Page 24 of 24
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1998
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
--------------
- - ------------------------------------------------------------------
(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 X NO
------- -------
10,109,266 shares of Common Stock, $.001 par value, were
outstanding as of November 11, 1998.
PARKWAY PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
Pages
-----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1998 and 1997 6
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signatures
Authorized signatures 24
PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
September 30 December 31
1998 1997
------------ -----------
(Unaudited)
Assets
Real estate related investments:
Office buildings.......................$565,383 $362,074
Land held for development.............. 1,721 1,721
Accumulated depreciation............... (23,499) (14,143)
-------- --------
543,605 349,652
Land held for sale..................... 3,903 4,309
Mortgage loans......................... 896 1,117
Real estate partnership................ 333 323
-------- --------
548,737 355,401
Interest, rents receivable and other
assets................................. 14,459 12,232
Cash and cash equivalents................ 809 959
-------- --------
$564,005 $368,592
======== ========
Liabilities
Notes payable to banks...................$ 14,025 $ 6,473
Mortgage notes payable without recourse.. 203,986 105,220
Accounts payable and other liabilities... 18,451 12,158
-------- --------
236,462 123,851
-------- --------
Stockholders' Equity
8.75% Series A Preferred stock, $.001 par
value, 2,750,000 shares authorized and
2,650,000 shares issued and
outstanding in 1998.................... 66,250 -
Common stock, $.001 par value, 70,000,000
shares authorized, 10,106,710 and
9,765,176 shares issued and outstanding
in 1998 and 1997, respectively......... 10 10
Additional paid-in capital............... 223,885 213,461
Retained earnings........................ 37,398 31,270
-------- --------
327,543 244,741
-------- --------
$564,005 $368,592
======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
September 30
---------------------
1998 1997
-------- --------
(Unaudited)
Revenues
Income from office properties $24,839 $11,874
Income from other real estate
properties - 124
Interest on mortgage loans 34 15
Management company income 158 147
Interest on investments 98 33
Dividend income - 195
Deferred gains and other income 53 36
------- -------
25,182 12,424
------- -------
Expenses
Office properties:
Operating expense 10,594 5,219
Interest expense:
Contractual 3,687 1,357
Amortization of loan costs. 38 25
Depreciation and amortization 4,290 1,540
Other real estate properties:
Operating expense 10 68
Interest expense on bank notes:
Contractual 47 527
Amortization of loan costs 216 49
Management company expenses 122 88
General and administrative 847 863
------- -------
19,851 9,736
------- -------
Income before gains and minority
interest 5,331 2,688
Gain (loss) on sales and minority
interest
Gain (loss) on real estate held
for sale and mortgage loans 3,547 (483)
Minority interest - unit holders (1) -
------- -------
Net income 8,877 2,205
Dividends on preferred stock 1,450 -
------- -------
Net income available to common
stockholders $ 7,427 $ 2,205
======= =======
Net income per common share:
Basic $ .70 $ .34
======= =======
Diluted $ .69 $ .33
======= =======
Weighted average shares outstanding:
Basic 10,611 6,532
======= =======
Diluted 10,734 6,675
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Nine Months Ended
September 30
---------------------
1998 1997
-------- --------
(Unaudited)
Revenues
Income from office properties $69,464 $29,939
Income from other real estate
properties - 564
Interest on mortgage loans 97 47
Management company income 391 398
Interest on investments 113 363
Dividend income 44 323
Deferred gains and other income 183 100
------- --------
70,292 31,734
------- --------
Expenses
Office properties:
Operating expense 29,249 12,678
Interest expense:
Contractual 7,767 3,856
Amortization of loan costs 89 68
Depreciation and amortization 10,205 3,795
Minority interest - 59
Other real estate properties:
Operating expense 84 361
Interest expense on bank notes:
Contractual 3,153 657
Amortization of loan costs 785 126
Management company expense 299 260
General and administrative 2,579 2,540
------- --------
54,210 24,400
------- --------
Income before gains and minority
interest 16,082 7,334
Gain on sales and minority interest
Gain on real estate held
for sale and mortgage loans 4,886 1,091
Minority interest - unit holders (1) -
------- -------
Net income 20,967 8,425
Dividends on preferred stock 2,464 -
------- -------
Net income available to common
stockholders $18,503 $ 8,425
======= =======
Net income per common share:
Basic $ 1.74 $ 1.36
======= =======
Diluted $ 1.72 $ 1.33
======= =======
Weighted average shares outstanding:
Basic 10,619 6,182
======= =======
Diluted 10,758 6,312
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
September 30
----------------------
1998 1997
--------- ---------
(Unaudited)
Operating activities
Net income............................. $20,967 $ 8,425
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 10,205 3,795
Gain on real estate held for
sale and mortgage loans............ (4,886) (1,091)
Equity in earnings and other......... (16) (4)
Changes in operating assets and
liabilities:
Decrease in receivables.......... (1,606) (537)
Increase in accounts payable and
accrued expenses............... 3,440 4,392
------- -------
Cash provided by operating activities.. 28,104 14,980
