**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON****, DC 20549**

                                          

**FORM 10-Q**

 

| R                                                                                                                                                                                                                                                                                                                                                                      | **Quarterly Report Pursuant to Section  13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **For Quarterly Period Ended September  30, 2009**                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                   | **or**                                                                                        |
| £                                                                                                                                                                                                                                                                                                                                                                | **Transition Report Pursuant to Section  13 or 15(d) of the Securities Exchange Act of 1934** |
| **For the Transition Period from                             to                            ** |

 

**Commission File Number 1-11533**

 

**Parkway Properties, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                    |   | **74-2123597**                    |
|---------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of |   | (IRS Employer Identification No.) |
| incorporation or organization)  |   |                              |

 

**One Jackson Place Suite 1000**

**188 East Capitol Street**

**P.O. Box 24647**

**Jackson, Mississippi 39225-4647**

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number,including area code **(601) 948-4091**

Registrant’s web site **www.pky.com**

 

(Former name, former address and former fiscal year, ifchanged since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  R No £

  

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes £ No £*   (*Registrant is notsubject to the requirements of Rule 405 of Regulation S-T at this time.)

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer	£ | Accelerated filer	R | Non-accelerated filer	£                  | Smaller reporting company	£ |
|---------------------------------|---------------------|------------------------------------------------|-----------------------------------|
|                            |                | (Do not check if a smaller reporting  company) |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). 

Yes £ No R

 

21,623,307shares of Common Stock, $.001 par value, were outstanding at November 2, 2009.

 

 

1

 

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**PARKWAYPROPERTIES, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

**FOR THE QUARTERENDED SEPTEMBER 30, 2009**

 
| ** **                        | ** ** | ** **                                                                                  | **Page** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------|----------|
| **Part I. Financial Information** |
| Item 1.                           |       | Financial Statements                                                                        |     |
|                              |       |                                                                                        |     |
|                              |       | Consolidated  Balance Sheets, September 30, 2009 and December 31, 2008                      | 3        |
|                              |       |                                                                                        |     |
|                              |       | Consolidated  Statements of Income for the Three Months and Nine Months Ended               |     |
|                              |       |            September  30, 2009 and 2008   | 4        |
|                              |       |                                                                                        |     |
|                              |       | Consolidated  Statement of Changes in Equity for the Nine Months Ended                      | 6        |
|                              |       |            September  30, 2009            |     |
|                              |       |                                                                                        |     |
|                              |       | Consolidated  Statements of Cash Flows for the Nine Months Ended                            | 7        |
|                              |       |            September  30, 2009 and 2008   |     |
|                              |       |                                                                                        |     |
|                              |       | Notes  to Consolidated Financial Statements                                                 | 8        |
|                              |       |                                                                                        |     |
| Item 2.                           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 22       |
|                              |       |                                                                                        |     |
| Item 3.                           |       | Quantitative and Qualitative Disclosures About Market  Risk                                 | 37       |
|                              |       |                                                                                        |     |
| Item 4.                           |       | Controls and Procedures                                                                     | 37       |
| ** **                        | ** ** | ** **                                                                                  |     |
| ** **                        | ** ** | ** **                                                                                  |     |
| **Part II. Other  Information**   |
|                              |       |                                                                                        |     |
| Item 1A.                          |       | Risk Factors                                                                                | 37       |
|                              |       |                                                                                        |     |
| Item 6.                           |       | Exhibits                                                                                    | 38       |
| ** **                        | ** ** | ** **                                                                                  |     |
| ** **                        | ** ** | ** **                                                                                  |     |
| **Signatures**                    |
|                              |       |                                                                                        |     |
| Authorized Signatures             | 38         |

 

2

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**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 (In thousands,except share and per share data)

 

|                                                                                                  | **September 30** | ** **      | **December 31** |
|-------------------------------------------------------------------------------------------------------|------------------|-----------------|-----------------|
|                                                                                                  | **2009**         | ** **      | **2008**        |
|                                                                                                  | (Unaudited)      | ** **      | ** **      |
| **Assets**                                                                                            |             |            |            |
| Real estate related investments:                                                                      |             |            |            |
| Office and parking properties                                                                         |  $          | 1,732,454  |            |  $ | 1,737,549   |
| Real estate development                                                                               | 609         |            | 609        |
| Accumulated depreciation                                                                              | (323,721)        |            | (282,919)       |
|                                                                                                  | 1,409,342   |            | 1,455,239  |
|                                                                                                  |             |            |            |
| Land available for sale                                                                               | 750         |            | 750        |
| Mortgage loan                                                                                         | 7,965       |            | 7,519      |
| Investment in unconsolidated joint  ventures                                                          | 11,332      |            | 11,057     |
|                                                                                                  | 1,429,389   |            | 1,474,565  |
|                                                                                                  |             |            |            |
| Rents receivable and other assets                                                                     | 112,011     |            | 118,512    |
| Intangible assets, net                                                                                | 66,794      |            | 79,460     |
| Cash and cash equivalents                                                                             | 35,635      |            | 15,318     |
|                                                                                                  |  $          | 1,643,829  |            |  $ | 1,687,855  |
| ** **                                                                                            |             |            |            |
| ** **                                                                                            |             |            |            |
| **Liabilities**                                                                                       |             |            |            |
| Notes payable to banks                                                                                |  $          | 100,000    |            |  $ | 185,940  |
| Mortgage notes payable                                                                                | 856,232     |            | 869,581    |
| Accounts payable and other liabilities                                                                | 96,874      |            | 98,894     |
|                                                                                                  | 1,053,106   |            | 1,154,415  |
| ** **                                                                                            |             |            |            |
| ** **                                                                                            |             |            |            |
| **Equity**                                                                                            |             |            |            |
| Parkway Properties, Inc. shareholders’  equity:                                                  |             |            |            |
| 8.00% Series D Preferred stock,  $.001  par value,                                               |             |            |            |
|      2,400,000 shares authorized, issued  and outstanding                         | 57,976      |            | 57,976     |
| Common stock, $.001 par value,  67,600,000 shares authorized, 21,621,552                              |             |            |            |
|      and 15,253,396 shares issued and  outstanding in 2009 and 2008, respectively | 22          |            | 15         |
| Common stock held in trust, at cost, 71,255  and 85,300 shares in 2009 and                            |             |            |            |
|      2008, respectively                                                           | (2,399)          |            | (2,895)         |
| Additional paid-in capital                                                                            | 514,757     |            | 428,367    |
| Accumulated other comprehensive loss                                                                  | (5,821)          |            | (7,728)         |
| Accumulated deficit                                                                                   | (93,553)         |            | (69,487)        |
| Total Parkway Properties, Inc.  shareholders’ equity                                             | 470,982     |            | 406,248    |
| Noncontrolling interest - real estate  partnerships                                                   | 119,741     |            | 127,192    |
| Total equity                                                                                          | 590,723     |            | 533,440    |
|                                                                                                  |  $          | 1,643,829  |            |  $ | 1,687,855  |

 

 

 

 

 

 

 

 

See notes toconsolidated financial statements.

3

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**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(In thousands, exceptper share data)

 

| ** **                                                                        | **Three Months Ended** |
|-----------------------------------------------------------------------------------|------------------------|
| ** **                                                                        | ** September 30** |
| ** **                                                                        | **2009**               | ** ** | **2008** |
| ** **                                                                        | (Unaudited)            |
| **Revenues**                                                                      |                   |   |   |
| Income from office and parking properties                                         |  $                | 66,474  |   |  $ | 69,857  |
| Management company income                                                         | 340               |   | 449  |
| Total revenues                                                                    | 66,814            |   | 70,306  |
| ** **                                                                        |                   |   |   |
| **Expenses**                                                                      |                   |   |   |
| Property operating expenses                                                       | 31,600            |   | 34,295  |
| Depreciation and amortization                                                     | 23,401            |   | 22,755  |
| Management company expenses                                                       | 577               |   | 432  |
| General and administrative                                                        | 1,783             |   | 2,055  |
| Total expenses                                                                    | 57,361            |   | 59,537  |
| ** **                                                                        |                   |   |   |
| **Operating income**                                                              | 9,453             |   | 10,769  |
| ** **                                                                        |                   |   |   |
| **Other income and expenses**                                                     |                   |   |   |
| Interest and other income                                                         | 672               |   | 346  |
| Equity in earnings of unconsolidated joint ventures                               | 48                |   | 255  |
| Interest expense                                                                  | (13,835)               |   | (14,843) |
| ** **                                                                        |                   |   |   |
| **Loss from continuing operations**                                               | (3,662)                |   | (3,473) |
|                                                                              |                   |   |   |
| **Discontinued operations:**                                                      |                   |   |   |
| Loss from discontinued operations                                                 | -                 |   | (2,001) |
| Gain on sale of real estate from discontinued operations                          | -                 |   | 22,588  |
| Total  discontinued operations                                                    | -                 |   | 20,587  |
| **Net income (loss)**                                                             | (3,662)                |   | 17,114  |
| Net loss attributable to noncontrolling interest - real estate  partnerships      | 2,107             |   | 2,584  |
| **Net income (loss) for Parkway Properties, Inc.**                                | (1,555)                |   | 19,698  |
| Change in market value of interest rate swaps                                     | (274)                  |   | (860) |
| **Comprehensive income (loss)**                                                   |  $                | (1,829) |   |  $ | 18,838  |
| ** **                                                                        |                   |   |   |   |   |
| **Net income (loss) for Parkway Properties, Inc.**                                |  $                | (1,555) |   |  $ | 19,698  |
| Dividends on preferred stock                                                      | (1,200)                |   | (1,200) |
| **Net income (loss) available to common stockholders**                            |  $                | (2,755) |   |  $ | 18,498  |
| ** **                                                                        |                   |   |   |
| **Net income (loss) per common share attributable to Parkway  Properties, Inc.:** |                   |   |   |
| Basic:                                                                            |                   |   |   |
| Loss from continuing operations attributable to Parkway Properties, Inc.          |  $                | (0.13) |   |  $ | (0.14) |
| Discontinued operations                                                           | -            |   | 1.37  |
| Net income (loss) attributable to Parkway Properties, Inc.                        |  $                | (0.13) |   |  $ | 1.23  |
|                                                                              |                   |   |   |
| Diluted:                                                                          |                   |   |   |
| Loss from continuing operations attributable to Parkway Properties, Inc.          |  $                | (0.13) |   |  $ | (0.14) |
| Discontinued operations                                                           | -                 |   | 1.37  |
| Net income (loss) attributable to Parkway Properties, Inc.                        |  $                | (0.13) |   |  $ | 1.23  |
| ** **                                                                        |                   |   |   |   |   |
| **Dividends per common share**                                                    |  $                | 0.325  |   |  $ | 0.65  |
| ** **                                                                        |                   |   |   |
| **Weighted average shares outstanding:**                                          |                   |   |   |
| Basic                                                                             | 21,313            |   | 15,031  |
| Diluted                                                                           | 21,313            |   | 15,031  |
|                                                                                   |                        |  |  |  |  |  |

 

 

 

See notes to consolidated financial statements.

4

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**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(In thousands, exceptper share data)

 

| ** **                                                                        | **Nine Months Ended** |
|-----------------------------------------------------------------------------------|-----------------------|
| ** **                                                                        | **September 30**      |
| ** **                                                                        | **2009**              | ** ** | **2008** |
| ** **                                                                        | (Unaudited)           |
| **Revenues**                                                                      |                  |   |   |
| Income from office and parking properties                                         |  $               | 200,751  |   |  $ | 198,144   |
| Management company income                                                         | 1,486            |   | 1,356   |
| Total revenues                                                                    | 202,237          |   | 199,500   |
| ** **                                                                        |                  |   |   |
| **Expenses**                                                                      |                  |   |   |
| Property operating expense                                                        | 97,058           |   | 95,708   |
| Depreciation and amortization                                                     | 68,701           |   | 66,659   |
| Management company expenses                                                       | 1,710            |   | 1,353   |
| General and administrative                                                        | 4,734            |   | 6,443   |
| Total expenses                                                                    | 172,203          |   | 170,163   |
| ** **                                                                        |                  |   |   |
| **Operating income**                                                              | 30,034           |   | 29,337   |
| ** **                                                                        |                  |   |   |
| **Other income and expenses**                                                     |                  |   |   |
| Interest and other income                                                         | 1,283            |   | 1,020   |
| Equity in earnings of unconsolidated joint ventures                               | 475              |   | 802   |
| Gain on involuntary conversion                                                    | 742              |   | -   |
| Gain on sale of real estate                                                       | 470              |   | -   |
| Interest expense                                                                  | (41,936)              |   | (44,954) |
| ** **                                                                        |                  |   |   |
| **Loss from continuing operations**                                               | (8,932)               |   | (13,795) |
| ** **                                                                        |                  |   |   |
| **Discontinued operations:**                                                      |                  |   |   |
| Loss from discontinued operations                                                 | -                |   | (760) |
| Gain on sale of real estate from discontinued operations                          | -                |   | 22,588  |
| Total  discontinued operations                                                    | -                |   | 21,828  |
| **Net income (loss)**                                                             | (8,932)               |   | 8,033  |
| Net loss attributable to noncontrolling interest - real estate  partnerships      | 7,508            |   | 7,134  |
| **Net income (loss) for Parkway Properties, Inc.**                                | (1,424)               |   | 15,167  |
| Change in market value of interest rate swaps                                     | 1,907            |   | (31) |
| **Comprehensive income**                                                          |  $               | 483  |   |  $ | 15,136  |
| ** **                                                                        |                  |   |   |   |   |
| **Net income (loss) for Parkway Properties, Inc.**                                |  $               | (1,424) |   |  $ | 15,167  |
| Dividends on preferred stock                                                      | (3,600)               |   | (3,600) |
| **Net income (loss) available to common stockholders**                            |  $               | (5,024) |   |  $ | 11,567  |
| ** **                                                                        |                  |   |   |
| **Net income (loss) per common share attributable to Parkway  Properties, Inc.:** |                  |   |   |
| Basic:                                                                            |                  |   |   |
| Loss from continuing operations attributable to Parkway Properties, Inc.          |  $               | (0.27) |   |  $ | (0.68) |
| Discontinued operations                                                           | -                |   | 1.45  |
| Net income (loss) attributable to Parkway Properties, Inc.                        |  $               | (0.27) |   |  $ | 0.77  |
|                                                                              |                  |   |   |
| Diluted:                                                                          |                  |   |   |
| Loss from continuing operations attributable to Parkway Properties, Inc.          |  $               | (0.27) |   |  $ | (0.68) |
| Discontinued operations                                                           | -                |   | 1.45  |
| Net income (loss) attributable to Parkway Properties, Inc.                        |  $               | (0.27) |   |  $ | 0.77  |
| ** **                                                                        |                  |   |   |   |   |
| **Dividends per common share**                                                    |  $               | 0.975  |   |  $ | 1.95  |
| ** **                                                                        |                  |   |   |
| **Weighted average shares outstanding:**                                          |                  |   |   |
| Basic                                                                             | 18,827           |   | 15,019   |
| Diluted                                                                           | 18,827           |   | 15,019   |
|                                                                                   |                       |  |  |  |  |  |

 

 

See notes to consolidated financial statements.

