10-Q 1 f10q033113.htm 1ST QUARTER 2013 FORM 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
                                  
FORM 10-Q

R
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For Quarterly Period Ended March 31, 2013
 
or
0
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Transition Period from                                                                                     to            

Commission File Number 1-11533

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

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

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

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

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

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

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

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

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

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

68,765,182 shares of Common Stock, $.001 par value, were outstanding at May 1, 2013.

1



 
 
 
Page
Part I. Financial Information
 
Item 1.
 
Financial Statements (unaudited)
 
 
 
 
 
 
 
Consolidated Balance Sheets, March 31, 2013 and December 31, 2012
4
 
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months
 
 
 
 Ended March 31, 2013 and 2012
5
 
 
 
 
 
 
Consolidated Statement of Changes in Equity for the Three Months Ended
 
 
 
March 31, 2013
6
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Three Months Ended
 
 
 
March 31, 2013 and 2012
7
 
 
 
 
 
 
Notes to Consolidated Financial Statements
8
 
 
 
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
20
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
37
 
 
 
 
Item 4.
 
Controls and Procedures
37
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
Item 1A.
 
Risk Factors
37
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
37
 
 
 
 
Item 3.
 
Defaults Upon Senior Securities
38
 
 
 
 
Item 4.
 
Mine Safety Disclosures
38
 
 
 
 
Item 5.
 
Other Information
38
 
 
 
 
Item 6.
 
Exhibits
38
 
 
 
 
 
 
 
 
Signatures
 
 
 
 
Authorized Signatures
39

2


Forward-Looking Statements

Certain statements in this Form 10-Q that are not in the present or past tense or discuss the Company's expectations (including the use of the words anticipate, believe, forecast, intends, expects, project, or similar expressions) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events.  Examples of forward-looking statements include projected capital resources, projected profitability and portfolio performance, estimates of market rental rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions or other transactions, the expected operating performance of anticipated near-term acquisitions and descriptions relating to these expectations, including without limitation, the anticipated net operating income yield.  Forward-looking statements involve risks and uncertainties (some of which are beyond our control) and are subject to change based upon various factors including, but not limited to, the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of our properties for rental purposes; the amount and growth of our expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in our geographic markets;  defaults or non-renewal of leases; risks associated with joint venture partners; the risks associated with the ownership of real property, including risks related to natural disasters; risks associated with property acquisitions; the failure to acquire or sell properties as and when anticipated; termination of property management contracts; the bankruptcy or insolvency of companies for which we provide property management services or the sale of these properties; the outcome of claims and litigation involving or affecting us; the ability to satisfy conditions necessary to close pending transactions; our failure to maintain our status as real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code; and other risks and uncertainties detailed from time to time in our SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, our business, financial condition, liquidity, cash flows and results could differ materially from those expressed in any forward-looking statement. Any forward-looking statements speak only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes.
3



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

 
       
 
 
March 31
2013
   
December 31
2012
 
 
 
         (Unaudited)
 
Assets
 
   
 
Real estate related investments:
 
   
 
Office and parking properties
 
$
1,934,000
   
$
1,762,566
 
Accumulated depreciation
   
(215,777
)
   
(199,849
)
 
   
1,718,223
     
1,562,717
 
 
               
Land available for sale
   
250
     
250
 
 
   
1,718,473
     
1,562,967
 
 
               
Receivables and other assets
   
139,421
     
124,691
 
Intangible assets, net
   
127,961
     
118,097
 
Management contracts, net
   
17,219
     
19,000
 
Cash and cash equivalents
   
74,560
     
81,856
 
      Total assets
 
$
2,077,634
   
$
1,906,611
 
 
               
 
               
Liabilities
               
Notes payable to banks
 
$
125,000
   
$
262,000
 
Mortgage notes payable
   
768,005
     
605,890
 
Accounts payable and other liabilities
   
89,180
     
82,715
 
       Total liabilities
   
982,185
     
950,605
 
 
               
Equity
               
Parkway Properties, Inc. stockholders' equity:
               
8.00% Series D Preferred stock,  $.001 par value, 5,421,296
     shares authorized, issued and outstanding in 2013 and 2012
   
128,942
     
128,942
 
Common stock, $.001 par value, 114,578,704 shares authorized
      in 2013 and 2012, and 68,765,182 and 56,138,209 shares issued
      and outstanding in 2013 and 2012, respectively
   
69
     
56
 
Additional paid-in capital
   
1,096,423
     
907,254
 
Accumulated other comprehensive loss
   
(6,279
)
   
(4,425
)
Accumulated deficit
   
(350,089
)
   
(337,813
)
Total Parkway Properties, Inc. stockholders' equity
   
869,066
     
694,014
 
Noncontrolling interests
   
226,383
     
261,992
 
Total equity
   
1,095,449
     
956,006
 
Total liabilities and equity
 
$
2,077,634
   
$
1,906,611
 















See notes to consolidated financial statements.
4


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

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
 
 
(Unaudited)
 
Revenues
 
   
 
Income from office and parking properties
 
$
67,760
   
$
45,157
 
Management company income
   
4,352
     
5,432
 
     Total revenues
   
72,112
     
50,589
 
 
               
Expenses and other
               
Property operating expense
   
25,617
     
17,955
 
Depreciation and amortization
   
29,515
     
17,690
 
Change in fair value of contingent consideration
   
-
     
216
 
Management company expenses
   
4,390
     
4,534
 
General and administrative
   
4,215
     
3,599
 
Acquisition costs
   
1,135
     
826
 
Total expenses and other
   
64,872
     
44,820
 
 
               
Operating income
   
7,240
     
5,769
 
 
               
Other income and expenses
               
Interest and other income
   
103
     
97
 
Interest expense
   
(10,470
)
   
(9,244
)
 
               
Loss before income taxes
   
(3,127
)
   
(3,378
)
 
               
Income tax benefit (expense)
   
507
     
(161
)
 
               
Loss from continuing operations
   
(2,620
)
   
(3,539
)
Discontinued operations:
               
     Income (loss) from discontinued operations
   
(347
)
   
3,291
 
     Gain on sale of real estate from discontinued operations
   
542
     
5,575
 
Total discontinued operations
   
195
     
8,866
 
 
               
Net income (loss)
   
(2,425
)
   
5,327
 
Net (income) loss attributable to noncontrolling interest – real estate partnerships
   
1,255
     
(533
)
Net (income) loss attributable to noncontrolling interests – unit holders
   
2
     
(89
)
 
               
Net income (loss) for Parkway Properties, Inc.
   
(1,168
)
   
4,705
 
Dividends on preferred stock
   
(2,711
)
   
(2,711
)
Net income (loss) attributable to common stockholders
 
$
(3,879
)
 
$
1,994
 
 
               
Net income (loss)
 
$
(2,425
)
 
$
5,327
 
Change in fair value of interest rate swaps
   
1,246
     
274
 
Comprehensive income (loss)
   
(1,179
)
   
5,601
 
Comprehensive income attributable to noncontrolling interests
   
(1,843
)
   
(814
)
Comprehensive income (loss) attributable to common stockholders
 
$
(3,022
)
 
$
4,787
 
 
               
 
               
Net income (loss) per common share attributable to Parkway Properties, Inc.:
               
Basic and Diluted:
               
     Loss from continuing operations attributable to Parkway Properties, Inc.
 
$
(0.07
)
 
$
(0.16
)
     Discontinued operations
   
-
     
0.25
 
     Basic and diluted net income (loss) attributable to Parkway Properties, Inc.
 
$
(0.07
)
 
$
0.09
 
 
               
Weighted average shares outstanding:
               
Basic
   
56,849
     
21,568
 
Diluted
   
56,849
     
21,568
 
 
               
Amounts attributable to Parkway Properties, Inc. common stockholders:
               
    Loss from continuing operations attributable to Parkway Properties, Inc.
 
$
(4,087
)
 
$
(3,517
)
    Discontinued operations
   
208
     
5,511
 
Net income (loss) attributable to common stockholders
 
$
(3,879
)
 
$
1,994
 
See notes to consolidated financial statements.
5


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

 
   
Parkway Properties, Inc. Stockholders
   
   
 
 
 
Preferred
Stock
   
Common
Stock
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Noncontrolling
Interests
   
Total
Equity
 
Balance at December 31, 2012
 
$
128,942
   
$
56
   
$
907,254
   
$
(4,425
)
 
$
(337,813
)
 
$
261,992
   
$
956,006
 
 
                                                       
Net loss
   
-
     
-
     
-
     
-
     
(1,168
)
   
(1,257
)
   
(2,425
)
Change in fair value of interest rate swaps
   
-
     
-
     
-
     
748
     
-
     
498
     
1.246
 
Common dividends declared-$0.15 per share
   
-
     
-
     
-
     
-
     
(8,397
)
   
-
     
(8,397
)
Preferred dividends declared-$0.50 per share
   
-
     
-
     
-
     
-
     
(2,711
)
   
-
     
(2,711
)
Share-based compensation
   
-
     
-
     
89
     
-
     
-
     
-
     
89
 
Issuance of 12,650,000 shares of common stock
   
-
     
13
     
208,934
     
-
     
-
     
-
     
208,947
 
Issuance of 4,223 shares issued pursuant to TPG
     Management Services Agreement
   
-
     
-
     
75
     
-
     
-
     
-
     
75
 
2,275 shares withheld to satisfy tax withholding obligation in connection with the vesting of restricted stock
   
-
     
-
     
(35
)
   
-
     
-
     
-
     
(35
)
Purchase of noncontrolling interest's share of office properties owned by Parkway Properties Office
     Fund II, L.P.
   
