental rate per square foot was $29.12.  Real estate tax expense for the property for 2012 was $2.7 million.

Lease expirations for Hearst Tower at January 1, 2013 are as follows (in thousands, except number of leases):

Year
Square Feet
of Leases
Expiring
Percentage
of Total
Square Feet
Annualized
Rental
Revenue (1)
Percentage of
Total Annualized
Rental Revenue
Number of
Leases
2013
111 
11.4%
 $
2,204 
8.3%
2014
72 
7.4%
 
2,621 
10.0%
2015
0.5%
 
129 
0.5%
2016
20 
2.0%
 
603 
2.3%
2017
261 
26.8%
 
7,386 
28.1%
2018
-%
 
-%
2019
-%
 
-%
2020
10 
1.1%
 
340 
1.3%
2021
-%
 
-%
2022
328 
33.7%
 
8,998 
34.2%
Thereafter
114 
11.7%
 
4,034 
15.3%
 
920 
94.6%
 $
26,315 
100.0%
27 
 
(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square feet, multiplied by the number of square feet leased by the customer.

Hearst Tower has three customers that occupy 10% or more of the rentable square footage.  Information regarding these customers is as follows:

Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate Per Square Foot
Lease Options
Banking
322
2022
$
27.53     
(1)
Media
181
2017
$
27.69     
(2)
Legal
238
(3)
 
(4)
(5)
 
 
(1)
This customer has the option to cancel 64,462 square feet in May 2017 if notice is provided in December 2015.
(2)
This customer does not have a cancellation option.
(3)
This customer has 48,000 square feet expiring in 2013 and 109,000 square feet expiring in 2027.
(4)
The effective rental rate per square foot for the 109,000 square feet expiring in 2027 is $35.29.  The effective rental rate per square foot for the 48,000 square feet expiring in 2013 is $9.20.
(5)
This customer has the option to cancel 109,000 square feet in September 2024 if notice is provided in September 2023.

Page 28 of 113


For tax purposes, depreciation is calculated over 39 years for building and garage, 7 to 39 years for building, garage and tenant improvements and 5 to 7 years for equipment, furniture and fixtures.  The federal tax basis net of accumulated tax depreciation of Hearst Tower is as follows at December 31, 2012 (in thousands):

 
Hearst
Tower
Land
 $
4,417 
Building and Garage
 
241,995 
Building and Tenant Improvements
 
210 
Equipment, Furniture and Fixtures
 
22 

We have one property, Two Liberty Place, whose gross revenue exceeds ten percent of consolidated gross revenues.

Two Liberty Place is a 57-story office tower located in the central business district of Philadelphia, Pennsylvania.  We acquired Two Liberty Place through our consolidated joint venture, Fund II, in May 2011.  Our ownership interest in Two Liberty Place is 19%.  The building was constructed in 1990 and includes 941,000 rentable square feet of Class A+ office space.  Two Liberty Place's major customers include an insurance company, an information technology company and businesses that provide legal, accounting, and other financial services.  The building was 99.1% occupied at January 1, 2013, with an average effective annual rental rate per square foot of $28.50.  The average occupancy and rental rate per square foot since we acquired ownership of Two Liberty Place is as follows:

Year
Average Occupancy
Average Rental Rate
per Square Foot
2011
99.3%
 $                            27.61 
2012
99.1%
 $                            28.11 

Lease expirations for Two Liberty Place at January 1, 2013 are as follows (in thousands, except number of leases):

Year
Square Feet
of Leases
Expiring
Percentage
of Total
Square Feet
Annualized
Rental
Revenue (1)
Percentage of
Total Annualized
Rental Revenue
Number of
Leases
2013
-%
 $
-%
2014
0.3%
 
89 
0.3%
2015
-%
 
-%
2016
518 
55.1%
 
14,291 
53.8%
2017
27 
2.9%
 
823 
3.1%
2018
51 
5.4%
 
1,518 
5.7%
2019
186 
19.8%
 
5,636 
21.2%
2020
70 
7.4%
 
1,854 
7.0%
2021
77 
8.2%
 
2,350 
8.9%
2022
-%
 
-%
Thereafter
-%
 
-%
 
932 
99.1%
 $
26,561 
100.0%
17 
 
(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square feet, multiplied by the number of square feet leased by the customer.

Two Liberty Place has one customer that occupies 10% or more of the rentable square footage.  Information regarding this customer is as follows:

Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate
Per Square Foot
Insurance
463
2016
 $
                    27.44 
 
 
 
 
 

Page 29 of 113


For tax purposes, depreciation is calculated over 39 years for building and garage, 7 to 39 years for building and tenant improvements and 5 to 7 years for equipment, furniture and fixtures.  The federal tax basis net of accumulated tax depreciation of Two Liberty Place is as follows at December 31, 2012 (in thousands):

 
Two Liberty
Place
Land
 $
32,587 
Building and Garage
 
152,210 
Building and Tenant Improvements
 
615 
Equipment, Furniture and Fixtures
 

Real estate tax expense for the property for 2012 was $3.1 million.  In 2011, our portion of real estate tax expense for the period the asset was owned was $1.7 million.

Two Liberty Place is subject to a non-recourse first mortgage (the "Two Liberty Mortgage").  The Two Liberty mortgage totaled $90.2 million at December 31, 2012 and has a fixed interest rate of 5.2%.  The Two Liberty mortgage matures on June 10, 2019.

We compete with a considerable number of other real estate companies, financial institutions, pension funds, private partnerships, individual investors and others seeking to acquire and lease office space in Charlotte and Philadelphia.  Principal factors of competition in our business are the quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator of quality office properties in the relevant market.  Our ability to compete also depends on, among other factors, trends in the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, taxes and governmental regulations and legislation.

The Company did not have any material liens or encumbrances that exceeded 10% of total assets at December 31, 2012.

ITEM 3.  Legal Proceedings.

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business.  Our management does not believe that any such litigation will materially affect our financial position or operations.

ITEM 4.  Mine Safety Disclosures

Not Applicable
Page 30 of 113


PART II

ITEM 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Price of and Dividends on the Issuer's Common Equity and Series D Preferred Stock

Our common stock ($.001 par value) is listed and trades on the New York Stock Exchange under the symbol "PKY".  The number of record holders of our common stock at March 1, 2013, was 2,056.

At March 1, 2013, the last reported sales price per common share on the New York Stock Exchange was $17.21.  The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock and the per share cash distributions we paid  during each quarter.

 
Year Ended
 
Year Ended
 
December 31, 2012
 
December 31, 2011
Quarter Ended
High
Low
Distributions
 
High
Low
Distributions
March 31
 $
10.89 
 
 $
9.02 
$
0.0750 
 
 $
18.37 
 $
15.37 
 $
0.075 
June 30
 $
11.57 
 
 $
9.57 
$
0.0750 
 
 $
18.55 
 $
15.84 
 $
0.075 
September 30
 $
13.63 
 
 $
10.68 
$
0.1125 
 
 $
18.28 
 $
10.83 
 $
0.075 
December 31
 $
14.72 
 
 $
12.77 
$
0.1125 
 
 $
13.55 
 $
9.40 
 $
0.075 
 
 
 
$
0.3750 
 
 
 
 $
0.300 

Common stock distributions during 2012 ($0.375 per share) and 2011 ($0.30 per share) were taxable as follows for federal income tax purposes:

 
Year Ended
 
December 31
 
2012
2011
Return of capital
 $
0.375 
 $
0.30 
 
 $
0.375 
 $
0.30 

At March 1, 2013, the last reported sales price per series D preferred share on the New York Stock Exchange was $25.50.  The following table sets forth, for the periods indicated, the high and low sales prices per share of our series D preferred stock and the per share cash distributions we paid  during each quarter.


 
Year Ended
 
Year Ended
 
December 31, 2012
 
December 31, 2011
Quarter Ended
High
Low
Distributions
 
High
Low
Distributions
March 31
 $
25.95 
 $
20.01 
 $
0.50 
 
 $
26.70 
 $
20.34 
 $
0.50 
June 30
 $
25.88 
 $
22.89 
 $
0.50 
 
 $
25.74 
 $
20.31 
 $
0.50 
September 30
 $
25.57 
 $
22.95 
 $
0.50 
 
 $
26.41 
 $
20.09 
 $
0.50 
December 31
 $
25.55 
 $
24.96 
 $
0.50 
 
 $
25.00 
 $
21.85 
 $
0.50 
 
 
 
 $
2.00 
 
 
 
 $
2.00 

At March 1, 2013, there were five holders of record of our 5.4 million shares of series D preferred stock.  Series D preferred stock distributions during 2012 and 2011 were taxable as follows for federal income tax purposes:

 
Year Ended December 31
 
2012
2011
Return of capital
 $
2.00 
 $
2.00 
 
 $
2.00 
 $
2.00 
Unregistered Sales of Equity Securities

On February 28, 2012, Parkway Properties LP issued 1.8 million common units to nine individuals as earn-out and earn-up consideration pursuant to the Contribution Agreement dated as of April 10, 2011 by and among Eola Capital LLC, Eola Office Partners LLC, Banyan Street Office Holdings LLC, and the members that are parties thereto, Parkway Properties, Inc. and Parkway Properties LP, as amended, as it relates to the contribution of the Eola management company to us.  The common units were exchanged during 2012 pursuant to their terms, into an equal number of shares of our common stock.  The common units were 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.
 
Page 31 of 113


On May 3, 2012, we entered into a Securities Purchase Agreement (the "Purchase Agreement"), by and among the Company and TPG Pantera.  Pursuant to the terms of the Purchase Agreement, on June 5, 2012, we issued to TPG Pantera 4.3 million shares, or approximately $48.4 million, of common stock and approximately 13.5 million shares, with an initial liquidation value of $151.6 million, of newly-created, non-voting Series E Cumulative Redeemable Convertible Preferred Stock, par value $.001 per share (the "Series E Preferred Stock").  We received net proceeds of approximately $200 million and incurred approximately $13.9 million in transaction costs, which were recorded as a reduction to proceeds received.  During the year ended December 31, 2012, we issued an additional 6,666 shares of Series E Preferred Stock and 11,733 shares of common stock to TPG Pantera in lieu of director's fees pursuant to the agreements entered into with TPG Pantera at the time of closing under the Purchase Agreement and paid approximately $5.0 million and $1.0 million in dividends on common stock and Series E Preferred Stock, respectively, to TPG Pantera.

