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, 2000
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.
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(Exact name of registrant as specified in its charter)
Maryland 74-2123597
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(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)
Registrant'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
------- -------
9,783,449 shares of Common Stock, $.001 par value, were
outstanding as of November 14, 2000.
PARKWAY PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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Pages
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Part II. Other Information
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures
Authorized signatures 22
PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30 December 31
2000 1999
------------ -----------
(Unaudited)
Assets
Real estate related investments:
Office and parking properties..........$652,244 $628,552
Office properties held for sale........ - 19,621
Office and parking redevelopment....... - 18,511
Accumulated depreciation............... (54,009) (41,319)
-------- --------
598,235 625,365
Land held for sale..................... 4,283 4,283
Note receivable from Moore Building
Associates LP........................ 7,996 -
Real estate equity securities.......... 16,632 -
Mortgage loans......................... 885 890
Real estate partnership................ 374 361
-------- --------
628,405 630,899
Interest, rents receivable and other
assets................................ 19,730 17,585
Cash and cash equivalents............... 1,249 885
-------- --------
$649,384 $649,369
======== ========
Liabilities
Notes payable to banks...................$ 72,037 $ 86,640
Mortgage notes payable without recourse.. 228,151 214,736
Accounts payable and other liabilities... 23,494 26,929
-------- --------
323,682 328,305
-------- --------
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 2000 and 1999....................... 66,250 66,250
Common stock, $.001 par value, 67,250,000
shares authorized, 9,791,272 and
9,972,318 shares issued and
outstanding in 2000 and 1999,
respectively........................... 10 10
Additional paid-in capital............... 214,599 220,526
Unearned compensation.................... (3,434) (4,923)
Accumulated other comprehensive income... 95 -
Retained earnings........................ 48,182 39,201
-------- --------
325,702 321,064
-------- --------
$649,384 $649,369
======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
September 30
---------------------
2000 1999
-------- --------
(Unaudited)
Revenues
Income from office and parking
properties $29,312 $29,520
Interest on mortgage loans 23 23
Management company income 183 318
Interest on note receivable from
Moore Building Associates LP 267 -
Incentive management fee from
Moore Building Associates LP 65 -
Dividend income 200 18
Interest on cash equivalents 93 16
Deferred gains and other income 22 14
------- -------
30,165 29,909
------- -------
Expenses
Office and parking properties:
Operating expense 12,042 12,558
Interest expense:
Contractual 4,090 3,736
Amortization of loan costs. 47 37
Depreciation and amortization 4,933 4,568
Other real estate properties:
Operating expense 16 16
Interest expense on bank notes:
Contractual 1,451 1,290
Amortization of loan costs 160 114
Management company expenses 155 179
General and administrative 781 1,380
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23,675 23,878
------- -------
Income before minority interest 6,490 6,031
Minority interest
Minority interest - unit holders (2) (1)
------- -------
Net income 6,488 6,030
Dividends on preferred stock 1,450 1,450
------- -------
Net income available to common
stockholders $ 5,038 $ 4,580
======= =======
Net income per common share:
Basic $ .51 $ .45
======= =======
Diluted $ .51 $ .45
======= =======
Dividends per common share:
Basic $ .56 $ .50
======= =======
Diluted $ .56 $ .50
======= =======
Weighted average shares outstanding:
Basic 9,790 10,124
======= =======
Diluted 9,921 10,263
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Nine Months Ended
September 30
---------------------
2000 1999
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(Unaudited)
Revenues
Income from office and parking
properties $88,990 $83,763
Interest on mortgage loans 68 69
Management company income 525 657
Interest on note receivable from
Moore Building Associates LP 503 -
Incentive management fee from
Moore Building Associates LP 120 -
Dividend income 612 66
Interest on cash equivalents 143 43
Deferred gains and other income 102 124
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91,063 84,722
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Expenses
Office and parking properties:
Operating expense 36,616 34,997
Interest expense:
Contractual 11,952 11,180
Amortization of loan costs. 127 124
Depreciation and amortization 14,402 12,868
Other real estate properties:
Operating expense 46 99
Interest expense on bank notes:
Contractual 4,814 2,524
Amortization of loan costs 381 400
Management company expenses 434 429
General and administrative 3,115 3,086
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71,887 65,707
