Parkway Reports Third Quarter 2014 Results

ORLANDO, Fla., Oct. 30, 2014 /PRNewswire/ -- Parkway Properties, Inc. (NYSE: PKY) today announced results for its third quarter ended September 30, 2014. 

Highlights for Third Quarter 2014 and recent events 

• Third quarter FFO of $0.37 per diluted share and Recurring FFO of $0.39 per diluted share
• Increased 2014 reported and recurring FFO guidance to ranges of $1.36 to $1.40 per diluted share and $1.44 to $1.48 per diluted share, respectively 
• Leased a total of 978,000 square feet at $32.27 per square foot, representing the highest quarterly leasing rate in Parkway's history   
• Executed 771,000 square feet of renewal leasing at $32.46 per square foot, representing a retention ratio of 85.0% and a positive cash renewal spread of 15.2% 
• Reached agreement to acquire Corporate Center I, II and III at International Plaza in the Westshore submarket of Tampa and One Buckhead Plaza in the Buckhead submarket of Atlanta

"We continued to achieve positive leasing momentum at increased rental rates during the third quarter," stated James R. Heistand, President and Chief Executive Officer of Parkway. "Total leasing for the quarter was approximately one million square feet, signed at an average rate representing an approximately 25% year-over-year increase. We executed three strategic lease renewals that we believe will help stabilize the portfolio and enable us to realize considerable mark-to-market gains. In addition, our pending acquisitions of both One Buckhead Plaza in Atlanta and Corporate Center I, II and III at International Plaza in Tampa reinforces our commitment to continue to upgrade the portfolio with value-add opportunities at an attractive cost basis. Finally, we issued common stock to partially fund our Corporate Center acquisition and remain committed to a conservative, low-leverage balance sheet."      

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For the third quarter 2014, funds from operations ("FFO") was $39.2 million, or $0.37 per diluted share for Parkway Properties LP's real estate portfolio, in which Parkway owns an interest (the "Parkway Portfolio").  Reported FFO during the third quarter 2014 includes the negative net impact of one-time items totaling $1.5 million, or $0.01 per diluted share, including $1.1 million in transition costs primarily related to the fourth-quarter 2013 merger with Thomas Properties Group, Inc.  Recurring FFO was $40.8 million, or $0.39 per diluted share for the Parkway Portfolio, and funds available for distribution ("FAD") was $12.0 million, or $0.11 per diluted share for the Parkway Portfolio. 

A reconciliation of FFO, recurring FFO and FAD to net income (loss) is included on page 13.  Net income (loss), FFO, recurring FFO, and FAD for the three months ended September 30, 2014 and year-to-date, as well as a comparison to the prior-year periods, are as follows:

Operational Results

Occupancy at the end of the third quarter 2014 was 89.1%, compared to 89.2% 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 third quarter 2014 was 91.0%, compared to 91.3% at the end of the prior quarter. Excluding the impact of third-quarter acquisition and disposition activity, third-quarter occupancy was 89.9% and the portfolio was 91.8% leased, which represents an increase from the end of the prior quarter of 70 basis points and 50 basis points, respectively.    

Parkway's share of recurring same-store net operating income ("NOI") for the Parkway Portfolio was $34.0 million on a GAAP basis during the third quarter 2014, which was an increase of $1.8 million, or 5.6%, compared to the same period of the prior year.  On a cash basis, the Company's share of recurring same-store NOI was $29.7 million, which was a decrease of $468,000, or 1.5%, compared to the same period of the prior year. The year-over-year decline in third quarter 2014 recurring same-store cash NOI is primarily attributable to the recognition of mid-term free rent associated with Blue Cross and Blue Shield of Georgia, Inc.'s existing lease at 3350 Peachtree (formerly, Capital City Plaza) in Atlanta, Georgia.

Portfolio GAAP NOI margin was 60.0% at Parkway's share during the third quarter 2014, compared to 59.1% during the same period of the prior year.

