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Article by DailyStocks_admin    (03-19-12 01:33 AM)

Description

Parkway Ppty. President and CEO James R Heistand bought 25000 shares on 3-07-2012 at $ 9.61

BUSINESS OVERVIEW

Overview

As used herein, the terms “we,” “us,” “our” “Parkway” and the “Company” refer to Parkway Properties, Inc., a Maryland corporation, individually or together with its subsidiaries, including Parkway Properties LP, a Delaware limited partnership, and our predecessors.

We are a self-administered real estate investment trust (“REIT”) specializing in the ownership of quality office properties in higher growth submarkets in the Sunbelt region of the United States. In Parkway’s core markets, the Company owns or has an interest in 34 office properties located in seven states with an aggregate of approximately 8.4 million square feet of leasable space at March 1, 2012. The Company also owns or has an interest in 15 non-strategic office properties totaling 2.7 million square feet at March 1, 2012. The non-strategic office properties include 11 properties that were classified as held for sale at December 31, 2011, and four properties in non-strategic markets including Columbia, South Carolina, Jackson, Mississippi, Memphis, Tennessee and New Orleans, Louisiana. Part I. Item 2. “Properties – Office Buildings” includes a complete listing of core properties and non-strategic properties by market. Fee-based real estate services are offered through wholly-owned subsidiaries of the Company, which in total manage and/or lease approximately 13.9 million square feet for third-party owners at March 1, 2012. Unless otherwise indicated, all references to square feet represent net rentable area.

Administration

The Company generally performs commercial real estate leasing, management and acquisition services on an in-house basis. As of December 31, 2011, we had approximately 341 employees. Our principal executive office is located at 390 North Orange Avenue, Suite 2400, Orlando, FL 32801 and our telephone number is (407) 650-0593. In addition, we have regional offices in Jackson, MS and Jacksonville, FL. Parkway's management team consists of experienced office property specialists with proven capabilities in office property (i) operations; (ii) leasing; (iii) management; (iv) acquisition/disposition; (v) financing; (vi) capital allocation; and (vii) accounting and financial reporting. Our 15 senior officers have an average of 22 years of real estate industry experience. Management has developed a highly service-oriented operating culture and believes that its focus on operations, proactive leasing, property management and asset management activities will result in higher customer retention and occupancy over the long-term and will translate into enhanced stockholder value.

Business Objective and Operating Strategies

Our business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets. We intend to achieve this objective by executing on the following business and growth strategies:



Create Value as the Leading Owner of Quality Assets in Core Submarkets . Our investment strategy is to pursue attractive returns by focusing primarily on owning high-quality office buildings and portfolios that are well-located and competitively positioned within central business district and urban infill locations within our core submarkets. We also seek to pursue value-add investment opportunities on a limited basis, for example by acquiring under-leased assets at attractive purchase prices and increasing occupancy at those assets over time, to complement the balance of the core portfolio. Further, we intend to pursue an efficient capital allocation strategy that maximizes the returns on our invested capital. This may include selectively disposing of properties when we believe returns have been maximized and redeploying capital into acquisitions or other opportunities.



Maximize Cash Flow by Continuing to Enhance the Operating Performance of Each Property . We provide property and asset management and leasing services to our portfolio, actively managing our properties and leveraging our customer relationships to improve operating performance, maximize long-term cash flow and enhance stockholder value. By developing an ownership plan for each of our properties and then continually managing our properties to those plans throughout our ownership, we seek to attain a favorable customer retention rate by providing outstanding property management and customer service programs responsive to the varying needs of our diverse customer base. We will also employ a judicious prioritization of capital projects to focus on projects that enhance the value of a property through increased rental rates, occupancy, service delivery, or enhanced reversion value.





Realize Leasing and Operational Efficiencies and Gain Local Advantage . We expect to concentrate our real estate portfolio in submarkets where we believe that we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies. We believe that strengthening our local presence and leveraging our extensive market relationships will yield superior market information and service delivery and facilitate additional investment opportunities to create long-term stockholder value.

Joint Ventures and Partnerships

Management views investing in wholly-owned properties as the highest priority of our capital allocation, however the Company intends to selectively pursue joint ventures if we determine that such a structure will allow us to reduce anticipated risks related to a property or portfolio or to address unusual operational risks. Under the terms of these joint ventures and partnerships, where applicable, Parkway will seek to manage all phases of the investment cycle including acquisition, financing, operations, leasing and dispositions. The Company will receive fees for providing these services.

