| ** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

_____________________________________________

** **

** **

**FORM 10-Q**

 

**                    T**                                    Quarterly Report Pursuant  to Section 13 or 15(d)**
**of the Securities Exchange Act of 1934  For Quarterly Period Ended September 30, 2008  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,  if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of  1934 during the preceding 12 months (or for such shorter period that the  registrant was required to file such reports), and (2) has been subject to  such filing requirements for the past 90 days.

Yes T    No  £

 

        Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, a non-accelerated filer or a smaller reporting company.  See  the definitions of “large accelerated filer,” “accelerated filer” and  “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

                                        Large  accelerated filer   T****                               Accelerated  filer                      	£  

 

                                       	Non-accelerated filer     £                                 Smaller  reporting company    £ 

 

        Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  Yes   £  No  T

        15,291,771 shares of Common Stock, $.001 par value, were outstanding as  of November 1, 2008.
 
Page  1 of 40

 

 

 

**PARKWAY PROPERTIES, INC. FORM 10-QTABLE OF CONTENTSFOR THE QUARTER ENDED SEPTEMBER 30, 2008  Part I. Financial Information**

Item  1.

Financial  Statements 

**Page**

 

 

 

 

Consolidated  Balance Sheets, September 30, 2008 and December 31, 2007

3

 

 

 

 

Consolidated  Statements of Income for the Three Months and Nine Months Ended 

 

 

       September  30, 2008 and 2007

4

 

 

 

 

Consolidated  Statements of Stockholders’ Equity for the Nine Months Ended

 

 

       September  30, 2008 and 2007

6

 

 

 

 

Consolidated  Statements of Cash Flows for the Nine Months Ended 

 

 

       September  30, 2008 and 2007

7

 

 

 

 

Notes  to Consolidated Financial Statements

8

 

 

 

Item  2.

Management’s  Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item  3. 

Quantitative  and Qualitative Disclosures About Market Risk

39

 

 

 

Item  4.

Controls  and Procedures

40

 

 

 

 

 

 

**Part II. Other Information**

Item  1A.

Risk  Factors

40

 

 

 

Item  6. 

Exhibits

40

 

 

 

 

 

 

**Signatures**

 

 

 

Authorized  Signatures

40

 

 

 

Page  2 of 40
 
 

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

(In thousands, except share data)

** **

** **

** **

** **
   
 
   
 
   
**September 30**
   
**December 31**
   
**2008**
   
**2007**
   
(Unaudited)
      
**Assets**
         
Real estate related  investments:

 
   
 

        Office and parking  properties

 $

1,696,326 
   
 $

1,551,707 

        Office property  development

37,158 
   
14,686 

        Accumulated  depreciation

(271,951)
   
(251,791)

 

1,461,533 

 

1,314,602 

 

 

 

 

        Land available for  sale

1,467 
   
1,467 

        Mortgage loan

7,381 
   
7,001 

        Investment in  unconsolidated joint ventures

11,152 
   
11,236 

 

1,481,533 
   
1,334,306 

 

 
   
 

Rents receivable and other  assets

117,601 
   
119,457 

Intangible assets, net

83,309 
   
70,719 

Cash and cash equivalents

15,057 
   
11,312 

** **

 $

1,697,500 
   
 $

1,535,794 

**Liabilities**

 
   
 

Notes payable to banks

 $

180,316 
   
 $

212,349 

Mortgage notes payable

860,034 
   
714,501 

Accounts payable and other  liabilities

101,129 
   
88,496 

 

1,141,479 
   
1,015,346 

**Minority Interest**

 

 

 

Minority Interest – unit  holders

31 

 

34 

Minority Interest – real  estate partnerships

131,336 

 

80,506 

 

131,367 

 

80,540 

**Stockholders' 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,

 
   
 

        15,290,403 and 15,223,350  shares issued and outstanding 

 
   
 

        in 2008 and 2007,  respectively

15 
   
15 

Common stock held in trust,  at cost, 85,800 and 104,500 

 
   
 

        shares in 2008 and  2007, respectively

(2,914)
   
(3,540)

Additional paid-in capital

427,534 
   
425,221 

Accumulated other  comprehensive loss

(389)
   
(358)

Accumulated deficit

(57,568)
   
(39,406)

** **

424,654 
   
439,908 

** **

 $

1,697,500 

 

 $

1,535,794 

 

 

 

See notes to consolidated financial statements.

 

Page  3 of 40

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(In thousands, except per share data)

 

** **

**Three Months Ended**

** **

**September 30**

** **

**2008**

 

**2007**

** **

(Unaudited)

**Revenues**

 

 

 

Income from office and  parking properties

 $

69,857 

 

 $

57,322 

Management company income

449 

 

432 

        Total revenues

70,306 

 

57,754 

** **

 

 

 

**Expenses**

 

 

 

Property operating expenses

34,295 

 

26,727 

Depreciation and  amortization

22,755 

 

18,896 

Management company expenses

432 

 

343 

General and administrative  expenses

2,055 

 

1,862 

        Total expenses

59,537 

 

47,828 

 

 

 

 

**Operating income**

10,769 

 

9,926 

** **

 

 

 

**Other income and expenses**

 

 

 

Interest and other income

346 

 

90 

Equity in earnings of  unconsolidated joint ventures

255 

 

234 

Loss on sale of real estate

- 

 

(3)

Interest expense

(14,843)

 

(12,987)

** **

 

 

 

**Loss before minority  interest and discontinued operations**

(3,473)

 

(2,740)

Minority interest – unit  holders

- 

 

(2)

Minority interest - real  estate partnerships

2,584 

 

1,088 

** **

 

 

 

**Loss from continuing  operations**

(889)

 

(1,654)

** **

 

 

 

Discontinued operations:

 

 

 

Income (loss) from  discontinued operations

(2,001)

 

760 

Gain on sale of real estate  from discontinued operations

22,588 

 

- 

**Net income (loss)**

19,698 

 

(894)

Change in market value of  interest rate swaps

(860)

 

(658)

Change in unrealized loss on  equity securities

- 

 

11 

**Comprehensive income  (loss)**

$ 

18,838 

 

 $

(1,541)

 

 

 

 

**Net income (loss)  available to common stockholders:**

 

 

 

Net income (loss)

 $

19,698 

 

 $

(894)

Dividends on preferred stock

(1,200)

 

(1,200)

**Net income (loss)  available to common stockholders**

 $

18,498 

 

 $

(2,094)

** **

 

 

 

 

 

**Net income (loss) per  common share:**

 

 

 

 

 

Basic:

 

 

 

 

 

        Loss from continuing  operations

 $

(0.14)

 

 $

(0.19)

        Discontinued  operations

 

1.37 

 

 

0.05 

        Net income (loss)

 $

1.23 

 

 $

(0.14)

Diluted:

 

 

 

 

 

        Loss from continuing  operations

 $

(0.14)

 

 $

(0.19)

        Discontinued  operations

 

1.36 

 

 

0.05 

        Net income (loss)

 $

1.22 

 

 $

(0.14)

** **

 

 

 

 

 

**Dividends per common  share**

 $

0.65 

 

 $

0.65 

** **

 

 

 

 

 

**Weighted average shares  outstanding:**

 

 

 

 

 

        Basic

 

15,031 

 

 

15,507 

        Diluted

 

15,173 

 

 

15,507 

 

 

 

 

See notes to consolidated financial statements.

 

Page  4 of 40

 

 

 

 

 

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(In thousands, except per share data)

 

** **

**Nine Months Ended**

** **

**September 30**

** **

**2008**

 

**2007**

** **

(Unaudited)

**Revenues**

 

 

 

Income from office and  parking properties

 $

198,144 

 

 $

173,461 

Management company income

1,356 

 

1,196 

        Total revenues

199,500 

 

174,657 

** **

 

 

 

**Expenses**

 

 

 

Property operating expenses

95,708 

 

80,722 

Depreciation and  amortization

66,659 

 

55,722 

Management company expenses

1,353 

 

887 

General and administrative  expenses

6,443 

 

5,109 

        Total expenses

170,163 

 

142,440 

 

 

 

 

**Operating income**

29,337 

 

32,217 

** **

 

 

 

**Other income and expenses**

 

 

 

Interest and other income

1,020 

 

308 

Equity in earnings of  unconsolidated joint ventures

802 

 

782 

Gain on sale of real estate

- 

 

20,307 

Interest expense

(44,954)

 

(39,342)

** **

 

 

 

**Income (loss) before  minority interest and discontinued operations**

(13,795)

 

14,272 

Minority interest – unit  holders

- 

 

(2)

Minority interest - real  estate partnerships

7,134 

 

2,575 

** **

 

 

 

**Income (loss) from  continuing operations**

(6,661)

 

16,845 

** **

 

 

 

**Discontinued operations**:

 

 

 

Income (loss) from  discontinued operations

(760)

 

1,929 

Gain on sale of real estate  from discontinued operations

22,588 

 

- 

**Net income**

15,167 

 

18,774 

Change in market value of  interest rate swaps

(31)

 

(695)

Change in unrealized loss on  equity securities

- 

 

4 

**Comprehensive income**

 $

15,136 

 

 $

18,083 

 

 

 

 

**Net income available to  common stockholders:**

 

 

 

Net income

 $

15,167 

 

 $

18,774 

Dividends on preferred stock

(3,600)

 

(3,600)

**Net income available to  common stockholders**

 $

11,567 

 

 $

15,174 

** **

 

 

 

 

 

**Net income per common  share:**

 

 

 

 

 

Basic:

 

 

 

 

 

        Income (loss) from  continuing operations

 $

(0.68)

 

 $

0.85 

        Discontinued  operations

 

1.45 

 

 

0.12 

        Net income

 $

0.77 

 

 $

0.97 

Diluted:

 

 

 

 

 

        Income (loss) from  continuing operations

 $

(0.68)

 

 $

0.84 

        Discontinued  operations

 

1.44 

 

 

0.12 

        Net income

 $

0.76 

 

 $

0.96 

** **

 

 

 

 

 

**Dividends per common  share**

 $

1.95 

 

 $

1.95 

** **

 

 

 

 

 

**Weighted average shares  outstanding:**

 

 

 

 

 

        Basic

 

15,019 

 

 

15,598 

        Diluted

 

15,154 

 

 

15,773 

 

 

 

See notes to consolidated financial statements.

 

Page  5 of 40
 
**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

(In thousands)

 

** **

 

**Nine Months Ended**

 

**September 30**

 

**2008**

 

**2007**

 

(Unaudited)

 

** **

 

** **

**8.00% Series D Preferred  stock, $.001 par value**

 

 

 

        Balance at beginning  of period

 $

57,976 

 

 $

57,976 

        Balance at end of  period

57,976 

 

57,976 

** **

 

 

 

**Common stock, $.001 par  value**

 

 

 

        Balance at beginning  of period

15 

                

16 

                Purchase of  Company stock

- 

 

(1)

        Balance at end of  period

15 

 

15 

** **

 

 

 

**Common stock held in  trust**

 

 

 

        Balance at beginning  of period

(3,540)

 

(3,894)

                Shares  distributed from deferred compensation plan

626 

 

354 

        Balance at end of  period

(2,914)

 

(3,540)

** **

 

 

 

**Additional paid-in  capital**

 

 

 

        Balance at beginning  of period

425,221 

 

449,141 

                Stock options exercised

792 

 

3,029 

                Shares  issued in lieu of Directors’ fees

140 

 

251 

                Shares  issued – DRIP plan

- 

 

363 

                Issuance  costs – stock offering

- 

 

(28)

                Employee  Stock Purchase Plan

- 

 

37 

                Purchase of  Company stock

- 

 

(19,935)

                Share based  compensation expense

1,381 

 

1,114 

        Balance  at end of period

427,534 

 

433,972 

** **

 

 

 

**Accumulated other  comprehensive income (loss)**

 

 

 

        Balance at beginning  of period

(358)

 

828 

                Change in  unrealized loss on equity securities

- 

 

4 

                Change in  market value of interest rate swaps

(31)

 

(695)

        Balance at end of  period

(389)

 

137 

** **

 

 

 

**Accumulated deficit**

 

 

 

        Balance at beginning  of period

(39,406)

 

(13,761)

                Net income

15,167 

 

18,774 

                Preferred  stock dividends declared

(3,600)

 

(3,600)

                Common stock  dividends declared

(29,729)

 

(30,664)

        Balance at end of  period

(57,568)

 

(29,251)

** **

 

 

 

 

 

**Total stockholders'  equity**

 $

424,654 

 

 $

459,309 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

Page  6 of 40

 

 

 

 

 

 

** **

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

** **

**Nine Months Ended**

** **

**September 30**

** **

**2008**

 

**2007**

** **

(Unaudited)

**Operating  activities**

 

 

 

        Net  income

 $

15,167 

 

 $

18,774 

        Adjustments  to reconcile net income to cash provided by 

 

 

 

                 operating  activities:

 

 

 

                 Depreciation  and amortization

66,659 

 

55,722 

                 Depreciation  and amortization – discontinued operations

1,873 

 

2,352 

                 Amortization  of above market leases 

198 

 

754 

                 Amortization  of loan costs

1,322 

 

898 

                 Amortization  of mortgage loan discount

(380)

 

- 

                 Share  based compensation expense

1,381 

 

1,114 

                 Operating  distributions from unconsolidated joint ventures

855 

 

902 

                 Loss  allocated to minority interests

(7,134)

 

(2,573)

                 Gain  on sale of real estate

(22,588)

 

(20,307)

                 Equity  in earnings of unconsolidated joint ventures

(802)

 

(782)

                 Increase  in deferred leasing costs

(6,527)

 

(2,792)

                 Changes  in operating assets and liabilities:

 

 

 

                         Change  in receivables and other assets

3,559 

 

(7,360)

                         Change  in accounts payable and other liabilities

1,896 

 

8,749 

** **

 

 

 

**        Cash  provided by operating activities**

55,479 

 

55,451 

** **

 

 

 

**Investing  activities**

 

 

 

        Distributions  from unconsolidated joint ventures        

38 

 

89 

        Purchases  of real estate related investments

(231,650)

 

(49,773)

        Proceeds  from sale of real estate

84,464 

 

56,795 

        Real  estate development

(19,592)

 

(6,417)

        Improvements  to real estate related investments

(22,452)

 

(33,151)

 

 

 

 

**        Cash  used in investing activities**

(189,192)

 

(32,457)

** **

 

 

 

**Financing  activities**

 

 

 

        Principal  payments on mortgage notes payable

(73,461)

 

(37,201)

        Proceeds  from long-term financing

218,994 

 

59,500 

        Proceeds  from bank borrowings

152,999 

 

181,712 

        Payments  on bank borrowings

(185,032)

 

(148,057)

        Redemption  of subsidiary redeemable preferred membership interests

- 

 

(10,741)

        Debt  financing costs

(1,703)

 

(738)

        Stock  options exercised

792 

 

3,029 

        Purchase  of Company stock

- 

 

(19,936)

        Dividends  paid on common stock

(29,492)

 

(30,428)

        Dividends  paid on preferred stock

(3,600)

 

(3,600)

        Contributions  from minority interest partners

60,501 

 

38,056 

        Distributions  to minority interest partners

(2,540)

 

(48,012)

        Employee  stock purchase plan

- 

 

37 

        Proceeds  from DRIP plan

- 

 

363 

        Issuance  costs from stock offering

- 

 

(28)

** **

 

 

 

**        Cash  provided by (used in) financing activities**

137,458 

 

(16,044)

** **

 

 

 

**        Change  in cash and cash equivalents**

3,745 

 

6,950 

 

 

 

 

**        Cash  and cash equivalents at beginning of period**

11,312 

 

4,474 

** **

 

 

 

 

 

**        Cash  and cash equivalents at end of period**

 $

15,057 

 

 $

11,424 

 

 

See notes to consolidated financial statements.

