Capital and Financing Transactions

Notes Payable to Banks

At December 31, 2014, the Company had a total of $481.5 million outstanding under the following credit facilities (in thousands):



Credit Facilities	Interest Rate		Maturity	Outstanding Balance
$10.0 Million Working Capital Revolving Credit Facility	1.7	%	03/30/2018	$	—
$250.0 Million Revolving Credit Facility	1.6	%	03/30/2018	131,500
$250.0 Million Five-Year Term Loan	2.5	%	03/29/2019	250,000
$100.0 Million Seven-Year Term Loan	4.3	%	03/31/2021	100,000
				$	481,500

At December 31, 2013, the Company had a total of $303.0 million outstanding under the following credit facilities (in thousands):



Credit Facilities	Interest Rate		Maturity	Outstanding Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility	—	%	03/29/2016	$	—
$215.0 Million Unsecured Revolving Credit Facility	2.0	%	03/29/2016	58,000
$125.0 Million Unsecured Term Loan (1)	2.5	%	09/27/2017	125,000
$120.0 Million Term Loan Facility (2)	3.3	%	06/11/2018	120,000
				$	303,000

(1)

Effective October 1, 2012, the Company executed two floating-to-fixed interest rate swaps associated with the Term Loan Facility totaling $125 million, locking LIBOR at 0.7% for five years. The loan bears interest at LIBOR plus the applicable spread which ranges between 150 to 225 basis points based on overall Company leverage. The current spread associated with the loan is 1.75% resulting in an all-in rate of 2.45%.

(2)

Effective June 12, 2013, the Company entered into a new floating-to-fixed interest rate swap associated with a New Term Loan Facility totaling $120 million, locking LIBOR at 1.6% for five years. The loan bears interest at LIBOR plus the applicable spread which ranges between 145 to 220 basis points based on overall Company leverage. The current spread associated with the loan is 1.7% resulting in an all-in rate of 3.3%.

On June 12, 2013, the Company entered into a term loan agreement for a $120 million unsecured term loan. The unsecured term loan has a maturity date of June 11, 2018, and has an accordion feature that allows for an increase in the size of the unsecured term loan to as much as $250 million. Interest on the unsecured term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on overall Company leverage (with the current rate set at 145 basis points). The unsecured term loan has substantially the same operating and financial covenants as required by the Company's $215 million senior unsecured revolving credit facility. Wells Fargo Bank, National Association, acted as Administrative Agent and lender. The Company also executed a floating-to-fixed interest rate swap totaling $120.0 million, locking LIBOR at 1.6% for five years and resulting in an effective current interest rate of 3.3%. The unsecured term loan had an outstanding balance of $120.0 million at December 31, 2013.

Effective April 1, 2014, the Company entered into an Amended, Restated and Consolidated Credit Agreement (the "Amended Agreement") which provides for a $250.0 million senior unsecured revolving credit facility, a $250.0 million five-year unsecured term loan and a $100.0 million seven-year unsecured term loan. The Amended Agreement amended, restated and consolidated the agreements governing the Company's prior $215.0 million senior unsecured revolving credit facility, $125.0 million unsecured term loan and $120.0 million unsecured term loan. The maturity date of the senior unsecured revolving credit facility was extended to March 30, 2018, with an additional one-year extension option, and the $250.0 million five-year unsecured term loan and $100.0 million seven-year unsecured term loan have maturity dates of March 29, 2019 and March 31, 2021, respectively.

The senior unsecured revolving credit facility bears interest at LIBOR plus an applicable margin which ranges from 1.40% to 2.00% based on the Company's overall leverage, and is currently 1.40% resulting in an all-in rate of 1.56%. The $250.0 million five-year unsecured term loan bears interest at LIBOR plus an applicable margin which ranges from 1.35% to 1.90% based on the Company's overall leverage, and is currently 1.35% resulting in a weighted average all-in rate of 2.51%, after giving effect to the floating-to-fixed-rate interest rate swaps. The $100.0 million seven-year unsecured term loan bears interest at LIBOR plus an applicable margin which ranges from 1.75% to 2.30% based on the Company's overall leverage, and is currently 1.75%, resulting in an all-in rate of 4.31%, after accounting for the floating-to-fixed-rate interest rate swap. For a discussion of interest rate swaps entered into in connection with the Company's unsecured term loans and senior unsecured revolving credit facility, see " —Interest Rate Swaps."

The $100.0 million seven-year unsecured term loan tranche had a delayed-draw feature which allowed the Company to draw all or a portion of the $100.0 million commitment in not more than two draws over a 12-month period. The Company drew the full amount on April 8, 2014 and simultaneously repaid in full the first mortgage debt secured by the Bank of America Center in Orlando, Florida, which had an outstanding balance of $33.9 million. The Company recognized a loss on extinguishment of debt of $339,000 on the repayment of the Bank of America Center mortgage.

