10-K 1 pky-20131231x10k.htm 10-K PKY-2013.12.31-10K


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

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           
Commission file number 1-11533

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

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

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


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

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

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

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

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

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

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

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o  Smaller reporting company o
(do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, at June 28, 2013 was $1.1 billion.

There were 99,055,960 shares of common stock and 4,213,104 shares of limited voting stock outstanding at February 24, 2014.

DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the Registrant's Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference into Part III.





PARKWAY PROPERTIES, INC.


TABLE OF CONTENTS

 
 
Page
 
 
 
PART I.
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV.
 
 
Item 15.
 
 
 
SIGNATURES
 




Forward-Looking Statements
Certain sections of this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). Examples of forward-looking statements include projected capital resources, projected profitability and portfolio performance, estimates of market rental rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions or other transactions, the expected operating performance of anticipated near-term acquisitions and descriptions relating to these expectations, including without limitation, the anticipated net operating income yield.  We caution investors that any forward-looking statements presented in this Annual Report on Form 10-K are based on management's beliefs and assumptions made by, and information currently available to, management. When used, the words "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result" and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve risks and uncertainties (some of which are beyond our control) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties:
changes in the real estate industry and in performance of the financial markets;
competition in the leasing market;
the demand for and market acceptance of our properties for rental purposes;
oversupply of office properties in our geographic markets;
the amount and growth of our expenses;
customer financial difficulties and general economic conditions, including increasing interest rates, as well as economic conditions in our geographic markets;
defaults or non-renewal of leases;
risks associated with joint venture partners;
the risks associated with the ownership of real property, including risks related to natural disasters;
risks associated with property acquisitions, including the recent merger with Thomas Properties Group, Inc.;
the failure to acquire or sell properties as and when anticipated;
illiquidity of real estate;
derivation of a significant portion of our revenue from a small number of assets;
termination or non-renewal of property management contracts;
the bankruptcy or insolvency of companies for which we provide property management services or the sale of these properties;
the outcome of claims and litigation involving or affecting us;
the ability to satisfy conditions necessary to close pending transactions;
compliance with environmental and other regulations, including real estate and zoning laws;
our inability to obtain financing;
our inability to use net operating loss carryforwards; and
our failure to maintain our status as real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code. 




A discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, our business, financial condition, liquidity, cash flows and results could differ materially from those expressed in any forward-looking statement. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Any forward-looking statements speak only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes.




PART I
ITEM I. Business

As used herein, the terms "we," "us," "our," "Parkway" and the "Company" refer to Parkway Properties, Inc., a Maryland corporation, individually or together with its subsidiaries, including Parkway Properties LP, a Delaware limited partnership, and our predecessors.  The term "operating partnership" refers to Parkway Properties LP, individually or together with its subsidiaries.

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.  We owned or had an interest in 50 office properties located in eight states with an aggregate of approximately 17.6 million square feet of leasable space at January 1, 2014.  "Part I. Item 2. Properties – Office Buildings" includes a complete listing of properties by market.  We offer fee-based real estate services through wholly owned subsidiaries, which in total managed and/or leased approximately 12.2 million square feet for third-party property owners at January 1, 2014. Unless otherwise indicated, all references to square feet represent net rentable area.

Administration

We were formed as a corporation under the laws of the State of Maryland in 1996 and elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1997. We generally perform commercial real estate leasing, management and acquisition services on an in-house basis.  As of December 31, 2013, we had 326 employees.  Our principal executive office is located at 390 North Orange Avenue, Suite 2400, Orlando, FL 32801 and our telephone number is (407) 650-0593.  In addition, we have a regional office in Jacksonville, FL.

Business Objective and Operating Strategies

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





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Recent Significant Activity

On December 19, 2013, we completed the merger transactions contemplated by the agreement and plan of merger, dated as of September 4, 2013 (the "Merger Agreement"), by and among us, Parkway Properties LP ("Parkway LP"), PKY Masters, LP, a wholly owned subsidiary of Parkway LP ("Merger Sub"), Thomas Properties Group, Inc. ("TPGI") and Thomas Properties Group, L.P. ("TPG LP").

Pursuant to the Merger Agreement, TPGI merged with and into Parkway Properties, Inc., with Parkway Properties, Inc. continuing as the surviving corporation (the "Parent Merger"), and TPG LP merged with and into Merger Sub, with TPG LP continuing as the surviving entity and an indirect wholly owned subsidiary of Parkway LP (the "Partnership Merger" and, together with the Parent Merger, the "Mergers"). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Parent Merger, each outstanding share of common stock, par value $.01 per share, of TPGI ("TPGI Common Stock") was converted into the right to receive 0.3822 (the "Exchange Ratio") shares of our common stock, par value $.001 per share ("common stock"), with cash paid in lieu of fractional shares, and each share of TPGI limited voting stock, par value $.01 per share ("TPGI Limited Voting Stock"), was converted into the right to receive a number of shares of newly created limited voting stock, par value $.001 per share ("limited voting stock"), equal to the Exchange Ratio. At the effective time of the Partnership Merger, which occurred immediately prior to the Parent Merger, each outstanding limited partnership interest in TPG LP ("TPG LP Units"), including long-term incentive units, was converted into the right to receive a number of limited partnership units in Parkway LP (the "Parkway LP Units") equal to the Exchange Ratio. We issued 17,820,972 shares of our common stock and 4,451,461 shares of our limited voting stock as consideration in the Parent Merger and Parkway LP issued 4,451,461 Parkway LP Units in the Partnership Merger. On December 19, 2013, the last reported sales price per share of our common stock on the New York Stock Exchange was $18.05.

In connection with the Mergers, we acquired TPGI's ownership interest in two wholly owned office properties in Houston, Texas and five office properties in Austin, Texas through an indirect interest in TPG/CalSTRS Austin, LLC (the "Austin joint venture"), a joint venture with the California State Teachers' Retirement System ("CalSTRS"). See "Note 4 - Investments in Unconsolidated Joint Ventures" and mortgage notes payable discussed in "Note 8 - Capital and Financing Transactions" of our consolidated financial statements. In addition, in connection with the Mergers, we acquired a parcel of undeveloped land in Houston, Texas and a 73% interest in a 302-unit residential condominium tower in Philadelphia, Pennsylvania.

Joint Ventures and Partnerships

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

Parkway Properties Office Fund II, L.P.

At December 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 the 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 seven properties totaling 2.5 million square feet in Atlanta, Georgia; Phoenix, Arizona; Jacksonville, Florida; and Philadelphia, Pennsylvania. 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 land available for development, all adjacent to our Hayden Ferry Lakeside I and Hayden Ferry Lakeside II office properties in Phoenix. In August 2013, Fund II expanded its investment guidelines solely for the purpose of authorizing the purchase of a parcel of land available for development in Tempe, Arizona.

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




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Joint Ventures

In addition to the 43 office properties included in our consolidated financial statements, we were also invested in three unconsolidated joint ventures with unrelated investors as of December 31, 2013.

On June 3, 2013, we purchased an approximate 75% 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. At closing, a subsidiary of ours issued a $3.5 million mortgage loan to an affiliate of US Airways, which is secured by the building. The mortgage loan carries a fixed interest rate of 3.0% and matures in December 2016. This nine-story Class A office building is adjacent to our Hayden Ferry Lakeside and Tempe Gateway assets and shares a parking garage with our Tempe Gateway asset. 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% interest in the building.

On November 5, 2013, we and our joint venture partner foreclosed and took ownership of 7000 Central Park, a 415,000 square foot office building located in the Central Perimeter of Atlanta, Georgia. We previously acquired a 40% common equity interest in a mortgage note secured by the asset for approximately $45.0 million, comprised of an investment of approximately $37.0 million for a preferred equity interest in the joint venture that acquired the note and an investment of approximately $8.0 million for a 40% common equity interest. On December 13, 2013, we and our joint venture partner placed secured financing on the asset in the amount of $30.0 million, the net proceeds of which were used to repay a portion of our initial preferred equity investment, reducing the preferred equity interest to approximately $7.6 million.

On December 19, 2013, as described above, we acquired TPGI's interest in the Austin joint venture as part of the Mergers. As of December 31, 2013, we and Madison International Realty, a New York based private equity firm ("Madison") owned a 50% interest in the joint venture with CalSTRS. The Austin joint venture owns the following properties: San Jacinto Center; Frost Bank Tower; One Congress Plaza; One American Center; and 300 West 6th Street. On January 24, 2014, pursuant to a put right held by Madison, we purchased Madison’s approximately 17% interest in the Austin joint venture for a purchase price of approximately $41.5 million. On February 10, 2014, CalSTRS exercised an option to purchase 60% of Madison's former interest on the same terms that we acquired the interest from Madison for approximately $24.9 million. After giving effect to these transactions, we have a 40% interest in the Austin joint venture and the Austin properties, with CalSTRS owning the remaining 60%.

Third-Party Management

We benefit from a fully integrated management infrastructure, provided by certain of our wholly owned subsidiaries (collectively, our "management companies").  As of January 1, 2014, our management companies managed and/or leased properties containing an aggregate of approximately 29.8 million net rentable square feet, of which approximately 17.6 million net rentable square feet related to properties owned fully or partially by us and approximately 12.2 million net rentable square feet related to properties owned by third parties.