 

Page  7 of 40
 
 

 

 

 

**Parkway Properties, Inc.Notes to Condensed Consolidated Financial Statements (Unaudited)September 30, 2008(1)           Basis of Presentation**

 

                Theconsolidated financial statements include the accounts of Parkway Properties,Inc. ("Parkway" or "the Company"), its wholly-ownedsubsidiaries and joint ventures in which the Company has a controllinginterest.  The other partners’ equity interests in the consolidated jointventures are reflected as minority interests in the consolidated financialstatements.  Parkway also consolidates subsidiaries where the entity is avariable interest entity and Parkway is the primary beneficiary, as defined in FinancialAccounting Standards Board (FASB) Interpretation 46R, *Consolidation ofVariable Interest Entities* (“FIN 46R”).  All significant intercompanytransactions and accounts have been eliminated in the accompanying financialstatements.

                The Company determines consolidation for joint ventures basedon standards set forth in EITF 96-16, *Investor’s Accounting for an InvesteeWhen the Investor Has a Majority of the Voting Interest but the MinorityShareholder or Shareholders Have Certain Approval or Veto Rights;*EITF04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights;*Statement of Position 78-9*, Accounting forInvestments in Real Estate Ventures;* and FIN 46R.  Based on the guidanceset forth in these pronouncements, the Company consolidates certain jointventures where it exercises significant control over major operating andmanagement decisions, or where the Company is the sole general partner and thelimited partners do not possess kick-out rights or other substantiveparticipating rights or where the entity is a variable interest entity andParkway is the primary beneficiary.  The equity method of accounting is usedfor those joint ventures that do not meet the criteria for consolidation andwhere Parkway exercises significant influence but does not control these jointventures. 

 

                Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance 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 accepted accountingprinciples for complete financial statements.

 

                Theaccompanying unaudited condensed financial statements reflect all adjustmentswhich are, in the opinion of management, necessary for a fair statement of theresults for the interim periods presented.  All such adjustments are of anormal recurring nature.  The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Operatingresults for the three months and nine months ended September 30, 2008 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2008.  The financial statements should be read in conjunction withthe 2007 annual report and the notes thereto.

 

                Thebalance sheet at December 31, 2007 has been derived from the audited financialstatements as of that date but does not include all of the information andfootnotes required by United States generally accepted accounting principlesfor complete financial statements.

 

                Certainreclassifications have been made in the 2007 financial statements to conform tothe 2008 classifications.

               

The 2008 consolidated statements of incomefor the nine months ended September 30, 2008, include a $657,000 non-cashreduction to net income as a result of a purchase price adjustment recorded toincome during the third quarter of 2006 through the end of 2007.  Thenon-cash purchase price adjustment was corrected in the first quarter of2008.  Parkway’s Management as well as the Audit Committee of the Board ofDirectors have reviewed this accounting error utilizing Securities and ExchangeCommission Staff Accounting Bulletins (SAB) Nos. 99 and 108 and believe theimpact of correcting this error is not material to the current and prior periodconsolidated financial statements.

 

Page  8 of 40

 

 

 

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (“SFASNo. 157”).  SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (GAAP), andexpands disclosures about fair value measurements.  The provisions of SFAS No. 157, with the exception of nonfinancialassets and liabilities, were effective for financial statements issued forfiscal years beginning after November 15, 2007.  The FASB deferred for one yearthe Statement’s fair value measurement requirements for nonfinancial assets andliabilities that are not required or permitted to be measured at fair value ona recurring basis.  These provisions will be effective for fiscal yearsbeginning after November 15, 2008, and the Company is in the process ofevaluating the impact that the adoption of these provisions will have on theCompany’s overall financial position and results of operations.  Theapplication of SFAS 157 had an immaterial impact on the Company’s overallfinancial position and results of operations upon adoption January 1, 2008.

 

                InDecember 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFASNo. 141R), which revised the previously issued SFAS No. 141 (SFAS No. 141). SFAS No. 141R retains the fundamental requirements of SFAS No. 141, but expandsthe scope to include all transactions and other events in which one entityobtains control over one or more other businesses.  SFAS No. 141R appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15, 2008.  SFAS No. 141R requires that the acquisition related transaction costsbe expensed as incurred.  SFAS No. 141R also includes new disclosurerequirements. The Company is currently evaluating the impact of SFAS No. 141Ron the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” (SFAS No. 160).  SFAS No. 160 amends ARB No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 alsoamends certain of ARB No. 51’s consolidation procedures for consistency withthe requirements of SFAS No. 141R.  SFAS No. 160 is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company is currently evaluating the impact of SFAS No. 160 on theCompany’s consolidated financial statements.

 

                InMarch 2008, the FASB issued SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities” (SFAS No. 161), which is an amendment ofFASB Statement No. 133. SFAS No. 161 requires all entities with derivativeinstruments to disclose information regarding how and why the entity usesderivative instruments and how derivative instruments and related hedged itemsaffect the entity’s financial position, financial performance, and cash flows.The Statement is effective prospectively for periods beginning on or afterNovember 15, 2008.  The Company is currently evaluating the impact of SFAS No.161 and does not expect the adoption of this Statement on January 1, 2009 tohave a material impact on the Company’s overall financial position and resultsof operations.

 

               In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (SFAS No. 162).  SFAS No. 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy).  SFAS No. 162 is effective November 15,2008, which represents 60 days following the SEC’s September 2008 approval ofthe Public Company Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.”  The Company is currently evaluating the impact of SFASNo. 162 on the Company's consolidated financial statements. 

 

** (2)          NetIncome (Loss) Per Common Share**

                Basic earnings per share (“EPS”) are computed by dividingincome available to common stockholders by the weighted-average number ofcommon shares outstanding for the period.  In arriving at income available tocommon stockholders, preferred stock dividends are deducted.  Diluted EPSreflects the potential dilution that could occur if share equivalents such asemployee stock options, restricted shares and deferred incentive share units wereexercised or converted into common stock that then shared in the earnings ofParkway.

Page  9 of 40

 

 

 

 

 

The computation of diluted EPS is as follows (inthousands, except per share data):

 

 

**Three Months Ended**

** **

**Nine Months Ended**

 

**September 30**

** **

**September 30**

 

**2008**

** **

**2007**

** **

**2008**

** **

**2007**

Numerator:

 

 

 

 

 

 

 

    Basic  and diluted net income (loss)

 

 

 

 

 

 

 

        available  to common stockholders

 $

18,498 

 

 $

(2,094) 

 

 $

11,567 

 

 $

15,174 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

    Basic  weighted average shares

15,031 

 

15,507 

 

15,019 

 

15,598 

    Dilutive  effect of share equivalents

142 

 

- 

 

135 

 

175 

    Dilutive  weighted average shares

15,173 

 

15,507 

 

15,154 

 

15,773 

Diluted  earnings (loss) per share

 $

1.22 

 

 $

(0.14)

 

 $

0.76 

 

 $

0.96 

 

                Thecomputation of diluted EPS for the three months ended September 30, 2007 didnot include the effect of share equivalents because their inclusion would havebeen anti-dilutive.

** **

**(3)           SupplementalCash Flow Information and Schedule of Non-Cash Investing and Financing Activity**

** **

                TheCompany considers all highly liquid investments with a maturity of three monthsor less when purchased to be cash equivalents.

 

 

**Nine Months Ended**

 

**September 30**

 

**2008**

 

**2007**

 

(in thousands)

 

 

 

 

Supplemental  cash flow information:

 

 

 

        Cash  paid for interest (net of amount capitalized)

 $

46,903 

 

 $

39,319 

Supplemental  schedule of non-cash investing and financing activity:

 

 

 

        Shares  issued in lieu of Directors’ fees

140 

 

251 

** **

**(4)                Acquisitions andDispositions**

** **

                OnJanuary 18, 2008, the discretionary fund with Ohio PERS (“Ohio PERS Fund I”),of which Parkway owns 25%, purchased Gateway Center, a 228,000 square footoffice property in the central business district of Orlando, Florida for apurchase price of $55.0 million.  The fund expects to spend an additional $2.8million for closing costs, building improvements, leasing costs and tenantimprovements during the first two years of ownership.  The purchase was fundedwith a $33.0 million first mortgage placement by the fund and with equity contributionsfrom the partners.

 

                OnJanuary 31, 2008, the Company purchased Desert Ridge Corporate Center, a293,000 square foot office project in Phoenix, Arizona for a purchase price of$81.6 million on behalf of Ohio PERS Fund I.  An additional $2.3 million isexpected to be spent for closing costs, building improvements, leasing costsand tenant improvements during the first two years of ownership.  The purchasewas funded with a $49.2 million first mortgage placement and with equitycontributions from the partners.  Due to Ohio PERS Fund I’s $80.0 million limiton a single investment, Parkway’s effective ownership interest in this asset is26.5%.

 

                OnFebruary 15, 2008, the Company purchased Citicorp Plaza, a 600,000 square footoffice project in Chicago, Illinois for a purchase price of $100.0 million onbehalf of Ohio PERS Fund I.  An additional $9.2 million is expected to be spentfor closing costs, building improvements, leasing costs and tenant improvementsduring the first two years of ownership.  The purchase was funded with a $60.0million first mortgage placement and with equity contributions from thepartners.  Due to the Ohio PERS Fund I’s $80.0 million limit on a singleinvestment, Parkway’s effective ownership interest in this asset is 40%.

 

                

Page  10 of 40

 

 

 

 

Thepreliminary allocation of purchase price allocated to intangible assets and(liabilities) and weighted average amortization period (in years) for eachclass of asset or liability for Gateway Center, Desert Ridge Corporate Centerand Citicorp Plaza is as follows (in thousands, except weighted average life):

 

 

** **

**Weighted**

 

**Amount**

**Average Life**

Lease  in place value

$17,328 

5

Above  market leases

2,718 

5

Below  market leases

(1,599)

6

 

                Duringthe third quarter of 2008, the Company sold three office properties totaling777,000 square feet for a combined gross sales price of approximately $86.3million.  Proceeds from the sales were used to pay down the existing $18.1million mortgage plus related mortgage prepayment expenses and reduce amountsoutstanding under the Company’s bank line of credit.  Total gain on the sale ofassets recognized during the third quarter of 2008 was $22.6 million.  See “Note5 – Discontinued Operations” for more information.

 

(5)           Discontinued Operations

 

                Allcurrent and prior period income from the following office property dispositionsis included in discontinued operations for the nine months ended September 30,2008 and 2007 (in thousands).

 

** **

** **

**Square**

**Date of**

**Gross 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

$  12,750

$ 10,621

$     1,559 

Wachovia Plaza

 St. Petersburg, Florida 

186

08/18/08

26,010

16,154

9,338 

Capitol Center

 Columbia, South Carolina 

460

09/05/08

47,500

35,101

11,691 

2008 Dispositions

 

777

 

$  86,260

$  61,876

$    22,588

 

Theamount of revenue and expense for these three office properties reported indiscontinued operations for the three months and nine months ended September30, 2008 and 2007 is as follows (in thousands):

** **

** **

**Three Months Ended**

** **

**Nine Months Ended**

** **

**September 30**

** **

**September 30**

** **

**2008**

** **

**2007**

** **

**2008**

** **

**2007**

**Income  Statement:**

** **

** **

** **

** **

** **

** **

** **

**Revenues**

 

 

 

 

 

 

 

Income from office and  parking properties

 $

2,042 

 

 $

3,480 

 

 $

9,053 

 

 $

10,014 

** **

2,042 

 

3,480 

 

9,053 

 

10,014 

**Expenses**

 

 

 

 

 

 

 

Property operating expense

1,466 

 

1,535 

 

4,772 

 

4,565 

Interest expense

2,406 

 

387 

 

3,168 

 

1,168 

Depreciation and  amortization

171 

 

798 

 

1,873 

 

2,352 

** **

4,043 

 

2,720    

 

9,813 

 

8,085 

** **

 

 

 

 

 

 

 

**Income (loss) from  discontinued operations**

(2,001)

 

760 

 

(760)

 

1,929 

**Gain on sale of real  estate from discontinued operations**

22,588 

 

- 

 

22,588 

 

- 

**Total discontinued  operations**

 $

20,587 

 

 $

760 

 

 $

21,828 

 

 $

1,929 

 

Page  11 of 40

 

 

 

 

(6)           Office Property Development

 

                Asof September 30, 2008, the Company had incurred $37.2 million in total developmentcosts for the construction of The Pinnacle at Jackson Place, which is a 192,000square foot Class A+ office building development adjacent to the Company’sheadquarters building in Jackson, Mississippi.  The estimated cost of thedevelopment is $48.5 million with expected completion in the fourth quarter of2008.  The Company has received commitments to lease approximately 82% of thenew office space.  Parkway is considering a joint venture structure for thedevelopment whereby Parkway will retain an ownership interest of approximately25%.  The development is designed to utilize benefits available under the GulfOpportunity Zone Act for new developments in areas affected by HurricaneKatrina.

** **

**(7)           Mortgage Loan**

 

                TheCompany owns the B participation piece (the “B piece”) of a first mortgagesecured by an 844,000 square foot office building in Dallas, Texas known as2100 Ross for $6.9 million.  The B piece was originated by Wachovia Bank, N.A.and has a face value of $10 million and a stated coupon rate of 6.065%.  Uponmaturity in May 2012, the Company will receive a principal payment of $10million, which produces a yield to maturity of 15.6%.  The balance of themortgage loan was $7.4 million as of September 30, 2008.

** **

**(8)           Investmentin Unconsolidated Joint Ventures**

 

In addition to the 60 office and parking propertiesincluded in the consolidated financial statements, the Company is also investedin four unconsolidated joint ventures with unrelated investors.  Theseinvestments are accounted for using the equity method of accounting, as Parkwaydoes not control any of these joint ventures.  Accordingly, the assets andliabilities of the joint ventures are not included on Parkway's consolidatedbalance sheets as of September 30, 2008 and December 31, 2007.  Informationrelating to these unconsolidated joint ventures is detailed below (inthousands).

 

** **

** **

** **

**Parkway's**

** **

**Percentage**

** **

** **

** **

**Ownership**

**Square**

**Leased**

**Joint Venture Entity**

**Property Name**

**Location**

**Interest**

**Feet**

**As of 10/01/08**

** **

** **

** **

** **

** **

** **

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

32

100.0%

Parkway Joint Venture, LLC  (“Jackson JV”)

UBS Building/River Oaks

Jackson, MS

20.0%

167

91.3%

RubiconPark I, LLC (“Rubicon  JV”)

Lakewood/Falls Pointe

Atlanta, GA

20.0%

552

98.0%

 

Carmel Crossing

Charlotte, NC

 

 

 

RubiconPark II, LLC  (“Maitland JV”)

Maitland 200

Orlando, FL

20.0%

204

99.0%

 

 

 

 

955

97.1%

 

               Cashdistributions from unconsolidated joint ventures are made to each partner basedon their percentage of ownership in each entity.  Cash distributions madeto partners in joint ventures where the percentage of debt assumed isdisproportionate to the ownership percentage in the venture is distributedbased on each partner’s share of cash available for distribution before debtservice, based on their ownership percentage, less the partner’s share of debtservice based on the percentage of debt assumed by each partner.