** **

5

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**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN EQUITY**

(In thousands, exceptshare and per share data)

(Unaudited)

 

| ** **                                                                                | **Parkway Properties, Inc. Shareholders** | ** **         | ** **            | ** ** | ** **            |
|-------------------------------------------------------------------------------------------|-------------------------------------------|--------------------|-----------------------|------------|-----------------------|
| ** **                                                                                | ** **                                | ** **         | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Total** | ** ** | **Noncontrolling** | ** ** | ** ** |
| ** **                                                                                | ** **                                | ** **         | ** **            | ** ** | **Common**            | ** ** | **Additional** | ** ** | **Other** | ** ** | ** ** | ** ** | **Parkway** | ** ** | **Interest –** | ** ** | ** ** |
| ** **                                                                                | **Preferred**                             | ** **         | **Common**            | ** ** | **Stock Held**        | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Properties, Inc.** | ** ** | **Real Estate** | ** ** | **Total** |
| ** **                                                                                | **Stock**                                 | ** **         | **Stock**             | ** ** | **in Trust**          | ** ** | **Capital** | ** ** | **Loss** | ** ** | **Deficit** | ** ** | **Shareholders’ Equity** | ** ** | **Partnerships** | ** ** | **Equity** |
| **Balance at December 31,  2008 as**                                                      |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **        previously  reported**                       |  $                                   | 57,976   |                  |  $    | 15          |   |  $ | (2,895) |   |  $ | 428,367  |   |  $ | (7,728) |   |  $ | (69,487) |   |  $ | 406,248  |   |  $ | -   |   |  $ | 406,248  |
| Reclassification upon the  adoption of                                                    |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         SFAS No. 160                                   | -                               |               | -           |       | -           |   | -    |   | -   |   | -   |   | -   |   | 127,192  |   | 127,192  |
| **Balance at December 31,  2008 as**                                                      |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
| **        presented**                                  | 57,976                          |               | 15          |       | (2,895)               |   | 428,367  |   | (7,728) |   | (69,487) |   | 406,248  |   | 127,192  |   | 533,440  |
| Comprehensive income  (loss)                                                              |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         Net loss                                       | -                               |               | -           |       | -           |   | -    |   | -   |   | (1,424)  |   | (1,424) |   | (7,508) |   | (8,932) |
|         Change in fair  value of interest              |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|               rate swaps | -                               |               | -           |       | -           |   | -    |   | 1,907  |   | -   |   | 1,907  |   | -   |   | 1,907  |
| Total comprehensive income  (loss)                                                        | -                               |               | -           |       | -           |   | -    |   | -   |   | -   |   | 483  |   | (7,508) |   | (7,025) |
| Common dividends declared  -                                                              |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         $0.975 per share                               | -                               |               | -           |       | -           |   | -    |   | -   |   | (19,042) |   | (19,042) |   | -   |   | (19,042) |
| Preferred dividends  declared -                                                           |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         $1.50 per share                                | -                               |               | -           |       | -           |   | -    |   | -   |   | (3,600) |   | (3,600) |   | -   |   | (3,600) |
| Share-based compensation                                                                  | -                               |               | -           |       | -           |   | 1,940  |   | -   |   | -   |   | 1,940  |   | -   |   | 1,940  |
| Stock offering – 6,250,000  shares                                                   |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         of common stock                                | -                               |               | 7           |       | -           |   | 84,450  |   | -   |   | -   |   | 84,457  |   | -   |   | 84,457  |
| Shares issued in lieu of  Directors’ fees – 3,000 shares                        |  

-                       |               |  

-   |       |  

-   |   |  

42  |   |  

-   |   |  

-   |   |  

42  |   |  

-   |   |  

42  |
| Purchase of Company stock –  3,594                                                   |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         shares withheld to  satisfy tax                |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         withholding  obligations in                    |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         connection with  the vesting                   |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         of restricted  stock                           | -                               |               | -           |       | -           |   | (42) |   | -   |   | -   |   | (42) |   | -   |   | (42) |
| Distribution of 15,125  shares of                                                         |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         common stock,  deferred                        |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         compensation plan                              | -                               |               | -           |       | 511              |   | -    |   | -   |   | -   |   | 511 |   | -   |   | 511  |
| Contribution of 1,080  shares                                                             |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         of common stock,                               |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         deferred  compensation plan                    | -                               |               | -           |       | (15)                  |   | -    |   | -   |   | -   |   | (15) |   | -   |   | (15) |
| Contribution of capital by                                                                |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |
|         noncontrolling  interests                      | -                               |               | -           |       | -           |   | -    |   | -   |   | -   |   | -   |   | 57  |   | 57  |
| ** **                                                                                |                                      |               |                  |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance at September  30, 2009**                                                        |  $                                   | 57,976   |                  |  $    | 22               |   |  $ | (2,399) |   |  $ | 514,757  |   |  $ | (5,821) |   |  $ | (93,553) |   |  $ | 470,982  |   |  $ | 119,741  |   |  $ | 590,723  |
|                                                                                           |                                           |                    |                       |            |                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

** **

6

----

 

 

 

 

 

**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In thousands)

 

|                                                                                  | **Nine Months Ended** |
|---------------------------------------------------------------------------------------|-----------------------|
|                                                                                  | **September 30**      |
|                                                                                  | **2009**              | ** ** | **2008** |
|                                                                                  | (Unaudited)           |
| **Operating activities**                                                              |                  |   |   |
| Net income (loss)                                                                     |  $               | (1,424)  |   |  $ | 15,167  |
| Adjustments to reconcile net income (loss) to cash provided by operating  activities: |                  |   |   |
| Depreciation and amortization                                                         | 68,701           |   | 66,659  |
| Depreciation and amortization - discontinued operations                               | -           |   | 1,873  |
| Amortization of above (below) market leases                                           | (98)                  |   | 198  |
| Amortization of loan costs                                                            | 1,772            |   | 1,322  |
| Amortization of mortgage loan discount                                                | (447)                 |   | (380) |
| Share-based compensation expense                                                      | 1,940            |   | 1,381  |
| Operating distributions from unconsolidated joint ventures                            | 392              |   | 855  |
| Loss allocated to noncontrolling interests                                            | (7,508)               |   | (7,134) |
| Net gain on real estate and involuntary conversion                                    | (1,212)               |   | (22,588) |
| Equity in earnings of unconsolidated joint ventures                                   | (475)                 |   | (802) |
| Increase in deferred leasing costs                                                    | (7,413)               |   | (6,527) |
| Changes in operating assets and liabilities:                                          |                  |   |   |
| Change in receivables and other assets                                                | 2,680            |   | 3,559  |
| Change in accounts payable and other liabilities                                      | 6,640            |   | 1,896  |
| ** **                                                                            |                  |   |   |
| **Cash provided by operating activities**                                             | 63,548           |   | 55,479  |
| ** **                                                                            |                  |   |   |
| **Investing activities**                                                              |                  |   |   |
| Distributions from unconsolidated joint ventures                                      | -           |   | 38  |
| Reimbursements from (purchases of) real estate related investments                    | 822              |   | (231,650) |
| Proceeds from sale of real estate                                                     | 15,542           |   | 84,464  |
| Proceeds from property insurance settlement                                           | 1,855            |   | -   |
| Real estate development                                                               | (4,937)               |   | (19,592) |
| Improvements to real estate related investments                                       | (18,950)              |   | (22,452) |
| ** **                                                                            |                  |   |   |
| **Cash used in investing activities**                                                 | (5,668)               |   | (189,192) |
| ** **                                                                            |                  |   |   |
| **Financing activities**                                                              |                  |   |   |
| Principal payments on mortgage notes payable                                          | (31,849)              |   | (73,461) |
| Proceeds from long-term financing                                                     | 18,500           |   | 218,994  |
| Proceeds from bank borrowings                                                         | 35,742           |   | 152,999  |
| Payments on bank borrowings                                                           | (121,682)             |   | (185,032) |
| Debt financing costs                                                                  | (310)                 |   | (1,703) |
| Stock options exercised                                                               | -           |   | 792  |
| Purchase of Company common stock                                                      | (42)                  |   | -   |
| Dividends paid on common stock                                                        | (18,836)              |   | (29,492) |
| Dividends paid on preferred stock                                                     | (3,600)               |   | (3,600) |
| Contributions from noncontrolling interest partners                                   | 57               |   | 60,501  |
| Distributions to noncontrolling interest partners                                     | -           |   | (2,540) |
| Proceeds from common stock offering                                                   | 84,457           |   | -   |
| ** **                                                                            |                  |   |   |
| **Cash provided by (used in) financing activities**                                   | (37,563)              |   | 137,458  |
| ** **                                                                            |                  |   |   |
| **Change in cash and cash equivalents**                                               | 20,317           |   | 3,745  |
| ** **                                                                            |                  |   |   |
| **Cash and cash equivalents at beginning of period**                                  | 15,318           |   | 11,312  |
| ** **                                                                            |                  |   |   |   |   |
| **Cash and cash equivalents at end of period**                                        |  $               | 35,635  |   |  $ | 15,057  |
|                                                                                       |                       |  |  |  |  |  |

 

 

 

 

 

 

See notes to consolidated financial statements.

7

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**Parkway Properties, Inc.**

**Notes to Condensed Consolidated Financial Statements(Unaudited)**

**September 30, 2009**

 

**Note A - Basis of Presentation**

 

The consolidatedfinancial statements include the accounts of Parkway Properties, Inc.(“Parkway” or “the Company”), its wholly-owned subsidiaries and joint venturesin which the Company has a controlling interest. The other partners’ equityinterests in the consolidated joint ventures are reflected as noncontrollinginterests in the consolidated financial statements. Parkway consolidatessubsidiaries where the entity is a variable interest entity (“VIE”) and Parkwayis the primary beneficiary and is expected to absorb a majority of the VIE’s anticipatedlosses, receive a majority of the VIE’s anticipated residual returns, or both. All significant intercompany transactions and accounts have been eliminated inthe accompanying financial statements.

 

The Company also consolidatescertain joint ventures where it exercises significant control over majoroperating and management decisions, or where the Company is the sole generalpartner and the limited partners do not possess kick-out rights or othersubstantive participating rights. The equity method of accounting is used forthose joint ventures that do not meet the criteria for consolidation and whereParkway exercises significant influence but does not control these jointventures.

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by United States generally acceptedaccounting principles (“GAAP”) for complete financial statements.

 

The accompanyingunaudited condensed financial statements reflect all adjustments which are, inthe opinion of management, necessary for a fair statement of the results forthe interim periods presented. All such adjustments are of a normal recurringnature. The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Operating results for thethree months and nine months ended September 30, 2009 are not necessarilyindicative of the results that may be expected for the year ended December 31,2009. The financial statements should be read in conjunction with the 2008annual report and the notes thereto.

 

The balance sheetat December 31, 2008 has been derived from the audited financial statements asof that date but does not include all of the information and footnotes requiredby United States GAAP for complete financial statements.

 

Certainreclassifications have been made in the 2008 financial statements to conform tothe 2009 classifications.

 

The Company hasevaluated all subsequent events through the issuance date of the financialstatements.

 

Effective January1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) AccountingStandard Codification (“ASC”) 805, “Business Combinations” (“FASB ASC 805”),which expands the scope of previous accounting guidance regarding businesscombinations to include all transactions and other events in which one entityobtains control over one or more other businesses. FASB ASC 805 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or afterDecember 15, 2008, requires that the acquisition related transaction costs beexpensed as incurred and also includes new disclosure requirements. The impactof FASB ASC 805 on the Company’s overall financial position and results ofoperations will be determined by the markets in which the Company invests. AtSeptember 30, 2009, the application of FASB ASC 805 had not impacted theCompany’s overall financial position or results of operations.

 

8

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Effective January1, 2009, the Company adopted FASB ASC 810-10-65, “Noncontrolling Interests inConsolidated Financial Statements” (“FASB ASC 810-10-65”). FASB ASC 810-10-65establishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. FASB ASC 810-10-65also amends certain consolidation procedures for consistency with therequirements of FASB ASC 805. FASB ASC 810-10-65 is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December15, 2008. Upon adoption of FASB ASC 810-10-65, the Company reclassified itsnoncontrolling interest in real estate partnerships from minority interest toequity in the accompanying September 30, 2009 and December 31, 2008consolidated balance sheets. In addition, the Company has separately disclosedthe amount of consolidated net loss attributable to the Company and itsnoncontrolling interest in consolidated real estate partnerships in theaccompanying September 30, 2009 and 2008 consolidated statements of income.

 

Effective January 1, 2009, theCompany adopted FASB ASC 815-10-65, “Disclosures about Derivative Instrumentsand Hedging Activities” (“FASB ASC 815-10-65”). FASB ASC 815-10-65 requires allentities with derivative instruments to disclose information regarding how andwhy the entity uses derivative instruments and how derivative instruments andrelated hedged items affect the entity’s financial position, financialperformance, and cash flows. The Statement is effective prospectively forperiods beginning on or after November 15, 2008. The application of FASB ASC815-10-65 had an immaterial impact on the Company’s overall financial positionand results of operations upon adoption.

 

Effective January 1, 2009, theCompany adopted FASB ASC 323-10, “Equity Method Investment AccountingConsiderations” (“FASB ASC 323-10”), which applies to all investments accountedfor under the equity method and clarifies the accounting for certaintransactions and impairment considerations involving those investments. FASB ASC323-10 is effective for financial statements issued for fiscal years beginningon or after December 15, 2008, and interim periods within those fiscal years.The application of FASB ASC 323-10 had an immaterial impact on the Company’soverall financial position and results of operation upon its adoption.

 

During the second quarter of 2009,the Company adopted FASB ASC 825-10-65, “Interim Disclosures about Fair Valueof Financial Instruments” (“FASB ASC 825-10-65”), which requires fair valuedisclosures for financial instruments that are not reflected in theConsolidated Balance Sheets at fair value.  Prior to the issuance of FASB ASC825-10-65, the fair values of those assets and liabilities were disclosedannually.  Upon adoption of FASB ASC 825-10-65, the Company is now required todisclose this information on a quarterly basis, providing quantitative andqualitative information about fair value estimates for all financialinstruments not measured in the Consolidated Balance Sheet at fair value.

 

During the second quarter of 2009,the Company adopted FASB ASC 855, “Subsequent Events” (“FASB ASC 855”), whichestablishes the accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  FASB ASC 855 requires the disclosure of the date through whichan entity has evaluated subsequent events and the basis for that date, that is,whether that date represents the date the financial statements were issued orwere available to be issued.  The adoption of FASB ASC 855 did not have amaterial impact on the Company’s overall financial position and results ofoperations.

 

In June 2009, the FASB issuedStatement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting forTransfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFASNo. 166”) which amends SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” by: eliminating theconcept of a qualifying special-purpose entity (“QSPE”); clarifying andamending the derecognition criteria for a transfer to be accounted for as asale; amending and clarifying the unit of account eligible for sale accounting;and requiring that a transferor initially measure at fair value and recognizeall assets obtained (for example beneficial interests) and liabilities incurredas a result of a transfer of an entire financial asset or group of financialassets accounted for as a sale.  Additionally, on and after the effective date,existing QSPEs (as defined under previous accounting standards) must beevaluated for consolidation by reporting entities in accordance with theapplicable consolidation guidance.  SFAS No. 166 requires enhanced disclosuresabout, among other things, a transferor’s continuing involvement with transfersof financial assets accounted for as sales, the risks inherent in thetransferred financial assets that have been retained, and the nature and financialeffect of restrictions on the transferor’s assets that continue to be reportedin the Consolidated Balance Sheet.  SFAS No. 166 will be effective as of thebeginning of interim and annual reporting periods that begin after November 15,2009.  The Company is currently evaluating the impact of SFAS No. 166 on theCompany’s consolidated financial statements.

 

In June 2009, the FASB issued SFASNo. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFASNo 167 amends FIN 46(R), “Consolidation of Variable Interest Entities,” andchanges the consolidation guidance applicable to a variable interest entity(“VIE”).  It also amends the guidance governing the determination of whether anenterprise is the primary beneficiary of a VIE, and is, therefore, required toconsolidate an entity, by requiring a qualitative analysis rather than aquantitative analysis.  The qualitative analysis will include, among otherthings, consideration of who has the power to direct the activities of theentity that most significantly impact the entity’s economic performance and whohas the obligation to absorb losses or the right to receive benefits 

9

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of the VIE that could potentially be significant to theVIE.  This standard also requires continuous reassessments of whether anenterprise is the primary beneficiary of a VIE.  Previously, FIN 46(R) requiredreconsideration of whether an enterprise was the primary beneficiary of a VIEonly when specific events had occurred.  QSPEs, which were previously exemptfrom the application of this standard, will be subject to the provisions ofthis standard when it becomes effective.  SFAS No. 167 also requires enhanceddisclosures about an enterprise’s involvement with a VIE.  SFAS No. 167 will beeffective as of the beginning of interim and annual reporting periods thatbegin after November 15, 2009.  The Company is currently evaluating the impactof SFAS No. 167 on the Company’s consolidated financial statements.

 

In June 2009, the FASB issuedAccounting Standards Update (“ASU”) 2009-01, “Topic 105 – Generally AcceptedAccounting Principles – amendments based on Statement of Financial AccountingStandards No. 168 – The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”), whichwill become the source of authoritative United States GAAP recognized by theFASB to be applied by nongovernmental entities.  ASU 2009-01 brings together inone place all authoritative GAAP previously in levels A through D of the GAAPhierarchy that has been issued by a standard setter, for example, FASBStatements, FASB Interpretations, EITF Abstracts, FASB Staff Positions andAICPA Accounting and Auditing Guides.   ASU 2009-01 is effective as of thebeginning of interim and annual reporting periods that begin after September15, 2009.  At September 30, 2009, the Company has adopted ASU 2009-01.

 

**Note B - Net Income (Loss) Per Common Share**

 

Basic earnings per share (“EPS”)are computed by dividing income available to common stockholders by the weighted-averagenumber of common shares outstanding for the period. In arriving at incomeavailable to common stockholders, preferred stock dividends are deducted.Diluted EPS reflects the potential dilution that could occur if shareequivalents such as employee stock options, restricted shares and deferredincentive share units were exercised or converted into common stock that thenshared in the earnings of Parkway.

 

The computation of diluted EPS isas follows (in thousands, except per share data):

 

|                                                                         | **Three Months Ended** | ** **   | **Nine Months Ended** |
|-----------------------------------------------------------------------------------|------------------------|--------------|-----------------------|
|                                                                              | **September 30**       | ** **   | **September 30**      |
|                                                                              | **2009**               | ** **   | **2008**              | ** ** | **2009** | ** ** | **2008** |
| Numerator:                                                                        |                   |         |                  |   |   |   |   |
|     Basic  and diluted net income (loss)                      |                   |         |                  |   |   |   |   |
|         available  to common stockholders |  $                | (2,755)      |                  | $ | 18,498 |   | $ | (5,024) |   | $ | 11,567 |
|                                                                              |                   |         |                  |   |   |   |   |
| Denominator:                                                                      |                   |         |                  |   |   |   |   |
|     Basic  weighted average shares                            | 21,313                 |         | 15,031                |   | 18,827 |   | 15,019 |
|     Dilutive  weighted average shares                         | 21,313                 |         | 15,031                |   | 18,827 |   | 15,019 |
| Diluted income (loss) per share attributable to Parkway Properties, Inc.          |  $                |  (0.13) |                  |  $ |  1.23 |   |  $ |  (0.27) |   |  $ | 0.77 |

 
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|

 

Consolidated loss from continuingoperations was $3.7 million and $3.5 million for the three months endedSeptember 30, 2009 and 2008, respectively.  Loss from continuing operationsattributable to Parkway Properties, Inc. was $1.6 million for the three monthsended September 30, 2009 compared to a loss from continuing operations of$889,000 for the three months ended September 30, 2008.  Loss from continuingoperations attributable to noncontrolling interests was $2.1 million and $2.6 millionfor the three months ended September 30, 2009 and 2008, respectively.