-
     
-
     
(19,894
)
   
-
     
-
     
(37,452
)
   
(57,346
)
Balance at March 31, 2013
 
$
128,942
   
$
69
   
$
1,096,423
   
$
(3,677
)
 
$
(350,089
)
 
$
223,781
   
$
1,095,449
 







































See notes to consolidated financial statements.
6


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

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
 
 
(Unaudited)
 
Operating activities
 
   
 
Net income (loss)
 
$
(2,425
)
 
$
5,327
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
29,515
     
17,690
 
Depreciation and amortization – discontinued operations
   
45
     
714
 
Amortization of above market leases
   
848
     
1,126
 
Amortization of below market leases – discontinued operations
   
-
     
(32
)
Amortization of loan costs
   
481
     
537
 
Share-based compensation expense
   
89
     
157
 
Deferred income tax benefit
   
(568
)
   
(245
)
Gain on sale of real estate investments
   
(542
)
   
(5,575
)
Equity in loss of unconsolidated joint ventures-discontinued operations
   
-
     
20
 
Change in fair value of contingent consideration
   
-
     
216
 
Increase in deferred leasing costs
   
(2,304
)
   
(1,792
)
Changes in operating assets and liabilities:
               
Change in receivables and other assets
   
(10,747
)
   
8,468
 
Change in accounts payable and other liabilities
   
2,879
     
(11,045
)
 
               
Net cash provided by operating activities
   
17,271
     
15,566
 
 
               
Investing activities
               
Distributions from unconsolidated joint ventures
   
-
     
120
 
Investment in real estate
   
(184,174
)
   
(128,873
)
Proceeds from sale of real estate
   
2,966
     
110,754
 
Improvements to real estate
   
(8,457
)
   
(7,911
)
 
               
Net cash used in investing activities
   
(189,665
)
   
(25,910
)
 
               
Financing activities
               
Principal payments on mortgage notes payable
   
(2,385
)
   
(18,033
)
Proceeds from mortgage notes payable
   
164,500
     
73,500
 
Proceeds from bank borrowings
   
28,299
     
30,126
 
Payments on bank borrowings
   
(165,299
)
   
(114,448
)
Debt financing costs
   
(975
)
   
(2,169
)
Purchase of Company stock
   
(35
)
   
(113
)
Dividends paid on common stock
   
(8,380
)
   
(1,657
)
Dividends paid on preferred stock
   
(2,711
)
   
(2,711
)
Contributions from noncontrolling interest partners
   
-
     
2,731
 
Distributions to noncontrolling interest partners
   
(56,863
)
   
(566
)
Proceeds from stock offerings, net of transaction costs
   
208,947
     
(10
)
 
               
Net cash provided by (used in) financing activities
   
165,098
     
(33,350
)
 
               
Change in cash and cash equivalents
   
(7,296
)
   
(43,694
)
 
               
Cash and cash equivalents at beginning of period
   
81,856
     
75,183
 
 
               
Cash and cash equivalents at end of period
 
$
74,560
   
$
31,489
 






See notes to consolidated financial statements.
7


Parkway Properties, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Note A – Basis of Presentation

The consolidated financial statements include the accounts of Parkway Properties, Inc. ("Parkway" or the "Company"), its wholly owned subsidiaries and joint ventures in which the Company has a controlling interest.  The other partners' equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the consolidated financial statements.  Parkway also consolidates subsidiaries where the entity is a variable interest entity ("VIE") and Parkway is the primary beneficiary and has the power to direct the activities of the VIE and has the obligation to absorb losses or the right to receive the benefits from the VIE that could be potentially significant to the VIE.  At March 31, 2013 and December 31, 2012, Parkway did not have any VIEs that required consolidation.  All significant intercompany transactions and accounts have been eliminated in the accompanying financial statements.

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

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

The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.  The financial statements should be read in conjunction with the 2012 annual report and the notes thereto.

The balance sheet at December 31, 2012 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.

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

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

Note B – Net Income (Loss) Per Common Share

Basic earnings per share ("EPS") are computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. In arriving at net income (loss) attributable to common stockholders, preferred stock dividends are deducted.  Diluted EPS reflects the potential dilution that could occur if share equivalents such as employee stock options, restricted shares and deferred incentive share units were exercised or converted into common stock that then shared in the earnings of Parkway.
8



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

 
   
 
 
Three Months Ended
March 31
 
 
 
2013
   
2012
 
Numerator:
 
   
 
     Basic and diluted net income (loss)
          attributable to common stockholders
 
$
(3,879
)
 
$
1,994
 
 
               
     Basic weighted average shares
   
56,849
     
21,568
 
     Dilutive weighted average shares
   
56,849
     
21,568
 
     Diluted net income (loss) per share attributable to
          Parkway Properties, Inc.
 
 
$
 
(0.07
)
 
 
$
 
0.09
 

 
The computation of diluted EPS for the three months ended March 31, 2013 and 2012 did not include the effect of employee stock options, deferred incentive share units, and restricted shares as their inclusion would have been anti-dilutive.

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

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

 
 
 
Three Months Ended
March 31
 
 
2013
   
2012
 
 
(in thousands)
 
Supplemental cash flow information:
 
   
 
    Cash paid for interest
 
$
9,625
   
$
10,311
 
    Cash paid for income taxes
   
51
     
9
 
Supplemental schedule of non-cash investing and financing activity:
               
    Mortgage note payable transferred to purchaser
   
-
     
(163,497
)
    Restricted shares and deferred incentive share units forfeited
   
(287
)
   
(274
)
    Shares issued pursuant to TPG Management Services Agreement
   
75
     
-
 

Note D – Acquisitions

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

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

On March 15, 2013, the Company entered into a definitive agreement to acquire approximately 75% of the interest in the US Airways Building, a 225,000 square foot office property located in the Tempe submarket of Phoenix, Arizona, for a purchase price of $41.8 million.  The building is currently encumbered by an approximate $18.0 million mortgage, which the Company intends to refinance at closing.  This nine-story Class A office building is adjacent to Parkway's Hayden Ferry Lakeside and Tempe Gateway assets and shares a parking garage with Tempe Gateway.  The property is the headquarters for US Airways, which has leased 100% of the building through April 2024.  US Airways has a termination option on December 31, 2016 or December 31, 2021 with 12 months prior notice.  US Airways is also the owner of the remaining approximate 25% in the building.  Closing is expected to occur by the end of the second quarter 2013, subject to customary closing conditions.
9



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

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

 
 
Amount
   
Weighted
Average Life
 
Land
 
$
31,337
     
N/A
 
Buildings and garages
   
121,369
     
40
 
Tenant improvements
   
13,434
     
5
 
Lease commissions
   
6,056
     
4
 
Lease in place value
   
15,862
     
4
 
Above market leases
   
2,936
     
4
 
Below market leases
   
(5,735
)
   
7
 

The allocation of purchase price for Tower Place 200 and the Deerwood Portfolio was preliminary at March 31, 2013 due to the timing of the acquisitions.

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

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
Revenues
 
$
75,820
   
$
56,478
 
Net income (loss) attributable to
common stockholders
 
$
(4,307
)
 
$
2,430
 
Basic net income (loss) attributable to
common stockholders
 
$
(0.08
)
 
$
0.11
 
Diluted net income (loss) attributable to
common stockholders
 
$
(0.08
)
 
$
0.11
 

On April 26, 2013, the Company entered into a purchase and sale agreement to acquire Lincoln Place, a 140,000 square foot office building located in the South Beach submarket of Miami, Florida.  Lincoln Place is comprised of 111,000 square feet of office space and 29,000 square feet of retail space on the ground floor, with a five-story garage adjacent to the property. The property is currently 100% leased to LNR Corporation through June 2021 with no renewal or early termination option. Parkway is under contract to acquire Lincoln Place in exchange for the assumption of the existing secured first mortgage, which has a current outstanding balance of approximately $49.6 million, a fixed interest rate of 5.9% and a maturity date of June 11, 2016, and the issuance of 900,000 shares of operating partnership units. Based on Parkway's closing stock price of $18.20 per share on May 3, 2013, the implied purchase price would be approximately $66.0 million.  Closing is expected to occur by the end of the third quarter 2013, subject to customary closing conditions.
10


For details regarding dispositions during the three months ended March 31, 2013, please see Note E – Discontinued Operations.