------- -------
Investing activities
Payments received on mortgage loans.... 394 80
Purchase of real estate related
investments.......................... (240,181) (172,686)
Proceeds from sale of real estate
held for sale and mortgage loans..... 55,853 5,665
Improvements to real estate related
investments.......................... (7,654) (3,290)
------- -------
Cash used in investing activities...... (191,588) (170,231)
------- -------
Financing activities
Principal payments on mortgage notes
payable.............................. (4,196) (1,777)
Proceeds from long term financing...... 97,000 -
Proceeds from bank borrowings.......... 167,530 98,149
Principal payments on bank borrowings.. (159,978) (89,949)
Stock options exercised................ 307 315
Dividends paid on common stock......... (12,375) (5,352)
Dividends paid on preferred stock...... (1,256) -
Proceeds from sale of stock............ 104,810 146,298
Purchase of company stock.............. (28,508) -
------- -------
Cash provided by financing activities.. 163,334 147,684
------- -------
Decrease in cash and cash equivalents.. (150) (7,567)
Cash and cash equivalents at beginning
of period............................ 959 8,053
------- -------
Cash and cash equivalents at end of
period............................... $ 809 $ 486
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Nine Months Ended
September 30
--------------------
1998 1997
-------- --------
(Unaudited)
8.75% Series A Preferred stock,
$.001 par value
Balance at beginning of period...... $ - $ -
Shares issued....................... 66,250 -
-------- --------
Balance at end of period............ 66,250 -
-------- --------
Common stock, $.001 par value
Balance at beginning of period...... 10 4
Shares issued - stock offerings..... 1 5
Purchase of company stock........... (1) -
-------- --------
Balance at end of period............ 10 9
-------- --------
Additional paid-in capital
Balance at beginning of period...... 213,461 52,356
Stock options exercised............. 307 368
Shares issued - stock offerings..... 38,559 146,294
Purchase of company stock........... (28,507) -
Shares issued in lieu of fees....... 65 -
-------- --------
Balance at end of period............ 223,885 199,018
-------- --------
Retained earnings
Balance at beginning of period...... 31,270 25,548
Net income.......................... 20,967 8,425
Preferred stock dividends declared.. (2,464) -
Common stock dividends declared
and paid........................ (12,375) (5,352)
-------- --------
Balance at end of period............ 37,398 28,621
-------- --------
Total stockholders' equity............ $327,543 $227,648
======== ========
See notes to consolidated financial statements.
Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998
(1) Basis of Presentation
The accompanying financial statements reflect all
adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods
presented. All such adjustments are of a normal recurring
nature. The financial statements should be read in conjunction
with the annual report and the notes thereto.
Effective January 1, 1997, the Company elected to be taxed
as a real estate investment trust (REIT) under the Internal
Revenue Code of 1986, as amended.
The Company completed its reorganization into the UPREIT
(Umbrella Partnership REIT) structure effective January 1, 1998.
The Company anticipates that the UPREIT structure will enable it
to pursue additional investment opportunities by having the
ability to offer tax-advantaged operating partnership units to
property owners in exchange for properties.
(2) Reclassifications
Certain reclassifications have been made in the 1997
financial statements to conform to the 1998 classifications.
(3) Supplemental Cash Flow Information
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Nine Months Ended
September 30
------------------------
1998 1997
----------- -----------
Cash paid for interest........ $10,920,000 $ 4,307,000
Mortgage assumed in purchase.. $ 5,647,000 $ 6,910,000
(4) Acquisitions and Dispositions
On January 21, 1998, the Company purchased the Schlumberger
Building (formerly known as the Veritas Technology Center) in
Houston, Texas for $12,200,000. The Schlumberger Building is a
five-story office building comprising approximately 155,000
square feet located in the Energy Corridor submarket of West
Houston. The building is situated on approximately 9.4 acres of
land and offers 450 surface parking spaces.
On February 25, 1998, the Company purchased a 13-building
portfolio totaling approximately 1,470,000 net rentable square
feet that included properties located in five of its primary
markets and three new markets. The breakdown of the 13-building
office portfolio by market is listed below:
Number of Net Rentable Percentage of
Location Properties Square Feet Portfolio
------------------ ---------- ------------ -------------
Houston, TX 2 536,000 36.4%
Dallas, TX 2 251,000 17.0%
Ft. Lauderdale, FL 2 215,000 14.6%
Richmond, VA 3 179,000 12.2%
Knoxville, TN 1 89,000 6.2%
Chesapeake, VA 1 82,000 5.6%
Northern VA 1 72,000 4.9%
Greenville, SC 1 46,000 3.1%
-- --------- ------
Total 13 1,470,000 100.0%
== ========= ======
The purchase price of this portfolio totaled $163,014,000
and was funded by advances on existing lines of credit, a
$75,000,000 unsecured loan from NationsBank, NA and the proceeds
of two Common Stock offerings discussed below in Capital
Transactions.
On March 31, 1998, the Company purchased the SouthTrust Bank
Building in St. Petersburg, Florida for $17,440,000. The
SouthTrust Bank Building is a seventeen-story 196,000 rentable
square foot office building overlooking Tampa Bay in downtown St.
