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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
-----------------------------------
For Quarterly Period Ended June 30, 1998
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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (601) 948-4091
------------------
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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
------- -------
10,614,885 shares of Common Stock, $.001 par value, were
outstanding as of August 11, 1998.
PARKWAY PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 1998
-----------------------------------------------------
Pages
-----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1998 and 1997 6
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K......................22
Signatures
Authorized signatures 23
PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
June 30 December 31
1998 1997
------------ -----------
(Unaudited)
Assets
Real estate related investments:
Office buildings...................... $526,988 $362,074
Office buildings held for sale........ 49,076 -
Land held for development.............. 1,721 1,721
Accumulated depreciation...............(19,398) (14,143)
-------- --------
558,387 349,652
Land held for sale..................... 4,408 4,309
Mortgage loans......................... 1,110 1,117
Real estate partnership................ 327 323
-------- --------
564,232 355,401
Interest, rents receivable and other
assets................................. 11,789 12,232
Cash and cash equivalents................ 99 959
-------- --------
$576,120 $368,592
======== ========
Liabilities
Notes payable to banks...................$ 24,353 $ 6,473
Mortgage notes payable without recourse.. 181,939 105,220
Accounts payable and other liabilities... 17,090 12,158
-------- --------
223,382 123,851
-------- --------
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, 11,074,835 and
9,765,176 shares issued and outstanding
in 1998 and 1997, respectively......... 11 10
Additional paid-in capital............... 251,892 213,461
Retained earnings........................ 34,585 31,270
-------- --------
352,738 244,741
-------- --------
$576,120 $368,592
======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
June 30
---------------------
1998 1997
-------- --------
(Unaudited)
Revenues
Income from office properties...... $24,981 $10,035
Income from other real estate
properties....................... - 134
Interest on mortgage loans......... 39 16
Management company income.......... 104 117
Interest on investments............ 8 29
Dividend income.................... 44 42
Deferred gains and other income.... 20 31
------- -------
25,196 10,404
------- -------
Expenses
Office properties:
Operating expense................ 10,411 4,039
Interest expense:
Contractual.................... 2,037 1,244
Amortization of loan costs..... 26 26
Depreciation and amortization.... 3,324 1,330
Minority interest................ - 32
Other real estate properties:
Operating expense................ 44 76
Interest expense on bank notes:
Contractual...................... 1,984 106
Amortization of loan costs....... 335 41
Management company expenses........ 72 85
General and administrative......... 830 817
------- -------
19,063 7,796
------- -------
Income before gains................ 6,133 2,608
Gain on sales
Gain on real estate held
for sale and mortgage loans...... 387 68
------- -------
Net income......................... 6,520 2,676
Dividends on preferred stock....... 1,014 -
------- -------
Net income available to common
stockholders..................... $ 5,506 $ 2,676
======= =======
Net income per common share:
Basic............................ $ .50 $ .43
======= =======
Diluted.......................... $ .49 $ .42
======= =======
Weighted average shares outstanding
Basic........................... 11,086 6,288
======= =======
Diluted.......................... 11,221 6,405
======= =======
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Six Months Ended
June 30
---------------------
1998 1997
-------- --------
(Unaudited)
Revenues
Income from office properties...... $44,626 $18,065
Income from other real estate
properties....................... - 440
Interest on mortgage loans......... 62 32
Management company income.......... 232 251
Interest on investments............ 15 330
Dividend income.................... 44 128
Deferred gains and other income.... 130 64
------- --------
45,109 19,310
------- --------
Expenses
Office properties:
Operating expense................ 18,655 7,459
Interest expense:
Contractual.................... 4,079 2,499
Amortization of loan costs..... 51 43
Depreciation and amortization.... 5,915 2,255
Minority interest................ - 59
Other real estate properties:
Operating expense................ 73 293
Interest expense on bank notes:
Contractual...................... 3,106 130
Amortization of loan costs....... 569 77
Management company expenses........ 177 172
General and administrative......... 1,733 1,677
------- --------
34,358 14,664
------- --------
Income before gains................ 10,751 4,646
Gain on sales
Gain on real estate held
for sale and mortgage loans...... 1,339 1,574
------- -------
Net income......................... 12,090 6,220
Dividends on preferred stock....... 1,014 -
------- -------
Net income available to common
stockholders..................... $11,076 $ 6,220
======= =======
Net income per common share:
Basic............................ $ 1.00 $ 1.04
======= =======
Diluted.......................... $ .99 $ 1.01
======= =======
Weighted average shares outstanding:
Basic............................ 11,082 6,004
======= =======
Diluted.......................... 11,222 6,128
======= =======
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
June 30
----------------------
1998 1997
--------- ---------
(Unaudited)
Operating activities
Net income............................. $12,090 $ 6,220
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 5,915 2,255
Gain on real estate held for
sale and mortgage loans............ (1,339) (1,574)
Equity in earnings and other......... (8) 7
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables.................... 911 (456)
Increase in accounts payable and
accrued expenses............... 2,312 1,345
------- -------
Cash provided by operating activities.. 19,881 7,797
------- -------
Investing activities
Payments received on mortgage loans.... 9 44
Purchase of real estate related
investments.......................... (210,581) (74,187)
Proceeds from sale of real estate
held for sale and mortgage loans..... 2,726 5,665
Improvements to real estate related
investments.......................... (4,350) (2,112)
------- -------
Cash used in investing activities...... (212,196) (70,590)
------- -------
Financing activities
Principal payments on mortgage notes
payable.............................. (2,147) (1,147)
Proceeds from long term financing...... 78,866 -
Proceeds from bank borrowings.......... 142,231 17,439
Principal payments on bank borrowings.. (124,351) (9,239)
Stock options exercised................ 189 90
Dividends paid on common stock......... (7,761) (3,144)
Proceeds from sale of stock............ 104,810 51,221
Purchase of treasury stock............. (382) -
------- -------
Cash provided by financing activities.. 191,455 55,220
------- -------
Decrease in cash and cash equivalents.. (860) (7,573)
Cash and cash equivalents at beginning
of period............................ 959 8,053
------- -------
Cash and cash equivalents at end of
period............................... $ 99 $ 480
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Six Months Ended
June 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 2
-------- --------
Balance at end of period............ 11 6
-------- --------
Additional paid-in capital
Balance at beginning of period...... 213,461 52,356
Stock options exercised............. 189 144
Shares issued - stock offerings..... 38,559 51,219
Purchase of treasury stock.......... (382) -
Shares issued in lieu of fees....... 65 -
-------- --------
Balance at end of period............ 251,892 103,719
-------- --------
Retained earnings
Balance at beginning of period...... 31,270 25,548
Net income.......................... 12,090 6,220
Preferred stock dividends declared.. (1,014) -
Common stock dividends declared
and paid........................ (7,761) (3,144)
-------- --------
Balance at end of period............ 34,585 28,624
-------- --------
Total stockholders' equity............ $352,738 $132,349
======== ========
See notes to consolidated financial statements.
Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
June 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.
Six Months Ended
June 30
-----------------------
1998 1997
---------- ----------
Cash paid for interest........$7,185,000 $2,629,000
(4) Acquisitions and Dispositions
On January 22, 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 is 95% leased to twenty-four tenants
and 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 and was 88.8% occupied at April 30, 1998. 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 and was 100%
occupied at June 30, 1998. Pavilion is located immediately off
of Georgia Highway 400 in the North Fulton sub-market.
(5) Subsequent Events
On July 1, 1998, the Company purchased a partnership owning
the 171,800 square foot 111 East Capitol Building in Jackson,
Mississippi for $11,350,000 in the Company's first UPREIT
transaction. The Company assumed existing debt on the property
of $5,647,000 at a rate of 8%. 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 and was 83% occupied at June 30, 1998.