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Income before gains and minority
interest 19,176 19,015
Gain on sales and minority interest
Gain on sale of real estate held
for sale and securities 9,472 86
Minority interest - unit holders (3) (2)
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Net income 28,645 19,099
Dividends on preferred stock 4,348 4,348
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Net income available to common
stockholders $24,297 $14,751
======= =======
Net income per common share:
Basic $ 2.47 $ 1.46
======= =======
Diluted $ 2.44 $ 1.45
======= =======
Dividends per common share:
Basic $ 1.56 $ 1.40
======= =======
Diluted $ 1.56 $ 1.40
======= =======
Weighted average shares outstanding:
Basic 9,837 10,086
======= =======
Diluted 9,940 10,202
======= =======
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Nine Months Ended
September 30
---------------------
2000 1999
-------- --------
(Unaudited)
8.75% Series A Preferred stock,
$.001 par value
Balance at beginning of period...... $ 66,250 $ 66,250
-------- --------
Balance at end of period............ 66,250 66,250
-------- --------
Common stock, $.001 par value
Balance at beginning of period...... 10 10
-------- --------
Balance at end of period............ 10 10
-------- --------
Additional paid-in capital
Balance at beginning of period...... 220,526 223,834
Stock options exercised........... 131 212
Shares issued in lieu of
Directors' fees................. 64 72
Restricted shares issued.......... 62 5,357
Reclassification for issuance of
restricted shares............... (843) -
Purchase of company stock......... (5,341) (4,362)
-------- --------
Balance at end of period............ 214,599 225,113
-------- --------
Unearned compensation
Balance at beginning of period...... (4,923) -
Restricted shares issued.......... (62) (5,358)
Reclassification for issuance of
restricted shares............... 843 -
Amortization of unearned
compensation.................... 708 300
-------- --------
Balance at end of period............ (3,434) (5,058)
-------- --------
Accumulated other comprehensive income
Balance at beginning of period...... - -
Change in net unrealized gain on
real estate equity securities... 95 -
-------- --------
Balance at end of period............ 95 -
-------- --------
Retained earnings
Balance at beginning of period...... 39,201 37,857
Net income........................ 28,645 19,099
Preferred stock dividends declared (4,348) (4,348)
Common stock dividends declared... (15,316) (14,158)
-------- --------
Balance at end of period............ 48,182 38,450
-------- --------
Total stockholders' equity............ $325,702 $324,765
======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
September 30
----------------------
2000 1999
--------- ---------
(Unaudited)
Operating activities
Net income........................... $ 28,645 $ 19,099
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 14,402 12,868
Amortization of unearned
compensation..................... 708 300
Gain on real estate held for
sale and other assets............ (9,472) (86)
Equity in earnings and other....... (35) (56)
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables.................. (2,299) 258
Decrease in accounts payable
and accrued expenses......... (3,467) (134)
-------- --------
Cash provided by operating activities 28,482 32,249
-------- --------
Investing activities
Payments received on mortgage loans.. 5 4
Net decrease in note receivable from
Moore Building Associates LP....... 10,363 -
Purchases of real estate related
investments........................ (16,499) (42,771)
Purchases of real estate equity
securities......................... (26,533) -
Proceeds from sale of real estate
held for sale and securities....... 49,753 401
Real estate development.............. (8,167) (7,499)
Improvements to real estate related
investments........................ (11,227) (10,977)
-------- --------
Cash used in investing activities.... (2,305) (60,842)
-------- --------
Financing activities
Principal payments on mortgage notes
payable............................ (7,585) (6,712)
Net proceeds from (payments on)
bank borrowings.................... (14,603) 35,711
Proceeds from long-term financing.... 21,000 20,100
Stock options exercised.............. 131 212
Dividends paid on common stock....... (15,067) (14,012)
Dividends paid on preferred stock.... (4,348) (4,348)
Purchases of Company stock........... (5,341) (4,362)
-------- --------
Cash (used in) provided in financing
activities......................... (25,813) 26,589
-------- --------
Increase (decrease) in cash and
cash equivalents................... 364 (2,004)
Cash and cash equivalents at
beginning of period................ 885 2,937
-------- --------
Cash and cash equivalents at end of
period............................. $ 1,249 $ 933
======== ========
See notes to consolidated financial statements.
Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
(1) Basis of Presentation
The consolidated financial statements include the accounts
of Parkway Properties, Inc. ("Parkway" or "the Company") and its
100% owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
The accompanying consolidated 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.