Note E – Discontinued Operations

All current and prior period income from the following office property dispositions and properties held for sale is included in discontinued operations for the three months ended March 31, 2013 and 2012 (in thousands).

Office Property
Location
 
Square
Feet
 
Date of
Sale
 
Net Sales
Price
   
Net Book
Value of
Real Estate
   
Gain
(Loss)
on Sale
 
2012 Dispositions (1):
 
 
 
 
 
   
   
 
Falls Pointe
Atlanta, GA
   
107
 
01/06/2012
 
$
5,824
   
$
4,467
   
$
1,357
 
111 East Wacker
Chicago, IL
   
1,013
 
01/09/2012
   
153,240
     
153,237
     
3
 
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
 
 
 
   
3,978
 
 
 
$
382,126
   
$
369,187
   
$
12,939
 
 
 
       
 
                       
2013 Disposition (2):
 
       
 
                       
Atrium at Stoneridge
Columbia, SC
   
108
 
03/20/2013
 
$
2,966
   
$
2,424
   
$
542
 
 
 
   
108
 
 
 
$
2,966
   
$
2,424
   
$
542
 

 
(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2012 was $12.9 million, of which $8.1 million was our proportionate share.
(2) Total gain on the sale of real estate in discontinued operations recognized during the three months ended March 31, 2013 was $542,000.

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

 
11

The amount of revenues and expenses for the office properties reported in discontinued operations for the three months ended March 31, 2013 and 2012 is as follows (in thousands):
 
Three Months Ended
March 31
 
 
 
2013
   
2012
 
Statement of Operations:
 
   
 
Revenues
 
   
 
Income from office and parking properties
 
$
(50
)
 
$
10,065
 
 
   
(50
)
   
10,065
 
 
               
Expenses
               
Office and parking properties:
               
Operating expense
   
244
     
4,233
 
Management company expense
   
8
     
152
 
Interest expense
   
-
     
1,791
 
Non-cash adjustment for interest rate swap
   
-
     
(138
)
Depreciation and amortization
   
45
     
736
 
 
   
297
     
6,774
 
 
               
Income (loss) from discontinued operations
   
(347
)
   
3,291
 
Gain on sale of real estate from discontinued
operations
   
542
     
5,575
 
Total discontinued operations per Statement
of Operations
    195        8,866   
Net (income) loss attributable to noncontrolling
    interest from discontinued operations
   
 
13
     
 
(3,355
 
)
Total discontinued operations-Parkway's share
 
$
208
   
$
5,511
 




Note F – Management Contracts

During the second quarter of 2011, as part of the Company's combination with Eola, Parkway purchased the management contracts associated with Eola's property management business.  At December 31, 2012, the contracts were valued by an independent appraiser at $19.0 million.  The value of the management contracts is based on the sum of the present value of future cash flows attributable to the management contracts, in addition to the value of tax savings as a result of the amortization of intangible assets.  During the three months ended March 31, 2013, the Company recorded amortization expense of $1.8 million on the management contracts.  At March 31, 2013, management contracts, net of accumulated amortization totaled $17.2 million.

Note G - Capital and Financing Transactions

Notes Payable to Banks

At March 31, 2013, the Company did not have any amounts outstanding under its senior unsecured revolving credit facilities and had $125.0 million outstanding under its unsecured term loan.  The Company was in compliance with all loan covenants under its revolving credit facilities and term loan.

 
  
 
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)
Wells-Fargo
   
-
%
03/29/16
   
-
 
$125.0 Million Unsecured Term Loan (2)
Key Bank
   
2.2
%
09/27/17
   
125,000
 
 
 
   
2.2
%
 
 
$
125,000
 

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

12


Mortgage Notes Payable

Mortgage notes payable at March 31, 2013 totaled $768.0 million, with an average interest rate of 5.0% and were secured by office properties.

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

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

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

13


Interest Rate Swaps

The Company has entered into interest rate swap agreements.  The Company designated the swaps as cash flow hedges of the variable interest rates on the Company's borrowings under the $125.0 million unsecured term loan and the debt secured by 245 Riverside, Corporate Center IV at International Plaza, Cypress Center I, II, and III, Bank of America Center, Two Ravinia, Hayden Ferry I, Hayden Ferry II, and NASCAR Plaza.  These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.

The Company's interest rate hedge contracts at March 31, 2013, and 2012 are summarized as follows (in thousands):

 
 
 
 
 
 
 
   
Fair Value
 
 
 
 
 
 
 
 
   
Asset (Liability)
 
Type of
Balance Sheet
 
Notional
 
Maturity
 
 
Fixed
   
March 31
 
Hedge
Location
 
Amount
 
Date
Reference Rate
 
Rate
   
2013
   
2012
 
Swap
Accounts payable
and other liabilities
 
$
12,088
 
11/18/15
1-month LIBOR
   
4.1
%
 
$
(541
)
 
$
(575
)
Swap
Accounts payable
and other liabilities
 
$
30,000
 
02/01/16
1-month LIBOR
   
2.3
%
   
(1,666
)
   
-
 
Swap
Accounts payable
and other liabilities
 
$
50,000
 
09/27/17
1-month LIBOR
   
2.2
%
   
26
     
-
 
Swap
Accounts payable
and other liabilities
 
$
75,000
 
09/27/17
1-month LIBOR
   
2.2
%
   
39
     
-
 
Swap
Accounts payable
and other liabilities
 
$
33,875
 
11/18/17
1-month LIBOR
   
4.7
%
   
(3,113
)
   
(2,715
)
Swap
Accounts payable
and other liabilities
 
$
22,000
 
01/25/18
1-month LIBOR
   
4.5
%
   
(1,804
)
   
(1,454
)
Swap
Accounts payable
and other liabilities
 
$
47,500
 
01/25/18
1-month LIBOR
   
5.0
%
   
(1,447
)
   
(403
)
Swap
Accounts payable
and other liabilities
 
$
9,250
 
09/30/18
1-month LIBOR
   
5.2
%
   
(1,140
)
   
(1,010
)
Swap
Accounts payable
and other liabilities
 
$
22,500
 
10/08/18
1-month LIBOR
   
5.4
%
   
(2,935
)
   
(2,641
)
Swap
Accounts payable
and other liabilities
 
$
22,100
 
11/18/18
1-month LIBOR
   
5.0
%
   
(2,458
)
   
(2,062
)
 
 
       
 
 
         
$
(15,039
)
 
$
(10,860
)

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

Note H – Noncontrolling Interests

Real Estate Partnerships

The Company has an interest in one joint venture that is included in its consolidated financial statements. Information relating to this consolidated joint venture as of March 31, 2013 is detailed below.

 
Parkway's
 
Square Feet
Joint Venture Entity and Property Name
 
Location
 
Ownership %
 
(In thousands)
Fund II
 
 
 
 
 
 
    Hayden Ferry Lakeside I
 
Phoenix, AZ
 
30.0%
 
203 
    Hayden Ferry Lakeside II
 
Phoenix, AZ
 
30.0%
 
299 
    Hayden Ferry Lakeside III, IV and V
 
Phoenix, AZ
 
30.0%
 
21 
    245 Riverside
 
Jacksonville, FL
 
30.0%
 
136 
    Bank of America Center
 
Orlando, FL
 
30.0%
 
421 
    Lakewood II
 
Atlanta, GA
 
30.0%
 
123 
    3344 Peachtree
 
Atlanta, GA
 
33.0%
 
484 
    Two Ravinia
 
Atlanta, GA
 
30.0%
 
438 
    Carmel Crossing
 
Charlotte, NC
 
30.0%
 
326 
    Two Liberty Place
 
Philadelphia, PA
 
19.0%
 
941 
Total Fund II
 
 
 
27.4%
 
3,392 

14



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

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash is distributed by Fund II pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned.  Thereafter, 56% will be distributed to TRST and 44% to Parkway.  The term of Fund II is seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the Company's discretion.

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

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

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

Effective May 1, 2010, the stockholders of the Company approved Parkway's 2010 Omnibus Equity Incentive Plan (the "2010 Equity Plan") that authorized the grant of up to 600,000 equity based awards to employees and directors of the Company.   The 2010 Equity Plan has a ten-year term.