At December 31, 2011, Parkway had two partnerships structured as discretionary funds and one other joint venture partnership agreement.

Parkway Properties Office Fund, L.P. (“Fund I”), a $500.0 million discretionary fund, was formed on July 6, 2005 and was fully invested at February 15, 2008. Fund I was structured such that Ohio Public Employees Retirement System (“Ohio PERS”) would be a 75% investor and Parkway a 25% investor in the fund with an original target capital structure of approximately $200.0 million of equity capital and $300.0 million of non-recourse, fixed-rate first mortgage debt.

On December 31, 2011, the Company completed the sale of its interest in nine assets in the Fund I portfolio to Ohio PERS. The completed sale of Fund I assets included nine properties totaling approximately 2.0 million square feet in five markets, representing a majority of the Fund I assets. Additionally, on March 1, 2012, the Company completed the sale of its interest in Renaissance Center, a 190,000 square foot office property located in Memphis, Tennessee. The sale of the remaining three assets in the Fund I portfolio is expected to close during the first half of 2012, subject to obtaining necessary lender consents in connection with the existing mortgage loans and customary closing conditions.

Parkway Properties Office Fund II, L.P. (“Fund II”), a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012. Fund II was structured such that Teacher Retirement System of Texas (“TRST”) would be a 70% investor and Parkway a 30% investor in the fund, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt. Fund II acquired 12 properties totaling 4.2 million square feet in Atlanta, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia.

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned. Thereafter, 56% will be distributed to TRST and 44% to Parkway. The term of Fund II will be seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the discretion of Parkway.

Third-Party Management

The Company benefits from a fully integrated management infrastructure, provided by its wholly-owned subsidiaries (collectively, the “Management Companies”). As of March 1, 2012, the Management Companies were managing and/or leasing properties containing an aggregate of approximately 23.1 million net rentable square feet, of which approximately 9.2 million net rentable square feet related to properties owned by us and approximately 13.9 million net rentable square feet related to properties owned by third parties.

Financing Strategy

The Company’s financing strategy is to maintain a strong and flexible financial position by limiting our debt to a prudent level. The Company monitors a number of leverage and other financial metrics defined in the loan agreements for the Company’s senior unsecured revolving credit facility and working capital unsecured credit facility, which includes but is not limited to the Company’s total debt to total asset value. In addition, the Company also monitors interest, fixed charge and modified fixed charge coverage ratios as well as the net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple. Other traditional measures of leverage are also monitored. Management believes all of the leverage and other financial metrics it monitors; including those discussed above, provide useful information on total debt levels as well as the Company’s ability to cover interest, principal and/or preferred dividend payments with current income. The Company seeks to maintain over the long-term a net debt to EBITDA multiple of between 5.5 and 6.5 times.

The Company intends to finance future growth and future maturing debt with the most advantageous source of capital when available, while also maintaining the Company’s variable interest rate exposure at a prudent level. The Company expects to continue seeking primarily fixed rate, non-recourse mortgage financing with maturities from five to ten years typically amortizing over 25 to 30 years on select office building investments as additional capital is needed. Other sources of capital may include selling common or preferred equity through public offerings or private placements.

Parkway may, in appropriate circumstances, acquire one or more properties in exchange for Parkway's equity securities. Parkway has no set policy as to the amount or percentage of its assets which may be invested in any specific property. Rather than a specific policy, Parkway evaluates each property in terms of whether and to what extent the property meets Parkway's investment criteria and strategic objectives. The strategies and policies set forth above were determined and are subject to review by Parkway's Board of Directors which may change such strategies or policies based upon their evaluation of the state of the real estate market, the performance of Parkway's assets, capital and credit market conditions, and other relevant factors.

Capital Allocation

Capital allocation receives constant review by management and the Board of Directors considering many factors including the capital markets, our weighted average cost of capital, buying criteria (written and published), the real estate market and management of the risk associated with the rate of return. We examine all aspects of each type of investment whether it is a fee simple purchase, joint venture asset, Parkway common stock or a mortgage loan receivable. Each carries a relationship to replacement cost which is still an important underwriting discipline for us. Each has a current yield and a leveraged and unleveraged internal rate of return that can be measured on a relative and absolute basis.