At a special meeting of our stockholders held on July 31, 2012, our stockholders approved, among other things, the right to convert, at our option or the option of the holders, the Series E Preferred Stock into shares of our common stock. On August 1, 2012, we delivered a conversion notice to TPG Pantera and all shares of Series E Preferred Stock were converted into common stock on a one-for-one basis.

The shares of common stock and Series E Preferred Stock described above were issued in transactions that were not registered under the Act in reliance on Section 4(2) of the Act.

Purchases of Equity Securities by the Issuer

We did not repurchase any equity securities in the fourth quarter of 2012.

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12 of this Annual Report on Form 10-K, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," for certain information regarding our equity compensation plans.
 
 
Page 32 of 113

Performance Graph

The following graph provides a comparison of cumulative stockholder returns for the period from December 31, 2007 through December 31, 2012 among Parkway, the Standard & Poor's 500 Index ("S&P 500") and the National Association of Real Estate Investment Trusts ("NAREIT") Equity REIT Total Return Index ("NAREIT Equity").  The stock performance graph assumes an investment of $100 in our common stock and each index and the reinvestment of any dividends.  The historical information set forth below is not necessarily indicative of future performance.

The performance graph and related information shall not be deemed "soliciting material" or deemed to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing.


 
 
Period Ending
 
Index
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Parkway Properties, Inc.
100.00 
52.45 
66.58 
57.03 
32.85 
48.15 
NAREIT All Equity REIT
100.00 
62.27 
79.70 
101.98 
110.42 
132.18 
S&P 500
100.00 
63.00 
79.68 
91.68 
93.61 
108.59 

Source:  SNL Financial LC, Charlottesville, VA

Page 33 of 113


ITEM 6.  Selected Financial Data.

 
Year Ended
12/31/12
Year Ended
12/31/11
Year Ended
12/31/10
Year Ended
12/31/09
Year Ended
12/31/08
 
(In thousands, except per share data)
Operating Data:
 
 
 
 
 
Revenues
 
 
 
 
 
     Income from office and parking properties
$
206,739 
$
147,290 
$
93,548 
$
94,960 
$
97,294 
     Management company income
 
19,778 
 
16,896 
 
1,652 
 
1,870 
 
1,936 
Total revenues
 
226,517 
 
164,186 
 
95,200 
 
96,830 
 
99,230 
Expenses
 
 
 
 
 
 
 
 
 
 
     Property operating expenses
 
80,748 
 
60,733 
 
40,408 
 
42,060 
 
43,924 
     Depreciation and amortization
 
81,537 
 
56,522 
 
28,496 
 
27,787 
 
28,867 
     Impairment loss on real estate
 
9,200 
 
6,420 
 
 
8,817 
 
2,542 
     Impairment loss on mortgage loan receivable
 
 
9,235 
 
 
 
     Impairment loss on management contracts and goodwill
 
41,967 
 
 
 
 
     Change in fair value of contingent consideration
 
216 
 
(13,000)
 
 
 
     Management company expenses
 
17,237 
 
13,337 
 
2,756 
 
1,987 
 
1,527 
     General and administrative and other
 
16,420 
 
18,805 
 
15,318 
 
14,305 
 
18,338 
     Acquisition costs
 
2,791 
 
17,219 
 
846 
 
 
Total expenses
 
250,116 
 
169,271 
 
87,824 
 
94,956 
 
95,198 
Operating income (loss)
 
(23,599)
 
(5,085)
 
7,376 
 
1,874 
 
4,032 
Other income and expense
 
 
 
 
 
 
 
 
 
 
     Interest and other income
 
272 
 
938 
 
1,487 
 
1,597 
 
1,176 
     Equity in earnings of unconsolidated joint ventures
 
 
57 
 
326 
 
437 
 
771 
     Gain on real estate, joint venture interests,
 
 
 
 
 
 
 
 
 
 
          involuntary conversion and other assets
 
548 
 
743 
 
40 
 
1,293 
 
     Interest expense
 
(35,334)
 
(31,612)
 
(20,271)
 
(19,158)
 
(24,875)
Loss before income taxes
 
(58,113)
 
(34,959)
 
(11,042)
 
(13,957)
 
(18,896)
     Income tax expense
 
(261)
 
(56)
 
(2)
 
(3)
 
(2)
     Loss from continuing operations
 
(58,374)
 
(35,015)
 
(11,044)
 
(13,960)
 
(18,898)
     Income (loss) from discontinued operations
 
2,454 
 
(194,813)
 
(10,881)
 
(8,205)
 
(5,785)
     Gain on sale of real estate from discontinued operations
 
12,939 
 
17,825 
 
8,518 
 
 
22,588 
Total discontinued operations
 
15,393 
 
(176,988)
 
(2,363)
 
(8,205)
 
16,803 
Net loss
 
(42,981)
 
(212,003)
 
(13,407)
 
(22,165)
 
(2,095)
Noncontrolling interests – unit holders
 
269 
 
(5)
 
 
 
Noncontrolling interests-real estate partnerships
 
3,317 
 
85,105 
 
10,789 
 
10,562 
 
11,369 
Net income (loss) for Parkway Properties, Inc.
 
(39,395)
 
(126,903)
 
(2,618)
 
(11,603)
 
9,274 
Dividends on preferred stock
 
(10,843)
 
(10,052)
 
(6,325)
 
(4,800)
 
(4,800)
Dividends on convertible preferred stock
 
(1,011)
 
 
 
 
Net income (loss) attributable to common stockholders
$
(51,249)
$
(136,955)
$
(8,943)
$
(16,403)
$
4,474 
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations
 $
(62,458)
 $
(35,803)
 $
(13,801)
 $
(18,031)
 $
(14,507)
Discontinued operations
 
11,209 
 
(101,152)
 
4,858 
 
1,628 
 
18,981 
Net income (loss) attributable to common stockholders
 $
(51,249)
 $
(136,955)
 $
(8,943)
 $
(16,403)
 $
4,474 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to
 
 
 
 
 
 
 
 
 
 
   Parkway Properties, Inc.
 
 
 
 
 
 
 
 
 
 
     Basic and diluted:
 
 
 
 
 
 
 
 
 
 
     Loss from continuing operations attributable to
 
 
 
 
 
 
 
 
 
 
          Parkway Properties, Inc.
$
(1.98)
$
(1.66)
$
(0.65)
$
(0.93)
$
(0.96)
     Discontinued operations
 
0.36 
 
(4.71)
 
0.23 
 
0.08 
 
1.26 
     Net income (loss) attributable to Parkway Properties, Inc.
$
(1.62)
$
(6.37)
$
(0.42)
$
(0.85)
$
0.30 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share (at end of year)
$
10.11 
$
11.03 
$
17.50 
$
18.32 
$
22.83 
Dividends per common share
$
0.375 
$
0.30 
$
0.30 
$
1.30 
$
2.275 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
     Basic
 
31,542 
 
21,497 
 
21,421 
 
19,304 
 
15,023 
     Diluted
 
31,542 
 
21,497 
 
21,421 
 
19,304 
 
15,023 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
     Office investments, net of depreciation
$
1,562,717 
$
921,937 
$
1,389,767 
$
1,401,890 
$
1,455,239 
     Total assets
 
1,906,611 
 
1,636,311 
 
1,603,682 
 
1,612,146 
 
1,687,855 
     Notes payable to banks
 
262,000 
 
132,322 
 
110,839 
 
100,000 
 
185,940 
     Mortgage notes payable
 
605,889 
 
498,012 
 
773,535 
 
852,700 
 
869,581 
     Total liabilities
 
950,605 
 
1,006,274 
 
983,163 
 
1,041,285 
 
1,154,383 
     Preferred stock
 
128,942 
 
128,942 
 
102,787 
 
57,976 
 
57,976 
     Noncontrolling interests
 
261,992 
 
258,428 
 
134,017 
 
116,715 
 
127,224 
     Total stockholders' equity attributable to Parkway
 
 
 
 
 
 
 
 
 
 
            Properties, Inc.
 
694,014 
 
371,609 
 
486,502 
 
454,145 
 
406,248 
Page 34 of 113

ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a self-administered real estate investment trust specializing in the ownership of quality office properties in higher-growth submarkets in the Sunbelt region of the United States.  At January 1, 2013, we owned or had an interest in a portfolio of 43 office properties located in nine states with an aggregate of approximately 11.9 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 10.8 million square feet for third-party property owners at January 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 temant 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 January 1, 2013, occupancy of our office portfolio was 88.0% compared to 89.6% at October 1, 2012 and 83.9% at January 1, 2012.  Not included in the January 1, 2013 occupancy rate is the impact of 22 signed leases totaling 159,000 square feet expected to take occupancy between now and the first quarter of 2014, of which the majority will commence during the first quarter of 2013.  Including these signed leases, the our portfolio was 89.3% leased at January 1, 2013.  Our average occupancy for the three months and year ended December 31, 2012 was 89.3% and 87.0%, respectively.

During the fourth quarter of 2012, 31 leases were renewed totaling 258,000 rentable square feet at an average annual rental rate per square foot of $27.43, representing a 0.2% rate decrease as compared to expiring rental rates, and at an average cost of $4.41 per square foot per year of the lease term.  During the year ended December 31, 2012, 140 leases were renewed totaling 889,000 rentable square feet at an average annual rental rate per square foot of $22.96, representing a 6.2% decrease as compared to expiring rental rates, and at an average cost of $3.06 per square foot per year of the lease term.  During the fourth quarter of 2012, we renewed a 109,000 square feet at Hearst Tower at an above market rental rate.  This renewal caused our average annual rental rate per square foot related to renewal leases to be higher than new and expansion leases signed during the year.
Page 35 of 113


During the fourth quarter of 2012, 12 expansion leases were signed totaling 45,000 rentable square feet at an average annual rental rate per square foot of $22.38 and at an average cost of $7.14 per square foot per year of the lease term.  During the year ended December 31, 2012, 45 expansion leases were signed totaling 176,000 rentable square feet at an average annual rental rate per square foot of $23.22 and at an average cost of $5.47 per square foot per year of the lease term.

