10-K 1 pkyinc-20161231x10k.htm 10-K Document


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, 2016
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 001-37819

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

Maryland
61-1796261
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

San Felipe Plaza
5847 San Felipe Street, Suite 2200
Houston, Texas 77057
(Address of principal executive offices) (Zip Code)

(346) 200-3100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 Par Value
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    o Yes xNo

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).      xYes   oNo

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.   x

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

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

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 Registrant’s shares of common stock, $0.001 par value per share (“common stock”), are listed and trade on the New York Stock Exchange (“NYSE”) and began trading publicly in the regular way on October 7, 2016. There were 49,195,214 shares of common stock outstanding on March 8, 2017. The aggregate market value of common stock held by non-affiliates, based on the closing price of $20.50 per share as reported on the NYSE on March 8, 2017, was approximately $990.4 million.

DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the Registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission are incorporated by reference into Part III of this Annual Report on Form 10-K.




EXPLANATORY NOTE

This Annual Report on Form 10-K of Parkway, Inc. (the “Company”) includes the financial statements of the Company as of December 31, 2016 and for the period from June 29, 2016 (date of capitalization) to December 31, 2016, the Company’s predecessor, Parkway Houston, as of October 5, 2016 and December 31, 2015 and for the period from January 1, 2016 to October 5, 2016 and the years ended December 31, 2015 and 2014, and the Company’s other predecessor, Cousins Houston, as of October 6, 2016 and December 31, 2015 and for the period from January 1, 2016 to October 6, 2016 and the years ended December 31, 2015 and 2014. “Parkway Houston” is the portion of the Houston Business (as defined below) previously owned and operated by Parkway Properties, Inc. (“Legacy Parkway”), including Legacy Parkway’s fee-based real estate services and certain other assets previously owned by Legacy Parkway. “Cousins Houston” is the portion of the Houston Business previously owned and operated by Cousins Properties Incorporated (“Cousins”). “Houston Business” is the portion of the combined businesses of Legacy Parkway and Cousins relating to the ownership of real properties in Houston Texas, together with Legacy Parkway’s fee-based real estate services, which was contributed to the Company pursuant to the Separation (as defined below). Parkway Houston and Cousins Houston were not operated by Legacy Parkway or Cousins as stand-alone businesses.

On October 6, 2016, Legacy Parkway merged with and into Clinic Sub Inc., a wholly owned subsidiary of Cousins, with Clinic Sub Inc. continuing as the surviving corporation and a wholly owned subsidiary of Cousins (the “Merger”). The Merger was consummated pursuant to that certain Agreement and Plan of Merger, dated April 28, 2016 (the “Merger Agreement”), by and among Cousins, Clinic Sub Inc., Legacy Parkway and Parkway Properties LP (“Parkway LP”). Following the consummation of the Merger on October 6, 2016, in accordance with the Merger Agreement, Cousins separated the portion of its combined businesses relating to the ownership of real properties in Houston, Texas, as well as Legacy Parkway’s fee-based real estate services, from the remainder of the combined businesses (the “Separation”). In connection with the Separation, Cousins and Legacy Parkway reorganized the combined businesses through a series of transactions (the “UPREIT Reorganization”) pursuant to which the Houston Business was transferred to the Company, and the remainder of the combined business was transferred to Cousins Properties LP, a Delaware limited partnership (“Cousins LP”), the operating partnership of Cousins. On October 7, 2016, following the Separation and Reorganization, Cousins completed the spin-off of the Company, by distributing all of the Company’s outstanding shares of common and limited voting stock to the holders of Cousins common and limited voting preferred stock as of the record date, October 6, 2016 (the “Spin-Off”). The Spin-Off was consummated pursuant to the Merger Agreement and that certain Separation, Distribution and Transition Services Agreement, dated October 5, 2016, by and among the Company, Parkway LP, Cousins, Cousins LP and certain other parties (the “Separation and Distribution Agreement”).

The financial statements of the Company presented in this report cover the period from June 29, 2016 (date of capitalization) to December 31, 2016, part of which was prior to consummation of the Separation, the UPREIT Reorganization and the Spin-Off. Therefore, the discussion of the Company’s results of operations, cash flows and financial condition set forth in this report is not necessarily indicative of the future results of operations, cash flows or financial condition of the Company as an independent, publicly traded company. Moreover, the combined financial statements for the Company’s predecessors are not necessarily indicative of the Company’s results of operations, cash flows or financial position following the completion of the Separation, the UPREIT Reorganization and the Spin-Off.





PARKWAY, 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.
Item 16.
 
 
 
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 closings of acquisitions, dispositions or other transactions, the ability to complete acquisitions and dispositions and the risks associated therewith, and the expected operating performance of anticipated near-term acquisitions and descriptions relating to these expectations.  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,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “should,” “will,” “result” or 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.

The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements.

Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such factors include, but are not limited to:
our short operating history as an independent company;
conditions associated with our primary market, including an oversupply of office space, customer financial difficulties and general economic conditions;
that each of our properties represent a significant portion of our revenues and costs;
that our Spin-Off from Cousins will not qualify for tax-free treatment;
our ability to meet mortgage debt obligations on certain of our properties;
the availability of refinancing current debt obligations;
risks associated with joint ventures and potential co-investments with third-parties;
changes in any credit rating we may subsequently obtain;
changes in the real estate industry and in performance of the financial markets and interest rates and our ability to effectively hedge against interest rate changes;
the actual or perceived impact of global and economic conditions, including U.S. monetary policy;
declines in commodity prices, which may negatively impact the Houston, Texas market;
the concentration of our customers in the energy sector;
the demand for and market acceptance of our properties for rental purposes;
our ability to enter into new leases or renewal leases on favorable terms;
the potential for termination of existing leases pursuant to customer termination rights;
the amount, growth and relative inelasticity of our expenses;
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 the company;
the ability to satisfy conditions necessary to close pending transactions and the ability to successfully integrate the assets and related operations acquired in such transactions after the closing;




applicable regulatory changes;
risks associated with the ownership and development of real property, including risks related to natural disasters and illiquidity of real estate;
risks associated with acquisitions, including the integration of the combined Houston Business;
risks associated with the fact that our historical and pro forma financial information may not be a reliable indicator of our future results;
risks associated with achieving expected synergies or cost savings;
defaults or non-renewal of leases;
termination or non-renewal of property management contracts;
our failure to maintain our status as real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”);
risks associated with the potential volatility of our common stock; and
other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (“SEC”) filings.

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 financial 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 statement speaks 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 1. Business

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

Overview

We are an independent, publicly traded, self-managed REIT that owns and operates high-quality office properties located in attractive submarkets in Houston, Texas. Our portfolio consists of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing geographic focus and significant operational scale and efficiencies. Our portfolio has proven to be resilient throughout market cycles and is occupied by a diversified customer base with strong credit profiles and limited near-term lease expirations. We believe that the creation of a geographically focused REIT with a strong balance sheet and targeted internal value-creation opportunities will generate attractive risk-adjusted returns for our stockholders while providing a platform for external growth opportunities over the longer-term.

In addition, the Company operates a fee-based real estate service (the “Third-Party Services Business”) through a wholly owned subsidiary, Eola Office Partners, LLC and its wholly owned subsidiaries (collectively, “Eola”), which in total managed approximately 3.8 million square feet (unaudited) for primarily third-party owners as of December 31, 2016

Our mission is to own and operate high-quality office properties located in attractive submarkets in Houston, with a primary focus on unlocking value within our existing portfolio through implementing active and creative leasing strategies, leveraging our scale to increase pricing power in lease and vendor negotiations and targeting redevelopment and asset repositioning opportunities. We plan to maintain a conservative balance sheet with low leverage and ample liquidity, which we expect will allow us to access multiple sources of capital. We believe that this strategy will support both our internal growth initiatives and our patient and disciplined approach to pursuing new investment opportunities at the appropriate time. We believe that this strategy, combined with our highly experienced management team that has a successful history of operating a publicly traded REIT, significant expertise in the Houston, Texas office sector and extensive relationships with industry participants, positions us for long-term internal and external growth.

Our Spin-Off from Cousins

On October 7, 2016, pursuant to the Merger Agreement and the Separation and Distribution Agreement, Cousins completed the Spin-Off of our company by distributing all of our outstanding shares of common and limited voting stock to the holders of Cousins common and limited voting preferred stock as of the record date, October 6, 2016.

We were incorporated on June 3, 2016 as a wholly owned subsidiary of Legacy Parkway. On October 6, 2016, pursuant to the Merger Agreement, Legacy Parkway merged with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation and a wholly owned subsidiary of Cousins. In connection with the Merger, we became a subsidiary of Cousins. Immediately following the effective time of the Merger, in accordance with the Merger Agreement, Cousins separated the Houston Business from the remainder of the combined businesses. In connection with the Separation and UPREIT Reorganization, the Houston Business was transferred to us, and the remainder of the combined business was transferred to Cousins LP, the operating partnership of Cousins. Following the Separation and UPREIT Reorganization, Cousins effected the Spin-Off on October 7, 2016.

Greenway Properties Joint Venture

On February 17, 2017, we, through our Operating Partnership and certain other subsidiaries, entered into an Omnibus Contribution and Partial Interest Assignment Agreement (the “Contribution Agreement”) with an affiliate of Canada Pension Plan Investment Board (“CPPIB”) and an entity controlled by TH Real Estate Global Asset Management and Silverpeak Real Estate Partners (“TIAA/SP”). Pursuant to the Contribution Agreement, we have agreed to sell to these two investors, indirectly through a new joint venture, an aggregate 49% interest in our Greenway Plaza and Phoenix Tower properties (the “Greenway Properties”). The new joint venture is expected to be owned 51% through subsidiaries of the Operating Partnership (with 1% being held by a subsidiary acting as the general partner and 50% being held by a subsidiary acting as a limited partner) and 24.5% by each of CPPIB and TIAA/SP, each as a limited partner of the joint venture. TIAA/SP will acquire its aggregate percentage interest in two

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tranches over a three business day period. The Contribution Agreement contains customary representations, warranties and interim operating covenants of the parties that are subject, in some cases, to specified exceptions and qualifications, and the transaction is subject to certain closing conditions. Obtaining the new mortgage financing described below is not a condition to closing. Closing under the Contribution Agreement is expected to occur during the second quarter of 2017, subject to extension to an outside date of May 31, 2017, which may be further extended to June 21, 2017 in certain circumstances. We cannot provide assurances that the Greenway Properties joint venture transaction will be consummated on the terms or timeline currently contemplated, or at all, which may have a material adverse effect on our business, financial condition and results of operations.

At closing under the Contribution Agreement, a subsidiary of the joint venture expects to assume the existing mortgage loan on Phoenix Tower and to enter into new mortgage financing of up to $465 million secured by the Greenway Plaza properties, as described below. At closing, the Operating Partnership will use a portion of the proceeds of the new mortgage financing and the purchase price received from the investors, in each case net of required reserves, to repay all amounts outstanding under our current credit facility, dated October 6, 2016, by and among us, the Operating Partnership, Bank of America, N.A. and certain other parties, and to fund a credit to the joint venture with respect to certain outstanding contractual lease obligations and in-process capital expenditures. The remainder of these proceeds will be retained by us for general corporate purposes.

In connection with the Contribution Agreement, the Operating Partnership received a debt commitment letter (the “Commitment Letter”) from Goldman Sachs Mortgage Company (“Goldman Sachs”) pursuant to which Goldman Sachs has, among other things, agreed to provide the joint venture and certain of its subsidiaries a mortgage loan in an aggregate principal amount of up to $465 million (the “Loan”) secured by the Greenway Plaza properties and all related assets. On February 22, 2017, the Operating Partnership and Goldman Sachs entered into the Commitment Letter and a rate lock agreement. Funding of the Loan is subject to certain other conditions set forth in the Commitment Letter.

Competitive Strengths

Accomplished management team with a demonstrated track record of acquiring, operating and repositioning assets and managing a public office REIT. Our management team, led by Mr. James R. Heistand, our President and Chief Executive Officer, has extensive experience in the office real estate industry, including in operations, leasing, acquisition, development and disposition of office assets through all stages of the real estate cycle, and has a proven track record of executing business strategies and delivering strong results for stockholders. Since joining Legacy Parkway in the fourth quarter of 2011 through October 6, 2016, our management team acquired $3.9 billion of high-quality, Class A office assets and disposed of approximately $2.6 billion of non-core assets resulting in approximately $290.0 million of net gains. During this time, our management team also realized significant portfolio-wide operational improvements as evidenced by a 47.6% increase in average in-place rents and an increase in the leased percentage of the portfolio from 85.7% to 90.5%. In addition, our management team has proven its ability to be creative in unlocking value from complex transactions and to create stockholder value through targeted asset sales and strategic capital recycling. Through this experience, our management team has proven its strong execution capabilities and established relationships with industry participants.

Houston focus with local and regional expertise. We are focused initially on owning and operating office properties in Houston, Texas, which is a region we believe is well-positioned for economic recovery. We believe our position as a “pure-play” Houston real estate company allows us to have a targeted focus on property performance that otherwise could be diluted in a company with more geographically diverse holdings. Additionally, our management and property-level teams have in-depth knowledge of the Houston real estate market and an extensive network of long-standing relationships with leading local, regional and national industry participants that we believe will drive our ability to identify and capitalize on internal and external value-creation opportunities and attractive acquisition opportunities as well as identify opportunities with potential joint venture partners, as such opportunities arise from time to time.