Financing Strategy

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

We intend to finance future growth and future maturing debt with the most advantageous source of capital when available, while also maintaining our variable interest rate exposure at a prudent level.  We expect to continue seeking primarily fixed rate, non-recourse mortgage financing with maturities from five to ten years typically amortizing over 25 to 30 years on select office building investments as additional capital is needed.  Sources of capital may include selling common or preferred equity through public offerings or private placements.
    
We may, in appropriate circumstances, acquire one or more properties in exchange for our equity securities.  We have no set policy as to the amount or percentage of our assets that may be invested in any specific property.  Rather than a specific policy, we evaluate each property in terms of whether and the extent to which the property meets our investment criteria and strategic

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objectives. The strategies and policies set forth above were determined and are subject to review by our Board of Directors, which may change such strategies or policies based upon their evaluation of the state of the real estate market, the performance of our assets, capital and credit market conditions, and other relevant factors.

Capital Allocation

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

Segment Reporting

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

Regulation/Environmental

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

Insurance

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

Competition

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


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Available Information

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

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

ITEM 1A.                          Risk Factors.

In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors.  Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on our financial condition and the performance of our business.

Risks Related to Our Properties and Business

We face risks associated with our recent and future property acquisitions.

Since January 1, 2013, we have acquired three wholly owned office properties, TRST's interest in four properties, two parcels of land available for development, investments in three unconsolidated joint ventures, and two office properties in connection with the Mergers, totaling over 8.1 million square feet of office space, increasing the total square footage of our portfolio by approximately 48%, net of dispositions.  In addition, we intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could further increase our size and result in further alterations to our capital structure.

Our acquisition activities and their success are subject to the following risks:

acquisition agreements contain conditions to closing, which may include completion of due diligence investigations to our satisfaction or other conditions that are not within our control, which may not be satisfied;

we may be unable to finance acquisitions on favorable terms or at all;

acquired properties may fail to perform as expected;

the actual costs of repositioning acquired properties may be higher than our estimates;

we may not be able to obtain adequate insurance coverage for new properties;

acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market and a limited number of established business relationships in the area; and

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, to the transferor with respect to unknown liabilities, including liabilities for clean-up of undisclosed environmental contamination. As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.

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

Integration of acquisitions involves a number of significant risks, including the diversion of management's attention to the assimilation of the operations of the acquired businesses or assets; difficulties in the integration of operations and systems; the inability to realize potential operating synergies; difficulties in the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and challenges in retaining the customers of the combined businesses. Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated operating expenses and depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential

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impairment charges, assumed litigation and unknown liabilities. If we are unable to successfully integrate our recent and future acquisitions in a timely and cost-effective manner, our operating results could be negatively affected.

Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.

We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities from other investors and this competition may adversely affect us by subjecting us to the following risks:
 
an inability to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, sovereign wealth funds, pension trusts, partnerships and individual investors; and

an increase in the purchase price for such acquisition property in the event we are able to acquire such desired property.

TPG VI Pantera Holdings, L.P. is a significant stockholder and may have conflicts of interest with us in the future.

As of December 31, 2013, TPG VI Pantera Holdings, L.P. ("TPG Pantera") and TPG VI Management, LLC, an affiliate of TPG Pantera (collectively, the "TPG Entities"), owned approximately 27% of our issued and outstanding common stock, and 26% of our issued and outstanding common stock and limited voting stock. As a result, TPG Pantera is our largest single stockholder, while no other stockholder is permitted to own more than 9.8% of our common stock, except as approved by our board of directors pursuant to the terms of our charter. In addition, so long as TPG Pantera owns at least 10% of our issued and outstanding common stock, TPG Pantera has a pre-emptive right to participate in our future equity issuances, subject to certain conditions. This concentration of ownership in one stockholder could potentially be disadvantageous to other stockholders' interests. In addition, if TPG Pantera were to sell or otherwise transfer all or a large percentage of its holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities.

The interests of the TPG Entities may differ from the interests of our other stockholders in material respects. For example, the TPG Entities may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. The TPG Entities are in the business of making or advising on investments in companies and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our stockholders agreement with the TPG Entities grants TPG Pantera certain rights that may restrain our ability to take various actions in the future.

In connection with TPG Pantera's May 2012 investment in us, we entered into a stockholders agreement with the TPG Entities, pursuant to which we granted TPG Pantera certain rights that may restrain our ability to take various actions in the future. Under the stockholders agreement, as amended, we have agreed to maintain a ten member board of directors, and TPG Pantera will have the right to nominate a specified number of directors to the board and to have a specified number of such directors appointed to each committee of the board of directors for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 5%. TPG Pantera will be entitled to nominate to the board (i) four directors if TPG Pantera's ownership percentage of our common stock is at least 21% and it continues to own at least 90% of the shares of our common stock that it owned as of the completion of our underwritten public offering in December 2012 (the "2012 offering"), which is approximately 21.2 million shares, (ii) three directors if TPG Pantera's ownership percentage is at least 17.5% but less than 21% and it continues to own at least 70% of the shares of our common stock that it owned as of the completion of the 2012 offering, which is approximately 16.5 million shares, (iii) two directors if TPG Pantera's ownership percentage is at least 13% but less than 17.5%, and (iv) one director if TPG Pantera's ownership percentage is at least 5% but less than 13%. In addition, we have agreed to constitute each of our board committees as a four member committee and (i) for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 20%, TPG Pantera has the right to have two of its nominated directors appointed to each committee of the board, and (ii) for so long as TPG Pantera's ownership percentage is equal to or greater than 5% but less than 20%, TPG Pantera will have the right to have one of its nominated directors appointed to each committee of the board.




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Pursuant to the terms of the stockholders agreement, TPG Pantera also will have the right to consent to certain actions related to our corporate existence and governance, including any change in the rights and responsibilities of either the investment committee of the board or the compensation committee of the board, for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 20%, other than in connection with any change in control.

In addition, for so long as TPG Pantera's ownership percentage of our common stock is equal to or greater than 5%, other than in connection with any change in control of us, the rights and responsibilities of the investment committee of the board will include (i) except for certain permitted issuances relating to outstanding rights to purchase or acquire our capital stock, compensation arrangements and acquisition transactions, any sale or issuance of any capital stock or other security, (ii) any incurrence of indebtedness with a principal amount greater than $20 million, and (iii) any other matters over which the investment committee currently has approval authority, including without limitation material asset acquisitions and dispositions. During such period, the rights and responsibilities of the compensation committee of the board will include (i) the hiring or termination of any our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or Chief Investment Officer, or any material change in any of the duties of any such executive officer, and (ii) any approval of future compensation arrangements for such officers. During such period, the board may not approve such matters without the affirmative approval of the investment committee or the compensation committee, as applicable.

Our performance is subject to risks inherent in owning real estate investments.

We are generally subject to risks incidental to the ownership of real estate. These risks include:

changes in supply of or demand for office properties or customers for such properties in areas in which we own buildings;

the ongoing need for capital improvements;

increased operating costs, which may not necessarily be offset by increased rents, including insurance premiums, utilities and real estate taxes, due to inflation and other factors;

changes in tax, real estate and zoning laws;

changes in governmental rules and fiscal policies;

inability of customers to pay rent;

competition from the development of new office space in the markets in which we own property and the quality of competition, such as the attractiveness of our properties as compared to our competitors' properties based on considerations such as convenience of location, rental rates, amenities and safety record; and

civil unrest, acts of war, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses), and other factors beyond our control.

Should any of these events occur, our financial condition and results of operations could be adversely affected.

Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise. 

We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our information technology networks and related systems. These risks include operational interruption, private data exposure and damage to our relationship with our customers, among others. Although we make efforts to maintain the security and integrity of our information technology networks and related systems and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that these activities will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways that could ultimately have an adverse effect on our financial condition and results of operations.

The conditions of our primary markets affect our operations.

Substantially all of our properties are located in the Southeastern and Southwestern United States and, therefore, our financial condition and ability to make distributions to our stockholders is linked to economic conditions in these markets as well

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as the market for office space generally in these markets. An economic downturn in these markets, particularly increases in unemployment, may adversely affect our financial condition and results of operations.

Additionally, the geographic concentration of our exposure makes us particularly susceptible to adverse weather conditions that threaten southern and coastal states, such as hurricanes and flooding. Although we anticipate and plan for losses, even a single catastrophe or destructive weather event may have a significant negative effect on our financial condition and results of operations because of the concentration of our properties.

If recent adverse global market and economic conditions worsen or do not fully recover, our business, financial condition and results of operations could be adversely affected.

In the United States, market and economic conditions continue to be challenging with tighter credit conditions and modest growth. Although the U.S. economy has emerged from the recent recession and economic data reflects a stabilization of the economy and credit markets, the cost and availability of credit and the commercial real estate market generally may be adversely affected by persistent high levels of unemployment, insufficient consumer demand or confidence, the impacts of changes in the U.S. federal budgetary process, changes in regulatory environments and other macro-economic factors. If current economic conditions deteriorate, business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio. The timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. Additionally, deteriorating economic conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. No assurances can be given that the current economic conditions will continue to improve, and if the economic recovery slows or stalls, our ability to lease our properties and increase or maintain rental rates may be effected, which would have a material adverse effect on our business, financial condition and results of operations.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to our existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our financial condition and results of operations.

Each year, we compete with a number of other owners and operators of office properties to renew leases with our existing customers and to attract new customers. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new customers, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we historically have. In addition, the economic downturn of the last several years has led to increased competition for credit worthy customers and we may have difficulty competing with competitors who have purchased properties at depressed prices because our competitor's lower cost basis in their properties may allow them to offer space at reduced rental rates.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew leases or re-let space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions, or other costs increase, our financial condition and results of operations could be adversely affected.