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

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

The time-based awards vest ratably over four years from the date the shares are granted.  The market condition awards are contingent on the Company meeting goals for compounded annual total return to stockholders ("TRTS") over the three year period beginning July 1, 2010.  The market condition goals are based upon (i) the Company's absolute compounded annual TRTS; and (ii) the Company's 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

15



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

The Company 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 the Company 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 the Company achieves an absolute compounded annual TRTS that exceeds 19%, then the Company 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 achieved by the Company.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual 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 awards is based upon the estimated fair value of the award on the grant date and adjustment as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on the Company's March 31, 2013 and December 31, 2012 consolidated balance sheets.  The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

At March 31, 2013, a total of 244,472 shares of restricted stock had been granted to officers of the Company and remain outstanding.  The shares are valued at $2.0 million, which equates to an average price per share of $8.09.  The value, including estimated forfeitures, of restricted shares that vest based on service conditions will be amortized to compensation expense ratably over the vesting period for each grant of stock.  At March 31, 2013, a total of 17,235 deferred incentive share units had been granted to employees of the Company and remain outstanding.  The deferred incentive share units are valued at $356,000, which equates to an average price per share of $20.66, and the units vest four years from grant date.  Total compensation expense related to the restricted stock and deferred incentive units of $89,000 and $157,000 was recognized during the three months ended March 31, 2013 and 2012, respectively.  Total compensation expense related to non-vested awards not yet recognized was $724,000 at March 31, 2013.  The weighted average period over which this expense is expected to be recognized is approximately 1.5 years.

A summary of the Company's restricted shares and deferred incentive share unit activity for the three months ended March 31, 2013 is as follows:

 
Weighted
Weighted
 
Average
Deferred
Average
 
Restricted
Grant-Date
Incentive
Grant-Date
 
Shares
Fair Value
Share Units
Fair Value
Balance at 12/31/12
281,233
$
8.34
17,760
$
25.61
Vested
(11,786
)
15.14
-
-
Forfeited
(24,975
)
7.53
(525
)
N/M
*
Balance at 03/31/13
244,472
$
8.09
17,235
$
20.66
*N/M-Not meaningful

On December 19, 2012, the Company's Board of Directors adopted the Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan (the "Plan"), subject to approval by its stockholders within 12 months of approval and adoption of the Plan by the Company's Board of Directors, or December 19, 2013. Except with respect to awards granted to non-employee directors, the Compensation Committee of the Company's Board of Directors (the "Committee") has the authority to administer the Plan.  The Plan authorizes the Committee or the Company's Board, where applicable, to grant stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units ("RSUs"), dividend equivalents, profits interest units ("LTIP units") and other stock-based awards. The Company's employees, non-employee directors and consultants are eligible to receive awards under the Plan.  The aggregate number of shares of common stock available for awards pursuant to the Plan is 3,250,000, including a maximum of 2,000,000 shares that may be granted pursuant to stock options or stock appreciation rights and a maximum of 1,250,000 shares that may be granted pursuant to other awards.

16


 
On March 2, 2013, the Committee approved the grant of 1.85 million stock options, 114,443 LTIP units and 173,947 RSUs (comprised of 115,350 time-vesting RSUs and 58,597 performance-vesting RSUs) under the Plan to employees of the Company.  Each stock option and time-vesting RSU award will vest in increments of 25% per year on each of the first, second, third and fourth anniversaries of the grant date, subject to the employee's continued service.  Each LTIP unit and performance-vesting RSU will vest based on the attainment of total stockholder return targets during the performance period running from March 2, 2013 to March 1, 2016, subject to the employee's continued service.  The Company will begin to expense the grants only if and when it receives stockholder approval of the Plan.  The actual expense associated with these grants is dependant on the public price of our common stock on the day of adoption of the Plan by the Company's stockholders.  If the Company's stockholders do not approve the Plan by December 19, 2013, the grants automatically will terminate and be forfeited.

Note J - Fair Values of Financial Instruments

FASB Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities.  ASC 820 requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).  A summary of the carrying amount and fair value of the Company's financial assets and liabilities as of March 31, 2013 and 2012 are as follows (in thousands):

 
As of March 31, 2013
   
As of December 31, 2012
 
 
Carrying
   
Fair
   
Carrying
   
Fair
 
 
Amount
   
Value
   
Amount
   
Value
 
 
 
Financial Assets:
 
   
   
   
 
  Cash and cash equivalents
 
$
74,560
   
$
74,560
   
$
81,856
   
$
81,856
 
 
                               
Financial Liabilities:
                               
  Mortgage notes payable
 
$
768,005
   
$
766,186
   
$
605,890
   
$
623,604
 
  Notes payable to banks
   
125,000
     
125,000
     
262,000
     
254,215 
 
  Interest rate swap agreements
   
15,039
     
15,039
     
16,285
     
16,285
 

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

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

Mortgage notes payable:  The fair value of mortgage notes payable is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.  This information is considered a Level 2 input as defined by ASC 820.

Notes payable to banks:  The fair value of the Company's notes payable to banks is estimated by discounting expected cash flows at current market rates.  This information is considered a Level 2 input as defined by ASC 820.

Interest rate swap agreements:  The fair value of the interest rate swaps is determined by estimating the expected cash flows over the life of the swap using the mid-market rate and price environment as of the last trading day of the reporting period.  This information is considered a Level 2 input as defined by ASC 820.

Note K – Income Taxes
The Company qualifies and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").  The Company will generally not be subject to federal income tax to the extent that it distributes its taxable income to the Company's shareholders, and as long as Parkway satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.
17


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

Parkway's provision for income taxes for the three months ended March 31, 2013 and 2012, was $61,000 and $406,000, respectively, of current federal and state income tax expense resulting from taxable REIT subsidiary income.

In connection with the contribution of the Eola management company to the Company, the Company recorded a deferred tax liability representing differences between the tax basis and GAAP basis of the acquired assets and liabilities (primarily related to the management company contracts) multiplied by the effective tax rate.  The Company was required to record these deferred tax liabilities as a result of the management company becoming a C corporation at the time it was acquired.  The Company's net deferred tax liabilities as of March 31, 2013 and December 31, 2012, were $1.4 million and $2.0 million, respectively.

Note L – Other Matters

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

On April 25, 2013, the Company redeemed all of its outstanding 8.00% Series D Cumulative Redeemable Preferred Stock.  The Company paid $136.3 million to redeem the preferred shares and expects to incur a charge during the second quarter of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

 
 

19


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

We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT") specializing in the acquisition, ownership and management of quality office properties in high-growth submarkets in the Sunbelt region of the United States.  At April 1, 2013, we owned or had an interest in 45 office properties located in eight states with an aggregate of approximately 13.0 million square feet of leasable space.  We offer fee-based real estate services through our wholly owned subsidiaries, which in total managed and/or leased approximately 11.8 million square feet for third-party property owners at April 1, 2013.  Unless otherwise indicated, all references to square feet represent net rentable area.

Business Objective and Operating Strategies

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

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

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

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

Occupancy.  Our revenues are dependent on the occupancy of our office buildings.  At April 1, 2013, occupancy of our office portfolio was 88.7% compared to 88.0% at January 1, 2013 and 85.9% at April 1, 2012.  Not included in the April 1, 2013 occupancy rate is the impact of 21 signed leases totaling 129,000 square feet expected to take occupancy between now and the first quarter of 2014, of which the majority will commence during the second and third quarters of 2013.  Including these signed leases, our portfolio was 89.7% leased at April 1, 2013.  Our average occupancy for the three months ended March 31, 2013 was 88.0%.

During the first quarter of 2013, 39 leases were renewed totaling 354,000 rentable square feet at an average annual rental rate per square foot of $25.42, representing a 1.2% rate decrease as compared to expiring rental rates, and at an average cost of $2.31 per square foot per year of the lease term.

During the first quarter of 2013, 15 expansion leases were signed totaling 86,000 rentable square feet at an average annual rental rate per square foot of $25.48 and at an average cost of $5.37 per square foot per year of the lease term.
20



During the first quarter of 2013, 17 new leases were signed totaling 61,000 rentable square feet at an average annual rental rate per square foot of $22.18 and at an average cost of $6.41 per square foot per year of the term.

Rental Rates.  An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates.  Inversely, a decrease in vacancy rates in a market or at a specific property has the effect of increasing market rental rates.  Our leases typically have three to seven year terms, though we do enter into leases with terms that are either shorter or longer than that typical range from time to time.  As leases expire, we seek to replace existing leases with new leases at the current market rental rate.  For our properties owned as of April 1, 2013, management estimates that we have approximately $0.34 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.  Our customer retention rate was 78.2% for the quarter ended March 31, 2013, as compared to 68.9% for the quarter ended December 31, 2012, and 46.8% for the quarter ended March 31, 2012.