Petersburg. The building has an attached parking garage
accommodating 192 spaces.
On April 28, 1998, the Company purchased the 109,000 square
foot Atrium at Stoneridge building in Columbia, South Carolina
for $8,330,000. The six-story office building was constructed in
1986. Atrium at Stoneridge is located two miles northwest of the
Columbia CBD in the St. Andrews sub-market.
On May 1, 1998, the Company purchased the 73,000 square foot
River Oaks Office Plaza in Jackson, Mississippi for $4,400,000.
The project consists of two garden-style, two-story buildings
constructed in 1981 and includes 326 surface parking spaces.
River Oaks Office Plaza is located in the Lakeland Drive sub-
market of Jackson.
On June 30, 1998, the Company purchased the 44,000 square
foot Pavilion Center in Atlanta, Georgia for $4,500,000. The
three-story office building was constructed in 1984. Pavilion is
located immediately off of Georgia Highway 400 in the North
Fulton sub-market.
On July 1, 1998, the Company purchased a partnership owning
the 172,000 square foot 111 East Capitol Building in Jackson,
Mississippi for $11,350,000 including 1,318 operating partnership
units of Parkway Properties LP and the assumption of a $5,647,000
mortgage note payable. This acquisition has been accounted for
using the purchase method of accounting. The total purchase
price has been allocated on the basis of fair values of the
assets acquired and liabilities assumed. The mortgage note
payable, which has a stated rate of 8% has been recorded at
$5,962,000 to reflect it at fair value based on the Company's
current incremental borrowing rate of 7%. The building was
constructed in 1983 and includes an attached 200-space two-level
parking garage. The 111 East Capitol Building is located in the
Central Business District of Jackson.
On July 1, 1998, the Company closed the sale of its
investment portfolio of four office properties located in Dallas,
Texas for net proceeds of $52,536,000 in cash to Triad Properties
Corporation, a Huntsville, Alabama-based private real estate
investment and operating company. The Company recorded a gain for
financial reporting purposes of $3,292,000 on the sale in the
third quarter. The Company anticipates that the taxable gain
from this transaction will be deferred through a Section 1031
like-kind exchange and, accordingly, no special dividend of the
capital gain will be required. At September 30, approximately
$1,600,000 of the sale proceeds remain in trust under the like-
kind exchange rules, pending the purchase of replacement
properties.
On July 20, 1998, the Company purchased the 144,000 square
foot Westvaco building in Richmond, Virginia for $13,030,000.
The five-story office building was constructed in 1986 and is
located in southwest Richmond in The Boulders office park. The
purchase was funded with proceeds from the sale of the Dallas
properties.
On July 20, 1998, the Company purchased the 130,000 square
foot Town Point Center building in Norfolk, Virginia for
$10,700,000. The eleven-story office building was constructed in
1987 and is located in the central business district of Norfolk.
The purchase was funded with proceeds from the sale of the Dallas
properties.
(5) Subsequent Events
On October 7, 1998, the Company closed a three year $150
million unsecured credit facility with a consortium of 14 banks
arranged by Chase Securities, Inc. The interest rate on the new
line of credit is equal to LIBOR plus 112.5 to 137.5 basis
points, depending upon overall company leverage, with the current
rate set at LIBOR plus 125 basis points, or 6.625%. The new
credit facility reflects a 15 basis point interest rate reduction
(based on current leverage) and a $50 million increase over the
previous lines of credit, which were secured lines of credit.
The lead agent for the credit facility is Chase Bank of Texas,
which is joined by a syndicate of banks including PNC Bank,
serving as documentation agent, Wells Fargo Bank, First Union
National Bank, SouthTrust Bank, AmSouth Bank, First National Bank
of Commerce, Compass Bank, First Tennessee Bank, Hibernia
National Bank, First American National Bank operating as Deposit
Guaranty National Bank, Comerica Bank, Trustmark National Bank,
and Bancorp South Bank.
(6) Impact of Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"), "Earnings per Share". SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts
for all periods have been presented and, where appropriate,
restated to conform to the SFAS No. 128 requirements.
As of January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components. The
adoption of SFAS No. 130 did not affect consolidated results of
operations or financial position.
As of January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131
superseded Statement 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments
interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No.
131 did not affect consolidated results of operations or
financial position.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The Company has no derivative or
hedging instruments outstanding, therefore, management does not
anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the
Company.
(7) Capital Transactions
On February 23, 1998, the Company completed the sale of
451,528 shares of Common Stock to a unit investment trust under
its existing shelf registration with net proceeds to the Company
of $14,231,000.
On March 11, 1998, the Company completed the sale of Common
Stock through the direct placement of 855,900 shares of Common
Stock in a public offering with net proceeds to the Company of
$26,948,000.
On April 28, 1998, the Company completed the sale of
2,400,000 shares of 8.75% Series A Cumulative Redeemable
Preferred Stock with net proceeds to the Company of approximately
$57,600,000. The underwriters in this transaction subsequently
purchased an additional 250,000 shares of preferred stock under
the over-allotment option. The exercise of the over-allotment
option closed on May 6, 1998 with net proceeds to the Company of
approximately $6,030,000.