 

               Parkwayprovides management, construction and leasing services for all of theunconsolidated joint ventures except for the Wink-Parkway Partnership, andreceives market based fees for these services.  The portion of fees earned onunconsolidated joint ventures attributable to Parkway’s ownership interest iseliminated in consolidation.

 

Page  12 of 40
 
 

 

Balance sheet information for the	unconsolidated joint ventures is summarized below as of September 30, 2008	and December 31, 2007 (in thousands):

 

**Balance Sheet Information**
 
**September 30, 2008**
 
**Wink**
**Jackson**
**Rubicon**
**Maitland**
**Combined**
 
**Building**
**JV**
**JV**
**JV**
**Total**
**Unconsolidated Joint Ventures				(at 100%):**
 
 
 
 
 
Real Estate, Net
$
1,174 
$
15,979 
$
65,750 
$
28,870 
$
111,773 
Other Assets
414 
1,012 
8,562 
1,377 
11,365 
        Total Assets
$
1,588 
$
16,991 
$
74,312 
$
30,247 
$
123,138 
 
 
 
 
 
 
Mortgage Debt (a)
$
95 
$
12,600 
$
52,000 
$
18,272 
$
82,967 
Other Liabilities
37 
682 
1,545 
841 
3,105 
Partners’ and Shareholders’ Equity
1,456 
3,709 
20,767 
11,134 
37,066 
        Total Liabilities &				Partners’/Shareholders’ Equity
$
1,588 
$
16,991 
$
74,312 
$
30,247 
$
123,138 
 
 
 
 
 
 
**Parkway’s Share of				Unconsolidated**
 
 
 
 
 
**        Joint Ventures**
 
 
 
 
 
Real Estate, Net
$
587 
$
3,196 
$
13,150 
$
5,774 
$
22,707 
Mortgage Debt
$
48 
$
2,520 
$
7,200 
$
- 
$
9,768 
Investment in Joint Ventures
$
728 
$
(292)
$
5,564 
$
5,152 
$
11,152 
 
 
 
 
 
 
 
**December 31, 2007**
 
**Wink**
**Jackson**
**Rubicon**
**Maitland**
**Combined**
 
**Building**
**JV**
**JV**
**JV**
**Total**
**Unconsolidated Joint Ventures				(at 100%):**
 
 
 
 
 
Real Estate, Net
$
1,191
$
15,945 
$
66,914
$
29,341
$
113,391
Other Assets
282
1,444 
7,117
1,109
9,952
        Total Assets
$
1,473
$
17,389 
$
74,031
$
30,450
$
123,343
 
 
 
 
 
 
Mortgage Debt (a)
$
176
$
12,600 
$
52,000
$
18,617
$
83,393
Other Liabilities
23
728 
1,580
686
3,017
Partners’ and Shareholders’ Equity
1,274
4,061 
20,451
11,147
36,933
        Total Liabilities &				Partners’/Shareholders’ Equity
$
1,473
$
17,389 
$
74,031
$
30,450
$
123,343
 
 
 
 
 
 
**Parkway’s Share of				Unconsolidated**
 
 
 
 
 
**        Joint Ventures**
 
 
 
 
 
Real Estate, Net
$
595
$
3,189 
$
13,383
$
5,868
$
23,035
Mortgage Debt
$
88
$
2,520 
$
7,200
$
-
$
9,808
Investment in Joint Ventures
$
637
$
(244)
$
5,433
$
5,410
$
11,236
 

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

 
Page  13 of 40
 
 

 

 

 

In most cases the Company’s share of debt related toits unconsolidated joint ventures is the same as its ownership percentage inthe venture.  However, in the case of the Rubicon Joint Venture and the MaitlandJoint Venture, the Company’s share of debt is disproportionate to its ownershippercentage.  The disproportionate debt structure was created to meet theCompany’s partner’s financing criteria.  In the Rubicon Joint Venture,Parkway owns a 20% interest in the venture but assumed 13.85% of thedebt.  In the Maitland Joint Venture, the Company owns a 20% interest inthe venture and assumed none of the debt. The terms related to Parkway's shareof unconsolidated joint venture mortgage debt are summarized below (inthousands):

 

** **

** **

** **

** **

**Parkway’s**

**Monthly**

**Loan**

**Loan**

** **

**Type of**

**Interest**

** **

**Share of**

**Debt**

**Balance**

**Balance**

**Joint Venture**

**Debt Service**

**Rate**

**Maturity**

**Debt**

**Service**

**09/30/08**

**12/31/07**

 

 

 

 

 

 

 

 

Wink-Parkway Partnership

Amortizing

8.625%

07/01/09

50.00%

 $

5 

 $

48 

 $

88 

Maitland JV

Amortizing

4.390%

06/01/11

0.00%

- 

- 

- 

Rubicon JV

Interest Only

4.865%

01/01/12

13.85%

30 

7,200 

7,200 

Jackson JV

Interest Only

5.840%

07/01/15

20.00%

12 

2,520 

2,520 

 

 

 

 

 

 $

47 

 $

9,768 

 $

9,808 

 

 

 

 

 

 

 

 

**Weighted average interest  rate at end of period**

 

 

 

5.135%

5.149% 

 

                Thefollowing table presents Parkway's proportionate share of principal paymentsdue for mortgage debt in unconsolidated joint ventures as of September 30, 2008(in thousands):

 

 

**Wink**

** **

**Jackson**

** **

**Rubicon**

** **

**Maitland**

** **

** **

 

**Partnership**

** **

**JV**

** **

**JV**

** **

**JV**

** **

**Total**

2008  (Remaining three months)

$

15

 

$

-

 

$

-

 

$

-

 

$

15

2009

33

 

12

 

100

 

-

 

145

2010

-

 

33

 

114

 

-

 

147

2011

-

 

35

 

119

 

-

 

154

2012

-

 

37

 

6,867

 

-

 

6,904

2013

-

 

39

 

-

 

-

 

39

Thereafter

-

 

2,364

 

-

 

-

 

2,364

 

$

48

 

$

2,520

 

$

7,200

 

$

-

 

$

9,768

 

Page  14 of 40

 

                Incomestatement information for the unconsolidated joint ventures is summarized belowfor the three months ended September 30, 2008 and 2007 (in thousands):

 

**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 JVs

$

- 

$

13 

$

62 

$

119 

$

194 

 

 

 
**Results of Operations**

 
** **

**Three Months Ended September 30, 2007**

** **

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
** **

**Building**

**JV**

**JV**

**JV**

**Total**

 
 

 

 

 

 

 

 
**Unconsolidated Joint  Ventures (100%):**

** **

** **

** **

** **

** **

 
Revenues

 $

89 

 $

603 

 $

2,564 

 $

1,098 

 $

4,354 

 
Operating Expenses

(22)

(319)

(1,009)

(439)

(1,789)

 
        Net Operating Income

67 

284 

1,555 

659 

2,565 

 
Interest Expense

(3)

(184)

(647)

(206)

(1,040)

 
Loan Cost Amortization

(1)

(1)

(16)

(3)

(21)

 
Depreciation and  Amortization

(6)

(134)

(503)

(192)

(835)

 
        Net Income (Loss)

 $

57 

 $

(35)

 $

389 

 $

258 

 $

669 

 
 

 

 

 

 

 

 
**Parkway’s Share of  Unconsolidated Joint Ventures:**

 

 

 

 

 

 
Net Income (Loss)

 $

29 

 $

(7)

 $

119 

 $

93 

 $

234 

 
Depreciation and  Amortization

 $

3 

 $

27 

 $

101 

 $

38 

 $

169 

 
Property Management Fees

 $

- 

 $

19 

 $

81 

 $

50 

 $

150 

 
 

 

 

 

 

 

 
Interest Expense

 $

2 

 $

36 

 $

90 

 $

- 

 $

128 

 
Loan Cost Amortization

 $

- 

 $

- 

 $

2 

 $

- 

 $

2 

 
 

 

 

 

 

 

 
**Other Supplemental  Information:**

 

 

 

 

 

 
Distributions from  Unconsolidated JVs

 $

- 

 $

23 

 $

209 

 $

- 

 $

232 

 
** **

** **

Page  15 of 40

 

** **

**Results of Operations**

** **

**Nine Months Ended September 30, 2008**

** **

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

** **

**JV**

**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 JVs

 $

38 

$

- 

$

39 

$

236 

$

580 

$

893 

** **

**Results of Operations**

 

**Nine Months Ended September 30, 2007**

 

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 

**JV**

**Building**

**JV**

**JV**

**JV**

**Total**

** **

 

 

 

 

 

 

**Unconsolidated Joint  Ventures (100%):**

 

 

 

 

 

 

Revenues

 $

1 

 $

290 

 $

1,933 

 $

7,714 

 $

3,303 

 $

13,241 

Operating Expenses

(35)

(72)

(963)

(2,915)

(1,249)

(5,234)

        Net Operating Income  (Loss)

(34)

218 

970 

4,799 

2,054 

8,007 

Interest Expense

- 

(14)

(552)

(1,918)

(621)

(3,105)

Loan Cost Amortization

- 

(3)

(2)

(47)

(11)

(63)

Depreciation and  Amortization

- 

(17)

(409)

(1,488)

(514)

(2,428)

Income (Loss) Before Gain on  Sale of Real Estate

(34)

184 

7 

1,346 

908 

2,411 

Gain on Sale of Real Estate

166 

- 

- 

- 

- 

166 

        Net Income

 $

132 

 $

184 

 $

7 

 $

1,346 

 $

908 

 $

2,577 

** **

 

 

 

 

 

 

**Parkway’s Share of  Unconsolidated**

 

 

 

 

 

 

**        Joint Ventures:**

 

 

 

 

 

 

Income (Loss) Before Gain on  Sale of Real Estate

 $

(11)

 $

93 

 $

2 

 $

390 

$

308 

 $

782 

Gain on Sale of Real Estate

50 

- 

- 

- 

- 

50 

Net Income

 $

39 

 $

93 

 $

2 

 $

390 

 $

308 

 $

832 

Depreciation and  Amortization

 $

- 

 $

9 

 $

 82 

 $

 297 

 $

103 

 $

491 

Property Management Fees

 $

- 

 $

- 

 $

103 

 $

259 

 $

124 

 $

486 

Incentive Fee

 $

27 

 $

- 

 $

- 

 $

- 

 $

- 

 $

27 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense 

 $

- 

 $

8 

 $

110 

 $

265 

 $

- 

 $

383 

Loan Cost Amortization

 $

- 

 $

2 

 $

- 

 $

6 

 $

- 

 $

8 

** **

 

 

 

 

 

 

**Other Supplemental  Information:**

 

 

 

 

 

 

Distributions from  Unconsolidated JVs

 $

89 

 $

- 

 $

69 

 $

660 

 $

173 

 $

991 

** **

Page  16 of 40
 
 

 

 

 

**(9)           Capitaland Financing Transactions**

 

As of September 30, 2008, the Company had a total of $180.3million outstanding under the line of credit and was in compliance with allloan covenants under each credit facility.  Company’s line of credit allowsParkway to borrow up to a combined $311.0 million at either the 30-day LIBORinterest rate plus 130 basis points or the Prime interest rate plus 25 basispoints.  At September 30, 2008, all amounts outstanding under the line ofcredit with interest rates not fixed by interest rate swap agreements areborrowed against the Prime interest rate plus 25 basis points.  Based on theloan covenants, the Company had $40.8 million in additional capacity availableon the line of credit as of September 30, 2008.

 

                Inconnection with the Ohio PERS Fund I investments during the first quarter of2008 discussed in “Note 4 – Acquisitions and Dispositions”, total non–recoursefirst mortgage debt was placed in the amount of $142.2 million at a weightedaverage interest rate of 5.7%.  The portion of mortgage debt attributable to thefund was $129.2 million, and $13.0 million was attributable to Parkway.  Themortgages are secured by the respective properties, have one to three yearinterest only periods and mature in 2016.

 

                OnFebruary 1, 2008, the Company paid off two mortgage notes payable secured bythe 400 North Belt and Woodbranch buildings in Houston, Texas with a totalprincipal balance of $3.5 million with advances under the line of credit.  Themortgages had an interest rate of 8.25% and were scheduled to mature on August1, 2011.  The Company recognized a total of $401,000 in expense associated withthe prepayment of these mortgages.

 

On May 2, 2008, the Company completed a $60.0 millionrecourse mortgage loan related to the refinance of a $41.4 million mortgagethat was scheduled to mature in September 2008.  The loan is secured by theCompany’s Capital City Plaza building in Atlanta, Georgia.  The interest rateon the loan is a variable rate based on LIBOR plus 165 basis points.  The loanterm is for two years, with a one-year extension option at the Company’sdiscretion. The excess loan proceeds of $18.4 million were used to pay down theCompany’s line of credit.  The Company recorded a gain on the prepayment of $388,000associated with the write off of the debt premium in the second quarter of2008.  The mortgage represented the Company’s only outstanding maturity in2008.  

 

                Duringthe second quarter of 2008, the Company entered into the following interestrate swap agreements:

 

▪    Interest rate swap agreement withRegions Bank for a $100 million notional amount that fixes the 30-day LIBORinterest rate at 3.635%, which equates to a total interest rate of 4.935%, forthe period January 1, 2009, through March 31, 2011. The swap agreement servesas a hedge of the variable interest rates on a portion of the borrowings underthe Company’s line of credit.

 

▪   Interest rate swap agreement withUS Bank for a $23.5 million notional amount that fixes the 30-day LIBORinterest rate at 4.05%, which equates to a total interest rate of 5.55%, forthe period January 1, 2009, through December 1, 2014. The swap agreement servesas a hedge of the variable interest rates on the borrowings under the Pinnacleat Jackson Place Senior New Market Tax Credits mortgage loan.

 

                Inconnection with the sale of Capitol Center in Columbia, South Carolina, onSeptember 5, 2008, the Company paid off the $18.1 million mortgage note payablesecured by the property and recorded mortgage prepayment expenses of $2.1million in the third quarter of 2008, which is included in discontinuedoperations.  The mortgage had an interest rate of 8.18% and was previouslyscheduled to mature on September 1, 2010.

Page  17 of 40
 
 

 

 

 

**(10)         MinorityInterest – Real Estate Partnerships**

** **

The Company has an interest in two joint ventures thatare included in its consolidated financial statements. Information relating tothese consolidated joint ventures is 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%

157

      Peachtree  Ridge

Atlanta, GA

25.000%

163

      Overlook  II

Atlanta, GA

25.000%

261

      Citicorp  Plaza

Chicago, IL

40.000%

600

      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

 

 

2,717

 

 

 

 

Total Consolidated Joint  Ventures

 

 

2,892

 

Moore Building Associates, LP (“MBALP”) wasestablished for the purpose of owning a commercial office building (the ToyotaCenter in Memphis, Tennessee).  In acting as the general partner, Parkway iscommitted to providing additional funding to meet partnership operatingdeficits up to an aggregate amount of $1 million.  Parkway receives income fromMBALP in the form of interest from a construction note receivable, incentivemanagement fees and property management fees.  Parkway also receives interestincome on a note receivable from Parkway Moore, LLC (“PMLLC”).  Anyintercompany asset, liability, revenue and expense accounts between Parkway andMBALP and PMLLC have been eliminated.

 

Parkway serves as the general partner of ParkwayProperties Office Fund, LP (“Ohio PERS Fund I”) and provides asset management,property management, leasing and construction management services to the fund,for which it is paid market-based fees.  Cash distributions from the fund aremade to each joint venture partner based on their percentage of ownership in thefund.  Since Parkway is the sole general partner and has the authority to makemajor decisions on behalf of the fund, Parkway is considered to have acontrolling interest.  Accordingly, Parkway is required to consolidate the fundin its consolidated financial statements.  As of February 15, 2008, Ohio PERS FundI was fully invested.

