Parkway Reports Second Quarter 2013 Results

ORLANDO, Fla., Aug. 5, 2013 /PRNewswire/ -- Parkway Properties, Inc. (NYSE: PKY) today announced results for its second quarter ended June 30, 2013. 

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Highlights for Second Quarter 2013 and Recent Events

• FFO of $0.22 per share and recurring FFO of $0.32 per share
• FAD of $0.28 per share
• Occupancy of 89.9%, with portfolio 90.6% leased
• Leased over 1.0 million square feet in the last four months
• Closed on $120 million unsecured term loan
• Sold three non-core assets for total gross proceeds of approximately $53 million

"We have made significant progress executing our leasing strategy over the past several months, leasing over 1.0 million square feet since the end of the first quarter," stated James R. Heistand, President and Chief Executive Officer of Parkway.   "We had an 84.7% customer retention rate during the quarter, our occupancy increased 120 basis points from the prior quarter, and the average rental rates for this leasing activity were well above our recent historical averages.  Our investments in several of our key, targeted submarkets are now nearly fully leased, including most of our recently acquired value-add investments, which we believe positions us to achieve further rental rate growth and improving lease economics.  We are seeing the direct benefits of having a strong regional presence in each of our core markets, concentration within targeted submarkets, and a higher-quality portfolio.  We believe these recent results demonstrate the Company's ability to not only acquire the right assets and grow effectively, but also to operate these assets at a high level." 

For the second quarter 2013, funds from operations ("FFO") available to common shareholders was $15.0 million, or $0.22 per diluted share.  Recurring FFO was $22.0 million, or $0.32 per diluted share, and funds available for distribution ("FAD") was $19.0 million, or $0.28 per diluted share.  Reported FFO during the second quarter 2013 includes the negative impact of a one-time, non-cash charge totaling $6.6 million, or $0.10 per share, related to the redemption of the Company's 8.00% Series D Cumulative Redeemable Preferred Stock.  A reconciliation of FFO, recurring FFO and FAD to net income is included on page 13.  Net income, FFO, recurring FFO, and FAD for the second quarter 2013 and year-to-date, as well as a comparison to the prior-year period, are as follows:

On a year-over-year basis, FFO and Recurring FFO increased on a gross basis but decreased on a per share basis. This is primarily the result of: (i) a repositioning of the portfolio, with $1.1 billion in asset acquisitions and $663.8 million of asset dispositions since the end of 2011; (ii) significant capital markets activities, including the issuance of 45.1 million shares of common stock in public and private offerings since the beginning of 2012 for gross proceeds of $608.7 million; and (iii) significant deleveraging of the Company.  Parkway's repositioned portfolio has resulted in improved asset quality and location, which in turn has led to greater average gross rent per square foot, less capital expenditures per square foot per lease year, higher operating margins and higher customer retention rates. 

Operational Results

Occupancy at the end of the second quarter 2013 was 89.9%, compared to 88.7% at the end of the prior quarter.  Including leases that have been signed but have yet to commence, the Company's leased percentage at the end of the second quarter 2013 was 90.6%.

Parkway's share of recurring same-store net operating income ("NOI") was $15.6 million on a GAAP basis during the second quarter 2013, which was a decrease of $846,000, or 5.2%, as compared to the same period of the prior year.  On a cash basis, the Company's share of recurring same-store NOI increased 17.6% to $16.0 million as compared to the same period of the prior year.

The Company's portfolio GAAP NOI margin was 60.5% during the second quarter 2013, as compared to 61.1% during the same period of the prior year. 

Leasing Activity

During the second quarter 2013, Parkway signed a total of 578,000 square feet of leases at an average rent per square foot of $28.13 and an average cost of $4.78 per square foot per year.

New & Expansion Leasing – During the second quarter 2013, the Company signed 95,000 square feet of new leases at an average rent per square foot of $23.39 and at an average cost of $6.04 per square foot per year.  Expansion leases during the quarter totaled 84,000 square feet at an average rent per square foot of $28.46 and at an average cost of $5.13 per square foot per year.

Renewal Leasing – Customer retention during the second quarter 2013 was 84.7%.  The Company signed 399,000 square feet of renewal leases at an average rent per square foot of $29.18, representing a 6.5% rate increase from the expiring rate.  The average cost of renewal leases was $4.35 per square foot per year.