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

The individual operating segments exhibit similar economic characteristics such as being leased by the square foot, sharing the same primary operating expenses and ancillary revenue opportunities and being cyclical in the economic performance based on current supply and demand conditions. The individual operating segments are also similar in that revenues are derived from the leasing of office space to customers and each office property is managed and operated consistently in accordance with Parkway’s standard operating procedures. The range and type of customer uses of our properties is similar throughout our portfolio regardless of location or class of building and the needs and priorities of our customers do not vary widely from building to building. Therefore, Parkway’s management responsibilities do not vary widely from location to location based on the size of the building, geographic location or class.

Available Information

Parkway makes available free of charge on the “Corporate” page of its web site, www.pky.com, its filed and furnished reports on Form 10-K, 10-Q and 8-K and all amendments thereto, as soon as reasonably practicable after Parkway electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The information on our website is not and should not be considered part of this Annual Report and is not incorporated by reference in this document.

The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics and the Charters of the Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee of the Board of Directors are available on the “Corporate” page of Parkway’s web site. Copies of these documents are also available free of charge in print upon written request addressed to Investor Relations, Parkway Properties, Inc., 390 North Orange Avenue, Suite 2400, Orlando, Florida 32801.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a self-administered REIT specializing in the ownership of quality office properties in higher growth submarkets in the Sunbelt region of the United States. At March 1, 2012, Parkway owns or has an interest in a core portfolio of 34 office properties located in seven states with an aggregate of approximately 8.4 million square feet of leasable space. At March 1, 2012, the Company owns or has an interest in 15 non-strategic properties totaling 2.7 million square feet. Three of these properties represent Fund I properties in Atlanta totaling 580,000 square feet and the remaining 12 properties total 2.1 million square feet and represent non-strategic properties in Jackson, Memphis, Columbia and New Orleans. Eleven properties totaling 1.9 million square feet and included in non-strategic properties, were classified as held for sale at December 31, 2011. Part I. Item 2. “Properties – Office Buildings” includes a listing of core and non-strategic properties. Fee-based real estate services are offered through wholly-owned subsidiaries of the Company, which in total manage and/or lease approximately 13.9 million square feet for third-party owners at March 1, 2012. Unless otherwise indicated, all references to square feet represent net rentable area.

Occupancy. Parkway’s revenues are dependent on the occupancy of its office buildings. At January 1, 2012, occupancy of Parkway’s office portfolio was 83.9% compared to 84.4% at October 1, 2011 and 85.3% at January 1, 2011. Adjusting January 1, 2012 occupancy to be reflective of core properties owned at March 1, 2012, occupancy of Parkway’s core portfolio would have been 86.9%. Parkway currently projects an average annual occupancy range of 84.5% to 86.5% during 2012 for its office properties. To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases. These include the Broker Bill of Rights, a short-form service agreement and customer advocacy programs which are models in the industry and have historically helped the Company maintain occupancy over time.

During the fourth quarter of 2011, 47 leases were renewed totaling 284,000 rentable square feet at an average rent per square foot of $23.88, representing a 3.0% rate decrease, and at an average cost of $3.70 per square foot per year of the lease term. During the year ended December 31, 2011, 228 leases were renewed totaling 1.2 million rentable square feet at an average rent per square foot of $20.40, representing an 8.7% decrease, and at an average cost of $2.63 per square foot per year of the lease term.

During the fourth quarter of 2011, 16 expansion leases were signed totaling 81,000 rentable square feet at an average rent per square foot of $24.12 and at an average cost of $5.69 per square foot per year of the lease term. During the year ended December 31, 2011, 64 expansion leases were signed totaling 229,000 rentable square feet at an average rent per square foot of $23.22 and at an average cost of $4.81 per square foot per year of the lease term.

During the fourth quarter of 2011, 31 new leases were signed totaling 161,000 rentable square feet at an average rent per square foot of $21.02 and at an average cost of $4.64 per square foot per year of the term. During the year ended December 31, 2011, 154 new leases were signed totaling 978,000 rentable square feet at an average rent per square foot of $21.17 and at an average cost of $4.79 per square foot per year of the lease term.

Rental Rates . An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates and vice versa. Parkway’s leases typically have three to seven year terms, though the Company does enter into leases with terms that are either shorter or longer than that typical range. As leases expire, the Company seeks to replace the existing leases with new leases at the current market rental rate. For Parkway’s core properties owned as of March 1, 2012, management estimates that it has approximately $0.72 per square foot in rental rate embedded loss in its office property leases. Embedded loss is defined as the difference between the weighted average in-place cash rents including operating expense reimbursements and the weighted average estimated market rental rate.