 

Consolidated loss from continuingoperations was $8.9 million and $13.8 million for the nine months ended September30, 2009 and 2008, respectively. Loss from continuing operations attributableto Parkway Properties, Inc. was $1.4 million and $6.7 million for the ninemonths ended September 30, 2009 and 2008, respectively. Loss from continuingoperations attributable to noncontrolling interests was $7.5 million and $7.1million for the nine months ended September 30, 2009 and 2008, respectively.

 

The computation of diluted EPS forthe three months and nine months ended September 30, 2009 and 2008 did notinclude the effect of employee stock options, deferred incentive units and restrictedshares because their inclusion would have been anti-dilutive.

10

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**Note C - Supplemental Cash Flow Information and Scheduleof Non-Cash Investing and****Financing Activity**

 

The Company considers all highlyliquid investments with a maturity of three months or less when purchased to becash equivalents.

 
|                                                                 | **Nine  Months Ended** |
|----------------------------------------------------------------------|------------------------|
|                                                                 | **September  30**      |
|                                                                 | **2009**               | ** ** | **2008** |
|                                                                 | (in  thousands)        |
| Supplemental cash flow information:                                  |                   |   |   |
| Cash paid for interest (net of amount  capitalized)                  |  $                | 40,437  |   |  $ | 46,903  |
| Supplemental schedule of non-cash  investing and financing activity: |                   |   |   |
| Restricted shares and deferred incentive  share units issued         | 3,039             |   | 1,091  |
| Shares issued in lieu of Directors’ fees                        | 42                |   | 140  |
|                                                                      |                        |  |  |  |  |

 

**Note D - Dispositions**

** **

On February 20, 2009, the Companysold Lynnwood Plaza, an 82,000 square foot office property in Hampton Roads,Virginia to an unrelated third party for a gross sales price of $7.8 million. Parkway received net cash proceeds from the sale of $7.1 million, which wereused to reduce amounts outstanding under the Company’s line of credit.  Duringthe fourth quarter of 2008 the Company recognized a non-cash impairment loss ofapproximately $1.1 million related to this property. Parkway Realty Services,LLC, a subsidiary of the Company, was retained to provide management servicesfor the property under a one-year agreement. Therefore, all revenue and expensefor this property is included as a component of continuing operations.

 

On June 1, 2009, the Company sold1717 St. James Place, a 110,000 square foot office property in Houston, Texasto an unrelated third party for a gross sales price of $8.7 million, and Parkwayreceived net cash proceeds from the sale of $8.4 million. The Companyrecognized a gain on the sale of $540,000 in the second quarter 2009.  ParkwayRealty Services, LLC, a subsidiary of the Company, was retained to providemanagement services for the property under a one-year agreement.  Therefore,all revenue and expense for this property is included as a component ofcontinuing operations.

 

**Note E - Discontinued Operations**

 

All current and prior period incomefrom the following office property dispositions are included in discontinuedoperations for the three months and nine months ended September 30, 2009 and 2008(in thousands).

 
| ** **          | ** ** | ** **               | ** ** | **Square** | ** ** | **Date of** | ** ** | **Net Sales** |         | **Net Book Value** | ** ** | **Gain**     |
|---------------------|------------|--------------------------|------------|------------|------------|-------------|------------|---------------|--------------|--------------------|------------|--------------|
| **Office Property** | ** ** | **Location**             | ** ** | **Feet**   | ** ** | **Sale**    | ** ** | **Price**     |         | **of Real Estate** | ** ** | **on Sale**  |
| Town Point Center   |       | Norfolk, Virginia        |       | 131        |       | 07/15/08    |       |  $       | 12,180  |               |  $    | 10,621  |   |  $ | 1,559  |
| Wachovia Plaza      |       | St. Petersburg, Florida  |       | 186        |       | 08/18/08    |       | 25,492   |         | 16,154        |       | 9,338   |
| Capitol Center      |       | Columbia, South Carolina |       | 460        |       | 09/05/08    |       | 46,792   |         | 35,101        |       | 11,691  |
| 2008 Dispositions   |       |                     |       | 777        |       |        |       |  $       | 84,464  |               |  $    | 61,876  |   |  $ | 22,588  |

 

 

11

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The amount of revenue and expensefor these three office properties reported in discontinued operations for thethree months and nine months ended September 30, 2009 and 2008 is as follows(in thousands):

 

|                                                         | **Three Months Ended** | ** **    | **Nine Months Ended** |
|--------------------------------------------------------------|------------------------|---------------|-----------------------|
|                                                         | **September 30**       | ** **    | **September 30**      |
|                                                         | **2009**               | ** **    | **2008**              | ** ** | **2009** | ** ** | **2008** |
| **Income Statement:**                                        |                   |          |                  |   |   |   |   |
| **Revenues**                                                 |                   |          |                  |   |   |   |   |
| Income from office and parking properties                    |  $                | -   |                  |  $ | 2,042  |   |  $ | -  |   |  $ | 9,053  |
|                                                         | -            |          | 2,042            |   | -  |   | 9,053  |
|                                                         |                   |          |                  |   |   |   |   |
| **Expenses**                                                 |                   |          |                  |   |   |   |   |
| Office and parking properties:                               |                   |          |                  |   |   |   |   |
| Property operating expense                                   | -                 |          | 1,466            |   | -  |   | 4,772  |
| Interest expense                                             | -                 |          | 2,406            |   | -  |   | 3,168  |
| Depreciation and amortization                                | -                 |          | 171              |   | -  |   | 1,873  |
|                                                         | -                 |          | 4,043            |   | -  |   | 9,813  |
| **Loss from discontinued operations**                        |                   | -        |                  |   | (2,001) |   |   | -  |   |   | (760) |
| **Gain on sale of real estate from discontinued operations** |                   | -        |                  |   | 22,588  |   |   | -  |   |   | 22,588  |
| **Total discontinued operations**                            | $                      | -        |                  | $ | 20,587  |   | $ | -  |   | $ | 21,828  |
|                                                              |                        |               |                       |  |  |  |  |  |  |  |  |  |

 

During the quarter ended March 31,2009, the Company classified Atrium at Stoneridge, a 108,000 square footnon-core office building in Columbia, South Carolina as held for sale andreclassified all income and expense for this property to discontinuedoperations.  However, on July 8, 2009, the contract to sell Atrium atStoneridge was terminated due to the inability of the proposed buyer to raisesufficient equity to complete the purchase.  The Company received $350,000 innon-refundable earnest money in connection with the termination of the contractthat has been recorded as other income in the third quarter of 2009. Therefore, the Company does not consider this asset to be held for sale andreclassified all revenue and expenses for this office property fromdiscontinued operations to continuing operations for all current and priorperiods presented.

 

**Note F - Mortgage Loan**

 

The Company owns the Bparticipation piece (the “B piece”) of a first mortgage secured by an 844,000square foot office building in Dallas, Texas known as 2100 Ross at an originalcost of $6.9 million. The B piece was originated by Wachovia Bank, N.A., aWells Fargo Company, and has a face value of $10.0 million and a stated couponrate of 6.065%. Upon maturity in May 2012, the Company will receive a principalpayment of $10.0 million, which produces a yield to maturity of 15.6%. The carryingamount of the mortgage loan was approximately $8.0 million at September 30,2009.  The carrying amount for the mortgage loan approximated fair value atSeptember 30, 2009.

 

**Note G - Investment in Unconsolidated Joint Ventures**

 

In addition to the 59 office andparking properties included in the consolidated financial statements, theCompany is also invested in four unconsolidated joint ventures with unrelatedinvestors. These investments are accounted for using the equity method ofaccounting, as Parkway does not control any of these joint ventures.Accordingly, the assets and liabilities of the joint ventures are not includedon Parkway’s consolidated balance sheets at September 30, 2009 and December 31,2008. Information relating to these unconsolidated joint ventures is detailedbelow (in thousands).

 
| ** **                                           | ** ** | ** **              | ** ** | ** **      | ** ** | **Parkway’s** | ** ** | ** ** | ** ** | **Percentage**  |
|------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|--------------------|------------|------------|------------|-----------------|
| ** **                                           | ** ** | ** **              | ** ** | ** **      | ** ** | **Ownership**      | ** ** | **Square** | ** ** | **Leased**      |
| **Joint Venture Entity**                             | ** ** | **Property Name**       | ** ** | **Location**    | ** ** | **Interest**       | ** ** | **Feet**   | ** ** | **At 10/01/09** |
| Wink-Parkway Partnership                             |       | Wink Building           |       | New Orleans, LA |       | 50.0%              |       | 32         |       | 7.6%            |
| Parkway Joint Venture, LLC  (“Jackson JV”) |       | UBS Building/River Oaks |       | Jackson, MS     |       | 20.0%              |       | 167        |       | 86.0%           |
| RubiconPark I, LLC  (“Rubicon JV”)         |       | Lakewood/Falls Pointe   |       | Atlanta, GA     |       |               |       |       |       |            |
|                                                 |       | Carmel Crossing         |       | Charlotte, NC   |       | 20.0%              |       | 552        |       | 90.3%           |
| RubiconPark II, LLC  (“Maitland JV”)       |       | Maitland 200            |       | Orlando, FL     |       | 20.0%              |       | 205        |       | 99.0%           |
|                                                 |       |                    |       |            |       |               |       | 956        |       | 88.6%           |

 

 

 

12

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Cash distributions fromunconsolidated joint ventures are made to each partner based on theirpercentage of ownership in each entity. Cash distributions made to partners injoint ventures where the percentage of debt assumed is disproportionate to theownership percentage in the venture is distributed based on each partner’sshare of cash available for distribution before debt service, based on theirownership percentage, less the partner’s share of debt service based on thepercentage of debt assumed by each partner.

 

Parkway provides management,construction and leasing services for all of the unconsolidated joint venturesexcept for the Wink-Parkway Partnership, and receives market based fees forthese services. The portion of fees earned on unconsolidated joint ventures attributableto Parkway’s ownership interest is eliminated in consolidation.

 

Balance sheet information for theunconsolidated joint ventures is summarized below at September 30, 2009 andDecember 31, 2008 (in thousands):

 
| ** **                                                     | **September 30, 2009** |
|----------------------------------------------------------------|------------------------|
| ** **                                                     | **Wink**               | ** ** | **Jackson** | ** ** | **Rubicon** | ** ** | **Maitland** | ** ** | **Combined** |
| ** **                                                     | **Building**           | ** ** | **JV** | ** ** | **JV** | ** ** | **JV** | ** ** | **Total** |
| **Unconsolidated joint ventures (at 100%):**                   |                   |   |   |   |   |   |   |   |   |
| Real estate, net                                               |  $                | 1,151 |   |  $ | 15,645   |   |  $ | 64,800 |   |  $ | 28,249 |   |  $ | 109,845 |
| Other assets                                                   | 542                    |   | 1,024   |   | 8,326 |   | 1,460 |   | 11,352 |
| Total assets                                                   |  $                | 1,693 |   |  $ | 16,669   |   |  $ | 73,126 |   |  $ | 29,709 |   |  $ | 121,197 |
|                                                           |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage debt (a)                                              |  $                | - |   |  $ | 12,574   |   |  $ | 51,501 |   |  $ | 17,793 |   |  $ | 81,868 |
| Other liabilities                                              | 44                     |   | 555   |   | 1,481 |   | 668 |   | 2,748 |
| Partners’ and shareholders’ equity                   | 1,649                  |   | 3,540   |   | 20,144 |   | 11,248 |   | 36,581 |
| Total liabilities and partners’/shareholders’ equity |  $                | 1,693 |   |  $ | 16,669   |   |  $ | 73,126 |   |  $ | 29,709 |   |  $ | 121,197 |
| ** **                                                     |                   |   |   |   |   |   |   |   |   |
| **Parkway’s share of unconsolidated joint ventures:**     |                   |   |   |   |   |   |   |   |   |
| Real estate, net                                               |  $                | 576 |   |  $ | 3,129  |   |  $ | 12,960 |   |  $ | 5,650 |   |  $ | 22,315 |
| Mortgage debt                                                  |  $                | - |   |  $ | 2,515  |   |  $ | 7,133 |   |  $ | - |   |  $ | 9,648 |
| Investment in joint ventures                                   |  $                | 825 |   |  $ | (296) |   |  $ | 5,669 |   |  $ | 5,134 |   |  $ | 11,332 |
|                                                                |                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
| ** **                                                     | **December 31, 2008** |
|----------------------------------------------------------------|-----------------------|
| ** **                                                     | **Wink**              | ** ** | **Jackson** | ** ** | **Rubicon** | ** ** | **Maitland** | ** ** | **Combined** |
| ** **                                                     | **Building**          | ** ** | **JV** | ** ** | **JV** | ** ** | **JV** | ** ** | **Total** |
| **Unconsolidated joint ventures (at 100%):**                   |                  |   |   |   |   |   |   |   |   |
| Real estate, net                                               |  $               | 1,168  |   |  $ | 15,918  |   |  $ | 65,749  |   |  $ | 28,828  |   |  $ | 111,663  |
| Other assets                                                   | 457              |   | 1,006  |   | 8,076  |   | 1,048  |   | 10,587  |
| Total assets                                                   |  $               | 1,625  |   |  $ | 16,924  |   |  $ | 73,825  |   |  $ | 29,876  |   |  $ | 122,250  |
|                                                           |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage debt (a)                                              |  $               | 67  |   |  $ | 12,600  |   |  $ | 52,000  |   |  $ | 18,154  |   |  $ | 82,821  |
| Other liabilities                                              | 39               |   | 700  |   | 1,573  |   | 628  |   | 2,940  |
| Partners’ and shareholders’ equity                   | 1,519            |   | 3,624  |   | 20,252  |   | 11,094  |   | 36,489  |
| Total liabilities and partners’/shareholders’ equity |  $               | 1,625  |   |  $ | 16,924  |   |  $ | 73,825  |   |  $ | 29,876  |   |  $ | 122,250  |
|                                                           |                  |   |   |   |   |   |   |   |   |
| **Parkway’s share of unconsolidated joint ventures:**     |                  |   |   |   |   |   |   |   |   |
| Real estate, net                                               |  $               | 584  |   |  $ | 3,184  |   |  $ | 13,150  |   |  $ | 5,766  |   |  $ | 22,684  |
| Mortgage debt                                                  |  $               | 34  |   |  $ | 2,520  |   |  $ | 7,200  |   |  $ | -  |   |  $ | 9,754  |
| Investment in joint ventures                                   |  $               | 760  |   |  $ | (310) |   |  $ | 5,484  |   |  $ | 5,123  |   |  $ | 11,057  |
|                                                                |                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

(a)           The mortgage debt, all of which isnon-recourse, is collateralized by the individual real estate properties withineach venture.

 

 

 

 

 

 

 

13

----

 

 

 

 

 

In most cases the Company’s shareof debt related to its unconsolidated joint ventures is the same as itsownership percentage in the venture. However, in the case of the Rubicon JointVenture and the Maitland Joint Venture, the Company’s share of debt isdisproportionate to its ownership percentage. The disproportionate debtstructure was created to meet the Company’s partner’s financing criteria. Inthe Rubicon Joint Venture, Parkway owns a 20% interest in the venture butassumed 13.85% of the debt. In the Maitland Joint Venture, the Company owns a20% interest in the venture and assumed none of the debt. The terms related toParkway’s share of unconsolidated joint venture mortgage debt are summarizedbelow (in thousands):

 
|                                                |       | ** **                                                                                                  | ** ** | ** **   | ** ** | ** **        | ** ** | **Parkway’s** | ** ** | **Monthly**                                               | ** ** | **Loan**          | ** ** | **Loan**          |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|-----------------------------------------------------------|------------|-------------------|------------|-------------------|
|                                                |       | **Type**                                                                                                    | ** ** | **Interest** | ** ** | ** **        | ** ** | **Share of**       | ** ** | **Debt**                                                  | ** ** | **Balance**       | ** ** | **Balance**       |
| **Joint Venture**                                   | ** ** | **Debt Service**                                                                                            | ** ** | **Rate**     | ** ** | **Maturity Date** | ** ** | **Debt**           | ** ** | **Service**                                               | ** ** | **09/30/09**      | ** ** | **12/31/08**      |
| Wink-Parkway Partnership                            |       |                  Amortizing |       | 8.625%       |       | 07/01/09          |       | 50.00%             |       |  $                                                   | -     |              |  $    | -       |   |  $ | 34  |
| Maitland JV                                         |       |                  Amortizing |       | 4.390%       |       | 06/01/11          |       | 0.00%              |       | -                                                    |       | -       |       | -            |
| Rubicon JV                                          |       |                  Amortizing |       | 4.865%       |       | 01/01/12          |       | 13.85%             |       | 38                                                   |       | 7,133   |       | 7,200        |
| Jackson JV                                          |       |                  Amortizing |       | 5.840%       |       | 07/01/15          |       | 20.00%             |       |          15  |       | 2,515   |       | 2,520        |
|                                                |       |                                                                                                        |       |         |       |              |       |               |       |  $                                                   | 53    |              |  $    | 9,648   |   |  $ | 9,754  |
| **Weighted average interest rate at end of period** |       |                                                                                                        |       |         |       |              |       | 5.119%   |       | 5.130%                                               |

 