Joint Ventures and Partnerships

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

At March 31, 2013, we had one partnership structured as a discretionary fund.  Parkway Properties Office Fund II, L.P. ("Fund II"), a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012.  Fund II was structured with Teacher Retirement System of Texas ("TRST") as a 70% investor and our operating partnership as a 30% investor, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Fund II currently owns 10 properties totaling 3.4 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando and Philadelphia. In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Lakeside III, IV and V, all adjacent to Hayden Ferry Lakeside I and Hayden Ferry Lakeside II office properties in Phoenix.

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

We serve as the general partner of Fund II and provide asset management, property management, leasing and construction management services to the fund, for which we are paid market-based fees.  Cash is distributed by Fund II pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned.  Thereafter, 56% will be distributed to TRST and 44% to us.  The term of Fund II is seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at our discretion.
21



Financial Condition

Comparison of the three months ended March 31, 2013 to the year ended December 31, 2012

Assets. In 2013, we have continued the execution of our strategy of operating and acquiring office properties as well as disposing of non-core assets that no longer meet our investment criteria or for which a disposition would maximize value.  During the three months ended March 31, 2013, total assets increased $171.0 million or 9.0% as compared to the year ended December 31, 2012.  The primary reason for the increase is due to the purchase of three office properties during first quarter 2013, partially offset by the disposition of one office property.

Acquisitions and Improvements.  Our investment in office properties increased $155.5 million net of depreciation to a carrying amount of $1.7 billion at March 31, 2013 and consisted of 45 office properties.  The primary reason for the increase in office properties relates to the purchase of three office properties.

During the three months ended March 31, 2013, we purchased three office properties and our co-investor's interest in three additional office properties as follows (in thousands):
 
Office Property
 
 
 
Location
 
 
Type of
Ownership
 
Ownership
Share
   
Square
Feet
 
 
 
Date
Purchased
 
Gross
Purchase
Price
 
 
 
 
 
   
 
 
 
 
Tower Place 200
Atlanta, GA
Wholly owned
   
100.0
%
   
258
 
01/17/13
 
$
56,250
 
Deerwood Portfolio (1)
Jacksonville, FL
Wholly owned
   
100.0
%
   
1,019
 
03/07/13
   
130,000
 
Tampa Fund II Assets (2)
Tampa, FL
Wholly owned
   
100.0
%
   
788
 
03/25/13
   
97,524
 
 
 
 
           
2,065
 
 
 
$
283,774
 

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

On April 26, 2013, we entered into a purchase and sale agreement to acquire Lincoln Place, a 140,000 square foot office building located in the South Beach submarket of Miami, Florida.  Lincoln Place is comprised of 111,000 square feet of office space and 29,000 square feet of retail space on the ground floor, with a five-story garage adjacent to the property. The property is currently 100% leased to LNR Corporation through June 2021 with no renewal or early termination option. Parkway is under contract to acquire Lincoln Place in exchange for the assumption of the existing secured first mortgage, which has a current outstanding balance of approximately $49.6 million, a fixed interest rate of 5.9% and a maturity date of June 11, 2016, and the issuance of 900,000 shares of operating partnership units. Based on our closing stock price of $18.20 per share on May 3, 2013, the implied purchase price would be approximately $66.0 million.  Closing is expected to occur by the end of the third quarter 2013, subject to customary closing conditions.

During the three months ended March 31, 2013, we capitalized building improvements of $8.5 million and recorded depreciation expense of $17.5 million related to our office properties.

Dispositions.  During the three months ended March 31, 2013, we completed the sale of Atrium at Stoneridge, a 108,000 square foot office property in Columbia, South Carolina, for a gross sales price of $3.1 million and recorded a gain of $542,000 during first quarter 2013.  We received $3.0 million in net proceeds from the sale, which was used to reduce amounts outstanding under our senior unsecured revolving credit facility.

Receivables and Other Assets. For the three months ended March 31, 2013, receivables and other assets increased $14.7 million or 11.8%. The net increase is primarily due to an increase in straight line rent receivable balances, related to one large lease renewal, office property purchases during the fourth quarter of 2012 and the first quarter of 2013, as well as an increase in capitalized lease costs and escrow deposits related to the purchase of three office properties during the first quarter of 2013.
22


 

Intangible Assets, Net. For the three months ended March 31, 2013, intangible assets net of related amortization increased $9.9 million or 8.4% due to the purchase of three office properties.

Management Contracts, Net.  For the three months ended March 31, 2013, management contracts, net of related amortization decreased $1.8 million or 9.4% as a result of amortization recorded during the period.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $7.3 million or 8.9% during the three months ended March 31, 2013 primarily due to cash used to fund acquisitions during the first quarter of 2013, offset by proceeds received from our March 2013 underwritten public offering of common stock.  Our proportionate share of cash and cash equivalents at March 31, 2013 and December 31, 2012 was $46.2 million and $56.0 million, respectively.

Notes Payable to Banks. Notes payable to banks decreased $137.0 million or 52.3% during the three months ended March 31, 2013.  At March 31, 2013, notes payable to banks totaled $125.0 million and the net decrease was attributable to repayment of all borrowings under our unsecured revolving credit facility from proceeds of our March 2013 underwritten public offering of common stock, offset by borrowings used to fund acquisitions during the quarter.

Mortgage Notes Payable. During the three months ended March 31, 2013, mortgage notes payable increased $162.1 million or 26.8% due to the placement of non-recourse mortgage loans secured by three wholly owned office properties totaling $164.5 million, offset by scheduled principal payments of $2.4 million.

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

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

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

We expect to continue seeking primarily fixed-rate, non-recourse mortgage financing with maturities from five to ten years typically amortizing over 25 to 30 years on select office building investments as additional capital is needed.  We monitor a number of leverage and other financial metrics defined in the loan agreements for our senior unsecured revolving credit facility and working capital unsecured credit facility, which include but are not limited to our total debt to total asset value ratio.  In addition, we monitor interest, fixed charge and modified fixed charge coverage ratios as well the net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio is computed by comparing cash interest accrued and preferred dividends paid to EBITDA.  The net debt to EBITDA multiple is computed by comparing our share of net debt to EBITDA for the current quarter as annualized and adjusted pro forma for any completed investment activity. We believe all of the leverage and other financial metrics we monitor, including those discussed above, provide useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments.
23


 

Accounts Payable and Other Liabilities.  For the three months ended March 31, 2013, accounts payable and other liabilities increased $6.5 million or 7.8% primarily due to an increase in below market lease value liabilities associated with the purchase of three office properties during the first quarter of 2013.

Equity. Total equity increased $139.4 million or 14.6% during the three months ended March 31, 2013, as a result of the following (in thousands):

 
 
Increase
 
 
 
(Decrease)
 
 
 
(Unaudited)
 
Net loss attributable to Parkway Properties, Inc.
 
$
(1,168
)
Net loss attributable to noncontrolling interests
   
(1,257
)
Net loss
   
(2,425
)
Change in market value of interest rate swaps
   
1,246
 
Common stock dividends declared
   
(8,397
)
Preferred stock dividends declared
   
(2,711
)
Share-based compensation
   
89
 
Issuance of common stock
   
208,947
 
Shares issued pursuant to TPG Management Services Agreement
   
75
 
Shares withheld to satisfy tax withholding obligation on vesting of restricted stock
   
(35
)
Purchase of noncontrolling interests of office properties owned by Parkway Properties Office Fund II, LP
   
(57,346
)
 
 
$
139,443
 

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

On April 25, 2013, we redeemed all of our outstanding 8.00% Series D Cumulative Redeemable Preferred Stock.  We paid $136.3 million to redeem the preferred shares and expect to incur a charge during the second quarter of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

Shelf Registration Statement.  We have a universal shelf registration statement on Form S-3 (No. 333-178001) 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 31, 2013, we had $91.3 million of securities available for issuance under the registration statement.

Results of Operations

Comparison of the three months ended March 31, 2013 to the three months ended March 31, 2012.

Net loss attributable to common stockholders for the three months ended March 31, 2013 was $3.9 million as compared to net income attributable to common stockholders of $2.0 million for the three months ended March 31, 2012.  The decrease in net income attributable to common stockholders for the three months ended March 31, 2013 compared to the same period for 2012 in the amount of $5.9 million is primarily attributable to a decrease in gains on the sale of real estate from discontinued operations recognized during the first quarter of 2013 as compared to the same period of 2012, offset by the purchase of five wholly owned office properties during the fourth quarter of 2012 and three wholly owned office properties purchased during the first quarter of 2013.  The change in income 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.
24



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 three months ended March 31, 2013, we classified as discontinued operations one property totaling 108,000 square feet, which was sold during the first quarter of 2013.  At March 31, 2013, same-store properties consisted of 33 properties comprising 8.4 million square feet.
The following table represents revenue from office properties for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended March 31
 
 
 
   
   
   
%
 
 
 
2013
   
2012
   
Increase
   
Change
 
Revenue from office properties:
 
   
   
   
 
Same-store properties
 
$
43,550
   
$
42,695
   
$
855
     
2.0
%
Properties acquired
   
24,210
     
2,462
     
21,748
     
N/M
*
Total revenue from office properties
 
$
67,760
   
$
45,157
   
$
22,603
     
50.1
%
*N/M – Not Meaningful
                               

Revenue from office properties for same-store properties increased $855,000 or 2.0% for the three months ended March 31, 2013 as compared to the same period for 2012.  The primary reason for the increase is due to an increase in average same-store occupancy during the three months ended March 31, 2013, compared to the same period of 2012.