Customer Retention. Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs. Parkway estimates that it costs five to six times more to replace an existing customer with a new one than to retain the existing customer. In making this estimate, Parkway takes into account the sum of revenue lost during downtime on the space plus leasing costs, which typically rise as market vacancies increase. Therefore, Parkway focuses a great amount of energy on customer retention. Parkway's operating philosophy is based on the premise that it is in the customer retention business. Parkway seeks to retain its customers by continually focusing on operations at its office properties. The Company believes in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders. Over the past ten years, Parkway maintained an average 66% customer retention rate. Parkway’s customer retention rate was 47.1% for the quarter ended December 31, 2011, as compared to 45.4% for the quarter ended September 30, 2011, and 68.3% for the quarter ended December 31, 2010. Customer retention for the years ended December 31, 2011 and 2010 was 51.2% and 67.8%, respectively. The decrease in the customer retention rate for the year ended December 31, 2011, was primarily attributable to the expiration of the 193,000 square foot AutoTrader.com lease at Peachtree Dunwoody Pavilion in Atlanta, the expiration of the 73,000 square foot Alta Mesa lease at 1401 Enclave in Houston, and the early termination of the 135,000 square foot Health Care Services Corporation lease at 111 East Wacker Drive in Chicago.

Business Objective and Operating Strategies

Our business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets. We intend to achieve this objective by executing on the following business and growth strategies:



Create Value as the Leading Owner of Quality Assets in Core Submarkets . Our investment strategy is to pursue attractive returns by focusing primarily on owning high-quality office buildings and portfolios that are well-located and competitively positioned within central business district and urban infill locations within our core submarkets. We also seek to pursue value-add investment opportunities on a limited basis, for example by acquiring under-leased assets at attractive purchase prices and increasing occupancy at those assets over time, to complement the balance of the core portfolio. Further, we intend to pursue an efficient capital allocation strategy that maximizes the returns on our invested capital. This may include selectively disposing of properties when we believe returns have been maximized and redeploying capital into acquisitions or other opportunities.



Maximize Cash Flow by Continuing to Enhance the Operating Performance of Each Property . We provide property and asset management and leasing services to our portfolio, actively managing our properties and leveraging our customer relationships to improve operating performance, maximize long-term cash flow and enhance stockholder value. By developing an ownership plan for each of our properties and then continually managing our properties to those plans throughout our ownership, we seek to attain a favorable customer retention rate by providing outstanding property management and customer service programs responsive to the varying needs of our diverse customer base. We will also employ a judicious prioritization of capital projects to focus on projects that enhance the value of a property through increased rental rates, occupancy, service delivery, or enhanced reversion value.



Realize Leasing and Operational Efficiencies and Gain Local Advantage . We expect to concentrate our real estate portfolio in submarkets where we believe that we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies. We believe that strengthening our local presence and leveraging our extensive market relationships will yield superior market information and service delivery and facilitate additional investment opportunities to create long-term stockholder value.

Joint Ventures and Partnerships

Management views investing in wholly-owned properties as the highest priority of our capital allocation, however the Company intends to selectively pursue joint ventures if we determine that such a structure will allow us to reduce anticipated risks related to a property or portfolio or to address unusual operational risks. Under the terms of these joint ventures and partnerships, where applicable, Parkway will seek to manage all phases of the investment cycle including acquisition, financing, operations, leasing and dispositions. The Company will receive fees for providing these services.

At December 31, 2011, Parkway had two partnerships structured as discretionary funds and one other joint venture partnership agreement.

Fund I, a $500.0 million discretionary fund, was formed on July 6, 2005 and was fully invested at February 15, 2008. Fund I was structured such that OPERS would be a 75% investor and Parkway a 25% investor in the fund, with an original target capital structure of approximately $200.0 million of equity capital and $300.0 million of non-recourse, fixed-rate first mortgage debt.

On December 31, 2011, the Company completed the sale of its interest in nine assets in the Fund I portfolio to Ohio PERS. The completed sale of Fund I assets included nine properties totaling approximately 2.0 million square feet in five markets, representing a majority of the Fund I assets. Additionally, on March 1, 2012, the Company completed the sale of its interest in Renaissance Center, a 190,000 square foot office property located in Memphis, Tennessee. The sale of the remaining three assets in the Fund I portfolio is expected to close during the first half of 2012, subject to obtaining necessary lender consents in connection with the existing mortgage loans and customary closing conditions.