On June 5, 1998, the Company's Board of Directors approved
the repurchase of 500,000 shares of the Company's Common Stock.
On August 5, 1998, the Company's Board of Directors approved the
repurchase of an additional 500,000 shares of the Company's
Common Stock. As of October 7, 1998, the Company completed the
purchase of 1,000,000 shares at an average price of $28.72. The
purchase represents approximately 9% of the shares outstanding
before the repurchase program was initiated.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Comments are for the balance sheet dated September 30, 1998
compared to the balance sheet dated December 31, 1997.
During the first nine months of 1998, the Company purchased
twenty-one office properties and sold four office properties and
miscellaneous non-core and other assets. Total assets increased
$195,413,000 and office properties (before depreciation)
increased $203,309,000 or 56%.
Parkway's direct investment in office buildings increased
$193,953,000 net of depreciation to a carrying amount of
$543,605,000 at September 30, 1998 and consisted of 48
properties. During the nine months ending September 30, 1998,
Parkway purchased 21 office properties as detailed below.
On January 21, 1998, the Company purchased the Schlumberger
Building (previously known as the Veritas Technology Center) for
$12,200,000. The Schlumberger Building is a 155,000 square foot
building with 450 surface parking spaces.
On February 25, 1998, the Company purchased a 13-building
portfolio for $163,014,000 totaling approximately 1,470,000 net
rentable square feet that included properties located in five of
its primary markets and three new markets. The breakdown of the
13 building office portfolio by market is listed below:
Number of Net Rentable Percentage of
Location Properties Square Feet Portfolio
------------------ ---------- ------------ -------------
Houston, TX 2 536,000 36.4%
Dallas, TX 2 251,000 17.0%
Ft. Lauderdale, FL 2 215,000 14.6%
Richmond, VA 3 179,000 12.2%
Knoxville, TN 1 89,000 6.2%
Chesapeake, VA 1 82,000 5.6%
Northern VA 1 72,000 4.9%
Greenville, SC 1 46,000 3.1%
-- --------- ------
Total 13 1,470,000 100.0%
== ========= ======
In connection with the portfolio purchase above, the Company
purchased approximately eight acres of land for $1,575,000 that
has been classified as land held for sale. The Company intends
to sell this land, as well as the remaining non-core assets.
On March 31, 1998, the Company purchased the SouthTrust Bank
Building in St. Petersburg, Florida for $17,440,000. The
SouthTrust Bank Building is a seventeen-story 196,000 rentable
square foot office building.
On April 28, 1998, the Company purchased the Atrium at
Stoneridge building in Columbia, South Carolina for $8,330,000.
The Atrium at Stoneridge is a six-story 109,000 square foot
office building.
On May 1, 1998, the Company purchased the 73,000 square foot
River Oaks Office Plaza in Jackson, Mississippi for $4,400,000.
The project consists of two garden-style, two-story buildings and
includes 326 surface parking spaces.
On June 30, 1998, the Company purchased the Pavilion Center
in Atlanta, Georgia for $4,500,000. The Pavilion Center is a
three-story 44,000 square foot office building.
On July 1, 1998, the Company purchased a partnership owning
the 172,000 square foot 111 East Capitol Building in Jackson,
Mississippi for $11,350,000 including 1,318 operating partnership
units of Parkway Properties LP and the assumption of a $5,647,000
mortgage note payable. This acquisition has been accounted for
using the purchase method of accounting. The total purchase
price has been allocated on the basis of fair values of the
assets acquired and liabilities assumed. The mortgage note
payable, which has a stated rate of 8% has been recorded at
$5,962,000 to reflect it at fair value based on the Company's
current incremental borrowing rate of 7%. The building was
constructed in 1983 and includes an attached 200-space two-level
parking garage. The 111 East Capitol Building is located in the
Central Business District of Jackson.
On July 20, 1998, the Company purchased the 144,000 square
foot Westvaco building in Richmond, Virginia for $13,030,000.
The five-story office building was constructed in 1986 and is
located in southwest Richmond in The Boulders office park.
On July 20, 1998, the Company purchased the 130,000 square
foot Town Point Center building in Norfolk, Virginia for
$10,700,000. The eleven-story office building was constructed in
1987 and is located in the central business district of Norfolk.
During the nine months ending September 30, 1998, the
Company also capitalized building improvements and additional
purchase expenses of $7,833,000 and recorded depreciation expense
of $9,690,000.
On July 1, 1998 the Company closed the sale of its
investment portfolio of four office properties located in Dallas,
Texas for net proceeds of $52,536,000. The Company recorded a
gain for financial reporting purposes of $3,292,000 on the sale
in the third quarter. The Company anticipates that the taxable
gain from this transaction will be deferred through a Section
1031 like-kind exchange and, accordingly, no special dividend of
the capital gain will be required. At September 30, 1998,
approximately $1,600,000 of the sale proceeds remain in trust
under the like-kind exchange rules, pending the purchase of
replacement properties. The decision to sell the Company's four
office buildings in Dallas was based on management's belief that
the significant amount of development and proposed development of
office properties in the Dallas market may have the effect of
depressing the recent growth in rental rates. The Company
routinely evaluates changes in market conditions that indicate an
opportunity or need to sell properties within those markets in
order to maximize shareholder value.