On July 1, 1998 the Company closed the sale of its
investment portfolio of four office properties located in Dallas,
Texas for $53,250,000 in cash to Triad Properties Corporation, a
Huntsville, Alabama-based private real estate investment and
operating company. The Company expects to record a gain for
financial reporting purposes of approximately $3.3 million 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 was required. Approximately
$25,000,000 of the sale proceeds are held 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
building is currently 99% leased. 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 building is currently 76% leased to 18 tenants. The purchase
price of the two properties represents a discount was funded with
proceeds from the sale of the Dallas properties.
(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.
(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.
Through August 11, 1998, 500,000 shares had been repurchased at
an average price of $29.84. 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Comments are for the balance sheet dated June 30, 1998 compared
to the balance sheet dated December 31, 1997.
During the first six months of 1998, the Company purchased
eighteen office properties and sold miscellaneous non-core and
other assets. Total assets increased $207,528,000, and office
properties (before depreciation) increased $214,323,000 or 59%.
Parkway's direct investment in office buildings increased
$208,735,000 net of depreciation to a carrying amount of
$558,387,000 at June 30, 1998 and consisted of 49 properties.
During the six months ending June 30, 1998, Parkway purchased 18
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.
During the six months ending June 30, 1998, the Company also
capitalized building improvements and additional purchase
expenses of $4,440,000 and recorded depreciation expense of
$5,589,000.
Office buildings held for sale increased $49,076,000 during
the six months due to the decision by the Company to exit the
Dallas market. 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. As a result of this
evaluation, the Company decided to attempt to sell the properties
located in Dallas. Subsequent to this decision, the Company
announced on April 22, 1998, the signing of an agreement to sell
these properties for $53,250,000 in cash to Triad Properties
Corporation, a private real estate investment company. The sales
price represents approximately $100 per square foot for the
properties, which total approximately 534,390 net rentable square
feet. The Company closed the transaction effective July 1, 1998
and expects to record a gain for financial reporting purposes of
approximately $3.3 million 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.
Parkway sold three non-core and other assets during the six
months that resulted in gains for financial reporting purposes of
$1,339,000 and net proceeds of $2,726,000. At June 30, 1998, non-
core assets other than mortgage loans totaled $4,408,000. The
Company expects to continue its efforts to liquidate these
assets.
Notes payable to banks totaled $24,353,000 at June 30, 1998
and are the result of advances under bank lines of credit to
purchase additional office properties.
Mortgage notes payable without recourse increased a net
$76,719,000 due to the funding of $78,866,000 of a $97,000,000
fixed rate loan and scheduled principal payments of $2,147,000
during the six months ended June 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% but anticipates that this ratio may exceed 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 $107,997,000 during the six
months ended June 30, 1998 as a result of the following factors
(in thousands):
Increase (Decrease)
-------------------
Net income $ 11,076
Shares issued-preferred stock 66,250
Shares purchased-treasury stock (382)
Dividend declared and paid (7,761)
Exercise of stock options 189
Shares issued-stock offerings 38,560
Shares issued in lieu of fees 65
--------
$107,997
=======
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.
RESULTS OF OPERATIONS
Comments are for the three months and six months ended June 30,
1998 compared to the three months and six months ended June 30,
1997.
Net income available for common stockholders for the three
months ended June 30, 1998 was $5,506,000 ($.50 per basic common
share) as compared to $2,676,000 ($.43 per basic common share)
for the three months ended June 30, 1997.
Net income available for common stockholders for the six
months ended June 30, 1998 was $11,076,000 ($1.00 per basic
common share) as compared to $6,220,000 ($1.04 per basic common
share) for the six months ended June 30, 1997.