High-quality portfolio of Class A office assets concentrated in desirable, resilient Houston submarkets. We own five Class A assets comprising 19 buildings and totaling approximately 8.7 million square feet in the Greenway, Galleria and Westchase submarkets, which are among the most desirable submarkets in Houston. These particular submarkets have a strong track record of outperforming the overall Houston market in rental rates, occupancy and value improvement over time. They are located adjacent to many high-income residential areas and offer state-of-the-art amenities, including high-end retail, restaurants, entertainment and recreational activities. We are the largest landlord in each of these submarkets, owning 60% of the Class A office inventory in Greenway, 15% in Galleria, and 15% in Westchase based on square footage as of December 31, 2016. We expect that these ownership levels will lead to pricing power in lease and vendor negotiations; the ability to attract, hire and retain superior local market leadership and leasing teams; flexibility to meet changing customer space demands; and an enhanced ability to identify and capitalize on emerging investment opportunities.



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High-quality, creditworthy customer base with limited near-term lease maturities. Our diversified customer base generally consists of high-quality and creditworthy customers. As of December 31, 2016, nearly 47% of our customers based on annual base rent had investment grade credit ratings from major credit rating agencies. In order to monitor the credit quality of our customers, our property management teams communicate regularly with all of our customers. We receive monthly credit reports for the largest customers in our portfolio and regularly review the financials of those customers that are in the energy industry. Further, with a weighted average remaining lease term of approximately six years as of December 31, 2016, our portfolio has limited near-term lease maturities which is expected to provide stable cash flows with minimal decline in contractual revenue over the next several years.

Flexible and conservative capital structure. We believe our flexible and conservative capital structure provides us with an advantage over many of our private and public competitors. We have limited near-term debt maturities, and as of December 31, 2016, approximately $230.3 million in cash and cash equivalents and up to $100 million of additional liquidity through a revolving credit facility (“the Revolving Credit Facility”), all of which provide financial flexibility, support ongoing capital improvement needs and reinforce our business and growth strategies of unlocking the value in our portfolio through leasing and asset repositioning. In addition, we believe our conservative approach to balance sheet management may provide strategic benefits by providing us with enhanced access to multiple sources of attractively priced capital that may not be available to many of our competitors in Houston. We also believe that our moderate leverage and strong liquidity will enable us to take advantage of attractive redevelopment and acquisition opportunities as they rise from time to time.

Embedded growth opportunities through leasing, asset repositioning and redevelopment. Our portfolio has significant, identified embedded growth opportunities both through leasing the remaining vacancies in the portfolio and through targeted asset repositioning and redevelopment opportunities. We expect that our initial focus on one geographic location, combined with our strong balance sheet, market knowledge and customer relationships, will allow us to successfully execute internal and external growth strategies. With our scale, we expect that we will have the ability to attract, hire and maintain a best-in-class leasing team that will help us identify opportunities early and implement aggressive and creative leasing strategies at our properties. We also own assets that offer various pricing points within the same submarkets, giving us the flexibility to move and relocate customers within our portfolio based on their changing needs, which we expect will lead to higher customer retention. We also believe there are opportunities to add revenue-generating amenities to our assets, such as additional retail options and parking. We believe that our management team’s experience, as well as its ability to exclusively focus on our growth strategy following the Spin-Off will allow us to unlock the value that we expect exists in our portfolio.

Business and Growth Strategies

Maximize cash flow growth and value through proactive asset management and leasing strategies. We believe we are well-positioned to drive growth in cash flow and maximize the value of our portfolio with proactive, creative and aggressive leasing and asset management strategies. We also expect that our substantial scale in the Greenway, Galleria and Westchase submarkets will provide us with enhanced visibility into submarket dynamics that will lead to stronger negotiating leverage with customers and vendors and will result in a potential reduction in our operating costs and improvement in NOI over time. We expect that we will also be able to leverage our broad existing customer relationships, leading market position and deep financial flexibility to attract new, high-quality customers, increase occupancy over the long-term and maximize customer retention rates at our properties.

Focus on unlocking value through repositioning and redeveloping existing properties. We expect that our management team will devote significant attention to internal value-creating investment opportunities that are intended to generate attractive growth in revenues and cash flow, enhancing the value of our portfolio. Specifically, we expect to leverage our real estate expertise to reposition and redevelop our existing properties, as well as properties that we may acquire in the future, with the objective of increasing occupancy, rental rates and risk-adjusted returns on our invested capital. As the Houston, Texas market continues to recover, our management team will seek to identify investment opportunities, that include creating joint ventures with existing ownership interests in certain of our properties, that will create value for our stockholders, enable us to better serve our customers, be consistent with our strategic objectives and have attractive risk-return profiles.

Maintain a conservative, flexible balance sheet with adequate liquidity to fund near-term growth opportunities. We maintain a conservative capital structure that will provide the resources and flexibility to position our company for both internal and external growth. As of December 31, 2016, we had approximately $230.3 million in cash and cash equivalents and $100 million of additional liquidity through the Revolving Credit Facility. We focus on maintaining sufficient liquidity with minimal short-term debt maturities, allowing us to pursue value enhancement strategies within our portfolio and support acquisition activities as they may arise from time to time. Initially, we expect to maintain a mix of property-level secured indebtedness as well as corporate debt secured by a pool of assets. As the Houston market recovers, we anticipate funding additional growth opportunities

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through proceeds received from asset dispositions, joint ventures, the refinancing of debt or public equity offerings. We also expect to target a net debt to Adjusted EBITDA multiple of no more than 6.0x.
    
Pursue acquisitions with a patient, prudent approach. While our initial focus is to unlock internal embedded growth in our existing portfolio, we intend to take advantage of current and future market dislocation in Houston to capitalize on emerging acquisition opportunities within our current submarkets as well as other Houston submarkets, if such assets meet our investment criteria. We may also acquire assets in other markets from time to time if such opportunities meet our investment criteria. However, we intend to devote the majority of our resources to sourcing opportunities within the Houston market for the foreseeable future. We believe that our management team’s in-depth market knowledge and relationships and its extensive acquisitions experience will enhance our ability to source new acquisition opportunities as they may arise from time to time. Whether we operate exclusively in Houston, or diversify our market exposure over the longer-term, our management team will use a patient, prudent and disciplined approach to investment decision-making.

Competition

We compete with a number of developers, owners and operators of office and commercial real estate, many of which own properties similar to ours in the same Houston submarkets in which our properties are located, and some of which have greater financial resources than we do. In operating and managing our portfolio, we compete for customers based on a number of factors, including location, leasing terms (including rent and other charges and allowances for customer improvements), security, flexibility and expertise to design space to meet prospective customers’ needs, quality and breadth of customer services provided and the manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter significant competition to renew or re-let space in light of the large number of competing properties within the submarkets in which we operate. As a result, we may be required to provide rent concessions or abatements, incur charges for customer improvements and other inducements, including early termination rights or below-market renewal options, or we may not be able to timely lease vacant space. In that case, the per share trading price of our common stock, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay dividends to stockholders may be adversely affected.

We will also face competition when pursuing acquisition and disposition opportunities. Our competitors may be able to pay higher property acquisition prices, may have private access to opportunities not available to us or may otherwise be in a better position to acquire a property. Competition may also have the effect of reducing the number of suitable acquisition opportunities available to us, increasing the price required to consummate an acquisition opportunity and generally reducing the demand for commercial office space in our submarkets. Likewise, competition with sellers of similar properties to locate suitable purchasers may result in our receiving lower proceeds from a sale or in our not being able to dispose of a property at a time of our choosing due to the lack of an acceptable return.

Administration

We, were formed as a corporation under the laws of the state of Maryland in June 2016, and we intend to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year that commenced on the day prior to the Spin-Off and ended December 31, 2016 upon the filing of our U.S. federal income tax return for such year. We generally perform commercial real estate leasing, management and acquisition services on an in-house basis. As of December 31, 2016, we had 158 employees. Our principal executive office is located at 5847 San Felipe Street, Suite 2200, Houston, Texas 77057 and our telephone number is (346) 200-3100. In addition, we have two regional offices in Jacksonville, Florida and Orlando, Florida.

Insurance

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



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Regulation

We believe that our properties are in compliance in all material respects with all U.S. federal, state and local laws, ordinances and regulations. Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of the properties in our portfolio have the necessary permits and approvals to operate its business. For more information, see “Risk Factors-Risks Related to Our Properties and Business.”

Americans with Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act (“ADA”), to the extent that our properties are “public accommodations” as defined by the ADA. The ADA may require, among other things, (1) the removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable, and (2) the reasonable modification of policies, practices and procedures that deny equal access to persons with disabilities. The ADA also requires that the design and construction of new facilities and some alterations comply with certain accessibility guidelines. See “Risk Factors-Risks Related to Our Properties and Business-Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.”

Environmental Matters

Under various U.S. federal, state and local laws, ordinances and regulations, current and former owners and operators of real estate are liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect an owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with our ownership and operation of our properties, we may be potentially liable for such costs. The operations of current and former customers at our properties have involved, or may have involved, the use of hazardous materials or generated hazardous wastes. The release of such hazardous materials and wastes could result in the incurrence of liabilities to remediate any resulting contamination, if the responsible party is unable or unwilling to do so. In addition, our properties are located in urban areas, and are therefore exposed to the risk of contamination originating from third-party sources. While a property owner may not be held responsible for remediating contamination that has migrated onsite from an offsite source, the contaminant’s presence can have material adverse effects on our business, operations and the redevelopment of our properties. 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 (1) future laws, ordinances or regulations or future interpretations of existing requirements will not impose any material environmental liability or (2) 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. For more information, see “Risk Factors-Risks Related to Our Properties and Business.”

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including, but not limited to, compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. If we do take advantage of some or all of these exemptions, some investors may find our common stock less attractive. The result may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take advantage of the benefits of this extended transition period and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This election is irrevocable.



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We will remain an emerging growth company until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (c) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (d) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

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 SEC. 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. We have included our website address as an inactive textual reference and do not intend it to be an active link to our website.

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 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, 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

If global market and economic conditions deteriorate, our business, financial condition and results of operations could be materially adversely affected.

Weak economic conditions generally, sustained uncertainty about global economic conditions, a tightening of credit markets, 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. Additionally, these factors and 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 regarding such macroeconomic factors or conditions, and our ability to lease our properties and increase or maintain rental rates may be negatively impacted, which may have a material adverse effect on our business, financial condition and results of operations.

The conditions of our market affect our business, financial condition and results of operations.

All of our properties are located in Houston, Texas. Therefore, our business, financial condition, results of operations and ability to pay dividends to our stockholders are directly linked to economic conditions in Houston generally, as well as the market for office space in Houston. An economic downturn in Houston, particularly increases in unemployment and customer bankruptcies, may materially adversely affect our business, financial condition and results of operations.

Additionally, as a result of the geographic concentration of our properties in Houston, we are particularly susceptible to adverse weather conditions that threaten southern and coastal states, such as hurricanes and flooding. A single catastrophe or destructive weather event may have a material adverse effect on our business, financial condition and results of operations.

Our business could be materially adversely affected by a decline in commodity prices, particularly a decline in the price of crude oil.

The Houston market is economically dependent on the petroleum industry. A key economic variable that affects the petroleum industry is the price of crude oil, which can be influenced by general economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries, weather-related damage and disruptions, competing fuel prices and geopolitical risk. If the Houston market faces significant exposure to fluctuations in global crude oil prices, particularly for extended periods of time, or oil prices remain at historically low levels, the Houston market may experience

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business layoffs, downsizing, consolidations, industry slowdowns and other similar factors. These potential risks to our customers in Houston could negatively impact commercial real estate fundamentals and result in lower occupancy, an increased market for sublease space, lower rental rates and declining values in our real estate portfolio in Houston, which may have a material adverse effect on our business, financial condition and results of operations.

We derive a significant portion of our revenues from customers in the energy sector, which will subject us to more risk than if we were broadly diversified.

As of December 31, 2016, approximately 47% of our revenues were derived from customers in the energy sector. Our customers in the energy sector may be negatively impacted by changes in the supply and demand for crude oil, natural gas and other energy commodities, exploration, production and other capital expenditures related to the energy projects, government regulation and other risks related to commodity prices described in the risk factor entitled “—Our business could be materially adversely affected by a decline in commodity prices, particularly a decline in the price of crude oil.” The occurrence of any of these events that have a negative impact on the energy sector would have a much larger adverse effect on our revenues than they would if we had a more diversified customer base, which may have a material adverse effect on our business, financial condition and results of operations.

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 in our market or sub-markets;
competition for customers in our market or sub-markets;
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 our market or sub-markets 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, terrorism, 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 the foregoing occur, it may 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 business, financial condition and results of operations.

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 may require us to give rent concessions or provide customer improvements to a greater extent than we otherwise would have. In addition, the economic downturn of the last several years has led to increased competition for creditworthy customers and we may have difficulty competing with competitors who have purchased properties at depressed prices, because our competitors’ lower cost basis in such properties may allow them to offer space to customers 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, or may not be able to increase rates to market rates, 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 customer 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. Our inability to renew leases or re-let space in a reasonable time, a decline in rental rates or an increase in customer improvement, leasing commissions, or other costs may have a material adverse effect on our business, financial condition and results of operations.

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More than half of our total annualized rent comes from a group of 20 customers, and as a result, the inability of any such customer to pay rent or a decision by such customer to vacate its premises could have a significant negative impact on our results of operations or financial condition.