Parkway sold various non-core and other assets during the
nine months that resulted in gains for financial reporting
purposes of $1,424,000 and net proceeds of $3,317,000. At
September 30, 1998, non-core assets other than mortgage loans
totaled $3,903,000. The Company expects to continue its efforts
to liquidate these assets.
Mortgage loans decreased $394,000 due to principal payments
received and increased $173,000 due to the amortization of
interest rate valuations on mortgage loans. Of the total
principal payments received, $336,000 is attributable to a payoff
of a mortgage loan. Due to the early pay off of the mortgage
loan, $170,000 was recognized as a gain on mortgage loan. The
gain represented the remaining interest rate valuation upon
payoff.
Notes payable to banks totaled $14,025,000 at September 30,
1998 and are the result of advances under bank lines of credit to
purchase additional office properties and company stock.
Mortgage notes payable without recourse increased a net
$98,766,000 due to the funding of a $97,000,000 fixed rate loan,
the assumption of existing debt on the 111 East Capitol Building
recorded at a rate of 7% in the amount of $5,962,000, net of a
valuation allowance of $315,000, and scheduled principal payments
of $4,196,000 during the nine months ended September 30, 1998 on
existing notes payable without recourse. The Company expects to
continue seeking fixed rate, non-recourse mortgage financing at
terms ranging from ten to fifteen years on select office building
investments as additional capital is needed. The Company plans
to maintain a ratio of debt to total market capitalization from
25% to 40% although such ratio may from time to time temporarily
exceed 40%, especially when the Company has incurred significant
amounts of short term debt in connection with property
acquisitions.
Stockholders' equity increased $82,802,000 during the nine
months ended September 30, 1998 as a result of the following
factors (in thousands):
Increase (Decrease)
-------------------
Net income $20,967
Shares issued-preferred stock 66,250
Shares purchased-company stock (28,508)
Preferred stock dividends declared (2,464)
Common stock dividends declared and paid (12,375)
Exercise of stock options 307
Shares issued-stock offerings 38,560
Shares issued in lieu of directors fees 65
--------
$82,802
========
On February 23, 1998, the Company completed the sale of
451,528 shares of Common Stock to a unit investment trust with
net proceeds to the Company of $14,231,000.
On March 11, 1998, the Company completed the sale of Common
Stock through the direct placement of 855,900 shares of Common
Stock in a public offering with net proceeds to the Company of
$26,948,000.
On April 28, 1998, the Company completed the sale of
2,400,000 shares of 8.75% Series A Cumulative Redeemable
Preferred Stock with net proceeds to the Company of approximately
$57,600,000. The underwriters in this transaction subsequently
purchased an additional 250,000 shares of preferred stock under
the over-allotment option. The exercise of the over-allotment
option closed on May 6, 1998 with net proceeds to the Company of
approximately $6,030,000.
On June 5, 1998, the Company's Board of Directors approved
the repurchase of 500,000 shares of the Company's common stock.
On August 5, 1998, the Company's Board of Directors approved the
repurchase of an additional 500,000 shares of the Company's
common stock. As of September 30, 1998, the Company completed
the purchase of 992,681 shares at an average price of $28.72.
The purchase represents approximately 9% of the shares
outstanding before the repurchase program was initiated.
RESULTS OF OPERATIONS
Comments are for the three months and nine months ended September
30, 1998 compared to the three months and nine months ended
September 30, 1997.
Net income available for common stockholders for the three
months ended September 30, 1998 was $7,427,000 ($.70 per basic
common share) as compared to $2,205,000 ($.34 per basic common
share) for the three months ended September 30, 1997.
Net income available for common stockholders for the nine
months ended September 30, 1998 was $18,503,000 ($1.74 per basic
common share) as compared to $8,425,000 ($1.36 per basic common
share) for the nine months ended September 30, 1997.
The primary reason for the increase in the Company's income
before gains for 1998 as compared to 1997 is the reflection of
the operations of the following office buildings subsequent to
the date of purchase:
Building Purchase Date Sq. Feet
------------------------------- ------------- ---------
Forum II & III 01/07/97 177,000
Ashford II 01/28/97 59,000
Courtyard at Arapaho 03/06/97 201,000
Charlotte Park Executive Center 03/18/97 187,000
Meridian Building 03/31/97 101,000
Vestavia Centre 04/04/97 76,000
Sugar Grove 05/01/97 123,000
Lakewood 07/10/97 119,000
NationsBank 07/31/97 297,000
Fairway Plaza 08/12/97 82,000
First Tennessee Plaza 09/18/97 430,000
Morgan Keegan Tower 09/30/97 335,000
Hightower Centre 10/01/97 78,000
First Little Rock Plaza 11/07/97 116,000
Raytheon 11/17/97 148,000
Greenbrier Towers 11/25/97 174,000
Schlumberger 01/21/98 155,000
Brookdale Portfolio 02/25/98 1,470,000
SouthTrust 03/31/98 196,000
Atrium at Stoneridge 04/28/98 109,000
River Oaks Office Plaza 05/01/98 73,000
Pavilion Center 06/30/98 44,000
111 East Capitol Building 07/01/98 172,000
Town Point Center 07/20/98 130,000
Westvaco Building 07/20/98 144,000
On July 1, 1998, the Company sold its investment portfolio
of four office properties in Dallas, Texas for net proceeds of
$52,536,000. The portfolio included Courtyard at Arapaho,
Fairway Plaza and two properties acquired in the Brookdale
Portfolio.
