Parkway Properties, Inc. Reports 2010 Second Quarter Results

JACKSON, Miss., Aug. 2 /PRNewswire-FirstCall/ --

Highlights

• Reports FFO of $0.66 per share and recurring FFO of $0.64 per share
• Reports current occupancy of 86.1%, with portfolio 87.1% leased
• Purchases RubiconPark I, LLC note receivable for $33.0 million
• Reaffirms 2010 earnings outlook

Parkway Properties, Inc. (NYSE: PKY) today announced results for its second quarter ended June 30, 2010.

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Steven G. Rogers, President and Chief Executive Officer stated, “Since the end of the first quarter, we have signed 1.1 million square feet in new, renewal and expansion leases; we sold one asset for $15.7 million; we acquired the Rubicon note for a net $33.0 million; we paid off two mortgage loans totaling $27.8 million that encumbered four assets; and we closed two new mortgage loans for a total of $35.0 million.  We are pleased to report that our key operating metrics are in line with our earnings outlook for the year.  I am particularly pleased to report that included in the leasing activity are the early renewal of three major customers totaling 521,000 square feet, which were previously scheduled to expire in 2011.  Additionally, the Rubicon note represents our first new investment in over two years, and we were able to acquire the note at a 35% discount to the outstanding principal balance.”

Consolidated Financial Results

• Funds from operations ("FFO") available to common shareholders totaled $14.3 million, or $0.66 per diluted share, for the three months ended June 30, 2010, as compared to $16.8 million, or $0.86 per diluted share, for the three months ended June 30, 2009.   Recurring FFO totaled $13.8 million, or $0.64 per diluted share for the three months ended June 30, 2010, as compared to $16.5 million, or $0.84 per diluted share for the three months ended June 30, 2009.  For the six months ended June 30, 2010, FFO totaled $34.1 million, or $1.58 per diluted share, as compared to $32.7 million, or $1.89 per diluted share, for the six months ended June 30, 2009.  Recurring FFO totaled $28.4 million, or $1.32 per diluted share for the six months ended June 30, 2010, as compared to $31.8 million, or $1.84 per diluted share for the six months ended June 30, 2009.

Included in FFO per diluted share are the following amounts (in thousands, except average rent per square foot and average occupancy):

• Funds available for distribution ("FAD") totaled $2.6 million, or $0.12 per diluted share, for the three months ended June 30, 2010, as compared to $10.3 million, or $0.53 per diluted share, for the three months ended June 30, 2009.  FAD totaled $16.6 million, or $0.77 per diluted share, for the six months ended June 30, 2010, as compared to $19.6 million, or $1.13 per diluted share for the six months ended June 30, 2009.  

• Net income available to common shareholders for the three months ended June 30, 2010, was $5.7 million, or $0.26 per diluted share, as compared to net loss available to common shareholders of $280,000, or $0.01 per diluted share, for the three months ended June 30, 2009.  Net income available to common shareholders for the six months ended June 30, 2010, was $7.0 million, or $0.33 per diluted share as compared to net loss available to common shareholders of $2.3 million, or $0.13 per diluted share, for the six months ended June 30, 2009.  Gain on the sale of real estate of $8.5 million was included in net income available to common shareholders for the three months and six months ended June 30, 2010.

Asset Recycling

• On April 15, 2010, the Company closed on the fee simple sale of One Park Ten, a 163,000 square foot office property built in 1982 in Houston, Texas, for gross sales proceeds of $15.7 million and received net cash proceeds of $4.8 million, which were used to reduce amounts outstanding under the Company's line of credit.  The $8.7 million first mortgage secured by One Park Ten was assumed by the buyer, and Parkway also provided a $1.5 million seller financing loan, which bears interest at 7.25% per annum with interest-only payments through maturity on June 1, 2012.  The Company recognized a $136,000 loss on extinguishment of debt and a gain on the sale of $8.5 million during the second quarter of 2010.  Additionally, the Company retained management of the property.  