As of December 31, 2016, our top 20 customers based on rental revenue represented 58.1% of our total annualized rent, with no single customer accounting for more than 10.1% of our annualized rent. The inability of any of our significant customers to pay rent, a decision by a significant customer to vacate their premises prior to, or at the conclusion of, their lease term, or potentially unfavorable terms in our future dealings or negotiations in order to maintain our relationship with a significant customer could have a significant negative impact on our results of operations or financial condition if a suitable replacement customer is not secured in a timely manner. These events could have a significant adverse impact on our results of operations or financial condition.

An oversupply of office space in our market could 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 the Houston market is generally more readily available and less expensive per square foot than in markets such as New York City, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, it may be easier for our competitors to construct new buildings that would compete with our properties than it would be if we operated in higher barrier-to-entry markets. Any oversupply of office space in our market could result in lower occupancy and rental rates in our portfolio, which may have a material adverse effect on our business, financial condition and results of operations.

Customer defaults may have a material adverse effect on our business, financial condition and results of operations.

The majority of our revenues and income comes from rental income from real property. As such, our business, financial condition and results of operations could be adversely affected if our customers default on their lease obligations. Our ability to manage our assets is also subject to U.S. federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property 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 U.S. 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 may have a material adverse effect on our business, financial condition and results of operations.

Some of our leases provide customers with the right to terminate their leases early, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our leases permit our customers to terminate their leases as to all or a portion of their 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 may 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. If our customers elect to terminate their leases early, it may have a material adverse effect on our business, financial condition and results of operations.

Our expenses may remain constant or increase, even if our revenues decrease, which may have a material adverse effect on our business, financial condition and results of operations.

Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inelastic and generally do not decrease, but 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 may have a material adverse effect on our business, financial condition and results of operations.

Our property taxes could increase due to a change in property tax rates or a reassessment, which could impact our cash flows.

Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase, our financial condition, results of operations, cash flows, trading price of our common stock and

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our ability to satisfy our principal and interest obligations and to pay dividends to our stockholders could be adversely affected, which may have a material adverse effect on our business, financial condition and 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 properties in response to changes in economic and other conditions may therefore be limited. In addition, the Code limits our ability to sell our properties by imposing a penalty tax of 100% on the gain derived from prohibited transactions, which are generally defined as sales or other dispositions of property (other than foreclosure property) held primarily for sale 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 ability 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, each of which may have a material adverse effect on our business, financial condition and results of operations.

Our portfolio is concentrated in five assets and, as a result, any adverse changes impacting any one of our properties may have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2016, four of our five assets, CityWestPlace, Greenway Plaza, Post Oak Central and San Felipe Plaza, individually accounted for more than 10% of our assets or rental revenue on a consolidated basis. Our revenue and funds 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 funds available for distribution to our stockholders would be materially adversely affected if customers 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. The significance of these properties in our portfolio means that any adverse change at any of these properties may have a material adverse effect on our business, financial condition and results of operations.

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

While our initial focus is to unlock internal embedded growth in our existing portfolio, we may acquire properties if we are presented with an attractive opportunity to do so. We may face competition for such acquisition opportunities from other investors, and such 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.

Accordingly, competition for acquisitions may limit our opportunities to grow, which may have a material adverse effect on our business, financial condition and results of operations.

We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

We may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our Operating Partnership. These transactions can result in stockholder dilution. This acquisition structure can have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require (and in the case of our properties, requires) that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions, which may have a material adverse effect on our business, financial condition and results of operations.





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We may face risks associated with future property acquisitions.

From time to time, we may pursue the acquisition of properties or portfolios of properties, including large portfolios that could further increase our size and result in changes 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 to our satisfaction or other conditions that are not within our control, which may not be satisfied;
necessary financing for such acquisitions may not be available on favorable terms or at all;
acquisition, development or redevelopment projects may require the consent of third parties, such as anchor customers, mortgage lenders and joint venture partners, and such consents may be withheld;
the diversion of management’s attention to the assimilation of the operations of the acquired businesses or assets;
acquired properties may fail to perform as expected;
difficulties in the integration of operations and systems and the inability to realize potential operating synergies;
difficulties in the assimilation and retention of the personnel of the acquired companies;
challenges in retaining customers;
the actual costs of repositioning acquired properties may be higher than our estimates;
adequate insurance coverage for new properties may not be available on favorable terms or at all;
future acquisitions may result in unanticipated expenses or charges to earnings, including unanticipated operating expenses and depreciation or amortization expenses over the life of any assets acquired;
we may not achieve the expected benefits of future acquisitions;
acquired properties may be located in new markets where we face risks associated with incomplete knowledge or understanding of the local market and a limited number of established business relationships in the area;
accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and
acquired properties may be subject to liabilities and we may not have any recourse, or only limited recourse, to the transferor with respect to unknown liabilities, including liabilities for cleanup of undisclosed environmental contamination or non-compliance with environmental laws. As a result, if a claim were asserted against us based upon ownership of such properties, we might be required to pay a substantial sum, either in settlements or in damages, which could adversely affect our cash flow.

Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We may be unable to develop new properties successfully, which could materially adversely affect our results of operations due to unexpected costs, delays and other contingencies.

From time to time, we may acquire unimproved real property for development purposes as market conditions warrant, with a joint venture partner or otherwise. In addition to the risks associated with the ownership of real estate investments in general, and investments in joint ventures specifically, there are significant risks associated with our development activities, including the following:

delays in obtaining, or an inability to obtain, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in completion delays and increased development costs;
incurrence of development costs for a property that exceed original estimates due to increased materials, labor or other costs, changes in development plans or unforeseen environmental conditions, which could make completion of the property more costly or uneconomical;
abandonment of contemplated development projects or projects in which we have started development, and the failure to recover expenses and costs incurred through the time of abandonment which could result in significant expenses;
risk of loss of periodic progress payments or advances to builders prior to completion;
termination of leases by customers due to completion delays;
failure to achieve expected occupancy levels, as the lease-up of space at our development projects may be slower than estimated; and
other risks related to the lease-up of newly constructed properties.

In addition, we also rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing to a purchase price at the time we acquire unimproved real property. If our projections are inaccurate, including due to any of the risks described above, we may overestimate the purchase price for a property and be unable to charge rents that compensate us for our increased costs, which may have a material adverse effect on our business, financial condition and results of operations.


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The Greenway Properties joint venture transaction may not be consummated on the terms or timeline currently contemplated, or at all.

Closing of the Greenway Properties joint venture transaction is subject to certain conditions under the Contribution Agreement, including performance in all material respects of each party’s pre-closing covenants and agreements contained in the Contribution Agreement, delivery of title insurance policies with respect to the Greenway Properties, certain local regulatory approvals, and consummation of certain pre-closing structuring in anticipation of the transaction, including the formation of a holding company subsidiary of the joint venture to be qualified as a REIT. We cannot provide assurances that the Greenway Properties joint venture transaction will be consummated on the terms or timeline currently contemplated, or at all, which may have a material adverse effect on our business, financial condition and results of operations.

We expect to co-invest in joint ventures with third parties from time to time, and such investments could be adversely affected by the capital markets, lack of sole decision-making authority, reliance on joint venture partners’ financial condition and any disputes that may arise between us and our joint venture partners.

On February 17, 2017, we entered into the Contribution Agreement pursuant to which, upon closing, we will own Greenway Plaza and Phoenix Tower through a joint venture with two other parties, CPPIB and TIAA/SP. Additionally, we may co-invest with third parties through other partnerships, joint ventures or other structures in which we acquire noncontrolling interests in, or share responsibility for, managing the affairs of a property, partnership, co-tenancy or other entity. Although we will own a majority interest in the Greenway Properties joint venture and manage its day-to-day operations, our joint venture partners will have customary approval rights over certain major decisions. We may not be in a position to exercise sole decision-making authority regarding the properties owned through this or other joint ventures or similar ownership structures. 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 joint venture partners and the possibility that a joint venture partner might become bankrupt or fail to fund its share of required capital contributions, thus exposing us to liabilities in excess of our share of the joint venture or jeopardizing our REIT status. The funding of our capital contributions to such joint ventures may be dependent on proceeds from asset sales, credit facility advances 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 its 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. Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We, our customers and our properties are subject to various U.S. federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations.

We, our customers and our properties are subject to various U.S. 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, or our customers, 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, or our customers, 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. Environmental noncompliance liability also could impact a customer’s ability to make rental payments to us. Furthermore, our reputation could be negatively affected if we violate environmental laws or regulations, which may have a material adverse effect on our business, financial condition and results of operations.

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, under 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. In particular, some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on, adjacent to or near sites upon which others, including former owners or customers of our properties, have engaged, or may in the future engage, in activities that have released or may have released petroleum products or other hazardous or toxic substances. 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. The presence of hazardous substances also may result in use restrictions on impacted properties or result in liens on contaminated sites in favor of the government for damages it incurs to address contamination. We also may be liable for the costs of removal or remediation of hazardous substances or waste disposal or treatment facilities if we arranged for disposal or treatment of hazardous substances at such facilities, whether or not we own such facilities. Moreover, buildings and other improvements on our properties

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may contain asbestos-containing material or other hazardous building materials or could have indoor air quality concerns (e.g., from airborne contaminants such as mold), which may subject us to costs, damages and other liabilities including abatement cleanup, personal injury, and property damage 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 may have a material adverse effect on our business, financial condition and results of operations.

We may be materially 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, financial condition and results of operations could be materially adversely affected. The federal government has enacted, and Houston or the state of Texas may enact, certain climate change laws and regulations which may, among other things, regulate “carbon footprints” and greenhouse gas emissions. Such laws and regulations 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, financial condition and results of operations. Additionally, the potential physical impacts of climate change on our operations are highly uncertain and would be particular to Houston. These may include changes in rainfall and storm patterns and intensity, water shortages, changing sea levels and changing temperatures. These impacts may have a material adverse effect on 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 ADA and any equivalent state or local laws, to the extent that our properties are public accommodations as defined under such laws. Under the ADA, all public accommodations must meet U.S. 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 any equivalent state or local laws, we may be required to incur additional costs to bring such property into compliance with the ADA or similar state or local laws. Noncompliance with the ADA or similar state and local laws could also result in the 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 any equivalent state or local laws. If we incur substantial costs to comply with the ADA or any equivalent state or local laws, it may have a material adverse effect on our business, financial condition and results of operations.

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

Our third-party management 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 of such management agreements on terms less favorable to us than the terms of current management agreements. If management agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease which may have a material adverse effect on our business, financial condition and results of operations.

Our Third-Party Services 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 that we have paid files for bankruptcy or commits fraud 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 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

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cannot perform as a result of bankruptcy or for any other reason, we may be responsible for cost overruns as well as the consequences for late delivery. In the event that 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, which may have a material adverse effect on our business, financial condition and results of operations.

We are required to maintain certain licenses to conduct our Third-Party Services Business.

Our Third-Party Services Business, which involves the brokerage of real estate leasing transactions and property management, requires us to maintain licenses in various jurisdictions in which we operate and to comply with particular regulations in such jurisdictions. 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, which may have a material adverse effect on our business, financial condition and results of operations.

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 our Third-Party Services Business. 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. Any such claims may have a material adverse effect on our business, financial condition and results of operations.

Our assets may be subject to impairment charges.

We regularly review our real estate assets for impairment, and based on these reviews, we may record impairment losses that have a material adverse effect on our business, financial condition and results of operations. Negative or uncertain market and economic conditions, as well as market volatility, increase the likelihood of incurring impairment losses. Such impairment losses may have a material adverse effect on our business, financial condition and results of operations.

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, environmental and umbrella liability coverage on all of our properties. We also carry wind and flood 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 cost basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. However, we may be subject to certain types of losses that are 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, which may have a material adverse effect on our business, financial condition and results of operations.

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 related 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. While we generally intend to vigorously defend ourselves against such claims, we cannot be certain of the ultimate outcomes of claims that may be asserted against us. Unfavorable resolution of such litigation 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 negatively impacting our ability to service debt and pay dividends to our stockholders, which may have a material adverse effect on our business, financial condition and results of operations. Certain litigation, or the resolution of certain litigation, may affect the availability or cost of some of our insurance coverage, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and directors, each of which may have a material adverse effect on our business, financial condition and results of operations.




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Our business could be materially 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, 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 interruptions, private data exposure and damage to our relationships with our customers, among other things. There can be no assurance that our efforts to maintain the security and integrity of our information technology networks and related systems will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways that may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to satisfy the regulatory requirements of the Sarbanes-Oxley Act, 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.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act and are required to prepare our financial statements in accordance with the rules and regulations promulgated by the SEC. 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 controls over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all of our control objectives. If we are not able to comply with these and other requirements in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of shares of our common stock could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which may have a material adverse effect on our business, financial condition and results of operations.

The success of our business depends on retaining officers and employees.

Our continued success depends to a significant degree upon the contributions of certain key personnel of the Company who would be difficult to replace. Although we entered into employment agreements with executive officers in December 2016, we cannot provide any assurance that they, including our senior management, will remain employed by us. Our ability to retain our executive officers, or to attract suitable replacements should they leave, is dependent on the competitive nature of the employment market. The loss of their services may have a material adverse effect on our business, financial condition and results of operations.

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

As of December 31, 2016, we had $793.2 million of total outstanding indebtedness. 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.

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 our future access to capital and our ability to satisfy our obligations under our indebtedness, which may have a material adverse effect on our business, financial condition and results of operations.





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

We have both fixed and variable rate indebtedness and may incur additional indebtedness in the future, including borrowings under a $350 million term loan facility (the “Term Loan”) and the Revolving Credit Facility (together with the Term Loan, the “Credit Facility”), 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.