The primary reason for the increase in the Company's income
before gains for 1998 as compared to 1997 is the reflection of
the operations of the following office buildings subsequent to
the date of purchase:
Building Purchase Date Sq. Feet
------------------------------- ------------- ---------
Forum II & III 01/07/97 177,250
Ashford II 01/28/97 58,511
Courtyard at Arapaho 03/06/97 200,726
Charlotte Park Executive Center 03/18/97 187,207
Meridian Building 03/31/97 100,932
Vestavia Centre 04/04/97 75,880
Sugar Grove 05/01/97 122,682
Lakewood 07/10/97 118,750
NationsBank 07/31/97 296,725
Fairway Plaza 08/12/97 82,268
First Tennessee Plaza 09/18/97 419,809
Morgan Keegan Tower 09/30/97 334,668
Hightower Centre 10/01/97 78,000
First Little Rock Plaza 11/07/97 117,000
Raytheon 11/17/97 148,000
Greenbrier Towers 11/25/97 173,000
Schlumberger 01/21/98 155,000
Brookdale Portfolio 02/25/98 1,470,000
SouthTrust 03/31/98 196,000
Atrium at Stoneridge 04/28/98 109,000
River Oaks Office Plaza 05/01/98 73,000
Pavilion Center 06/30/98 44,000
Operations of office building properties are summarized
below (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Income.............$ 24,981 $ 10,035 $ 44,626 $ 18,065
Operating expense.. (10,411) (4,039) (18,655) (7,459)
--------- --------- --------- ---------
14,570 5,996 25,971 10,606
Interest expense... (2,063) (1,270) (4,130) (2,542)
Depreciation and
amortization..... (3,324) (1,330) (5,915) (2,255)
Minority interest.. - (32) - (59)
--------- -------- --------- ---------
Net Income $ 9,183 $ 3,364 $ 15,926 $ 5,750
========= ======== ========= =========
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 $24,000 was recorded on the equity method
of accounting during the six months ended June 30, 1998 and
$19,000 during the six months ended June 30, 1997. At June 30,
1998, the carrying value of this investment totaled $327,000.
Operations of other real estate properties held for sale are
summarized below (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Income from real
estate properties $ - $ 134 $ $ 440
Real estate
operating expenses (44) (76) (73) (293)
--------- --------- --------- ---------
Net income (loss) $ (44) $ 58 $ (73) $ 147
========= ========= ========= =========
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 June 30, 1998 was 7.4%.
The $2,976,000 increase in interest expense on banks notes
for the six month ending June 30, 1998 compared to the six months
ending June 30, 1997 is primarily due to advances made on
existing bank lines of credit for purchases of office properties
in the first six 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 matures 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 $99,000 and $959,000 at June
30, 1998 and December 31, 1997, respectively. The Company
generated $19,881,000 in cash flows from operating activities
during the six months ending June 30, 1998 compared to $7,797,000
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 six months ending June 30, 1998
with a net of $212,196,000 being invested. In implementing its
investment strategy, the Company used $211,459,000, 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
$2,726,000. The Company also spent $4,350,000 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 six months of 1998.
Cash dividends of $7,761,000 ($.70 per common share) were paid to
shareholders, 13,088 shares of Common Stock were repurchased for
a total of $382,000 and principal payments of $2,147,000 were
made on mortgage notes payable during the six months ending June
30, 1998.
Liquidity
At June 30, 1998, the Company had available $68,956,000 on
its acquisition line of credit and $6,691,000 on its working
capital line of credit. The Company plans to continue actively
pursuing the purchase of office building investments that meet
the Company's investment criteria and intends to use these lines
of credit, proceeds from the sale of non-core assets and cash
balances to fund those acquisitions. At June 30, 1998, the lines
of credit had an interest rate equal to the 90-day LIBOR rate
plus 1.40% (adjusted monthly), interest due monthly and annual
commitment fees of .35%. In addition, both lines of credit have
fees of .175% on the unused balances due quarterly. The interest
rate on the notes was 7.07% as of August 11, 1998. The
acquisition line of credit and the working capital line of credit
matured June 30, 1998 and were extended to September 30, 1998.
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 June 30, 1998, the Company had $181,939,000 of non-
recourse fixed rate mortgage notes payable with an average
interest rate of 7.433% secured by office properties and
$24,353,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately
$599,250,000 at June 30, 1998 (using the June 30, 1998 closing
price of $29.50 per share) the Company's debt represented
approximately 34.4% 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.