Operations and Leasing

• The Company's average rent per square foot decreased 0.1% to $23.04 during the second quarter 2010 as compared to $23.07 for the second quarter 2009 and increased 0.4% to $23.02 during the six months ended June 30, 2010, as compared to $22.93 for the six months ended June 30, 2009.  On a same-store basis, the Company's average rent per square foot decreased 0.3% to $23.05 during the second quarter 2010 as compared to $23.11 during the second quarter 2009, and increased 0.2% to $23.03 during the six months ended June 30, 2010, as compared to $22.98 during the six months ended June 30, 2009.  

• The Company's average occupancy for the second quarter 2010 was 85.5% as compared to 89.4% for the second quarter 2009, and was 85.9% for the six months ended June 30, 2010, as compared to 89.7% for the six months ended June 30, 2009.  On a same-store basis, the Company's average occupancy for the second quarter 2010 was 85.5% as compared to 89.4% for the second quarter 2009.  For the six months ended June 30, 2010, same-store average occupancy was 85.8% as compared to 89.6% for the six months ended June 30, 2009.  

• At July 1, 2010, the Company's office portfolio occupancy was 85.4% as compared to 85.6% at April 1, 2010 and 88.7% at July 1, 2009.  Including the July 2010 commencement of the 99,000 square foot Combined Insurance lease, occupancy is currently 86.1%.  Not included in the July 1, 2010, occupancy rate are 19 signed leases totaling 224,000 square feet, which commence in the third and fourth quarters of 2010.  Including these leases, the Company's portfolio was 87.1% leased at July 13, 2010.        

• Parkway's customer retention rate was 69.7% for the quarter ended June 30, 2010, as compared to 68.8% for the quarter ended June 30, 2009, and 57.2% for the quarter ended March 31, 2010.  Customer retention for the six months ended June 30, 2010 and 2009, was 61.8% and 62.9%, respectively.

• During the second quarter 2010, 78 leases were renewed or expanded on 345,000 rentable square feet at an average rent per square foot of $18.90, representing a 6.7% decrease, and at a cost of $2.43 per square foot of the lease term in annual leasing costs.  During the six months ending June 30, 2010, 145 leases were renewed or expanded on 848,000 rentable square feet at an average rent per square foot of $18.97, representing a 4.0% decrease, and at a cost of $1.51 per square foot per year of the lease term in annual leasing costs.  Subsequent to quarter end, the Company signed three renewal leases totaling 521,000 square feet at an average cost of $2.66 per square foot per year in annual leasing costs and an average term of 4.6 years.      

• During the second quarter 2010, 35 new leases were signed on 191,000 rentable square feet at an average rent per square foot of $16.70 and at a cost of $3.54 per square foot of the lease term in annual leasing costs.  During the six months ending June 30, 2010, 53 new leases were signed on 257,000 rentable square feet at an average rent per square foot of $17.50 and at an average cost of $3.59 per square foot per year of the lease term in annual leasing costs.    

• On a same-store basis, the Company's share of reported net operating income ("NOI") decreased $1.5 million or 5.1% for the second quarter 2010 as compared to the same period of the prior year on a GAAP basis and decreased $2.0 million or 7.1% on a cash basis.  Parkway's share of recurring same-store NOI on a GAAP basis decreased $2.0 million or 7.0% for the second quarter 2010 compared to the same period of the prior year and decreased $2.5 million or 9.1% on a cash basis.  The Company's share of reported same-store NOI for the six months ended June 30, 2010, increased $3.6 million or 6.3% compared to the same period of 2009 on a GAAP basis and increased $2.9 million or 5.2% on a cash basis.  Parkway's share of recurring same-store NOI on a GAAP basis decreased $2.8 million or 4.9% for the six months ended June 30, 2010, as compared to the same period of 2009 and decreased $3.5 million or 6.4% on a recurring cash basis.  The decrease in NOI is primarily attributable to a decrease in rental income associated with a 380 basis point reduction in average occupancy for the six months ended June 30, 2010, compared to the same period of 2009.        