If we are unable to repay or refinance our indebtedness as it becomes due, we may need to sell assets or to seek protection from our creditors under applicable law, which may have a material adverse effect on our business, financial condition and results of operations.

Our governing documents do not limit the amount of indebtedness we may incur and we may become more highly leveraged.

Our Articles of Amendment and Restatement (“Charter”) and Amended and Restated Bylaws (“Bylaws”) do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may permit us to 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 funds available for distribution to stockholders might be negatively affected, and the risk of default on our indebtedness could increase, which may have a material adverse effect on our business, financial condition and results of operations.

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 upon 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. Any such losses may have a material adverse effect on our business, financial condition and results of operations.

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

The credit agreement governing the Credit Facility contains restrictions on the amount of debt we may incur and other restrictions and requirements on its operations. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declarations of default under, and acceleration of, any related indebtedness, which would result in adverse consequences to our financial condition. The credit agreement contains cross-default provisions that give the lenders the right to declare a default if we are in default resulting in (or permitting the) acceleration of other debt 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 may have a material adverse effect on our business, financial condition and results of operations.



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Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties (or portions thereof).

For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan generally would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to satisfy the distribution requirements applicable to REITs under the Code. Foreclosures could also trigger our tax indemnification obligations under the terms of our agreements with certain continuing investors with respect to sales of certain properties, which may have a material adverse effect on our business, financial condition and 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.

In order to qualify to be taxed as a REIT, we generally must distribute annually at least 90% of our “REIT taxable income,” subject to certain adjustments and excluding any net capital gain, to our stockholders. Because of this distribution requirement, 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 ability to make distributions to our stockholders may be adversely affected which may have a material adverse effect on our business, financial condition and results of operations.

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

Our board of directors may change our investment strategy or any of our investment guidelines, financing strategy or leverage policies with respect to investments, developments, acquisitions, growth, operations, indebtedness, capitalization and dividends at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. Such a change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, among other risks. These changes could adversely affect our ability to pay dividends to our stockholders, and may have a material adverse effect on our business, financial condition and results of operations.

TPG Pantera is a significant stockholder and may have conflicts of interest with us in the future.

As of December 31, 2016, TPG VI Pantera Holdings, L.P. (“TPG Pantera”) and TPG VI Management, LLC (“TPG Management,” and together with TPG Pantera, the “TPG Parties”) owned approximately 9.8% of our issued and outstanding common stock. In addition, pursuant to the stockholders agreement, dated October 7, 2016, among us and the TPG Parties (the “Stockholders Agreement”), so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of our issued and outstanding common stock, the TPG Parties will have preemptive rights to participate in our future equity issuances, subject to certain conditions. This concentration of ownership in one group of stockholders, together with the contractual ability for these stockholders to acquire additional shares, could potentially be disadvantageous to other stockholders’ interests. If the TPG Parties were to sell or otherwise transfer all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities.

Additionally, the interests of the TPG Parties may differ from the interests of our other stockholders in material respects. For example, the TPG Parties may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in the TPG Parties’ judgment, could enhance their other equity investments, even though such transactions might involve risks to us. The TPG Parties 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

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of our business. The TPG Parties 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, which may have a material adverse effect on our business, financial condition and results of operations.

The Stockholders Agreement with the TPG Parties grants TPG Pantera certain rights that may restrain our ability to take various actions in the future.

On October 7, 2016, we entered into the Stockholders Agreement, pursuant to which we granted TPG Pantera certain board rights, which could allow TPG Pantera to influence our board of directors. Under the Stockholders Agreement, we have granted TPG Pantera the right to nominate a specified number of directors to our board of directors and to have a specified number of such directors appointed to the compensation committee of our board of directors (the “Compensation Committee”) and the investment committee of our board of directors (the “Investment Committee”) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 2.5% of the outstanding shares of our common stock. TPG is entitled to nominate to our board of directors (i) three directors if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 30%, (ii) two directors if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 5% but less than 30% and (iii) one director if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 2.5% but less than 5%. In addition, we have agreed to constitute our Investment Committee as a four member committee and (i) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of the issued and outstanding shares of our common stock, TPG Pantera will have the right to have two of its designees to our board of directors appointed to the Investment Committee and one of its designees to our board of directors appointed to the Compensation Committee; and (ii) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 2.5% but less than 5% of the issued and outstanding shares of our common stock, TPG will have the right to have one of its designees to our board of directors appointed to the Investment Committee and the Compensation Committee. Pursuant to the terms of the Stockholders Agreement, so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of the outstanding shares of our common stock, other than in connection with any change in control of us, TPG Pantera also will have the right to consent to any change in the size or rights and responsibilities of either our Investment Committee or the Compensation Committee and to certain other matters. The ability of TPG Pantera to influence our board of directors may have a material adverse effect on our business, financial condition and results of operations.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder and may have interests that differ from our other stockholders.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder on a fully diluted basis. Concurrently with the execution of the Merger Agreement, Legacy Parkway and Parkway LP entered into a letter agreement (the “Thomas Letter Agreement”) with Mr. Thomas, then chairman of the Legacy Parkway board of directors, and certain unitholders of Parkway LP who are affiliated with Mr. Thomas (together with Mr. Thomas, the “Thomas Parties”) relating to certain governance rights of Mr. Thomas, certain tax protection arrangements, and registration rights. Pursuant to the Separation and Distribution Agreement, the Thomas Letter Agreement is binding on us. Among other things, the Thomas Letter Agreement provides that Legacy Parkway would cause Mr. Thomas to be appointed as our chairman and that Legacy Parkway would modify certain existing tax protection agreements in favor of Mr. Thomas. While, as our director, Mr. Thomas has a fiduciary duty to us and our stockholders, Mr. Thomas’ interests may differ from the interests of our other stockholders and, given his significant ownership in us, he may influence opportunities that have an effect on our business, financial condition and results of operations.

Risks Related to the Separation, the UPREIT Reorganization and the Spin-Off

Our business and operating results could be negatively affected if we are unable to successfully integrate the Houston businesses previously owned by Cousins and Parkway.

The Merger involved the combination of two companies which previously operated as independent public companies. The Separation, the UPREIT Reorganization and the Spin-Off involved the separation, reorganization and distribution of the assets of two companies that previously operated as independent public companies. Our management team has devoted and will continue to devote significant management attention and resources to post-closing activities. Potential difficulties we may encounter in the integration process and related post-closing activities include the following:

difficulties in the integration of operations and systems of the Houston businesses previously owned by Cousins and Legacy Parkway;
the inability to realize potential operating synergies;

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the failure by us to retain key employees;
the complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases;
accounting, regulatory or compliance issues that could arise, including internal control over financial reporting;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger, the Separation, the UPREIT Reorganization and the Spin-Off; and
challenges in retaining the customers of each of Cousins and Legacy Parkway after the Spin-Off.

For all these reasons, you should be aware that it is possible that the integration process, the Separation, the UPREIT Reorganization and the Spin-Off or the related post-closing activities could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our 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 Separation, the UPREIT Reorganization and the Spin-Off, which may have a material adverse effect on our business, financial condition and results of operations.

We have no operating history as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about our business in this Annual Report on Form 10-K refers to Cousins’ portion of the Houston Business as operated and integrated with Legacy Parkway’s portion of the Houston Business. Our historical and pro forma financial information included in this report is derived from the consolidated financial statements and accounting records of Cousins and Legacy Parkway. Accordingly, the historical and pro forma financial information included in this report does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented, or those that we will achieve in the future. Factors which could cause our results to materially differ from those reflected in such historical and pro forma financial information and which may adversely impact our ability to achieve similar results in the future may include, but are not limited to, the following:

the financial results in this report do not reflect all of the expenses we will incur as a public company;
prior to the Separation, the UPREIT Reorganization and the Spin-Off, our business was operated by Legacy Parkway and Cousins as part of their respective corporate organizations. We will need to make investments to replicate or outsource from other providers certain facilities, systems, infrastructure, and personnel to which we will no longer have access after the Spin-Off, which will be costly;
after the Spin-Off, we are unable to use Legacy Parkway’s and Cousins’ economies of scope and scale in procuring various goods and services and in maintaining vendor and customer relationships. Although we entered into the Separation and Distribution Agreement, which provides for certain transition-related arrangements between us and Cousins, these arrangements may not fully capture the benefits we have previously enjoyed as a result of our business being integrated within the businesses of Legacy Parkway and Cousins and may result in us paying higher charges than in the past for necessary services;
prior to the Separation, the UPREIT Reorganization and the Spin-Off, our working capital requirements and capital for our general corporate purposes, including acquisitions, research and development, and capital expenditures, were satisfied as part of the corporation-wide cash management policies of Cousins and Legacy Parkway. Following the Spin-Off, while we have entered into the Credit Facility, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may not be on terms as favorable to those obtained by Cousins or Legacy Parkway, and the cost of capital for our business may be higher than Cousins’ or Legacy Parkway’s cost of capital prior to the Separation, the UPREIT Reorganization and the Spin-Off, which may have a material adverse effect on our business, financial condition and results of operations; and
our cost structure, management, financing and business operations will be significantly different as a result of operating as an independent public company. These changes will result in increased costs, including, but not limited to, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of our status as an independent company, which may result in greater than anticipated costs. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, please see “Selected Historical Consolidated Financial Data—Parkway, Inc.,” “Selected Historical Combined Financial Data—Parkway Houston,” “Selected Historical Combined Financial

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Data—Cousins Houston,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included in this Annual Report on Form 10-K.

Cousins may fail to perform under various transaction agreements that were executed as part of the Separation, the UPREIT Reorganization and the Spin-Off, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

Prior to the effective time of the Merger, we entered into agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Spin-Off including the Separation and Distribution Agreement, the Employee Matters Agreement (the “Employee Matters Agreement”) and the Tax Matters Agreement (the “Tax Matters Agreement”), each dated as of October 5, 2016, among us, Legacy Parkway, Cousins and certain other parties thereto. Certain of these agreements provide for the performance of services by each company for the benefit of the other for a period of time after the Spin-Off. We rely on Cousins to satisfy its performance and payment obligations under such agreements. If Cousins is unable to satisfy such obligations, including its indemnification obligations, we could incur operational difficulties or losses, which may have a material adverse effect on our business, financial condition and results of operations.

If we do not have in place similar agreements with other providers of these services when the transaction agreements terminate and we are not able to provide these services internally, we may not be able to operate our business effectively and our profitability may decline, which may have a material adverse effect on our business, financial condition and results of operations.

Potential indemnification liabilities owed to Cousins pursuant to the Separation and Distribution Agreement may have a material adverse effect on our business, financial condition and results of operations.

The Separation and Distribution Agreement provides for, among other things, the principal corporate transactions required to effect the Separation, the UPREIT Reorganization and the Spin-Off, certain conditions to the Separation, the UPREIT Reorganization and the Spin-Off and provisions governing our relationship with Cousins with respect to and following the Spin-Off. Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist related to our business activities, whether incurred prior to or after the Spin-Off, as well as certain obligations of Cousins that we assumed pursuant to the Separation and Distribution Agreement. If we are required to indemnify Cousins under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our directors may have actual or potential conflicts of interest because of their previous or continuing equity interests in, or positions at, Cousins.

Certain of our directors are persons who have previously served as directors of Cousins or who may own Cousins common stock or other equity awards. Even though our board of directors consists of a majority of independent directors, we expect that certain of our directors will continue to have a financial interest in Cousins common stock. Continued ownership of Cousins common stock or other equity awards could create, or appear to create, potential conflicts of interest, which may have a material adverse effect on our business, financial condition and results of operations.

We may not achieve some or all of the expected benefits of the Separation, the UPREIT Reorganization and the Spin-Off, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, the UPREIT Reorganization and the Spin-Off, or such benefits may be delayed due to a variety of circumstances, not all of which may be under our control.

We may not achieve the anticipated benefits of the Separation, the UPREIT Reorganization and the Spin-Off for a variety of reasons, including, among others: (i) diversion of management’s attention from operating and growing our business; (ii) disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, which could adversely affect our ability to maintain relationships with customers; (iii) increased susceptibility to market fluctuations and other adverse events following the Separation, the UPREIT Reorganization and the Spin-Off; and (iv) lack of diversification in our business, compared to Legacy Parkway’s or Cousins’ businesses prior to the Separation, the UPREIT Reorganization and the Spin-Off. Failure to achieve some or all of the benefits expected to result from the Separation, the UPREIT Reorganization and the Spin-Off, or a delay in realizing such benefits, may have a material adverse effect on our business, financial condition and results of operations.


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Our agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Spin-Off involve conflicts of interest, and we may have received better terms from unaffiliated third parties than the terms received in these agreements.

Because the Separation, the UPREIT Reorganization and the Spin-Off involved the combination and division of certain businesses previously owned by Legacy Parkway and Cousins into two independent companies, we entered into certain agreements with Cousins to provide a framework for our relationship with Cousins following the Separation, the UPREIT Reorganization and the Spin-Off, including the Separation and Distribution Agreement, the Tax Matters Agreement and the Employee Matters Agreement. The terms of these agreements were determined while portions of our business were still owned by Cousins and Legacy Parkway and were negotiated by persons who were employees, officers or directors of Legacy Parkway, Cousins or their respective subsidiaries prior to the Separation, the UPREIT Reorganization and the Spin-Off, or who are employees, officers or directors of Cousins following the effective time of the Merger, and, accordingly, may have conflicts of interest. For example, during the period in which the terms of these agreements were negotiated, our board of directors was not independent of Legacy Parkway or Cousins. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties, which may have a material adverse effect on our business, financial condition and results of operations.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain pre-Spin-Off liabilities and liabilities related to Cousins’ assets. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities, or that Cousins’ ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Cousins retains, and there can be no assurance that Cousins will be able to fully satisfy its indemnification obligations to us. Moreover, even if we ultimately succeed in recovering from Cousins any amounts for which we were held liable by such third parties, any indemnification received may be insufficient to fully offset the financial impact of such liabilities or we may be temporarily required to bear these losses while seeking recovery from Cousins, which may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Status as a REIT

Failure to qualify to be taxed as a REIT, or failure to remain qualified as a REIT, would cause us to be subject to U.S. federal income tax as a regular corporation and could cause us to face substantial tax liability, which would substantially reduce funds available for distribution to our stockholders.