An oversupply of space in our markets would typically cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all.

Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, New York; Chicago, Illinois; Boston, Massachusetts; and San Francisco and Los Angeles, California. As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our results of operations.

Customer defaults could adversely affect our operations.

The majority of our revenues and income come from rental income from real property. As such, our revenues and income could be adversely affected if a significant number of our customers defaulted under their lease obligations. Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors' rights and remedies available to real property

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owners to collect delinquent rents. If a customer becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the customer promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that customer. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a customer becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the customer. A customer's default on its obligations to us could adversely affect our financial condition and results of operations.

Some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations.

Certain of our leases permit our customers to terminate their leases as to all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee. To the extent that our customers exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third party customers.

Our expenses may remain constant or increase, even if our revenues decrease, causing our results of operations to be adversely affected.

Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inflexible and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a customer fails to pay rent or other circumstances cause a reduction in property revenues. As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which would adversely affect our results of operations.
 
Illiquidity of real estate may limit our ability to vary our portfolio.

Real estate investments are relatively illiquid. Our ability to vary our portfolio by selling properties and buying new ones in response to changes in economic and other conditions may therefore be limited. In addition, the Internal Revenue Code limits our ability to sell our properties by imposing a penalty tax of 100% on the gain derived from prohibited transactions, which are defined as sales of property held primarily for sale to customers in the ordinary course of a trade or business. The frequency of sales and the holding period of the property sold are two primary factors in determining whether the property sold fits within this definition. These considerations may limit our opportunities to sell our properties. If we must sell an investment, we cannot assure you that we will be able to dispose of the investment in the time period we desire or that the sales price of the investment will recoup or exceed our cost for the investment, or that the penalty tax would not be assessed.

We own certain properties which represent a significant portion of our revenue. One property accounts for a significant portion of our assets, and, in the future, certain other properties may represent a significant portion of our revenues and assets.

As of December 31, 2013, one of our properties, Hearst Tower, accounted for approximately 10.2% of our portfolio's annualized base rent and another of our properties, CityWestPlace , accounts for approximately 13.4% of our assets on a consolidated basis. No other property accounted for more than 10% of our portfolio's annualized base rent or assets as of December 31, 2013. In the future, CityWestPlace and San Felipe Plaza, two wholly owned office properties in Houston, Texas acquired pursuant to the Mergers, may each account for a significant portion of our revenues. Our revenue and cash available for distribution to our stockholders would be materially and adversely affected if any of these properties were materially damaged or destroyed. Additionally, our revenue and cash available for distribution to our stockholders would be materially adversely affected if tenants at any of these properties experienced a downturn in their business, which could weaken their financial condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy.

Our joint venture investments could be adversely affected by the capital markets, our lack of sole decision-making authority, our reliance on joint venture partner's financial condition and any disputes that may arise between us and our joint venture partners.

We have in the past co-invested, and may in the future co-invest, with third parties through partnerships, joint ventures or other structures, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, co-tenancy or other entity. Therefore, we may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures. In addition, investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including potential deadlocks in making major decisions, restrictions on our ability to exit the joint venture, reliance on our joint venture partners and the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions, thus exposing us to liabilities in excess of our share of the investment. The funding of our capital contributions may be dependent on proceeds from asset sales, credit facility advances and/

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or sales of equity securities. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. We may in specific circumstances be liable for the actions of our joint venture partners. In addition, any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase our expenses.

We and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations.
    
We and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Failure to comply with these requirements could subject us to governmental fines or private litigant damage awards. In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us to incur significant expenditures. We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will develop. In addition, as a current or former owner or operator of real property, we may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on or emanating from such property, including investigation and cleanup costs; natural resource damages; third-party liability for cleanup costs, personal injury or property damage; and costs or losses arising from property use restrictions. Cleanup liabilities are often imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. Moreover, buildings and other improvements on our properties may contain asbestos-containing material or could have indoor air quality concerns (e.g., from mold), which may subject us to costs, damages and other liabilities including cleanup and personal injury liabilities. The foregoing could adversely affect occupancy and our ability to develop, sell or borrow against any affected property and could require us to make significant unanticipated expenditures that would adversely impact our business, financial condition and results of operations.
 
We may be adversely affected by laws, regulations or other issues related to climate change.

If we become subject to laws or regulations related to climate change, our business, results of operations and financial condition could be impacted adversely. The federal government has enacted, and some of the states and localities in which we operate may enact certain climate change laws and regulations or have begun regulating carbon footprints and greenhouse gas emissions. Although these laws and regulations have not had any known material adverse effects on our business to date, they could result in substantial compliance costs, retrofit costs and construction costs, including monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment. Furthermore, our reputation could be negatively affected if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future interpretations of current laws and regulations, related to climate change will affect our business, results of operations and financial condition. Lastly, the potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely affect our business, financial condition and results of operations.

Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.

Our properties must comply with the Americans with Disabilities Act ("ADA"), to the extent that our properties are public accommodations as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. If one or more of our properties is not in compliance with the ADA or other legislation, then we may be required to incur additional costs to bring the property into compliance with the ADA or similar state or local laws. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA or other legislation, our business, financial condition and results of operations could be adversely affected.

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

Our third party management and leasing agreements are subject to the risk of possible termination under certain circumstances, including our failure to perform as required under these agreements and to the risk of non-renewal by the property owner upon expiration or renewal on terms less favorable to us than the current terms. Many of the management and leasing agreements that expire or are contractually terminable prior to December 31, 2014 will automatically renew if written notice is not received by us prior to the termination date. If management and leasing agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease and our financial condition and results of operations could be adversely affected.



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Our third-party property management business may subject us to certain liabilities.

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

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

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

Uninsured and underinsured losses may adversely affect our operations.

We, or in certain instances, customers at our properties, carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage and umbrella liability coverage on all of our properties and wind, flood and hurricane coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate. Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets, and we believe our properties are adequately insured. We do not carry insurance for generally uninsured losses, including, but not limited to losses caused by riots, war or acts of God. In the event of substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property.

We may be subject to litigation, which could have a material adverse effect on our financial condition.

We may be subject to litigation, including claims relating to our assets and operations that are otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we may not be insured against. We generally intend to vigorously defend ourselves against such claims. However,

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we cannot be certain of the ultimate outcomes of claims that may be asserted. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, would adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make quarterly distributions to our stockholders. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our financial condition and results of operations, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

If we are unable to satisfy the regulatory requirements of the Sarbanes-Oxley Act of 2002, or if our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the trading price of our common stock.

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. Although management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in the trading price of our common stock, or otherwise materially adversely affect our business, reputation, results of operations, financial condition, or liquidity.
 
We depend on key personnel, each of whom would be difficult to replace.

Our continued success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, James R. Heistand, our President and Chief Executive Officer, who would be difficult to replace. Although we entered into an employment agreement with Mr. Heistand in July 2013 that provides for a three-year term, we cannot provide any assurance that he will remain employed by us. Our ability to retain Mr. Heistand, or to attract a suitable replacement should he leave, is dependent on the competitive nature of the employment market. The loss of services of Mr. Heistand could adversely affect our results of operations and slow our future growth.

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

On December 31, 2013 we closed our Jackson, Mississippi office in order to consolidate our support functions, including accounting, tax, human resources and information technology, in Florida.  However, we may not be able to effectively consolidate our accounting and other support functions in our Florida offices and we may not achieve the level of cost savings and other benefits we expect to realize as a result of the consolidation. Changes in the amount, timing and nature of the charges related to this consolidation could have a material adverse effect on our results of operations.

We have a significant amount of indebtedness and may need to incur more in the future.

We have substantial indebtedness related to the completion of the Mergers. As of December 31, 2013, we had approximately $1.4 billion of total outstanding indebtedness (including our pro rata share of debt of our unconsolidated subsidiaries). In addition, in connection with executing our business strategies going forward, we expect to continue to evaluate the possibility of acquiring additional properties and making strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for us, including:

hindering our ability to adjust to changing market, industry or economic conditions;

limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions or emerging businesses;

limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses;

making us more vulnerable to economic or industry downturns, including interest rate increases; and

placing us at a competitive disadvantage compared to less leveraged competitors.



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Moreover, to respond to competitive challenges, we may be required to raise substantial additional capital to execute our business strategy. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. If we are able to obtain additional financing, our credit ratings could be further adversely affected, which could further raise our borrowing costs and further limit its future access to capital and its ability to satisfy its obligations under its indebtedness.

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

We currently have both fixed and variable rate indebtedness and may incur additional indebtedness in the future, including borrowings under our credit facilities, to finance possible acquisitions and for general corporate purposes. As a result, we are and expect to be subject to the risks normally associated with debt financing including:

that interest rates may rise;

that our cash flow will be insufficient to make required payments of principal and interest;

that we will be unable to refinance some or all of our debt;

that any refinancing will not be on terms as favorable as those of our existing debt;

that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines;

that debt service obligations will reduce funds available for distribution to our stockholders;

that any default on our debt, due to noncompliance with financial covenants or otherwise, could result in acceleration of those obligations;

that we may be unable to refinance or repay the debt as it becomes due; and

that if our degree of leverage is viewed unfavorably by lenders or potential joint venture partners, it could affect our ability to obtain additional financing.

We may not be able to refinance or repay debt as it becomes due which may force us to refinance or to incur additional indebtedness at higher rates and additional cost or, in the extreme case, to sell assets or seek protection from our creditors under applicable law.