The following table represents property operating expenses for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended March 31
 
 
 
   
   
   
%
 
 
 
2013
   
2012
   
Increase
   
Change
 
Expense from office properties:
 
   
   
   
 
Same-store properties
  $
17,643
    $ 
17,079
   
564
     
3.3
%
Properties acquired
   
7,974
     
876
     
7,098
     
N/M
*
Total expense from office properties
 
$
25,617
   
$
17,955
   
$
7,662
     
42.7
%
*N/M – Not Meaningful
                               

Property operating expenses for same-store properties increased $564,000 or 3.3% for the three months ended March 31, 2013, compared to the same period of 2012.  The primary reason for the increase is due to an increase in insurance and bad debt expenses.

Depreciation and Amortization.  Depreciation and amortization expense attributable to office properties increased $11.8 million for the three months ended March 31, 2013, compared to the same period for 2012.  The primary reason for the increase is due to the purchase of five office properties during the fourth quarter of 2012 and three office properties during the first quarter of 2013.

Management Company Income and Expenses.  Management company income decreased $1.1 million and management company expenses decreased $144,000 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.  The primary reason for the decreases in management company income and expenses for the three months ended March 31, 2013 is due to management contracts terminated during 2012.

Acquisition Costs.  During the three months ended March 31, 2013, we incurred $1.1 million in acquisition costs compared to $826,000 for the same period in 2012.   The primary reason for the increase is due to the purchase of three office properties in the first quarter of 2013 as compared to the purchase of two office properties in the first quarter of 2012.  Our proportionate share of acquisition costs for the three months ended March 31, 2013 and 2012 was $1.1 million and $248,000, respectively.

Share-Based Compensation Expense. Compensation expense related to restricted shares and deferred incentive share units of $89,000 and $157,000 was recognized for the three months ended March 31, 2013 and 2012, respectively.  This expense is included in general and administrative expenses on our Consolidated Statements of Operations and Comprehensive Income (Loss).  Total compensation expense related to non-vested awards not yet recognized was $724,000 at March 31, 2013. The weighted average period over which the expense is expected to be recognized is approximately 1.5 years.
25


 

Interest Expense. Interest expense from continuing operations, including amortization of deferred financing costs, increased $1.2 million or 13.3% for the three months ended March 31, 2013, compared to the same period of 2012 and is comprised of the following (in thousands):

 
 
Three Months Ended March 31
 
 
 
   
   
Increase
   
%
 
 
 
2013
   
2012
   
(Decrease)
   
Change
 
Interest expense:
 
   
   
   
 
Mortgage interest expense
 
$
8,673
   
$
7,589
   
$
1,084
     
14.3
%
Credit facility interest expense
   
1,317
     
974
     
343
     
35.2
%
Loss on early extinguishment of debt
   
-
     
190
     
(190
)
   
-100.0
%
Mortgage loan cost amortization
   
173
     
168
     
5
     
3.0
%
Credit facility cost amortization
   
307
     
323
     
(16
)
   
-5.0
%
Total interest expense
 
$
10,470
   
$
9,244
   
$
1,226
     
13.3
%

Mortgage interest expense increased $1.1 million for the three months ended March 31, 2013 compared to the same period for 2012, and is primarily due to mortgage loans placed or assumed during 2012 and 2013, in connection with acquisitions of office properties during the same period.

Credit facility interest expense increased $343,000 for the three months ended March 31, 2013 compared to the same period of 2012.  The increase is due to an increase in year-to-date average borrowings of $150.5 million offset by a decrease in the weighted average interest rate on average borrowings of 153 basis points. The increase in average borrowings is primarily due to the placement of a $125 million term loan and borrowings under our unsecured revolving credit facility to purchase office properties during 2012 and 2013, offset by repayment of all borrowings under our unsecured revolving credit facility from proceeds of our underwritten public common stock offerings during December 2012 and March 2013.

Discontinued Operations.  Discontinued operations is comprised of the following for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended
March 31
 
 
 
2013
   
2012
 
Statement of Operations:
 
   
 
Revenues
 
   
 
Income from office and parking properties
 
$
(50
)
 
$
10,065
 
 
   
(50
)
   
10,065
 
 
               
Expenses
               
Office and parking properties:
               
Operating expense
   
244
     
4,233
 
Management company expense
   
8
     
152
 
Interest expense
   
-
     
1,791
 
Non-cash adjustment for interest rate swap
   
-
     
(138
)
Depreciation and amortization
   
45
     
736
 
 
   
297
     
6,774
 
 
               
Income (loss) from discontinued operations
   
(347
)
   
3,291
 
Gain on sale of real estate from discontinued
      operations
   
542
     
5,575
 
Total discontinued operations per Statement
      of Operations
   
195
     
8,866
 
Net (income) loss attributable to noncontrolling
      interest from discontinued operations
   
13
     
(3,355
)
Total discontinued operations-Parkway's share
 
$
208
   
$
5,511
 

26



All current and prior period income from the following office property dispositions is included in discontinued operations for the three months ended March 31, 2013 and 2012 (in thousands):
Office Property
Location
 
Square
Feet
 
Date of
Sale
 
Net Sales
Price
   
Net Book
Value of
Real Estate
   
Gain
(Loss)
on Sale
 
2012 Dispositions (1):
 
 
 
 
 
   
   
 
Falls Pointe
Atlanta, GA
   
107
 
01/06/2012
 
$
5,824
   
$
4,467
   
$
1,357
 
111 East Wacker
Chicago, IL
   
1,013
 
01/09/2012
   
153,240
     
153,237
     
3
 
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
 
 
 
   
3,978
 
 
 
$
382,126
   
$
369,187
   
$
12,939
 
 
 
       
 
                       
2013 Disposition (2):
 
       
 
                       
Atrium at Stoneridge
Columbia, SC
   
108
 
03/20/2013
 
$
2,966
   
$
2,424
   
$
542
 
 
 
   
108
 
 
 
$
2,966
   
$
2,424
   
$
542
 

 
(1) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2012 was $12.9 million, of which $8.1 million was our proportionate share.
(2) Total gain on the sale of real estate in discontinued operations recognized during the three months ended March 31, 2013 was $542,000.

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

Income Taxes.  The analysis below reflects changes to the components of income tax (expense) benefit for the three months ended March 31, 2013 and 2012 (in thousands):

 
Three Months Ended March 31
 
 
 
   
   
   
%
 
 
 
2013
   
2012
   
Decrease
   
Change
 
Current:
 
   
   
   
 
Federal
 
$
(51
)
 
$
(351
)
 
$
300
     
85.5
%
State
   
(10
)
   
(55
)
   
45
     
81.8
%
Total current
 
$
(61
)
 
$
(406
)
 
$
345
     
85.0
%
 
                               
 
Three Months Ended March 31
 
 
                         
%
 
 
   
2013
     
2012
   
Increase
   
Change
 
Deferred:
                               
Federal
 
$
480
   
$
207
   
$
273
     
131.9
%
State
   
88
     
38
     
50
     
131.6
%
Total deferred
 
$
568
   
$
245
   
$
323
     
131.8
%
 
                               
Total income tax benefit (expense)
 
$
507
   
$
(161
)
 
$
668
     
414.9
%

Current income tax expense decreased $345,000 for the three months ended March 31, 2013, compared to the same period of 2012.  The decrease is directly attributable to the decrease in management company income for the three months ended March 31, 2013.  Deferred income tax benefit increased $323,000 for the three months ended March 31, 2013 compared to the same period of 2012.  The increase is directly attributable to the management contract impairment recognized during the fourth quarter of 2012.  At March 31, 2013, the deferred tax liability associated with the management contracts totaled $1.4 million.
27


Liquidity and Capital Resources

General

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

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

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

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

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

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

Cash.

Cash and cash equivalents were $74.6 million and $31.5 million at March 31, 2013 and 2012, respectively.  Cash flows provided by operating activities for the three months ended March 31, 2013 and 2012 were $17.3 million and $15.6 million, respectively.  The increase in cash flows from operating activities of $1.7 million is primarily attributable to an increase in revenues offset by an increase in operating expenses, both as a result of office property acquisitions during 2012 and 2013.