Operations of office building properties are summarized
below (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Income............ $24,839 $ 11,874 $69,464 $ 29,939
Operating expense. (10,594) (5,219) (29,249) (12,678)
------------------ --------- ---------
14,245 6,655 40,215 17,261
Interest expense.. (3,725) (1,382) (7,856) (3,924)
Depreciation and
amortization.... (4,290) (1,540) (10,205) (3,795)
Minority interest. - - - (59)
--------- --------- --------- ---------
Net Income........ $6,230 $ 3,733 $22,154 $ 9,483
================== ========= =========
In addition to direct investments in office properties, the
Company owns the Wink Office Building in New Orleans, Louisiana
through a 50% ownership in the Wink/Parkway Partnership. Income
from the partnership of $35,000 was recorded on the equity method
of accounting during the nine months ended September 30, 1998 and
$30,000 during the nine months ended September 30, 1997. At
September 30, 1998, the carrying value of this investment totaled
$333,000.
Operations of other real estate properties held for sale are
summarized below (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Income from real
estate properties $ - $ 124 $ - $ 564
Real estate
operating expenses (10) (68) (84) (361)
--------- --------- --------- ---------
Net income (loss) $ (10) $ 56 $ (84) $ 203
========= ========= ========= =========
The increase in interest expense on office properties is
primarily due to the mortgage loans assumed and/or new loans
placed in 1997 and 1998. The average interest rate on Mortgage
Notes Payable as of September 30, 1998 was 7.2%.
The $2,496,000 increase in interest expense on banks notes
for the nine months ending September 30, 1998 compared to the
nine months ending September 30, 1997 is primarily due to
advances made on existing bank lines of credit for purchases of
office properties and company stock in the first nine months of
1998 and an advance of $75,000,000 on an unsecured loan from
NationsBank, NA. The NationsBank, NA facility required the
negative pledge of the 13 office properties purchased February
25, 1998 and matured August 25, 1998. This loan was repaid in
full on June 30, 1998 with proceeds from the 97,000,000 mortgage
notes payable.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Cash and cash equivalents were $809,000 and $959,000 at
September 30, 1998 and December 31, 1997, respectively. The
Company generated $28,104,000 in cash flows from operating
activities during the nine months ending September 30, 1998
compared to $14,980,000 for the same period of 1997, an increase
primarily attributable to the significant increase in the number
of office properties owned by the Company. The Company
experienced significant investing activity during the nine months
ending September 30, 1998 with a net of $191,588,000 being
invested. In implementing its investment strategy, the Company
used $240,577,000 not including closing costs and certain
capitalized expenses, to purchase office properties and land held
for sale while receiving net cash proceeds from the sale of non-
core and other assets of $3,317,000 and net cash proceeds of
$52,536,000 from the sale of four office properties located in
Dallas, Texas. The Company also spent $7,654,000 to make capital
improvements at its office properties. The Company received net
proceeds of $41,180,000 from the sale of 1,307,428 shares of
Common Stock and $63,630,000 from the sale of 2,650,000 shares of
8.75% Series A Preferred Stock during the nine months of 1998.
Cash dividends of $12,375,000 ($1.15 per common share) were paid
to shareholders, 992,681 shares of Common Stock were repurchased
for a total of $28,508,000 and principal payments of $4,196,000
were made on mortgage notes payable during the nine months ending
September 30, 1998.
Liquidity
The Company plans to continue actively pursuing the purchase
of office building investments that meet the Company's investment
criteria and intends to use bank lines of credit, proceeds from
the sale of non-core assets and cash balances to fund those
acquisitions. At September 30, 1998, the Company had $14,025,000
outstanding under two bank lines of credit. These lines of
credit matured on September 30, 1998 and were replaced with a
$10,000,000 line of credit with First American Bank, operating as
Deposit Guaranty National Bank (the "$10 million line"), and a
$150,000,000 line of credit with a consortium of 14 banks with
Chase Bank of Texas, National Association serving as the lead
agent (the "$150 million line").
The $10 million line is unsecured and is expected to fund
the daily cash requirements of the Company's treasury management
system. This line of credit matures September 30, 2001 and has
an interest rate equal to the 30 day LIBOR rate plus 112.5 to
137.5 basis points, depending upon overall Company leverage, with
the current rate set at LIBOR plus 125 basis points. The Company
paid a facility fee of 40 basis points ($40,000) upon closing of
the loan and will pay an annual administration fee of $3,000.