During the fourth quarter of 2012, 21 new leases were signed totaling 110,000 rentable square feet at an average annual rental rate per square foot of $21.70 and at an average cost of $4.73 per square foot per year of the term.  During the year ended December 31, 2012, 86 new leases were signed totaling 550,000 rentable square feet at an average annual rental rate per square foot of $21.05 and at an average cost of $4.97 per square foot per year of the lease 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 the Company does 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 January 1, 2013, management estimates that we have approximately $0.36 per square foot in annual rental rate embedded loss in our office property leases.  Embedded loss 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.  We estimate that it costs five to six times more to replace an existing customer with a new one than to retain the existing customer.  In making this estimate, we take into account the sum of revenue lost during downtime on the space plus leasing costs, which typically rise as market vacancies increase.  Therefore, we focus a great amount of energy on customer retention.  We seek to retain our customers by continually focusing on operations at our office properties.  We believe in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders.  Over the past ten years, Parkway maintained an average 65% customer retention rate.  Our customer retention rate was 68.9% for the quarter ended December 31, 2012, as compared to 76.0% for the quarter ended September 30, 2012, and 47.1% for the quarter ended December 31, 2011. Customer retention for the years ended December 31, 2012 and 2011 was 64.2% and 51.2%, respectively.

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 or to 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 December 31, 2012, 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 acquired 13 properties totaling 4.2 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia. In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry III, IV and V, all adjacent to Hayden Ferry I and Hayden Ferry II office properties in Phoenix.

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.

We entered into an agreement to sell the 13 office properties, totaling 2.7 million square feet, owned by Parkway Properties Office Fund, L.P. ("Fund I") to our existing partner in the fund for a gross sales price of $344.3 million, of which $97.4 million was our share.  As of December 31, 2011, we had completed the sale of nine of these 13 assets. As of July 1, 2012, we had completed the sale of the remaining four Fund I assets.  We received approximately $14.2 million in net proceeds from the sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under our credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was our share.
 
Page 36 of 113


Financial Condition

Comparison of the year ended December 31, 2012 to the year ended December 31, 2011

Assets.  In 2012, we 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 year ended December 31, 2012, total assets increased $270.3 million or 16.5% as compared to the year ended December 31, 2011.  The primary reason for the increase is due to the purchase of nine office properties, offset by the sale of 23 office properties during 2012.

Acquisitions and Improvements.  Our investment in office properties increased $640.8 million net of depreciation to a carrying amount of $1.6 billion at December 31, 2012 and consisted of 43 office properties.  The primary reason for the increase in office properties relates to the purchase of nine office properties during 2012.

During the year ended December 31, 2012, we and Fund II purchased nine office properties as follows (in thousands):
 
Office Property
 
 
 
Location
 
 
Type of
Ownership
 
 
Ownership
Share
 
 
Square
Feet
 
 
Date
Purchased
 
Gross
Purchase
Price
 
 
 
 
 
 
 
The Pointe
Tampa, FL
Fund II
30.0%
252 
01/11/12
$
46,900 
Hayden Ferry Lakeside II
Phoenix, AZ
Fund II
30.0%
300 
02/10/12
 
86,000 
Hearst Tower
Charlotte, NC
Wholly owned
100.0%
973 
06/06/12
 
250,000 
Hayden Ferry Lakeside III, IV, and V
Phoenix, AZ
Fund II
30.0%
21 
08/31/12
 
18,200 
Westshore Corporate Center
Tampa, FL
Wholly owned
100.0%
170 
11/15/12
 
22,691 
525 North Tryon
Charlotte, NC
Wholly owned
100.0%
402 
12/06/12
 
47,350 
Phoenix Tower
Houston, TX
Wholly owned
100.0%
626 
12/20/12
 
123,750 
Tempe Gateway
Phoenix, AZ
Wholly owned
100.0%
251 
12/21/12
 
66,100 
NASCAR Plaza
Charlotte, NC
Wholly owned
100.0%
395 
12/31/12
 
99,999 
 
 
 
 
 
 
 
 
 
 
 
3,390 
 
$
760,990 

On January 17, 2013, we purchased Tower Place 200, a 260,000 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 on our unsecured credit facilities.  The building is unencumbered by debt.

On January 21, 2013, we entered into a purchase and sale agreement to acquire a portfolio of eight office properties totaling 1.0 million square feet located in the Deerwood submarket of Jacksonville, Florida for a gross purchase price of $130 million.  We will own 100% of the portfolio and plan to place secured first financing on the properties, simultaneous with closing, totaling approximately 65% of the gross purchase price.  Closing is expected to occur by the end of the first quarter 2013 and is subject to customary closing conditions, including completion of satisfactory due diligence.  We intend to fund our share of equity using borrowings from our senior unsecured revolving credit facility.
 
Page 37 of 113


During the year ended December 31, 2012, we capitalized building improvements of $25.6 million and recorded depreciation expense of $50.7 million related to our office properties.

 
Dispositions.  During the year ended December 31, 2012, we completed our previously disclosed dispositions as part of our strategic objective of becoming a leading owner of high-quality office assets in higher-growth markets in the Sunbelt.  During the year ended December 31, 2012, we sold 23 office properties as follows (in thousands):

 
 
 
 
 
Gross
 
 
 
 
Square
Date of
Sales
 
Gain (Loss)
Office Property
 
Location
Feet
Sale
Price
 
on Sale
Falls Pointe
 
Atlanta, GA
107
01/06/12
$
6,000 
 
$
1,357 
111 East Wacker
 
Chicago, IL
1,013
01/09/12
 
150,600 
 
 
Renaissance Center
 
Memphis, TN
189
03/01/12
 
27,650 
 
 
3,033 
Non-Core Assets
 
Various
1,745
Various
 
139,500 
 
 
3,700 
Overlook II
 
Atlanta, GA
260
04/30/12
 
29,350 
 
 
777 
Wink
 
New Orleans, LA
32
06/08/12
 
765 
 
 
(98)
Ashford Center/
Peachtree Ridge
 
Atlanta, GA
321
07/01/12
 
29,850 
 
 
1,292 
111 Capitol Building
 
Jackson, MS
187
09/06/12
 
8,200 
 
 
(371)
Sugar Grove
 
Houston, TX
124
10/23/12
 
11,425 
 
 
3,246 
 
 
 
 
 
 
 
 
 
 
Total 2012
 
 
3,978
 
$
403,340 
 
$
12,939 


We entered into an agreement to sell the 13 office properties, totaling 2.7 million square feet, owned by Fund I to our existing partner in the fund for a gross sales price of $344.3 million, of which $97.4 million was our share.  As of December 31, 2011, we had completed the sale of nine of these 13 assets. As of July 1, 2012, we had completed the sale of the remaining four Fund I assets.  We received approximately $14.2 million in net proceeds from the sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under our credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was our share.

Additionally, during the year ended December 31, 2012, we completed the sale of the 15 properties included in our strategic sale of a portfolio of non-core assets and the sale of 111 Capitol Building, for a gross sales price of $147.7 million and generating net proceeds to us of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was our share.  The 15 assets that were sold include five assets in Richmond, Virginia, four assets in Memphis, Tennessee, and six assets in Jackson, Mississippi.

We completed the sale of four additional assets during the year ended December 31, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, Sugar Grove, a 124,000 square foot office property in Houston, Texas, and Falls Pointe, a 107,000 square foot office property located in Atlanta and owned by Fund II for an aggregate gross sales price of $168.8 million.  We received approximately $14.8 million in aggregate net proceeds from these sales, which were used to reduce amounts outstanding under our revolving credit facility.   In connection with the sale of 111 East Wacker, the buyer assumed the existing $147.9 million mortgage loan upon sale.

Mortgage Loans.  In connection with the previous sale of One Park Ten, we had seller-financed a $1.5 million note receivable that bore interest at 7.3% per annum on an interest-only basis through maturity in June 2012.  On April 2, 2012, the borrower prepaid the note receivable and all accrued interest in full.

On April 10, 2012, we transferred our rights, title and interest in the B participation piece (the "B piece") of a first mortgage secured by an 844,000 square foot office building in Dallas, Texas known as 2100 Ross.  The B piece was purchased at an original cost of $6.9 million in November 2007.  The B piece was originated by Wachovia Bank, N.A., a Wells Fargo Company, and had a face value of $10.0 million, a stated coupon rate of 6.1% and a scheduled maturity in May 2012.  During 2011, we recorded a non-cash impairment loss on the mortgage loan in the amount of $9.2 million, thereby reducing our investment in the mortgage loan to zero.  Under the terms of the transfer, we were entitled to certain payments if the transferee was successful in obtaining ownership of 2100 Ross or if the transferee was successful in obtaining payment on the amount due on the note receivable.  During the third quarter of 2012, the transferee successfully obtained ownership of 2100 Ross and as a result we received a $500,000 payment which is classified as recovery of losses on mortgage loan receivable in our Consolidated Statements of Operations and Comprehensive Loss.

Receivables and Other Assets. For the year ended December 31, 2012, rents receivable and other assets increased $15.3 million or 13.9%. The primary reason for the increase in receivables and other assets is due to the increase in lease costs related to the purchase of nine office properties during 2012.

Intangible Assets, Net.  For the year ended December 31, 2012, intangible assets net of related amortization increased $22.5 million or 23.5% and was primarily due to the purchase of nine office properties offset by an impairment loss of $26.2 million on goodwill.  The goodwill was originally recorded in connection with the Eola combination in 2011.
 
Page 38 of 113


Assets Held for Sale and Liabilities Related to Assets Held for Sale.  For the year ended December 31, 2012, assets held for sale decreased $382.8 million, or 100%, and liabilities related to assets held for sale decreased $285.6 million, or 100%, as a result of us not classifying any assets for sale in 2012.  For a complete discussion of assets and liabilities held for sale, please reference "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Discontinued Operations."

Management Contracts, Net.  For the year ended December 31, 2012, management contracts decreased $30.6 million or 61.7% due to a non-cash impairment loss recorded during the fourth quarter 2012.  The impairment loss was recorded as a result of reduction in the value of our management contracts to $19.0 million at December 31, 2012.