Additionally, effective April 1, 2014, the Company amended its $10.0 million unsecured working capital credit facility under terms and conditions similar to the Amended Agreement.

Mortgage Notes Payable

A summary of mortgage notes payable at December 31, 2014 and 2013 is as follows (in thousands):



	Variable	Fixed	Maturity	Monthly		December 31,
Office and Parking Properties	Rate	Rate (1)	Date	Payment		2014		2013
Wholly Owned
Westshore Corporate Center		2.5%	05/01/2015	$	88	$	14,091	$	14,312
Teachers Insurance and Annuity Associations (5 properties)		6.2%	01/01/2016	565		68,884		71,307
John Hancock Facility (2 properties)		7.6%	06/01/2016	130		17,398		17,634
3350 Peachtree, formerly Capital City Plaza		7.3%	03/05/2017	253		32,185		32,860
One Orlando Centre		4.6%	05/11/2017	265		54,000		—
One Congress Plaza		3.2%	06/11/2017	649		128,000		—
San Jacinto Center		3.2%	06/11/2017	509		101,000		—
The Pointe		4.0%	02/10/2019	78		23,500		23,500
Corporate Center IV (2)		4.6%	04/08/2019	129		36,000		36,000
Raymond James Tower (3)		7.6%	10/01/2019	—		—		9,211
Citrus Center		6.3%	06/01/2020	153		21,138		21,601
Bank of America Center (4)		4.7%	05/18/2018	—		—		33,875
Stein Mart		6.5%	08/01/2020	81		11,041		11,286
Phoenix Tower		3.9%	03/01/2023	258		80,000		80,000
Deerwood North and South		3.9%	04/01/2023	276		84,500		84,500
Lincoln Place		3.6%	06/11/2016	293		48,670		49,317
CityWestPlace I & II		3.5%	07/06/2016	738		116,111		117,663
CityWestPlace III & IV		4.3%	03/05/2020	512		91,889		93,367
San Felipe Plaza		4.3%	12/01/2018	576		109,585		110,000
Total Wholly Owned				$	5,553	$	1,037,992	$	806,433

Parkway Properties Office Fund II, LP
3344 Peachtree		5.3%	10/01/2017	485		82,907		84,739
Hayden Ferry Lakeside I (2)		4.5%	07/25/2018	112		21,887		22,000
Hayden Ferry Lakeside II & IV (2)		4.5%	07/25/2018	163		46,875		46,875
Hayden Ferry Lakeside III	2.0%		07/25/2018	1		481		—
245 Riverside (2)		5.2%	03/31/2019	51		9,166		9,250
Two Ravinia (2)		5.0%	05/20/2019	86		22,100		22,100
Two Liberty Place		5.2%	06/10/2019	391		90,200		90,200
Total Fund II				$	1,289	$	273,616	$	275,164
Unamortized premium, net						$	27,842	$	15,896
Total Mortgage Notes Payable				$	6,842	$	1,339,450	$	1,097,493


(1)	This represents the net effective interest rate.


(2)	Property has entered into an interest rate swap agreement with the Lender associated with these mortgage loans.


(3)	The first mortgage secured by Raymond James Tower was prepaid in full on December 31, 2014, and the asset was sold on January 15, 2015. The Company incurred a $2.1 million loss on extinguishment of debt as a result of the debt prepayment.


(4)	On December 23, 2013, the Company acquired its partner's 70.0% ownership interest in Bank of America Center. No changes were made to the size, structure or terms of the mortgage note secured by the property.

At December 31, 2014 and 2013, the net book value of the office and parking properties collateralizing the mortgage loans was $2.0 billion and $1.7 billion, respectively.

The aggregate annual maturities of mortgage notes payable at December 31, 2014 are as follows (in thousands):



	Total Mortgage Maturities		Debt Balloon Payments		Debt Principal Amortization
2015	$	30,005	$	14,013	$	15,992
2016	260,594		244,747		15,847
2017	405,525		390,939		14,586
2018	179,443		162,710		16,733
2019	175,947		167,935		8,012
Thereafter	260,094		245,476		14,618
Total principal maturities	1,311,608		1,225,820		85,788
Unamortized premium, net	27,842		N/A		N/A
Total principal maturities and fair value premium on mortgage debt acquired	$	1,339,450	$	1,225,820	$	85,788

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

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

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

On June 28, 2013, the Company modified the existing mortgage loan secured by Hayden Ferry II, an office property located in the Tempe submarket of Phoenix, Arizona. The loan modification eliminates quarterly principal payments of $625,000. As a result of the modification, loan payments are now interest-only through February 2015. The mortgage loan bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points. The Company entered into a floating-to-fixed interest rate swap that fixed LIBOR on the original loan at 1.5% through January 2018 and resulted in an all-in interest rate of 4.7% on December 31, 2013. Effective August 1, 2013, the Company entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount of $625,000 associated with the loan modification, resulting in an all-in interest rate of 4.9%. This loan is cross-defaulted with Hayden Ferry I, IV and V.