Cash used in investing activities was $189.7 million and $25.9 million for the three months ended March 31, 2013 and 2012, respectively.  The increase in cash used by investing activities of $163.8 million is primarily due to an increase in investments in real estate as well as a decrease in proceeds from the sale of real estate.

Cash provided by financing activities was $165.1 million for the three months ended March 31, 2013 compared to cash used in financing activities of $33.4 million for the three months ended March 31, 2012.  The increase in cash provided by financing activities of $198.5 million is primarily attributable to the net proceeds of our March 2013 underwritten public common stock offering and an increase in mortgage loan proceeds due to the placement of non-recourse mortgage loans secured by two office properties, offset by distributions to non-controlling interests for the purchase of our co-investor's 70% interest in the Tampa Fund II Assets.
28


Indebtedness.

Notes Payable to Banks.  At March 31, 2013, we did not have any amounts outstanding under our senior unsecured revolving credit facilities and had $125.0 million outstanding under our unsecured term loan.

 
  
 
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
   
-
%
03/29/16
   
-
 
$125.0 Million Unsecured Term Loan (2)
Various
   
2.2
%
09/27/17
   
125,000
 
 
 
   
2.2
%
 
 
$
125,000
 
 
 
       
 
       

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

We monitor a number of leverage and other financial metrics including, but not limited to, total debt to total asset value ratio, as defined in the loan agreements for our senior unsecured revolving credit facility and working capital unsecured credit facility.  In addition, we also monitor interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA. The interest coverage ratio for the three months ended March 31, 2013 and 2012 was 4.2 and 3.3 times, respectively.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The fixed charge coverage ratio for the three months ended March 31, 2013 and 2012 was 2.5 and 2.0 times, respectively.  The modified fixed charge coverage ratio is computed by comparing the cash interest accrued and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio for the three months ended March 31, 2013 and 2012 was 3.0 and 2.3 times, respectively.  The net debt to EBITDA multiple is computed by comparing our share of net debt to EBITDA for the current quarter, as annualized and adjusted pro forma for any completed investment activity.  The net debt to EBITDA multiple for the three months ended March 31, 2013 and 2012 was 4.8 and 4.7 times, respectively.  We believe various leverage and other financial metrics we monitor provide useful information on total debt levels as well as our ability to cover interest, principal and/or preferred dividend payments.

Mortgage Notes Payable.  At March 31, 2013, we had $768.0 million in mortgage notes payable secured by office properties, with an average interest rate of 5.0%.

The table below presents the principal payments due and weighted average interest rates for total mortgage notes payable at March 31, 2013 (in thousands).

   
Weighted
   
Total
   
   
Recurring
 
   
Average
   
Mortgage
   
Balloon
   
Principal
 
   
Interest Rate
   
Maturities
   
Payments
   
Amortization
 
Schedule of Mortgage Maturities by Years:
   
   
   
   
 
 
2013
*
   
5.0
%
 
$
7,394
   
$
-
   
$
7,394
 
 
2014
     
5.0
%
   
10,963
     
-
     
10,963
 
 
2015
     
5.0
%
   
26,972
     
14,051
     
12,921
 
 
2016
     
4.9
%
   
149,714
     
137,406
     
12,308
 
 
2017
     
4.7
%
   
120,012
     
107,907
     
12,105
 
 
2018
     
4.7
%
   
101,768
     
91,550
     
10,218
 
Thereafter
     
4.0
%
   
351,182
     
329,458
     
21,724
 
Total
     
5.0
%
 
$
768,005
   
$
680,372
   
$
87,633
 
Fair value at 03/31/13
           
$
765,934
                 
*Remaining nine months
                                 

29



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

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

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

Market Risk

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

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

30


Our interest rate hedge contracts at March 31, 2013, and 2012 are summarized as follows (in thousands):

 
 
 
 
 
 
 
   
Fair Value
 
 
 
 
 
 
 
 
   
Asset (Liability)
 
Type of
Balance Sheet
 
Notional
 
Maturity
 
 
Fixed
   
March 31
 
Hedge
Location
 
Amount
 
Date
Reference Rate
 
Rate
   
2013
   
2012
 
Swap
Accounts payable
and other liabilities
 
$
12,088
 
11/18/15
1-month LIBOR
   
4.1
%
 
$
(541
)
 
$
(575
)
Swap
Accounts payable
and other liabilities
 
$
30,000
 
02/01/16
1-month LIBOR
   
2.3
%
   
(1,666
)
   
-
 
Swap
Accounts payable
and other liabilities
 
$
50,000
 
09/27/17
1-month LIBOR
   
2.2
%
   
26
     
-
 
Swap
Accounts payable
and other liabilities
 
$
75,000
 
09/27/17
1-month LIBOR
   
2.2
%
   
39
     
-
 
Swap
Accounts payable
and other liabilities
 
$
33,875
 
11/18/17
1-month LIBOR
   
4.7
%
   
(3,113
)
   
(2,715
)
Swap
Accounts payable
and other liabilities
 
$
22,000
 
01/25/18
1-month LIBOR
   
4.5
%
   
(1,804
)
   
(1,454
)
Swap
Accounts payable
and other liabilities
 
$
47,500
 
01/25/18
1-month LIBOR
   
5.0
%
   
(1,447
)
   
(403
)
Swap
Accounts payable
and other liabilities
 
$
9,250
 
09/30/18
1-month LIBOR
   
5.2
%
   
(1,140
)
   
(1,010
)
Swap
Accounts payable
and other liabilities
 
$
22,500
 
10/08/18
1-month LIBOR
   
5.4
%
   
(2,935
)
   
(2,641
)
Swap
Accounts payable
and other liabilities
 
$
22,100
 
11/18/18
1-month LIBOR
   
5.0
%
   
(2,458
)
   
(2,062
)
 
 
       
 
 
         
$
(15,039
)
 
$
(10,860
)

Equity

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 $91.3 million of securities available for issuance under the registration statement.

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

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

On April 25, 2013, we redeemed all of our outstanding 8.00% Series D Cumulative Redeemable Preferred Stock using proceeds from our March 2013 underwritten public offering of common stock.  We paid $136.3 million to redeem the preferred shares and expect to incur a charge during the second quarter of approximately $6.6 million, which represents the difference between the costs associated with the issuances, including the price at which such shares were paid, and the redemption price.

31


Capital Expenditures

During the three months ended March 31, 2013, we incurred $4.6 million in recurring capital expenditures on a consolidated basis, with $3.8 million representing our share of such expenditures.  These costs include tenant improvements, leasing costs and recurring building improvements. During the three months ended March 31, 2013, we incurred $6.1 million related to upgrades on properties acquired in recent years that were anticipated at the time of purchase and major renovations that are nonrecurring in nature to office properties, with $3.6 million representing our share of such expenditures.  All such improvements were financed with cash flow from the properties, capital expenditure escrow accounts, borrowings under our senior unsecured revolving credit facility and contributions from joint venture partners.

Dividends

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

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

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

During the three months ended March 31, 2013, we paid $8.4 million in dividends to our common stockholders and $2.7 million to our Series D preferred stockholders.   These dividends were funded with cash flow from the properties, proceeds from the sales of properties, proceeds from the issuance of common stock or borrowings on our credit facility.

Contractual Obligations

See information appearing under the caption "Financial Condition – Comparison of the three months ended March 31, 2013 to the year ended December 31, 2012 – Notes Payable to Banks" and "Financial Condition – Comparison of the three months ended March 31, 2013 to the year ended December 31, 2012 – Mortgage Notes Payable" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of changes in long-term debt since December 31, 2012.

Critical Accounting Policies and Estimates

Our investments are generally made in office properties.  Therefore, we are generally subject to risks incidental to the ownership of real estate.  Some of these risks include changes in supply or demand for office properties or customers for such properties in an area in which we have buildings; changes in real estate tax rates; and changes in federal income tax, real estate and zoning laws.  Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements.  Our Consolidated Financial Statements include the accounts of Parkway Properties, Inc., our majority owned subsidiaries and joint ventures in which we have a controlling interest. We also consolidate subsidiaries where the entity is a variable interest entity and we are the primary beneficiary.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period.  Actual results could differ from our estimates.
32



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

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

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

Recent Accounting Pronouncements

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

Funds From Operations ("FFO")

Management believes that FFO is an appropriate measure of performance for equity REITs and computes this measure in accordance with the NAREIT definition of FFO (including any guidance that NAREIT releases with respect to the definition).  Funds from operations is defined by NAREIT as net income (computed in accordance with GAAP), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive our pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, we do not adjust FFO to eliminate the effects of non-recurring charges.  We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses.  However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient.  Thus, NAREIT created FFO as a supplemental measure of operating performance for real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP.  We believe that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful.  FFO as reported by us may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  Funds from operations do not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds from operations should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.
33



The following table presents a reconciliation of our net income (loss) for Parkway Properties, Inc. to FFO for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
Net income (loss) for Parkway Properties, Inc.
 