A lack of any limitation on our debt could result in our becoming more highly leveraged.

Our governing documents do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We might become more highly leveraged as a result, and our financial condition, results of operations and cash available for distribution to stockholders might be negatively affected, and the risk of default on our indebtedness could increase.

The cost and terms of mortgage financings may render the sale or financing of a property difficult or unattractive.

The sale of a property subject to a mortgage loan may trigger pre-payment penalties, yield maintenance payments or make-whole payments to the lender, which would reduce the amount of gain or increase our loss on the sale of a property and could make the sale of a property less likely. Certain of our mortgage loans will have significant outstanding principal balances on their maturity dates, commonly known as "balloon payments." There is no assurance that we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial condition and results of operations. Additionally, at the time a loan matures, the property may be worth less than the loan amount and, as a result, we may determine not to refinance the loan and permit foreclosure, generating a loss.

Financial covenants could adversely affect our ability to conduct our business.

Our senior unsecured revolving credit facility and unsecured term loans contain restrictions on the amount of debt we may incur and other restrictions and requirements on our operations. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business

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initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declaration of defaults under and acceleration of any related indebtedness, which would result in adverse consequences to our financial condition. Our senior unsecured revolving credit facility and unsecured term loans also contain cross-default provisions that give the lenders the right to declare a default if we are in default under other loans in excess of certain amounts. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which would have a material adverse effect on our business, financial condition and results of operations.

Failure to hedge effectively against interest rate changes may adversely affect results of operations.

The interest rate hedge instruments we use to manage some of our exposure to interest rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We depend on external sources of capital that are outside of our control, which may affect our ability to pursue strategic opportunities, refinance or repay our indebtedness and make distributions to our stockholders.

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs from income from operations. As a result, when we engage in the development or acquisition of new properties or expansion or redevelopment of existing properties, we will continue to rely on third-party sources of capital, including lines of credit, collateralized or unsecured debt (both construction financing and permanent debt), and equity issuances. Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market's view of the quality of our assets, the market's perception of our growth potential, our current debt levels and our current and expected future earnings. There can be no assurance that we will be able to obtain the financing necessary to fund our current or new developments or project expansions or our acquisition activities on terms favorable to us or at all. If we are unable to obtain a sufficient level of third party financing to fund our capital needs, our results of operations, financial condition and ability to make distributions to our stockholders may be adversely affected.

We may amend our investment strategy and business policies without your approval.

Our board of directors may change our investment strategy or any of our guidelines, financing strategy or leverage policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. A change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. These changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

Our ability to use our net operating loss carryforwards is limited.

As of December 31, 2013, we had net operating losses, or NOLs, of approximately $166.4 million for U.S. federal income tax purposes (not including NOLs of TPGI to which we succeeded as a result of the Parent Merger). These NOLs will expire at various times between 2018 and 2032. We have undergone an ownership change for purposes of Section 382 of the Code. An ownership change is, as a general matter, triggered by sales or acquisitions of our stock in excess of 50% on a cumulative basis during a three-year period by persons owning five percent or more of our total equity value. As a result of this ownership change, and subject to certain exceptions, we generally may utilize only approximately $3.1 million of our NOLs carryforwards derived prior to the ownership change to reduce our REIT taxable income (and therefore our distribution requirement) for a given taxable year. In addition, if we experience an additional ownership change during any subsequent three-year period, our future ability to utilize our NOLs may become further limited.

In addition, our ability to use NOLs of TPGI to which we succeeded as a result of the Parent Merger is limited.

Risks Related to Our Status as a REIT

Loss of our tax status as a real estate investment trust would have significant adverse consequences to us and the value of our securities.

We believe that we qualify for taxation as a REIT for U.S. federal income tax purposes, and we plan to operate so that we can continue to meet the requirements for taxation as a REIT. To qualify as a REIT we must satisfy numerous requirements

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(some on an annual and quarterly basis) established under the highly technical and complex provisions of the Internal Revenue Code ("Code") applicable to REITs, which include:

maintaining ownership of specified minimum levels of real estate related assets;

generating specified minimum levels of real estate related income;

maintaining certain diversity of ownership requirements with respect to our shares; and

distributing at least 90% of our taxable income on an annual basis.

The distribution requirement noted above could adversely affect our ability to use earnings for improvements or acquisitions because funds distributed to stockholders will not be available for capital improvements to existing properties or for acquiring additional properties.

Only limited judicial and administrative interpretations exist of the REIT rules. In addition, qualification as a REIT involves the determination of various factual matters and circumstances not entirely within our control.

If we fail to qualify as a REIT, we will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which we failed to qualify. This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the year or years involved. In addition, we would no longer be required to make distributions to our stockholders. To the extent that distributions to stockholders had been made based on our qualifying as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the applicable tax. As a REIT, we have been and will continue to be subject to certain U.S. federal, state and local taxes on our income and property.

If our operating partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that our operating partnership is properly treated as a partnership for U.S. federal income tax purposes. As a partnership, our operating partnership is not subject to U.S. federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, its share of our operating partnership's income. We cannot assure you, however, that the Internal Revenue Service, or the IRS, will not challenge the status of our operating partnership or any other subsidiary partnership in which we own an interest as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnerships to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which could reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

REIT distribution requirements could adversely affect our ability to execute our business plan or cause us to finance our needs during unfavorable market conditions.

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.

From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with generally accepted accounting principles ("GAAP"). In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, we may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income could cause us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our common stock

19



as part of a distribution in which stockholders may elect to receive our common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect our business, financial condition and results of operations.
 
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income, property or net worth, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. Any of these taxes would decrease cash available for the payment of our debt obligations and distributions to stockholders. Our taxable REIT subsidiaries (each a "TRS") generally will be subject to U.S. federal corporate income tax on their net taxable income.

Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or contribute to a TRS otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. In addition, we may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain attractive investments.

The requirements necessary to maintain our REIT status limit our ability to earn fee income at the REIT level, which causes us to conduct fee-generating activities through a TRS.

The REIT provisions of the Code limit our ability to earn additional management fee and other fee income from joint ventures and third parties. Our aggregate gross income from fees and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, our ability to increase the amount of fee income we earn at the REIT level is limited and, therefore, we conduct fee-generating activities through a TRS. Any fee income we earn through a TRS is subject to U.S. federal, state, and local income tax at regular corporate rates, which reduces our cash available for distribution to stockholders.

Our ownership of TRSs will be limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the rules applicable to TRSs limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions involving a TRS that are not conducted on an arm's length basis.

Our TRS will pay U.S. federal, state and local income tax on its taxable income. The after-tax net income of our TRSs will be available for distribution to us but generally is not required to be distributed. We anticipate that the aggregate value of the stock and securities of our TRS will be less than 25% of the value of our total assets (including the stock and securities of our TRS). Furthermore, we will monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with the ownership limitations applicable to TRSs. We will scrutinize all of our transactions involving our TRS to ensure that they are entered into on arm's length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however,

20



that we will be able to comply with the 25% limitation discussed above or avoid application of the 100% excise tax discussed above.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates and will continue to be subject to tax at rates applicable to ordinary income. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our stock.

The tax imposed on REITs engaging in "prohibited transactions" may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes.

A REIT's net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will be able to make use of the otherwise available safe harbors.

There is a risk of changes in the tax law applicable to REITs.

The Internal Revenue Service, the United States Treasury Department and Congress frequently review U.S. federal income tax legislation. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

Risks Associated with Our Stock

Limitations on the ownership of our common stock may preclude the acquisition or change of control of our Company.

Certain provisions contained in our charter and bylaws and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control. Provisions of our charter are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our capital stock that might jeopardize REIT qualification. Among other things, these provisions provide that, if a transfer of our stock or a change in our capital structure would result in (1) any person (as defined in the charter) directly or indirectly acquiring beneficial ownership of more than 9.8% (in value or in number, whichever is more restrictive) of our outstanding equity stock excluding Excess Stock, (2) our outstanding shares being constructively or beneficially owned by fewer than 100 persons, or (3) our being "closely held" within the meaning of Section 856(h) of the Code, then:

any proposed transfer will be void from the beginning and we will not recognize such transfer;

we may institute legal proceedings to enjoin such transfer;

we will have the right to redeem the shares proposed to be transferred; and/or

the shares proposed to be transferred will be automatically converted into and exchanged for shares of a separate class of stock, the Excess Stock.

Excess Stock has no dividend or voting rights but holders of Excess Stock do have certain rights in the event of our liquidation, dissolution or winding up. Our charter provides that we will hold the Excess Stock as trustee for the person or persons to whom the shares are ultimately transferred, until the time that the shares are retransferred to a person or persons in whose hands the shares would not be Excess Stock and certain price-related restrictions are satisfied. These provisions may have an anti-takeover effect by discouraging tender offers or purchases of large blocks of stock, thereby limiting the opportunity for stockholders to receive a premium for their shares over then-prevailing market prices. Under the terms of our charter, our Board of Directors has the authority to waive these ownership restrictions.
 

21



Furthermore, under our charter, our Board of Directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the Board of Directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders' best interests.

Maryland business statutes may limit the ability of a third party to acquire control of us.

Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations. The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.

The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of ten percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, ten percent or more of the voting power of the outstanding stock of the Maryland corporation.

Market interest rates may have an effect on the value of our common stock.

One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher dividend yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

The number of shares of our common stock available for future issuance or sale could adversely affect the per share trading price of our common stock and may be dilutive to current stockholders.