Leasing Activity

During the third quarter 2014, Parkway signed a total of 978,000 square feet of leases at an average rent per square foot of $32.27, which was an increase of $2.19 per square foot, or 7.3%, compared to the prior quarter. Total leasing for the quarter was signed at an average cost of $6.98 per square foot per year.

New & Expansion Leasing – During the third quarter 2014, Parkway signed 151,000 square feet of new leases at an average rent per square foot of $31.21 and at an average cost of $7.94 per square foot per year.

Included in this leasing activity was 77,000 square feet of new leases at assets acquired within the last 12 months at an average rent per square foot of $38.15. One of these new leases is a 32,000 square foot lease with WeWork Companies Inc. at One American Center in Austin, Texas that expires on January 31, 2030. A portion of the WeWork space includes a collaborative workspace on the ground floor of the property, which will significantly upgrade the One American Center lobby. Because of the strategic importance of this lease and associated lobby improvements, Parkway committed capital in the amount of $10.58 per square foot per year. Excluding this lease, total capital on all new leasing during the third quarter 2014 would have been $6.20 per square foot per year. One American Center was 98.6% leased as of October 1, 2014, compared to 77.4% occupied when the asset was acquired on December 19, 2013.

Expansion leases during the quarter totaled 56,000 square feet at an average rent per square foot of $32.48 and at an average cost of $8.50 per square foot per year.

Renewal Leasing – Customer retention during the third quarter 2014 was 85.0%. The Company signed 771,000 square feet of renewal leases at an average rent per square foot of $32.46, representing a 15.2% rate increase from the expiring rate. The average cost of renewal leases was $6.65 per square foot per year.  

During the quarter, Parkway signed three significant strategic renewal leases totaling 605,000 square feet.

Nabors Industries signed a 225,000 square foot 10-year renewal lease at One Commerce Green in Houston, Texas that stabilizes 66% of the building through September 30, 2025. Additionally, BMC Software, Inc. signed a 216,000 square foot renewal lease at CityWestPlace in Houston, Texas, that expires on June 30, 2026. This five-year extension creates a positive renewal spread of 41.8% from the expiring rate beginning in July 1, 2021, following BMC's original expiration date. As part of the agreement, BMC agreed to contract by 303,000 square feet on January 31, 2016. Parkway believes there is considerable embedded growth to be realized when this space is vacated.

Given the long-term strategic benefit of these two renewals, the average capital committed in connection with these two renewals was $7.97 per square foot per year. Excluding these two renewals, the average cost associated with renewal leases in the third quarter 2014 would have been $2.33 per square foot per year.

Lastly, on September 29, 2014, JPMorgan Chase Bank N.A. signed a 164,000 square foot, 24-month renewal lease at Deerwood South in Jacksonville, Florida that expires on June 17, 2017. The three renewal leases of Nabors, BMC, and JP Morgan represent a 20.4% weighted average rate increase from the expiring rate.

Significant operational and leasing statistics for the quarter as compared to prior quarters is as follows:

Acquisition and Disposition Activity

On July 3, 2014, Parkway acquired Millenia Park One, a six-story Class A office building totaling 157,000 square feet located in the Millenia submarket of Orlando, Florida. As of October 1, 2014, the property was 78.9% occupied. Parkway's purchase price for Millenia Park One was approximately $25.5 million, or $163 per square foot. The acquisition was funded using available cash and borrowings under the Company's unsecured credit facility.  

On July 29, 2014, Parkway acquired a $50.0 million first mortgage note secured by The Forum at West Paces, a 223,000 square foot Class A office building located in the Buckhead submarket of Atlanta, Georgia.  The Forum was constructed in 2001 as part of a 17-acre, luxury mixed-use development project. The total purchase price for the note, which was previously under special servicer oversight, was $47.0 million. On August 19, 2014, Parkway took ownership of the asset on a fee simple basis by way of a deed in lieu of foreclosure.  As of October 1, 2014, the property was 45.8% occupied.