$
(1,168
)
 
$
4,705
 
Adjustments to derive funds from operations:
               
Depreciation and amortization
   
29,515
     
17,690
 
Depreciation and amortization – discontinued operations
   
46
     
714
 
Noncontrolling interest depreciation and amortization
   
(7,856
)
   
(8,041
)
Noncontrolling interest – unit holders
   
(2
)
   
89
 
Adjustments for unconsolidated joint ventures – discontinued operations
   
-
     
22
 
Preferred dividends
   
(2,711
)
   
(2,711
)
Gain on sale of real estate (Parkway's Share)
   
(542
)
   
(2,333
)
Funds from operations attributable to common stockholders (1)
 
$
17,282
   
$
10,135
 

(1)
Funds from operations attributable to common stockholders for the three months ended March 31, 2013 and 2012 include the following items at our proportionate ownership share (in thousands):

 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
Gain on extinguishment of debt
 
$
-
   
$
(288
)
Acquisition costs
   
(1,130
)
   
(248
)
Non-recurring lease termination fee income
   
146
     
596
 
Change in fair value of contingent consideration
   
-
     
(216
)
Non-cash adjustment for interest rate swap
   
-
     
138
 
Realignment expenses
   
(460
)
   
(180
)

EBITDA

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

34



We view EBITDA primarily as a liquidity measure and, as such, the GAAP financial measure most directly comparable to it is cash flows provided by operating activities.  Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income, or cash flows provided by operating, investing and financing activities prepared in accordance with GAAP.  The following table reconciles cash flows provided by operating activities to EBITDA for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
 
 
(Unaudited)
 
Cash flows provided by operating activities
 
$
17,271
   
$
15,566
 
Amortization of above market leases
   
(848
)
   
(1,094
)
Interest rate swap adjustment
   
-
     
(138
)
Interest expense
   
9,990
     
10,172
 
Loss on early extinguishment of debt
   
-
     
288
 
Acquisition costs (Parkway's share)
   
1,130
     
248
 
Tax expense - current
   
61
     
406
 
Change in deferred leasing costs
   
2,304
     
1,792
 
Change in receivables and other assets
   
10,747
     
(8,468
)
Change in accounts payable and other liabilities
   
(2,879
)
   
11,045
 
Adjustments for noncontrolling interests
   
(10,032
)
   
(9,517
)
Adjustments for unconsolidated joint ventures
   
-
     
37
 
EBITDA
 
$
27,744
   
$
20,337
 

35



The reconciliation of net income (loss) for Parkway Properties, Inc. to EBITDA and the computation of our proportionate share of interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple is as follows for the three months ended March 31, 2013 and 2012 (in thousands):

 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
   
2012
 
 
 
(Unaudited)
 
Net income (loss) for Parkway Properties, Inc.
 
$
(1,168
)
 
$
4,705
 
Adjustments to net income (loss) for Parkway Properties, Inc.:
               
Interest expense
   
9,990
     
10,172
 
Amortization of financing costs
   
480
     
537
 
Non-cash adjustment for interest rate swap – discontinued operations
   
-
     
(138
)
(Gain) loss on early extinguishment of debt
   
-
     
291
 
Acquisition costs (Parkway's share)
   
1,130
     
248
 
Depreciation and amortization
   
29,561
     
18,404
 
Amortization of share-based compensation
   
89
     
157
 
Gain on sale of real estate (Parkway's share)
   
(542
)
   
(2,333
)
Change in fair value of contingent consideration
   
-
     
216
 
Tax expense (benefit)
   
(507
)
   
161
 
EBITDA adjustments - unconsolidated joint ventures
   
-
     
58
 
EBITDA adjustments - noncontrolling interest in real estate partnerships
   
(11,289
)
   
(12,141
)
EBITDA (1)
 
$
27,744
   
$
20,337
 
 
               
Interest coverage ratio:
               
EBITDA
 
$
27,744
   
$
20,337
 
Interest expense:
               
Interest expense
 
$
9,990
   
$
10,172
 
Interest expense - unconsolidated joint ventures
   
-
     
21
 
Interest expense - noncontrolling interest in real estate partnerships
   
(3,352
)
   
(3,987
)
Total interest expense
 
$
6,638
   
$
6,206
 
Interest coverage ratio
   
4.2
     
3.3
 
 
               
Fixed charge coverage ratio:
               
EBITDA
 
$
27,744
   
$
20,337
 
Fixed charges:
               
Interest expense
 
$
6,638
   
$
6,206
 
Preferred dividends
   
2,711
     
2,711
 
Principal payments (excluding early extinguishment of debt)
   
2,385
     
1,758
 
Principal payments - unconsolidated joint ventures
   
-
     
6
 
Principal payments - noncontrolling interest in real estate partnerships
   
(668
)
   
(364
)
Total fixed charges
 
$
11,066
   
$
10,317
 
Fixed charge coverage ratio
   
2.5
     
2.0
 
 
               
Modified fixed charge coverage ratio:
               
EBITDA
 
$
27,744
   
$
20,337
 
Modified fixed charges:
               
Interest expense
 
$
6,638
   
$
6,206
 
Preferred dividends
   
2,711
     
2,711
 
Total modified fixed charges
 
$
9,349
   
$
8,917
 
Modified fixed charge coverage ratio
   
3.0
     
2.3
 
 
               
Net Debt to EBITDA multiple:
               
Annualized EBITDA (2)
 
$
127,466
   
$
76,216
 
Parkway's share of total debt:
               
Mortgage notes payable
 
$
768,005
   
$
553,674
 
Mortgage notes payable-held for sale
   
-
     
90,710
 
Notes payable to banks
   
125,000
     
48,000
 
Adjustments for non-controlling interest in real estate partnerships
   
(230,885
)
   
(320,107
)
Parkway's share of total debt
   
662,120
     
372,277
 
Less:  Parkway's share of cash
   
(46,235
)
   
(12,522
)
Parkway's share of net debt
 
$
615,885
   
$
359,755
 
Net Debt to EBITDA multiple
   
4.8
     
4.7
 

(1)
We define EBITDA, a non-GAAP financial measure, as net income before interest, income taxes, depreciation, amortization, acquisition costs, gains or losses on early extinguishment of debt, other gains and losses and fair value adjustments.  EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.
(2)
Annualized EBITDA includes the implied annualized impact of any acquisition or disposition activity during the period.

36



Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures at March 31, 2013.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at March 31, 2013.  There were no changes in our internal control over financial reporting during the first quarter of 2013 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

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

PART II. OTHER INFORMATION

Item 1A. Risk Factors

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

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

On March 27, 2013, we issued 4,223 shares of common stock to TPG VI Management, LLC as payment of a monitoring fee pursuant to the Management Services Agreement dated June 5, 2012, which we entered into in connection with the 2012 investment transaction with TPG IV Pantera Holdings, L.P.  The common stock was issued in a transaction that was not registered under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act.

The following table shows the total number of shares that we acquired during the three months ended March 31, 2013:
37



 
 
 
 
 
Period
 
Total Number
of Shares
Purchased
   
Average
Price Paid
per Share
   
Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
Or Programs
   
Maximum Number
of Shares that
May Yet Be
Purchased Under
The Plans or Programs
 
 
 
   
   
   
 
01/01/13 to 01/31/13
   
2,275
(1) 
 
$
15.56
     
-
     
-
 
02/01/13 to 02/28/13
   
-
     
-
     
-
     
-
 
03/01/13 to 03/31/13
   
-
     
-
     
-
     
-
 
Total
   
2,275
   
$
15.56
                 
(1) As permitted under our equity compensation plan, these shares were withheld by us to satisfy tax withholding obligations for employees in connection with the vesting of stock. Shares withheld for tax withholding obligations do not affect the total number of shares available for repurchase under any approved common stock repurchase plan. At March 31, 2013, we did not have an authorized stock repurchase plan in place.
 
 
Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

10.1 Purchase and Sale Agreement, dated as of January 21, 2013, by and between FDG Mezzanine A LLC and Flagler Development Company LLC, as Sellers, and Parkway Properties, LP, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 23, 2013).
10.2 Consulting Agreement dated January 28, 2013 by and between Parkway Properties, Inc. and Mandy M. Pope (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 29, 2013).
10.3 Second Amended and Restated Agreement of Limited Partnership of Parkway Properties, LP, dated February 27, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 27, 2013).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials from Parkway Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of operations and comprehensive income, (iii) consolidated statement of changes in equity, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.**
* Denotes management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
38




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: May 6, 2013
  PARKWAY PROPERTIES, INC.

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

39