Fund II, a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012. Fund II was structured such that TRST would be a 70% investor and Parkway a 30% investor in the fund, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt. Fund II acquired 12 properties totaling 4.2 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia.

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned. Thereafter, 56% will be distributed to TRST and 44% to Parkway. The term of Fund II will be seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the discretion of Parkway.

Financial Condition

Comments are for the balance sheet dated December 31, 2011 as compared to the balance sheet dated December 31, 2010.

Office and Parking Properties. In 2011, Parkway continued the execution of its strategy of operating and acquiring office properties as well as liquidating non-strategic assets that no longer meet the Company's investment criteria strategic objectives or that the Company has determined value will be maximized by selling. During the year ended December 31, 2011, total assets increased $32.6 million or 2.0%.

Acquisitions and Improvements. Parkway's investment in office and parking properties decreased $467.8 million net of depreciation to a carrying amount of $922 million at December 31, 2011 and consisted of 36 office and parking properties totaling 8.6 million square feet. The primary reason for the decrease in office and parking properties relates to the net effect of building improvements and the purchase of nine office properties, offset by the sale of the majority of the Fund I assets as well as other non-strategic assets. Assets held for sale totaled $382.8 million at December 31, 2011 and consisted of 21 office properties totaling 3.8 million square feet under contract for sale.

On February 4, 2011, the Company purchased its partner’s 50% interest in the Wink-Parkway Partnership (“Wink JV”) for $250,000. The Wink JV was established for the purpose of owning the Wink Building, a 32,000 square foot office property in New Orleans, Louisiana. Upon completing the purchase of its partner’s interest, Parkway now owns 100% of the Wink Building.

On May 18, 2011, the Company closed on the agreement with Eola Capital, LLC and related entities (“Eola”) in which Eola contributed its Property Management Company (the “Management Company”) to Parkway. Eola’s principals contributed the Management Company to Parkway for initial consideration of $32.4 million in cash and contingent consideration of 1.8 million units of limited partnership interest in Parkway’s operating partnership (“OP Units”) to Eola’s principals through an earn-out and earn-up arrangement based on the achievement by the Management Company of certain targeted annual gross fee revenue for the balance of 2011 and 2012. On December 30, 2011, Parkway and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all OP Units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made. Based on the Management Company revenue for 2011, the target was achieved and all OP Units were earned and issued to Eola’s principals on February 28, 2012. All OP Units are redeemable for cash or, at Parkway’s option, shares of Parkway common stock on a one-for-one basis. The Management Company was contributed to a wholly-owned taxable REIT subsidiary and therefore, the Company began incurring income tax expenses upon closing of the agreement. The Management Company currently manages assets totaling approximately 11.4 million square feet and produces annual gross fee revenue of approximately $21.0 million. Parkway funded the cash consideration for the Management Company contribution with operating cash flow, proceeds from the disposition of office properties, proceeds from equity issuance and amounts available under the Company’s senior unsecured revolving credit facility.

The Company is under contract to sell a non-core portfolio of 15 assets (the “Non-Core Portfolio”) in Jackson, Memphis and Richmond for a gross sale price of $147.5 million. The sale is expected to close by the end of the first quarter of 2012, subject to the buyer’s successful assumption of certain existing mortgage loans and customary closing conditions. As of March 1, 2012, the Company had completed the sale of seven properties totaling 580,000 square feet.

The Company recognized a total non-cash impairment loss of approximately $57.2 million in the fourth quarter of 2011 related to the Non-Core Portfolio as well as a parcel of land in Jackson and two remaining assets in Jackson and Memphis; however, this is only an estimate and could change based primarily upon the ultimate timing of the sale. Additionally, the Company recorded a non-cash charge to interest expense in discontinued operations of $2.3 million in the fourth quarter of 2011 related to the termination of a cash flow hedging relationship and the unwinding of an interest rate swap associated with one of the non-core assets. At December 31, 2011, the Non-Core Portfolio was classified as held for sale and all income and expenses classified as discontinued operations for all current and prior periods presented.

On January 6, 2012, Fund II completed the sale of Falls Pointe, a 107,000 square foot office property located in the Central Perimeter submarket of Atlanta for a gross sale price of $6.0 million and Parkway’s ownership share was 30%. In connection with the sale, the Company expects to record a gain on the sale from discontinued operations in the first quarter of 2012 of approximately $1.3 million, of which approximately $400,000 is Parkway’s share. The property was unencumbered with debt at the time of the sale, and Fund II received approximately $4.3 million in net proceeds at closing, of which approximately $1.3 million was Parkway’s share. At December 31, 2011, this property was classified as held for sale and all income and expenses were classified as discontinued operations for all current and prior periods presented.