On September 4, 2014, Parkway sold the Schlumberger Building, a 155,000 square foot office property located in Houston, Texas, for a gross sale price of $17.0 million. During the third quarter, Parkway recognized a gain on sale of the Schlumberger Building of approximately $6.7 million. 

On September 19, 2014, Parkway reached an agreement to acquire Corporate Center I, II and III at International Plaza, located in the Westshore submarket of Tampa, Florida. The three Corporate Center assets were constructed between 1999 and 2004 and total approximately 974,000 square feet.  The properties had a combined occupancy of 69.7% as of September 19, 2014, which is adjusted to reflect approximately 50,000 square feet of known move-outs over the next 12 months. As part of the same transaction, Parkway agreed to purchase 19 additional office properties located in six states totaling approximately 2.1 million square feet. Parkway's gross purchase price for the entire portfolio was $475.0 million. Parkway expects the closing of the portfolio acquisition to occur during the fourth quarter of 2014, subject to customary closing conditions.  Subsequent to the end of the third quarter, Parkway reached an agreement to sell the portfolio of 19 office buildings.

Subsequent Events

On October 5, 2014, Parkway reached an agreement to sell a portfolio of 19 office buildings, which Parkway has agreed to acquire as part of its pending acquisition of Corporate Center I, II and III at International Plaza, for a gross sale price of $237.0 million. As part of the agreement, the prospective buyer posted a $10.0 million earnest money deposit. Parkway expects the closing of the sale of the 19 office portfolio to occur during the fourth quarter of 2014, subject to customary closing conditions, immediately following and subject to the closing of Parkway's acquisition of Corporate Center I, II and III at International Plaza.

On October 29, 2014, Parkway reached an agreement to acquire One Buckhead Plaza, a 462,000 square foot Class A office building located in the Buckhead submarket of Atlanta, Georgia. The 20-story office building, which includes 36,000 square feet of ground floor retail, was 88.6% occupied as of October 29, 2014. Parkway's gross purchase price for the asset is $157.0 million. Parkway expects the closing of the acquisition to occur in the first quarter of 2015, subject to customary closing conditions.     

Capital Structure

On September 26, 2014, Parkway completed an underwritten public offering of 10,000,000 shares of its common stock at the public offering price of $18.60. On October 2, 2014, Parkway sold an additional 1,500,000 shares of its common stock at the public offering price of $18.60 pursuant to the exercise of the underwriters' option to purchase additional shares.  The net proceeds from the offering, including shares sold pursuant to the underwriters' option to purchase additional shares, after deducting the underwriting discount and offering expenses payable by the Company, were approximately $204.8 million and Parkway expects to use these proceeds to fund its pending acquisition of Corporate Center I, II and III at International Plaza and, if such acquisition is not completed, to repay amounts outstanding from time to time under its senior unsecured revolving credit facility, and/or for general corporate purposes, including to fund other potential acquisitions.

During the three months ended September 30, 2014, Parkway sold 220,100 shares of common stock under its ATM Equity Offering Sales Agreement for net offering proceeds of approximately $4.5 million after deducting commissions. The Company used the net proceeds for general corporate purposes, including repaying amounts outstanding under our unsecured revolving credit facility, and to fund acquisitions and development of office properties.

At September 30, 2014, the Company had no outstanding balance under its unsecured revolving credit facility, $350.0 million outstanding under its unsecured term loans and held $127.9 million in cash and cash equivalents, of which $104.7 million of cash and cash equivalents was Parkway's share.  Parkway's share of secured debt totaled $1.2 billion at September 30, 2014.

At September 30, 2014, the Company's net debt to EBITDA multiple was 5.9x, using the quarter's annualized EBITDA after adjusting for the impact of investment activity completed during the period, as compared to 6.6x at June 30, 2014, and 7.5x at September 30, 2013.  Adjusting for certain nonrecurring realignment costs primarily related to the Company's fourth quarter 2013 merger with Thomas Properties Group, Inc., the Company's net debt to recurring EBITDA multiple was 5.8x, which is within Parkway's stated target range of 5.5x to 6.5x.