Cash and Cash equivalents. Cash and cash equivalents increased $6.7 million or 8.9% for the year ended December 31, 2012 primarily due to proceeds from the $125 million unsecured term loan and our December 2012 underwritten public offering of common stock, which closed on December 10, 2012, offset against equity contributions from Fund II limited partners received during 2011 for the purchase of office properties which closed during the first quarter of 2012.  Our proportionate share of cash and cash equivalents at December 31, 2012 and December 31, 2011 was $56.0 million and $25.8 million, respectively.

Notes Payable to Banks. Notes payable to banks increased $129.7 million or 98.0% during the year ended December 31, 2012.  At December 31, 2012, notes payable to banks totaled $262.0 million and the net increase is due to placement of a $125 million unsecured term loan as well as borrowings to fund our proportionate share of nine office property purchases, offset by payments on the senior unsecured revolving credit facility from proceeds received from the sale of office properties, proceeds received from the December 2012 common stock offering and proceeds received from our transaction with TPG Pantera, which is described below.

On March 30, 2012, we entered into an Amended and Restated Credit Agreement with a consortium of eight banks for our $190 million senior unsecured revolving credit facility.  Additionally, we amended our $10 million working capital revolving credit facility under substantially the same terms and conditions, with the combined size of the facilities remaining at $200 million (collectively, the "New Facilities").  The New Facilities provide for modifications to our then-existing credit facilities by, among other things, extending the maturity date from January 31, 2014 to March 29, 2016, with an additional one-year extension option with the payment of a fee, increasing the size of the accordion feature from $50 million to as much as $160 million, lowering applicable interest rate spreads and unused fees, and modifying certain other terms and financial covenants.  The interest rate on the New Facilities is based on LIBOR plus 160 to 235 basis points, depending on our overall leverage (with the current rate set at 160 basis points).  Additionally, we pay fees on the unused portion of the New Facilities ranging between 25 and 35 basis points based upon usage of the aggregate commitment (with the current rate set at 25 basis points).  Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Book Runners on the senior facility.  In addition, Wells Fargo Bank, N.A. acted as Administrative Agent and Bank of America, N.A. acted as Syndication Agent.  KeyBank, N.A., PNC Bank, N.A. and Royal Bank of Canada all acted as Documentation Agents.  Other participating lenders include JPMorgan Chase Bank, Trustmark National Bank, and Seaside National Bank and Trust.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

On October 10, 2012, we exercised $25 million of the $160 million accordion feature of our existing unsecured revolving credit facility and increased capacity from $190 million to $215 million with the additional borrowing capacity being provided by U.S. Bank National Association, bringing the total number of participating lenders to nine.  The interest rate on the credit facility is currently LIBOR plus 160 basis points.  Other terms and conditions under the credit facility remain unchanged.

On September 27, 2012, we closed a $125 million unsecured term loan.  The term loan has a maturity date of September 27, 2017, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million, subject to certain conditions.  Interest on the term loan is based on LIBOR plus an applicable margin of 150 to 225 basis points depending on our overall leverage (with the current rate set at 150 basis points.)  The term loan has substantially the same operating and financial covenants as required by our current unsecured revolving credit facility.  Keybanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Bookrunners on the term loan.  In addition, Keybank National Association acted as Administrative Agent; Bank of America, N. A. acted as Syndication Agent; and Wells Fargo Bank, National Association acted as Documentation Agent.  Other participating lenders include Royal Bank of Canada, PNC Bank, National Association, U. S. Bank National Association, and Trustmark National Bank.
 
Page 39 of 113


Mortgage Notes Payable. During the year ended December 31, 2012, mortgage notes payable decreased $146.5 million or 19.5% (including mortgage notes payable included in liabilities held for sale) as a result of the following (in thousands):

 
Increase
 
(Decrease)
 
 
Placement of mortgage debt on Fund II properties
 $
73,500 
Assumption of mortgage debt on Westshore Corporate Center
 
15,717 
Assumption of mortgage debt on NASCAR Plaza
 
42,977 
Transfer of mortgage to purchaser of Fund I properties
 
(76,722)
Transfer of mortgage to purchaser of non-core properties
 
(177,373)
Principal paid on early extinguishment of debt
 
(16,275)
Scheduled principal payments
 
(8,348)
 
 $
(146,524)

On January 11, 2012, in connection with the purchase of The Pointe in Tampa, Florida, Fund II obtained a $23.5 million non-recourse first mortgage loan, which is secured by the Pointe and matures in February 2019.  The mortgage has a fixed rate of 4.0% and is interest only for the first 42 months of the term.

On February 10, 2012, Fund II obtained a $50.0 million non-recourse mortgage loan, of which $15.0 million is our share, secured by Hayden Ferry II, a 300,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The mortgage loan matures in July 2018 and bears interest at LIBOR plus the applicable spread which ranges from 250 to 350 basis points over the term of the loan.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes LIBOR at 1.5% through January 25, 2018, which equates to a total interest rate ranging from 4.0% to 5.0%.  The mortgage loan is cross-collateralized, cross-defaulted, and coterminous with the mortgage loan secured by Hayden Ferry I.

On March 9, 2012, we repaid a $16.3 million non-recourse mortgage loan secured by Bank of America Plaza, a 337,000 square foot office property in Nashville, Tennessee.  The mortgage loan had a fixed rate of 7.1% and was scheduled to mature in May 2012.  We repaid the mortgage loan using available proceeds under the senior unsecured revolving credit facilities.

On November 15, 2012, in connection with the purchase of Westshore Corporate Center in Tampa, Florida, we assumed a $14.5 million existing non-recourse first mortgage secured by Westshore Corporate Center, with a fixed interest rate of 5.8% and a maturity date of May 1, 2015.  In accordance with generally accepted accounting principles ("GAAP"), the mortgage was recorded at $15.7 million to reflect the value of the instrument based on a market interest rate of 2.5% on the date of purchase.

On December 31, 2012, in connection with the purchase of NASCAR Plaza in Charlotte, North Carolina, we assumed a $42.6 million first mortgage loan secured by NASCAR Plaza with a fixed interest rate of 4.7% and a maturity date of March 30, 2016.  In accordance with GAAP, the mortgage was recorded at $43.0 million to reflect the value of the instrument based on a market interest rate of 3.4% on the date of purchase.

During 2012, in conjunction with the sale of the Fund I assets, the buyer assumed $76.7 million of non-recourse first mortgage loans, of which $19.2 million was our share.

On February 20, 2013, the Company obtained an $80.0 million non-recourse first mortgage loan secured by Phoenix Tower, a 626,000 square foot office property in Houston, Texas.  The mortgage loan has a fixed interest rate of 3.9%, an initial 24-month interest only period and a maturity date of March 2023.

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.  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 computed for the current quarter as annualized and adjusted pro forma for any completed investment activity. Management believes all of the leverage and other financial metrics it monitors, including those discussed above, provides useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments.  We currently target a net debt to EBITDA multiple of 5.5 to 6.5 times.
 
Page 40 of 113


Accounts Payable and Other Liabilities.  For the year ended December 31, 2012, accounts payable and other liabilities decreased $7.6 million or 8.4% and is primarily due to the decrease in contingent consideration related to the Eola purchase for which 1.8 million common units were issued during the first quarter of 2012, and the decrease in deferred tax liability as a result of the non-cash impairment loss associated with the Company's management contracts, offset by an increase in the fair value of interest rate swaps and below market lease value liabilities associated with the purchase of nine properties during 2012.

Equity.  Total equity increased $326.0 million or 51.7% during the year ended December 31, 2012 as a result of the following (in thousands):

 
Increase
(Decrease)
Net loss attributable to Parkway Properties, Inc.
 $
(39,395)
Net loss attributable to noncontrolling interest
 
(3,586)
Net loss
 
(42,981)
Change in market value of interest rate swaps
 
(3,364)
Common stock dividends declared
 
(14,570)
Preferred stock dividends declared
 
(10,843)
Convertible preferred dividends declared
 
(1,011)
Share-based compensation
 
432 
Shares issued in lieu of Director's Fees
 
263 
Issuance of common stock
 
229,843 
Shares issued pursuant to TPG Management Services Agreement
225 
Conversion of 13,484,444 convertible preferred shares to common stock
 
141,173 
Shares purchased to satisfy tax withholding obligation on vesting of restricted stock
 
 
     and deferred incentive share units
 
(173)
Net shares distributed from deferred compensation plan
 
220 
Issuance of 1.8 million operating partnership units
 
18,216 
Contribution of capital by noncontrolling interest
 
17,447 
Distribution of capital to noncontrolling interest
 
(729)
Sale of noncontrolling interest in Parkway Properties Office Fund, L.P.
 
(8,179)
 
 $
325,969 

Common Stock. On December 10, 2012, we completed a public offering of 13.5 million shares of our common stock, plus an additional 1.2 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 $13.00 per share.  Net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $184.8 million. Pursuant to its stockholders agreement with us, TPG Pantera exercised its preemptive rights to purchase 5,822,000 shares of common stock in this offering.

Shelf Registration Statement.  We have a universal shelf registration statement on Form S-3 (No. 333-178001) that was declared effective by the Securities and Exchange Commission on December 5, 2011.  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; and (iii) warrants to purchase preferred stock or 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 $500 million.  As of March 1, 2013, we had $315.2 million of securities available for issuance under the registration statement.

We also have a registration statement on Form S-3 (No. 333-178003) that was declared effective by the Securities and Exchange Commission on February 28, 2012 under which we may issue up to 1.8 million shares of common stock, par value $0.001 per share, to certain holders of common units.  Our indirect, controlled subsidiary is the general partner of PPLP.  Pursuant to the Partnership Agreement for PPLP, we may elect to deliver shares to common unit holders who wish to have their common units redeemed.  We filed the registration statement in order to satisfy our registration obligations under the Registration Rights Agreement, dated May 18, 2011, between us and certain holders of common units.  As of December 31, 2012, we had no shares of common stock available for issuance under the registration statement as we have issued 1.8 million shares of common stock in redemption of common units.
 