On December 6, 2013, in connection with the purchase of Lincoln Place, the Company assumed a mortgage loan with a balance of $49.3 million at December 31, 2013, with a fixed interest rate of 5.9% and a maturity date of June 11, 2016.

On December 19, 2013, in connection with the Mergers, the Company assumed $321.0 million of existing first mortgage loans that are secured by the properties. The mortgage loan for CityWestPlace buildings I and II carries a balance of $117.7 million at December 31, 2013, with a fixed interest rate of 6.2% and a maturity date of July 6, 2016. The mortgage loan for CityWestPlace buildings III and IV carries a balance of $93.4 million at December 31, 2013, with a fixed interest rate of 5.0% and a maturity date of March 5, 2020. The mortgage loan for San Felipe Plaza carries a balance $110.0 million at December 31, 2013, with a fixed interest rate of 4.8% and a maturity date of December 1, 2018.

On April 8, 2014, the Company repaid the first mortgage debt secured by Bank of America Center and terminated the related $33.9 million floating-to-fixed interest rate swap. The terminated $33.9 million swap had a liability value of $1.9 million which was rolled into the pricing set for the new $100.0 million swap.

On April 14, 2014, the Company purchased One Orlando Centre in Orlando, Florida, and simultaneously restructured the existing first mortgage loan secured by the property. The existing $68.3 million first mortgage note was restructured into a new $54.0 million first mortgage note and a $15.3 million subordinated note. Upon the sale or recapitalization of the property, proceeds are to be distributed first to the lender up to the amount of outstanding principal of the first mortgage note; second, to the Company up to its equity investment; third, to the Company until it receives a 12% annual return on its equity investment; fourth, 60% to the Company and 40% to the lender until the subordinated note is repaid in full; and fifth, to the Company at 100%. At the acquisition date, and as of December 31, 2014, the fair value of the subordinated note was zero.

On July 2, 2014, Fund II closed on a construction loan secured by the Hayden Ferry Lakeside III development in the Tempe submarket of Phoenix, Arizona, for $43.0 million, or 62.5% of the total estimated cost of the development, which will be funded subsequent to Fund II's and the Company's equity investment in the development. The loan is initially a 35% recourse loan to Fund II that will be reduced to non-recourse upon stabilization of the property. The loan is cross-collateralized with Fund II's Hayden Ferry Lakeside I, Hayden Ferry Lakeside II, Hayden Ferry Lakeside IV and the adjacent parking garage. The loan matures on July 25, 2018, is interest-only through maturity, and has an interest rate of one-month LIBOR plus 1.80% which decreases to 1.60% upon stabilization. As of December 31, 2014, the balance of the construction loan payable was approximately $481,000.

On November 17, 2014, the Company terminated the Austin Joint Venture. As part of the agreement, the Company acquired CalSTRS' 60% interest in One Congress Plaza and San Jacinto Center, resulting in 100% ownership of these two assets. As a result the Company assumed a mortgage loan with a balance of $128.0 million at December 31, 2014, with a fixed interest rate of 3.2% and a maturity date of June 11, 2017 for One Congress Plaza, and assumed a mortgage loan with a balance of $101.0 million at December 31, 2014, with a fixed interest rate of 3.2% and a maturity date of June 11, 2017 for San Jacinto Center.

On December 31, 2014, the Company extinguished the mortgage loan associated with Raymond James Tower in Memphis, Tennessee with a principal balance of $7.9 million. The Company incurred a loss on extinguishment of debt of approximately $2.1 million as part of the repayment.

Interest Rate Swaps

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2014, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2014 and 2013, the Company recorded $32,000 and $127,000, respectively, of hedge ineffectiveness in earnings attributable to the redesignation of several interest rate swaps.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2015, the Company estimates that an additional $6.9 million will be reclassified as an increase to interest expense. During the year ended December 31, 2014, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were a loss of $180,000.