The following table presentsParkway’s proportionate share of principal payments due for mortgage debt inunconsolidated joint ventures at September 30, 2009 (in thousands):

 
|                          | **Wink**        | ** ** | **Maitland** | ** ** | **Rubicon** | ** ** | **Jackson** | ** ** | ** ** |
|-------------------------------|-----------------|------------|--------------|------------|-------------|------------|-------------|------------|------------|
|                          | **Partnership** | ** ** | **JV**       | ** ** | **JV**      | ** ** | **JV**      | ** ** | **Total**  |
| 2009 (Remaining three months) |  $         | -          |         |  $    | -      |       |  $     | 27         |       |  $ | 8 |   |  $ | 35 |
| 2010                          | -               |       | -       |       | 109         |       | 32          |       | 141        |
| 2011                          | -               |       | -       |       | 114         |       | 35          |       | 149        |
| 2012                          | -               |       | -       |       | 6,883       |       | 37          |       | 6,920      |
| 2013                          | -               |       | -       |       | -           |       | 39          |       | 39         |
| 2014                          | -               |       | -       |       | -           |       | 41          |       | 41         |
| Thereafter                    | -               |       | -       |       | -           |       | 2,323       |       | 2,323      |
|                          |  $         | -          |         |  $    | -      |       |  $     | 7,133      |       |  $ | 2,515 |   |  $ | 9,648 |

 

14

----

 

 

 

 

 

Income statement information forthe unconsolidated joint ventures is summarized below for the three monthsended September 30, 2009 and 2008 (in thousands):

 
|   |   |   | **Results of Operations** |  
 

 

 

**Three Months Ended  September 30, 2009**

 
 

** **

** **

**Wink**

** **

**Jackson**

** **

**Rubicon**

** **

**Maitland**

** **

**Combined**

 
** **

** **

** **

**Building**

** **

**JV**

** **

**JV**

** **

**JV**

** **

**Total**

 
** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 
**Unconsolidated joint ventures  (100%):**

 

     

 

 

 

 

 

 

 

 

 

 
Revenues

 

 

 $

52 

 

 $

661 

 

 $

2,395 

 

 $

1,167 

 

 $

4,275 

 
Operating expenses

 

 

(26)

 

(290)

 

(1,536)

 

(472)

 

(2,324)

 
      Net operating income

 

 

26 

 

371 

 

859 

 

695 

 

1,951 

 
Interest expense

 

 

- 

 

(184)

 

(641)

 

(196)

 

(1,021)

 
Loan cost amortization

 

 

(1)

 

(1)

 

(16)

 

(3)

 

(21)

 
Depreciation and amortization

 

 

(6)

 

(169)

 

(696)

 

(227)

 

(1,098)

 
      Net income (loss)

 

 

 $

19 

 

 $

17 

 

 $

(494)

 

 $

269 

 

 $

(189)

 
** **

 

 

 

 

 

 

 

 

 

 

 

 
**Parkway’s share of unconsolidated  joint ventures:**

 

 

 

 

 

 

 

 

 

 

 

 
Net income (loss)

 

 

 $

10 

 

 $

3 

 

 $

(59)

 

 $

94 

 

 $

48 

 
Depreciation and amortization

 

 

 $

3 

 

 $

34 

 

 $

139 

 

 $

45 

 

 $

221 

 
Property management fees

 

 

 $

- 

 

 $

43 

 

 $

67 

 

 $

42 

 

 $

152 

 
Interest expense

 

 

 $

- 

 

 $

37 

 

 $

89 

 

 $

- 

 

 $

126 

 
Loan cost amortization

 

 

 $

- 

 

 $

- 

 

 $

2  

 

 $

- 

 

 $

2 

 
** **

 

 

 

 

 

 

 

 

 

 

 

 
**Other supplemental information:**

 

 

 

 

 

 

 

 

 

 

 

 
Distributions from unconsolidated  joint ventures

 

 

 $

- 

 

 $

23 

 

 $

-  

 

 $

46 

 

 $

69 

 
 

** **

** **

** **

 

** **

** **

** **

 

** **

** **

**Results  of Operations**

 

** **

** **

**Three  Months Ended September 30, 2008**

 

** **

** **

**Wink**

** **

**Jackson**

** **

**Rubicon**

** **

**Maitland**

** **

**Combined**

** **

** **

** **

**Building**

** **

**JV**

** **

**JV**

** **

**JV**

** **

**Total**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Unconsolidated joint ventures  (100%):**

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 $

98 

 

 $

767 

 

 $

2,543 

 

 $

1,151 

 

 $

4,559 

Operating expenses

 

 

(29)

 

(354)

 

(941)

 

(408)

 

(1,732)

      Net operating income

 

 

69 

 

413 

 

1,602 

 

743 

 

2,827 

Interest expense

 

 

(2)

 

(184)

 

(647)

 

(201)

 

(1,034)

Loan cost amortization

 

 

(1)

 

(1)

 

(15)

 

(3)

 

(20)

Depreciation and amortization

 

 

(6)

 

(212)

 

(550)

 

(228)

 

(996)

      Net income

 

 

 $

60 

 

 $

16 

 

 $

390 

 

 $

311 

 

 $

777 

** **

 

 

 

 

 

 

 

 

 

 

 

**Parkway’s share of unconsolidated  joint ventures:**

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 $

30 

 

 $

3 

 

 $

119 

 

 $

103 

 

 $

255 

Depreciation and amortization

 

 

 $

3 

 

 $

42 

 

 $

110 

 

 $

45 

 

 $

200 

Property management fees

 

 

 $

- 

 

 $

52 

 

 $

106 

 

 $

40 

 

 $

198 

Interest expense

 

 

 $

1 

 

 $

37 

 

 $

90 

 

 $

- 

 

 $

128 

Loan cost amortization

 

 

 $

1 

 

 $

- 

 

 $

2 

 

 $

- 

 

 $

3 

** **

 

 

 

 

 

 

 

 

 

 

 

**Other supplemental information:**

 

 

 

 

 

 

 

 

 

 

 

Distributions from unconsolidated  joint ventures

 

 

 $

- 

 

 $

13 

 

 $

62 

 

 $

119 

 

 $

194 

 

15

 

 

 

 

 

 

 

 

Income statement information forthe unconsolidated joint ventures is summarized below for the nine months endedSeptember 30, 2009 and 2008 (in thousands):

 

 

** **

**Results  of Operations**

 

** **

**Nine  Months Ended September 30, 2009**

 

** **

**Viad  Corp**

** **

**Wink**

** **

**Jackson**

** **

**Rubicon**

** **

**Maitland**

** **

**Combined**

** **

** **

**Center**

** **

**Building**

** **

**JV**

** **

**JV**

** **

**JV**

** **

**Total**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Unconsolidated joint ventures  (100%):**

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 $

- 

 

 $

214 

 

 $

2,143 

 

 $

7,301 

 

 $

3,460 

 

 $

13,118 

Operating expenses

 

- 

 

(62)

 

(950)

 

(3,527)

 

(1,356)

 

(5,895)

      Net operating income

 

- 

 

152 

 

1,193 

 

3,774 

 

2,104 

 

7,223 

Interest expense

 

- 

 

(2)

 

(552)

 

(1,909)

 

(591)

 

(3,054)

Loan cost amortization

 

- 

 

(3)

 

(3)

 

(47)

 

(10)

 

(63)

Depreciation and amortization

 

- 

 

(18)

 

(490)

 

(1,925)

 

(693)

 

(3,126)

      Net income (loss)

 

 $

- 

 

 $

129 

 

 $

148 

 

 $

(107)

 

 $

810 

 

 $

980 

** **

 

 

 

 

 

 

 

 

 

 

 

 

**Parkway’s share of unconsolidated  joint ventures:**

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 $

- 

 

 $

65 

 

 $

29 

 

 $

98 

 

 $

283 

 

 $

475 

Depreciation and amortization

 

 $

- 

 

 $

9 

 

 $

98 

 

 $

385 

 

 $

138 

 

 $

630 

Property management fees

 

 $

- 

 

 $

- 

 

 $

119 

 

 $

780 

 

 $

112 

 

 $

1,011 

Interest expense

 

 $

- 

 

 $

1 

 

 $

111 

 

 $

264 

 

 $

- 

 

 $

376 

Loan cost amortization

 

 $

- 

 

 $

2 

 

 $

- 

 

 $

6 

 

 $

- 

 

 $

8 

** **

 

 

 

 

 

 

 

 

 

 

 

 

**Other supplemental information:**

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from unconsolidated  joint ventures

 

 $

- 

 

 $

- 

 

 $

69 

 

 $

14 

 

 $

309 

 

 $

392 

 

** **

** **

 

** **

** **

 

** **

**Results  of Operations**

 

** **

**Nine  Months Ended September 30, 2008**

 

** **

**Viad  Corp**

** **

**Wink**

** **

**Jackson**

** **

**Rubicon**

** **

**Maitland**

** **

**Combined**

** **

** **

**Center**

** **

**Building**

** **

**JV**

** **

**JV**

** **

**JV**

** **

**Total**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Unconsolidated joint ventures  (100%):**

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 $

108 

 

 $

287

 

 $

2,056 

 

 $

7,664 

 

 $

3,458 

 

 $

13,573 

Operating expenses

 

(2)

 

(76)

 

(1,040)

 

(2,894)

 

(1,195)

 

(5,207)

      Net operating income

 

106 

 

211

 

1,016 

 

4,770 

 

2,263 

 

8,366 

Interest expense

 

- 

 

(9)

 

(552)

 

(1,925)

 

(607)

 

(3,093)

Loan cost amortization

 

- 

 

(2)

 

(3)

 

(47)

 

(10)

 

(62)

Depreciation and amortization

 

- 

 

(17)

 

(507)

 

(1,575)

 

(653)

 

(2,752)

      Net income (loss)

 

 $

106 

 

 $

183 

 

 $

(46)

 

 $

1,223 

 

 $

993 

 

 $

2,459 

** **

 

 

 

 

 

 

 

 

 

 

 

 

**Parkway’s share of unconsolidated joint ventures:**

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 $

32 

 

 $

91 

 

 $

(10)

 

 $

367 

 

 $

322 

 

 $

802 

Depreciation and amortization

 

 $

- 

 

 $

9 

 

 $

101 

 

 $

315 

 

 $

130 

 

 $

555 

Property management fees

 

 $

- 

 

 $

- 

 

 $

160 

 

 $

295 

 

 $

126 

 

 $

581 

Incentive fee

 

 $

5 

 

 $

- 

 

 $

- 

 

 $

- 

 

 $

- 

 

 $

5 

Interest expense

 

 $

- 

 

 $

4 

 

 $

111 

 

 $

267 

 

 $

- 

 

 $

382 

Loan cost amortization

 

 $

- 

 

 $

2 

 

 $

- 

 

 $

6 

 

 $

- 

 

 $

8 

** **

 

 

 

 

 

 

 

 

 

 

 

 

**Other supplemental information:**

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from unconsolidated  joint ventures

 

 $

38 

 

 $

- 

 

 $

39 

 

 $

236 

 

 $

580 

 

 $

893 

 

 

16

 

 

 

 

 

**Note H - Capital and Financing Transactions**

 

At September 30,2009, the Company had a total of $100.0 million outstanding under the line ofcredit and was in compliance with all loan covenants under each creditfacility. The Company’s line of credit allows borrowing up to a combined $311.0million at either the 30-day LIBOR interest rate plus 115 basis points or thePrime interest rate plus 25 basis points. At September 30, 2009, all amountsoutstanding under the line of credit are fixed by an interest rate swapagreement.

 

Mortgage notespayable at September 30, 2009 totaled $856.2 million with an average interestrate of 5.6% and were secured by office properties.  The fair value of mortgagenotes payable at September 30, 2009 was $786.9 million.

 

On February 27,2009, the Company paid off the mortgage note payable secured by the 1717 St.James, 5300 Memorial, and Town and Country office buildings in Houston, Texas, with a total principal balance of $21.8 million with advances under theCompany’s line of credit. The mortgage had an interest rate of 4.83% and wasscheduled to mature March 1, 2009. The mortgage represented the Company’s onlyoutstanding maturity in 2009.

 

On April 28, 2009,the Company sold 6.25 million shares of common stock to UBS Investment Bank ata gross offering price of $13.71 per share and a net price of $13.56 per share.The Company used the net proceeds of $84.5 million to reduce outstandingborrowings under the Company’s line of credit and for general corporatepurposes.

 

On May 4, 2009, theCompany placed an $18.5 million seven-year non-recourse first mortgage with afixed interest rate of 7.6% per annum, and the proceeds were used to reduceborrowings under the line of credit. The mortgage is secured by the 5300Memorial and Town and Country office buildings in Houston, Texas totaling303,000 square feet.

 

**Note I - Noncontrolling Interest - Real Estate Partnerships**

 

The Company has aninterest in three joint ventures that are included in its consolidatedfinancial statements. Information relating to these consolidated joint venturesis detailed below.

 

 

 

** **

** **

**Parkway’s**
   
**Square Feet**

**Joint Venture Entity and Property Name**

 

**Location**

** **

**Ownership %**
   
(In thousands)

Parkway Moore, LLC/ Moore Building Associates, LP (Toyota Center)

 

Memphis, TN

 

75.025%
   
175

Parkway Properties Office Fund, LP

 

 

 

 
   
 

Desert Ridge I, II and Shops

 

Phoenix, AZ

 

26.500%
   
293

Maitland 100

 

Orlando, FL

 

25.000%
   
128

555 Winderley

 

Orlando, FL

 

25.000%
   
102

Gateway Center

 

Orlando, FL

 

25.000%
   
228

BellSouth Building

 

Jacksonville,  FL

 

25.000%
   
92

Centurion Centre

 

Jacksonville,  FL

 

25.000%
   
88

100 Ashford Center

 

Atlanta, GA

 

25.000%
   
160

Peachtree Ridge

 

Atlanta, GA

 

25.000%
   
163

Overlook II

 

Atlanta, GA

 

25.000%
   
260

Citicorp Plaza

 

Chicago, IL

 

40.000%
   
603

Chatham Centre

 

Schaumburg, IL

 

25.000%
   
206

Renaissance Center

 

Memphis, TN

 

25.000%
   
190

1401 Enclave Parkway

 

Houston, TX

 

25.000%
   
209

Total Parkway Properties Office Fund, LP

 

 

 

 
   
2,722

Parkway Properties Office Fund II, LP

 
   
 
      
-

Total Consolidated Joint Ventures

 

 

 

 
   
2,897

 

Moore BuildingAssociates, LP (“MBALP”) was established for the purpose of owning a commercialoffice building (the Toyota Center in Memphis, Tennessee). In acting as thegeneral partner, Parkway is committed to providing additional funding to meetpartnership operating deficits up to an aggregate amount of $1.0 million.Parkway receives income from MBALP in the form of property management fees.Parkway also receives interest income on a note receivable from Parkway Moore,LLC (“PMLLC”). Any intercompany asset, liability, revenue and expense accountsbetween Parkway and MBALP and PMLLC have been eliminated.

 

17

 

 

 

 

 

Parkway serves asthe general partner of Parkway Properties Office Fund, LP (“Ohio PERS Fund I”)and provides asset management, property management, leasing and constructionmanagement services to the fund, for which it is paid market-based fees. Cashdistributions from the fund are made to each joint venture partner based ontheir percentage of ownership in the fund. Since Parkway is the sole generalpartner and has the authority to make major decisions on behalf of the fund,Parkway is considered to have a controlling interest. Accordingly, Parkway isrequired to consolidate the fund in its consolidated financial statements. AtFebruary 15, 2008, Ohio PERS Fund I was fully invested.

 

In 2008, Parkwayformed Parkway Properties Office Fund II, LP (“Texas Teachers Fund II”), a$750.0 million discretionary fund with the Teacher Retirement System of Texas(“TRS”), for the purpose of acquiring high-quality multi-tenant officeproperties. TRS will be a 70% investor, and Parkway will be a 30% investor inthe fund, which will be capitalized with approximately $375.0 million of equitycapital and $375.0 million of non-recourse, fixed-rate first mortgage debt.Parkway’s share of the equity contribution for the fund will be $112.5 millionand will be funded with proceeds from asset sales, line of credit advancesand/or sales of equity securities. The fund will target investments in officebuildings in Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix,Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, Ft.Lauderdale, as well as other growth markets to be determined at Parkway’sdiscretion.

 

Parkway will serve as the generalpartner of Texas Teachers Fund II and will provide asset management, propertymanagement, and leasing and construction management services to the fund forwhich it will be paid market-based fees. Parkway will have four years, orthrough May 2012, to identify and acquire properties, with funds contributed asneeded to complete acquisitions. Parkway will exclusively represent the fund inmaking acquisitions within the target markets and within certain predefinedcriteria. Parkway may continue to make fee-simple acquisitions in marketsoutside of the target markets, acquire properties within the target marketsthat do not meet the fund’s specific criteria or sell any currently ownedproperties. At September 30, 2009, there have been no acquisitions of assets onbehalf of Texas Teachers Fund II. 

 

Noncontrolling interest - realestate partnerships represents the other partners’ proportionate share ofequity in the partnerships discussed above at September 30, 2009. Income isallocated to noncontrolling interest based on the weighted average percentageownership during the year.

 

**Note J - Share-Based Compensation**

 

Effective January 1, 2003, thestockholders of the Company approved Parkway’s 2003 Equity Incentive Plan (the“2003 Plan”) that authorized the grant of up to 200,000 equity based awards toemployees of the Company. At present, it is Parkway’s intention to grantrestricted shares and/or deferred incentive share units instead of stockoptions. Restricted shares and deferred incentive share units are valued basedon the New York Stock Exchange closing market price of Parkway common shares(NYSE ticker symbol, PKY) as of the date of grant.

 

Compensation expense, includingestimated forfeitures, is recognized over the expected vesting period, which isfour to seven years from grant date for restricted shares subject to serviceconditions and four years from grant date for deferred incentive share units.During the nine months ended September 30, 2009, a total of 30,416 restrictedshares were issued to officers of the Company. These shares vested upon achievementof the goals of the GEAR UP Plan. The compensation expense relating to thevesting of the GEAR UP performance-based restricted shares was recognized in2008.