 
Page 41 of 113

 
    TPG Pantera Securities Purchase Agreement.  On May 3, 2012, we entered into a Securities Purchase Agreement (the "Purchase Agreement"), by and between the Company and TPG Pantera.  Pursuant to the terms of the Purchase Agreement, on June 5, 2012, we issued to TPG Pantera 4.3 million shares, or approximately $48.4 million, of common stock and approximately 13.5 million shares, with an initial liquidation value of $151.6 million, of newly created, of Series E Preferred Stock.  We received net proceeds of approximately $200 million and incurred approximately $13.9 million in transaction costs, which were recorded as a reduction to proceeds received.  During the year ended December 31, 2012, we issued an additional 6,666 shares of Series E Preferred Stock and 11,733 shares of common stock to TPG Pantera in lieu of director's fees pursuant to the agreements entered into with TPG Pantera at the time of closing under the Purchase Agreement and paid approximately $5.0 million and $1.0 million in dividends on common stock and Series E Preferred Stock, respectively, to TPG Pantera.

At a special meeting of our stockholders held on July 31, 2012, our stockholders approved, among other things, the right to convert, at our option or the option of the holders, the Series E Preferred Stock into shares of our common stock. On August 1, 2012, we delivered a conversion notice to TPG Pantera and all shares of Series E Preferred Stock were converted into common stock on a one-for-one basis.

Results of Operations

Comparison of the year ended December 31, 2012 to the year ended December 31, 2011.

Net loss attributable to common stockholders for the years ended December 31, 2012 and 2011 was $51.2 million ($1.62 per basic common share) and $137.0 million ($6.37 per basic common share), respectively.  The primary reason for the decrease in net loss attributable to common stockholders for the year ended December 31, 2012 as compared to the year ended December 31, 2011 in the amount of $85.8 million is primarily attributable to Parkway's proportionate share of impairment losses recorded during 2011 on Fund I office properties, net operating income recorded in 2012 from Fund II purchases which closed in the second quarter of 2011 and first quarter of 2012 and the purchase of  six wholly owned office properties during 2012, gains on sale of real estate from discontinued operations, and acquisition costs recognized in 2011, offset by non-cash impairment losses on real estate, management contracts and goodwill recorded during 2012.  The change in loss from discontinued operations as well as other variances for income and expense items that comprise net 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 year ended December 31, 2012, we classified as discontinued operations 23 properties totaling 4.0 million square feet, which were sold during 2012.  At December 31, 2012, same-store properties consisted of 34 properties comprising 8.5 million square feet.

The following table represents revenue from office properties for the years ended December 31, 2012 and 2011 (in thousands):

 
Year Ended December 31
 
 
 
 
%
 
2012
2011
Increase
Change
Revenue from office properties:
 
 
 
     Same-store properties
 $
140,887 
 $
136,917 
 $
3,970 
2.9%
     Properties acquired
 
65,852 
 
10,373 
 
55,479 
*N/M
Total revenue from office properties
 $
206,739 
 $
147,290 
 $
59,449 
 40.4%
*N/M – Not meaningful

Revenue from office properties for same-store properties increased $4.0 million or 2.9% for the year ended December 31, 2012, compared to the same period for 2011.  The primary reason for the increase is due to an increase in average same-store occupancy for the year ended December 31, 2012 compared to the same period for 2011.  Average same-store occupancy increased 146 basis points for the year ended December 31, 2012 compared to the same period of 2011.
 

 
Page 42 of 113

The following table represents property operating expenses for the years ended December 31, 2012 and 2011 (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2012
2011
(Decrease)
Change
Expense from office properties:
 
 
 
     Same-store properties
 $
56,809 
 $
57,364 
 $
(555)
-1.0%
     Properties acquired
 
23,939 
 
3,369 
 
20,570 
*N/M
Total expense from office properties
 $
80,748 
 $
60,733 
 $
20,015 
33.0%
*N/M – Not meaningful

Property operating expenses for same-store properties decreased $555,000 or 1.0% for the year ended December 31, 2012, compared to the same period of 2011. The primary reason for the decrease is due to decreased personnel and utilities expense.

Depreciation and amortization expense attributable to office properties increased $25.0 million for the year ended December 31, 2012 compared to the same period for 2011.  The primary reason for the increase is due to the purchase of eight office properties and an additional interest in one property during 2011, which were owned for a full year during 2012, in addition to nine office properties purchased during 2012.  The total gross purchase price for acquisitions completed during the year ended December 31, 2012 was $761.0 million compared with $586.9 million for the same period of 2011.

Impairment Loss on Real Estate.  We recorded total impairment losses on real estate of $9.2 million and $196.3 million for the years ended December 31, 2012 and 2011, respectively.  For the year ended December 31, 2012, the impairment loss of $9.2 million related to assets included in continuing operations. For the year ended December 31, 2011, $6.4 million of the total impairment losses recorded were related to assets included in continuing operations and $189.9 million were related to discontinued operations.  For 2012, impairment losses on continuing operations are comprised of losses in connection with assets in Jackson, Mississippi and Columbia, South Carolina.  For 2011, impairment losses on real estate in continuing operations are comprised of the $5.9 million loss in connection with two remaining assets in Jackson, Mississippi and Memphis, Tennessee, and a $500,000 loss on non-depreciable land in New Orleans, Louisiana.  Impairment losses on real estate in discontinued operations are comprised of the $105.4 million loss (our share was $29.3 million) in connection with sale of our interests in the Fund I office portfolio, a $51.2 million loss in connection with the sale of non-core assets and a parcel of land in Jackson, Mississippi; Memphis, Tennessee; and Richmond, Virginia, a $19.1 million loss in connection with the sale of 111 East Wacker in Chicago, Illinois, a $11.6 million loss in connection with the Wells Fargo Building office property in Houston, Texas, all of which were classified as held for sale at December 31, 2011, and a $2.7 million loss in connection with the sale of Tower at 1301 Gervais in Columbia, South Carolina.

Impairment Loss on Management Contracts and Goodwill.  During the year ended December 31, 2012, we recorded a $42.0 million non-cash impairment loss, net of deferred tax liability, associated with our investment in management contracts and goodwill.  Our strategy related to the third-party management business has changed since the acquisition of these contracts.  When the contracts were acquired, our strategy was to grow the third-party business and continue to add management contracts in our various markets.  While we still view the cash flows from this business as positive and the additional management contracts gives us scale and critical mass in some of our key markets, we are no longer actively seeking to grow this portion of the business.  Given this change in strategy, we determined that our management contracts and associated goodwill were impaired and recorded a $42.0 million non-cash impairment charge, net of deferred tax liability, during the fourth quarter of 2012.

Impairment Loss on Mortgage Loan Receivable.  During the year ended December 31, 2011, we recorded a non-cash impairment loss on a mortgage loan of $9.2 million in connection with the B participation piece of a first mortgage secured by an 844,000 square foot office property in Dallas, Texas known as 2100 Ross.  The borrower is in default on the first mortgage and we did not believe we would recover our investment in the loan.  Therefore, we wrote off our total investment in the mortgage loan.  Our original cash investment in the loan was $6.9 million and was purchased in November 2007.

Change in Fair Value of Contingent Consideration.  On May 18, 2011, we closed on the agreement with Eola in which Eola contributed its Property Management Company to us.  Eola's principals contributed the Management Company to us for initial consideration of $32.4 million in cash and contingent consideration of 1.8 million common units to Eola's principals through an earn-out and earn-up arrangement based on the achievement by the Management Company of certain targeted annual gross fee revenue for the balance of 2011 and 2012.  The initial value of the common units was $31.0 million based on our stock price on the date of purchase.  However, due to the decline in our stock price during 2011, the value of the contingent consideration was reduced to $18.0 million, resulting in a change in fair value of the contingent consideration of $13.0 million recorded during the year ended December 31, 2011, as compared to an increase of $216,000 recorded during the year ended December 31, 2012, upon the issuance of the common units.  On December 30, 2011, we and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all common units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made.  Based on the Management Company revenue for 2011, the target was achieved and all common  units were earned and issued to Eola's principals on February 28, 2012.  As of December 31, 2012, all common units had been redeemed for our common stock.
 
 
Page 43 of 113


Management Company Income and Expenses.  Management company income increased $2.9 million and management company expenses increased $3.9 million during the year ended December 31, 2012, compared to the same period for 2011 and is primarily a result of a full year of activity for the Eola Management Company which was purchased in the second quarter of 2011.

Acquisition Costs.  During the year ended December 31, 2012, we incurred $2.8 million in acquisition costs compared to $17.2 million for the same period in 2011.   The primary reason for the decrease is due to costs associated with the Eola combination and purchase of eight Fund II office properties that closed during the first half of 2011, compared with the purchase of three Fund II office properties and a parking garage and six wholly owned office properties that closed during 2012.  Our proportionate share of acquisition costs for the year ended December 31, 2012 and 2011 was $2.1 million and $15.4 million, respectively.

General and Administrative Expense.  General and administrative expense decreased $2.4 million or 12.7% for the year ended December 31, 2012, compared to the same period of 2011. The decrease is primarily due to additional personnel expenses incurred during 2011 as part of our realignment efforts.

Share-Based and Long-Term Compensation Expense.  Compensation expense related to restricted shares and deferred incentive share units of $432,000 and $1.3 million was recognized for the years ended December 31, 2012 and 2011, respectively.  Total compensation expense related to nonvested awards not yet recognized was $1.1 million at December 31, 2012. The weighted average period over which the expense is expected to be recognized is approximately 1.5 years.  During the year ended December 31, 2012, compensation expense related to nonvested awards not yet recognized and the weighted average period over which expense is expected to be recognized decreased as a result of approximately 195,000 awards either vesting or being forfeited.

On February 14, 2012, the Board of Directors approved 21,900 long-term equity incentive awards to our officers.  The long-term equity incentive awards are time-based awards and are valued at $222,000 which equates to an average price per share of $10.15.  These awards vest ratably over four years from the date of grant and are accounted for as equity-classified awards.