On January 9, 2012, the Company completed the sale of 111 East Wacker, a 1.0 million square foot office property located in the central business district of Chicago for a gross sale price of $150.6 million. The buyer assumed the existing $147.9 million non-recourse mortgage loan secured by the property. As a result of the property being classified as held for sale at December 31, 2011, the Company recorded a non-cash impairment loss in discontinued operations in 2011 totaling $19.1 million. Parkway received approximately $2.8 million in net proceeds at closing, which were used to reduce amounts outstanding under the Company's senior unsecured revolving credit facility. At December 31, 2011, this property was classified as held for sale and all income and expenses were classified as discontinued operations for all current and prior periods presented.

Land Available for Sale. Land available for sale includes 12 acres of land in New Orleans, Louisiana and decreased $500,000 to a carrying value of $250,000. The decrease is related to a non-cash impairment loss recorded in the fourth quarter of 2011 in connection with the valuation of the land based on a change in the estimated fair value.

Mortgage Loans. Parkway’s investment in mortgage loans decreased $8.8 million or 85.5% for the year ended December 31, 2011 and is primarily due to a non-cash impairment loss recorded on a mortgage loan of $9.2 million in connection with the B participation piece of a first mortgage secured by an 844,000 square foot office property in Dallas, Texas known as 2100 Ross. The borrower is currently in default on the first mortgage and based on current information, the Company does not believe it will recover its investment in the loan. Therefore, Parkway wrote off its investment in the mortgage loan during the third quarter of 2011. The Company’s original cash investment in the loan was $6.9 million and was purchased in November 2007.

Receivables and Other Assets . For the year ended December 31, 2011, rents receivable and other assets decreased $23.1 million or 17.4%. The primary reason for the decrease in receivables and other assets relates the reclassification of certain assets to assets held for sale, completed dispositions in 2011, offset by the increase in lease costs related to the purchase price allocation of eight office properties.

Intangible Assets, Net. For the year ended December 31, 2011, intangible assets net of related amortization increased $45.0 million or 88.9% and was primarily due to the purchase of eight office properties and $26.2 million of goodwill recorded in connection with the Eola combination, offset by the sale of the majority of the Fund I assets and other 2011 dispositions as well as the reclassification of certain assets to assets held for sale.

Management Contracts, Net . For the year ended December 31, 2011, management contracts increased $49.6 million due to the Eola combination.

During the second quarter of 2011, as part of the Company’s combination with Eola, Parkway purchased the management contracts associated with Eola’s property management business. At the purchase date, the contracts were valued at $51.8 million. During the year ended December 31, 2011, the Company recorded amortization expense of $2.2 million on the management contracts.

Cash and Cash Equivalents. Cash and cash equivalents increased $55.5 million or 282.2% for the year ended December 31, 2011 and is primarily due to equity contributions from Fund II’s limited partners for the purchase of office properties which closed during the first quarter of 2012. Parkway’s proportionate share of cash and cash equivalents at December 31, 2011 and December 31, 2010 was $25.8 million and $9.7 million, respectively.

Accounts Payable and Other Liabilities. For the year ended December 31, 2011, accounts payable and other liabilities decreased $8.4 million or 8.6% and is primarily due to the properties sold in 2011 or classified to held for sale in 2011, offset by the recognition of a liability for deferred taxes in the amount of $14.3 million and contingent consideration of $18.0 million, both in connection with the purchase of the Eola management company.

Assets Held for Sale and Liabilities Related to Assets Held for Sale. For the year ended December 31, 2011, assets held for sale increased to $382.8 million and liabilities related to assets held for sale increased to $285.6 million. For a complete discussion of assets and related liabilities held for sale, please reference “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Discontinued Operations.”

Notes Payable to Banks . Notes payable to banks increased $21.5 million or 19.4% for the year ended December 31, 2011. At December 31, 2011, notes payable to banks totaled $132.3 million and the increase is primarily attributable to advances on the Company's senior unsecured revolving credit facility to make investments in and improvements to office properties, offset by proceeds received from the sale of office properties during the year.