The Company will also pay unused fees based upon overall Company
leverage, with the current rate set at the maximum of 25 basis
points.
The $150 million line is also unsecured and is expected to
fund acquisitions of additional office building investments.
This line of credit matures October 7, 2001 and has an interest
rate equal to the LIBOR rate plus 112.5 to 137.5 basis points,
depending upon overall Company leverage, with the current rate
set at LIBOR plus 125 basis points. The Company paid a facility
fee of $150,000 and upfront fees of $432,500 (28.8 basis points)
upon closing of the loan and will pay an annual administration
fee of $37,500. The Company will also pay unused fees based upon
overall Company leverage, with the current rate set at the
maximum of 25 basis points.
On June 30, 1998, the Company closed a $97,000,000 fixed
rate mortgage loan at 6.945% that amortizes over a 15-year term
and matures July 1, 2008. The loan was funded in two parts with
$78,866,000 funded June 30, 1998 and $18,134,000 funded July 31,
1998. This loan is secured by 13 of the Company's office
properties and was used to repay the NationsBank, NA loan of
$75,000,000 and repay advances outstanding on bank lines of
credit. The loan also contains a conversion feature that gives
the Company an option to unsecure all or part of the loan upon
receipt of an investment grade rating from two of the major
rating agencies during the first 24 months of the loan.
At September 30, 1998, the Company had $203,986,000 of non-
recourse fixed rate mortgage notes payable with an average
interest rate of 7.175% secured by office properties and
$14,025,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately
$592,556,000 at September 30, 1998 (using the September 30, 1998
closing price of $30.50 per share) the Company's debt represented
approximately 36.8% of its total market capitalization. The
Company plans to maintain a ratio of debt to total market
capitalization from 25% to 40% although such ratio may from time
to time temporarily exceed 40%, especially when the Company has
incurred significant amounts of short term debt in connection
with property acquisitions.
The Company presently has plans to make capital improvements
at its office properties in 1998 of approximately $15,000,000.
These expenses include tenant improvements, capitalized
acquisition costs and capitalized building improvements.
Approximately $8,000,000 of these improvements relate to upgrades
on properties acquired in 1996, 1997 and 1998 that were
anticipated at the time of purchase. All such improvements are
expected to be financed by cash flow from the properties and
advances on bank lines of credit.
The Company anticipates that its current cash balance,
operating cash flows, proceeds from the sale of office properties
held for sale and borrowings (including borrowings under the
working capital line of credit) will be adequate to pay the
Company's (i) operating and administrative expenses, (ii) debt
service obligations, (iii) distributions to shareholders, (iv)
capital improvements, and (v) normal repair and maintenance
expenses at its properties both in the short and long term.
Funds From Operations
Management believes that funds from operations ("FFO") are
an appropriate measure of performance for equity REITs. Funds
from operations are defined by the National Association of Real
Estate Investment Trusts (NAREIT) as net income or loss,
excluding gains or losses from debt restructuring and sales of
properties, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
In March 1995, NAREIT issued a clarification of the definition of
FFO. The clarification provides that amortization of deferred
financing costs and depreciation of non-real estate assets are
not to be added back to net income to arrive at FFO. Funds from
operations does not represent cash generated from operating
activities in accordance with generally accepted accounting
principles and is not an indication of cash available to fund
cash needs. Funds from operations should not be considered an
alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a
measure of liquidity.
The following table presents the Company's FFO for the three
months and nine months ended September 30, 1998 and 1997 (in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income $8,877 $2,205 $20,967 $8,425
Adjustments to
derive funds
from operations:
Preferred
Dividends (1,450) - (2,464) -
Depreciation and
amortization 4,290 1,540 10,205 3,795
Minority interest
depreciation - 1 - (56)
Equity in earnings (12) (11) (35) (30)
Distributions from
unconsolidated
subsidiaries 5 - 24 27
(Gain) loss on
real estate (3,547) 483 (4,886) (1,091)
Amortization of
discounts,
deferred gains
and other (1) - (5) (1)
-------- -------- -------- --------
Funds from
Operations $8,162 $4,218 $23,806 $11,069
======== ======== ======== ========
NAREIT has recommended supplemental disclosure concerning
capital expenditures, leasing costs and straight-line rents which
are given below (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
Straight-line rents $ 223 $ 95 $ 462 $ 217
Building
improvements 474 68 1,202 171
Tenant improvements:
New leases 54 42 348 135
Lease renewals 399 17 861 641
Leasing commissions:
New leases 111 228 316 402
Lease renewals 320 614 724 1,070
Non-core asset
improvements - 5 - 27
Leasing commissions
amortized 181 120 473 228
Upgrades on recent
acquisitions 1,944 204 4,202 844
Inflation
In the last five years, inflation has not had a significant
impact on the Company because of the relatively low inflation
rate in the Company's geographic areas of operation. Most of the
leases require the tenants to pay their pro rata share of
operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's
exposure to increases in operating expenses resulting from
inflation. In addition, the Company's leases typically have
three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the
existing leases are below the then-existing market rate.