(2) Reclassifications
Certain reclassifications have been made in the 1999
consolidated financial statements to conform to the 2000
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
-----------------------
2000 1999
----------- -----------
Cash paid for interest.............$17,507,000 $13,831,000
Mortgage assumed in purchase....... - 1,936,000
Income taxes paid.................. 127,000 194,000
Restricted shares issued........... 62,000 5,358,000
Shares issued in lieu of
Directors' fees.................. 64,000 72,000
(4) Acquisitions and Dispositions
During the nine months ended September 30, 2000, the Company
purchased $26,533,000 in common equity of other publicly traded
real estate investment trusts ("REIT") in accordance with the
Company's REIT Significant Value Program ("RSVP Program"). The
RSVP Program is the Company's initiative to take advantage of
discounted REIT valuations by purchasing common equity in other
REITs. The Company is continuing to execute its RSVP initiative,
which resulted in the previously announced sale of its equity
interest in another REIT for $10,577,000. A nonrecurring gain of
$581,000 was recognized on the sale in the second quarter of
2000. Proceeds from the sale were used to purchase 93,471 shares
of Parkway common stock at an average price of $28.07 per share
and in equity securities of other REITs. At September 30, 2000,
the securities held are reflected in the consolidated balance
sheet at their market value of $16,632,000 and the net unrealized
gain on these securities of $95,000 reflected in shareholders'
equity.
On June 20, 2000, the Company completed the cash sale of its
220,000 square foot portfolio of office properties in Northern
Virginia for net proceeds of $28.1 million. The Company recorded
a gain for financial reporting purposes of $7.9 million on the
sale in the second quarter. Of the total net proceeds, $13.4
million was used to reduce amounts outstanding on the Company's
lines of credit. The Company reinvested the remaining $14.7
million of the net proceeds from this sale through a tax-deferred
exchange by purchasing 133,000 rentable square feet of Class A
office condominium space in St. Petersburg, Florida.
On June 22, 2000, the Company closed on the cash sale of its
116,000 square foot office property in Little Rock, Arkansas for
net proceeds of $11.1 million. The Company recorded a gain for
financial reporting purposes of $973,000 on the sale in the
second quarter. The net proceeds from the sale were used to
reduce amounts outstanding on the Company's lines of credit.
On August 3, 2000, the Company purchased 133,000 rentable
square feet of Class A office condominium space in the Central
Station building in St. Petersburg, Florida for $16,500,000.
Central Station is a two-story office complex, which is part of
an eight-story commercial condominium building containing 630,000
square feet. The remaining six floors of the building, referred
to as the South Core Parking Garage are owned separately by
unrelated parties. The shell of the building was constructed in
1990, and the two floors of office space were completed in 1998.
The building is located in the central business district of St.
Petersburg, Florida.
(5) Deconsolidation of Moore Building Associates LP
The redevelopment of the Toyota Center, formerly the Moore
Building, was substantially completed as of June 30, 2000. This
building is owned by Moore Building Associates LP (the
"Partnership") in which the Company has an ownership interest.
The Partnership added an institutional investor in March 2000,
subject to certain conditions of the Partnership agreement
pertaining to the completion of the building and realization of
the historic tax credits. During the second quarter of 2000, the
majority of these conditions were met and management determined
that the certification of the historic tax credits was probable.
With the conditions for the institutional investor ownership in
the Partnership being met, the Company's ownership interest is
less than 1%. Therefore, the Company deconsolidated the
Partnership in the second quarter of 2000 resulting in an
increase of $18,358,000 in a note receivable from the Partnership
and a corresponding decrease in real estate development. During
the second quarter of 2000, the Partnership completed a
$15,000,000 permanent financing of the Toyota Center with loan
proceeds used to reduce the Company's note receivable from the
Partnership. The Company used these proceeds to reduce its short-
term borrowings under its bank lines of credit. At September 30,
2000, the Company's investment in this project consisted of a
$7,996,000 note receivable from the Partnership.
(6) Impact of Recently Issued Accounting Standards
The FASB has issued Statement of Financial Accounting
Standards No. 138 ("FASB No. 138"), Accounting for Derivative
Instruments and Hedging Activities which amended certain
provisions of FASB No. 133 and requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. FASB No. 138 is
effective for the Company on January 1, 2001. The Company has no
derivative or hedging instruments outstanding as of September 30,
2000. Management does not anticipate that the adoption of FASB
No. 138 will have a significant effect on the Company's results
of consolidated operations or its financial position.