Common Dividend

The Company's previously announced third quarter cash dividend of $0.1875 per share, which represents an annualized dividend of $0.75 per share, was paid on September 24, 2014 to shareholders of record as of September 10, 2014. 

2014 Revised Outlook  

After considering the Company's year-to-date performance and expected results for the remainder of the year, as well as recently announced investment activity, Parkway is increasing its 2014 FFO outlook to a range of $1.36 to $1.40 per diluted share for the Parkway Portfolio and adjusting its earnings (loss) per diluted share ("EPS") outlook to a range of $(0.06) to $(0.02) for the Parkway Portfolio. Excluding the impact of projected significant one-time items, including (i) realignment costs primarily related to the Company's fourth quarter 2013 merger with Thomas Properties Group, Inc. and subsequent severance expenses, (ii) year-to-date property acquisition costs, (iii) lease termination fees, and (iv) interest expense associated with early extinguishment of debt and redesignation of interest rate swaps, all of which total approximately $8.3 million, the Company's 2014 recurring FFO outlook is being increased to a range of $1.44 to $1.48 per diluted share for the Parkway Portfolio. 

The reconciliation of projected EPS to projected FFO and recurring FFO per diluted share is as follows:  

The revised 2014 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 2014 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, possible future capital markets activity, 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 not to issue quarterly earnings guidance or revise the annual earnings outlook unless a material event occurs that impacts the Company's 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 third quarter earnings conference call on Friday, October 31, 2014 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 November 14, 2014, by dialing 877-870-5176, or 1-858-384-5517 for international callers, and using the passcode 13592357. 

About Parkway Properties

Parkway Properties, Inc. is a fully integrated, self-administered and self-managed real estate investment trust specializing in the acquisition, ownership, development 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 52 office properties located in eight states with an aggregate of approximately 18.5 million square feet of leasable space at October 1, 2014. Fee-based real estate services are offered through wholly owned subsidiaries of the Company, which in total manage and/or lease approximately 10.6 million square feet for third-party owners at October 1, 2014.

Forward Looking Statements

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 projections relating to 2014 fully diluted EPS, share of depreciation and amortization, gain on sales of real estate, reported FFO per share, recurring FFO per share, nonrecurring items, net operating income, cap rates, internal rates of return, dividend payment rates, FFO accretion, capital improvements, expected sources of financing, the timing of closing of acquisitions, dispositions or other 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 actual or perceived impact of U.S. monetary policy; competition in the leasing market; the demand for and market acceptance of the Company's properties for rental purposes; oversupply of office properties in the Company's geographic markets; the amount and growth of the Company's expenses; customer financial difficulties and general economic conditions, including increasing interest rates, as well as economic conditions in the Company's geographic markets; defaults or non-renewal of leases; risks associated with joint venture partners; risks associated with the ownership and development of real property, including risks related to natural disasters; risks associated with property acquisitions; the failure to acquire or sell properties as and when anticipated; termination or non-renewal of property management contracts; the bankruptcy or insolvency of companies for which the Company 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 businesses compliance with environmental and other regulations, including real estate and zoning laws; the Company's inability to obtain financing; the Company's inability to use net operating loss carry forwards; the Company's failure to maintain its status as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended; 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. FFO measures 100% of the operating performance of Parkway Properties LP's real estate properties in which Parkway Properties, Inc. owns an interest.  

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. Recurring FFO measures 100% of the operating performance of Parkway Properties LP's real estate properties in which Parkway Properties, Inc. owns an interest.

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. FAD measures 100% of the operating performance of Parkway Properties LP's real estate properties in which Parkway Properties, Inc. owns an interest.

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 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.                 
Ted McHugh                           
Director of Investor Relations                               
Bank of America Center            
390 N. Orange Ave., Suite 2400                                 
Orlando, FL 32801                                                     
(407) 650-0593                           
www.pky.com

SOURCE Parkway Properties, Inc.

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