We intend to elect and qualify to be taxed as a REIT beginning with our short taxable year that commenced on the day prior to the Spin-Off and ended December 31, 2016, upon the filing of our U.S. federal income tax return for such year. We believe that we have been organized, and have operated and will continue to operate in such a manner as to qualify for taxation as a REIT. To qualify as a REIT we must satisfy numerous requirements (some on an annual and quarterly basis) established under the highly technical and complex provisions of the 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 Capital Stock; and
distributing at least 90% of our “REIT taxable income,” subject to certain adjustments and excluding any net capital gain on an annual basis.

Only limited judicial and administrative interpretations exist of the REIT rules. Certain facts and circumstances not entirely within our control may affect our ability to qualify as a REIT. In addition, we can provide no assurance that legislation, new regulations, administrative interpretations, or court decisions will not adversely affect our qualification as a REIT or the U.S. federal income tax consequences of our REIT status.

If we were to fail to qualify as a REIT in any taxable year, we would face serious tax consequences that would substantially reduce the funds available for distributions to our stockholders because:

we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;
we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and
unless we were entitled to relief under certain U.S. federal income tax laws, we would not be able to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

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In addition, if we were to fail to qualify as a REIT, we would no longer be required to make distributions. Any corporate tax liability imposed as a result of our failure to qualify as a REIT could be substantial and would reduce the amount of funds available for distribution to our stockholders. As a result of all these factors, our failure to qualify as a REIT could adversely affect the value of, and trading prices for, our common stock, and could have a material adverse effect on our business, financial condition and results of operations.

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 (“IRS”) will not challenge the status of our Operating Partnership or any other subsidiary partnerships 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 certain of our other subsidiary partnerships 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 U.S. 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.

If either Cousins or Legacy Parkway failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, we would be prevented from electing to qualify as a REIT for several years.

We believe that, from the time of our formation until the issuance of our non-voting preferred stock to Cousins LP in the UPREIT Reorganization, we were a “qualified REIT subsidiary” of Cousins. Under applicable Treasury Regulations, if either Cousins or Legacy Parkway failed to qualify as a REIT in its 2012 through 2016 taxable years, unless Cousins’ or Legacy Parkway’s failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Cousins or Legacy Parkway failed to qualify. Failure to qualify as a REIT would have a material adverse effect on 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 flows.

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 and assets, 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. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax. 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. Moreover, our taxable REIT subsidiary (“TRS”) generally will be subject to U.S. federal corporate income tax on its net taxable income.

In addition, for U.S. federal income tax purposes, if a REIT acquires property from a non-REIT “C” corporation in a transaction in which gain is not required to be recognized for tax purposes and sells such property within a specified number of years after such acquisition, the REIT will be subject to corporate income tax on the gain that would have been recognized had the property been sold in a taxable transaction at the time of the acquisition (referred to as “sting tax gain”). Legacy Parkway acquired properties in December 2013 from a non-REIT “C” corporation that are subject to these rules. Cousins transferred these properties to us in the Separation. The parties structured the Separation in a manner intended to cause Cousins to recognize the “sting tax gain,” and to preclude us from having to recognize “sting tax gain” with respect to these properties if they were to be sold by us prior to January 2019. There can be no assurance, however, that if these properties were to be sold by us prior to January 2019 that we would not also be subject to the corporate income tax on the “sting tax gain” associated with those properties. If the IRS were to assert that position successfully, then we could incur a significant corporate income tax liability if we were to sell these former Legacy Parkway properties prior to January 2019.

Failure to make required distributions would subject us to U.S. federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT (and assuming that certain other requirements are also satisfied), we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our

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stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. If we are subject to a U.S. federal corporate income tax, it could have a material adverse effect on our business, financial condition and results of operations.

REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

To satisfy the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of cash and the recognition of taxable income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT, which could have a material adverse effect on our business, financial condition and results of operations.

Our ownership of our TRS, and any other TRSs we form, is subject to limitations and our transactions with our TRS, and any other TRSs we form, may 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. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. While we anticipate that the aggregate value of the stock and securities of our TRSs will be less than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total gross assets (including our TRS stock and securities), there can be no assurance that we will be able to comply with this ownership limitation. We will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations.

In addition, the Code limits 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 Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an arm’s-length rent. We have structured and will continue to structure our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax. There can be no assurance, however, that we will be able to avoid the application of the 100% excise tax. The limitations and taxes imposed on TRSs could have a material adverse effect on our business, financial condition and results of operations

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, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries, and no more than 25% of the value of our total assets can be represented by nonqualified publicly offered REIT debt instruments. 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 our TRS otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and funds available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and 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, which could have a material adverse effect on our business, financial condition and results of operations.


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You may be restricted from acquiring or transferring certain amounts of our capital stock.

The stock ownership restrictions of the Code for REITs and the stock ownership limit in our Charter may inhibit market activity in our capital stock (as defined in our Charter) and restrict our business combination opportunities.

In order to qualify as a REIT for each of our taxable years after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each of our taxable years after 2016. To help insure that we meet these tests, our Charter restricts the acquisition and ownership of shares of our capital stock.

Our Charter generally authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, our Charter generally prohibits any person (other than a person who has been granted an exception) from actually or constructively owning more than 9.8% of the aggregate of the outstanding shares of our common stock and limited voting stock (each, as defined in our Charter) (by value or by number of shares, whichever is more restrictive), or more than 9.8% of the aggregate of the outstanding shares of any class or series of preferred stock (as defined in our Charter) (by value or by number of shares, whichever is more restrictive). Our Charter grants Cousins and certain of its affiliates an exemption from these ownership limits with respect to Cousins’ ownership of our Series A non-voting preferred stock (as defined in our Charter). Our Charter also permits exceptions to be made for stockholders provided our board of directors determines such exceptions will not jeopardize our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

Our board of directors has granted TPG an exemption from the stock ownership limits contained in our Charter to enable TPG to acquire up to 32% of our common stock, subject to continued compliance with the terms of our Charter.

We may pay taxable dividends on our common stock in common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

In connection with our qualification as a REIT, we are required to annually distribute to our stockholders at least 90% of our “REIT taxable income,” determined without regard to the deduction for dividends paid and excluding net capital gain. Although we do not currently intend to do so, in order to satisfy this requirement, we are permitted, subject to certain conditions and limitations, to make distributions that are in part payable in shares of our common stock.

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends would be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.

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

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends treated as qualified dividend income, which could adversely affect the value of the shares of REITs, including our common stock.

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Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, income that we generate from derivatives or other transactions that we enter into to manage the risk of interest rate changes with respect to borrowings made, or to be made, to acquire or carry real estate assets (each such hedge, a “Borrowings Hedge”) does not constitute “gross income” for purposes of the 75% and 95% gross income requirements applicable to REITs, provided that certain identification requirements are met. This exclusion from the 95% and 75% gross income tests also applies if we previously entered into a Borrowings Hedge, a portion of the hedged indebtedness or property is disposed of, and in connection with such extinguishment or disposition we enter into a new “clearly identified” hedging transaction to offset the prior hedging position. To the extent that we enter into other types of hedging transactions or fail to properly identify such transactions as a hedge, the income from such transactions is likely to be treated as non-qualifying income for purposes of both the 75% and 95% gross income tests. As a result of these rules, we may be required to limit the use of hedging techniques that might otherwise be advantageous, or implement those hedges through a TRS. This could increase the cost of our hedging activities because any such TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates or other changes than we would otherwise incur. In addition, losses in any TRS will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income in the TRS, which could have a material adverse effect on our business, financial condition and results of operations.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our Charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have a material adverse effect on our total return to our stockholders, or on our business, financial condition and results of operations.

We may be subject to adverse legislative, administrative, or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Legislative and regulatory changes, including comprehensive tax reform, may be more likely in the 115th Congress, which convened in January 2017, because the Presidency and both Houses of Congress will be controlled by the same political party. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. Any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation, could have a material adverse effect on our business, financial condition and results of operations.

The prohibited transactions tax may limit our ability to dispose of our assets, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our dispositions.

A REIT’s net income from prohibited transactions is subject to a 100% 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. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of property. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some or all of our future dispositions may not qualify for that safe harbor. We intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our assets or may conduct such sales through a TRS, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material, which could have a material adverse effect on our business, financial condition and results of operations.







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Risks Related to an Investment in Our Common Stock

The price of our common stock may be volatile or 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 of our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These fluctuations in the stock market may adversely affect the market price of our common stock. Among the factors that could affect the market price of our common stock are:

actual or anticipated quarterly fluctuations in our business, financial condition and operating results;
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 dividend 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.

In addition, until the market has fully evaluated our business as a stand-alone entity, the prices at which shares of our common stock trade may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. The increased volatility of our stock price following the Spin-Off may have a material adverse effect on our business, financial condition and results of operations.

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

Certain provisions contained in our Charter 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 our REIT qualification. Among other things, unless exempted by our board of directors, no person may actually or constructively own more than 9.8% of the aggregate of the outstanding shares of our common stock and limited voting stock (by value or by number of shares, whichever is more restrictive), or 9.8% of the aggregate of the outstanding shares of any class or series of preferred stock (by value or by number of shares, whichever is more restrictive). Our Charter grants Cousins and certain of its affiliates an exemption from these ownership limits with respect to Cousins’ ownership of our Series A non-voting preferred stock. Our board of directors may, in its sole discretion, grant other exemptions to the stock ownership limits, subject to such conditions and the receipt by our board of directors of certain representations and undertakings. Our board of directors has granted TPG an exemption from the Common Stock Ownership Limit contained in our Charter to enable TPG to acquire up to 32% of our Common Stock, subject to continued compliance with the terms of our Charter.

In addition to these ownership limits, our Charter also prohibits any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, shares of our capital stock that would result in us being “closely held” under Section 856(h) of the Code, (b) transferring our capital stock if such transfer would result in our stock being owned by fewer than 100 persons (determined without reference to any rules of attribution), (c) beneficially or constructively owning shares of our capital stock to the extent such ownership would result in us owning (directly or indirectly) an interest in a tenant described in Section 856(d)(2)(B) of the Code if the income derived by us from that tenant for our taxable year during which such determination is being made would reasonably be expected to equal or exceed the lesser of one percent of our gross income or an amount that would cause us to fail to satisfy any of the REIT gross income requirements and (d) beneficially or constructively owning shares of our capital stock that would cause us otherwise to fail to qualify as a REIT. If any transfer of shares of our common stock occurs which, if effective, would result in any person beneficially or constructively owning shares of stock in excess, or in violation, of the above transfer or ownership limitations, (such person, a prohibited owner), then that number of shares of stock, the beneficial or constructive ownership of which otherwise would cause such person to violate the transfer or ownership limitations (rounded up to the nearest whole share), will be automatically transferred to a charitable trust for the exclusive benefit of a charitable beneficiary, and the prohibited owner will not acquire any rights in such shares. If the transfer to the charitable trust would not be effective for any reason to prevent the violation of the above transfer or ownership limitations, then the transfer of that number of shares of our capital stock that otherwise would cause any person to violate the above limitations will be void. The prohibited owner will not benefit economically from ownership of any shares of our capital stock held in the charitable trust,

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will have no rights to dividends or other distributions and will not possess any rights to vote or other rights attributable to the shares of our capital stock held in the charitable trust.

Generally, the ownership limits imposed under the Code are based upon direct or indirect ownership by “individuals,” but only during the last half of a taxable year. The ownership limits contained in our Charter are based upon direct or indirect ownership at any time by any “person,” which term includes entities. These ownership limitations in our Charter are common in REIT governing documents and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, the ownership limits on our common stock also might delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

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 our 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, which could have a material adverse effect on our business, financial condition and results of operations.

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for Parkway common stock or that our stockholders otherwise believe to be in their best interest.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of Parkway common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10 percent or more of the voting power of our common stock or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of our then outstanding voting shares at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an “interested shareholder,” and thereafter impose fair price and/or supermajority and stockholder voting requirements on these combinations; and

“control share” provisions that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by the MGCL, we have elected to opt out of the business combination and control share provisions of the MGCL. However, we cannot assure you that our board of directors will not opt to be subject to such business combination and control share provisions of the MGCL in the future. Subtitle 8 of Title 3 of the MGCL, known as the Maryland Unsolicited Takeover Act, permits the board of directors of a Maryland corporation, without stockholder approval and regardless of what is currently provided in the corporation’s charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of the corporation’s common stock with the opportunity to realize a premium over the then current market price. We have elected to opt out of certain provisions of the Maryland Unsolicited Takeover Act and cannot opt back in without obtaining stockholder approval in advance.