 

Compensation expense related torestricted shares and deferred incentive share units of $1.9 million and $1.4million was recognized for the nine months ended September 30, 2009 and 2008,respectively. Total compensation expense related to nonvested awards not yetrecognized was $2.9 million at September 30, 2009. Of the total not yetrecognized at September 30, 2009, $1.7 million and $1.2 million are subject toservice conditions and performance conditions, respectively. The weightedaverage period over which the expense subject to service and performanceconditions is expected to be recognized is approximately 1.9 years. For theremainder of 2009, the Company expects to recognize approximately $660,000 ofadditional compensation expense on nonvested awards subject to service andperformance conditions.

 

Restricted shares and deferredincentive share units are forfeited if an employee leaves the Company beforethe vesting date. Shares and/or units that are forfeited become available forfuture grant under the 2003 Plan.

 

During the nine months endedSeptember 30, 2009, the Board of Directors approved the grant of 120,500restricted shares to officers of the Company. The shares were valued at $1.9million and will vest subject to achievement of certain performance-based goalsin 2009 at a rate of 30,125 shares per year over the four years following thegrant date.

18

 

 

 

 

 

 

A summary of the Company’srestricted shares and deferred incentive share unit activity for the nine  monthsended September 30, 2009 is as follows:

 

** **

** **

** **

**Weighted**

** **

** **

** **

**Weighted**

** **

** **

** **

**Average**

** **

**Deferred**

** **

**Average**

** **

**Restricted**

** **

**Grant-Date**

** **

**Incentive**

** **

**Grant-Date**

** **

**Shares**

** **

**Fair Value**

** **

**Share Units**

** **

**Fair Value**

Balance at 12/31/08

220,641 

 

$39.49

 

22,805 

 

$37.62

Granted

120,500 

 

15.77

 

- 

 

-

Vested

(30,416)

 

43.08

 

- 

 

-

Forfeited

(1,750)

 

30.85

 

(3,010)

 

39.14

Balance at 09/30/09

308,975 

 

$29.94

 

19,795 

 

$37.39

 

**Note K - Segment Information**

 

Parkway’s primary business is theownership and operation of office properties. The Company accounts for eachoffice property or groups of related office properties as an individualoperating segment. Parkway has aggregated its individual operating segmentsinto a single reporting segment due to the fact that the individual operatingsegments have similar operating and economic characteristics.

 

The Company believes that theindividual operating segments exhibit similar economic characteristics such asbeing leased by the square foot, sharing the same primary operating expensesand ancillary revenue opportunities and being cyclical in the economicperformance based on current supply and demand conditions. The individualoperating segments are also similar in that revenues are derived from theleasing of office space to customers and each office property is managed andoperated consistently in accordance with Parkway’s standard operatingprocedures. The range and type of customer uses of our properties is similarthroughout our portfolio regardless of location or class of building and theneeds and priorities of our customers do not vary from building to building.Therefore, Parkway’s management responsibilities do not vary from location tolocation based on the size of the building, geographic location or class.

 

The management of the Companyevaluates the performance of the reportable office segment based on funds fromoperations applicable to common shareholders (“FFO”). Management believes thatFFO is an appropriate measure of performance for equity REITs and computes thismeasure in accordance with the National Association of Real Estate InvestmentTrusts’ (“NAREIT”) definition of FFO. Funds from operations is defined byNAREIT as net income (computed in accordance with GAAP), excluding gains orlosses from sales of property and extraordinary items under GAAP, plusdepreciation and amortization, and after adjustments to derive the Company’spro rata share of FFO of consolidated and unconsolidated joint ventures.Further, the Company does not adjust FFO to eliminate the effects ofnon-recurring charges. The Company believes that FFO is a meaningfulsupplemental measure of its operating performance because historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate assets diminishes predictably over time, asreflected through depreciation and amortization expenses. However, since realestate values have historically risen or fallen with market and otherconditions, many industry investors and analysts have considered presentationof operating results for real estate companies that use historical costaccounting to be insufficient. Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP. The Company believes that the use of FFO, combinedwith the required GAAP presentations, has been beneficial in improving theunderstanding of operating results of real estate investment trusts among theinvesting public and making comparisons of operating results among suchcompanies more meaningful. FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition. Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cashavailable to fundcash needs. Funds from operations should not be considered analternative to net income as an indicator of the Company’s operating performanceor as an alternative to cash flow as a measure of liquidity.

 

19

 

 

 

 

 

The following is a reconciliationof FFO and net income (loss) available to common stockholders for officeproperties and total consolidated entities for the three months ended September30, 2009 and 2008. Amounts presented as “Unallocated and Other” representprimarily income and expense associated with providing management services,corporate general and administration expense, interest expense on unsecuredlines of credit and preferred dividends.

 

 

**At or for the three months ended**

** **

**At or for the three months ended**

** **

**September 30, 2009**

** **

**September 30, 2008**

** **

**Office**

** **

**Unallocated**

** **

** **

** **

**Office**

** **

**Unallocated**

** **

** **

** **

**Properties**

** **

**and Other**

** **

**Consolidated**

** **

**Properties**

** **

**and Other**

** **

**Consolidated**

** **

                                                                 (in thousands)

 

                                                                     (in thousands)

Property operating revenues (a)

 $

66,474 

 

 $

- 

 

 $

66,474 

 

 $

69,857 

 

 $

- 

 

 $

69,857  

Property operating expenses (b)

(31,600)

 

- 

 

(31,600)

 

(34,295)

 

- 

 

(34,295) 

Property net operating income from

 

 

 

 

 

 

 

 

 

 

 

        continuing operations

34,874 

 

- 

 

34,874 

 

35,562 

 

- 

 

35,562  

 

 

 

 

 

 

 

 

 

 

 

 

Management company income

-  

 

340 

 

340 

 

- 

 

449 

 

449 

Interest and other income

-  

 

672 

 

672 

 

- 

 

346 

 

346 

Interest expense (c)

(12,304)

 

(1,531)

 

(13,835)

 

(12,336)

 

(2,507)

 

(14,843)

Management company expenses

-  

 

(577)

 

(577)

 

- 

 

(432)

 

(432)

General and administrative expenses

-  

 

(1,783)

 

(1,783)

 

- 

 

(2,055)

 

(2,055)

Equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

 

 

 

        joint ventures

48 

 

- 

 

48 

 

255 

 

- 

 

255 

Adjustment for depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -unconsolidated joint ventures

221 

 

- 

 

221 

 

200 

 

- 

 

200 

Adjustment for depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        - discontinued operations

-  

 

- 

 

- 

 

171 

 

- 

 

171 

Adjustment for noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

        -real estate partnerships

(2,518)

 

- 

 

(2,518)

 

(2,427)

 

- 

 

(2,427)

Loss from discontinued operations

-  

 

- 

 

- 

 

(2,001)

 

- 

 

(2,001)

Dividends on preferred stock

-  

 

(1,200)

 

(1,200)

 

- 

 

(1,200)

 

(1,200)

Funds from operations available to

 

 

 

 

 

 

 

 

 

 

 

        common stockholders (d)

20,321 

 

(4,079)

 

16,242 

 

19,424 

 

(5,399)

 

14,025 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

(23,401)

 

- 

 

(23,401)

 

(22,755)

 

- 

 

(22,755)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -unconsolidated joint ventures

(221)

 

- 

 

(221)

 

(200)

 

- 

 

(200)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -discontinued operations

-  

 

- 

 

- 

 

(171)

 

- 

 

(171)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -noncontrolling interest - real

 

 

 

 

 

 

 

 

 

 

 

                estate partnerships

4,625 

 

- 

 

4,625 

 

5,011 

 

- 

 

5,011 

Gain on sale of real estate from 

         discontinued  operations

-  

 

- 

 

- 

 

22,588 

 

- 

 

22,588 

Net income (loss) available to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        common stockholders

 $

1,324 

 

 $

(4,079)

 

 $

(2,755)

 

 $

23,897 

 

 $

(5,399)

 

 $

18,498 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (e)

 $

9,685 

 

$

- 

 

 $

9,685 

 

 $

9,750 

 

 $

- 

 

 $

9,750 

 

(a)            Included in propertyoperating revenues are rental revenues, customer reimbursements, parking incomeand other income. 

 

(b)            Included in propertyoperating expenses are real estate taxes, insurance, contract services, repairsand maintenance and other property operating expenses. 

 

(c)            Interest expense foroffice properties represents interest expense on property secured mortgagedebt. It does not include interest expense on the Company’s unsecured line ofcredit, which is included in “Unallocated and Other”. 

 

(d)            For the three monthsended September 30, 2009, FFO includes lease termination fee income of $349,000. For the three months ended September 30, 2008, FFO includes lease terminationfee income of $2.4 million, Hurricane Ike expenses in the amount of $640,000,and  a loss on extinguishment of debt of $2.1 million, included as a componentof discontinued operations. 

 

(e)            Capital expendituresinclude building improvements, tenant improvements and deferred leasing costs.

 

 

 

 

 

 

20

 

 

 

 

 

The following is a reconciliationof FFO and net income (loss) available to common stockholders for officeproperties and total consolidated entities for the nine months ended September30, 2009 and 2008. Amounts presented as “Unallocated and Other” representprimarily income and expense associated with providing management services,corporate general and administration expense, interest expense on unsecuredlines of credit and preferred dividends.

 

 

**At or for the nine  months ended**

** **

**At or for the nine  months ended**

** **

**September 30, 2009**

** **

**September 30, 2008**

** **

**Office**

** **

**Unallocated**

** **

** **

** **

**Office**

** **

**Unallocated**

** **

** **

** **

**Properties**

** **

**and Other**

** **

**Consolidated**

** **

**Properties**

** **

**and Other**

** **

**Consolidated**

** **

(in thousands)

** **

(in thousands)

Property operating revenues (a)

 $

200,751 

 

 $

- 

 

 $

200,751 

 

 $

198,144 

 

 $

- 

 

 $

198,144 

Property operating expenses (b)

(97,058)

 

- 

 

(97,058)

 

(95,708)

 

- 

 

(95,708)

Property net operating income from

 

 

 

 

 

 

 

 

 

 

 

        continuing operations

103,693 

 

- 

 

103,693 

 

102,436 

 

- 

 

102,436 

 

 

 

 

 

 

 

 

 

 

 

 

Management company income

- 

 

1,486 

 

1,486 

 

-  

 

1,356 

 

1,356 

Interest and other income

- 

 

1,283 

 

1,283 

 

-  

 

1,020 

 

1,020 

Interest expense (c)

(36,869)

 

(5,067)

 

(41,936)

 

(36,095)

 

(8,859)

 

(44,954)

Management company expenses

- 

 

(1,710)

 

(1,710)

 

-  

 

(1,353)

 

(1,353)

General and administrative expenses

- 

 

(4,734)

 

(4,734)

 

-  

 

(6,443)

 

(6,443)

Equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

 

 

 

        joint ventures

475 

 

- 

 

475 

 

802 

 

-  

 

802 

Adjustment for depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -unconsolidated joint ventures

630 

 

- 

 

630 

 

555 

 

-  

 

555 

Adjustment for depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        - discontinued operations

- 

 

- 

 

- 

 

1,873 

 

-  

 

1,873 

Adjustment for noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

        -real estate partnerships

(7,431)

 

- 

 

(7,431)

 

(6,985)

 

-  

 

(6,985)

Loss from discontinued operations

- 

 

- 

 

                    - 

 

(760)

 

-  

 

(760)

Dividends on preferred stock

- 

 

(3,600)

 

(3,600)

 

- 

 

(3,600)

 

(3,600)

Gain on involuntary conversion

742 

 

- 

 

742  

 

- 

 

-  

 

- 

Funds from operations available to

 

 

 

 

 

 

 

 

 

 

 

        common stockholders (d)

61,240 

 

(12,342)

 

48,898 

 

61,826 

 

(17,879)

 

43,947 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

(68,701)

 

- 

 

(68,701)

 

(66,659)

 

-  

 

(66,659)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -unconsolidated joint ventures

(630)

 

- 

 

(630)

 

(555)

 

-  

 

(555)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -discontinued operations

- 

 

- 

 

- 

 

(1,873)

 

-  

 

(1,873)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

        -noncontrolling interest - real

 

 

 

 

 

 

 

 

 

 

 

                estate partnerships

14,939 

 

- 

 

14,939 

 

14,119 

 

-  

 

14,119 

Gain on sale of real estate

470 

 

- 

 

470 

 

- 

 

-  

 

- 

Gain on sale of real estate from 

         discontinued operations

- 

 

- 

 

- 

 

22,588 

 

-   

 

22,588 

Net income (loss) available to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        common stockholders

 $

7,318 

 

 $

(12,342)

 

 $

(5,024)

 

 $

29,446 

 

 $

(17,879)

 

 $

11,567 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 $

1,617,643 

 

 $

26,186  

 

 $

1,643,829 

 

 $

1,683,918 

 

 $

13,582 

 

 $

1,697,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office and parking properties

 $

1,409,342 

 

 $

- 

 

 $

1,409,342 

 

 $

1,461,533 

 

 $

- 

 

 $

1,461,533 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 $

11,332 

 

$

- 

 

 $

11,332 

 

 $

11,152 

 

 $

- 

 

 $

11,152 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (e)

 $

26,363 

 

 $

- 

 

 $

26,363 

 

 $

28,979 

 

 $

- 

 

 $

28,979 

 

(a)            Included inproperty operating revenues are rental revenues, customer reimbursements,parking income and other income. 

 

(b)            Included in property operating expensesare real estate taxes, insurance, contract services, repairs and maintenanceand other property operating expenses. 

 

(c)            Interest expense for office propertiesrepresents interest expense on property secured mortgage debt. It does notinclude interest expense on the Company’s unsecured line of credit, which isincluded in “Unallocated and Other”. 

 

(d)            For the nine months ended September 30,2009, FFO includes a gain on involuntary conversion from Hurricane Ike of$742,000 and lease termination fee income of $429,000. For the nine monthsended September 30, 2008, FFO includes lease termination fee income of $3.7million, offset by repair and clean up costs related to Hurricane Ike of$640,000, a reduction for a non-cash purchase accounting adjustment of $657,000and a loss on extinguishment of debt of $2.1 million, included as a componentof discontinued operations. 

 

(e)            Capitalexpenditures include building improvements, tenant improvements and deferredleasing costs.

21

 

 

 

 

 

 

**Note L - Hurricane Ike Impact**

 

The Company had 13 wholly-ownedproperties and one jointly-owned property totaling 2.3 million square feet in Houston, Texas, which sustained some property damage from Hurricane Ike on September 13,2008. The current estimate of damages for the 14 properties is approximately $6.5million. The Company estimates that its insurance deductible related to theseclaims will be approximately $2.6 million. Approximately $370,000 is estimatedto represent repair and clean up costs with the remainder representingcapitalized costs. The Company expects to record a net gain of approximately $860,000related to an involuntary conversion of the damaged assets. During the nine monthsended September 30, 2009, the Company recorded the partial recognition of thegain on involuntary conversion of $742,000 related to Hurricane Ike. TheCompany expects to recognize the remaining gain on involuntary conversion ofapproximately $118,000 in subsequent quarters.

 

**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results****of Operations.**

 

**Overview**

 

Parkway is a self-administered andself-managed REIT specializing in the acquisition, operation, leasing andownership of office properties. The Company is geographically focused on theSoutheastern and Southwestern United States and Chicago. At October 1, 2009,Parkway owned or had an interest in 65 office properties located in 11 stateswith an aggregate of approximately 13.4 million square feet of leasable space.Included in the portfolio are one discretionary fund and several partnershiparrangements which encompass 21 properties totaling 3.9 million square feet,representing 28.8% of the portfolio. With the discretionary fund and/orpartnerships, the Company receives fees for asset management, propertymanagement, leasing and construction management services and potentiallyreceives incentive fees upon sale if certain investment targets are achieved.Increasing the number of co-investments, and consequently the related feeincome, is part of the Company’s strategy to transform itself to anoperator-owner versus an owner-operator. The strategy capitalizes on theCompany’s strength in providing excellent service in the operation andacquisition of office properties for investment clients in addition to itsdirect ownership of real estate assets. Fee-based real estate services areoffered through the Company’s wholly owned subsidiary, Parkway Realty ServicesLLC, which also currently manages and/or leases approximately 1.3 million squarefeet for third party owners. The Company generates revenue primarily by leasingoffice space to its customers and providing management and leasing services tothird party office property owners (including joint venture interests). Theprimary drivers behind Parkway’s revenues are occupancy, rental rates andcustomer retention.

 

*Occupancy*. Parkway’s revenues are dependent on theoccupancy of its office buildings. At October 1, 2009, occupancy of Parkway’soffice portfolio was 88.3% compared to 88.7% at July 1, 2009 and 90.4% at October1, 2008. Not included in the October 1, 2009 occupancy rate are 23 signedleases totaling 133,000 square feet, which commence during the fourth quarterof 2009 through the first quarter of 2010 and will raise Parkway’s percentageleased to 89.3%. To combat rising vacancy, Parkway utilizes innovativeapproaches to produce new leases. These include the Broker Bill of Rights, ashort-form service agreement and customer advocacy programs which are models inthe industry and have helped the Company maintain occupancy around 90% during atime when the national occupancy rate is approximately 82.8%. Parkway currentlyprojects an average annual occupancy range of approximately 89.0% to 89.5%during 2009 for its office properties.