On January 31, 2011, the Company closed a new $190.0 million senior unsecured revolving credit facility and a new $10.0 million unsecured working capital revolving credit facility. These credit facilities have an initial term of three years and replaced an existing unsecured revolving credit facility, term loan and working capital facility that were scheduled to mature on April 27, 2011. The Company had a $100.0 million interest rate swap associated with the credit facilities that expired March 31, 2011, and locked LIBOR at 3.635%. Wells Fargo Securities and JP Morgan Securities LLC acted as Joint Lead Arrangers and Joint Book Runners on the new senior unsecured revolving credit facility. In addition, Wells Fargo Bank, N.A. acted as Administration Agent and JPMorgan Chase Bank, N.A. acted as Syndication Agent. Other participating lenders include PNC Bank, N.A., Bank of America, N.A., US Bank, N.A., Trustmark National Bank, and BancorpSouth Bank. The working capital revolving credit facility was provided solely by PNC Bank, N.A. On September 20, 2011, the Company entered into an amendment to the revolving credit facility that reduced the tangible net worth requirement and adjusted the definition of Funds from Operation (“FFO”) under the revolving credit facility.

On February 18, 2011, Fund II obtained a $10.0 million mortgage non-recourse loan secured by Carmel Crossing, a 326,000 square foot office complex in Charlotte, North Carolina. The mortgage loan has a fixed rate of 5.5% and a term of nine years.

On March 31, 2011, Fund II obtained a $9.3 million non-recourse mortgage loan secured by 245 Riverside, a 135,000 square foot office property in Jacksonville, Florida. The mortgage has a stated rate of LIBOR plus 200 basis points, an initial 36 month interest only period and a maturity of March 31, 2019. In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.3% through September 30, 2018.

On April 8, 2011, Fund II obtained a $22.5 million non-recourse mortgage loan secured by Corporate Center Four, a 250,000 square foot office property in Tampa, Florida. The mortgage has a stated rate of LIBOR plus 200 basis points, an initial 36 month interest only period and a maturity of April 8, 2019. In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.4% through October 8, 2018.

On May 11, 2011, in connection with the sale of 233 North Michigan, Parkway repaid the $84.6 million non-recourse mortgage loan that was scheduled to mature in July 2011. The Company recognized a gain on extinguishment of debt of $302,000 during the second quarter of 2011, which is recorded in income from discontinued operations.

On May 18, 2011, Fund II obtained the following mortgage loans in connection with the purchase of four office properties:



A $12.1 million non-recourse mortgage loan secured by Cypress Center, a 286,000 square foot office complex in the Westshore submarket of Tampa, Florida. The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 18, 2016. Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.1% through November 18, 2015.



A $33.9 million non-recourse mortgage loan secured by Bank of America Center, a 421,000 square foot office property in the central business district of Orlando, Florida. The mortgage loan has a stated rate


of LIBOR plus 200 basis points with a maturity of May 18, 2018. Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.7% through November 18, 2017.



A $22.1 million non-recourse mortgage loan secured by Two Ravinia Drive, a 438,000 square foot office property located in the Central Perimeter submarket of Atlanta, Georgia. The mortgage loan has a stated rate of LIBOR plus 200 basis points with a maturity of May 20, 2019. Upon obtaining the mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.99% through November 18, 2018.



A $90.2 million non-recourse mortgage loan secured by Two Liberty Place, a 941,000 square foot office property located in the central business district of Philadelphia, Pennsylvania. The mortgage loan has a fixed rate of 5.2% and a maturity date of June 10, 2019.

On June 1, 2011, the Company repaid a $9.9 million non-recourse mortgage loan secured by Forum I, a 163,000 square foot office property in Memphis, Tennessee. The mortgage loan had a fixed interest rate of 5.3%. The Company repaid the mortgage loan using available proceeds under the credit facility.

Upon its maturity on June 1, 2011, the Company elected not to repay an $8.5 million non-recourse mortgage loan secured by the Wells Fargo Building, a 136,000 square foot office building in Houston. This mortgage loan had a fixed interest rate of 4.4%. A third-party buyer purchased the mortgage and accepted a deed in lieu of foreclosure on the property on December 9, 2011. The Company recognized a total non-cash impairment loss of $11.6 million in discontinued operations during the year ended December 31, 2011, and recorded a gain on the forgiveness of debt in discontinued operations of $8.6 million.