A summary of our restricted stock and deferred incentive share unit activity is as follows:

 
 
Weighted
Deferred
Weighted
 
Restricted
Average
Incentive
Average
 
Shares
Price
Share Units
Price
Outstanding at December 31, 2010
479,930 
 $
12.81 
15,640 
 $
25.71 
Granted
235,168 
 
10.31 
20,435 
 
23.97 
Vested
(99,202)
 
23.99 
(4,930)
 
45.11 
Forfeited
(161,826)
 
10.68 
(3,775)
 
20.38 
Outstanding at December 31, 2011
454,070 
 
9.83 
27,370 
 
21.65 
Granted
21,900 
 
10.15 
 
Vested
(56,013)
 
21.55 
(3,030)
 
14.93 
Forfeited
(138,724)
 
8.18 
(6,580)
 
14.06 
Outstanding at December 31, 2012
281,233 
 $
8.34 
17,760 
 $
25.61 

We also adopted a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010.  The performance goals for actual payment under the long-term cash incentive will require us to (i) achieve an absolute compounded annual total return to stockholders ("TRTS"), that exceeds 14% and (ii) achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 500 basis points.  Notwithstanding the above goals, in the event we achieve an absolute compounded annual TRTS that exceeds 19%, then we must achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 600 basis points.  The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRTS that we achieve.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual TRTS that approximates 23%, provided that the absolute compounded annual TRS exceeds the compounded annual return of the RMS by at least 600 basis points.  The total compensation expense for the long-term cash incentive is based upon the estimated fair value of the award on the grant date and adjusted as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on our 2012 consolidated balance sheet.  The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.
Page 44 of 113


Interest Expense.  Interest expense, including amortization of deferred financing costs, increased $3.7 million or 11.8% for the year ended December 31, 2012, compared to the same period of 2011 and is comprised of the following (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2012
2011
(Decrease)
Change
Interest expense:
 
 
 
 
     Mortgage interest expense
 $
30,515 
 $
24,411 
 $
6,104 
25.0%
     Credit facility interest expense
 
2,640 
 
5,578 
 
(2,938)
-52.7%
     Debt prepayment expense
 
190 
 
 
190 
*N/M
     Mortgage loan cost amortization
 
689 
 
477 
 
212 
44.4%
     Credit facility cost amortization
 
1,300 
 
1,146 
 
154 
13.4%
 
 
 
 
 
 
 
 
Total interest expense
 $
35,334 
 $
31,612 
 $
3,722 
11.8%
*N/M – Not meaningful
 
 
 
 
 
 
 

Mortgage interest expense increased $6.1 million or 25.0% for the year ended December 31, 2012 compared to the same period for 2011, primarily due to $132.2 million of mortgage debt placed or assumed during 2012 in connection with office property acquisitions in 2012 as well as a full year of interest expense for $309.2 million of mortgage debt placed or assumed during 2011 in connection with office property acquisitions in 2011.

Credit facility interest expense decreased $2.9 million or 52.7% for the year ended December 31, 2012 compared to the same period for 2011.  The decrease in credit facility interest expense is primarily due to a decrease in year-to-date average borrowings of $29.7 million and a decrease in the weighted average interest rate on average borrowings of 162 basis points for the year ended December 31, 2012 compared to the same period of 2011.  The decrease in year-to-date average borrowings is primarily due to the net proceeds from office property sales in 2011 and 2012 and proceeds received from our recent common stock offering, which were used to pay down amounts outstanding under the credit facilities, offset by borrowings to fund our proportionate share of office property purchases and the placement of a $125 million unsecured term loan.  The decrease in weighted average interest rate is due to the modification of the terms of our credit facility entered into during the first quarter of 2012.
Page 45 of 113


Discontinued Operations.  Discontinued operations are comprised of the following for years ended December 31, 2012 and 2011 (in thousands):

 
Year Ended December 31
 
2012
 
2011
Statement of Operations:
 
 
 
Revenues
 
 
 
Income from office properties
 $
13,752 
 
 $
135,964 
 
 
13,752 
 
 
135,964 
Expenses
 
 
 
 
 
Office properties:
 
 
 
 
 
Operating expenses
 
6,525 
 
 
61,424 
Management company expense
 
350 
 
 
288 
Interest expense
 
5,199 
 
 
29,794 
Gain on extinguishment of debt
 
(1,494)
 
 
(7,635)
Non-cash expense on interest rate swap
 
(215)
 
 
2,338 
Depreciation and amortization
 
933 
 
 
54,628 
Impairment loss
 
 
 
189,940 
 
 
11,298 
 
 
330,777 
 
 
 
 
 
 
Income (loss) from discontinued operations
 
2,454 
 
 
(194,813)
Gain on sale of real estate from discontinued operations
 
12,939 
 
 
17,825 
Total discontinued operations per Statement of Operations
 
15,393 
 
 $
(176,988)
Net (income) loss attributable to noncontrolling interest from discontinued operations
 
(4,184)
 
 
75,836 
Total discontinued operations – Parkway's Share
 $
11,209 
 
 $
(101,152)

All current and prior period income from the following office property dispositions is included in discontinued operations for the years ended December 31, 2012 and 2011 (in thousands).

Office Property
 
Location
 
Square
Feet
 
Date of
Sale
 
 
Net Sales
Price
 
 
Net Book
Value of
Real Estate
 
 
Gain
(Loss)
on Sale
233 North Michigan
 
Chicago, IL
 
1,070 
 
05/11/2011
 
$
156,546 
 
$
152,254 
 
$
4,292 
Greenbrier I & II
 
Hampton
Roads, VA
 
172 
 
07/19/2011
 
 
16,275 
 
 
15,070 
 
 
1,205 
Glen Forest
 
Richmond, VA
 
81 
 
08/16/2011
 
 
8,950 
 
 
7,880 
 
 
1,070 
Tower at Gervais
 
Columbia, SC
 
298 
 
09/08/2011
 
 
18,421 
 
 
18,421 
 
 
Wells Fargo
 
Houston, TX
 
134 
 
12/09/2011
 
 
 
 
 
 
Fund I Assets
 
Various
 
1,956 
 
12/31/2011
 
 
255,725 
 
 
244,467 
 
 
11,258 
2011 Dispositions (1)
 
 
 
3,711 
 
 
 
$
455,917 
 
$
438,092 
 
$
17,825 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Falls Pointe
 
Atlanta, GA
 
107 
 
01/06/2012
 
$
5,824 
 
$
4,467 
 
$
1,357 
111 East Wacker
 
Chicago, IL
 
1,013 
 
01/09/2012
 
 
153,240 
 
 
153,237 
 
 
Renaissance Center
 
Memphis, TN
 
189 
 
03/01/2012
 
 
27,661 
 
 
24,629 
 
 
3,032 
Overlook II
 
Atlanta, GA
 
260 
 
04/30/2012
 
 
29,467 
 
 
28,689 
 
 
778 
Wink Building
 
New Orleans, LA
 
32 
 
06/08/2012
 
 
705 
 
 
803 
 
 
(98)
Ashford/Peachtree
 
Atlanta, GA
 
321 
 
07/01/2012
 
 
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 
2012 Dispositions (2)
 
 
 
3,978 
 
 
 
$
382,126 
 
$
369,187 
 
$
12,939 
 
(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2011 was $17.8 million, of which $9.8 million was our proportionate share.
(2) 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.

Page 46 of 113


During the year ended December 31, 2012, we completed our previously disclosed dispositions as part of our strategic objective of becoming a leading owner of high-quality office assets in higher growth markets in the Sunbelt region of the United States.  We entered into an agreement to sell the 13 office properties, totaling 2.7 million square feet, owned by Parkway Properties Office Fund, L.P. ("Fund I") to our existing partner in the fund for a gross sales price of $344.3 million, of which $97.4 million was our share.  As of December 31, 2011, we had completed the sale of nine of these 13 assets. As of July 1, 2012, we had completed the sale of the remaining four Fund I assets.  We received approximately $14.2 million in net proceeds from the sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under our credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was our share.

Additionally, during the year ended December 31, 2012, we completed the sale of the 15 properties included in our strategic sale of a portfolio of non-core assets, for a gross sales price of $147.7 million and generating net proceeds to us of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was our share.  The 15 assets that were sold include five assets in Richmond, Virginia, four assets in Memphis, Tennessee, and six assets in Jackson, Mississippi.

We completed the sale of four additional assets during the year ended December 31, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, Sugar Grove, a 124,000 square foot office property in Houston, Texas, and Falls Pointe, a 107,000 square foot office property located in Atlanta and owned by Fund II for aggregate gross sales price of $168.8 million.  We received approximately $14.8 million in aggregate net proceeds from these sales, which were used to reduce amounts outstanding under our revolving credit facility.  In connection with the sale of 111 East Wacker, the buyer assumed the existing $147.9 mortgage loan upon sale.

Income Taxes.  The analysis below includes changes attributable to current income tax expenses and deferred income tax benefit for the years ended December 31, 2012 and 2011 (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2012
2011
(Decrease)
Change
Income tax expense
 
 
 
 
     Income tax expense – current
 $
1,116 
 $
486 
 $
630 
129.6%
     Income tax benefit – deferred
 
(1,855)
 
(430)
 
(425)
98.8%
Total income tax expense
$
261 
$
56 
$
205 
366.1%

Current income tax expense increased $630,000 for the year ended December 31, 2012, compared to the year ended December 31, 2011.  The increase is primarily attributable to an increase in revenue for the period from our taxable REIT subsidiary ("TRS"), which was purchased in May 2011.  Deferred income tax benefit increased $425,000 for the year ended December 31, 2012 compared to the same period of 2011.  The increase is primarily attributable to the change in deferred tax liability recorded as part of the purchase price allocation associated with the Eola management company.  At December 31, 2012, the deferred tax liability totaled $2.0 million.

Comparison of the year ended December 31, 2011  to the year ended December 31, 2010.

Net loss attributable to common stockholders for the years ended December 31, 2011 and 2010 was $137.0 million ($6.37 per basic common share) and $8.9 million ($0.42 per basic common share), respectively.  The primary reason for the increase in net loss attributable to common stockholders for the year ended December 31, 2011 as compared to the same period for 2010 is an increase in asset disposition activity in 2011, which resulted in an increase in the loss from discontinued operations attributable to common stockholders of $106.0 million.  Included in the loss from discontinued operations are impairment losses totaling $189.9 million offset by loss attributable to noncontrolling interests of $79.1 million.  The change in loss from discontinued operations as well as other variances for income and expense items that comprise net 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 year ended December 31, 2011, we classified as discontinued operations 14 assets sold in 2011 totaling 3.7 million square feet and 21 assets that were held for sale at December 31, 2011 totaling 3.8 million square feet.  At December 31, 2011, same-store properties consisted of 27 properties comprising 5.3 million square feet.
Page 47 of 113



The following table represents revenue from office properties for the years ended December 31, 2011 and 2010 (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2011
2010
(Decrease)
Change
Revenue from office properties:
 
 
 
     Same-store properties
 $
87,970 
 $
93,184 
 $
(5,214)
-5.6%
     Properties acquired
 
59,320 
 
364 
 
58,956 
N/M*
Total revenue from office properties
 $
147,290 
 $
93,548 
 $
53,742 
57.4%
*N/M – Not meaningful

Revenue from office properties for same-store properties decreased $5.2 million or 5.6% for the year ended December 31, 2011, compared to the same period for 2010.  The primary reason for the decrease is due to a decrease in average same-store occupancy for the year ended December 31, 2011 compared to the same period for 2010.  Average same-store occupancy decreased 480 basis points for the year ended December 31, 2011, compared to the same period of 2010.