 

Minority interest in real estate partnershipsrepresents the other partners’ proportionate share of equity in thepartnerships discussed above at September 30, 2008.  Income is allocated tominority interest based on the weighted average percentage ownership during theyear.

 

On May 14, 2008, Parkway formed Parkway PropertiesOffice Fund II, LP (“Texas Teachers Fund II”), a $750 million discretionaryfund with the Teacher Retirement System of Texas (“TRS”), for the purpose ofacquiring high-quality multi-tenant office properties.   TRS will be a 70%investor, and Parkway will be a 30% investor in the fund, which will becapitalized with approximately $375 million of equity capital and $375 millionof non-recourse, fixed-rate first mortgage debt.  Parkway’s share of the equitycontribution for the fund will be $112.5 million and will be funded withproceeds from sales, line of credit advances and/or sales of equity securities. The fund will target investments in office buildings in Houston, Austin, SanAntonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville,Jacksonville, Orlando, Tampa/St. Petersburg, Ft. Lauderdale, as well as othergrowth markets to be determined at Parkway’s discretion.

Page  18 of 40
 
 

 

Parkway will serve as the general partner of TexasTeachers Fund II and will provide asset management, property management, andleasing and construction management services to the fund for which it will bepaid market-based fees.  Parkway will have four years to identify and acquireproperties, with funds contributed as needed to complete acquisitions.  Parkwaywill exclusively represent the fund in making acquisitions within the targetmarkets and within certain predefined criteria.  Parkway may continue to makefee-simple acquisitions in markets outside of the target markets, acquireproperties within the target markets that do not meet the fund’s specificcriteria or sell any currently owned properties.  As of September 30, 2008,there have been no acquisitions of assets on behalf of Texas Teachers Fund II.

 

**(11)         ShareBased Compensation**

 

                EffectiveJanuary 1, 2003, the stockholders of the Company approved Parkway’s 2003 EquityIncentive Plan (the “2003 Plan”) that authorized the grant of up to 200,000equity based awards to employees of the Company.  At present, it is Parkway’sintention to grant restricted shares and/or deferred incentive share unitsinstead of stock options.  Restricted shares and deferred incentive share unitsare valued based on the New York Stock Exchange closing market price of Parkwaycommon shares (NYSE ticker symbol, PKY) as of the date of grant.

 

                Compensationexpense, including estimated forfeitures, is recognized over the expectedvesting period, which is four to seven years from grant date for restrictedshares subject to service conditions and four years from grant date for deferredincentive share units.  Certain restricted shares have been granted to officersof the Company where vesting is contingent upon achieving the cumulative goalsof the GEAR UP Plan, which began January 1, 2006 and ends December 31, 2008. Compensation expense will not be recorded on the shares that vest based on performanceconditions until the Company determines that it is probable that the goal willbe achieved.  Therefore, no expense has been recorded in 2006, 2007 and 2008for these shares.

 

Compensation expense related to restricted shares anddeferred incentive share units of $1.4 million and $1.1 million was recognizedfor the nine months ended September 30, 2008 and 2007, respectively.  Totalcompensation expense related to nonvested awards subject to service conditions notyet recognized was $4.0 million as of September 30, 2008.  The weighted averageperiod over which this expense is expected to be recognized is approximately 2.3years.  Total potential compensation expense associated with shares that vestbased on performance conditions is $1.5 million as of September 30, 2008.

 

                Restrictedshares and deferred incentive share units are forfeited if an employee leavesthe Company before the vesting date.  Shares and/or units that are forfeitedbecome available for future grant under the 2003 Plan.

 

                Duringthe nine months ended September 30, 2008, the Board of Directors approved thegrant of 38,017 restricted shares to officers of the Company.  The shares werevalued at $1.2 million and 36,975 shares will vest four years from grant dateand 1,042 shares will vest subject to achievement of the cumulative goals ofthe GEAR UP plan, which will end on December 31, 2008.  

 

                Asummary of the Company’s restricted shares and deferred incentive share unitactivity for the nine months ended September 30, 2008 is as follows:

 

 

** **

**Weighted**

** **

**Weighted**

 

** **

**Average**

**Deferred**

**Average**

 

**Restricted**

**Grant-Date**

**Incentive**

**Grant-Date**

 

**Shares**

**Fair Value**

**Share Units**

**Fair Value**

Outstanding  at December 31, 2007

220,999

$40.72

21,835 

$45.96

Granted

38,017

32.39

- 

-

Forfeited

-

-

(2,230)

46.10

Outstanding  at September 30, 2008

259,016

$39.50

19,605 

$45.95

Page  19 of 40

 

 

 

**(12)         SegmentInformation**

 

                Parkway’sprimary business is the ownership and operation of office properties. TheCompany accounts for each office property or groups of related officeproperties as an individual operating segment.  Parkway has aggregated itsindividual operating segments into a single reporting segment due to the factthat the individual operating segments have similar operating and economiccharacteristics.

 

                TheCompany believes that the individual operating segments exhibit similareconomic characteristics such as being leased by the square foot, sharing thesame primary operating expenses and ancillary revenue opportunities and beingcyclical in the economic performance based on current supply and demandconditions.  The individual operating segments are also similar in thatrevenues are derived from the leasing of office space to customers and eachoffice property is managed and operated consistently in accordance withParkway’s standard operating procedures.  The range and type of customer usesof our properties is similar throughout our portfolio regardless of location orclass of building and the needs and priorities of our customers do not varyfrom building to building. Therefore, Parkway’s management responsibilities donot vary from location to location based on the size of the building,geographic location or class.

 

The management of the Company evaluates theperformance of the reportable office segment based on funds from operationsapplicable to common shareholders (“FFO”).  Management believes that 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 byNAREIT as net income (computed in accordance with generally accepted accountingprinciples "GAAP"), excluding gains or losses from sales of propertyand extraordinary items under GAAP, plus depreciation and amortization, andafter adjustments to derive the Company’s pro rata share of FFO of consolidatedand unconsolidated joint ventures.  Further, the Company does not adjust FFO toeliminate the effects of non-recurring charges.  The Company believes that FFOis a meaningful supplemental measure of its operating performance becausehistorical cost accounting for real estate assets in accordance with GAAPimplicitly assumes that the value of real estate assets diminishes predictablyover time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting 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,combined with the required GAAP presentations, has been beneficial in improvingthe understanding 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 fund cash needs.  Funds from operations should not be consideredan alternative to net income as an indicator of the Company's operatingperformance or as an alternative to cash flow as a measure of liquidity.

 

Page  20 of 40

 

 

 

 

The following is a reconciliation of FFOand net income available to common stockholders for office properties and totalconsolidated entities for the three months ended September 30, 2008 and 2007. Amounts presented as “Unallocated and Other” represent primarily income andexpense associated with providing management services, corporate general andadministration expense, interest expense on unsecured lines of credit andpreferred dividends.

** **

 

**As of or for the three months ended**

**September 30, 2008**

 

**As of or for the three months ended**

**September 30, 2007**

 

**Office**

**Unallocated**

** **

 

**Office**

**Unallocated**

** **

 

**Properties**

**and Other**

**Consolidated**

 

**Properties**

**and Other**

**Consolidated**

 

 (in thousands) 

 

 (in thousands) 

 

 

 

 

 

 

 

 

Property operating revenues (a)

$

69,857 

$

- 

$

69,857 

 

$

57,322 

$

- 

$

57,322 

Property operating expenses (b)

(34,295)

- 

(34,295)

 

(26,727)

- 

(26,727)

Property net operating income from 

 

 

 

 

 

- 

 

        continuing operations

35,562 

- 

35,562 

 

30,595 

- 

30,595 

 

 

 

 

 

 

 

 

Management company income

- 

449 

449 

 

- 

432 

432 

Interest and other income

- 

346 

346 

 

- 

90 

90 

Interest expense (c)

(12,336)

(2,507)

(14,843)

 

(10,152)

(2,835)

(12,987)

Management company expenses

- 

(432)

(432)

 

- 

(343)

(343)

General and administrative expenses

- 

(2,055)

(2,055)

 

- 

(1,862)

(1,862)

Equity in earnings or unconsolidated joint ventures

255 

- 

255 

 

234 

- 

234 

Adjustment for depreciation and amortization -

 

 

 

 

 

 

 

        unconsolidated joint ventures

200 

- 

200 

 

169 

- 

169 

Adjustment for depreciation and amortization –

 

 

 

 

 

 

 

        discontinued operations

171 

- 

171 

 

798 

- 

798 

Adjustment for minority interest – 

 

 

 

 

 

 

 

        real estate partnerships

(2,427)

- 

(2,427)

 

(1,711)

- 

(1,711)

Income (loss) from discontinued operations

(2,001)

- 

(2,001)

 

760 

- 

760 

Loss on non depreciable assets

- 

- 

- 

 

(3)

- 

(3)

Dividends on preferred stock

- 

(1,200)

(1,200)

 

- 

(1,200)

(1,200)

Funds from operations available 

 

 

 

 

 

 

 

        to common stockholders

19,424 

(5,399)

14,025 

 

20,690 

(5,718)

14,972 

 

 

 

 

 

 

 

 

Depreciation and amortization

(22,755)

- 

(22,755)

 

(18,896)

- 

(18,896)

Depreciation and amortization –

 

 

 

 

 

 

 

        unconsolidated joint ventures

(200)

- 

(200)

 

(169)

- 

(169)

Depreciation and amortization –

 

 

 

 

 

 

 

        discontinued operations

(171)

- 

(171)

 

(798)

- 

(798)

Depreciation and amortization - minority

 

 

 

 

 

 

 

        interest - real estate partnerships

5,011 

- 

5,011 

 

2,799 

- 

2,799 

Gain on sale of real estate from 

 

 

 

 

- 

- 

- 

        discontinued operations

22,588 

- 

22,588 

 

- 

- 

- 

Minority interest – unit holders

- 

- 

- 

 

- 

(2)

(2)

Net income (loss) available to common

 

 

 

 

 

 

 

        stockholders

 $

23,897 

 $

(5,399)

 $

18,498 

 

 $

3,626 

 $

(5,720)

 $

(2,094)

 

 

 

 

 

 

 

 

Capital expenditures (d)

 $

9,750 

 $

- 

 $

9,750 

 

 $

10,951 

 $

- 

 $

10,951 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

(c)    Interest expense for office properties  represents interest expense on property secured mortgage debt and interest on  subsidiary redeemable preferred                                                                                                                                                                                  membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in “Unallocated and Other”.

 

(d)   Capital expenditures include building  improvements, tenant improvements and deferred leasing costs.

 

Page  21 of 40

 

 

 

The following is a reconciliation of FFOand net income available to common stockholders for office properties and totalconsolidated entities for the nine months ended September 30, 2008 and 2007. Amounts presented as “Unallocated and Other” represent primarily income andexpense associated with providing management services, corporate general andadministration expense, interest expense on unsecured lines of credit andpreferred dividends.

** **

 

**As of or for the nine months ended**

**September 30, 2008**

 

**As of or for the nine months ended**

**September 30, 2007**

 

**Office**

**Unallocated**

** **

 

**Office**

**Unallocated**

** **

 

**Properties**

**and Other**

**Consolidated**

 

**Properties**

**and Other**

**Consolidated**

 

 (in thousands) 

 

 (in thousands) 

 

 

 

 

 

 

 

 

Property operating revenues (a)

 $

198,144 

 $

- 

 $

198,144 

 

 $

173,461 

 $

- 

 $

173,461 

Property operating expenses (b)

(95,708)

- 

(95,708)

 

(80,722)

- 

(80,722)

Property net operating income from 

 

 

 

 

 

 

 

        continuing operations

102,436 

- 

102,436 

 

92,739 

- 

92,739 

 

 

 

 

 

 

 

 

Management company income

- 

1,356 

1,356 

 

- 

1,196 

1,196 

Interest and other income

- 

1,020 

1,020 

 

- 

308 

308 

Interest expense (c)

(36,095)

(8,859)

(44,954)

 

(30,770)

(8,572)

(39,342)

Management company expenses

- 

(1,353)

(1,353)

 

- 

(887)

(887)

General and administrative expenses

- 

(6,443)

(6,443)

 

- 

(5,109)

(5,109)

Equity in earnings of unconsolidated joint ventures

802 

- 

802 

 

782 

- 

782 

Adjustment for depreciation and amortization –

 

 

 

 

 

 

 

        unconsolidated joint ventures

555 

- 

555 

 

491 

- 

491 

Adjustment for depreciation and amortization – 

 

 

 

 

 

 

 

        discontinued operations

1,873 

- 

1,873 

 

2,352 

- 

2,352 

Adjustment for minority interest – 

 

 

 

 

 

 

 

        real estate partnerships

(6,985)

- 

(6,985)

 

(4,899)

- 

(4,899)

Income (loss) from discontinued operations

(760)

- 

(760)

 

1,929 

- 

1,929 

Gain on non depreciable assets

- 

- 

- 

 

47 

- 

47 

Dividends on preferred stock

- 

(3,600)

(3,600)

 

- 

(3,600)

(3,600)

Funds from operations available 

 

 

 

 

 

 

 

        to common stockholders

61,826 

(17,879)

43,947 

 

62,671 

(16,664)

46,007 

 

 

 

 

 

 

 

 

Depreciation and amortization

(66,659)

- 

(66,659)

 

(55,722)

- 

(55,722)

Depreciation and amortization –

 

 

 

 

 

 

 

        unconsolidated joint ventures

(555)

- 

(555)

 

(491)

- 

(491)

Depreciation and amortization - 

 

 

 

 

 

 

 

        discontinued operations

(1,873)

- 

(1,873)

 

(2,352)

- 

(2,352)

Depreciation and amortization - minority

 

 

 

 

 

 

 

        interest - real estate partnerships

14,119 

- 

14,119 

 

7,474 

- 

7,474 

Gain on sale of real estate from 

 

 

 

 

 

 

 

        discontinued operations

22,588 

- 

22,588 

 

20,260 

- 

20,260 

Minority interest – unit holders

- 

- 

- 

 

- 

(2)

(2)

Net income available to common

 

 

 

 

 

 

 

 

 

 

 

 

 

        stockholders

 $

29,446 

 $

(17,879)

 $

11,567 

 

 $

31,840 

 $

(16,666)

 $

15,174 

 

 

 

 

 

 

 

 

Total assets

 $

1,683,918 

 $

13,582 

 

1,697,500 

 

 $

1,519,751 

 $

8,142 

 $

1,527,893 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office and parking properties

 $

1,461,533 

 $

- 

 $

1,461,533 

 

 $

1,316,172 

 $

- 

 $

1,316,172 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 $

11,152 

 $

- 

 $

11,152 

 

 $

11,068 

 $

- 

 $

11,068 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (d)

 $

28,979 

 $

- 

 $

28,979 

 

 $

35,943 

 $

- 

 $

35,943 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

(c)    Interest expense for office properties  represents interest expense on property secured mortgage debt and interest on  subsidiary redeemable preferred                                                                                                                                                                                  membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in “Unallocated and Other”.

 

(d)   Capital expenditures include building  improvements, tenant improvements and deferred leasing costs.