Additionally, as previously disclosed, since the end of the second quarter, Parkway has signed a total of 452,000 square feet of leases as of July 29, 2013, resulting in a total of over 1.0 million square feet leased in the last four months. The additional 452,000 square feet of leases that have been signed as of July 29, 2013, consists of 111,000 square feet of new leases, 231,000 square feet of renewal leases and 110,000 square feet of expansion leases.  Leases signed but not yet commenced are generally subject to customary conditions to commencement.

Acquisition and Disposition Activity

On June 3, 2013, the Company purchased an approximate 75% interest in the US Airways building, a 225,000 square foot office property located in the Tempe submarket of Phoenix, Arizona, for a purchase price of $41.8 million.  US Airways retained the remaining approximate 25% interest in the property.  The US Airways Building was built in 1999 and is LEED^® Gold Certified.  It is located adjacent to Parkway's Hayden Ferry Lakeside and Tempe Gateway assets and shares a parking garage with Tempe Gateway.  The property is 100% leased to US Airways through April 2024.  US Airways has the option to terminate its lease on December 31, 2016 or December 31, 2021 with 12 months prior written notice. 

On July 10, 2013, the Company sold its Waterstone and Meridian office properties, which represented 190,000 square feet in the aggregate in Atlanta, Georgia, for a combined gross sales price of $10.2 million.  During the second quarter 2013 the Company recorded an impairment loss of $4.6 million associated with the sale of these assets.  The Company received $9.5 million in net proceeds from the sale, which was used to reduce amounts outstanding under the Company's revolving credit facility. 

On July 17, 2013, the Company sold Bank of America Plaza, a 436,000 square foot office property located in Nashville, Tennessee, for a gross sales price of $42.8 million and expects to record a gain of approximately $11.9 million during third quarter of 2013.  The Company received $40.8 million in net proceeds from the sale, which was used to reduce amounts outstanding under the Company's revolving credit facilities.

Capital Structure

At June 30, 2013, the Company had $68.0 million outstanding under its revolving credit facility, $245.0 million outstanding under its unsecured term loans and held $30.2 million in cash and cash equivalents, of which $16.2 million of cash and cash equivalents was Parkway's share.  Parkway's share of secured debt totaled $493.9 million at June 30, 2013.

On April 25, 2013, the Company redeemed all of its outstanding Series D Preferred using proceeds from its underwritten public offering of common stock.  The Company paid $136.3 million to redeem these shares, which includes a $135.5 million liquidation value and accrued dividends of $723,000.  The Company recorded a $6.6 million non-cash charge during the second quarter 2013, which represents the difference between the costs associated with the issuance, including the price at which such shares were paid, and the redemption price.

On May 31, 2013, the Company modified the existing $22.5 million first mortgage secured by Corporate Center Four at International Plaza, a 250,000 square foot office property located in the Westshore submarket of Tampa, Florida.  The modified first mortgage carries a principal balance of $36 million, a weighted average fixed interest rate of 4.6% and matures in April 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 3, 2013, an affiliate of the Company issued a $13.9 million mortgage loan to a wholly owned subsidiary and an affiliate of US Airways, which is secured by the US Airways building.  The interest rate on the loan is 3.0% and it matures December 2016.  Parkway's share of the mortgage loan has been eliminated in the Company's consolidated financial statements.

The Company closed a $120 million unsecured term loan on June 12, 2013.  The 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 term loan to as much as $250 million.  Interest on the term loan is based on LIBOR plus an applicable margin, initially 1.5%.  Parkway has also executed a floating-to-fixed interest rate swap totaling $120 million, locking LIBOR at 1.6% for five years and resulting in an initial all-in interest rate of 3.1%.  The term loan will have substantially the same operating and financial covenants as required by the Company's current unsecured revolving credit facility.  Wells Fargo Bank funded the entire amount of the term loan.  The term loan had an outstanding balance of $120 million at June 30, 2013.

Simultaneous with the closing of the term loan, the Company repaid two first mortgages totaling $55.0 million which were secured by Cypress Center, a 286,000 square foot office complex in Tampa, Florida, and NASCAR Plaza, a 394,000 square foot office property in Charlotte, North Carolina.  The two mortgages had a weighted average interest rate of 3.6% and were schedule to mature in 2016.

On June 28, 2013, the Company modified the existing mortgage secured by Hayden Ferry Lakeside II, a 299,000 square foot 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 bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points.  The Company entered into an 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 interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional principal associated with the loan modification.  This loan is cross-defaulted with Hayden Ferry Lakeside I, III, IV and V.