Our charter authorizes our Board of Directors to, among other things, issue additional shares of capital stock without stockholder approval. We cannot predict whether future issuances or sales of shares of our common stock or the availability of shares for resale in the open market will decrease the per share trading price per share of our common stock. The issuance of substantial numbers of shares of our common stock in the public market, or upon exchange of common units of limited partnership interests in our operating partnership, or the perception that such issuances might occur, could adversely affect the per share trading price of our common stock. In addition, any such issuance could dilute our existing stockholders' interests in our company. The per share trading price of our common stock may decline significantly upon the sale of shares of our common stock pursuant to registration rights granted to the TPG Entities in connection with TPG Pantera's investment in us in May 2012. In particular, we have entered into a stockholders agreement with the TPG Entities pursuant to which the TPG Entities may at any time (i) make up to three demands for registration and (ii) include the common stock they hold in any registration statement we file on account of any of our other security holders. The shares of common stock that may be registered on behalf of the TPG Entities, as described above, represent approximately 27% of our issued and outstanding common stock as of December 31, 2013 and 26% of our issued and outstanding common stock and limited voting stock. As a result, a substantial number of shares may be sold pursuant to the registration rights granted to the TPG Entities. The sale of such shares by the TPG Entities, or the perception that such a sale may occur, could materially and adversely affect the per share trading price of our common stock and could dilute our existing stockholders' interests in our company.

The exchange of common units for common stock, the issuance of our common stock or common units in connection with future property, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the per share trading price of our common stock. In addition, we may issue shares of our common stock or grant options, deferred incentive share units, restricted shares or other equity-based awards exercisable for or convertible or exchangeable into shares of our common stock under the Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan. Future issuances of shares of our common stock may be dilutive to existing stockholders.

22



Future offerings of debt securities, which would be senior to our common stock upon liquidation, or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the per share trading price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing our operating partnership to issue such debt securities), including medium-term notes, senior or subordinated notes and additional classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock or preferred units of partnership interest in our operating partnership and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Other than the TPG Entities, holders of our common stock are not entitled to preemptive rights or other protections against dilution. Any shares of preferred stock or preferred units that we issue in the future could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.

Our ability to pay dividends is limited by the requirements of Maryland law.

Our ability to pay dividends on our common stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus, unless the corporation's charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our common stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences upon dissolution senior to those of our common stock.

We may change our dividend policy.

Future distributions will be declared and paid at the discretion of our Board of Directors and the amount and timing of distributions will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code, and such other factors as our Board of Directors deems relevant. Our Board of Directors may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods.

Our senior unsecured revolving credit facility prohibits us from repurchasing shares of our common stock and may limit our ability to pay dividends on our common stock.

Our senior unsecured revolving credit facility, which matures in March 2016, prohibits us from repurchasing any shares of our stock, including our common stock, during the term of the senior unsecured revolving credit facility. Under the unsecured revolving credit facility, our distributions may not exceed the greater of (i) 90% of our funds from operations, (ii) the amount required for us to qualify and maintain our status as a REIT or (iii) the amount required for us to avoid the imposition of income and excise taxes. As a result, if we do not generate sufficient funds from operations (as defined in our senior unsecured revolving credit facility) during the 12 months preceding any common stock dividend payment date, we would not be able to pay dividends to our common stockholders consistent with our past practice without causing a default under our senior unsecured revolving credit facility. In the event of such a default, we would be unable to borrow under our senior unsecured revolving credit facility, and any amounts we have borrowed thereunder could become due and payable.

The price of our common stock may be volatile and may decline.

The market price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These fluctuations in the stock market may adversely affect the market price of our common stock. Among the factors that could affect the market price of our common stock are:

23




actual or anticipated quarterly fluctuations in our operating results and financial condition;

changes in revenues or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;

the ability of our customers to pay rent to us and meet their other obligations to us under current lease terms;

our ability to re-lease spaces as leases expire;

our ability to refinance our indebtedness as it matures;

any changes in our distribution policy;

any future issuances of equity securities;

strategic actions by us or our competitors, such as acquisitions or restructurings;

general market conditions and, in particular, developments related to market conditions for the real estate industry; and

domestic and international economic factors unrelated to our performance.

Risks Related to Our Recent Merger Transaction with TPGI.

We may be unable to integrate our and TPGI’s businesses successfully or realize the anticipated synergies and other benefits of the Mergers or do so within the anticipated timeframe.

We expect to benefit from the elimination of duplicative costs associated with supporting TPGI’s public company platform and the leveraging of state-of-the art technology and systems. These savings are expected to be realized upon full integration, which is expected to occur by the end of 2014. However, we will be required to devote significant management attention and resources to integrating the business practices and operations of TPGI with our own. Potential difficulties we may encounter in the integration process include the following:

the inability to successfully combine our and TPGI’s businesses in a manner that permits us to achieve the cost savings anticipated to result from the Mergers, which would result in the anticipated benefits of the Mergers not being realized in the timeframe currently anticipated or at all;

the complexities associated with integrating personnel from the two companies;

the complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases;

unanticipated costs of operating the former TPGI portfolio in a REIT-compliant manner;

potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Mergers; and

performance shortfalls as a result of the diversion of management’s attention caused by completing the Mergers and integrating the companies’ operations.

For all these reasons, it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our operations, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the Mergers, or could otherwise adversely affect our business and financial results.

We have incurred and expect to incur substantial expenses related to the Mergers with TPGI.

We have incurred and expect to incur substantial expenses in connection with the Mergers with TPGI and integrating TPGI’s business, operations, networks, systems, technologies, policies and procedures with ours. In addition, there are a large

24



number of systems that must be integrated, including property management, revenue management, customer payment, lease administration, website content management, purchasing, accounting, payroll, fixed assets and financial reporting. Additionally, there are a number of factors beyond our control that could affect the total amount or the timing of the integration expenses. As a result, the integration expenses associated with the Mergers could exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the businesses in the near future.

Our future results will suffer if we do not effectively manage our expanded operations following the Mergers.

We have expanded our operations as a result of the Mergers and intend to continue to expand our operations through additional acquisitions of properties, some of which may involve complex challenges. Our future success will depend, in part, upon our ability to manage the integration of the TPGI operations and our expansion opportunities, each of which may pose substantial challenges for us to integrate new operations into our existing business in an efficient and timely manner, and upon our ability to successfully monitor our operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that our expansion or acquisition opportunities will be successful, or that we will realize any expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
    
The Parent Merger carries certain tax risks.

The parties to the Parent Merger intended that the Parent Merger be treated as a reorganization within the meaning of Section 368(a) of the Code. If the Parent Merger were to have failed to qualify as a reorganization, then, among other things, TPGI would be treated as having sold, in a taxable transaction, all of its assets to us, with the result that TPGI would have generally recognized gain or loss on the deemed transfer of its assets to us and we, as successor to TPGI, would have assumed a significant current tax liability. The balance of this discussion assumes that the Parent Merger, as intended by the parties, qualified as a reorganization.

Because TPGI was taxable as a regular C corporation and we acquired its appreciated assets in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of TPGI prior to the Parent Merger, we will be subject to corporate income tax on the "built-in gain" with respect to TPGI’s assets at the time of the Parent Merger to the extent that we dispose of those assets in a taxable transaction within ten years following the Parent Merger (which occurred on December 19, 2013). This built-in gain is measured by the difference between the value of the TPGI assets at the time of the Parent Merger and the adjusted basis in those assets. Our ability to use historic net operating loss carryovers of TPGI (if any) to offset any built-in gain subject to this tax is limited.

Furthermore, in order to qualify as a REIT, we must not have, at the end of any taxable year, any earnings and profits accumulated in a non-REIT year. In connection with the Parent Merger, we would have succeeded to any earnings and profits accumulated by TPGI for taxable periods preceding the Parent Merger. In connection with the closing of the Mergers, we received a report, prepared by TPGI’s accountants, to the effect that TPGI would not have any earnings and profits accumulated in a non-REIT year to which we would succeed as a result of the Parent Merger. If we are (or were) treated as having, as a result of the Parent Merger or otherwise, any earnings and profits accumulated in any non-REIT year, in order to maintain our qualification as a REIT, we may have to pay a special dividend and/or employ applicable deficiency dividend procedures to eliminate such earnings and profits. If we need to make a special dividend or pay a deficiency dividend and do not otherwise have cash on hand to do so, we may need to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts otherwise intended to be used for other purposes, or (iv) make a taxable distribution of common stock. These alternatives could increase our costs or reduce our equity. In addition, we may be required to pay interest based on the amount of any such deficiency dividends. If we were unable to utilize any applicable deficiency dividend procedures, we could lose our REIT status.
Moreover, as TPGI was not a REIT but rather a regular C corporation its income, assets, and operations were not necessarily consistent with the requirements applicable to REITs. We took certain steps with respect to the historic assets and operations of TPGI so as to permit us to continue to qualify as a REIT following the Mergers. If we were unable to otherwise identify and restructure in a timely manner assets or operations of TPGI that were inconsistent with our status as a REIT, we may be unable to satisfy one or more of the requirements applicable to REITs.

In addition to the foregoing, as a result of the Parent Merger, we are liable for unpaid taxes of TPGI (if any) for any periods through the Parent Merger.

ITEM 1B.                          Unresolved Staff Comments.

None.

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ITEM 2.                  Properties.