 

Page  22 of 40

 

 

 

**(13)         Hurricane Ike Impact**

 

                The Company has 13 wholly-owned properties and onejointly-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 between $6.5 millionto $7.5 million.  The Company estimates that its insurance deductible relatedto these claims will be approximately $3.0 million to $3.5 million. Approximately $640,000 is estimated to represent repair and clean up costs withthe remainder representing capitalized costs.  The Company expects to record anet gain of approximately $1.0 million related to an involuntary conversion ofthe damaged assets.  The Company will record this gain upon final settlement ofthe hurricane claim with its insurance carrier.  

** **

**(14)         SubsequentEvent**

** **

**               **On October 29, 2008, the Company exercised its rightto extend the maturity date of $236.0 million of its $311.0 million line ofcredit to April 2011.  The Company paid a one-time extension fee of $354,000that will be amortized over the remaining term of the line of credit.

** **

**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 **Overview**

 

Parkway is a self-administered and self-managed REITspecializing in the operation, leasing, acquisition and ownership of officeproperties.  The Company performs these services for its own account and forother institutional investors through co-ownership structures such asdiscretionary funds and/or partnerships.  The Company is geographically focusedon the Southeastern and Southwestern United States and Chicago.  Currently,Parkway owns or has an interest in 66 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 3.8 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 highlights 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 manages and/or leases approximately 1.8 million square feet forthird party owners as of October 1, 2008. A significant phase of thetransformation to an operator-owner is currently under way through theCompany’s GEAR UP Plan, which started January 1, 2006 and ends December 31,2008.  The Company generates revenue primarily by leasing office space to itscustomers and providing management and leasing services to third party officeproperty owners (including joint venture interests).  The primary driversbehind Parkway’s revenues are occupancy, rental rates and customer retention.  

*Occupancy*.  Parkway’s revenues are dependent on the occupancy of itsoffice buildings.  As of October 1, 2008, occupancy of Parkway’s office portfoliowas 90.4% compared to 91.3% as of July 1, 2008 and 92.3% as of October 1, 2007. Not included in the October 1, 2008 occupancy rate are 27 signed leasestotaling 111,000 square feet, which commence during the fourth quarter of 2008through the second quarter of 2009 and will raise Parkway’s percentage leasedto 91.2%  To combat rising vacancy, Parkway utilizes innovative approaches toproduce new leases.  These include the Broker Bill of Rights, a short-formservice agreement and customer advocacy programs which are models in theindustry and have helped the Company maintain occupancy around 90% during atime when the national occupancy rate is approximately 86%.

*****Rental Rates.*  An increase in vacancy rates has the effect ofreducing market rental rates and vice versa.  Parkway’s leases typically havethree to seven year terms.  As leases expire, the Company replaces the existingleases with new leases at the current market rental rate.  As of October 1,2008, Parkway had $1.14 per square foot in rental rate embedded growth in itsoffice property leases.  Embedded growth is defined as the difference betweenthe weighted average in place cash rents and the weighted average market rentalrate.   

 

Page  23 of 40
*Customer Retention*.  Keeping existing customers is important as highcustomer retention leads to increased occupancy, less downtime between leases,and reduced leasing costs.  Parkway estimates that it costs five to six timesmore to replace an existing customer with a new one than to retain thecustomer.  In making this estimate, Parkway takes into account the sum ofrevenue lost during downtime on the space plus leasing costs, which rise asmarket vacancies increase.  Therefore, Parkway focuses a great deal of energyon customer retention.  Parkway's operating philosophy is based on the premisethat it is in the customer retention business.  Parkway seeks to retain itscustomers by continually focusing on operations at its office properties.  TheCompany believes in providing superior customer service; hiring, training,retaining and empowering each employee; and creating an environment of open communicationboth internally and externally with customers and stockholders.  Over the pastten years, Parkway maintained an average 73% customer retention rate. Parkway’s customer retention for the three months and nine months ended September30, 2008 was 66.7% and 71.5% respectively, compared to 69.8% and 69.3% for thethree months and nine months ended September 30, 2007, respectively.
*Strategic Planning*.   Parkway is a focused office REIT with ahands-on, service-oriented approach, a disciplined asset allocation program anda willingness to recycle assets.  However, we see the future transformationtaking Parkway from being an owner-operator to being an operator-owner.  OnJanuary 1, 2006, the Company initiated a new three-year operating plan referredto as the “GEAR UP” Plan that will serve as the spring board to transformParkway from being first an owner of real estate and secondarily an operator ofreal estate for others to being first an operator of real estate for othersthat also owns an interest in the real estate.  The goals of the GEAR UP Planare as follows:

 

▪   ***Great People***.  Great customer service starts with hiring greatpeople, training them well and retaining them.  It will take great people toaccomplish the ambitious goals of the Plan.

 

▪   ***Equity Opportunities***.  Over the last several years management has createda broad array of equity opportunities for Parkway.  On the private equity sidethis includes the use of discretionary funds, such as the funds with Ohio PERSand the Teacher Retirement System of Texas, and partnerships.  The judicioususe of private equity provides a greater return on equity to the publicshareholders. Parkway intends to contribute assets from its balance sheet toform new joint ventures and expects these subsequent ventures to be similar todiscretionary funds in their duration and economics. On the public equity side,this includes the judicious use of common equity and preferred equity to managethe balance sheet and growth.  

 

▪    ***Asset Recycling***. The Company has demonstrated its willingness in thepast to sell assets when management believed the time was right.  At the startof the GEAR UP Plan, Parkway identified 25 buildings in twelve markets,totaling approximately 5 million rentable square feet to be part of the asset recyclingprogram.  Most of these properties are smaller assets or located in smallermarkets that do not fit with the Company strategy of owning larger assets ininstitutional markets.  The dispositions that are planned will help align theCompany’s portfolio with its current acquisition criteria, which focuses onlarger properties in institutional markets.  In most cases, Parkway will seekto keep a 10% to 30% joint venture interest in the properties being recycledand retain management and leasing agreements.  This is a fluid list of assetsbased on the Company’s evaluation of specific market conditions and review ofthe portfolio.  The other side of Asset Recycling is the reinvestment ofproceeds from dispositions into other assets, either owned in the fee-simpleformat or owned jointly with a partner.

 

                Thesetwo goals, ***Equity Opportunities*** and ***Asset Recycling***,are what combine to transform Parkway from being an owner-operator to being anoperator-owner.  Management strongly believes that these actions will result inParkway better leveraging its core strength of operating office properties andwill be advantageous for the Company’s shareholders over the long term.  Sowhether we are in  an economy characterized by growth or recession, we believe purchasingassets with a good partner and leveraging our operating expertise throughearning recurring fees allows us to increase our core portfolio in larger andmore institutional markets and increase our earnings potential from theservices provided.

 

▪   ***Retain Customers***.  Customer retention remains the cornerstone of theCompany’s business and is why partners choose to partner with Parkway.  Thegoal is a customer retention rate of 70% to 75%.  The average customerretention rate since the inception of the GEAR UP Plan on January 1, 2006 is 71%,and we anticipate that the annual customer retention rate for 2008 will be inthe range of 70% to 75%.

 

Page  24 of 40

 

 

 

▪    ***Uncompromising Focus onOperations***.  Parkway isreaffirming its commitment to do that which it does best, and that is tooperate office properties for maximum returns.

 

▪    ***Performance***.  In the planning process, management first decidedwhat actions to take strategically over the three years of the GEAR UP Plan andsecondly, modeled the economic impact of these actions.  Given the largecomponent of Asset Recycling in the Plan, management selected a financialmetric that would be most appropriate to measure the success of the Plan.  This led to the adoption of Cumulative Adjusted Funds Available forDistribution (“Cumulative Adjusted FAD”) as the metric for the GEAR UP Plan,with a target of $7.18 per share cumulative over three years.  Actual AdjustedFAD for 2006 and 2007 exceeded the amount projected by the Company at thebeginning of the Plan.   Management set an internal target for fixed chargecoverage before principal payments of 2.5 times as a measure of leverage forthe plan.  While not a requirement in the plan, this self-imposed target servesto prevent the performance goals being met by over-leveraging the Company.

 

For the GEAR UP Plan, Parkway is not abandoning Fundsfrom Operations, but rather carrying it a step further to includeaccountability for capital items and removing the accounting adjustments whichare not directly influenced by the operations of its properties.  Management believes an Adjusted FAD goal provides an effective alignment withthe shareholders by focusing the team on maximizing income from operationswhile being mindful of capital expenses and ultimately the funds available tocover the dividend.   Cumulative Adjusted FAD is calculated as thesum of Adjusted FAD for each of the three years of the plan.   The adjustments that will be made to FAD reported each quarterprincipally include charges for impairment of value and expenses related to theearly extinguishment of debt.  

 

                Parkwayhas made progress on its ***Asset Recycling*** and ***EquityOpportunities*** goals in 2006, 2007 and 2008 as follows:

 

▪    *Dispositions*.   Parkway sold thirteen office properties for agross sales price totaling $240.1 million and recorded a total gain on thesales for financial reporting purposes in the amount of $65.7 million.

 

▪    *Fund I Acquisitions*.  The Ohio PERS Fund I and Parkway purchased elevenoffice properties at an aggregate contract purchase price of $465.9 million, whichis comprised of investments by the fund totaling $444.3 million plus anadditional investment by Parkway of $21.6 million.  The Ohio PERS Fund I wasfully invested as of February 15, 2008.

* *

▪    *Fund II Formation. *On May 14, 2008, Parkway entered into a $750 milliondiscretionary fund with the Teacher Retirement System of Texas (“TRS”) for thepurpose of acquiring office properties.  TRS is a 70% investor and Parkway is a30% investor.    

 

▪    *Fee Simple Purchases*.  Parkway purchased One Illinois Center in Chicago, Illinois at a contract purchase price of $198 million.

 

▪   *Other Purchases*.  Parkway purchased an additional interest in MooreBuilding Associates, LP, which owns the Toyota Center in Memphis, Tennessee, for $1.4 million raising Parkway’s total ownership interest to 75.025%.

 

▪    *Equity Offering*.  On December 18, 2006, the Company sold 600,000shares of common stock to Banc of America Securities LLC at a gross offeringprice of $50.25 per share and a net price of $49.37 per share. The Company usedthe net proceeds of approximately $29.6 million to repay indebtednessoutstanding under a $19.3 million mezzanine loan incurred in connection withthe purchase of One Illinois Center and to make additional investments inoffice properties.

* *

▪    *Stock Buyback*.  On August 3, 2007, the Board of Directorsauthorized the repurchase of up to 1.7 million shares of Parkway’s outstandingcommon stock through July 30, 2008.  During 2007, the Company purchased approximately687,000 shares of Parkway common stock under this authorization for $29.1 million,which equates to an average price of $42.36 per share.

 

Page  25 of 40

 

 

*DiscretionaryFunds*.  On July 6, 2005, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $500 million discretionary fund with Ohio PERS (“Ohio PERS Fund I”) forthe 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 million of equity capital and $300 millionof non-recourse, fixed-rate first mortgage debt.  As of February 15, 2008, the OhioPERS Fund I was fully invested.

 

                TheOhio PERS Fund I targeted properties with an anticipated leveraged internalrate of return of greater than 11%.  Parkway serves as the general partner of thefund and provides asset management, property management, leasing andconstruction management services to the fund, for which it is paid market-basedfees.  After each partner has received a 10% annual cumulative preferred returnand a return of invested capital, 20% of the excess cash flow will be paid tothe general partner and 80% will be paid to the limited partners.    Throughits general partner and limited partner ownership interests, Parkway mayreceive a distribution of the cash flow equivalent to 40%.  The term of OhioPERS Fund I will be seven years until February 2015, with provisions to extendthe term for two additional one-year periods. 

 

On May 14, 2008, Parkway, through affiliated entities,entered into a limited partnership agreement forming a $750 milliondiscretionary fund, known as Parkway Properties Office Fund II, L.P., (“TexasTeachers Fund II”) with the Teacher Retirement System of Texas (“TRS”) for thepurpose of acquiring high-quality multi-tenant office properties.  TRS is a 70%investor and Parkway is a 30% investor in the fund, which will be capitalizedwith approximately $375 million of equity capital and $375 million ofnon-recourse, fixed-rate first mortgage debt.  Parkway’s share of the equitycontribution for the fund will be $112.5 million and will be funded withproceeds from sales, line of credit advances and/or sales of equity securities. The Texas Teachers Fund II targets acquisitions in the core markets of Houston,Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville,Jacksonville, Orlando, Tampa/St. Petersburg,  and other growth markets to bedetermined by Parkway.

 

The Texas Teachers Fund II targets properties with ananticipated leveraged internal rate of return of greater than 10%.  Parkwayserves as the general partner of the fund and provides asset management,property management, leasing and construction management services to the fund,for which it will be paid market-based fees.  Cash will be distributed pro ratato each partner until a 9% annual cumulative preferred return is received andinvested capital is returned.  Thereafter, 56% will be distributed to TRS and44% to Parkway.  Parkway has four years from the inception date of TexasTeachers Fund II to identify and acquire properties (the “Investment Period”),with funds contributed as needed to close acquisitions.  Parkway willexclusively represent the fund in making acquisitions within the target marketsand acquisitions with certain predefined criteria.  Parkway will not beprohibited from making fee-simple or joint venture acquisitions in marketsoutside of the target markets, acquiring properties within the target marketsthat do not meet Texas Teachers Fund II’s specific criteria or selling or jointventuring currently owned properties.  The term of Texas Teachers Fund II willbe seven years from the expiration of the Investment Period, with provisions toextend the term for two additional one-year periods at the discretion ofParkway.

** **

**FinancialCondition**

***Comments are for the balance sheet dated September 30, 2008 compared tothe balance sheet dated December 31, 2007.***

 

*                Officeand Parking Properties.*  In 2008,Parkway continued the application of its strategy of operating and acquiringoffice properties, joint venturing interests in office assets, as well asliquidating non-core assets and office assets that no longer meet the Company’sinvestment criteria and/or the Company has determined value will be maximizedby selling.  During the nine months ended September 30, 2008, total assets increased$161.7 million or 10.5% and office and parking properties (before depreciation)increased $144.6 million or 9.3%.

                *Purchases, Dispositions, Improvements and Development.* Parkway’sinvestment in office and parking properties and office property development increased$146.9 million net of depreciation to a carrying amount of $1.5 billion at September30, 2008, and consisted of 60 office and parking properties and one officeproperty development.  The primary reason for the increase in office andparking properties relates to the net effect of the purchase of office properties,building improvements, development costs, the sale of three office properties, anddepreciation recorded during the year.

 

                

Page  26 of 40

 

During the nine months ended September 30, 2008, theCompany incurred $22.5 million in development costs for the construction of ThePinnacle at Jackson Place, which is a 192,000 square foot Class A+ officebuilding development adjacent to the Company’s headquarters building inJackson, Mississippi.  The estimated cost of the development is $48.5 millionwith expected completion in the fall of 2008.  The Company has receivedcommitments to lease approximately 82% of the new office space.  Parkway isconsidering a joint venture structure for the development whereby Parkway willretain an ownership interest of approximately 25%.  The development is designedto utilize benefits available under the Gulf Opportunity Zone Act for newdevelopments in areas affected by Hurricane Katrina.

                

                OnJanuary 18, 2008, Ohio PERS Fund I, of which Parkway owns 25%, purchasedGateway Center, a 228,000 square foot office property in the central businessdistrict of Orlando, Florida for a purchase price of $55.0 million.  The fundexpects to spend an additional $2.8 million for closing costs, buildingimprovements, leasing costs and tenant improvements during the first two yearsof ownership.  The purchase was funded with a $33.0 million first mortgageplacement by the fund and with equity contributions from the partners.  