At June 30, 2013, the Company's net debt to EBITDA multiple was 6.2x, using the quarter's annualized EBITDA after adjusting for the impact of acquisitions and dispositions completed during the period, as compared to 4.8x at March 31, 2013, and 4.6x at June 30, 2012.  At June 30, 2013, the Company's net debt plus preferred to EBITDA multiple was 6.2x, as compared to 5.9x at March 31, 2013, and 6.2x at June 30, 2012.  The Company's net debt to EBITDA increased during the second quarter of 2013 due to additional borrowings used to fund the purchase of the US Airways building and to redeem the Company's Series D Preferred Stock.  The Company anticipates its leverage at June 30, 2013, will be reduced given that the proceeds from the sale of the three non-core office properties that closed in July were used to repay amounts outstanding on the Company's credit facilities.

The Company remains under contract to acquire Lincoln Place, a 140,000 square foot office building located in the South Beach submarket of Miami, Florida, in exchange for the assumption of the existing secured first mortgage, which has a current outstanding balance of approximately $49.6 million, a fixed interest rate of 5.9% and a maturity date of June 11, 2016, and the issuance of 900,000 shares of operating partnership units. Closing is expected to occur by the end of the third quarter 2013, subject to customary closing conditions.

Common Dividend

The Company's previously announced second quarter cash dividend of $0.15 per share, which represents an annualized dividend of $0.60 per share, was paid on June 26, 2013 to shareholders of record as of June 12, 2013. 

2013 Revised Outlook

After considering the Company's recently announced leasing activity, corporate services transition and sale of three non-core office properties, Parkway is revising its 2013 FFO outlook from $1.10 to $1.20 per share to $1.00 to $1.10 per share and adjusting its earnings (loss) per share ("EPS") to ($0.28) to ($0.18).  The Company's revised 2013 FFO outlook includes the negative impact of its office closing in Jackson, Mississippi and the recently announced non-core asset sales, partially offset by recent leasing activity.  Excluding the impact of two significant one-time items related to the (i) redemption of the Company's preferred stock totaling $6.6 million and (ii) the transition of its Jackson office operations totaling approximately $3.7 million, the Company's guidance would be increased to $1.16 to $1.26.  The reconciliation of projected EPS to projected FFO per diluted share is as follows:  

The revised 2013 outlook is based on the core operating, financial and investment assumptions described below.  These assumptions reflect the Company's expectations based on its knowledge of current market conditions and historical experience.  All dollar amounts presented for the revised 2013 outlook and the previous 2013 outlook are at Parkway's share and dollars and shares are in thousands.

Variance within the outlook range may occur due to variations in the recurring revenue and expenses of the Company, as well as certain non-recurring items.  The earnings outlook does not include the impact of possible future gains or losses on early extinguishment of debt, possible future acquisitions or dispositions and related costs, the impact of fluctuations in the Company's stock price on share-based compensation, possible future impairment charges or other unusual charges that may occur during the year, except as noted.  It has been and will continue to be the Company's policy to not issue quarterly earnings guidance or revise the annual earnings outlook unless a material event occurs that impacts our original reported FFO outlook range.  This policy is intended to lessen the emphasis on short-term movements that do not have a material impact on earnings or long-term value of the Company.

Webcast and Conference Call

The Company will conduct its second quarter earnings conference call on Tuesday, August 6, 2013 at 9:00 a.m. Eastern Time.  To participate in the conference call, please dial 877-407-3982, or 1-201-493-6780 for international participants, at least five minutes prior to the scheduled start time.  A live audio webcast will also be available on the Company's website (www.pky.com).  A taped replay of the call can be accessed 24 hours a day through August 20, 2013, by dialing 877-870-5176, or 1-858-384-5517 for international callers, and using the passcode 417088. 

About Parkway Properties

Parkway Properties, Inc. is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") specializing in the acquisition, ownership and management of quality office properties in higher growth submarkets in the Sunbelt region of the United States.  Parkway owns or has an interest in 46 office properties located in eight states with an aggregate of approximately 13.3 million square feet at July 1, 2013.  Parkway also offers fee-based real estate services which manage and/or lease approximately 11.8 million square feet for third parties as of July 1, 2013.  Additional information about Parkway is available on the Company's website at www.pky.com.   