General

We operate and invest principally in quality office properties in high growth submarkets in the Sunbelt region of the United States.  At January 1, 2014, we owned or had an interest in 50 office properties, including interests held through consolidated and unconsolidated joint ventures, comprising approximately 17.6 million square feet of office space located in eight states.

Office Buildings

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

Acquisitions

During the year ended December 31, 2013, we acquired TPGI’s ownership interest in two wholly owned office properties in Houston, Texas, five office properties in Austin, Texas held by the Austin joint venture, a 73% interest in a 302-unit residential condominium tower in Philadelphia, Pennsylvania, and a parcel of undeveloped land in Houston, Texas, and purchased three additional wholly owned office properties, TRST's interest in four office properties, two parcels of land available for development, and investments in three unconsolidated joint ventures as follows (in thousands):
 
Office Property
 
 
 
 
Location
 
 
 
Type of
Ownership
 
Ownership
Share
 
Square
Feet
 
 
 
Date
Purchased
 
Gross
Purchase
Price (1)
Tower Place 200
 
Atlanta, GA
 
Wholly owned
 
100.00
%
 
258

 
01/17/2013
 
$
56,250

Deerwood Portfolio (2)
 
Jacksonville, FL
 
Wholly owned
 
100.00
%
 
1,019

 
03/07/2013
 
130,000

Tampa Fund II Assets (3)
 
Tampa, FL
 
Wholly owned
 
100.00
%
 
788

 
03/25/2013
 
139,300

US Airways
 
Tempe, AZ
 
Joint venture
 
74.58
%
 
225

 
06/03/2013
 
41,750

7000 Central Park (4)
 
Atlanta, GA
 
Joint venture
 
40.00
%
 
415

 
09/11/2013
 
56,600

Lincoln Place
 
Miami, FL
 
Wholly owned
 
100.00
%
 
140

 
12/06/2013
 
65,382

Bank of America Center (5)
 
Orlando, FL
 
Wholly owned
 
100.00
%
 
417

 
12/23/2013
 
75,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cypress Center IV (6)
 
Tampa, FL
 
Wholly owned
 
100.00
%
 

 
08/01/2013
 
2,900

Tempe Town Lake (6)
 
Tempe, AZ
 
Fund II
 
30.00
%
 

 
08/27/2013
 
1,200

 
 
 
 
 
 
 
 
 
 
 
 
 
CityWestPlace (7)
 
Houston, TX
 
Wholly owned
 
100.00
%
 
1,473

 
12/19/2013
 
N/A

San Felipe Plaza (7)
 
Houston, TX
 
Wholly owned
 
100.00
%
 
980

 
12/19/2013
 
N/A

300 West 6th (8)
 
Austin, TX
 
Joint venture
 
33.33
%
 
454

 
12/19/2013
 
N/A

One American Center (8)
 
Austin, TX
 
Joint venture
 
33.33
%
 
504

 
12/19/2013
 
N/A

Frost Bank Tower (8)
 
Austin, TX
 
Joint venture
 
33.33
%
 
535

 
12/19/2013
 
N/A

One Congress Plaza (8)
 
Austin, TX
 
Joint venture
 
33.33
%
 
519

 
12/19/2013
 
N/A

San Jacinto Center (8)
 
Austin, TX
 
Joint venture
 
33.33
%
 
410

 
12/19/2013
 
N/A

 
 
 
 
 
 
 

 
8,137

 
 
 
$
568,382

(1)
Purchase price consists of the contract price only and does not include closing costs.
(2)
We purchased two office complexes (collectively, the "Deerwood Portfolio") totaling 1.0 million square feet located in the Deerwood submarket of Jacksonville, Florida.
(3)
We purchased TRST's 70% interest in Corporate Center IV at International Plaza, Cypress Center I, II, III and Cypress Center garage, and The Pointe for $97.5 million, which represents TRST's 70% interest in these office properties.
(4)
We and our joint venture partner purchased the mortgage loan secured by 7000 Central Park. The joint venture foreclosed on the property on November 5, 2013 and on December 13, 2013, we and our joint venture partner placed secured financing on the asset.
(5)
We purchased TRST's 70% interest in Bank of America Center for $28.1 million plus the assumption of debt of approximately $23.7 million, representing TRST's 70% share. See note below regarding our change in ownership to 100%.
(6)
We purchased approximately six acres of land available for development in Tampa, Florida and approximately one acre of land available for development in Tempe, Arizona. The land purchased in Tampa, Florida is adjacent to our Cypress Center I, II and III assets and land purchased in Tempe, Arizona is adjacent to our Hayden Ferry Lakeside and Tempe Gateway assets. V and Tempe Town Lake are parcels of undeveloped land.
(7)
Wholly owned Houston properties acquired in connection with the Mergers.
(8)
Austin joint venture properties acquired in connection with the Mergers. As of February 10, 2014, our ownership share was 40%. Please refer to "Item 2. Properties - Subsequent Property Transactions" for more information regarding this change in ownership share.
    
We generally financed these acquisitions with borrowings under our senior unsecured revolving credit facility, and with proceeds from underwritten public offerings of shares of our common stock or, in the case of the properties acquired in the Mergers, with shares of our common stock.
 

26



We purchased these 16 assets at an estimated weighted average capitalization rate of 6.5%.  We compute the estimated capitalization rate by dividing cash net operating income excluding rent concessions for the first year of ownership by the gross purchase price.  We define cash net operating income as property specific revenues (rental revenue, property expense recoveries and other revenue) less property specific expenses (personnel, real estate taxes, insurance, repairs and maintenance and other property expenses).

Dispositions

During the year ended December 31, 2013, we sold the following properties (in thousands):
Office Property
 
Type of Ownership
 
Location
 
Square Feet
 
Date of Sale
 
Gross Sales Price
 
Gain (Loss) on Sale
Atrium at Stoneridge
 
Wholly Owned
 
Columbia, SC
 
108

 
03/20/2013
 
$
3,050

 
$
542

Waterstone
 
Wholly Owned
 
Atlanta, GA
 
93

 
07/10/2013
 
3,400

 
40

Meridian
 
Wholly Owned
 
Atlanta, GA
 
97

 
07/10/2013
 
6,800

 
55

Bank of America Plaza
 
Wholly Owned
 
Nashville, TN
 
436

 
07/17/2013
 
42,750

 
11,450

Lakewood II
 
Fund II
 
Atlanta, GA
 
123

 
10/31/2013
 
10,600

 
5,837

Carmel Crossing
 
Fund II
 
Charlotte, NC
 
326

 
11/08/2013
 
37,500

 
14,569

Total 2013
 
 
 
 
 
1,183

 
 
 
$
104,100

 
$
32,493


The following table sets forth certain information about office properties which we owned or had an interest in at January 1, 2014:
Market and Property
 
Number
Of
Properties (1)
 
Parkway's
Ownership
Interest
 
Total Net
Rentable
Square
Feet (In thousands)
 
Occupancy
Percentage
 
Weighted Avg.
Gross
Rental Rate Per
Net Rentable
Square Foot (2)
 
% of
Leases
Expiring
in
2014 (3)
 
Year Built/
Renovated
PHOENIX, AZ
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Squaw Peak I & II
 
 
 
100.0
%
 
291

 
92.7
%
 
$
22.61

 
5.5
%
 
1999/2000
Mesa Corporate Center (4)
 
 
 
100.0
%
 
106

 
92.9
%
 
16.77

 
11.9
%
 
2000
Tempe Gateway
 
 
 
100.0
%
 
264

 
93.0
%
 
26.17

 
2.9
%
 
2009
Hayden Ferry Lakeside I
 
 
 
30.0
%
 
204

 
94.9
%
 
28.42

 
5.4
%
 
2002
Hayden Ferry Lakeside II
 
 
 
30.0
%
 
299

 
89.5
%
 
29.59

 
1.6
%
 
2007
Hayden Ferry Lakeside III - V
 
 
 
30.0
%
 
21

 
90.5
%
 
28.88

 
0.0
%
 
2007
US Airways
 
 
 
74.6
%
 
225

 
100.0
%
 
17.50

 
0.0
%
 
1999
 
 
7

 
68.7
%
 
1,410

 
93.5
%
 
26.22

 
3.8
%
 
 
FT. LAUDERDALE, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hillsboro V
 
 
 
100.0
%
 
116

 
95.5
%
 
23.71

 
15.7
%
 
1985
Hillsboro I-IV
 
 
 
100.0
%
 
100

 
73.0
%
 
17.78

 
12.6
%
 
1985
 
 
2

 
100.0
%
 
216

 
85.1
%
 
21.33

 
28.3
%
 
 
JACKSONVILLE, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SteinMart Building
 
 
 
100.0
%
 
197

 
99.0
%
 
20.57

 
10.6
%
 
1985
Riverplace South
 
 
 
100.0
%
 
106

 
65.6
%
 
19.75

 
5.7
%
 
1981
Deerwood North
 
 
 
100.0
%
 
497

 
95.7
%
 
21.01

 
71.0
%
 
1999
Deerwood South
 
 
 
100.0
%
 
522

 
92.5
%
 
19.73

 
3.9
%
 
1999
245 Riverside
 
 
 
30.0
%
 
136

 
98.8
%
 
22.03

 
33.0
%
 
2003
 
 
5

 
78.3
%
 
1,458

 
93.1
%
 
20.52

 
3.5
%
 
 
TAMPA, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westshore Corporate Center (6)
 
 
 
100.0
%
 
171

 
80.3
%
 
24.38

 
8.4
%
 
1988
Corporate Center Four at International Plaza (6)
 
 
 