 

*Rental Rates.*An increase in vacancy rates has theeffect of reducing market rental rates and vice versa. Parkway’s leasestypically have three to seven year terms. As leases expire, the Companyreplaces the existing leases with new leases at the current market rental rate.At October 1, 2009, Parkway had $0.60 per square foot in rental rate embedded lossin its office property leases. Embedded loss is defined as the differencebetween the weighted average in place cash rents and the weighted averagemarket rental rate.

 

22

 

 

 

 

 

*Customer Retention*. Keeping existing customersis important as high customer retention leads to increased occupancy, lessdowntime between leases, and reduced leasing costs. Parkway estimates that itcosts five to six times more to replace an existing customer with a new onethan to retain the customer. In making this estimate, Parkway takes intoaccount the sum of revenue lost during downtime on the space plus leasingcosts, which rise as market vacancies increase. Therefore, Parkway focuses agreat deal of energy on customer retention. Parkway’s operating philosophy isbased on the premise that it is in the customer retention business. Parkwayseeks to retain its customers by continually focusing on operations at itsoffice properties. The Company believes in providing superior customer service;hiring, training, retaining and empowering each employee; and creating anenvironment of open communication both internally and externally with customersand stockholders. Over the past ten years, Parkway maintained an average 72.5%customer retention rate. Parkway’s customer retention rate was 58.0% for thequarter ending September 30, 2009, as compared to 68.8% for the quarter endingJune 30, 2009, and 66.7% for the quarter ending September 30, 2008.  Customerretention for the nine months ended September 30, 2009, and September 30, 2008,was 61.0% and 71.5%, respectively.

 

*Discretionary Funds*. On July 6, 2005, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $500.0 million discretionary fund with Ohio PERS (“Ohio PERS Fund I”)for the purpose of acquiring high-quality multi-tenant office properties. OhioPERS is a 75% investor and Parkway is a 25% investor in the fund, which iscapitalized with approximately $200.0 million of equity capital and $300.0million of non-recourse, fixed-rate first mortgage debt. At February 15, 2008,the Ohio PERS Fund I was fully invested.

 

The Ohio PERS Fund I targetedproperties with an anticipated leveraged internal rate of return of greaterthan 11%. Parkway serves as the general partner of the fund and provides assetmanagement, property management, leasing and construction management servicesto the fund, for which it is paid market-based fees. After each partner hasreceived a 10% annual cumulative preferred return and a return of investedcapital, 20% of the excess cash flow will be paid to the general partner and80% will be paid to the limited partners. Through its general partner andlimited partner ownership interests, Parkway may receive a distribution of thecash flow equivalent to 40%. The term of Ohio PERS Fund I will be seven yearsuntil February 2015, with provisions to extend the term for two additionalone-year periods.

 

On May 14, 2008, Parkway, throughaffiliated entities, entered into a limited partnership agreement forming a$750.0 million discretionary fund, known as Parkway Properties Office Fund II,L.P., (“Texas Teachers Fund II”) with the Teacher Retirement System of Texas(“TRS”) for the purpose of acquiring high-quality multi-tenant officeproperties. TRS is a 70% investor and Parkway is a 30% investor in the fund,which will be capitalized with approximately $375.0 million of equity capitaland $375.0 million of non-recourse, fixed-rate first mortgage debt. Parkway’sshare of the equity contribution for the fund will be $112.5 million and willbe funded with proceeds from asset sales, line of credit advances and/or salesof equity securities. The Texas Teachers Fund II targets acquisitions in thecore markets of Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix,Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, andother growth markets to be determined by Parkway.

                       

The Texas Teachers Fund II targetsproperties with an anticipated leveraged internal rate of return of greaterthan 10%. Parkway serves as the general partner of the fund and provides assetmanagement, property management, leasing and construction management servicesto the fund, for which it will be paid market-based fees. Cash will bedistributed pro rata to each partner until a 9% annual cumulative preferredreturn is received and invested capital is returned. Thereafter, 56% will bedistributed to TRS and 44% to Parkway. Parkway has four years, or through May2012, to identify and acquire properties (the “Investment Period”), with fundscontributed as needed to close acquisitions. Parkway will exclusively representthe fund in making acquisitions within the target markets and acquisitions withcertain predefined criteria. Parkway will not be prohibited from makingfee-simple or joint venture acquisitions in markets outside of the targetmarkets, acquiring properties within the target markets that do not meet TexasTeachers Fund II’s specific criteria or selling or joint venturing currentlyowned properties. The term of Texas Teachers Fund II will be seven years fromthe expiration of the Investment Period, with provisions to extend the term fortwo additional one-year periods at the discretion of Parkway.

 

**Financial Condition**

 

***Comments are for the balance sheet dated September 30,2009 compared to the balance******sheet dated December 31, 2008.***

 

*Office and Parking Properties.*In2009, Parkway continued the execution of its strategy of operating andacquiring office properties, joint venturing interests in office assets, aswell as liquidating non-core assets and office assets that no longer meet theCompany’s investment criteria or the Company has determined value will bemaximized by selling. During the nine months ended September 30, 2009, totalassets decreased $44.0 million or 2.6% and office and parking properties andreal estate development (before depreciation) decreased $5.1 million or 0.3%.

 

23

 

 

 

 

 

*Dispositions and Improvements.*Parkway’sinvestment in office and parking properties and real estate developmentdecreased $45.9 million net of depreciation to a carrying amount of $1.4billion at September 30, 2009, and consisted of 59 office and parkingproperties. The primary reason for the decrease in office and parkingproperties relates to the net effect of the building improvements, developmentcosts, the sale of two office properties, and depreciation recorded during theperiod.

 

On February 20, 2009, the Companysold Lynnwood Plaza, an 82,000 square foot office property located in HamptonRoads, Virginia, for a gross sales price of $7.8 million. Parkway received netcash proceeds from the sale of $7.1 million, which were used to reduce amountsoutstanding under the Company’s line of credit. During the fourth quarter of2008, the Company recognized an impairment loss of $1.1 million related to thisproperty. Parkway Realty Services LLC, a subsidiary of the Company, wasretained to provide management and leasing services for the property under aone-year agreement. Therefore, all revenue and expenses for this property areincluded as a component of continuing operations.

 

On June 1, 2009, the Company sold1717 St. James Place, a 110,000 square foot office property located in Houston,Texas, for a gross sales price of $8.7 million, and Parkway received net cashproceeds from the sale of $8.4 million.  Parkway Realty Services, LLC, asubsidiary of the Company, was retained to provide management and leasingservices for the property under a one-year agreement.  Therefore, all revenueand expenses for this property are included as a component of continuingoperations.

 

During the nine months ended September30, 2009, the Company capitalized building improvements and additional purchaseexpenses of $18.1 million and recorded depreciation expense of $50.4 millionrelated to its office and parking properties.

 

*Rents Receivable and OtherAssets*. For the nine months ended September 30, 2009, rents receivable andother assets decreased $6.5 million or 5.5%. The net decrease is primarily dueto the decrease in escrow bank account balances, which was caused by therelease of funds in connection with payment of property taxes and office propertycapital expenditures, the decrease in the receivables for insurance proceeds relatedto Hurricane Ike and amortization of existing capitalized lease commissions.

 

*Intangible Assets, Net.*Forthe nine months ended September 30, 2009, intangible assets net of relatedamortization decreased $12.7 million or 15.9% and was primarily due to theeffect of amortization of the existing intangible assets for the period.

 

                *Cash and Cash Equivalents.*  For thenine months ended September 30, 2009, cash and cash equivalents increased $20.3million, or 132.6% to a carrying amount of $35.6 million.  The increase isprimarily attributable to proceeds received from the sale of 1717 St. JamesPlace in Houston, Texas and reimbursements received from escrow accounts.

 

*Notes Payable to Banks.*Notespayable to banks decreased $85.9 million or 46.2% during the nine months ended September30, 2009. At September 30, 2009, notes payable to banks totaled $100.0 millionand the net decrease is primarily attributable to proceeds received from thesale of Lynnwood Plaza in Hampton Roads, Virginia, the placement of anon-recourse first mortgage secured by two office buildings in Houston, Texasand the Company’s common stock offering, offset by advances under the line ofcredit to make improvements to office properties and retire existing debt.

 

*Mortgage Notes Payable.*Duringthe nine months ended September 30, 2009, mortgage notes payable decreased$13.3 million or 1.5% and is due to the net effect of scheduled principal paymentson mortgages of $10.0 million, the retirement of existing mortgage debt of$21.8 million, and the placement of mortgage debt of $18.5 million.

 

On February 27, 2009, the Companypaid off the mortgage note payable secured by 1717 St. James, 5300 Memorial andTown and Country office buildings in Houston, Texas, with a total principalbalance of $21.8 million with advances under the Company’s line of credit. Themortgage had an interest rate of 4.83% and was scheduled to mature on March 1,2009. The mortgage represented the Company’s only outstanding maturity in 2009.

 

24

 

 

 

 

 

On May 4, 2009, the Company placedan $18.5 million seven-year non-recourse first mortgage with a fixed interestrate of 7.6% per annum, and the proceeds were used to reduce borrowings underthe line of credit. The mortgage is secured by two office buildings in Houston, Texas totaling 303,000 square feet.

 

The Company expects to continueseeking fixed-rate, non-recourse mortgage financing with maturities from fiveto ten years typically amortizing over 25 to 30 years on select office buildinginvestments as additional capital is needed. The Company monitors the totaldebt to total asset value ratio as defined in the loan agreements for the$311.0 million unsecured line of credit. In addition to the total debt to totalasset value ratio, the Company monitors interest, fixed charge and modifiedfixed charge coverage ratios and the debt to earnings before interest, taxes,depreciation and amortization (“EBITDA”) multiple. The interest coverage ratio iscomputed by comparing the cash interest accrued to EBITDA. The fixed chargecoverage ratio is computed by comparing the cash interest accrued, principalpayments made on mortgage loans and preferred dividends paid to EBITDA. Themodified fixed charge coverage ratio is computed by comparing cash interestaccrued and preferred dividends paid to EBITDA. The debt to EBITDA multiple iscomputed by comparing Parkway’s share of total debt to EBITDA computed for atrailing 12-month period. Management believes the total debt to total assetvalue, interest coverage, fixed charge coverage, modified fixed charge coverageand the debt to EBITDA multiple provide useful information on total debt levelsas well as the Company’s ability to cover interest, principal and/or preferreddividend payments with current income.

 

25

 

 

 

 

 

The computation of the interest,fixed charge and modified fixed charge coverage ratios, the debt to EBITDAmultiple and the reconciliation of net income (loss) to EBITDA is as followsfor the nine months ended September 30, 2009 and 2008 (in thousands):

** **

**Nine Months Ended**

** **

**September 30**

** **

**2009**

** **

**2008**

** **

(Unaudited)

**Net income (loss)**

 $

(1,424)

 

 $

15,167 

**Adjustments to net income (loss):**

 

 

 

Interest expense

40,164 

 

44,647 

Amortization of financing costs

1,772 

 

1,322 

Prepayment expense - early extinguishment of debt

- 

 

2,153 

Depreciation and amortization

68,701 

 

68,532 

Amortization of share-based compensation

1,940 

 

1,381 

Net gain on real estate and involuntary conversion

(1,212)

 

(22,588)

Tax expense

2 

 

2 

EBITDA adjustments - unconsolidated joint ventures

1,014 

 

945 

EBITDA adjustments - noncontrolling interest in real estate partnerships

(24,356)

 

(23,067)

**EBITDA (1)**

 $

86,601 

 

 $

88,494 

** **

 

 

 

**Interest coverage ratio:**

 

 

 

EBITDA

 $

86,601 

 

 $

88,494 

Interest expense:

 

 

 

Interest expense

 $

40,164 

 

 $

44,647 

Capitalized interest

- 

 

601    

Interest expense - unconsolidated joint ventures

376 

 

382 

Interest expense - noncontrolling interest in real estate partnerships

(9,209)

 

(8,750)

Total interest expense

 $

31,331 

 

 $

36,880 

**Interest coverage ratio**

2.76 

 

2.40 

** **

 

 

 

**Fixed charge coverage ratio:**

 

 

 

EBITDA

 $

86,601 

 

 $

88,494 

Fixed charges:

 

 

 

Interest expense

 $

31,331 

 

 $

36,880 

Preferred dividends

3,600 

 

3,600 

Principal payments (excluding early extinguishment of debt)

10,083 

 

10,481 

Principal payments - unconsolidated joint ventures

108 

 

40 

Principal payments - noncontrolling interest in real estate partnerships

(695)

 

(250)

Total fixed charges

 $

44,427 

 

 $

50,751 

**Fixed charge coverage ratio**

1.95 

 

1.74 

** **

 

 

 

**Modified fixed charge coverage ratio:**

 

 

 

EBITDA

 $

86,601 

 

 $

88,494 

Modified fixed charges:

 

 

 

Interest expense

 $

31,331 

 

 $

36,880 

Preferred dividends

3,600 

 

3,600 

Total modified fixed charges

 $

34,931 

 

 $

40,480 

**Modified fixed charge coverage ratio**

2.48 

 

2.19 

** **

 

 

 

 

 

**Debt to EBITDA multiple:**

 

 

 

 

 

EBITDA - trailing 12 months

 $

114,316 

 

 $

118,436 

Mortgage notes payable

 $

856,232 

 

 $

860,034 

Notes payable to banks

100,000 

 

180,316 

Adjustments for unconsolidated joint ventures

9,648 

 

9,768 

Adjustments for noncontrolling interest in real estate partnerships

(215,891)

 

(216,672)

Parkway’s share of total debt

 $

749,989 

 

 $

833,446 

**Debt to EBITDA multiple**

6.56 

 

7.04 

 

(1)           Parkway defines EBITDA, a non-GAAPfinancial measure, as net income before interest, income taxes, depreciation,amortization, losses on early extinguishment of debt and other gains andlosses. EBITDA, as calculated by us, is not comparable to EBITDA reported byother REITs that do not define EBITDA exactly as we do.

26

 

 

 

 

 

The Company believes that EBITDAhelps investors and Parkway’s management analyze the Company’s ability toservice debt and pay cash distributions. However, the material limitationsassociated with using EBITDA as a non-GAAP financial measure compared to cashflows provided by operating, investing and financing activities are that EBITDAdoes not reflect the Company’s historical cash expenditures or future cashrequirements for working capital, capital expenditures or the cash required tomake interest and principal payments on the Company’s outstanding debt.Although EBITDA has limitations as an analytical tool, the Company compensatesfor the limitations by using EBITDA only to supplement GAAP financial measures.Additionally, the Company believes that investors should consider EBITDA inconjunction with net income and the other required GAAP measures of itsperformance and liquidity to improve their understanding of Parkway’s operatingresults and liquidity.

 

Parkway views EBITDA primarily as aliquidity measure and, as such, the GAAP financial measure most directlycomparable to it is cash flows provided by operating activities. Because EBITDAis not a measure of financial performance calculated in accordance with GAAP,it should not be considered in isolation or as a substitute for operatingincome, net income, or cash flows provided by operating, investing andfinancing activities prepared in accordance with GAAP. The following tablereconciles EBITDA to cash flows provided by operating activities for the ninemonths ended September 30, 2009 and 2008 (in thousands):

** **

**Nine Months  Ended**

** **

**September 30**

** **

**2009**

** **

**2008**

**EBITDA**

 $

86,601 

 

  $

88,494 

Amortization of above (below) market leases

(98)

 

198 

Amortization of mortgage loan discount

(447)

 

(380)

Operating distributions from unconsolidated  joint ventures

392 

 

855 

Interest expense

(40,164)

 

(44,647)

Prepayment expense - early extinguishment  of debt

- 

 

(2,153)

Tax expense

(2)

 

(2)

Change in deferred leasing costs

(7,413)

 

(6,527)

Change in receivables and other assets

2,680 

 

3,559 

Change in accounts payable and other liabilities

6,640 

 

1,896 

Adjustments for noncontrolling interests

16,848 

 

15,933 

Adjustments for unconsolidated joint ventures

(1,489)

 

(1,747)

**Cash flows provided by operating activities**

 $

63,548 

 

  $

55,479 

 

*Equity.*Total equity increased$57.3 million or 10.7 % during the nine months ended September 30, 2009, as aresult of the following (in thousands):

** **

**Increase**

** **

**(Decrease)**

Net loss attributable to Parkway  Properties, Inc.

 $

(1,424)

Net loss attributable to noncontrolling interest

(7,508)

Net loss

(8,932)

Change in market value of interest rate swaps

1,907 

Comprehensive loss

(7,025)

Common stock dividends declared

(19,042)

Preferred stock dividends declared

(3,600)

Shares issued through common stock  offering

84,457 

Share-based compensation

1,940 

Shares withheld to satisfy tax withholding  obligation on vesting of restricted stock

(42)

Share issued in lieu of Directors’ fees

42 

Net shares distributed from deferred compensation  plan

496 

Contribution of capital by  noncontrolling interest

57 

 

 $

57,283 

 

On April 28, 2009, the Company sold6.25 million shares of common stock to UBS Investment Bank at a gross offeringprice of $13.71 per share and a net price of $13.56 per share. The Company usedthe net proceeds of $84.5 million to reduce outstanding borrowings under theCompany’s line of credit and for general corporate purposes.

 

27

 

 

 

 

 

**Results of Operations**

 

***Comments are for the three months and nine monthsended September 30, 2009 compared to the three******months and ninemonths ended September 30, 2008***.