Events subsequent to quarter-end are listed below.
On July 1, 1998, the Company purchased a partnership owning
the 171,800 square foot 111 East Capitol Building in Jackson,
Mississippi for $11,350,000 in the Company's first UPREIT
transaction. The Company assumed existing debt on the property
of $5,647,000 at a rate of 8%. 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 and was 83% occupied at June 30, 1998.
On July 1, 1998 the Company closed the sale of its
investment portfolio of four office properties located in Dallas,
Texas for $53,250,000 in cash to Triad Properties Corporation, a
Huntsville, Alabama-based private real estate investment and
operating company. The Company expects to record a gain for
financial reporting purposes of approximately $3.3 million 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 was required. Approximately
$25,000,000 of the sale proceeds are held 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
building is currently 99%.
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 building is currently 76% leased to 18 tenants.
On June 5, 1998, the Company's board of Directors
approved the repurchase of 500,000 shares of the Company's Common
Stock. Through August 11, 1998, 500,000 shares had been
repurchased at an average price of $29.84. 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.
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 $9,000,000 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 six months ended June 30, 1998 and 1997 (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income..........$ 6,520 $ 2,646 $12,090 $ 6,220
Adjustments to
derive funds
from operations...
Preferred
Dividends....... (1,014) - (1,014) -
Depreciation and
Amortization ... 3,324 1,329 5,915 2,254
Minority interest
depreciation.... - (227) - (57)
Equity earnings... (12) (7) (24) (19)
Distributions from
unconsolidated
subsidiaries.... 7 10 20 28
Gain on real
estate.......... (387) (68) (1,339) 1,574)
Amortization of
discounts,
deferred gains
and other....... (2) - (4) (1)
-------- -------- -------- --------
Funds from
Operations......$ 8,436 $ 3,918 $15,644 $ 6,851
======== ======== ======== ========
NAREIT has recommended supplemental disclosure concerning
capital expenditures, leasing costs and straight-line rents which
are given below (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
Straight-line rents $156 $ 60 $240 $122
Building
improvements 350 97 728 103
Tenant improvements:
New leases 238 8 294 93
Lease renewals 353 587 461 624
Leasing commissions:
New leases 101 85 205 174
Lease renewals 199 342 404 456
Non-core asset
improvements - - - 22
Leasing commissions
amortized 152 70 292 108
Upgrades on recent
acquisitions 1,415 481 2,258 640
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.
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 and
increases in real property tax rates. 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 4. Submission of Matters to a Vote of Security Holders
On June 5, 1998, the Company held its Annual Meeting of
Stockholders. At the Annual Meeting, the following nine directors
were elected to serve until the next Annual Meeting.
Vote Vote
For Withheld
Daniel C. Arnold 9,285,097 11,638
Roger P. Friou 9,285,584 11,151
Martin L. Garcia 9,285,440 11,295
Michael J. Lipsey 9,285,877 10,858
Joe F. Lynch 9,285,058 11,677
C. Herbert Magruder 9,284,937 11,798
W. Lincoln Mossop, Jr. 9,285,747 10,988
Steven G. Rogers 9,286,804 9.931
Leland R. Speed 9,285,553
11,182
In Addition, the following item was also approved at
the June 5, 1998 meeting:
(1) Approval of the amendment to the 1994 Stock Option Plan.
For 9,189,697
Against 71,010
Withheld 36,026
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 4 - Articles Supplementary of the Company
relating to the 8.75% Series A Cumulative
Redeemable Preferred Stock (incorporated by
reference to Exhibit 1 to the Company'' Form 8-A
filed April 24, 1998).
(b) Exhibit 27 - Financial Data Schedule attached
hereto.
(c) Reports on Form 8-K
(1) 8-K Filed April 22, 1998
Reporting the Sale of the Dallas Portfolio.
(2) 8-K Filed April 28, 1998
Reporting the Preferred Stock Offering.
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: August 14, 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
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