100.0
%
 
250

 
94.6
%
 
32.34

 
1.5
%
 
2008
Cypress Center I, II & III
 
 
 
100.0
%
 
286

 
93.0
%
 
19.78

 
2.7
%
 
1982
The Pointe
 
 
 
100.0
%
 
252

 
91.7
%
 
28.08

 
6.5
%
 
1982
 
 
4

 
100.0
%
 
959

 
90.8
%
 
26.13

 
4.4
%
 
 
MIAMI, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lincoln Place (6)
 
 
 
100.0
%
 
140

 
100.0
%
 
49.81

 
%
 
2002
 
 
1

 
100.0
%
 
140

 
100.0
%
 
49.81

 
%
 
 
ORLANDO, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Citrus Center
 
 
 
100.0
%
 
261

 
81.1
%
 
24.35

 
0.1
%
 
1971
Bank of America Center
 
 
 
100.0
%
 
417

 
80.6
%
 
23.01

 
0.8
%
 
1987
 
 
2

 
100.0
%
 
678

 
80.8
%
 
23.51

 
0.9
%
 
 

27



Market and Property
 
Number
Of
Properties (1)
 
Parkway's
Ownership
Interest
 
Total Net
Rentable
Square
Feet (In thousands)
 
Occupancy
Percentage
 
Weighted Avg.
Gross
Rental Rate Per
Net Rentable
Square Foot (2)
 
% of
Leases
Expiring
in
2014 (3)
 
Year Built/
Renovated
ATLANTA, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Peachtree Dunwoody
 
 
 
100.0
%
 
370

 
68.8
%
 
21.55

 
6.3
%
 
1976/1980
Capital City Plaza
 
 
 
100.0
%
 
409

 
76.3
%
 
27.64

 
11.4
%
 
1989
Tower Place 200
 
 
 
100.0
%
 
258

 
89.6
%
 
26.98

 
36.1
%
 
1998
3344 Peachtree
 
 
 
33.0
%
 
484

 
93.3
%
 
1.00

 
24.0
%
 
1986
Two Ravinia Drive
 
 
 
30.0
%
 
392

 
85.7
%
 
21.26

 
13.8
%
 
1987
7000 Central Park
 
 
 
40.0
%
 
414

 
74.8
%
 
23.75

 
11.6
%
 
1988
 
 
6

 
64.4
%
 
2,327

 
81.4
%
 
26.77

 
11.4
%
 
 
JACKSON, MS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
City Centre
 
 
 
100.0
%
 
266

 
87.5
%
 
14.80

 
4.0
%
 
1987
 
 
1

 
100.0
%
 
266

 
87.5
%
 
14.80

 
4.0
%
 
 
CHARLOTTE, NC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hearst Tower
 
 
 
100.0
%
 
973

 
88.8
%
 
29.60

 
9.6
%
 
2002
525 North Tryon
 
 
 
100.0
%
 
405

 
66.0
%
 
19.07

 
%
 
1998
NASCAR Plaza (6)
 
 
 
100.0
%
 
395

 
88.0
%
 
26.71

 
4.1
%
 
2009
 
 
3

 
100.0
%
 
1,773

 
83.4
%
 
27.02

 
6.2
%
 
 
PHILADELPHIA, PA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Two Liberty Place
 
 
 
19.0
%
 
941

 
99.1
%
 
29.73

 
0.3
%
 
1990
 
 
1

 
19.0
%
 
941

 
99.1
%
 
29.73

 
0.3
%
 
 
MEMPHIS, TN
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Morgan Keegan Tower
 
 
 
100.0
%
 
337

 
92.3
%
 
19.54

 
4.9
%
 
1985
 
 
1

 
100.0
%
 
337

 
92.3
%
 
19.54

 
4.9
%
 
 
AUSTIN, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
300 West 6th (5)
 
 
 
33.3
%
 
454

 
94.1
%
 
37.30

 
8.0
%
 
2001
One American Center (5) (6)
 
 
 
33.3
%
 
504

 
77.4
%
 
28.13

 
5.2
%
 
1984
Frost Bank Tower (5) (6)
 
 
 
33.3
%
 
535

 
90.8
%
 
44.40

 
53.0
%
 
2003
One Congress Plaza (5)
 
 
 
33.3
%
 
519

 
80.2
%
 
36.90

 
10.0
%
 
1987
San Jacinto Center (5)
 
 
 
33.3
%
 
410

 
85.7
%
 
34.54

 
2.9
%
 
1987
 
 
5

 
33.3
%
 
2,422

 
85.5
%
 
38.44

 
5.3
%
 
 
HOUSTON, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
400 Northbelt
 
 
 
100.0
%
 
231

 
60.2
%
 
18.47

 
17.7
%
 
1982
Woodbranch (4)
 
 
 
100.0
%
 
109

 
100.0
%
 
21.24

 
17.0
%
 
1982
Honeywell
 
 
 
100.0
%
 
157

 
100.0
%
 
25.13

 
0.4
%
 
1983
Schlumberger
 
 
 
100.0
%
 
155

 
100.0
%
 
17.51

 
0.0
%
 
1983
One Commerce Green
 
 
 
100.0
%
 
341

 
100.0
%
 
23.07

 
0.0
%
 
1983
Comerica Bank Building
 
 
 
100.0
%
 
194

 
93.5
%
 
22.04

 
7.8
%
 
1983
550 Greens Parkway
 
 
 
100.0
%
 
72

 
100.0
%
 
22.29

 
%
 
1999
5300 Memorial
 
 
 
100.0
%
 
154

 
98.9
%
 
25.07

 
11.8
%
 
1982
Town & Country
 
 
 
100.0
%
 
149

 
100.0
%
 
23.42

 
10.6
%
 
1982
Phoenix Tower
 
 
 
100.0
%
 
629

 
87.5
%
 
27.71

 
5.9
%
 
1984/2011
CityWestPlace
 
 
 
100.0
%
 
1,473

 
97.4
%
 
28.50

 
30.1
%
 
2002
San Felipe Plaza
 
 
 
100.0
%
 
980

 
86.4
%
 
32.11

 
15.7
%
 
1984
 
 
12

 
100.0
%
 
4,644

 
92.3
%
 
26.97

 
16.0
%
 
 
Total Properties as of January 1, 2014
 
50

 
78.7
%
 
17,571

 
88.9
%
 
$
27.65

 
7.9
%
 
 

(1)
Our properties include 50 properties comprising 17.6 million net rentable square feet and include 36 office properties owned directly, seven office properties owned through Fund II, and seven properties owned through unconsolidated joint ventures, representing 68.5%, 14.1%, and 17.4% of our portfolio, respectively.  Our non-strategic properties include two properties comprising 603,000 square feet as of January 1, 2014, which include properties in non-strategic markets such as Jackson, Mississippi and Memphis, Tennessee.  See "Note 4 - Investment in Unconsolidated Joint Ventures" to the consolidated financial statements for additional information on properties owned through unconsolidated joint ventures. See "Note 12 - Noncontrolling Interests" to the consolidated financial statements for additional information on properties owned through Fund II.
(2)
Weighted average expiring gross rental rate is the weighted average current rental rate, which also includes $5.07 per square foot of escalations for operating expenses.  These rates do not reflect any future increases in contractual rent or projections with respect to expense reimbursements.
(3)
The percentage of leases expiring in 2014 represents the ratio of square feet under leases expiring in 2014 divided by total net rentable square feet.
(4)
Sold in January 2014. Refer to "Item 2. Properties - Subsequent Property Transactions" for details.
(5)
As of February 10, 2014, our ownership percentage was 40% . Please refer to "Item 2. Properties - Subsequent Property Transactions" for more information regarding this change in ownership percentage.
(6)
These properties are subject to ground leases.  See "Note 2 - Investments in Office Properties", to the consolidated financial statements for additional information on these ground leases.

28



The following table sets forth scheduled lease expirations for properties owned at January 1, 2014, assuming no customer exercises renewal options or early termination rights:
Year of Lease Expiration
 
Number of Leases
 
Net Rentable Square Feet Expiring (in thousands)
 
Percent of Total Net Rentable Square Feet
 
Annualized Rental Amount Expiring (1) (in thousands)
 
Percent of Annualized Rental Amount Expiring
 
Weighted Average Expiring Gross Rental Rate per Net Rentable Square Foot (2)
2014
 
279

 
1,482

 
9.8
%
 
$
42,487

 
9.8
%
 
$
28.67

2015
 
182

 
1,551

 
8.8
%
 
39,706

 
9.2
%
 
25.60

2016
 
214

 
2,623

 
14.9
%
 
67,849

 
15.7
%
 
25.87

2017
 
165

 
2,226

 
12.7
%
 
59,209

 
13.7
%
 
26.60

2018
 
141

 
1,150

 
6.6
%
 
32,636

 
7.6
%
 
28.38

2019
 
65

 
1,189

 
6.8
%
 
34,664

 
8.0
%
 
29.15

2020 & Later
 
157

 
5,404

 
31.0
%
 
155,557

 
36.0
%
 
28.79

 
 
1,203

 
15,625

 
90.3
%
 
$
432,108

 
100.0
%
 
$
27.65


(1)
Annualized rental amount expiring is defined as net rentable square feet expiring multiplied by the weighted average expiring annual rental rate per net rentable square foot.
(2)
Weighted average expiring gross rental rate is the weighted average current rental rate, which also includes $5.07 per square foot of escalations for operating expenses.  These rates do not reflect any future increases in contractual rent or projections with respect to expense reimbursements.