(7) Capital Transactions
The Company has purchased 191,281 shares of its common stock
during the nine months ending September 30, 2000, at an average
price of $27.93. Subsequent to September 30, 2000, the Company
purchased 8,000 additional shares of its common stock at an
average price of $29.49. Since June 1998, the Company has
purchased a total of 1,514,293 shares of its common stock, which
represents approximately 13.7% of the common stock outstanding
when the buyback program was initiated on June 30, 1998.
On May 10, 2000, the Board of Directors approved the
issuance of 2,000 shares of restricted stock to officers of the
Company. The stock price on the date of grant was $31.125. The
vesting period for the stock is 10 years or 32 months if certain
operating results are achieved by the Company.
(8) Subsequent Events
On October 6, 2000, the Company entered into an agreement
with Five Arrows Realty Securities III LLC, an investment fund
managed by Rothschild Realty, Inc., a member of the Rothschild
Group, providing for the sale of up to 2,142,857 shares of Series
B Convertible Cumulative Preferred Stock at a price of $35.00 per
share with an initial dividend payment rate of 8.34%. The net
price to Parkway of the shares will be $34.30 per share. Under
the terms of this agreement, Parkway may sell the Series B
Preferred Stock to Five Arrows at up to four closings, at
Parkway's option, during the nine months subsequent to October 6,
2000. Under the terms of the agreements entered into with Five
Arrows, Parkway has appointed Matthew W. Kaplan, a managing
director of Rothschild Realty, Inc. to its board of directors and
has granted Five Arrows certain registration rights. In
connection with this sale, Parkway issued a warrant to Five
Arrows to purchase 75,000 shares of common stock at a price of
$35.00 for a period of seven years.
On October 20, 2000, the Company and Southeast OfficeInvest,
LLC, an affiliate of Investcorp International, Inc., announced
the formation of a strategic joint venture to acquire up to $100
million of office properties. The venture is targeting A and B+
quality office properties in Central Business Districts in the
Southeast and Southwest United States. Under the terms of the
joint venture agreement, Parkway will operate, manage, and lease
the properties on a day-to-day basis, provide acquisition and
construction management services to the venture, and receive fees
for providing these services. The venture will arrange first
mortgage financing which will approximate 70% of the value of
each office asset purchased. This debt will be non-recourse,
property specific debt. Investcorp will provide 75% of the joint
venture capital, and Parkway will provide 25%, with distributions
being made pro rata. No investments have been made and no funds
have been advanced under this agreement as of November 14, 2000.
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, 2000
compared to the balance sheet dated December 31, 1999.
During the nine months ending September 30, 2000, total
assets increased $15,000 and office and parking properties
(before depreciation) increased $4,071,000 or .6%.
Parkway's direct investment in office and parking properties
and office redevelopment decreased $27,130,000 net of
depreciation to a carrying amount of $598,235,000 at September
30, 2000 and consisted of 49 operating properties. During the
nine months ending September 30, 2000, the Company capitalized
building improvements and additional purchase expenses of
$10,248,000 and recorded depreciation expense of $13,415,000
related to its office and parking properties.
During the nine months ended September 30, 2000, office
properties held for sale decreased $19,621,000. On June 20,
2000, the Company completed the cash sale of its 220,000 square
foot portfolio of office properties in Northern Virginia for net
proceeds of $28.1 million. The Company recorded a gain for
financial reporting purposes of $7.9 million on the sale in the
second quarter. Of the total net proceeds, $13.4 million was
used to reduce amounts outstanding on the Company's lines of
credit. The Company reinvested the remaining $14.7 million of
the net proceeds from this sale through a tax-deferred exchange
by purchasing 133,000 rentable square feet of Class A office
condominium space in St. Petersburg, Florida.
On June 22, 2000, the Company closed on the cash sale of its
116,000 square foot office property in Little Rock, Arkansas for
net proceeds of $11.1 million. The Company recorded a gain for
financial reporting purposes of $973,000 on the sale in the
second quarter. The net proceeds from the sale were used to
reduce amounts outstanding on the Company's lines of credit.
On August 3, 2000, the Company purchased 133,000 rentable
square feet of Class A office condominium space in the Central
Station building in St. Petersburg, Florida for $16,500,000.
Central Station is a two-story office complex, which is part of
an eight-story commercial condominium building containing 630,000
square feet. The remaining six floors of the building, referred
to as the South Core Parking Garage are owned separately by
unrelated parties. The shell of the building was constructed in
1990, and the two floors of office space were completed in 1998.