 

Net loss available to commonstockholders for the three months ended September 30, 2009 was $2.8 million($0.13 per basic common share) as compared to net income available to commonstockholders of $18.5 million ($1.23 per basic common share) for the three monthsended September 30, 2008.  Net loss available to common stockholders for thenine months ended September 30, 2009 was $5.0 million ($0.27 per basic commonshare) as compared to net income available to common stockholders of $11.6million ($0.77 per basic common share) for the nine months ended September 30,2008.  The primary reason for the decrease in net income available to commonstockholders for the three months and nine months ended September 30, 2009compared to the same periods for 2008 is due to the decrease in gain on sale ofreal estate from discontinued operations in the amount of $22.6 million, whichis attributable to three assets sold in 2008.  The decrease in gain as well asthe discussion of other variances for income and expense items that comprisenet loss available to common stockholders is discussed in detail below.   

 

*Office and Parking Properties.*Theanalysis below includes changes attributable to same-store properties,acquisitions, development and dispositions of office properties. Same-storeproperties are consolidated properties that the Company owned for the currentand prior year reporting periods, excluding properties classified asdiscontinued operations. At September 30, 2009, same-store properties consistedof 58 properties comprising 12.2 million square feet.  One office property with189,000 square feet was developed in 2008 and does not meet the definition fora same-store property for the three months ended September 30, 2009.

 

The following table representsrevenue from office and parking properties for the three months and nine monthsended September 30, 2009 and 2008 (in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2009**

**2008**

**(Decrease)**

**Change**

** **

**2009**

**2008**

**(Decrease)**

**Change**

Revenue from office and  parking

 

 

 

 

 

 

 

 

 

    properties:

 

 

 

 

 

 

 

 

 

    Same-store  properties

$        65,514 

$   68,986

$          (3,472)

-5.0%

 

$  190,152

$  192,370

$          (2,218)

-1.2%

    Properties  acquired in 2008

- 

-

- 

0.0%

 

7,315

3,763

3,552 

94.4%

    Office  property development

963 

-

963 

0.0%

 

2,741

-

2,741 

0.0%

    Properties  disposed

(3)

871

(874)

-100.3%

 

543

2,011

(1,468)

-73.0%

Total revenue from office  and 

 

 

 

 

 

 

 

 

 

    parking  properties

 $        66,474  

$  69,857

$          (3,383)

-4.8%

 

$  200,751

$  198,144

$            2,607 

1.3%

 

Revenue from office and parkingproperties for same-store properties decreased $3.5 million and $2.2 million forthe three months and nine months ended September 30, 2009, respectively,compared to the same period for 2008. The primary reason for the decrease isdue to a decrease in expense reimbursement income as a result of lower propertyoperating expenses as well as a decrease in lease termination fee income forthe three months and nine months ended September 30, 2009 compared to September30, 2008 offset by an increase in same-store average rental rates forsame-store properties.  Average same-store rental rates increased 2.8% and 2.7%for the three months and nine months ended September 2009, respectively,compared to the same period of 2008.

 

 

28

 

 

 

 

 

The following table representsproperty operating expenses for the three months and nine months endedSeptember 30, 2009 and 2008 (in thousands):     

                                                                                                                                      

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2009**

**2008**

**(Decrease)**

**Change**

** **

**2009**

**2008**

**(Decrease)**

**Change**

Expenses from office

 

 

 

 

 

 

 

 

 

    and parking properties:

 

 

 

 

 

 

 

 

 

    Same-store properties

$      31,173 

$   33,718

$       (2,545)

-7.5%

 

$     91,775

$      92,695

$            (920)

-1.0%

    Properties acquired in  2008

- 

-

- 

0.0%

 

3,686

1,768

1,918 

108.5%

    Office property  development

435 

16

419 

2,618.8%

 

1,328

23

1,305 

5,673.9%

    Properties disposed

(8)

561

(569)

-101.4%

 

269

1,222

(953)

-78.0%

Total expenses from office 

 

 

 

 

 

 

 

 

 

    and parking properties

 $     31,600 			

$  34,295

$       (2,695)

-7.9%

 

$     97,058

$      95,708

$          1,350 

1.4%

 

 

Property operating expenses forsame-store properties decreased $2.5 million and $920,000 for the three months andnine months ended September 30, 2009, respectively, compared to the same periodof 2008. The primary reason for the decrease is due to decreased personnelexpenses, utilities and repairs associated with Hurricane Ike in 2008, offsetby an increase in bad debt expense.

 

Depreciation and amortizationexpense attributable to office and parking properties increased $646,000 and$2.0 million for the three months and nine months ended September 30, 2009,respectively, compared to the same period for 2008. The primary reason for theincrease is due to the change in depreciation expense associated with thedevelopment of an office property in 2008, the acquisition of office propertiesin 2008, and improvements to properties.

 

*Hurricane Ike Impact*. TheCompany had 13 wholly-owned properties and one jointly-owned property totaling2.3 million square feet in Houston, Texas, which sustained some property damagefrom Hurricane Ike on September 13, 2008. The current estimate of damages forthe 14 properties is approximately $6.5 million. The Company estimates that itsinsurance deductible related to these claims will be approximately $2.6million. Approximately $370,000 is estimated to represent repair and clean upcosts with the remainder representing capitalized costs. The Company expects torecord a net gain of approximately $860,000 related to an involuntaryconversion of the damaged assets. During the nine months ended September 30,2009, the Company recorded the partial recognition of the gain on involuntaryconversion of $742,000 related to Hurricane Ike. The Company expects torecognize the remaining gain on involuntary conversion of approximately $118,000in subsequent quarters.

 

*Share-Based Compensation Expense*.Compensation expense related to restricted shares and deferred incentive shareunits of $1.9 million and $1.4 million was recognized for the nine months endedSeptember 30, 2009 and 2008, respectively. Total compensation expense relatedto nonvested awards not yet recognized was $2.9 million at September 30, 2009.Of the total not yet recognized at September 30, 2009, $1.7 million and $1.2million are subject to service conditions and performance conditions,respectively. The weighted average period over which the expense subject toservice and performance conditions is expected to be recognized isapproximately 1.9 years. For the remainder of 2009, the Company expects to recognizeapproximately $660,000 of additional compensation expense on nonvested awardssubject to service and performance conditions.

 

During the nine months ended September30, 2009, a total of 30,416 restricted shares were issued to officers of theCompany. These shares vested upon the achievement of the goals of the GEAR UPPlan. The compensation expense relating to the vesting of the GEAR UPperformance-based restricted shares was recognized in 2008.

 

During the nine months endedSeptember 30, 2009, the Board of Directors approved the grant of 120,500restricted shares to officers of the Company. The shares were valued at $1.9million and will vest subject to certain performance-based goals in 2009 at arate of 30,125 shares per year over the four years following the grant date.

 

*General and AdministrativeExpense*. General and administrative expense decreased $272,000 and $1.7 millionfor the three months and nine months ended September 30, 2009, respectively,compared to the same period of 2008 and is primarily attributable to decreasedpersonnel costs.

29

 
**
 

 

 

 

*Interest Expense.*Interestexpense, including amortization of deferred financing costs, decreased $1.0million and $3.0 million for the three months and nine months ended September30, 2009, compared to the same period of 2008 and is comprised of the following(in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2009**

**2008**

**(Decrease)**

**Change**

** **

**2009**

**2008**

**(Decrease)**

**Change**

Interest expense:

 

 

 

 

 

 

 

 

 

     Mortgage  interest expense

$ 12,035

$ 12,055

$            (20)			

-0.2%

 

$ 35,846

$ 35,248

$            598 

1.7%

     Bank  line interest expense

1,252

2,339

(1,087)

-46.5%

 

4,318

8,385

(4,067)

-48.5%

     Debt  prepayment expense

-

-

                  -

0.0%

 

-

13

(13)

-100.0%

     Mortgage  loan cost amortization

269

281

(12)

-4.3%

 

1,023

835

188 

22.5%

     Bank  loan cost amortization

279

168

111 

66.1%

 

749

473

276 

58.4%

 

 

 

 

 

 

 

 

 

 

Total interest expense

$ 13,835

$ 14,843

$       (1,008)

-6.8%

 

$ 41,936

$ 44,954

$       (3,018)

-6.7%

 

Mortgage interest expense increased$598,000 for the nine months ended September 30, 2009, compared to the sameperiod for 2008,  and is due to the net effect of new loans placed in 2008 and2009, the refinancing of one loan in 2008 and the early extinguishment of threemortgages in 2008 and one mortgage in 2009. The average interest rate onmortgage notes payable at September 30, 2009 and 2008 was 5.6% and 5.7%,respectively.

 

Bank line interest expensedecreased $1.1 million and $4.1 million for the three months and nine months endedSeptember 30, 2009, respectively,  compared to the same period of 2008, and isprimarily due to a decrease in average borrowings of $89.4 million for the ninemonths ended September 30, 2009 compared to the nine months ended September 30,2008, and a decrease in average interest rate from 5.0% for the nine monthsended September 30, 2008 to 4.2% for the nine months ended September 30, 2009.The decrease in average borrowings is primarily attributable to proceedsreceived from the sale of Lynnwood Plaza in Hampton Roads, Virginia and theCompany’s April 2009 common stock offering, offset by advances under the lineof credit to make improvements to office properties.

 

*Discontinued Operations.*Discontinuedoperations is comprised of the following for the three months and nine monthsended September 30, 2009 and 2008 (in thousands):

 

  

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2009**

**2008**

**(Decrease)**

**Change**

** **

**2009**

**2008**

**(Decrease)**

**Change**

Discontinued operations:

 

 

 

 

 

 

 

 

 

   Loss from discontinued operations

 $

- 

 $

(2,001)

 $

2,001 

-100.0 %

 

 $

- 

$

(760)

$

760 

-100.0 %

  Gain on sale of real estate from 

     discontinued operations

 

- 

 

22,588 

 

(22,588)

 

-100.0 %

 

 

- 

 

22,588 

 

(22,588)

 

-100.0 %

Total discontinued  operations

 $

- 

 $

20,587 

 $

(20,587)

-100.0 %

 

 $

- 

$

21,828 

$

(21,828)

-100.0 %

 

                                                                                                                                                                                                           

All current and prior period incomefrom the following office property dispositions are included in discontinuedoperations for the three months and nine months ended September 30, 2009 and2008 (in thousands).

 

** **

** **

** **

** **

** **

**Net Book**

** **

** **

** **

**Square**

**Date of**

**Net Sales**

**Value of**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Proceeds**

**Real Estate**

**on Sale**

Town Point Center

Norfolk, Virginia

131

07/15/08

 $

12,180 

 $

10,621 

 $

1,559 

Wachovia Plaza

St. Petersburg, Florida

186

08/18/08

25,492 

16,154 

9,338 

Capitol Center

Columbia, South Carolina

460

09/05/08

46,792 

35,101 

11,691 

2008 Dispositions

 

777

 

 $

84,464 

 $

61,876 

 $

22,588 

 

30

 

 

 

 

 

 

During the quarter ended March 31,2009, the Company classified Atrium at Stoneridge, a 108,000 square footnon-core office building in Columbia, South Carolina as held for sale andreclassified all income and expense for this property to discontinuedoperations.  However, on July 8, 2009, the contract to sell Atrium at Stoneridgewas terminated due to the inability of the proposed buyer to raise sufficientequity to complete the purchase.  The Company received $350,000 innon-refundable earnest money in connection with the termination of the contractthat has been recorded as other income in the third quarter of 2009. Therefore, the Company does not consider this asset to be held for sale andreclassified all revenue and expenses for this office property fromdiscontinued operations to continuing operations for all current and priorperiods presented.

** **

**Recent Accounting Pronouncements**

 

Effective January 1, 2009, the Companyadopted Financial Accounting Standards Board (“FASB”) Accounting StandardCodification (“ASC”) 805, “Business Combinations” (“FASB ASC 805”), whichexpands the scope of previous accounting guidance regarding businesscombinations to include all transactions and other events in which one entityobtains control over one or more other businesses. FASB ASC 805 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or afterDecember 15, 2008, requires that the acquisition related transaction costs beexpensed as incurred and also includes new disclosure requirements. The impactof FASB ASC 805 on the Company’s overall financial position and results ofoperations will be determined by the markets in which the Company invests. AtSeptember 30, 2009, the application of FASB ASC 805 had not impacted theCompany’s overall financial position or results of operations.

 

Effective January 1, 2009, theCompany adopted FASB ASC 810-10-65, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“FASB ASC 810-10-65”). FASB ASC 810-10-65 establishesaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary. FASB ASC 810-10-65 alsoamends certain consolidation procedures for consistency with the requirementsof FASB ASC 850.  FASB ASC 810-10-65 is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15, 2008.Upon adoption of FASB ASC 810-10-65, the Company reclassified itsnoncontrolling interest in real estate partnerships from minority interest toequity in the accompanying September 30, 2009 and December 31, 2008consolidated balance sheets. In addition, the Company has separately disclosedthe amount of consolidated net loss attributable to the Company and itsnoncontrolling interest in consolidated real estate partnerships in theaccompanying September 30, 2009 and 2008 consolidated statements of income.

 

Effective January 1, 2009, theCompany adopted FASB ASC 815-10-65, “Disclosures about Derivative Instrumentsand Hedging Activities” (“FASB ASC 815-10-65”). FASB ASC 815-10-65 requires allentities with derivative instruments to disclose information regarding how andwhy the entity uses derivative instruments and how derivative instruments andrelated hedged items affect the entity’s financial position, financialperformance, and cash flows. The Statement is effective prospectively forperiods beginning on or after November 15, 2008. The application of FASB ASC815-10-65 had an immaterial impact on the Company’s overall financial positionand results of operations upon adoption.

 

Effective January 1, 2009, theCompany adopted FASB ASC 323-10, “Equity Method Investment AccountingConsiderations” (“FASB ASC 323-10”), which applies to all investments accountedfor under the equity method and clarifies the accounting for certaintransactions and impairment considerations involving those investments. FASB ASC323-10 is effective for financial statements issued for fiscal years beginningon or after December 15, 2008, and interim periods within those fiscal years.The application of FASB ASC 323-10 had an immaterial impact on the Company’soverall financial position and results of operation upon its adoption.

 

During the second quarter of 2009,the Company adopted FASB ASC 825-10-65, “Interim Disclosures about Fair Valueof Financial Instruments” (“FASB ASC 825-10-65”), which requires fair valuedisclosures for financial instruments that are not reflected in theConsolidated Balance Sheets at fair value.  Prior to the issuance of FASB ASC825-10-65, the fair values of those assets and liabilities were disclosedannually.  Upon adoption of FASB ASC 825-10-65, the Company is now required todisclose this information on a quarterly basis, providing quantitative andqualitative information about fair value estimates for all financialinstruments not measured in the Consolidated Balance Sheet at fair value.

 

During the second quarter of 2009,the Company adopted FASB ASC 855, “Subsequent Events” (“FASB ASC 855”), whichestablishes the accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  FASB ASC 855 requires the disclosure of the date through whichan entity has evaluated subsequent events and the basis for that date, that is,whether that date represents the date the financial statements were issued orwere available to be issued.  The adoption of FASB ASC 855 did not have amaterial impact on the Company’s overall financial position and results ofoperations.

31

 

 

 

 

 

 

In June 2009, the FASB issuedStatement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting forTransfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFASNo. 166”) which amends SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” by: eliminating theconcept of a qualifying special-purpose entity (“QSPE”); clarifying andamending the derecognition criteria for a transfer to be accounted for as asale; amending and clarifying the unit of account eligible for sale accounting;and requiring that a transferor initially measure at fair value and recognizeall assets obtained (for example beneficial interests) and liabilities incurredas a result of a transfer of an entire financial asset or group of financialassets accounted for as a sale.  Additionally, on and after the effective date,existing QSPEs (as defined under previous accounting standards) must beevaluated for consolidation by reporting entities in accordance with the applicableconsolidation guidance.  SFAS No. 166 requires enhanced disclosures about,among other things, a transferor’s continuing involvement with transfers offinancial assets accounted for as sales, the risks inherent in the transferredfinancial assets that have been retained, and the nature and financial effectof restrictions on the transferor’s assets that continue to be reported in theConsolidated Balance Sheet.  SFAS No. 166 will be effective as of the beginningof interim and annual reporting periods that begin after November 15, 2009. The Company is currently evaluating the impact of SFAS No. 166 on the Company’sconsolidated financial statements.

 

In June 2009, the FASB issued SFASNo. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFASNo 167 amends FIN 46(R), “Consolidation of Variable Interest Entities,” andchanges the consolidation guidance applicable to a variable interest entity(“VIE”).  It also amends the guidance governing the determination of whether anenterprise is the primary beneficiary of a VIE, and is, therefore, required toconsolidate an entity, by requiring a qualitative analysis rather than aquantitative analysis.  The qualitative analysis will include, among otherthings, consideration of who has the power to direct the activities of theentity that most significantly impact the entity’s economic performance and whohas the obligation to absorb losses or the right to receive benefits of the VIEthat could potentially be significant to the VIE.  This standard also requirescontinuous reassessments of whether an enterprise is the primary beneficiary ofa VIE.  Previously, FIN 46(R) required reconsideration of whether an enterprisewas the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this standard, willbe subject to the provisions of this standard when it becomes effective.  SFASNo. 167 also requires enhanced disclosures about an enterprise’s involvementwith a VIE.  SFAS No. 167 will be effective as of the beginning of interim andannual reporting periods that begin after November 15, 2009.  The Company iscurrently evaluating the impact of SFAS No. 167 on the Company’s consolidatedfinancial statements.