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

One of the factors that influence the price of our common stock is its dividend yield, or the dividend per share 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 historically low levels, 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. If market interest rates increase and we are unable to increase our dividend in response, including due to an increase in borrowing costs,

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insufficient funds available for distribution or otherwise, investors may seek alternative investments with a higher dividend yield, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease as market interest rates increase, which may have a material adverse effect on our business, financial condition and results of operations.

Substantial sales of our common stock may occur, which could cause our share price to decline.

As of December 31, 2016, we had an aggregate of approximately 49,110,645 shares of common stock issued and outstanding. Such shares of our common stock are freely tradable without restriction or further registration under the Securities Act, unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.

Although we have no actual knowledge of any plan or intention on the part of any of our 5% or greater stockholders to sell their shares of our common stock, it is possible that some of our large stockholders will sell our common stock that they received in the Spin-Off. For example, our stockholders may sell our common stock because our concentration in Houston, Texas, our business profile or our market capitalization as an independent company does not fit their investment objectives, or because shares of our common stock are not included in certain indices after the Spin-Off. A portion of Cousins common stock is held by index funds, and if we are not included in these indices, these index funds may be required to sell our common stock. The sales of significant amounts of our common stock, or the perception in the market that this may occur, may result in the lowering of the market price of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

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 a certain amount of additional shares of our common 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 of our common stock. The issuance of a substantial number of shares of our common stock in the open market or the issuance of a substantial number of shares of our common stock upon the exchange of OP units, 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. In addition, we have adopted an equity incentive plan, and we may issue shares of our common stock or grant equity incentive awards exercisable for or convertible or exchangeable into shares of our common stock under the plan. Future issuances of shares of our common stock may be dilutive to existing stockholders, which may have a material adverse effect on our business, financial condition and results of operations.

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 dividends or upon liquidation, may materially adversely affect the per share trading price of our common stock.

In the future, we may increase our capital resources by making additional offerings of debt or equity securities (or causing the 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 and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution of such assets to holders of our common stock. Additionally, any convertible or exchangeable securities that we may 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 TPG Pantera’s rights pursuant to the Stockholders Agreement, holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our non-voting preferred stock has a preference on liquidating distributions and a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. 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 dividends that could limit our ability to 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. Any such future offerings may reduce the per share trading price of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

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 Maryland law. Under the MGCL, a Maryland corporation generally may not make a dividend if, after giving effect to the dividend, the corporation would not be able to pay its debts as such debts become due in the ordinary course of business or the corporation’s total assets would be less than the sum of its total liabilities

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plus, unless the corporation’s charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the dividend. Accordingly, we generally may not make a dividend on our common stock if, after giving effect to the dividend, we would not be able to pay our debts as they become due in the ordinary 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. If we are unable to pay dividends, or our ability to pay dividends is limited, investors may seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

The Credit Facility may limit our ability to pay dividends on our common stock, including repurchasing shares of our common stock.

Under the credit agreement governing the Credit Facility, our dividends may not exceed the greater of (1) 90% of our funds from operations, and (2) the amount required for us to qualify and maintain our status as a REIT. Other permitted dividends include the amount required for us to avoid the imposition of income and excise taxes. Any inability to pay dividends may negatively impact our REIT status or could cause stockholders to sell shares of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

We may change our dividend policy.

Future dividends will be declared and paid at the discretion of our board of directors, and the amount and timing of dividends will depend upon cash generated by operating activities, our business, financial condition, results of operations, capital requirements, annual distribution requirements under the REIT provisions of the 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. Any reduction in our dividends may cause investors to seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

During the period in which we qualify as an “emerging growth company,” we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We currently qualify as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, we are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (5) provide certain disclosure regarding executive compensation required of larger public companies or (6) hold stockholder advisory votes on executive compensation. Although we have elected not to take advantage of the extended transition period for compliance with new or revised financial accounting standards described in clause (2) above, we cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

ITEM 1B.                  Unresolved Staff Comments.

None.


32



ITEM 2.                  Properties.

Our portfolio consists of five Class A office assets located in the Galleria, Greenway and Westchase submarkets in Houston, Texas, comprising 19 buildings and totaling approximately 8.7 million rentable square feet. As of December 31, 2016, our portfolio had an occupancy rate of 85.8%. Upon closing of the joint venture transaction pursuant to the Contribution Agreement, we will own a 51% interest in Greenway Plaza and Phoenix Tower through a joint venture with two other parties, CPPIB and TIAA/SP.

The following table sets forth certain information about office properties which we owned or had an interest in at December 31, 2016:
Property
 
Total
Square Feet (in thousands)
 
Occupancy
Percentage
 
Leased Percentage
 
Weighted Average Expiring Net Rental Rate per Net Rentable Square Foot (NRSF)
 
Weighted Average Estimated Market Rent per NRSF
CityWestPlace
 
1,473

 
72.5
%
 
77.3
%
 
$
23.01

 
$
22.00

San Felipe Plaza
 
980

 
84.8
%
 
85.4
%
 
22.06

 
23.00

Phoenix Tower
 
630

 
79.0
%
 
80.9
%
 
18.80

 
20.00

Greenway Plaza
 
4,322

 
89.6
%
 
90.7
%
 
16.63

 
18.91

Post Oak Central
 
1,280

 
92.5
%
 
93.4
%
 
20.13

 
21.00

Total office properties as of December 31, 2016
 
8,685

 
85.8
%
 
87.5
%
 
$
18.85

 
$
20.21


Lease expirations

The following table represents the embedded growth by lease expiration year for our portfolio:
Year of Expiration

Occupied Square Footage       (in thousands)

Percentage of Total Occupied Square Feet

Annualized Rental Revenue (1)                        (in thousands)

Number of Leases

Weighted Average Expiring Net Rental Rate per NRSF

Weighted Average Estimated Market Rent per NRSF
 
2016
 
96

 
1.3
%
 
$
1,620

 
57

 
$
16.88

 
$
18.67

(2)
2017

530


7.1
%

9,463


78


17.85


20.08

 
2018

494


6.6
%

9,472


63


19.17


19.50

 
2019

1,043


14.0
%

20,540


56


19.69


20.47

 
2020

587


7.9
%

12,022


66


20.48


20.12

 
2021

459


6.2
%

9,114


42


19.86


20.47

 
2022

418


5.6
%

7,838


35


18.75


19.15

 
2023

1,218


16.3
%

21,666


21


17.79


19.55

 
2024

291


3.9
%

4,890


15


16.80


19.09

 
2025

369


4.9
%

7,964


7


21.58


21.65

 
2026

1,273


17.1
%

20,180


12


15.85


20.44

 
Thereafter

675


9.1
%

15,721


9


23.29


20.39

 


7,453


100.0
%

$
140,490


461


$
18.85


$
20.21

 
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) Includes square feet expiring on the last day of the fourth quarter.


33



Top 20 Customers (based on rental revenue)

At December 31, 2016, our office properties were subject to 461 leases associated with 371 customers, which are in a wide variety of industries. The following table sets forth information concerning the 20 largest customers in our portfolio based on annualized rental revenues as of December 31, 2016:
Customer (1)
Weighted Average Lease Term
 
Occupied Square Footage (in thousands)
 
Percentage of Rentable Square Feet
 
Annualized Rental Revenue (in thousands) (2)
 
Percentage of Annualized Rental Revenue
 
Annualized Rental Revenue Per Occupied Square Foot
Occidental Oil & Gas Corporation
9.7

 
962

 
12.9
%
 
$
14,122

 
10.1
%
 
$
14.69

Statoil Gulf Services, LLC
15.7

 
507

 
6.8
%
 
12,300

 
8.8
%
 
24.24

Apache Corporation
3.0

 
524

 
7.0
%
 
9,340

 
6.6
%
 
17.81

Invesco Management Group, Inc
7.0

 
391

 
5.2
%
 
6,525

 
4.6
%
 
16.69

Stewart Information Services Corporation
2.7

 
183

 
2.5
%
 
4,737

 
3.4
%
 
25.90

Ion Geophysical Corporation
6.7

 
176

 
2.4
%
 
4,435

 
3.2
%
 
25.15

BMC Software, Inc.
9.5

 
216

 
2.9
%
 
3,708

 
2.6
%
 
17.15

Transocean Offshore Deepwater Drilling, Inc.
6.0

 
255

 
3.4
%
 
3,551

 
2.5
%
 
13.90

CPL Retail Energy, LP
6.4

 
202

 
2.7
%
 
3,260

 
2.3
%
 
16.17

ENSCO International Incorporated
9.0

 
167

 
2.2
%
 
3,251

 
2.3
%
 
19.48

Nalco Company
1.2

 
130

 
1.7
%
 
2,380

 
1.7
%
 
18.29

Engie Holdings Inc.
3.3

 
135

 
1.8
%
 
2,158

 
1.5
%
 
16.03

Raymond James & Associates, Inc.
4.9

 
97

 
1.3
%
 
2,013

 
1.4
%
 
20.86

Camden Property Trust
8.7

 
87

 
1.2
%
 
1,764

 
1.3
%
 
20.34

Parker Drilling Mgmt. Services
4.7

 
87

 
1.2
%
 
1,596

 
1.1
%
 
18.37

Regus Equity Business Centers, LLC
4.4

 
71

 
1.0
%
 
1,419

 
1.0
%
 
19.96

W & T Offshore, LLC
5.8

 
83

 
1.1
%
 
1,394

 
1.0
%
 
16.82

Sheridan Production Company, LLC
3.5

 
71

 
1.0
%
 
1,293

 
0.9
%
 
18.17

Frontica Business Solutions, Inc.
0.1

 
76

 
1.0
%
 
1,289

 
0.9
%
 
17.00

Houston Series of Lockton Companies, LLC
1.0

 
84

 
1.1
%
 
1,267

 
0.9
%
 
15.13

Totals


 
4,504

 
60.4
%
 
$
81,802

 
58.1
%
 
$
18.17

(1) In some cases, the actual tenant may be an affiliate or subsidiary of the customer shown.
(2) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

Significant Properties

Four of our five properties, CityWestPlace, Greenway Plaza, Post Oak Central and San Felipe Plaza, had a book value that exceeded 10% of total assets at December 31, 2016 or had rental revenue that exceeded 10% of consolidated gross revenues for the year ended December 31, 2016 and are therefore deemed to be significant properties.

CityWestPlace

CityWestPlace is located in Houston, Texas and comprises four office buildings in a 35.3 acre complex that range from six stories to 21 stories with an aggregate of 1.5 million rentable square feet. Our predecessor, Parkway Houston, acquired CityWestPlace in December 2013. The buildings were constructed between 1993 and 2001. CityWestPlace’s major customers include companies in the technology and energy industries. At December 31, 2016, the property was 72.5% occupied with a weighted average expiring net rental rate per net rentable square foot of $23.01. The average occupancy and rental rate per square foot since Parkway Houston acquired ownership of CityWestPlace is as follows:
Year
 
Average Occupancy
 
Average Rental Rate
per Square Foot
2013
 
97.4%
 
$
16.30

2014
 
96.4%
 
16.54

2015
 
85.3%
 
19.43

2016
 
77.2%
 
23.74





34



Lease expirations for CityWestPlace at December 31, 2016 are as follows (in thousands, except square feet of leases expiring and 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
 
2016
 
585

 
0.1
%
 
$

 
%
 
3

(2)
2017
 
75,816

 
5.2
%
 
1,294

 
5.3
%
 
2

 
2018
 

 
%
 
5

 
%
 

 
2019
 

 
%
 

 
%
 
1

 
2020
 
35,550

 
2.4
%
 
1,219

 
5.0
%
 
5

 
2021
 
16,286

 
1.1
%
 
384

 
1.6
%
 
3

 
2022
 

 
%
 

 
%
 

 
2023
 
176,349

 
12.0
%
 
4,435

 
18.1
%
 
1

 
2024
 

 
%
 

 
%
 

 
2025
 
39,114

 
2.7
%
 
1,214

 
4.9
%
 
1

 
2026
 
216,237

 
14.7
%
 
3,708

 
15.1
%
 
1

 
Thereafter
 
507,420

 
34.3
%
 
12,300

 
50.0
%
 
2

 
 
 
1,067,357

 
72.5
%
 
$
24,559

 
100.0
%
 
19

 
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) Includes square feet expiring on the last day of the fourth quarter.

CityWestPlace has three customers that occupy 10% or more of the rentable square footage. Information regarding these customers is as follows:
Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate
Per Square Foot
Annualized Rental Revenue (1)
Lease Options
Energy
507
2032
$24.24
$12,300
(2)
Technology
216
2026
17.15
3,708
(3)
Energy
176
2023
25.15
4,435
(4)
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) This tenant has three one-time options to cancel one floor each effective August 31, 2022, August 31, 2024, and August 21, 2027 upon 12 months' prior notice.
(3) This tenant has an option to cancel 10,448 square feet effective July 2, 2021 upon 12 months' prior notice.
(4) This tenant has an option to cancel 23,000 square feet effective October 1, 2017 upon 12 months' prior notice.

 For tax purposes, depreciation is calculated over 39 years for buildings and garages, seven to 39 years for building and tenant improvements and five to seven years for equipment, furniture and fixtures. The federal tax basis, without adjustments for gain recognized and/or loss disallowed in connection with transactions occurring on October 6, 2016, net of accumulated tax depreciation of CityWestPlace is estimated as follows at December 31, 2016 (in thousands):
 
CityWestPlace
Land
$
31,555

Building and garage
175,212

Building and tenant improvements
73,531

    
Real estate tax expense for the property for the period from October 7, 2016 (date of the Spin-Off) to December 31, 2016 was $2.7 million.