Capital Structure

• On June 30, 2010, the Company owed $124.1 million related to its $311.0 million line of credit and had $20.7 million in cash and cash equivalents.

• On April 30, 2010, the Company paid off a $17.2 million mortgage note payable secured by two office properties in Houston, Texas, and one office property in Atlanta, Georgia, utilizing its line of credit.  The mortgage had an interest rate of 5.3% and was scheduled to mature on May 1, 2010.

• On May 28, 2010, the Company placed a $23.0 million ten-year, non-recourse first mortgage with a fixed interest rate of 6.3%, and the proceeds were used to reduce borrowings under the line of credit.  The mortgage is secured by Citrus Center, a 261,000 square foot office building in Orlando, Florida.

• Upon maturity, on June 1, 2010, the Company paid off its share and its partner's share of a $10.6 million mortgage note payable secured by the Toyota Center, a 175,000 square foot office property in Memphis, Tennessee, utilizing the line of credit.  The mortgage had an interest rate of 7.9%.  

• On July 8, 2010, the Company placed a $12.0 million ten-year, non-recourse first mortgage with a fixed interest rate of 6.5%, and the proceeds were used to reduce borrowings under the line of credit.  The mortgage is secured by the Stein-Mart building, a 196,000 square foot office property in Jacksonville, Florida.

• The Company's remaining proportionate share of debt maturities in 2010 is $38.6 million, and the Company plans to either refinance this debt with non-recourse, first mortgages or utilize the line of credit to pay the debt maturities.  

• On July 30, 2010, the Company purchased a first mortgage loan secured by three properties owned by RubiconPark I, LLC from Special Servicer J. E. Robert Co. Inc. for $35.0 million.  Rubicon US REIT owns an 80% interest in RubiconPark I, LLC, and Parkway Properties, LP owns the remaining 20%.  The loan has a $2.0 million rollover reserve which was credited to Parkway at closing, for a net purchase price of $33.0 million.  This loan was originated by Bear Stearns Commercial Mortgage, Inc. and had a principal balance of $51.0 million at July 30, 2010.  The purchase of the loan was funded using Parkway's line of credit.  The loan is secured by two office properties in Atlanta, Georgia, totaling 235,000 square feet and a three-building office complex in Charlotte, North Carolina, totaling 326,000 square feet.  The loan matures on January 1, 2012, and bears interest at a stated rate of 4.9%.  

• The Company's previously announced cash dividend of $0.075 per share for the quarter ended June 30, 2010, represented a payout of approximately 11.3% of FFO per diluted share for the quarter. The second quarter dividend was paid on June 30, 2010.   The dividend was the ninety-fifth (95^th) consecutive quarterly distribution to Parkway's shareholders of Common Stock, representing an annualized dividend of $0.30 per share.

• At June 30, 2010 and March 31, 2010, the Company's net debt to EBITDA multiple was 6.1 times as compared to 6.4 times at June 30, 2009.  

FOCUS

On July 1, 2010, we initiated our newest strategic and operating plan that will be referred to as the "FOCUS" Plan, which is centered on accomplishing a set of specific goals that we believe will lead to a 12% compounded annual total return to our shareholders over a three-year period.  FOCUS is an acronym that details the actions we are currently taking and expect to take during the Plan, which began July 1, 2010 and will end June 30, 2013.  We view Fund and Fund-Like Investments as the highest priority of our capital allocation, because it gives our shareholders the highest risk adjusted return as measured by internal rate of return, cap rate, and accretion per share.  We plan to continue our transformation to an Operator/Owner through these investments as well as the expansion of Parkway Realty Services, with the goal of being a majority operator/owner at the end of the Plan.  Capital Allocation Discipline is a two-fold goal that refers to balance sheet strength as well as investment capital, including the goal to exit non-strategic markets and sell properties that no longer meet our acquisition criteria in core markets through the continuation of our Asset Recycling program.  We believe that our Uncompromising Focus on Operations is what sets Parkway apart from other office property owners, and the accomplishment of these goals will contribute to the ultimate goal of the Plan, which is to maximize Shareholder Returns.  