The building is located in the central business district of St.
Petersburg, Florida.
The Company is also considering selling properties in
Birmingham, Alabama and Indianapolis, Indiana. The investment
decisions will be based upon the Company's analysis of existing
markets and competing investment opportunities.
During the nine months ending September 30, 2000, office and
parking redevelopment decreased $18,511,000. The redevelopment
of the Toyota Center, formerly the Moore Building, was
substantially completed as of June 30, 2000. This building is
owned by Moore Building Associates LP (the "Partnership") in
which the Company has an ownership interest. The Partnership
added an institutional investor in March 2000, subject to certain
conditions of the Partnership agreement pertaining to the
completion of the building and realization of the historic tax
credits. During the second quarter of 2000, the majority of
these conditions were met and management determined that the
certification of the historic tax credits was probable. With the
conditions for the institutional investor ownership in the
Partnership being met, the Company's ownership interest is less
than 1%. Therefore, the Company deconsolidated the Partnership
in the second quarter of 2000 resulting in an increase of
$18,358,000 in a note receivable from the Partnership and a
corresponding decrease in real estate development. During the
second quarter of 2000, the Partnership completed a $15,000,000
permanent financing of the Toyota Center with loan proceeds used
to reduce the Company's note receivable from the Partnership.
The Company used these proceeds to reduce its short-term
borrowings under its bank lines of credit. At September 30,
2000, the Company's investment in this project consisted of a
$7,996,000 note receivable from the Partnership. The adjacent
770-space garage, which is owned by the Company, was completed
April 1, 2000 with the majority of the 84% pre-leased monthly
parking fees commencing on that day.
At September 30, 2000, non-core assets, other than mortgage
loans, totaled $4,283,000. The Company expects to continue its
efforts to liquidate these assets.
During the nine months ended September 30, 2000, the Company
purchased $26,533,000 in common equity of other publicly traded
real estate investment trusts ("REIT") in accordance with the
Company's REIT Significant Value Program ("RSVP Program"). The
RSVP Program is the Company's initiative to take advantage of
discounted REIT valuations by purchasing common equity in other
REITs. The Company is continuing to execute its RSVP initiative,
which resulted in the previously announced sale of its equity
interest in another REIT for $10,577,000. A nonrecurring gain of
$581,000 was recognized on the sale in the second quarter of
2000. Proceeds from the sale were used to purchase 93,471 shares
of Parkway common stock at an average price of $28.07 per share
and in equity securities of other REITs. At September 30, 2000,
the securities held are reflected in the consolidated balance
sheet at their market value of $16,632,000 and the net unrealized
gain on these securities of $95,000 reflected in shareholders'
equity.
Notes payable to banks totaled $72,037,000 at September 30,
2000 and are the result of advances under bank lines of credit to
purchase additional office properties, make improvements to
office properties, fund redevelopment costs, purchase real estate
equity securities and purchase Company stock.
Mortgage notes payable without recourse increased
$13,415,000 during the nine months ended September 30, 2000 due
to the funding of a $21,000,000 fixed rate loan and scheduled
principal payments of $7,585,000. On August 14, 2000, the
Company closed a $21,000,000 non-recourse first mortgage on the
Capitol Center building in Columbia, South Carolina. The loan
was funded by Principal Commercial Funding LLC at a fixed rate of
8.18%. The loan proceeds were used to reduce amounts outstanding
on the Company's lines of credit.
The Company expects to continue seeking fixed rate, non-
recourse mortgage financing at terms ranging from ten to twenty
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 45% although such ratio
may from time to time temporarily exceed 45%, especially when the
Company has incurred significant amounts of short-term debt in
connection with acquisitions. In addition, volatility in the
price of the Company's common stock, which is out of the control
of the Company, may result in a debt to total market
capitalization exceeding 45% from time to time. In addition to
the debt to total market capitalization ratio, the Company also
monitors interest and fixed charge coverage ratios. Interest
coverage ratios are computed by comparing the cash interest
accrued to earnings before interest, taxes, depreciation and
amortization. The interest coverage ratio for the nine months
ending September 30, 2000 and 1999 was 2.99 and 3.31 times,
respectively. Fixed charge coverage ratios are computed by
comparing the cash interest accrued, principal payments made on
mortgage loans and preferred dividends paid to earnings before
interest, taxes, depreciation and amortization. The fixed charge
coverage ratio for the nine months ending September 30, 2000 and
1999 was 1.77 and 1.85 times, respectively.