 

In June 2009, the FASB issuedAccounting Standards Update (“ASU”) 2009-01, “Topic 105 – Generally AcceptedAccounting Principles – amendments based on Statement of Financial AccountingStandards No. 168 – The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”), whichwill become the source of authoritative United States GAAP recognized by theFASB to be applied by nongovernmental entities.  ASU 2009-01 brings together inone place all authoritative GAAP previously in levels A through D of the GAAPhierarchy that has been issued by a standard setter, for example, FASBStatements, FASB Interpretations, EITF Abstracts, FASB Staff Positions andAICPA Accounting and Auditing Guides.   ASU 2009-01 is effective as of thebeginning of interim and annual reporting periods that begin after September15, 2009.  At September 30, 2009, the Company has adopted ASU 2009-01.

** **

**Liquidity and Capital Resources**

 

*Statement ofCash Flows.*Cash and cash equivalents were $35.6 million and $15.3 millionat September 30, 2009 and December 31, 2008, respectively. Cash flows providedby operating activities for the nine months ended September 30, 2009 and 2008were $63.5 million and $55.5 million, respectively. The increase in cash flowsfrom operating activities of $8.0 million is primarily attributable to theeffect of the timing of receipt of revenues and payment of expenses.

 

Cash used in investing activities forthe nine months ended September 30, 2009 and 2008 were $5.7 million and $189.2million, respectively.  The decrease in cash used in investing activities of $183.5million is primarily due to the effect of office property purchases in 2008 andreduced development costs in 2009, offset by the impact of increased propertysales in 2008.

 

32

 

 

 

 

 

Cash used in financing activitieswas $37.6 million for the nine months ended September 30, 2009 compared to cashprovided by financing activities of $137.5 million for the same period of 2008.The decrease in cash provided by financing activities of $175.1 million isprimarily due to additional mortgage placements in 2008 and contributions fromnoncontrolling interest partners to fund office property purchases in 2008,offset by proceeds received from the common stock offering in 2009.

 

*Liquidity.*The Company plansto continue pursuing the acquisition of additional investments that meet theCompany’s investment criteria and intends to use the Company’s line of credit,proceeds from the refinancing of mortgages, proceeds from the sale of non-coreassets and office properties, proceeds from the sale of portions of ownedassets through joint ventures, possible sales of securities and cash balancesto fund those acquisitions.

 

The Company’s cash flows areexposed to interest rate changes primarily as a result of its line of creditused to maintain liquidity and fund capital expenditures and expansion of theCompany’s real estate investment portfolio and operations. The Company’sinterest rate risk management objective is to limit the impact of interest ratechanges on earnings and cash flows and to lower its overall borrowing costs. Toachieve its objectives, the Company borrows at fixed rates, but also utilizesan unsecured revolving credit facility, an unsecured term loan and an unsecuredline of credit (“the Company’s line of credit”).

 

The Company’s line of credit allowsParkway to borrow up to a combined $311.0 million and it matures in April 2011.At September 30, 2009, the Company had a total of $100.0 million outstandingunder its line of credit as follows (in thousands):

 

** **

** **

** **

** **

** **

** **

** **

** **

**Outstanding**

**Line  of Credit**

** **

**Lender**

** **

**Interest  Rate**

** **

**Maturity**

** **

**Balance**

$15.0 million unsecured line of credit  (1)

 

PNC  Bank  

 

-

 

04/27/11

 

 $

-

$236.0 million unsecured line of credit  (2)

 

Wells  Fargo

 

4.8%

 

04/27/11

 

40,000

$60.0 million unsecured term loan (3)

 

Wells  Fargo

 

4.8%

 

04/27/11

 

60,000

 

 

 

 

4.8%

 

 

 

 $

100,000

 

(1)           Theinterest rate on the $15.0 million unsecured line of credit with PNC Bank iscurrently LIBOR plus 200 basis points. The Company pays fees on the unusedportion of the line of 25 basis points.

 

(2)           The$236.0 million unsecured line of credit is led by Wells Fargo and syndicated toeight other banks. The interest rate on the line of credit is currently LIBORplus 115 basis points or the Prime interest rate plus 25 basis points. At September30, 2009, all amounts outstanding under the line of credit are fixed by aninterest rate swap agreement. The Company pays an annual administration fee of$35,000 and fees on the unused portion of the revolver ranging between 12.5 and20 basis points based upon overall Company leverage, with the rate set at 20basis points at September 30, 2009.

 

(3)           The$60.0 million unsecured term loan is led by Wells Fargo and syndicated to eightother banks. The interest rate on the term loan is fixed by an interest rateswap agreement. Excluding the interest rate swap agreement, the interest rateon the term loan is LIBOR plus 115 basis points.

 

 

 

 

 

 

 

 

 

 

 

 

 

33

 

 

 

 

 

To protect against the potentialfor rapidly rising interest rates, the Company entered into interest rate swapagreements in 2008.  The Company designated the swaps as hedges of the variableinterest rates on the Company’s borrowings under the Wells Fargo unsecuredrevolving credit facility and a portion of the debt placed on the Pinnacle atJackson Place.  These swaps are considered to be fully effective and changes inthe fair value of the swaps are recognized in accumulated other comprehensiveincome (loss).  The Company’s interest rate hedge contracts at September 30, 2009and 2008 are summarized as follows (in thousands):      

 

** **

** **

** **

** **

** **

** **

**Fair Market Value**

** **

** **

** **

** **

** **

** **

**Asset (Liability)**

**Type of**

**Balance Sheet**

**Notional**

**Maturity**

** **

**Fixed**

**September 30**

**Hedge**

**Location**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2009**

**2008**

Swap
                                           			Accounts payable      
 
                                           			and other liabilities
$ 40,000
12/31/08
1-month LIBOR
4.360%
 $                                                			-
$                                             			(50)
Swap
                                           			Accounts payable      
 

                                     and other liabilities

$  20,000

12/31/08

1-month LIBOR

4.245%

                                                    - 

(34)

Swap

                                    			Accounts payable

 

 

 

 

 

 

 

                                     and other liabilities

$100,000

03/31/11

1-month LIBOR

4.785%

(4,167)

(434)

Swap

                                     Accounts payable

 

 

 

 

 

 

 

                                     and other liabilities

$  23,500

12/01/14

1-month LIBOR

5.800%

(1,654)

129 

 

 

 

 

 

 

 $

(5,821)

 $

(389)

 

At September 30, 2009, the Companyhad $856.2 million in mortgage notes payable with an average interest rate of5.6% secured by office properties and $100.0 million drawn under the Company’sline of credit. Parkway’s pro rata share of unconsolidated joint venture debtwas $9.6 million with an average interest rate of 5.1% at September 30, 2009.

 

The Company monitors the total debtto total asset value ratio as defined in the loan agreements for the Company’sline of credit. In addition to the total debt to total asset value ratio, theCompany also monitors interest, fixed charge and modified fixed charge coverageratios, as well as the debt to EBITDA multiple. The interest coverage ratio iscomputed by comparing the cash interest accrued to earnings before interest,taxes, depreciation and amortization (“EBITDA”). The interest coverage ratiofor the nine months ended September 30, 2009 and 2008 was 2.76 and 2.40 times,respectively. The fixed charge coverage ratio is computed by comparing the cashinterest accrued, principal payments made on mortgage loans and preferreddividends paid to EBITDA. The fixed charge coverage ratio for the nine monthsended September 30, 2009 and 2008 was 1.95 and 1.74 times, respectively. Themodified fixed charge coverage ratio is computed by comparing the cash interestaccrued and preferred dividends paid to EBITDA. The modified fixed chargecoverage ratio for the nine months ended September 30, 2009 and 2008 was 2.48and 2.19 times, respectively. The debt to EBITDA multiple is computed bycomparing Parkway’s share of total debt to EBITDA for a trailing 12-monthperiod.  The debt to EBITDA multiple for the nine months ended September 30,2009 and 2008 was 6.56 and 7.04 times, respectively. Management believes thetotal debt to total asset value, interest coverage, fixed charge coverage, modifiedfixed charge coverage and the debt to EBITDA multiple provide usefulinformation on total debt levels as well as the Company’s ability to coverinterest, principal and/or preferred dividend payments with current income.

 

34

 

 

 

 

 

The table below presents theprincipal payments due and weighted average interest rates for the mortgagenotes payable at September 30, 2009 (in thousands).

 

**Total**

** **

** **

** **

**Recurring**

 

**Mortgage**

** **

**Balloon**

** **

**Principal**

 

**Maturities**

** **

**Payments**

** **

**Amortization**

**Schedule of Mortgage Maturities by Years:**

 

 

 

 

 

2009*

 $

3,532

 

$

-

 

$

3,532 

2010

139,968

 

126,411

 

13,557 

2011

112,941

 

102,694

 

10,247 

2012

65,243

 

56,738

 

8,505 

2013

8,651

 

-

 

8,651 

2014

9,211

 

-

 

9,211 

Thereafter

516,686

 

486,126

 

30,560 

Total

 $

856,232

 

$

771,969

 

$

84,263 

Fair value at 09/30/09

 $

786,900

 

 

 

 

 

*Remaining three months

 

The Companypresently has plans to make additional capital improvements at its officeproperties in 2009 of approximately $11.7 million. These expenditures includetenant improvements, leasing costs, capitalized acquisition costs andcapitalized building improvements. Approximately $1.5 million of theseimprovements relate to upgrades on properties acquired in recent years thatwere anticipated at the time of purchase. All such improvements are expected tobe financed by cash flow from the properties, capital expenditure escrowaccounts, advances on the Company’s line of credit and contributions frompartners.

 

On February 20,2009, the Company sold Lynnwood Plaza, an 82,000 square foot office propertylocated in Hampton Roads, Virginia, for a gross sales price of $7.8 million.Parkway received net cash proceeds from the sale of $7.1 million, which wereused to reduce amounts outstanding under the Company’s line of credit.

 

On February 27,2009, the Company paid off the mortgage note payable secured by 1717 St. James,5300 Memorial and Town and Country office buildings in Houston, Texas, with atotal principal balance of $21.8 million with advances under the Company’s lineof credit. The mortgage had an interest rate of 4.83% and was scheduled tomature on March 1, 2009. The mortgage represented the Company’s onlyoutstanding maturity in 2009.

 

On April 28,2009, the Company sold 6.25 million shares of common stock to UBS InvestmentBank at a gross offering price of $13.71 per share and a net price of $13.56per share. The Company used the net proceeds of $84.5 million to reduceoutstanding borrowings under the Company’s line of credit and for generalcorporate purposes.

 

On May 4, 2009,the Company placed an $18.5 million seven-year non-recourse first mortgage witha fixed interest rate of 7.6% per annum, and the proceeds were used to reduceborrowings under the line of credit. The mortgage is secured by two officebuildings in Houston, Texas.

 

On June 1, 2009, the Company sold1717 St. James Place, a 110,000 square foot office property located in Houston,Texas, for a gross sales price of $8.7 million, and Parkway received net cashproceeds from the sale of $8.4 million.

 

The Companyanticipates that its current cash balance, operating cash flows, contributionsfrom partners and borrowings (including borrowings under the working capitalline of credit) will be adequate to pay the Company’s (i) operating andadministrative expenses, (ii) debt service obligations, (iii) distributions toshareholders, (iv) capital improvements, and (v) normal repair and maintenanceexpenses at its properties, both in the short and long term. In addition, theCompany may use proceeds from sales of assets, sales of equity securities andborrowings to fund property acquisitions and pay debts as they mature.

 

35

 

 

 

 

 

**Contractual Obligations**

 

See informationappearing under the caption “Financial Condition - Notes Payable to Banks andMortgage Notes Payable” in Item 2, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for a discussion of changes inlong-term debt since December 31, 2008.

 

**Funds From Operations**

 

Management believesthat funds from operations available to common shareholders (“FFO”) is anappropriate measure of performance for equity REITs and computes this measurein accordance with the National Association of Real Estate Investment Trusts’(“NAREIT”) definition of FFO. Funds from operations is defined by NAREIT as netincome (computed in accordance with GAAP), excluding gains or losses from salesof property and extraordinary items under GAAP, plus depreciation andamortization, and after adjustments to derive the Company’s pro rata share ofFFO of consolidated and unconsolidated joint ventures. Further, the Companydoes not adjust FFO to eliminate the effects of non-recurring charges. TheCompany believes that FFO is a meaningful supplemental measure of its operatingperformance because historical cost accounting for real estate assets inaccordance with GAAP implicitly assumes that the value of real estate assetsdiminishes predictably over time, as reflected through depreciation andamortization expenses. However, since real estate values have historically risenor fallen with market and other conditions, many industry investors andanalysts have considered presentation of operating results for real estatecompanies that use historical cost accounting to be insufficient. Thus, NAREITcreated FFO as a supplemental measure of operating performance for real estateinvestment trusts that excludes historical cost depreciation and amortization,among other items, from net income, as defined by GAAP. The Company believesthat the use of FFO, combined with the required GAAP presentations, has beenbeneficial in improving the understanding of operating results of real estateinvestment trusts among the investing public and making comparisons ofoperating results among such companies more meaningful. FFO as reported by Parkwaymay not be comparable to FFO reported by other REITs that do not define theterm in accordance with the current NAREIT definition. Funds from operations donot represent cash generated from operating activities in accordance withaccounting principles generally accepted in the United States and is not anindication of cash available to fund cash needs. Funds from operations shouldnot be considered an alternative to net income as an indicator of the Company’soperating performance or as an alternative to cash flow as a measure ofliquidity.

 

The following table presents areconciliation of the Company’s net income to FFO for the three months and ninemonths ended September 30, 2009 and 2008 (in thousands):

 

 

**Three Months Ended**

** **

**Nine Months Ended**

 

**September 30**

** **

**September 30**

 

**2009**

** **

**2008**

** **

**2009**

** **

**2008**

Net income (loss)

 $

(1,555)

 

 $

19,698  

 

 $

(1,424)

 

 $

15,167  

Adjustments to net income (loss):

 

 

 

 

 

 

 

Preferred  dividends

(1,200)

 

(1,200)

 

(3,600)

 

(3,600)

Depreciation  and amortization

23,401 

 

22,755 

 

68,701 

 

66,659 

Depreciation  and amortization - discontinued operations

- 

 

171 

 

-  

 

1,873 

			Noncontrolling interest depreciation and amortization

(4,625)

 

(5,011)

 

(14,939)

 

(14,119)

Adjustments  for unconsolidated joint ventures

221 

 

200  

 

630 

 

555 

Gain  on sale of real estate

                                                - 

 

(22,588)

 

(470)

 

(22,588)

Funds  from operations available to common shareholders

 $

16,242 

 

 $

14,025 

 

$

48,898 

 

 $

43,947 

 

**Inflation**

 

Inflation has not had a significantimpact on the Company because of the relatively low inflation rate in theCompany’s geographic areas of operation. Additionally, most of the leasesrequire the customers to pay their pro rata share of operating expenses,including common area maintenance, real estate taxes, utilities and insurance,thereby reducing the Company’s exposure to increases in operating expensesresulting from inflation. The Company’s leases typically have three to sevenyear terms, which may enable the Company to replace existing leases with newleases at market base rent, which may be higher or lower than the existinglease rate.

 

36

 

 

 

 

 

**Forward-Looking Statements**

 

In addition to historicalinformation, certain sections of this Form 10-Q may contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, such as those that are notin the present or past tense, that discuss the Company’s beliefs, expectationsor intentions or those pertaining to the Company’s capital resources,profitability and portfolio performance and estimates of market rental rates.Forward-looking statements involve numerous risks and uncertainties. Thefollowing factors, among others discussed herein and in the Company’s filingsunder the Securities Exchange Act of 1934, could cause actual results andfuture events to differ materially from those set forth or contemplated in theforward-looking statements: defaults or non-renewal of leases, increasedinterest rates and operating costs, failure to obtain necessary outsidefinancing, difficulties in identifying properties to acquire and in effectingacquisitions, the failure to acquire or sell properties as and whenanticipated, failure to qualify as a real estate investment trust under theInternal Revenue Code of 1986, as amended, environmental uncertainties, risksrelated to natural disasters, financial market fluctuations, changes in realestate and zoning laws and increases in real property tax rates. The success ofthe Company also depends upon the trends of the economy, including interestrates, income tax laws, governmental regulation, legislation, populationchanges and those risk factors discussed elsewhere in this Form 10-Q and in theCompany’s filings under the Securities Exchange Act of 1934. Readers arecautioned not to place undue reliance on forward-looking statements, whichreflect management’s analysis only as the date hereof. The Company assumes noobligation to update forward-looking statements.

 

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

See information appearing under thecaption “Liquidity” in Item 2, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

**Item 4. Controls and Procedures**

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that at the end of the Company’s most recent fiscal quarter, theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

 

During the period covered by thisreport, the Company reviewed its internal controls, and there have been nochanges in the Company’s internal controls over financial reporting that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

 

**PART II. OTHERINFORMATION**

 

**Item 1A. Risk Factors**

 

There have been no material changesto the risk factors previously disclosed in Parkway’s Form 10-K for the yearended December 31, 2008. For a full description of these risk factors, pleaserefer to Item 1A-Risk Factors, in the 2008 Annual Report on Form 10-K.

 

** **

** **

** **

** **

** **

** **

** **

** **

37

 

 

 

 

 

**Item 6. Exhibits**

 

31.1         Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1         Certification of Chief Executive Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certification of Chief Financial Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

**SIGNATURES**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

**DATE**: November 4,2009                                                                   **                                                                                                                                                    PARKWAYPROPERTIES, INC.**

 

**                                                                                                                                                                                                                                                                    BY:**/s/ Mandy M. Pope 

                                                                                                                                                                                                                                                                    MandyM. Pope, CPA 

                                                                                                                                                                                                                                                                    SeniorVice President, Controller and 

                                                                                                                                                                                                                                                                    ChiefAccounting Officer 

38

 

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