 

                OnJanuary 31, 2008, the Company purchased Desert Ridge Corporate Center, a293,000 square foot office project in Phoenix, Arizona for a purchase price of$81.6 million on behalf of Ohio PERS Fund I.  An additional $2.3 million isexpected to be spent for closing costs, building improvements, leasing costsand tenant improvements during the first two years of ownership.  The purchasewas funded with a $49.2 million first mortgage placement and with equitycontributions from the partners.  Due to Ohio PERS Fund I’s $80.0 million limiton a single investment, Parkway’s effective ownership interest in this asset is26.5%.   

 

                OnFebruary 15, 2008, the Company purchased Citicorp Plaza, a 600,000 square footoffice project in Chicago, Illinois for a purchase price of $100.0 million onbehalf of Ohio PERS Fund I.  An additional $9.2 million is expected to be spentfor closing costs, building improvements, leasing costs and tenant improvementsduring the first two years of ownership.  The purchase was funded with a $60.0million first mortgage placement and with equity contributions from thepartners.  Due to Ohio PERS Fund I’s $80.0 million limit on a singleinvestment, Parkway’s effective ownership interest in this asset is 40%.

 

                Duringthe third quarter of 2008, the Company sold three non-strategic officeproperties described below.  The Company received gross proceeds of $86.3million and recorded gains on sale of $22.6 million.  The net proceeds from thesales were used to extinguish $18.1 million in first mortgage debt secured byCapitol Center and related prepayment expenses of $2.1 million and reduceamounts outstanding under the bank line of credit.  In accordance withgenerally accepted accounting principles, the gains on sale and all current andprior period income have been classified to discontinued operations.

 

▪    On July 15, 2008, the Company soldTown Point Center, a 131,000 square foot office building in Norfolk, Virginia,to an unrelated third party for a gross sales price of $12.8 million.  Parkway recordeda gain on the sale of $1.6 million in the third quarter of 2008.

 

▪   On August 18, 2008, the Companysold Wachovia Plaza, a 186,000 square foot office building in St. Petersburg,Florida, to an unrelated third party for a gross sales price of $26.0 million.  Parkwayrecorded a gain on the sale of $9.3 million in the third quarter of 2008.

 

▪   On September 5, 2008, the Companysold Capitol Center, a 460,000 square foot office building in Columbia, SouthCarolina, to an unrelated third party for a gross sales price of $47.5 million. Parkway recorded a gain on the sale of $11.7 million in the third quarter of2008.

 

                Duringthe nine months ended September 30, 2008, the Company capitalized buildingimprovements and additional purchase expenses of $23.0 million and recordeddepreciation expense of $49.7 million related to its office and parkingproperties.

 

Page  27 of 40
 
 

*Intangible Assets, Net.* For the nine months ended September 30, 2008, intangible assets net of relatedamortization increased $12.6 million or 17.8% and was primarily due to the neteffect of the purchase of three office investments during the period andamortization of the existing intangible assets for the period.

 

*                NotesPayable to Banks. *Notes payable tobanks decreased $32.0 million or 15.1% during the nine months ended September30, 2008.  At September 30, 2008, notespayable to banks totaled $180.3 million and the net decrease is primarilyattributable to proceeds received from refinancing the mortgage secured byCapital City Plaza in Atlanta, Georgia and the sale of three office properties,offset by advances under the line of credit to purchase and develop real estateand make improvements to office properties.

 

                OnMay 7, 2008, the Company entered into an interest rate swap agreement withRegions Bank.  The interest rate swap is for a $100 million notional amount andfixes the 30-day LIBOR interest rate at 3.635%, which equates to a totalinterest rate of 4.935% for the period January 1, 2009 through March 31, 2011. The swap serves as a hedge on the variable interest rates on a portion of the borrowingsunder the Company’s line of credit.

 

*                MortgageNotes Payable. *During the ninemonths ended September 30, 2008, mortgage notes payable increased $145.5 millionor 20.4% and is due to the net effect of scheduled principal payments onmortgages of $10.5 million, the prepayment of existing mortgage debt of $63.0million, the placement of mortgage debt of $202.2 million and advances onmortgage debt of $16.8 million to fund The Pinnacle development.

 

                OnFebruary 1, 2008, the Company paid off the mortgage notes payable secured bythe 400 North Belt and Woodbranch buildings in Houston, Texas, with a totalprincipal balance of $3.5 million with advances under bank lines of credit. The mortgages had an interest rate of 8.25% and were scheduled to mature onAugust 1, 2011.  The Company recognized a total of $401,000 in expenseassociated with the prepayment of these mortgages.  

 

                Inconnection with the Ohio PERS Fund I investments during the first quarter of2008 discussed under “Financial Condition – Office and Parking Properties –Purchases, Dispositions, Improvements and Development”,  total non–recoursefirst mortgage debt was placed in the amount of $142.2 million at a weightedaverage interest rate of 5.7%.  The portion of mortgage debt attributable to OhioPERS Fund I was $129.2 million and $13.0 million was attributable to Parkway. The mortgages are secured by the respective properties, have one to three yearinterest only periods and mature in 2016.

 

On April 4, 2008, the Company entered into an interestrate swap agreement with US Bank.  The interest rate swap is for a $23.5million notional amount and fixes the 30-day LIBOR interest rate at 4.05%,which equates to a total interest rate of 5.55%, for the period January 1, 2009through December 1, 2014.  The swap serves as a hedge of the variable interestrates on a portion of the mortgage debt placed on the Pinnacle development.

 

                OnMay 2, 2008, the Company completed a $60.0 million recourse mortgage loanrelated to the refinance of a $41.4 million mortgage that was scheduled tomature in September 2008.  The loan is secured by the Company’s Capital CityPlaza building in Atlanta, Georgia.  The interest rate on the loan is avariable rate based on LIBOR plus 165 basis points.  The loan term is for twoyears, with a one-year extension option at the Company’s discretion. The excessloan proceeds of approximately $18.4 million were used to pay down theCompany’s line of credit.  The Company recorded a gain on the prepayment ofapproximately $388,000 associated with the write off of the debt premium in thesecond quarter of 2008.  The mortgage represented the Company’s onlyoutstanding maturity in 2008.

 

                Inconnection with the sale of Capitol Center on September 5, 2008, the Companyprepaid the $18.1 million first mortgage plus $2.1 million in related mortgageprepayment expenses with proceeds received from the sale.

 

Page  28 of 40

 

 

 

 

 

 

 

 

 

                TheCompany expects to continue seeking fixed-rate, non-recourse mortgage financingwith maturities from five to ten years typically amortizing over 25 to 30 yearson select office building investments as additional capital is needed.  TheCompany targets a debt to total market capitalization rate at a percentage inthe range of 45% to 50%. This rate may vary at times pending acquisitions,sales and/or equity offerings.  In addition, volatility in the price of theCompany’s common stock may affect the debt to total market capitalizationratio.  However, over time the Company plans to maintain a percentage in therange of 45% to 50%.  The Company calculates this ratio by including itsproportionate share of any debt on assets held in funds and partnerships.  Inaddition to this debt ratio, the Company monitors interest, fixed charge andmodified fixed charge coverage ratios.  The interest coverage ratio is computedby comparing the cash interest accrued to earnings before interest, taxes,depreciation and amortization ("EBITDA"). The fixed charge coverageratio is computed by comparing the cash interest accrued, principal paymentsmade on mortgage loans and preferred dividends paid to EBITDA.  The modifiedfixed charge coverage ratio is computed by comparing cash interest accrued andpreferred dividends paid to EBITDA. In connection with the GEAR UP Plan,management set an internal target for the modified fixed charge coverage ratioof 2.5 times as a measure of leverage for the plan.  While not a requirement ofthe plan, this self-imposed target serves to prevent the performance goalsbeing met by over-leveraging the Company.  Management believes the debt tomarket capitalization, interest coverage, fixed charge coverage and modifiedfixed charge coverage ratios provide useful information on total debt levels aswell as the Company’s ability to cover interest, principal and/or preferreddividend payments with current income. As of September 30, 2008, Parkway’s debtto total market capitalization rate was 56.7% which is higher than theCompany’s target range of 45% to 50%.  The increase in the rate was dueprimarily to a stock price decrease.

 

                Thecomputation of the interest, fixed charge and modified fixed charge coverageratios and the reconciliation of net income to EBITDA is as follows for the ninemonths ended September 30, 2008 and 2007 (in thousands):

 

 

**Nine Months Ended**

 

**September 30**

 

**2008**

** **

**2007**

**Net  Income**

 $

15,167 

 

 $

18,774 

**Adjustments  to Net Income:**

 

 

 

        Interest  expense

44,647 

 

39,242 

        Amortization  of financing costs

1,322 

 

898 

        Prepayment  expense – early extinguishment of debt

2,153 

 

370 

        Depreciation  and amortization

68,532 

 

58,074 

        Amortization  of share based compensation

1,381 

 

1,114 

        Gain  on real estate and non depreciable assets

(22,588)

 

(20,307)

        Tax  expense

2 

 

129 

        EBITDA  adjustments - unconsolidated joint ventures

945 

 

882 

        EBITDA  adjustments - minority interest in real estate partnerships

(23,067)

 

(12,019)

**EBITDA  (1)**

 $

88,494 

 

 $

87,157 

** **

 

 

 

**Interest  Coverage Ratio:**

 

 

 

EBITDA

 $

88,494 

 

 $

87,157 

Interest  expense:

 

 

 

        Interest  expense

 $

44,647 

 

 $

39,242 

        Capitalized  interest

601 

 

115 

        Interest  expense - unconsolidated joint ventures

382 

 

383 

        Interest  expense - minority interest in real estate partnerships

(8,750)

 

(4,428)

Total  interest expense

 $

36,880 

 

 $

35,312 

**Interest  Coverage Ratio**

2.40 

 

2.47 

 

 

 

 

**Fixed  Charge Coverage Ratio:**

 

 

 

EBITDA

 $

88,494 

 

 $

87,157 

Fixed  charges:

 

 

 

        Interest  expense

 $

36,880 

 

 $

35,312 

        Preferred  dividends

3,600 

 

3,600 

        Principal  payments (excluding early extinguishment of debt)

10,481 

 

11,770 

        Principal  payments - unconsolidated joint ventures

40 

 

37 

        Principal  payments - minority interest in real estate partnerships

(250)

 

(229)

Total  fixed charges

 $

50,751 

 

 $

50,490 

**Fixed  Charge Coverage Ratio**

1.74 

 

1.73 

** **

 

 

 

**Modified  Fixed Charge Coverage Ratio:**

 

 

 

EBITDA

 $

88,494 

 

 $

87,157 

Modified  fixed charges:

 

 

 

        Interest  expense

 $

36,880 

 

 $

35,312 

        Preferred  dividends

3,600 

 

3,600 

Total  modified fixed charges

 $

40,480 

 

 $

38,912 

**Modified  Fixed Charge Coverage Ratio**

2.19 

 

2.24 

 

(1)           Parkwaydefines EBITDA, a non-GAAP financial measure, as net income before interest,income taxes, depreciation, amortization, losses on early extinguishment ofdebt and other gains and losses.  EBITDA, as calculated by us, is notcomparable to EBITDA reported by other REITs that do not define EBITDA exactlyas we do.

 

Page  29 of 40

 

 

 

 

                TheCompany believes that EBITDA helps investors and Parkway’s management analyzethe Company’s ability to service debt and pay cash distributions.  However, thematerial limitations associated with using EBITDA as a non-GAAP financialmeasure compared to cash flows provided by operating, investing and financingactivities are that EBITDA does not reflect the Company’s historical cash expendituresor future cash requirements for working capital, capital expenditures or thecash required to make interest and principal payments on the Company’soutstanding debt.  Although EBITDA has limitations as an analytical tool, theCompany compensates for the limitations by using EBITDA only to supplement GAAPfinancial measures.  Additionally, the Company believes that investors shouldconsider EBITDA in conjunction with net income and the other required GAAPmeasures of its performance and liquidity to improve their understanding ofParkway’s operating results and liquidity.  

 

                Parkwayviews EBITDA primarily as a liquidity measure and, as such, the GAAP financialmeasure most directly comparable to it is cash flows provided by operatingactivities.  Because EBITDA is not a measure of financial performancecalculated in accordance with GAAP, it should not be considered in isolation oras a substitute for operating income, net income, cash flows provided byoperating, investing and financing activities prepared in accordance withGAAP.  The following table reconciles EBITDA to cash flows provided byoperating activities for the nine months ended September 30, 2008 and 2007 (inthousands):

 

 

**Nine Months Ended**

 

**September 30**

 

**2008**

 

**2007**

 

 

 

 

EBITDA

 $

88,494 

 

 $

87,157 

 

 

 

 

Amortization  of above market leases

198 

 

754 

Amortization  of mortgage loan discount

(380)

 

- 

Operating  distributions from unconsolidated joint ventures

855 

 

902 

Interest  expense

(44,647)

 

(39,242)

Prepayment  expense early extinguishment of debt

(2,153)

 

(370)

Tax  expense

(2)

 

(129)

Change  in deferred leasing costs

(6,527)

 

(2,792)

Change  in receivables and other assets

3,559 

 

(7,360)

Change  in accounts payable and other liabilities

1,896 

 

8,749 

Adjustments  for minority interests

15,933 

 

9,446 

Adjustments  for unconsolidated joint ventures

(1,747)

 

(1,664)

Cash  flows provided by operating activities

 $

55,479 

 

 $

55,451 

* *

                *MinorityInterest – Real Estate Partnerships.* During the nine months ended September30, 2008, minority interest associated with real estate partnerships increased $50.8million or 63.1%.  The increase is attributable to the minority interestpartner’s equity contribution toward the three Ohio PERS Fund I office investmentsduring the first quarter of 2008 discussed under “Financial Condition – Officeand Parking Properties – Purchases, Dispositions, Improvements andDevelopment”.

 

*                Stockholders’Equity.*Stockholders’ equity decreased$15.3 million or 3.5% during the nine months ended September 30, 2008, as aresult of the following (in thousands):

 

 

**Increase**

 

**(Decrease)**

Net  income

 $

15,167 

Change  in market value of interest rate swaps

(31)

Comprehensive  income

15,136 

Common  stock dividends declared

(29,729)

Preferred  stock dividends declared

(3,600)

Exercise  of stock options

792 

Shares  issued in lieu of Directors fees

140 

Share  based compensation expense

1,381 

Shares  distributed from deferred compensation plan

626 

 

 $

(15,254)

Page  30 of 40

 

**Resultsof Operations**

***Comments are for the three months and nine months ended September 30, 2008 comparedto the three months and nine months ended September 30, 2007***.

** **

                Netincome available to common stockholders for the three months ended September 30,2008 was $18.5 million ($1.23 per basic common share) as compared to net lossavailable to common stockholders of $2.1 million ($0.14 per basic common share)for the three months ended September 30, 2007.  Net income available to commonstockholders for the nine months ended September 30, 2008 was $11.6 million($0.77 per basic common share) as compared to net income available to commonstockholders of $15.2 million ($0.97 per basic common share) for the ninemonths ended September 30, 2007.  The primary reason for the increase in netincome for the three months ended September 30, 2008, is due to the gains onreal estate from discontinued operations of $22.6 million.

 

*                Officeand Parking Properties. *The analysisbelow includes changes attributable to same store properties, acquisitions anddispositions of office properties.  Same store properties are those that theCompany owned for the current and prior year reporting periods, excludingproperties classified as discontinued operations.  At September 30, 2008, samestore properties consisted of 56 properties comprising 11.2 million squarefeet.  Properties acquired in 2007 and 2008 that do not meet the definition ofsame store properties consisted of four properties with 1.2 million square feet.