Impact of Year 2000
At the end of 1997, the Company formed a Y2K Committee of
employees to identify, assess and prepare for the upcoming Year
2000 Issue. The Year 2000 Issue refers to the inability of many
existing computer programs to properly recognize a year that
begins with "20" instead of "19" which, in programs that are time-
sensitive, may result in a variety of problems ranging from
miscalculations to the failure of entire systems.
The Company's plan to address this issue includes making an
inventory of the Company's systems, contacting our suppliers and
vendors, prioritizing the problem areas and appropriate
contingency planning.
The Company operates in a PC-based environment and maintains
its accounting, property and internal control systems utilizing
non-proprietary software systems. The Company has contacted
vendors of its significant software systems and received
representations that all such software systems are Year 2000
compliant, or will be changed prior to June 30, 1999 to be Year
2000 compliant. All major computer hardware that supports the
Company's local area network and wide-area network has been
purchased within the past 18 months and is believed, based upon
representations by the vendors, to be Year 2000 compliant.
The Company is in the process of evaluating it's building
systems, such as heating, air conditioning, elevators, and
security systems to determine Year 2000 compliance. The Company
has issued each property a compliance plan which outlines the
basic steps in identifying, assessing, correcting and testing
building systems or "embedded items" that may be potentially non-
compliant. Each building system should be assessed by the fourth
quarter of 1998 and implementation and testing should be complete
by the end of the first quarter of 1999. In addition, the
Company has sent correspondence to all tenants in order to keep
them advised of the Year 2000 Issue and of our commitment to
minimize to the greatest extent possible business interruptions
related to the Year 2000 Issue.
The cost associated with the Year 2000 analysis and the
remediation of known Year 2000 issues is estimated to be
immaterial. Such costs have been and will continue to be
expensed as incurred. To date, the Company has incurred and
expensed immaterial amounts for assessment of the Year 2000
Issue. As noted above, however, the Company's evaluation of Year
2000 issues is continuing and there can be no assurance that said
evaluation will not uncover Year 2000 issues that will cause the
Company to incur material costs.
Based on the completion and the results of the above stages
of analysis on the Year 2000 Issue, contingency plans are
expected to be developed to take the necessary and feasible
precautions against problems which could be caused by third
parties not within our control. In addition, the Company will
continue its review of internal systems and others that are under
its direct control. This process will be ongoing for the
remainder of 1998 and is expected to extend into 1999.
Forward-Looking Statements
In addition to historical information, certain sections of
this Form 10-Q may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, such as those
pertaining to the Company's capital resources, profitability and
portfolio performance. Forward-looking statements involve
numerous risks and uncertainties. The following factors, among
others discussed herein, could cause actual results and future
events to differ materially from those set forth or contemplated
in the forward-looking statements: defaults or non-renewal of
leases, increased interest rates and operating costs, failure to
obtain necessary outside financing, difficulties in identifying
properties to acquire and in effecting acquisitions, failure to
qualify as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code"), environmental
uncertainties, risks related to natural disasters, financial
market fluctuations, changes in real estate and zoning laws,
increases in real property tax rates and the ability of the
Company and the parties on which the Company relies to
successfully comply with the Year 2000 issues. The success of
the Company also depends upon the trends of the economy,
including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk
factors discussed elsewhere in this Form 10-Q. Readers are
cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only as the date
hereof. The Company assumes no obligation to update forward-
looking statements.
PARKWAY PROPERTIES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) (27) - Financial Data Schedule attached hereto.
(99)(a) Credit Agreement among Parkway
Properties LP, Chase Bank of Texas,
National Association, and PNC Bank,
National Association and the Lenders.
(Incorporated by reference to the
Registrant's Form 8-K filed November 12,
1998.)
(99)(b) Form of Note by Parkway
Properties LP as maker and Chase Bank of
Texas, National Association as agent.
(Incorporated by reference to the
Registrant's Form 8-K filed November 12,
1998.)
(b) Reports on Form 8-K
(1) 8-K Filed July 1, 1998
Reporting the Sale of the
Dallas Portfolio, and the purchase of the
111 East Capitol Building.
(2) 8-K/A Filed July 20, 1998
Reporting Financial
Statements and Exhibits and the opinion of
Jaeckle Fleischmann & Mugel, LLP regarding
tax matters.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DATED: November 16, 1998 PARKWAY PROPERTIES, INC.
/s/ Regina P. Shows
Regina P. Shows, CPA
Controller
/s/ Sarah P. Clark
Sarah P. Clark, CPA
Sr. Vice-President,
Chief Financial Officer,
Treasurer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 809
<SECURITIES> 0
<RECEIVABLES> 14,459
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 23,499
<TOTAL-ASSETS> 564,005
<CURRENT-LIABILITIES> 236,462
<BONDS> 0
0
66,250
<COMMON> 10
<OTHER-SE> 261,283
<TOTAL-LIABILITY-AND-EQUITY> 564,005
<SALES> 0
<TOTAL-REVENUES> 70,292
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 42,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,794
<INCOME-PRETAX> 20,967
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,967
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.72
</TABLE>