Outlook for 2010

The Company is reiterating its 2010 reported FFO outlook of $2.72 to $2.92 per diluted share and recurring FFO outlook of $2.40 to $2.60 per diluted share.   The reconciliation of budgeted earnings per diluted share ("EPS") to budgeted FFO per diluted share and recurring FFO per diluted share is as follows:

The 2010 earnings outlook is based on the original earnings outlook issued on February 8, 2010.  Below please find the major assumptions to the Company's 2010 earnings outlook.      

2010 Earnings Outlook Major Assumptions

• An average annual same-store occupancy range of 85% to 87%.
• An average annual same-store rental rate per square foot of $22.00 to $23.00.
• Parkway's share of recurring same-store net operating income decrease of 2.5% to 5.5% on a GAAP basis.  On a recurring cash basis, Parkway's share of annual same-store net operating income is expected to decline by 5.0% to 8.0%.  
• Non-recurring lease termination fee income of approximately $7.0 million or $0.32 per diluted share has been included in the 2010 earnings outlook.    
• Net general and administrative expenses are expected to be in the range of $7.7 million to $8.2 million.  
• The Company is estimating its proportionate share of total recurring capital expenditures for building improvements, tenant improvements and leasing commissions in the range of $38.0 million to $43.0 million.  
• No investments for the discretionary fund with the Teacher Retirement System of Texas or additional sales or joint ventures of existing properties are included in the earnings outlook.  

About Parkway Properties

Parkway Properties, Inc., a member of the S&P Small Cap 600 Index, is a self-administered real estate investment trust specializing in the operation, leasing, acquisition, and ownership of office properties. The Company is geographically focused on the Southeastern and Southwestern United States and Chicago. Parkway owns or has an interest in 64 office properties located in 11 states with an aggregate of approximately 13.2 million square feet of leasable space at August 2, 2010.  Included in the portfolio are 21 properties totaling 3.9 million square feet that are owned jointly with other investors, representing 29.3% of the portfolio.  Fee-based real estate services are offered through the Company's wholly-owned subsidiary, Parkway Realty Services, which also manages and/or leases approximately 2.8 million square feet for third-party owners at August 2, 2010.

Additional Information

The Company will conduct a conference call to discuss the results of its second quarter operations on Tuesday, August 3, 2010, at 11:00 a.m. Eastern Time. The number for the conference call is 888-631-3392. A taped replay of the call can be accessed 24 hours a day through August 13, 2010, by dialing 888-203-1112 and using the pass code of 9198411. An audio replay will be archived and indexed in the investor relations section of the Company's website at www.pky.com.  A copy of the Company's 2010 second quarter supplemental financial and property information package is available by accessing the Company's website, emailing your request to [email protected] or calling Rita Jordan at 6019484091. Please participate in the visual portion of the conference call by accessing the Company's website and clicking on the "2Q Call" icon.

Additional information on Parkway Properties, Inc., including an archive of corporate press releases and conference calls, is available on the Company's website. The Company's second quarter 2010 Supplemental Operating and Financial Data, which includes a reconciliation of Non-GAAP financial measures, is available on the Company's website.

Forward Looking Statement

Certain statements in this release that are not in the present or past tense or discuss the Company's expectations (including the use of the words anticipate, believe, forecast, intends or project) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. 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 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; the risks associated with the ownership and development of real property; the failure to acquire or sell properties as and when anticipated;  the outcome of claims and litigation involving and affecting the Company and other risks and uncertainties detailed from time to time on the Company's SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's results could differ materially from those expressed in the forward-looking statements. The Company does not undertake to update forward-looking statements.

Company's Use of FFO, Recurring FFO, FAD and EBITDA

FFO, FFO per diluted share, FAD, FAD per diluted share and EBITDA 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 equity REITs. Management believes that FFO, FFO per diluted share, FAD, FAD per diluted share 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. FFO, FAD 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 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.

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

SOURCE Parkway Properties, Inc.

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