The following table represents property operating expenses for the years ended December 31, 2011 and 2010 (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2011
2010
(Decrease)
Change
Expense from office properties:
 
 
 
     Same-store properties
 $
38,365 
 $
40,124 
 $
(1,759)
-4.4%
     Properties acquired
 
22,368 
 
284 
 
22,084 
N/M*
Total expense from office properties
 $
60,733 
 $
40,408 
 $
20,325 
50.3%
*N/M – Not meaningful
 
Property operating expenses for same-store properties decreased $1.8 million or 4.4% for the year ended December 31, 2011, compared to the same period of 2010. The primary reason for the decrease is due to decreased ad valorem taxes, personnel, and contract services expense.

Depreciation and amortization expense attributable to office properties increased $28.0 million for the year ended December 31, 2011 compared to the same period for 2010.  The primary reason for the increase is the purchase of additional interests in office properties during 2010 and nine office properties during 2011.

Impairment Loss on Real Estate.  We recorded total impairment losses on real estate from continuing operations of $6.4 million and discontinued operations of $189.9 million, for a total of $196.3 million for the year ended December 31, 2011.  Our proportionate share of total impairment losses on real estate from continuing operations was $6.4 million and discontinued operations of $113.8 million, for a total of $120.2 million for the year ended December 31, 2011.  Impairment losses on real estate in continuing operations are comprised of the $5.9 million loss in connection with two remaining assets in Jackson, Mississippi and Memphis, Tennessee, and a $500,000 loss on non-depreciable land in New Orleans, Louisiana.  Impairment losses on real estate in discontinued operations are comprised of the $105.4 million loss (our share $29.3 million) in connection with sale of our interests in the Fund I office portfolio, a $51.2 million loss in connection with the sale of non-core assets and a parcel of land in Jackson, Mississippi; Memphis, Tennessee; and Richmond, Virginia, a $19.1 million loss in connection with the sale of 111 East Wacker in Chicago, Illinois, a $11.6 million loss in connection with the Wells Fargo Building office property in Houston, Texas, all of which were classified as held for sale at December 31, 2011, and a $2.7 million loss in connection with the sale of Tower at 1301 Gervais in Columbia, South Carolina.

Impairment Loss on Mortgage Loan Receivable.  During the year ended December 31, 2011, we recorded a non-cash impairment loss on a mortgage loan of $9.2 million in connection with the B participation piece of a first mortgage secured by an 844,000 square foot office property in Dallas, Texas known as 2100 Ross.  The borrower is in default on the first mortgage and we did not believe we would recover our investment in the loan.  Therefore, we wrote off our total investment in the mortgage loan.  Our original cash investment in the loan was $6.9 million and was purchased in November 2007.
 
 
Page 48 of 113


Change in Fair Value of Contingent Consideration.  On May 18, 2011, we closed on the agreement with Eola in which Eola contributed its Property Management Company to us.  Eola's principals contributed the Management Company to us for initial consideration of $32.4 million in cash and contingent consideration of 1.8 million common units to Eola's principals through an earn-out and earn-up arrangement based on the achievement by the Management Company of certain targeted annual gross fee revenue for the balance of 2011 and 2012.  The initial value of the common units was $31.0 million based on our stock price on the date of purchase.  However, due to the decline in our stock price during the year, the value of the contingent consideration was reduced to $18.0 million, resulting in a change in fair value of the contingent consideration of $13.0 million.  On December 30, 2011, we and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all common units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made.  Based on the Management Company revenue for 2011, the target was achieved and all common units were earned and issued to Eola's principals on February 28, 2012.  As of December 31, 2012, all common units had been redeemed for our common stock.

Management Company Income and Expenses.  Management company income increased $15.2 million and management company expenses increased $10.6 million during the year ended December 31, 2011 primarily as a result of the purchase of the Eola management company in May 2011.

Acquisition Costs.  During the year ended December 31, 2011, acquisition costs increased $16.4 million primarily as a result of the contribution of Eola's management company to us that closed during the second quarter of 2011 and the purchase of eight Fund II office properties during 2011.

General and Administrative Expense.  General and administrative expense increased $3.5 million for the year ended December 31, 2011, compared to the same period of 2010. The increase is primarily due to additional personnel expenses incurred during 2011 as part of our realignment efforts.

Share-Based and Long-Term Compensation Expense.  Compensation expense related to restricted shares and deferred incentive share units of $1.3 million was recognized for the years ended December 31, 2011 and 2010.  Total compensation expense related to nonvested awards not yet recognized was $2.6 million at December 31, 2011. The weighted average period over which the expense is expected to be recognized is approximately 2.2 years.

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

On May 12, 2011, our Board of Directors, upon the recommendation of the Compensation Committee, approved the Parkway Properties, Inc. 2011 Employee Inducement Award Plan (the "2011 Inducement Plan").  The 2011 Inducement Plan is substantively similar to our 2010 Omnibus Equity Incentive Plan, approved by the our stockholders on May 13, 2010, however the potential awards under the 2011 Inducement Plan are limited to shares of restricted stock and restricted share units to our new employees as a result of our combination with Eola.  Under the 2011 Inducement Plan, our Board of Directors approved the grant of up to 149,573 restricted shares and/or deferred incentive share units to our employees and directors in connection with the combination with Eola.  The Plan shall continue in effect until the earlier of (a) its termination by our Board or (b) the date on which all of the shares of Stock available for issuance under the Plan have been issued; provided that awards outstanding on that date shall survive in accordance with their terms.

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

On June 1, 2011, 68,802 long-term equity incentive awards were granted to our new officers under the 2011 Inducement Plan.  The long-term equity incentive awards are valued at $628,000 which equates to an average price per share of $9.13 and consist of 12,384 time-based awards, 31,649 market condition awards subject to an absolute total return goal, and 24,769 market condition awards subject to a relative total return goal.  These shares are accounted for as equity-classified awards.

On June 20, 2011, 8,705 long-term equity incentive awards were granted to our officers.  The long-term equity incentive awards are valued at $68,000 which equates to an average price per share of $7.81 and consist of 534 time-based awards, 4,584 market condition awards subject to an absolute total return goal, and 3,587 market condition awards subject to a relative total return goal.  These shares are accounted for as equity-classified awards.
 
 
Page 49 of 113


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.  The grant date fair value for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

A summary of our restricted stock and deferred incentive share unit activity is as follows:

 
 
Weighted
Deferred
Weighted
 
Restricted
Average
Incentive
Average
 
Shares
Price
Share Units
Price
Outstanding at December 31, 2009
308,975 
 $
29.94 
18,055 
 $
34.08 
Granted
345,120 
 
7.30 
3,805 
 
14.83 
Vested
(152,941)
 
33.06 
(4,355)
 
47.78 
Forfeited
(21,224)
 
26.69 
(1,865)
 
32.99 
Outstanding at December 31, 2010
479,930 
 
12.81 
15,640 
 
25.71 
Granted
235,168 
 
10.31 
20,435 
 
23.97 
Vested
(99,202)
 
23.99 
(4,930)
 
45.11 
Forfeited
(161,826)
 
10.68 
(3,775)
 
20.38 
Outstanding at December 31, 2011
454,070 
 $
9.83 
27,370 
 $
21.65 

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

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

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

We also adopted a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010.  The performance goals for actual payment under the long-term cash incentive will require us to (i) achieve an absolute compounded annual TRTS that exceeds 14% AND (ii) achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 500 basis points.  Notwithstanding the above goals, in the event we achieve an absolute compounded annual TRTS that exceeds 19%, then we must achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 600 basis points.  The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRTS that we achieve.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual TRTS that approximates 23%, provided that the absolute compounded annual TRTS exceeds the compounded annual return of the RMS by at least 600 basis points.  The total compensation expense for the long-term cash incentive is based upon the estimated fair value of the award on the grant date and adjusted as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on our consolidated balance sheet.  The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.
Page 50 of 113


Interest Expense.  Interest expense, including amortization of deferred financing costs, increased $11.3 million or 55.9% for the year ended December 31, 2011, compared to the same period of 2010 and is comprised of the following (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2011
2010
(Decrease)
Change
Interest expense:
 
 
 
 
     Mortgage interest expense
 $
24,411 
 $
13,926 
 $
10,485 
75.3%
     Credit facility interest expense
 
5,578 
 
5,200 
 
378 
7.3%
     Debt prepayment expense
 
 
53 
 
(53)
*N/M
     Mortgage loan cost amortization
 
477 
 
276 
 
201 
72.8%
     Credit facility cost amortization
 
1,146 
 
816 
 
330 
40.4%
 
 
 
 
 
 
 
 
Total interest expense
 $
31,612 
 $
20,271 
 $
11,341 
55.9%
*N/M – Not meaningful
 
 
 
 
 
 
 

Mortgage interest expense increased $10.5 million or 75.3% for the year ended December 31, 2011 compared to the same period for 2010, primarily due to $309.2 million of mortgage debt placed or assumed during 2011 in connection with office property acquisitions in 2011.

Credit facility interest expense increased $378,000 or 7.3% for the year ended December 31, 2011 compared to the same period for 2010.  The increase in credit facility interest expense is primarily due to an increase in average borrowings of $20.3 million for the year ended December 31, 2011 compared to the same period for 2010.  The increase in average borrowing is due to advances on the senior unsecured revolving credit facility to make improvements to real estate, our share of equity contributions to purchase office properties through Fund II, and the purchase cost associated with the combination with Eola.