Stockholders' equity increased $4,638,000 during the nine
months ended September 30, 2000 as a result of the following
factors (in thousands):
Increase (Decrease)
-------------------
Net income $28,645
Net unrealized gain on real estate
equity securities 95
-------
Comprehensive income 28,740
Shares purchased-Company common stock (5,341)
Preferred stock dividends declared (4,348)
Common stock dividends declared (15,316)
Exercise of stock options 131
Shares issued in lieu of directors' fees 64
Amortization of unearned compensation 708
-------
$ 4,638
=======
The Company has purchased 191,281 shares of its common stock
during the nine months ended September 30, 2000, at an average
price of $27.93. Subsequent to September 30, 2000, the Company
purchased 8,000 additional shares of its common stock at an
average price of $29.49. Since June 1998, the Company has
purchased a total of 1,514,293 shares of its common stock, which
represents approximately 13.7% of the common stock outstanding
when the buyback program was initiated on June 30, 1998.
On May 10, 2000, the Board of Directors approved the
issuance of 2,000 shares of restricted stock to officers of the
Company. The stock price on the date of grant was $31.125. The
vesting period for the stock is 10 years or 32 months if certain
operating results are achieved by the Company.
RESULTS OF OPERATIONS
Comments are for the three months and nine months ended September
30, 2000 compared to the three months and nine months ended
September 30, 1999.
Net income available for common stockholders for the three
months ended September 30, 2000 was $5,038,000 ($.51 per basic
common share) as compared to $4,580,000 ($.45 per basic common
share) for the three months ended September 30, 1999. Net income
available for common stockholders for the nine months ended
September 30, 2000 was $24,297,000 ($2.47 per basic common share)
as compared to $14,751,000 ($1.46 per basic common share) for the
nine months ended September 30, 1999. Net income included net
gains from the sale of real estate and securities in the amount
of $9,472,000 and $86,000 for the nine months ended September 30,
2000 and 1999, respectively.
The primary reason for the change in the Company's net
income from office and parking properties for 2000 as compared to
1999 is the net effect of the operations of the following
properties purchased and sold:
Properties Purchased/Constructed:
--------------------------------
Office Properties Purchase Date Sq. Feet
----------------- --------------- --------
Moorefield I 01/12/99 46,000
Capitol Center 07/01/99 466,000
Central Station 08/03/00 133,000
Parking Property Completion Date Spaces
-------------------- --------------- --------
Toyota Center Garage 04/01/00 770
Properties Sold:
---------------
Office Properties Date Sold Sq. Feet
----------------------- --------------- --------
West Office 11/30/99 21,000
Cherokee 06/20/00 54,000
Courthouse 06/20/00 95,000
Loudoun Plaza 06/20/00 72,000
First Little Rock Plaza 06/22/00 116,000
Operations of office and parking properties are summarized
below (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Income $ 29,312 $ 29,520 $ 88,990 $ 83,763
Operating expense (12,042) (12,558) (36,616) (34,997)
-------- -------- -------- --------
17,270 16,962 52,374 48,766
Interest expense (4,137) (3,773) (12,079) (11,304)
Depreciation and
amortization (4,933) (4,568) (14,402) (12,868)
-------- -------- -------- --------
Net Income $ 8,200 $ 8,621 $ 25,893 $ 24,594
======== ======== ======== ========
Dividend income increased $546,000 for the nine months
ending September 30, 2000 compared to the nine months ending
September 30, 1999. The increase is due to the income earned on
the purchase of common equity of other publicly traded REITs in
2000 through the Company's RSVP Program.
Income also increased due to the interest income earned on
the note receivable from Moore Building Associates LP of $503,000
and the incentive management fee earned from the Toyota Center
(formerly Moore Building) of $120,000 for the nine months ending
September 30, 2000.
Net losses on operations of other real estate properties
held for sale were $46,000 and $99,000 for the nine months ending
September 30, 2000 and 1999, respectively, and consisted
primarily of property taxes on land held for sale.
The $775,000 increase in interest expense on office
properties is primarily due to the mortgage loans assumed and/or
new loans placed in 1999 and 2000. The average interest rate on
mortgage notes payable as of September 30, 2000 and 1999 was
7.47% and 7.40%, respectively.