 

                Thefollowing table represents revenue from office and parking properties for thethree months and nine months ended September 30, 2008 and 2007 (in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2008**

**2007**

**(Decrease)**

**Change**

** **

**2008**

**2007**

**(Decrease)**

**Change**

Revenue from office and  parking

        properties:

 

 

 

 

 

 

 

 

 

        Same store  properties

$62,388

$57,180 

$  5,208

9.1%

 

$176,785 

$168,954

$  7,831 

4.6%

        Properties acquired  in 2007

351

149 

202

135.6%

 

3,797 

423

3,374 

797.6%

        Properties acquired  in 2008

7,118

- 

7,118

0.0%

 

17,572 

-

17,572 

0.0%

        Properties disposed

-

(7)

7

-100.0%

 

(10)

4,084

(4,094)

-100.2%

Total  revenue from office and

 

 

 

 

 

 

 

 

 

        parking properties

$69,857

$57,322 

$12,535

21.9%

 

$198,144 

$173,461

$24,683 

14.2%

 

                Revenuefrom office and parking properties for same store properties increased $5.2million and $7.8 million for the three months and nine months ended September30, 2008, respectively, compared to the same period for 2007.  The primaryreason for the increase is due to an increase in same store average rentalrates for same store properties for the nine months ended September 30, 2008 comparedto September 30, 2007.  Average same store rental rates increased 2.7% for the ninemonths ended September 30, 2008 compared to the same period of 2007. Additionally, lease termination fee income increased, and expense reimbursementincome increased as a result of higher property operating expenses.

                Thefollowing table represents property operating expenses for the three months andnine months ended September 30, 2008 and 2007 (in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2008**

**2007**

**(Decrease)**

**Change**

** **

**2008**

**2007**

**(Decrease)**

**Change**

Expenses from office and  parking 

        properties:

 

 

 

 

 

 

 

 

 

 

        Same store  properties

$30,600

$26,512

$4,088 

15.4%

 

$85,274

$78,369

$6,905 

8.8%

        Properties acquired  in 2007

278

84

194 

231.0%

 

2,023

194

1,829 

942.8%

        Properties acquired  in 2008

3,400

-

3,400 

0.0%

 

8,366

-

8,366 

0.0%

        Office property  development

16

25

(9)

-36.0%

 

23

82

(59)

-72.0%

        Properties disposed

1

106

(105)

-99.1%

 

22

2,077

(2,055)

-98.9%

Total expenses from office  and 

 

 

 

 

 

 

 

 

 

        parking properties

$34,295

$26,727

$7,568 

28.3%

 

$95,708

$80,722

$14,986 

18.6%

 

                Propertyoperating expenses for same store properties increased $4.1 million and $6.9million for the three months and nine months ended September 30, 2008, respectively,compared to the same period of 2007.  The primary reason for the increase isdue to increased utilities, real estate taxes and repairs associated withHurricane Ike discussed below.

 

Page  31 of 40

 

 

                Depreciationand amortization expense attributable to office and parking propertiesincreased  $3.9 million and $10.9 million for the three months and nine months endedSeptember 30, 2008, respectively, compared to the same period for 2007 and isdue to the additional depreciation associated with the acquisition of officeproperties and improvements to properties.

 

*                Hurricane Ike Impact.*The Company has 13 wholly-owned properties and onejointly-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 between $6.5 millionto $7.5 million.  The Company estimates that its insurance deductible relatedto these claims will be approximately $3.0 million to $3.5 million. Approximately $640,000 is estimated to represent repair and clean up costs withthe remainder representing capitalized costs.  The Company expects to record anet gain of approximately $1.0 million related to an involuntary conversion ofthe damaged assets.  The Company will record this gain upon final settlement ofthe hurricane claim with its insurance carrier.  

 

                *ShareBased Compensation Expense*.  Effective January 1, 2006, Parkway adoptedFASB Statement No. 123R, Share-Based Payment (“FAS 123R”) using themodified-prospective transition method. In the past the Company had grantedstock options for a fixed number of shares to employees and directors with anexercise price equal to or above the fair value of the shares at the date ofgrant.  However, no stock options have been granted to employees since 2002 orto directors since 2003.  Since 2003, Parkway has elected to grant restrictedshares and deferred incentive share units instead of stock options.  Therefore,the adoption of FAS 123R has not had a material impact on income fromcontinuing operations, net income, cash flow from operations, cash flow fromfinancing activities or basic and diluted earnings per share.  

 

                Duringthe nine months ended September 30, 2008, the Board of Directors approved thegrant of 38,017 restricted shares to officers of the Company.  The shares werevalued at $1.2 million and 36,975 shares will vest four years from grant dateand 1,042 shares will vest subject to achievement of the cumulative goals ofthe GEAR UP plan, which will end on December 31, 2008.  Compensation expensewill not be recorded on the shares that vest based on performance conditionsuntil the Company determines that it is probable that the goal will beachieved.  Therefore, no expense has been recorded to date for the shares thatvest based on achievement of the cumulative goals of the GEAR UP Plan.

 

                Sharebased compensation expense of $1.4 million and $1.1 million was recognized forthe nine months ended September 30, 2008 and 2007, respectively.  Totalcompensation expense related to nonvested awards subject to service conditionsnot yet recognized was $4.0 million as of September 30, 2008.  The weightedaverage period over which this expense is expected to be recognized isapproximately 2.3 years.  Total potential compensation expense associated withshares that vest based on performance conditions is $1.5 million as of September30, 2008.

 

                *Generaland Administrative Expense*.  General and administrative expense increased $193,000and $1.3 million for the three months and nine months ended September 30, 2008,respectively, compared to the same period of 2007 and is primarily attributableto increased personnel costs and share based compensation expense.

 

Page  32 of 40

 

*                InterestExpense. *Interest expense, includingamortization, increased $1.9 million  and $5.6 million for the three monthsended and nine months ended September 30, 2008, compared to the same period of2007 and is comprised of the following (in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2008**

**2007**

**(Decrease)**

**Change**

** **

**2008**

**2007**

**(Decrease)**

**Change**

Interest expenses:

 

 

 

 

 

 

 

 

 

        Mortgage interest  expense

$12,055 

$10,076 

$1,979 

19.6%

 

$35,248

$29,952

$5,296 

17.7%

        Bank  line interest expense

2,339 

2,527 

(188)

-7.4%

 

8,385

7,693

692 

9.0%

        Subsidiary  redeemable preferred

 

 

 

 

 

 

 

 

 

                membership  interest

- 

76 

(76)

-100.0%

 

-

449

(449)

-100.0%

        Debt prepayment  expense

- 

- 

- 

0.0%

 

13

369

(356)

-96.5%

        Mortgage loan cost  amortization

281 

192 

89 

46.4%

 

835

568

267 

47.0%

        Bank loan cost  amortization

168 

116 

52 

44.8%

 

473

311

162 

52.1%

 

 

 

 

 

 

 

 

 

 

Total interest expense

$14,843 

$12,987 

$1,856 

14.3%

 

$44,954

$39,342

$5,612 

14.3%

 

                Mortgageinterest expense increased $2.0 million and $5.3 million for the three months andnine months ended September 30, 2008, respectively, compared to the same periodfor 2007 and is due to the net effect of new loans placed in 2007 and 2008, therefinancing of one loan and the early extinguishment of three mortgages in 2008. The average interest rate on mortgage notes payable as of September 30, 2008 and2007 was 5.7% and 5.8%, respectively.

* *

                Bankline interest expense decreased $188,000 for the three months ended September30, 2008 and increased $692,000 for the nine months ended September 30, 2008,compared to the same period of 2007, and is primarily due to the net effect ofproceeds received from the sale of assets, borrowings due to additionalpurchases of office investments and a decrease in average interest rate from 6.3%for the nine months ended September 30, 2007 to 5.0% for the nine months ended September30, 2008.

 

*                DiscontinuedOperations. *Discontinued operationsis comprised of the following for the three months and nine months endingSeptember 30, 2008 and 2007 (in thousands):

 

 

**Three Months Ended September 30**

** **

**Nine Months Ended September 30**

 

** **

** **

**Increase**

**%**

** **

** **

** **

**Increase**

**%**

 

**2008**

**2007**

**(Decrease)**

**Change**

** **

**2008**

**2007**

**(Decrease)**

**Change**

Discontinued operations:

 

 

 

 

 

 

 

 

 

        Income (loss) from  discontinued

 

 

 

 

 

 

 

 

 

                operations

$(2,001)

$760

$ (2,761)

-363.3%

 

$   (760)

$1,929

$(2,689)

-139.4%

        Gain on sale of real  estate from

 

 

 

 

 

 

 

 

 

                discontinued  operations

22,588 

-

22,588 

0.0%

 

22,588 

-

22,588 

0.0%

Total discontinued  operations

$20,587 

$760

$19,827 

2608.8%

 

$21,828 

$1,929

$19,899 

1031.6%

 

                Thenet gains and all current and prior period income from the following officeproperty dispositions are included in discontinued operations for the threemonths and nine months ending September 30, 2008 and 2007 (in thousands).

 

** **

** **

**Square**

**Date of**

**Gross Sales**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**on Sale**

Town  Point Center

Norfolk,  Virginia

131

07/15/08

$12,750

$  1,559

Wachovia  Plaza

St.  Petersburg, Florida

186

08/18/08

26,010

9,338

Capitol  Center

Columbia,  South Carolina

460

09/05/08

47,500

11,691

2008  Dispositions

 

777

 

$86,260

$22,588

 

 

 

Page  33 of 40

**Recent AccountingPronouncements**

 

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements.  The provisions of SFAS No.157, with the exception of nonfinancial assets and liabilities, were effectivefor financial statements issued for fiscal years beginning after November 15,2007.  The FASB deferred for one year the Statement’s fair value measurementrequirements for nonfinancial assets and liabilities that are not required orpermitted to be measured at fair value on a recurring basis.  These provisionswill be effective for fiscal years beginning after November 15, 2008, and theCompany is in the process of evaluating the impact that the adoption of theseprovisions will have on the Company’s overall financial position and results ofoperations.  The application of SFAS 157 had an immaterial impact on theCompany’s overall financial position and results of operations upon adoptionJanuary 1, 2008.

 

                InDecember 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFASNo. 141R), which revised the previously issued SFAS No. 141 (SFAS No. 141). SFAS No. 141R retains the fundamental requirements of SFAS No. 141, but expandsthe scope to include all transactions and other events in which one entityobtains control over one or more other businesses.  SFAS No. 141R appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15, 2008.  SFAS No. 141R requires that the acquisition related transaction costsbe expensed as incurred.  SFAS No. 141R also includes new disclosurerequirements. The Company is currently evaluating the impact of SFAS No. 141Ron the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” (SFAS No. 160).  SFAS No. 160 amends ARB No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 alsoamends certain of ARB No. 51’s consolidation procedures for consistency withthe requirements of SFAS No. 141R.  SFAS No. 160 is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company is currently evaluating the impact of SFAS No. 160 on theCompany’s consolidated financial statements.

 

                InMarch 2008, the FASB issued SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities” (SFAS No. 161), which is an amendment ofFASB Statement No. 133. SFAS No. 161 requires all entities with derivativeinstruments to disclose information regarding how and why the entity usesderivative instruments and how derivative instruments and related hedged itemsaffect the entity’s financial position, financial performance, and cash flows.The Statement is effective prospectively for periods beginning on or afterNovember 15, 2008.  The Company is currently evaluating the impact of SFAS No.161 and does not expect the adoption of this Statement on January 1, 2009 tohave a material impact on the Company’s overall financial position and resultsof operations.

 

                In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (SFAS No. 162).  SFAS No. 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy).  SFAS No. 162 is effective November 15,2008, which represents 60 days following the SEC’s September 2008 approval ofthe Public Company Accounting Oversight Board amendments to AU Section 411, “TheMeaning of**Present Fairly in Conformity With Generally AcceptedAccounting Principles.”  The Company is currently evaluating the impact of SFASNo. 162 on the Company’s consolidated financial statements.  

 

**Liquidityand Capital Resources**

* *

*Statement of Cash Flows. *Cash and cash equivalents were $15.1 million and $11.3million at September 30, 2008 and December 31, 2007, respectively.  Cash flowsprovided by operating activities for the nine months ended September 30, 2008and 2007 were $55.5 million.

 

Cash used in investing activities was $189.2 millionfor the nine months ended September 30, 2008 compared to $32.5 million for thesame period of 2007.  The increase in cash used in investing activities of $156.7million is primarily due to the net effect office property purchases, proceedsfrom the sale of real estate, office property improvements and developmentcosts in 2008.

 

                Cashprovided by financing activities was $137.5 million for the nine months ended September30, 2008 compared to cash used in financing activities of $16.0 million for thesame period of 2007.  The increase in cash provided by financing activities of $153.5million is primarily due to additional mortgage placements in 2008 andcontributions from minority interest partners to fund office propertypurchases.

** **

Page  34 of 40

 

 

*Liquidity. *TheCompany plans to continue pursuing the acquisition of additional investmentsthat meet the Company’s investment criteria and intends to use the Company’sline of credit, proceeds from the sale of non-core assets and officeproperties, proceeds from the sale of portions of owned assets through jointventures, possible sales of securities and cash balances to fund thoseacquisitions.  

 

                TheCompany's cash flows are exposed to interest rate changes primarily as a resultof its line of credit used to maintain liquidity and fund capital expendituresand expansion of the Company’s real estate investment portfolio andoperations.  The Company’s interest rate risk management objective is to limitthe impact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs.  To achieve its objectives, the Company borrows atfixed rates, but also utilizes a four-year unsecured revolving credit facility,a five-year unsecured term loan and two one-year unsecured lines of credit(“the Company’s line of credit”).

 

                TheCompany’s line of credit allows Parkway to borrow up to a combined $311.0million.  At September 30, 2008, the Company had a total of $180.3 millionoutstanding under its line of credit.  Based on the loan covenants,Parkway had $40.8 million in additional capacity available at September 30,2008.  At September 30, 2008, the following amounts were outstanding underthe line of credit (in thousands):

 

** **

** **

** **

** **

**Outstanding**

**Line of Credit**

**Lender**

**Interest Rate**

**Maturity**

**Balance**

$9  Million Unsecured Line of Credit

Trustmark  National Bank

3.8%

12/07/08

$      9,000

$15  Million Unsecured Line of Credit

PNC  Bank

5.0%

01/28/09

2,316

$236  Million Unsecured Line of Credit (1)

Wachovia  Bank

4.3%

04/27/11

109,000

$60  Million Unsecured Term Loan (2)

Wachovia  Bank

5.6%

04/27/11

60,000

 

 

4.7%

 

$  180,316

 

(1)   The interest rate on the $236 millionunsecured line of credit interest rate is currently LIBOR plus 130 basis pointsor the Prime interest rate plus 25 basis points.  At September 30, 2008, allamounts outstanding under the line of credit with interest rates not fixed byan interest rate swap agreement are borrowed against the Prime interest rateplus 25 basis points.  The Company pays an annual administration fee of $35,000and fees on the unused portion of the revolver ranging between 12.5 and 20basis points based upon overall Company leverage, with the rate set at 12.5basis points at September 30, 2008.  On October 29, 2008, the Company exercisedits right to extend this line to April 2011.  The Company paid a one-timeextension fee of $354,000 that will be amortized over the term of the line ofcredit.