Forward Looking Statement

Certain statements in this press release that are not in the present or past tense or that discuss the Company's expectations (including any use of the words "anticipate," "assume," "believe," "estimate," "expect," "forecast," "guidance," "intend," "may," "might," "outlook," "project", "should" or similar expressions) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current beliefs as to the outcome and timing of future events. There can be no assurance that actual future developments affecting the Company will be those anticipated by the Company.  Examples of forward-looking statements include projected 2013 fully diluted EPS, share of depreciation and amortization, reported FFO per share, projected net operating income, cap rates, internal rates of return, future dividend payment rates, forecasts of FFO accretion, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions and other potential transactions and descriptions relating to these expectations.  These forward-looking statements involve risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors including, but not limited to, the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of the Company's properties for rental purposes; the ability of the Company to enter into new leases or renewal leases on favorable terms; the amount and growth of the Company's expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in those areas where the Company owns properties; risks associated with joint venture partners; risks associated with the ownership and development of real property; termination of property management contracts; the bankruptcy or insolvency of companies for which Parkway provides 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 pending transactions; applicable regulatory changes; and other risks and uncertainties detailed from time to time in the Company's SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's business, financial condition, liquidity, cash flows and financial results could differ materially from those expressed in the Company's forward-looking statements. 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.  The Company does not undertake to update forward-looking statements except as may be required by law. 

Company's Use of Non-GAAP Financial Measures

FFO, FAD, NOI and EBITDA, including related per share amounts, are used by management, investors and industry analysts as supplemental measures of operating performance of equity REITs and should be evaluated along with GAAP net income and income per diluted share (the most directly comparable GAAP measures), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of the Company. Management believes that FFO, FAD, NOI and EBITDA are helpful to investors as supplemental performance measures because these measures exclude the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, these non-GAAP measures can facilitate comparisons of operating performance between periods and among other equity REITs.  Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations determined in accordance with GAAP.  FFO, FAD, NOI and EBITDA do not represent cash generated from operating activities in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs as disclosed in the Company's Consolidated Statements of Cash Flows.  FFO, FAD, NOI and EBITDA should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity.  The Company's calculation of these non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

FFO – Parkway computes FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  FFO is defined as net income, computed in accordance with GAAP, reduced by preferred dividends, excluding gains or losses on depreciable real estate, plus real estate related depreciation and amortization.  Adjustments for Parkway's share of partnerships and joint ventures are included in the computation of FFO on the same basis.  On October 31, 2011, NAREIT issued updated guidance on reporting FFO such that impairment losses on depreciable real estate should be excluded from the computation of FFO for current and prior periods presented.   

Recurring FFO – In addition to FFO, Parkway also discloses recurring FFO, which considers Parkway's share of adjustments for non-recurring lease termination fees, gains and losses on extinguishment of debt, gains and losses, acquisition costs, fair value adjustments or other unusual items. Although this is a non-GAAP measure that differs from NAREIT's definition of FFO, the Company believes it provides a meaningful presentation of operating performance.

FAD – There is not a generally accepted definition established for FAD.  Therefore, the Company's measure of FAD may not be comparable to FAD reported by other REITs.  Parkway defines FAD as FFO, excluding the amortization of share-based compensation, amortization of above and below market leases, straight line rent adjustments, gains and losses, acquisition costs, fair value adjustments, gain or loss on extinguishment of debt, amortization of loan costs, non-cash charges and reduced by recurring non-revenue enhancing capital expenditures for building improvements, tenant improvements and leasing costs.  Adjustments for Parkway's share of partnerships and joint ventures are included in the computation of FAD on the same basis.

EBITDA – Parkway defines EBITDA, a non-GAAP financial measure, as net income before interest expense, amortization of financing costs, amortization of share-based compensation, income taxes, depreciation, amortization, acquisition costs, gains and losses on early extinguishment of debt, other gains and losses and fair value adjustments.  Adjustments for Parkway's share of partnerships and joint ventures are included in the computation of EBITDA on the same basis.  EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.  EBITDA does not represent cash generated from operating activities in accordance with GAAP, and should not be considered an alternative to operating income or net income as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

NOI, Recurring NOI, Same-Store NOI and Recurring Same-Store NOI – NOI includes income from real estate operations less property operating expenses (before interest expense and depreciation and amortization).  In addition to NOI, Parkway discloses recurring NOI, which considers adjustments for non-recurring lease termination fees or other unusual items.  The Company's disclosure of same-store NOI and recurring same-store NOI includes those properties that were owned during the entire current and prior year reporting periods and excludes properties classified as discontinued operations.

Contact:
Parkway Properties, Inc.
Thomas E. Blalock
Vice President of Finance and Capital Markets
Bank of America Center                                               
390 N. Orange Ave., Suite 2400                                    
Orlando, FL 32801                                                        
(407) 650-0593
www.pky.com