The $2,290,000 increase in contractual interest expense on
bank notes for the nine months ending September 30, 2000 compared
to the nine months ending September 30, 1999 is primarily due to
the increase in the average balance of borrowings outstanding
under bank lines of credit from $58,849,000 during 1999 to
$91,240,000 during 2000. In addition, weighted average interest
rates under existing bank lines of credit increased from 6.38%
for the nine months ending September 30, 1999 to 7.70% for the
nine months ending September 30, 2000.
General and administrative expenses were $3,115,000 and
$3,086,000 for the nine months ended September 30, 2000 and 1999,
respectively. The net increase of $29,000 is primarily due to
the increase in amortization of unearned compensation expense
pertaining to the Company's restricted stock shares offset by the
decrease in due diligence expense. A non-recurring charge of
$450,000 was recorded in the third quarter of 1999 for certain
expenses related to an unsuccessful merger transaction.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Cash and cash equivalents were $1,249,000 and $885,000 at
September 30, 2000 and December 31, 1999, respectively. The
Company generated $28,482,000 in cash flows from operating
activities during the nine months ending September 30, 2000
compared to $32,249,000 for the same period of 1999. The Company
used $2,305,000 in investing activities during the nine months
ending September 30, 2000. In implementing its investment
strategy, the Company used $26,533,000 to purchase real estate
equity securities during the nine months ended September 30,
2000. Proceeds from the sale of real estate and securities were
$49,753,000 and $401,000 for the nine months ended September 30,
2000 and 1999, respectively. The Company also spent $11,227,000
to make capital improvements at its office properties and
$8,167,000 toward the Memphis real estate redevelopment projects.
Cash dividends of $19,415,000 ($1.56 per common share and $1.64
per preferred share) were paid to stockholders, 191,281 shares of
common stock were repurchased for a total of $5,341,000.
Proceeds from long-term financing were $21,000,000 and principal
payments of $7,585,000 were made on mortgage notes payable during
the nine months ending September 30, 2000.
Liquidity
The Company plans to continue pursuing the purchase of
additional investments that meet the Company's investment
criteria and intends to use bank lines of credit, proceeds from
the sale of non-core assets, proceeds from the sale of
convertible preferred stock and cash balances to fund those
acquisitions. At September 30, 2000, the Company had $72,037,000
outstanding under two bank lines of credit.
The Company is exposed to interest rate changes primarily as
a result of its lines of credit used to maintain liquidity and
fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's
interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives, the Company
borrows at fixed rates, but also has a three-year $150 million
unsecured revolving credit facility with a consortium of 13 banks
with Chase Bank of Texas, National Association serving as the
lead agent (the "$150 million line") and a three-year $10 million
unsecured line of credit with AmSouth Bank (the "$10 million
line"). The interest rates on the lines of credit are equal to
the 30 day LIBOR rate plus 112.5 to 137.5 basis points, depending
upon overall Company leverage. The interest rate on the $10
million line and the $150 million line was 8.0% at September 30,
2000.
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 137.5 basis points. The
Company paid a facility fee of 40 basis points ($40,000) upon
closing of the loan agreement and pays an annual administration
fee of $3,000. The Company also pays fees on the unused portion
of the line based upon overall Company leverage, with the current
rate set at 25 basis points.
The $150 million line is also unsecured and is expected to
fund acquisitions of additional 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
137.5 basis points. The Company paid a facility fee of $150,000
and originating fees of $432,500 (28.8 basis points) upon closing
of the loan agreement and pays an annual administration fee of
$37,500. The Company also pays unused fees on the unused portion
of the line based upon overall Company leverage, with the current
rate set at 25 basis points.
At September 30, 2000, the Company had $228,151,000 of non-
recourse fixed rate mortgage notes payable with an average
interest rate of 7.47% secured by office properties and
$72,037,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately
$665,112,000 at September 30, 2000 (using the September 30, 2000
closing price of $30.50 per common share), the Company's debt
represented approximately 45.13% of its total market
capitalization. The Company plans to maintain a ratio of debt to
total market capitalization from 25% to 45% although such ratio
may from time to time temporarily exceed 45%, especially when the
Company has incurred significant amounts of short-term debt in
connection with acquisitions. In addition, volatility in the
price of the Company's common stock, which is out of the control
of the Company, may result in a debt to market capitalization
exceeding 45% from time to time. In addition to the debt to
total market capitalization ratio, the Company also monitors
interest and fixed charge coverage ratios. Interest coverage
ratios are computed by comparing the cash interest accrued to
earnings before interest, taxes, depreciation and amortization.