The Company's interest rate hedge contracts at December 31, 2014 and 2013 are summarized as follows (in thousands):



							Asset (Liability) Balance
							December 31,
Type of Hedge	Balance Sheet Location	Associated Loan	Notional Amount	Maturity Date	Reference Rate	Fixed Rate	2014			2013
Swap	Receivables and Other Assets	5-year term loan	50,000	09/27/2017	1-month LIBOR	0.7%	452			769
Swap	Account payable and other liabilities	5-year term loan	120,000	06/11/2018	1-month LIBOR	1.6%	(1,438		)	(985		)
Swap	Account payable and other liabilities	Corporate Center IV	13,671	10/08/2018	1-month LIBOR	3.3%	(18		)	90
Swap	Receivables and Other Assets	5-year term loan	75,000	09/27/2017	1-month LIBOR	0.7%	679			1,162
Swap	Account payable and other liabilities	Hayden Ferry Lakeside II	3,750	01/25/2018	1-month LIBOR	1.7%	(71		)	(49		)
Swap	Account payable and other liabilities	Bank of America Center	33,875	11/18/2017	1-month LIBOR	4.7%	—			(1,973		)
Swap	Account payable and other liabilities	Hayden Ferry Lakeside I	21,887	01/25/2018	1-month LIBOR	4.5%	(877		)	(1,067		)
Swap	Account payable and other liabilities	Hayden Ferry Lakeside II	43,125	01/25/2018	1-month LIBOR	1.5%	(413		)	(383		)
Swap	Account payable and other liabilities	245 Riverside	9,166	09/30/2018	1-month LIBOR	5.2%	(617		)	(703		)
Swap	Account payable and other liabilities	Corporate Center IV	22,329	10/08/2018	1-month LIBOR	5.4%	(1,613		)	(1,843		)
Swap	Account payable and other liabilities	Two Ravinia	22,100	11/18/2018	1-month LIBOR	5.0%	(1,317		)	(1,427		)
Swap	Account payable and other liabilities	5 year term loan	5,000	04/01/2019	1-month LIBOR	1.7%	(60		)	—
Swap	Account payable and other liabilities	7 year term loan	100,000	03/31/2021	1-month LIBOR	2.6%	(4,652		)	—
							$	(9,945	)	$	(6,409	)

On March 25, 2013, in connection with the purchase of the Teacher Retirement System of Texas' ("TRST") interest in the Tampa Fund II Assets, the Company assumed the remaining 70% of two interest rate swaps, which have a total notional amount of $34.6 million.

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

On June 12, 2013, the Company executed a floating-to-fixed interest rate swap for a notional amount of $120.0 million, associated with its $120.0 million unsecured term loan that fixes LIBOR at 1.6% for five years, which resulted in an initial all-in interest rate of 3.3%. The interest rate swap matures June 11, 2018.

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

Effective June 12, 2013, the Company entered into a floating-to-fixed interest rate swap related to one-month LIBOR with a value of $120.0 million, locking LIBOR at 1.6% through June 11, 2018. On April 1, 2014, the Company dedesignated two of its existing floating-to-fixed interest rate swaps totaling $125.0 million that were previously associated with the $125.0 million five-year unsecured term loan and redesignated the swaps as a cash flow hedge of the risk of changes in cash flows attributable to changes in the benchmark interest rate for one-month LIBOR related to indexed interest payments made each month, regardless of the specific debt agreement from which they may flow. The two swaps totaling $125.0 million lock LIBOR at 0.7% through September 27, 2017. Additionally, on the same date, the Company entered into a new $5.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments made each month. The new $5.0 million swap has a fixed rate of 1.7%, an effective date of April 1, 2014 and matures on April 1, 2019.

The Company also terminated the $33.9 million swap designated to the Bank of America Center first mortgage. The net impact of the changes made to the existing swaps during the second quarter of 2014 resulted in a one-time increase in interest expense of approximately $121,000.

On April 1, 2014, the Company entered into a new $100.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments made each month. The $100.0 million swap has a fixed rate of 2.6%, an effective date of April 1, 2014 and a maturity date of March 31, 2021. The Company entered into this interest rate swap in connection with its $100.0 million seven-year unsecured term loan that bears interest at LIBOR plus the applicable margin which ranges from 1.75% to 2.30% based on the Company's overall leverage. The current spread associated with the loan is 1.75% resulting in an all-in rate of 4.31%.

The Company designated these swaps as cash flow hedges of the variable interest payments associated with the mortgage loans.

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss)

The table below presents the effect of the Company's derivative financial instruments on the Company's consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2014, 2013, and 2012 (in thousands):



	Year Ended
Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps)	December 31,
	2014			2013			2012
Amount of gain (loss) recognized in other comprehensive income on derivative	$	(10,968	)	$	4,110		$	(7,413	)
Amount of loss reclassified from accumulated other comprehensive income into interest expense	(7,445		)	(5,615		)	(4,117		)
Amount of gain reclassified from accumulated other comprehensive income into non-cash expense on interest rate swap included in discontinued operations	—			—			215
Amount of loss recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)	(212		)	(390		)	—