Discontinued Operations.  Discontinued operations are comprised of the following for years ended December 31, 2011 and 2010 (in thousands):

 
Year Ended December 31
 
2011
 
2010
Statement of Operations:
 
 
 
Revenues
 
 
 
Income from office properties
 $
135,964 
 
 $
162,057 
 
 
135,964 
 
 
162,057 
Expenses
 
 
 
 
 
Office properties:
 
 
 
 
 
Operating expenses
 
61,424 
 
 
69,930 
Management company expense
 
288 
 
 
380 
Interest expense
 
29,794 
 
 
34,693 
Gain on extinguishment of debt
 
(7,635)
 
 
Non-cash expense on interest rate swap
 
2,338 
 
 
Depreciation and amortization
 
54,628 
 
 
63,815 
Impairment loss
 
189,940 
 
 
4,120 
 
 
330,777 
 
 
172,938 
 
 
 
 
 
 
Loss from discontinued operations
 
(194,813)
 
 
(10,881)
Gain on sale of real estate from discontinued operations
 
17,825 
 
 
8,518 
Total discontinued operations per Statement of Operations
 
(176,988)
 
 
(2,363)
Net loss attributable to noncontrolling interest from discontinued operations
 
75,836 
 
 
7,221 
Total discontinued operations – Parkway's Share
 $
(101,152)
 
 $
4,858 

Page 51 of 113


All current and prior period income from the following office property dispositions is included in discontinued operations for the years ended December 31, 2011 and 2010 (in thousands).
Office Property
Location
Square
Feet
Date of
Sale
 
Net Sales
Price
 
Net Book
Value of
Real Estate
 
Gain
(Loss)
on Sale
 
 
 
 
Impairment
Loss (3)
One Park Ten
Houston, TX
163 
04/15/2010
$
14,924 
$
6,406 
$
8,518 
$
2010 Dispositions
 
163 
 
$
14,924 
$
6,406 
$
8,518 
$
 
 
 
 
 
 
 
 
 
 
 
 
233 North Michigan
Chicago, IL
1,070 
05/11/2011
$
156,546 
$
152,254 
$
4,292 
$
Greenbrier I & II
Hampton Roads, VA
172 
07/19/2011
 
16,275 
 
15,070 
 
1,205 
 
Glen Forest
Richmond, VA
81 
08/16/2011
 
8,950 
 
7,880 
 
1,070 
 
Tower at Gervais (4)
Columbia, SC
298 
09/08/2011
 
18,421 
 
18,421 
 
 
6,147 
Wells Fargo
Houston, TX
134 
12/09/2011
 
 
 
 
11,561 
Fund I Assets
Various
1,956 
12/31/2011
 
255,725 
 
244,467 
 
11,258 
 
68,513 
2011 Dispositions (1)
 
3,711 
 
$
455,917 
$
438,092 
$
17,825 
$
86,221 
 
 
 
 
 
 
 
 
 
 
 
 
Falls Pointe
Atlanta, GA
107 
01/06/2012
$
5,824 
$
4,467 
$
1,357 
$
111 East Wacker
Chicago, IL
1,013 
01/09/2012
 
153,240 
 
153,237 
 
 
19,050 
Renaissance Center
Memphis, TN
189 
03/01/2012
 
27,661 
 
24,629 
 
3,032 
 
9,200 
Overlook II
Atlanta, GA
260 
04/30/2012
 
29,467 
 
28,689 
 
778 
 
10,500 
Wink Building
New Orleans, LA
32 
06/08/2012
 
705 
 
803 
 
(98)
 
Ashford/Peachtree
Atlanta, GA
321 
07/01/2012
 
29,440 
 
28,148 
 
1,292 
 
17,200 
Non-Core Assets (5)
Various
1,932 
Various
 
125,486 
 
122,157 
 
3,329 
 
51,889 
Sugar Grove
Houston, TX
124 
10/23/2012
 
10,303 
 
7,057 
 
3,246 
 
2012 Dispositions (2)
 
3,978 
 
$
382,126 
$
369,187 
$
12,939 
$
107,839 


(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2011 was $17.8 million, of which $9.8 million was our proportionate share.
(2) Total gain on the sale of real estate in discontinued operations recognized during the year ended December 31, 2012 was $12.9 million, of which $8.1 million was our proportionate share.
(3) Total impairment losses in discontinued operations recognized during 2011 total $189.9 million, of which $113.8 million was our proportionate share.
(4) During 2010 and 2011, we recognized non-cash impairment losses on this property of $3.4 million and $2.7 million, respectively.
(5) During 2010 and 2011, we recognized non-cash impairment losses associated with these properties of $640,000 and $51.2 million, respectively.

On May 11, 2011, we sold 233 North Michigan, a 1.1 million square foot office building in Chicago, Illinois, for gross proceeds of $162.2 million and recorded a gain on the sale of $4.3 million.

On July 19, 2011, we sold Greenbrier Towers I & II for gross proceeds of $16.7 million and recorded a gain on the sale of $1.2 million.  The two office buildings total 172,000 square feet and are located in Hampton Roads, Virginia. 

On August 16, 2011, we sold Glen Forest, an 81,000 square foot office building in Richmond, Virginia, for gross proceeds of $9.3 million and recorded a gain on the sale of $1.1 million. 

On September 8, 2011, we sold Tower at 1301 Gervais, a 298,000 square foot office building in Columbia, South Carolina, for gross proceeds of $19.5 million.  In accordance with GAAP, a non-cash impairment loss totaling $2.7 million was recognized during 2011, with respect to this property.

On December 9, 2011, we conveyed the deed in lieu of foreclosure on Wells Fargo, a 134,000 square foot office building in Houston, Texas.  In association with the deed in lieu of foreclosure, we recognized an $8.6 million non-cash gain associated with the forgiveness of the mortgage loan secured by this property.  During the fourth quarter 2011, we recognized an impairment loss of $11.6 million with respect to this property.

On December 31, 2011, we sold nine properties totaling approximately 2.0 million square feet in five markets, representing a majority of Fund I assets. In connection with the completed sale of these Fund I assets, we recorded an $11.3 million gain on the sale, of which $3.2 million is our share, and an impairment loss of $105.4 million, of which $29.3 million is our share, in 2011.


Page 52 of 113


The major classes of assets and liabilities classified as held for sale at December 31, 2011 are as follows (in thousands):

 
December 31
 
2011
Balance Sheet:
 
Investment property
 $
355,623 
Accumulated depreciation
 
(23,709)
Office property held for sale
 
331,914 
Rents receivable and other assets
 
44,724 
Intangible assets, net
 
6,151 
Other assets held for sale
 
50,875 
Total assets held for sale
 $
382,789 
 
 
Mortgage notes payable
 $
254,401 
Accounts payable and other liabilities
 
31,198 
Total liabilities held for sale
 $
285,599 

Income Taxes.  The analysis below includes changes attributable to current income tax expenses and deferred income tax benefit for the years ended December 31, 2011 and 2010 (in thousands):

 
Year Ended December 31
 
 
 
Increase
%
 
2011
2010
(Decrease)
Change
Income-tax expense
 
 
 
 
     Income tax expense – current
 $
486 
 $
 $
484 
N/M*  
     Income tax benefit – deferred
 
(430)
 
 
(430)
N/M*
Total income tax expense
$
56 
$
$
54 
N/M*  
*N/M – Not meaningful

During the year ended December 31, 2011, current income tax expense increased $484,000 over the same period in 2010.  The increase is attributable to taxes incurred by our TRS, which was formed as a result of the purchase of the Eola management company in May 2011.  During the year ended December 31, 2011, deferred income tax benefit increased $430,000 over the same period in 2010 as a result of the change in the $14.8 million of deferred tax liabilities recorded as part of the purchase price allocation associated with the Eola management company.

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.
 

 
Page 53 of 113

Our long-term liquidity needs include the principal amount of our long-term debt as it matures, significant capital expenditures that need to be made at our properties and acquiring additional investments 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 $81.9 million and $75.2 million at December 31, 2012 and 2011, respectively.  Cash flows provided by operating activities for the years ended December 31, 2012 and 2011 were $61.6 million and $35.5 million, respectively.  The increase in cash flows from operating activities of $26.1 million is primarily attributable to decreased deferred leasing costs and acquisition costs.

Cash used in investing activities was $588.5 million and $365.6 million for the years ended December 31, 2012 and 2011, respectively.  The increase in cash used by investing activities of $222.9 million is primarily due to the purchase of six wholly owned office properties and three Fund II owned office properties in 2012 compared to the purchase of one wholly owned office property, eight Fund II office properties and the Eola Management Company in 2011.

Cash provided by financing activities was $533.6 million and $385.6 million for the year ended December 31, 2012 and 2011, respectively.  The increase in cash provided by financing activities of $148.0 million is primarily attributable to stock offering proceeds net of transaction costs and proceeds on bank borrowings offset by decreases in contributions from non-controlling interest partners and proceeds from mortgage notes payable.

Indebtedness.

Notes Payable to Banks.  At December 31, 2012, we had a total of $262.0 million outstanding under the following credit facilities (in thousands):

 
 
 
 
Interest
 
 
 
 
Outstanding
Credit Facilities
 
Lender
 
Rate
 
Maturity
 
 
Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility (1)
 
PNC Bank
 
-%
 
03/29/16
 
$
$215.0 Million Unsecured Revolving Credit Facility (1)
 
Various
 
1.8%
 
03/29/16
 
 
137,000 
$125.0 Million Unsecured Term Loan (2)
 
Various
 
2.2%
 
09/27/17
 
 
125,000 
 
 
 
 
2.0%
 
 
 
$
262,000 

(1)
The interest rate on the credit facilities is based on LIBOR plus 160 to 235 basis points, depending upon overall Company leverage as defined in the loan agreements for our credit facility, 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 25 basis points.
(2)
The interest rate on the term loan is based on LIBOR plus an applicable margin of 1.5% to 2.3% depending on our leverage (with the current rate set at 1.5%).  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 is effective October 1, 2012.

On March 30, 2012, we entered into an Amended and Restated Credit Agreement with a consortium of eight banks for our $190 million senior unsecured revolving credit facility.  Additionally, we amended our $10 million working capital revolving credit facility under substantially the same terms and conditions, with the combined size of the facilities remaining at $200 million (collectively, the "New Facilities").  The New Facilities provide for modifications to our then-existing credit facilities by, among other things, extending the maturity date fro