The interest coverage ratio for the nine months ending September
30, 2000 and 1999 was 2.99 and 3.31 times, respectively. Fixed
charge coverage ratios are computed by comparing the cash
interest accrued, principal payments paid on mortgage loans and
preferred dividends paid to earnings before interest, taxes,
depreciation and amortization. The fixed charge coverage ratio
for the nine months ending September 30, 2000 and 1999 was 1.77
and 1.85 times, respectively.
The table below presents the principal payments due and
weighted average interest rates for the fixed rate debt.
Average Fixed Rate Debt
Interest Rate (In thousands)
------------- ---------------
2000* 7.47% $ 2,681
2001 7.47% 11,235
2002 7.48% 12,100
2003 7.48% 14,697
2004 7.48% 13,969
2005 7.48% 15,047
Thereafter 7.63% 158,422
--------
Total $228,151
========
Fair value at 9/30/00 $220,343
========
*Remaining three months
The Company anticipates that its current cash balance,
operating cash flows, proceeds from the sale of office properties
held for sale and other assets, proceeds from the sale of
convertible preferred stock 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") is an
appropriate measure of performance for equity REITs. Funds from
operations is 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. In addition,
effective January 1, 2000, NAREIT has clarified that FFO should
include both recurring and non-recurring operating results except
those defined as extraordinary items under generally accepted
accounting principles and gains or losses from sales of
depreciable operating property. The Company's calculation of FFO
shown below is consistent with NAREIT's recent clarification and
includes an adjustment of $86,000 for the nine months ending
September 30, 1999 to include gains on sales of real estate held
for sale during that quarter. 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, 2000 and 1999 (in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net income $ 6,488 $ 6,030 $28,645 $19,099
Adjustments to
derive funds from
operations:
Preferred dividends (1,450) (1,450) (4,348) (4,348)
Depreciation and
amortization 4,933 4,568 14,402 12,868
Equity in earnings (12) (12) (34) (26)
Distributions from
unconsolidated
subsidiaries - - 20 19
Gain on sale of real
estate - - (8,891) -
Amortization of
discounts, deferred
gains and other (2) (13) (21) (48)
------- ------- ------- -------
Funds from Operations $ 9,957 $ 9,123 $29,773 $27,564
======= ======= ======= =======
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
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
Straight-line rents $ 353 $ 300 $1,125 $ 993
Building improvements 479 690 2,012 1,660
Tenant improvements:
New leases 466 511 2,585 1,201
Lease renewals 1,380 391 3,019 1,640
Leasing commissions:
New leases 208 227 972 513
Lease renewals 206 135 628 517
Leasing commissions
amortized 335 249 947 691
Upgrades on recent
acquisitions 477 1,680 2,011 5,446
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 rent 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 that
are not in the present or past tense, that discuss the Company's
beliefs, expectations or intentions or those pertaining to the
Company's capital resources, profitability and portfolio
performance and estimates of market rental rates. Forward-
looking statements involve numerous risks and uncertainties. The
following factors, among others discussed herein and in the
Company's filings under the Securities Exchange Act of 1934,
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, 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 and in the
Company's filings under the Securities Exchange Act of 1934.
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.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
See information appearing under the caption "Liquidity" in
Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 5. Other Information
On September 11, 2000, the Company announced that it is
dividing the responsibilities currently performed by Sarah P.
Clark, Chief Financial Officer, and creating the new senior
management position of Senior Vice President of Administration
and Strategic Planning. Ms. Clark relinquished the duties of CFO
effective November 1, 2000 to fill the new executive position,
which will incorporate the areas of technology, risk management,
administration, corporate governance and strategic planning. The
company has hired Marshall A. Loeb, a former employee of the
company, as its new CFO with responsibilities for all traditional
CFO duties including financial management, capital markets,
investor relations, accounting and SEC and REIT compliance and
reporting. Mr. Loeb joined the Company full-time on November 1,
2000.
PARKWAY PROPERTIES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (27) - Financial Data Schedule attached hereto.
(b) Reports on Form 8-K
(1) 8-K Filed - September 12, 2000
New senior management position of Senior
Vice President of Administration and
Strategic Planning and announcement of new
Chief Financial Officer.
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 14, 2000 PARKWAY PROPERTIES, INC.
/s/ Regina P. Shows
Regina P. Shows, CPA
Chief Accounting Officer