Greenway Plaza

Greenway Plaza is located in Houston, Texas and comprises 10 office buildings in a 52.4 acre complex that range from five stories to 31 stories with an aggregate of 4.3 million rentable square feet. The buildings were constructed between 1969 and 1981. Greenway Plaza’s major customers include companies primarily in the energy and finance industries. On February 17, 2017, we entered into the Contribution Agreement pursuant to which, upon closing, we will own a 51% interest in Greenway Plaza through a joint venture with two other parties, CPPIB and TIAA/SP. At December 31, 2016, the property was 89.6% occupied

35



with a weighted average expiring net rental rate per net rentable square foot of $16.63. The average occupancy and rental rate per square foot since Cousins Houston acquired ownership of Greenway Plaza is as follows:
Year
Average Occupancy
Average Rental Rate per Square Foot
2013
95.2%
$13.18
2014
93.1%
14.42
2015
89.8%
15.40
2016
82.2%
17.67

Lease expirations for Greenway Plaza at December 31, 2016 are as follows (in thousands, except square feet of leases expiring and 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
 
2016
85,005

2.0
%
$
1,424

2.2
%
38

(2)
2017
240,770

5.6
%
4,161

6.5
%
44

 
2018
208,067

4.8
%
3,879

6.0
%
38

 
2019
207,297

4.8
%
3,504

5.4
%
29

 
2020
286,929

6.6
%
5,573

8.7
%
40

 
2021
224,594

5.2
%
4,006

6.2
%
21

 
2022
300,179

6.9
%
5,360

8.3
%
19

 
2023
943,611

21.8
%
14,988

23.3
%
15

 
2024
212,209

4.9
%
2,947

4.6
%
8

 
2025
137,074

3.2
%
2,862

4.4
%
3

 
2026
1,000,463

23.2
%
15,108

23.5
%
7

 
Thereafter
25,204

0.6
%
568

0.9
%
1

 
 
3,871,402

89.6
%
$
64,380

100.0
%
263

 
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) Includes square feet expiring on the last day of the fourth quarter.

Greenway Plaza has one customer that occupies 10% or more of the rentable square footage. Information regarding this customer is as follows:
Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate
Per Square Foot
Annualized Rental Revenue (1)
Lease Options
Energy
962
2016, 2026
$14.69
$14,122
(2)
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) This tenant has an annual option through December 31, 2024 to cancel up to three full floors in the aggregate upon 12 months' prior notice.
    
For tax purposes, depreciation is calculated over 39 years for buildings and garages, seven to 39 years for building and tenant improvements and five to seven years for equipment, furniture and fixtures. The federal tax basis, without adjustments for gain recognized and/or loss disallowed in connection with transactions occurring on October 6, 2016, net of accumulated tax depreciation of Greenway Plaza is estimated as follows at December 31, 2016 (in thousands):
 
Greenway Plaza
Land
$
179,649

Building and garage
477,972

Building and tenant improvements
146,967


Real estate tax expense for the property for the period from October 7, 2016 (date of the Spin-Off) to December 31, 2016 was $6.9 million.






36



Post Oak Central

Post Oak Central is located in Houston, Texas and comprises three office buildings in a 17.19 acre complex that are 24 stories each with an aggregate of 1.3 million rentable square feet. The buildings were constructed between 1974 and 1980. Post Oak Central’s major customers include companies in energy and financial services industries. At December 31, 2016, the property was 92.5% occupied with a weighted average expiring net rental rate per net rentable square foot of $20.13. The average occupancy and rental rate per square foot since Cousins Houston acquired ownership of Post Oak Central is as follows:
Year
Average Occupancy
Average Rental Rate per Square Foot
2013
92.0%
$14.55
2014
94.9%
16.04
2015
95.4%
18.31
2016
94.0%
18.28

Lease expirations for Post Oak Central at December 31, 2016 are as follows (in thousands, except square feet of leases expiring and number of leases):
Year
Square Feet of Leases Expiring
Percentage of Total Square Feet
Annualized Rental Revenue (1)
Percentage of Total Annualized Rent
Number of Leases
 
2016
7,392

0.5
%
$
133

0.5
%
9

(2)
2017
45,125

3.5
%
1,041

4.4
%
14

 
2018
782

0.1
%
21

0.1
%
1

 
2019
747,555

58.4
%
15,025

63.0
%
16

 
2020
172,521

13.5
%
3,055

12.8
%
10

 
2021
89,580

7.0
%
1,802

7.6
%
10

 
2022
43,034

3.4
%
929

3.9
%
8

 
2023
31,731

2.5
%
714

3.0
%
3

 
2024
33,044

2.6
%
817

3.4
%
3

 
2025

%

%

 
2026
6,574

0.5
%
135

0.6
%
1

 
Thereafter
7,392

0.5
%
170

0.7
%
1

 
 
1,184,730

92.5
%
$
23,842

100.0
%
76

 
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) Includes square feet expiring on the last day of the current quarter.

Post Oak Central has three customers that occupy 10% or more of the rentable square footage. Information regarding these customers is as follows:
Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate
Per Square Foot
Annualized Rental Revenue (1)
Lease Options
Energy
524
2019
$17.81
$9,340
(2)
Finance
183
2019
25.90
4,737
(3)
Energy
135
2020
16.03
2,158
(2)
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) This tenant has no contraction or termination options.
(3) This tenant has an option to cancel the 10th and/or 14th floor effective September 30, 2016 upon 90 days prior notice, and the option to cancel 9,526 square feet of storage space effective between October 1, 2016 and September 30, 2018 upon 90 days' prior notice.

For tax purposes, depreciation is calculated over 39 years for buildings and garages, seven to 39 years for building and tenant improvements and five to seven years for equipment, furniture and fixtures. The federal tax basis, without adjustments for gain recognized and/or loss disallowed in connection with transactions occurring on October 6, 2016, net of accumulated tax depreciation of Post Oak Central is estimated as follows at December 31, 2016 (in thousands):

37



 
Post Oak Central
Land
$
81,667

Building and garage
94,379

Building and tenant improvements
39,574


Real estate tax expense for the property for the period from October 7, 2016 (date of the Spin-Off) to December 31, 2016 was $2.3 million.

San Felipe Plaza

San Felipe Plaza is located in Houston, Texas and is a 46 story office building with an aggregate of 980,000 rentable square feet. The building was constructed in 1984. San Felipe Plaza’s major customers include companies in the energy and financial services industries. At December 31, 2016, the property was 84.8% occupied with a weighted average expiring net rental rate per net rentable square foot of $22.06. The average occupancy and rental rate per square foot since Parkway Houston acquired ownership of San Felipe Plaza is as follows:
Year
Average Occupancy
Average Rental Rate per Square Foot
2013
87.4%
$16.55
2014
86.6%
18.69
2015
84.1%
20.60
2016
84.6%
21.40

Lease expirations for San Felipe Plaza at December 31, 2016 are as follows (in thousands, except square feet of leases expiring and number of leases):
Year
Square Feet of Leases Expiring
Percentage of Total Square Feet
Annualized Rental Revenue (1)
Percentage of Total Annualized Rent
Number of Leases
 
2016
1,645

0.2
%
$
17

0.1
%
6

(2)
2017
107,430

10.9
%
1,912

10.4
%
8

 
2018
81,614

8.2
%
1,888

10.3
%
13

 
2019
44,678

4.6
%
1,166

6.4
%
2

 
2020
66,264

6.8
%
1,611

8.8
%
8

 
2021
118,507

12.1
%
2,604

14.2
%
6

 
2022
30,521

3.1
%
790

4.3
%
5

 
2023
66,573

6.8
%
1,529

8.3
%
2

 
2024
46,198

4.7
%
1,126

6.1
%
4

 
2025
177,110

18.1
%
3,512

19.1
%
2

 
2026
49,836

5.1
%
1,228

6.7
%
3

 
Thereafter
41,265

4.2
%
965

5.3
%
2

 
 
831,641

84.8
%
$
18,348

100.0
%
61

 
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) Includes square feet expiring on the last day of the fourth quarter.

San Felipe Plaza has one customer that occupies 10% or more of the rentable square footage. Information regarding this customer is as follows:
Nature of Business
Square Feet Expiring (in thousands)
Lease Expiration Date
Effective Rental Rate
Per Square Foot
Annualized Rental Revenue (1)
Lease Options
Energy
167
2017, 2025
$19.48
$3,251
(2)
(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.
(2) This tenant has no contraction or termination options.



38



    For tax purposes, depreciation is calculated over 39 years for buildings and garages, seven to 39 years for building and tenant improvements and five to seven years for equipment, furniture and fixtures. The federal tax basis, without adjustments for gain recognized and/or loss disallowed in connection with transactions occurring on October 6, 2016, net of accumulated tax depreciation of San Felipe Plaza is estimated as follows at December 31, 2016 (in thousands):
 
San Felipe Plaza
Land
$
10,696

Building and garage
96,574

Building and tenant improvements
50,627


Real estate tax expense for the property for the period from October 7, 2016 (date of the Spin-Off) to December 31, 2016 was $2.4 million.

Mortgage Debt

Four of our five properties, CityWestPlace, Phoenix Tower, Post Oak Central and San Felipe Plaza, are subject to mortgage debt. A summary of mortgage notes payable, net at December 31, 2016 is as follows (dollars in thousands):
Office Properties
Fixed Rate
 
Maturity Date
 
December 31, 2016
San Felipe Plaza
4.8%
 
12/01/2018
 
$
106,085

CityWestPlace III and IV
5.0%
 
03/05/2020
 
88,700

Post Oak Central
4.3%
 
10/01/2020
 
178,285

Phoenix Tower
3.9%
 
03/01/2023
 
76,561

 Unamortized premium, net
 
 
 
 
2,600

 Unamortized debt issuance costs, net
 
 
 
 
(654
)
Total mortgage notes payable, net
 
 
   
 
$
451,577


Upon closing of the joint venture transaction under the Contribution Agreement, a subsidiary of the joint venture expects to assume the existing mortgage loan on Phoenix Tower. In addition, on February 22, 2017, the Operating Partnership and Goldman Sachs entered into the Commitment Letter pursuant to which Goldman Sachs has, among other things, agreed to provide the joint venture and certain of its subsidiaries the Loan in an aggregate principal amount of up to $465 million secured by the Greenway Plaza properties and all related assets. Funding of the Loan is subject to certain conditions set forth in the Commitment Letter.

We did not have any material liens or encumbrances that exceeded 10% of total assets at December 31, 2016.

For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Parkway, Inc.—Liquidity and Capital Resources.”

ITEM 3.  Legal Proceedings.
 
We and our subsidiaries may be involved from time to time in various legal proceedings that arise in the ordinary course of our business, including, but not limited to commercial disputes, environmental matters and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims and administrative proceedings will not have a material adverse impact on our financial position or our results of operations. Most occurrences involving liability, claims of negligence and employees will be covered by insurance with solvent insurance carriers. For those losses not covered by insurance, we will record a liability when a loss is considered probable and the amount can be reasonably estimated.
    
ITEM 4.  Mine Safety Disclosures

Not Applicable.

39



PART II

ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Price of and Dividends on the Issuer’s Common Equity

Our common stock, $0.001 par value, is listed and trades on the New York Stock Exchange (the “NYSE”) under the symbol “PKY” and began trading publicly in the regular way on October 7, 2016. The number of record holders of our common stock and limited voting stock was 1,516 and six, respectively, at March 8, 2017.

The following table sets forth, for the period indicated, the high and low sales prices per share of our common stock on the NYSE. We have not paid any dividends during or with respect to the period indicated.
 
 
Price Range
 
 
 
 
High
 
Low
 
Dividends
2016:
 
 
 
 
 
 
Fourth quarter (1)
 
$
23.20

 
$
16.39

 
$

(1) Information provided only for the period from October 7, 2016 to December 31, 2016, as our common stock did not begin trading publicly in the regular way until October 7, 2016.

At March 8, 2017, the last reported sales price per share of our common stock on the NYSE was $20.50.

Dividends

We are a newly formed company that has recently commenced operations, and as a result, we have not declared or paid any dividends from the period from June 29, 2016 to December 31, 2016. We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

(1)
90 % of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with accounting principles generally accepted in the United States (“GAAP”)); plus

(2)
90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

(3)
any excess non-cash income (as determined under the Code).

We cannot assure you that our dividend policy will remain the same in the future, or that any estimated dividends will be made or sustained. Dividends made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, funds from operations and results of operations, the revenue we actually receive from our properties, our operating expense, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financial arrangements, the annual REIT distribution requirements and such other factors as our board of directors deems relevant.

Although we have not paid any dividends on our common stock as of the date of this Annual Report on Form 10-K, in accordance with our Charter and as authorized by our board of directors, we have declared a quarterly dividend in the amount of $0.10 per share of common stock to holders of record of our common stock on March 16, 2017. The common dividend will be paid on March 30, 2017. In addition, we declared a dividend in the amount of $2,000 per share of Series A non-voting preferred stock to Cousins LP, the holder of record of all outstanding shares of such stock. A preferred dividend totaling approximately $100,000 will be paid on March 31, 2017 to the holder of record of Series A non-voting preferred stock on March 17, 2017.

Our Credit Facility contains provisions that may limit our ability to make distributions to our stockholders. These facilities generally provide that if a default occurs and is continuing, we will be precluded from making distributions on our common stock (other than those required to allow us to qualify and maintain our status as a REIT, so long as such default does not arise from a payment default or bankruptcy) and lenders under the facility and, potentially, other indebtedness, could accelerate the maturity of the related indebtedness. The Credit Facility also contains covenants providing for a maximum distribution of the greater of (i) the amount required for us to qualify as a REIT or (ii) 90% of our funds from operations (as defined in such credit agreement). Upon closing of the Greenway Properties joint venture transaction, we expect to terminate the Credit Facility and prepay the $350

40



million outstanding balance using proceeds from the joint venture transaction. We cannot provide assurances that the Greenway Properties joint venture transaction will be consummated on the terms or timeline currently contemplated, or at all, which may have a material adverse effect on our business, financial condition and results of operations.