Top 20 Customers (based on rental revenue)

At January 1, 2014, our office properties were leased pursuant to 1,203 leases with customers in a wide variety of industries including banking, insurance, professional services (including legal, accounting, and consulting), energy, financial services and telecommunications.  Our largest and 20 largest customers accounted for 5.0% and 35.0%, respectively, of our annualized rental revenue.  The following table sets forth information concerning the 20 largest customers of the properties owned directly or through joint ventures as of January 1, 2014 (in thousands, except number of properties and footnotes):

Customer
No. of
Props.
 
Square Footage Expiring
 
Leased
Square
Feet (1)
 
Annualized
Rental
Revenue (1)
 
Percentage of Total Annualized Rental Revenue
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
BMC Software, Inc.
2
 

 

 

 

 

 

 
521

 
521

 
$
15,995

 
5.0
%
Halliburton Energy Services, Inc.
2
 
443

 

 

 

 

 

 

 
443

 
13,791

 
4.3
%
Bank of America, NA (2)
3
 

 

 

 
194

 

 

 
358

 
552

 
13,361

 
4.1
%
Blue Cross Blue Shield of Georgia, Inc. (3)
1
 

 

 

 

 

 

 
228

 
228

 
6,607

 
2.1
%
Ensco International Incorporated
1
 
43

 

 

 

 

 

 
165

 
208

 
6,409

 
2.0
%
Hearst Communications, Inc.
1
 

 

 

 
181

 

 

 

 
181

 
5,089

 
1.6
%
Statoil Gulf Services, LLC
1
 

 

 

 
150

 

 

 

 
150

 
5,080

 
1.6
%
Nabors Industries
1
 

 
225

 

 

 

 

 

 
225

 
5,025

 
1.6
%
Raymond James & Associates
3
 
5

 

 
240

 

 

 

 
19

 
264

 
4,931

 
1.5
%
NASCAR
1
 

 

 

 

 

 

 
139

 
139

 
4,328

 
1.3
%
K & L Gates (4)
1
 

 

 

 

 

 

 
111

 
111

 
3,924

 
1.2
%
Nalco Company
1
 

 

 

 

 

 

 
130

 
130

 
3,614

 
1.1
%
JPMorgan Chase Bank, N.A.
3
 

 
189

 

 

 

 

 

 
189

 
3,565

 
1.1
%
Honeywell
1
 

 

 

 
12

 
5

 
116

 

 
133

 
3,416

 
1.1
%
Ion Geophysical Corporation
1
 

 

 

 

 

 

 
139

 
139

 
3,190

 
1.0
%
Board of Regents of University System of GA
1
 
61

 

 

 

 

 

 
51

 
112

 
3,146

 
1.0
%
Chiquita Brands, L.L.C.
1
 

 

 

 

 

 

 
138

 
138

 
3,086

 
1.0
%
Southwestern Energy Company (5)
2
 

 

 

 

 

 
118

 

 
118

 
2,889

 
0.9
%
Vitera Healthcare Solutions, LLC
1
 

 

 

 
86

 

 

 

 
86

 
2,848

 
0.9
%
Schlumberger Technology (6)
1
 

 

 

 
155

 

 

 

 
155

 
2,719

 
0.8
%
Total
 
 
552

 
414

 
240

 
778

 
5

 
234

 
1,999

 
4,222

 
$
113,013

 
35.0
%
Total Rentable Square Footage (1)
 
 
17,571

 
 
 
 
Total Annualized Rental Revenue (1)
 
 
$
323,063

 
 
 
 


29



(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square foot, multiplied by the number of square feet leased by the customer.  Annualized rent for customers in joint ventures is calculated based on our ownership interest (Parkway's share).  However, leased square feet and total rentable square footage represents 100% of square feet leased and owned through direct ownership or through joint ventures. Amounts do not include the impact for grossing up triple net leases.
(2)
Bank of America (Hearst Tower in Charlotte, North Carolina) lease provides an option to cancel 64,462 square feet in June 2017 with 18 months written notice.
(3)
Blue Cross Blue Shield of Georgia (Capital City Plaza in Atlanta, Georgia) has the option to cancel 58,368 square feet in January 2016 or January 2018 with nine months written notice.  Additionally, the lease provides the option to cancel an additional 29,610 square feet in January 2018 with nine months written notice.
(4)
K & L Gates LLP (Hearst Tower in Charlotte, North Carolina) lease provides a cancellation option in September September 2024 with 12 months prior written notice.
(5)
Southwest Energy Company (One Commerce Green and 550 Greens Parkway in Houston, Texas) lease provides a cancellation option in February 2015, 2016, 2017 and 2018, each with 12 months written notice.
(6)
Schlumberger Technology (Schlumberger Building in Houston, Texas) lease provides a cancellation option in June 2015 with 12 months advance notice.

Significant Properties

We have one property, CityWestPlace, whose book value at December 31, 2013 exceeded ten percent of total assets.

CityWestPlace is comprised of four office buildings in a 35.3 acre complex that range from six stories to 21 stories with an aggregate 1,475,000 rentable square feet located in Houston, Texas. We acquired CityWestPlace in December 2013 in conjunction with Mergers. The buildings were constructed between 1993 and 2001. CityWestPlace's major customers include companies in technology, energy, oil and gas and businesses that provide technology support, energy products, and dining. The building was 97.3% occupied at January 1, 2014, with an average effective annual rental rate per square foot of $28.50.

Lease expirations for CityWestPlace at January 1, 2014 are as follows (in thousands, except number of leases):
Year
 
Square Feet
of Leases
Expiring
 
Percentage
of Total
Square Feet
 
Annualized
Rental
Revenue (1)
 
Percentage of
Total Annualized
Rental Revenue
 
Number of
Leases
2014
 
443

 
30.1
%
 
$
13,792

 
33.7
%
 
8

2015
 
61

 
4.2
%
 
2,069

 
5.1
%
 
2

2016
 

 
%
 

 
%
 

2017
 
226

 
15.3
%
 
7,425

 
18.2
%
 
2

2018
 

 
%
 

 
%
 

2019 & Later
 
703

 
47.7
%
 
17,564

 
43.0
%
 
9

 
 
1,433

 
97.3
%
 
$
40,850

 
100.0
%
 
21


(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square feet, multiplied by the number of square feet leased by the customer.

CityWestPlace has three customers that occupy 10% or more of the rentable square footage.  Information regarding these customers are as follows:
Nature of Business
 
Square Feet Expiring        (in thousands)
 
Lease Expiration Date
 
Effective Rental Rate
Per Square Foot
 
Lease Options
Technology
 
521
 
2021
 
$
15.00

 
(1)
Energy
 
379
 
2014
 
24.00

 
(2)
Oil & Gas
 
150
 
2017
 
30.14

 
(3)
(1)
This customer has the option to cancel 32,008 square feet at any time with 180 days notice.
(2)
This customer has an option to cancel its lease in June 2014 if notice is provided in June 2014.
(3)
This customer does not have an option to cancel.

For tax purposes, depreciation is calculated over 39 years for buildings and garages, 7 to 39 years for building and tenant improvements and 5 to 7 years for equipment, furniture and fixtures.  The federal tax basis net of accumulated tax depreciation of CityWestPlace is estimated as follows at December 31, 2013 (in thousands):
 
 
CityWestPlace
Land
 
$
41,000

Building and Garage
 
220,000

Building and Tenant Improvements
 
22,000



30



We have one property, Hearst Tower, whose gross revenue exceeds ten percent of consolidated gross revenues for the year ended December 31, 2013.

Hearst Tower is a 46-story office property located in the central business district in Charlotte, North Carolina. We acquired fee simple title to Hearst Tower in June 2012.  The building was constructed in 2002 and includes 973,000 rentable square feet of office space. Hearst Tower's major customers include a banking entity, a media company, and businesses that provide legal, accounting and other financial service. The building was 91.3% occupied at January 1, 2014, with an average effective annual rental rate per square foot of $29.60. The average occupancy and rental rate per square foot since we acquired ownership of Hearst Tower is as follows:
Year
 
Average Occupancy
 
Average Rental Rate
per Square Foot
2012
 
93.9%
 
$
29.12

2013
 
91.3%
 
29.60


Lease expirations for Hearst Tower at January 1, 2014 are as follows (in thousands, except number of leases):

Year
 
Square Feet
of Leases
Expiring
 
Percentage
of Total
Square Feet
 
Annualized
Rental
Revenue (1)
 
Percentage of
Total Annualized
Rental Revenue
 
Number of
Leases
2014
 
94

 
9.6
%
 
$
3,023

 
11.8
%
 
5

2015
 
1

 
0.1
%
 
20

 
0.1
%
 
1

2016
 
14

 
1.4
%
 
414

 
1.6
%
 
2

2017
 
246

 
25.3
%
 
7,072

 
27.7
%
 
5

2018
 
2

 
0.2
%
 
32

 
0.1
%
 
1

2019 & Later
 
508

 
52.2
%
 
15,014

 
58.7
%
 
16

 
 
865

 
88.8
%
 
$
25,575

 
100.0
%
 
30


(1)
Annualized rental revenue represents the gross rental rate (including escalations) per square feet, multiplied by the number of square feet leased by the customer.

Hearst Tower has three customers that occupy 10% or more of the rentable square footage.  Information regarding these customers are as follows:
Nature of Business
 
Square Feet Expiring (in thousands)