 

(2)   The interest rate on the $60 million term loanrepresents the weighted average interest rate of two interest rate swaps thatexpire December 31, 2008.

 

             The Company’s $236million unsecured revolving credit facility and $60 million unsecured term loanare both led by Wachovia Bank and syndicated to nine other banks.  The creditfacility requires compliance with a number of restrictive financial covenants,including tangible net worth, fixed charge coverage ratio, unencumberedinterest coverage ratio, total debt to total asset ratio, secured debt to totalasset value ratio, secured recourse debt to total asset value ratio andunencumbered pool restrictions.  As of September 30, 2008, the Company wasin compliance with these financial covenants.

 

The $15 million line is expected to fund the dailycash requirements of the Company’s treasury management system.  The interestrate on the $15 million line is based on LIBOR plus 80 to 130 basis points,depending upon overall Company leverage, with the current rate set at LIBORplus 130 basis points as of September 30, 2008.  Under the $15 million line, theCompany does not pay annual administration fees or fees on the unused portionof the line.

 

The $9 million line with Trustmark National Bank has acurrent interest rate equal to the 30-day LIBOR rate plus 132.5 basis points.  Theproceeds of the loan were used to finance the construction of the City CentreGarage, which was completed in 2005.

 

Page  35 of 40

 

To protect against the potential for rapidly risinginterest rates, the Company entered into interest rate swap agreements in 2008,2007, 2005 and 2004.  The Company designated the swaps as hedges of thevariable interest rates on the Company’s borrowings under the Wachoviaunsecured revolving credit facility and a portion of the debt placed on the Pinnacledevelopment.  These swaps are considered to be fully effective and changes inthe fair value of the swaps are recognized in accumulated other comprehensiveincome.  The Company's interest rate hedge contracts as of September30, 2008 and 2007 are summarized as follows (in thousands):

 

** **

** **

** **

** **

** **

**Fair Market Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**September 30**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2008**

**2007**

Swap

$30,000

08/31/08

1-Month LIBOR

4.924%

$      - 

$    (54)

Swap

$40,000

12/31/08

1-Month LIBOR

4.360%

(50)

100 

Swap

$20,000

12/31/08

1-Month LIBOR

4.245%

(34)

91 

Swap

$100,000

03/31/11

1-Month LIBOR

4.935%

(434)

- 

Swap

$23,500

12/01/14

1-Month LIBOR

5.550%

129 

- 

 

 

 

 

 

$(389)

$    137 

 

                AtSeptember 30, 2008, the Company had $860.0 million in mortgage notes payablewith an average interest rate of 5.7% secured by office properties and $180.3million drawn under the Company’s line of credit.  Parkway's pro rata share ofunconsolidated joint venture debt was $9.8 million with an average interestrate of 5.1% at September 30, 2008.  Based on the Company’s total marketcapitalization of $1.5 billion at September 30, 2008 (using the September 30,2008 closing price of $37.86 per common share), the Company’s debt represented 56.7%of its total market capitalization.  The Company targets a debt to total marketcapitalization rate at a percentage in the range of 45% to 50%.  This rate mayvary at times pending acquisitions, sales and/or equity offerings.  Inaddition, volatility in the price of the Company’s common stock may affect thedebt to total market capitalization ratio.  However, over time the Companyplans to maintain a percentage in the range of 45% to 50%.  The increase in thedebt to total market capitalization rate at September 30, 2008 was dueprimarily to a stock price decrease.

 

                Inaddition to the debt to total market capitalization ratio, the Company alsomonitors interest, fixed charge and modified fixed charge coverage ratios.  Theinterest coverage ratio is computed by comparing the cash interest accrued toearnings before interest, taxes, depreciation and amortization (“EBITDA”). This ratio for the nine months ended September 30, 2008 and 2007 was 2.40 and 2.47times, respectively.  The fixed charge coverage ratio is computed by comparingthe cash interest accrued, principal payments made on mortgage loans andpreferred dividends paid to EBITDA.  This ratio for the nine months ended September30, 2008 and 2007 was 1.74 and 1.73 times, respectively.  The modified fixedcharge coverage ratio is computed by comparing the cash interest accrued and preferreddividends paid to EBITDA.  This ratio for the nine months ended September 30,2008 and 2007 was 2.19 and 2.24 times, respectively.  In connection with theGEAR UP Plan, management set an internal target for the modified fixed chargecoverage ratio of 2.5 times as a measure of leverage for the plan.  While not arequirement of the plan, this self-imposed target serves to prevent theperformance goals being met by over-leveraging the Company.  Managementbelieves the debt to market capitalization, interest coverage, fixed chargecoverage and modified fixed charge coverage ratios provide useful informationon total debt levels as well as the Company’s ability to cover interest,principal and/or preferred dividend payments with current income.

 

Page  36 of 40

 

 

 

 

                The table below presents the principal paymentsdue and weighted average interest rates for the mortgage notes payable as of September 30, 2008 (inthousands).

 

 

** **

**Total**

** **

**Recurring**

 

**Average**

**Mortgage**

**Balloon**

**Principal**

 

**Interest Rate**

**Maturities**

**Payments**

**Amortization**

2008*

5.6%

$    3,158

$           -

$  3,158

2009

5.7%

35,299

21,766

13,533

2010

5.8%

139,794

126,411

13,383

2011

5.9%

112,754

102,694

10,060

2012

5.9%

65,070

56,738

8,332

2013

5.9%

8,434

-

8,434

Thereafter

4.1%

495,525

469,095

26,430

Total

 

$860,034

$776,704

$83,330

Fair value at 09/30/08

 

$803,712

 

 

 

*Remaining three months

 

The Company presently has plans to make additionalcapital improvements at its office properties in 2008 of approximately $12 million. These expenditures include tenant improvements, capitalized acquisition costsand capitalized building improvements.  Approximately $6 million of theseimprovements relate to upgrades on properties acquired in recent years thatwere anticipated at the time of purchase.  All such improvements are expectedto be financed by cash flow from the properties, capital expenditure escrowaccounts, advances on the bank lines of credit or contributions from partners.

 

In the fall of 2008, the Company expects to completethe development of a 192,000 square foot Class A+ office building in Jackson,Mississippi known as The Pinnacle at Jackson Place, adjacent to the Company’sheadquarters building.  The total estimated cost of the development is $48.5million, and for the remainder of 2008, the Company expects to incurapproximately $11.3 million in construction costs, which will be funded withadvances under mortgage notes payable secured by The Pinnacle.  The Company hascommitments to lease approximately 82% of the new office space.  Parkway isconsidering a joint venture structure for the development whereby Parkway willretain an ownership interest of approximately 25%.  The development is designedto utilize benefits available under the Gulf Opportunity Zone Act for newdevelopments in areas affected by Hurricane Katrina.

 

On May 2, 2008, the Company completed a $60.0 millionrecourse mortgage loan related to the refinance of a $41.4 million mortgagethat was scheduled to mature in September 2008.  The loan is secured by theCompany’s Capital City Plaza building in Atlanta, Georgia.  The interest rateon the loan is a variable rate based on LIBOR plus 165 basis points.  The loanterm is for two years, with a one-year extension option at the Company’sdiscretion. The excess loan proceeds of approximately $18.4 million were usedto pay down the Company’s line of credit.  The Company recorded a gain on theprepayment of approximately $388,000 associated with the write off of the debtpremium in the second quarter of 2008.  The mortgage represented the Company’sonly outstanding maturity in 2008.  

 

On May 14, 2008 Parkway formed Parkway PropertiesOffice Fund II, LP (“Texas Teachers Fund II”), a $750 million discretionaryfund with the Teacher Retirement System of Texas (“TRS”), for the purpose ofacquiring high-quality multi-tenant office properties.   TRS will be a 70%investor, and Parkway will be a 30% investor in the fund, which will becapitalized with approximately $375 million of equity capital and $375 millionof 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 sales, line of credit advances and/or sales of equitysecurities.

 

                Duringthe third quarter of 2008, the Company sold three non-strategic officeproperties for gross proceeds of $86.3 million and recorded gains on sale of$22.6 million.  The net proceeds from the sales were used to extinguish $18.1million in first mortgage debt secured by one of the properties and related debtprepayment expenses of $2.1 million and reduce amounts outstanding under thebank line of credit.  The office properties sold were Town Point Center inNorfolk, Virginia, Wachovia Plaza in St. Petersburg, Florida and Capitol Centerin Columbia, South Carolina.

Page  37 of 40

                OnOctober 29, 2008, the Company exercised its right to extend its $236 millionrevolving credit facility to April 2011.  The Company paid a one-time extensionfee of $354,000 that will be amortized over the remaining term of the line ofcredit.

 

               The Company anticipates that its current cashbalance, operating cash flows, contributions from partners, and borrowings(including borrowings under the Company’s line of credit) will be adequate topay the Company's (i) operating and administrative expenses, (ii) debt serviceobligations, (iii) distributions to shareholders, (iv) capital improvements,and (v) normal repair and maintenance expenses at its properties, both in theshort and long term.  In addition, the Company may use proceeds from sales of assets,possible sales of equity securities and borrowings to fund propertyacquisitions.

**Contractual Obligations**

 

                Seeinformation appearing under the caption “Financial Condition – Notes Payable toBanks and Mortgage Notes Payable” in Item 2, Management’s Discussion andAnalysis of Financial Condition and Results of Operations for a discussion ofchanges in long-term debt since December 31, 2007.  

** **

**FundsFrom Operations**

 

Management believes that funds from operationsavailable to common shareholders (“FFO”) is an appropriate measure ofperformance for equity REITs and computes this measure in accordance with theNational Association of Real Estate Investment Trusts' ("NAREIT")definition of FFO.  Funds from operations is defined by NAREIT as net income (computedin accordance with generally accepted accounting principles "GAAP"),excluding gains or losses from sales of property and extraordinary items underGAAP, plus depreciation and amortization, and after adjustments to derive theCompany’s pro rata share of FFO of consolidated and unconsolidated jointventures.  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,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing 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 fund cash needs.  Funds from operations should not be consideredan alternative to net income as an indicator of the Company's operatingperformance or as an alternative to cash flow as a measure of liquidity.

 

Page  38 of 40

 

The following table presents a reconciliation of theCompany’s net income to FFO for the three months and nine months ended September30, 2008 and 2007 (in thousands):

 

 

**Three Months Ended**

** **

**Nine Months Ended**

 

**September 30**

** **

**September 30**

 

**2008**

 

**2007**

** **

**2008**

 

**2007**

Net  income (loss)

 $

19,698 

 

 $

(894)

 

 $

$15,167 

 

 $

18,774 

Adjustments  to net income (loss):

 

 

 

 

 

 

 

        Preferred dividends

(1,200)

 

(1,200)

 

(3,600)

 

(3,600)

        Depreciation and amortization

22,755 

 

18,896 

 

66,659 

 

55,722 

        Depreciation and amortization – discontinued  operations

171 

 

798 

 

1,873 

 

2,352 

        Minority interest depreciation and  amortization

(5,011)

 

(2,799)

 

(14,119)

 

(7,474)

        Adjustments for unconsolidated joint ventures

200 

 

169 

 

555 

 

491 

        Minority Interest – Unit Holders

- 

 

2 

 

- 

 

2 

        Gain on sale of real estate

(22,588)

 

- 

 

(22,588)

 

(20,260)

Funds from operations available to common

 

 

 

 

 

 

 

        shareholders

 $

14,025 

 

 $

14,972 

 

 $

43,947 

 

 $

46,007 

**Inflation**

 

                Inflationhas not had a significant impact on the Company because of the relatively lowinflation rate in the Company’s geographic areas of operation.  Additionally,most of the leases require the customers to pay their pro rata share ofoperating expenses, including common area maintenance, real estate taxes,utilities and insurance, thereby reducing the Company’s exposure to increasesin operating expenses resulting from inflation.  The Company’s leases typicallyhave three to seven year terms, which may enable the Company to replaceexisting leases with new leases at market base rent, which may be higher orlower than the existing lease rate.

 

**Forward-LookingStatements**

 

                Inaddition to historical information, certain sections of this Form 10-Q maycontain forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,such as those that are not in the present or past tense, that discuss theCompany’s beliefs, expectations or intentions or those pertaining to theCompany’s capital resources, profitability and portfolio performance andestimates of market rental rates.  Forward-looking statements involve numerousrisks and uncertainties.  The following factors, among others discussed hereinand in the Company’s filings under the Securities Exchange Act of 1934, couldcause actual results and future events to differ materially from those setforth or contemplated in the forward-looking statements:  defaults ornon-renewal of leases, increased interest rates and operating costs, failure toobtain necessary outside financing, difficulties in identifying properties toacquire and in effecting acquisitions, the failure to acquire or sellproperties as and when anticipated, failure to qualify as a real estateinvestment trust under the Internal Revenue Code of 1986, as amended,environmental uncertainties, risks related to natural disasters, financialmarket fluctuations, changes in real estate and zoning laws and increases inreal property tax rates.  The success of the Company also depends upon thetrends of the economy, including interest rates, income tax laws, governmentalregulation, legislation, population changes and those risk factors discussedelsewhere in this Form 10-Q and in the Company’s filings under the SecuritiesExchange Act of 1934.  Readers are cautioned not to place undue reliance onforward-looking statements, which reflect management’s analysis only as thedate hereof.  The Company assumes no obligation to update forward-lookingstatements.

** **

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

** **

                Seeinformation appearing under the caption “Liquidity” in Item 2, Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

Page  39 of 40

 

 

 

 

**Item 4.  Controls andProcedures**

** **

                TheCompany carried out an evaluation, under the supervision and with theparticipation of the Company's management, including the Company's ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company's disclosure controls and procedurespursuant to Exchange Act Rule 13a‐15.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that as of theend of the Company’s most recent fiscal quarter, the Company's disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company's periodic SEC filings.

 

                Duringthe period covered by this report, the Company reviewed its internal controls,and there have been no changes in the Company's internal controls overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

**Item 1A.  Risk Factors**

 

                Therehave been no material changes to the risk factors previously disclosed inParkway’s Form 10-K for the year ended December 31, 2007, except as notedbelow.  For a full description of these risk factors, please refer to Item1A--Risk Factors, in the 2007 Annual Report on Form 10-K.

 

                Thefollowing has been added as a risk factor:

 

*                Thecurrent turmoil in the credit markets could limit demand for our officeproperties and affect the overall availability and cost of credit. *

 

                Thecurrent turmoil in the credit markets could limit demand for our officeproperties and affect the overall availability and cost of credit.  At thistime, it is unclear whether and to what extent the actions taken by the U.S.government, including, without limitation, the passage of the EmergencyEconomic Stabilization Act of 2008 and other measures currently beingimplemented or contemplated, will mitigate the effects of the crisis.  Withrespect to Parkway, currently these conditions have not impaired our ability toaccess credit markets and finance our operations however the impact of thecurrent crisis on our ability to obtain financing in the future, and the costand terms of same, is unclear.  No assurances can be given that the effects ofthe current crisis will not have a material adverse effect on our business,financial condition and results of operations.

 

**Item6.  Exhibits**

** **

31.1    Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2    Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1    Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

32.2    Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

** **

**SIGNATURES**

** **

        Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

**DATE**:   November 4, 2008

**PARKWAY PROPERTIES, INC.**

** **

** **

** **

** **

** **

** **

** **

**BY**:

/s/ Mandy  M. Pope

** **

 

Mandy M. Pope, CPA

** **

 

Senior Vice President and

** **

 

Chief Accounting Officer

 

Page  40 of 40**** |
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