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities by the Issuer

None.

Performance Graph

The following graph provides a comparison of cumulative stockholder returns for the period from October 7, 2016 through December 31, 2016 among Parkway, Inc., the Morgan Stanley Capital International (“MSCI”) US REIT (RMS) Index and the Standard & Poor’s 500 Index (“S&P 500”). The stock performance graph assumes an investment of $100 in our common stock and each index and the reinvestment of any dividends. The historical information set forth below is not necessarily indicative of future performance.

The performance graph and related information shall not be deemed “soliciting material” or deemed to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

pky-2013123_chartx27699a03.jpg


41



    
 
 
Period Ending
Index
 
10/7/2016
 
12/31/2016
Parkway, Inc.
 
100.00

 
106.92

MSCI US REIT (RMS) Index
 
100.00

 
102.49

S&P 500
 
100.00

 
104.45


Source:  SNL Financial, an offering of S&P Global Market Intelligence

42



ITEM 6.  Selected Financial Data.

SELECTED FINANCIAL DATA—PARKWAY, INC.
    
The following table sets forth our selected financial data as of December 31, 2016 and for the period from June 29, 2016 (date of capitalization) to December 31, 2016, consisting primarily of operating activity for the 86-day period from October 7, 2016 (date on which our common stock began regular way trading on the NYSE) to December 31, 2016. This data should be read with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

 
For the Period From June 29, 2016 (Date of Capitalization) to December 31, 2016
 
(In thousands, except per share data)
Income Statement Data:
 
Revenues
 
Income from office properties
$
67,550

Management company income
1,381

Total revenues
68,931

Expenses
 
Property operating expenses
32,518

Management company expenses
1,050

Depreciation and amortization
25,139

General and administrative
17,510

Total expenses
76,217

Operating loss
(7,286
)
Other income and expenses
 
Interest and other income
1,225

Interest expense
(8,007
)
Loss before income taxes
(14,068
)
Income tax expense
(453
)
Net loss
(14,521
)
Net loss attributable to noncontrolling interest - unitholders
299

Net loss attributable to Parkway, Inc.
(14,222
)
Dividends on preferred stock
(94
)
Net loss attributable to common stockholders
$
(14,316
)
Net loss per common share attributable to common stockholders - basic and diluted
$
(0.29
)
Dividends per share of common stock
$

Weighted average shares outstanding - basic and diluted
49,111

 
 
 
As of December 31, 2016
 
(In thousands)
Balance Sheet Data:
 
Total real estate related investments, net 
$
1,705,611

Total assets
2,163,895

Notes payable to banks, net
341,602

Mortgage notes payable, net
451,577

Total liabilities
1,011,973

Preferred stock
5,000

Total Parkway, Inc. stockholders’ equity
1,128,885

Noncontrolling interests
23,037


43



SELECTED HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

The following table sets forth the selected historical combined financial data of Parkway Houston, one of our predecessors, which was carved out from the financial information of Legacy Parkway as described below. The selected historical financial data set forth below as of October 5, 2016, December 31, 2015, 2014 and 2013, for the period from January 1, 2016 to October 5, 2016 (the date immediately prior to the closing date of the Merger), and for the years ended December 31, 2015, 2014 and 2013 has been derived from Parkway Houston’s audited combined financial statements.

Parkway Houston’s combined financial statements were carved out from the financial information of Legacy Parkway at a carrying value reflective of historical cost in Legacy Parkway's records. Parkway Houston’s historical financial results reflect charges for certain corporate expenses which include, but are not limited to, costs related to property management, accounting, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganization. Costs of the services were allocated based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly Parkway Houston’s percentage of Legacy Parkway’s square footage. Parkway Houston believes these charges are reasonable; however, these results may not reflect what Parkway Houston’s expenses would have been had Parkway Houston been operating as a separate, stand-alone public company. The historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Parkway Houston had been an independent, stand-alone entity during the periods shown. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The historical combined financial data set forth below does not indicate results expected for any future periods. This data should be read with Parkway Houston's combined financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

44



 
Period from January 1, 2016 to October 5, 2016 (the date immediately prior to the closing date of the Merger)
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Income Statement Data (in thousands):
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Income from office properties
$
83,249

 
$
108,507

 
$
123,172

 
$
20,965

Management company income
3,835

 
9,891

 
23,971

 
17,526

Sale of condominium units

 
11,063

 
16,554

 

Total revenues
87,084

 
129,461

 
163,697

 
38,491

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Property operating expenses
39,758

 
45,385

 
54,856

 
9,119

Management company expenses
3,263

 
9,362

 
27,038

 
23,638

Cost of sales - condominium units

 
11,120

 
13,199

 
14

Depreciation and amortization
30,791

 
55,570

 
64,012

 
10,465

Impairment loss on management contracts

 

 
4,750

 

General and administrative
4,880

 
6,336

 
6,917

 
7,267

Total expenses
78,692

 
127,773

 
170,772

 
50,503

Operating income (loss)
8,392

 
1,688

 
(7,075
)
 
(12,012
)
Other income and expenses
 
 
 
 
 
 
 
Interest and other income
196

 
246

 
244

 
1,663

Gain on extinguishment of debt
154

 

 

 

Interest expense
(10,010
)
 
(16,088
)
 
(16,252
)
 
(3,296
)
Loss before income taxes
(1,268
)
 
(14,154
)
 
(23,083
)
 
(13,645
)
Income tax (expense) benefit
(1,113
)
 
(1,635
)
 
180

 
1,276

Net loss
(2,381
)
 
(15,789
)
 
(22,903
)
 
(12,369
)
Net (income) loss attributable to noncontrolling interests

 
7

 
(148
)
 

Net loss attributable to Parkway Houston
$
(2,381
)
 
$
(15,782
)
 
$
(23,051
)
 
$
(12,369
)
 
As of October 5,
 
As of December 31,
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data (in thousands):
 
 
 
 
 
 
 
Total real estate related investments, net
$
744,956

 
$
752,653

 
$
738,846

 
$
757,848

Total assets
855,502

 
865,731

 
866,496

 
903,165

Mortgage notes payables, net
276,441

 
396,901

 
407,211

 
414,656

Total liabilities
326,314

 
456,665

 
485,535

 
503,130

Legacy Parkway equity
529,188

 
409,066

 
380,053

 
396,985

Noncontrolling interests

 

 
908

 
3,050



45



SELECTED HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

The following table sets forth the selected historical combined financial data of Cousins Houston, one of our predecessors, which was carved out from the financial information of Cousins as described below. The selected historical combined financial data set forth below as of October 6, 2016, December 31, 2015, 2014 and 2013, for the period from January 1, 2016 to October 6, 2016 (closing date of the Merger), for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 has been derived from Cousins Houston’s audited combined financial statements.

Cousins Houston’s combined financial statements were carved out from Cousins’ financial information based on historical cost. The historical financial results for Cousins Houston include certain allocated corporate costs, which we believe are reasonable. These costs were incurred by Cousins and estimated to be applicable to Cousins Houston based on proportionate leasable square footage. Such costs do not necessarily reflect what the actual costs would have been if Cousins Houston were operating as a separate stand-alone public company. These costs are discussed further in “Note 3—Related Party Transactions” of the combined financial statements of Cousins Houston for the period ended October 6, 2016. The selected historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Cousins Houston had been an independent, stand-alone entity during the periods shown.

The selected historical combined financial data set forth below do not indicate results expected for any future periods. This data should be read with Cousins Houston’s combined financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
 
Period from January 1, 2016 to October 6, 2016 (closing date of the Merger)
 
Year Ended December 31,
 
Period from February 7, 2013 (date of inception) to December 31, 2013
 
 
2015
 
2014
 
Income Statement Data (in thousands):
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental property revenues
$
137,374

 
$
177,890

 
$
184,536

 
$
72,696

Other
288

 

 
31

 
11

Total revenues
137,662

 
177,890

 
184,567

 
72,707

 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Rental property operating expenses
58,704

 
74,162

 
79,625

 
31,759

General and administrative expenses
6,787

 
6,328

 
7,347

 
3,793

Depreciation and amortization
47,345

 
63,791

 
77,760

 
29,146

Interest expense
6,021

 
7,988

 
8,127

 
2,618

Acquisition and related costs
6,349

 

 

 
3,858

Total costs and expenses
125,206

 
152,269

 
172,859

 
71,174

Net income
$
12,456

 
$
25,621

 
$
11,708

 
$
1,533

 
As of October 6,
 
As of December 31,
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data (in thousands):
 
 
 
 
 
 
 
Operating properties, net
$
1,081,712

 
$
1,086,451

 
$
1,077,290

 
$
1,087,181

Total assets
1,180,221

 
1,188,236

 
1,188,355

 
1,220,551

Note payable
178,180

 
180,937

 
184,097

 
187,120

Total liabilities
260,681

 
271,364

 
278,558

 
283,604

Equity
919,540

 
916,872

 
909,797

 
936,947


46



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

The following discussion and analysis covers the financial condition and results of operations of the Company, and our predecessors, Parkway Houston and Cousins Houston. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and related notes of Parkway, Inc., Parkway Houston and Cousins Houston, and “Risk Factors” contained elsewhere in this Annual Report on Form 10-K.

PARKWAY, INC.

Overview

We are an independent, publicly traded, self-managed REIT that owns and operates high-quality office properties located in attractive submarkets in Houston, Texas. Our portfolio consists of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing geographic focus and significant operational scale and efficiencies.

In addition, we offer fee-based real estate services through Eola, which in total managed approximately 3.8 million square feet primarily for third-party property owners at December 31, 2016. Unless otherwise indicated, all references to square feet represent net rentable square feet.

Our mission is to own and operate high-quality office properties located in submarkets in Houston, with a primary focus on unlocking value within our existing portfolio through implementing active and creative leasing strategies, leveraging our scale to increase pricing power in lease and vendor negotiations and targeting redevelopment and asset repositioning opportunities. We plan to maintain a conservative balance sheet with low leverage and ample liquidity, which we expect will allow us to access multiple sources of capital. We believe that this strategy will support both our internal growth initiatives and our patient and disciplined approach to pursuing new investment opportunities at the appropriate time. We believe that this strategy, combined with our highly experienced management team that has a successful history of operating a publicly traded REIT, significant expertise in the Houston, Texas office sector and extensive relationships with industry participants, positions us for long-term internal and external growth.

Our Spin-Off from Cousins

Prior to the Spin-Off, we were incorporated on June 3, 2016 as a wholly owned subsidiary of Legacy Parkway. On October 6, 2016, pursuant to the Merger Agreement, Legacy Parkway merged with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation and a wholly owned subsidiary of Cousins. In connection with the Merger, we became a subsidiary of Cousins. On October 7, 2016, Cousins completed the Spin-Off of our company by distributing all of our outstanding shares of common and limited voting stock to the holders of Cousins common and limited voting preferred stock as of the record date, October 6, 2016.

Greenway Properties Joint Venture

On February 17, 2017, we, through our Operating Partnership and certain other subsidiaries, entered into the Contribution Agreement with CPPIB and TIAA/SP, pursuant to which we have agreed to sell to these two investors, indirectly through a new joint venture, an aggregate 49% interest in the Greenway Properties. The new joint venture is expected to be owned 51% through subsidiaries of the Operating Partnership (with 1% being held by a subsidiary acting as the general partner and 50% being held by a subsidiary acting as a limited partner) and 24.5% by each of CPPIB and TIAA/SP, each as a limited partner of the joint venture. At closing under the Contribution Agreement, a subsidiary of the joint venture expects to assume the existing mortgage loan on Phoenix Tower and to enter into new mortgage financing of up to $465 million secured by the Greenway Plaza properties, in accordance with the Commitment Letter with Goldman Sachs. Subject to certain conditions, closing under the Contribution Agreement is expected to occur during the second quarter of 2017, subject to extension to an outside date of May 31, 2017, which may be further extended to June 21, 2017 in certain circumstances.









47



Leasing Activity

Rental Rates

An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates. Inversely, a decrease in vacancy rates in a market or at a specific property has the effect of increasing market rental rates. Our leases typically have three- to seven-year terms, though from time to time, we may enter into leases with terms that are either shorter or longer than that typical range. As leases expire, we seek to replace existing leases with new leases at the current market rental rate. For our properties owned as of December 31, 2016, management estimates that we have approximately $1.36 per square foot in annual rental rate embedded growth in our office property leases. Embedded growth is defined as the difference between the weighted average in-place cash rents including operating expense reimbursements and the weighted average estimated market rental rate.

The following table represents the embedded growth by lease expiration year for our portfolio:
Year of Expiration
 
Occupied Square Footage       (in thousands)
 
Percentage of Total Occupied Square Feet
 
Annualized Rental Revenue (1)                        (in thousands)
 
Number of Leases
 
Weighted Average Expiring Net Rental Rate per NRSF
 
Weighted Average Estimated Market Rent per NRSF
 
2016
 
96

 
1.3
%
 
$
1,620

 
57

 
$
16.88

 
$
18.67

(2)
2017
 
530

 
7.1
%
 
$
9,463

 
78

 
$
17.85