On July 25, 2011, Fund II obtained a $22.0 million non-recourse mortgage loan secured by Hayden Ferry I, a 203,000 square foot office property located in the Tempe submarket of Phoenix, Arizona. The mortgage loan has a stated rate of LIBOR plus 200 basis points, an initial 36 month interest only period, and a maturity date of July 25, 2018. In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 4.5% through January 25, 2018. During the first quarter of 2012, the mortgage loan secured by Hayden Ferry I was amended such that it is now cross-collateralized, cross-defaulted and coterminous with the mortgage loan secured by Hayden Ferry II.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Parkway is a self-administered and self-managed REIT specializing in the acquisition, operations, leasing and ownership of office properties. At October 1, 2011, Parkway owned or had an interest in 67 office properties located in 12 states with an aggregate of approximately 14.5 million square feet of leasable space. Included in the portfolio are 26 properties totaling 6.6 million square feet that are owned jointly with other investors, representing 45.5% of the portfolio. Parkway has reached an agreement in principle to sell its interests in 2.7 million square feet of these jointly owned properties. For further discussion, see “Discretionary Funds” below. Fee-based real estate services are offered through wholly owned subsidiaries of the Company, which in total manage and/or lease approximately 12.9 million square feet for third party owners. The Company generates revenue primarily by leasing office space to its customers and by providing asset management, property management and construction and leasing services to third party office property owners (including joint venture interests). The primary drivers behind Parkway’s revenues are occupancy, rental rates and customer retention.

Occupancy . Parkway’s revenues are dependent on the occupancy of its office buildings. At October 1, 2011, occupancy of Parkway’s office portfolio was 84.4% compared to 84.6% at July 1, 2011 and 85.7% at October 1, 2010. Not included in the October 1, 2011 occupancy rate are 30 signed leases totaling 270,000 square feet, which will take occupancy between now and the third quarter of 2012. Including these leases the Company’s portfolio was 86.3% leased at October 13, 2011. To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases and retain existing customers. These include the Broker Bill of Rights, a short-form service agreement and customer advocacy programs, which the Company believes are models in the industry and have helped the Company maintain occupancy over time.

During the third quarter 2011, 53 leases were renewed totaling 184,000 rentable square feet at an average rent per square foot of $20.97, representing a 11.6% rate decrease, and at an average cost of $3.04 per square foot per year of the lease term. During the nine months ending September 30, 2011, 181 leases were renewed totaling 908,000 rentable square feet at an average rent per square foot of $19.31, representing a 10.7% decrease, and at an average cost of $2.21 per square foot per year of the lease term.

During the third quarter 2011, 20 expansion leases were signed totaling 71,000 rentable square feet at an average rent per square foot of $24.52 and at an average cost of $4.19 per square foot per year of the lease term. During the nine months ending September 30, 2011, 48 expansion leases were signed totaling 148,000 rentable square feet at an average rent per square foot of $22.73 and at an average cost of $3.98 per square foot per year of the lease term.

During the third quarter 2011, 44 new leases were signed totaling 317,000 rentable square feet at an average rent per square foot of $20.09 and at an average cost of $4.57 per square foot per year of the term. During the nine months ending September 30, 2011, 123 new leases were signed on 817,000 rentable square feet at an average rent per square foot of $21.19 and at an average cost of $4.81 per square foot per year of the lease term.

Rental Rates. An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates and vice versa. Parkway’s leases typically have three to seven year terms though the Company does enter into leases with terms that are either shorter or longer than that typical range. As leases expire, the Company seeks to replace the expired leases with new leases at the current market rental rate. At October 1, 2011, Parkway estimates that it had $1.18 per square foot in rental rate embedded loss in its office property leases. Embedded loss is defined as the difference between the weighted average in place cash rents including operating expense reimbursements and the estimated weighted average market rental rate.

Customer Retention . Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs relative to new leases. Parkway estimates that it can cost up to five to six times more to replace an existing customer with a new one than to retain the customer. In making this estimate, Parkway takes into account the sum of revenue lost during downtime on the space plus leasing costs, which typically rise as market vacancies increase. Therefore, Parkway focuses a great amount of energy on customer retention. Parkway’s operating philosophy is based on the premise that it is in the customer retention business. Parkway seeks to retain its customers by continually focusing on operations at its office properties. The Company believes in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders. Over the past ten years, Parkway maintained an average customer retention rate of approximately 69%. Parkway’s customer retention rate was 45.4% for the quarter ending September 30, 2011, as compared to 65.7% for the quarter ending June 30, 2011, and 75.0% for the quarter ending September 30, 2010. Parkway’s customer retention rate for the nine months ended September 30, 2011 and 2010 was 52.6% and 67.5%, respectively.


Strategic Planning. Parkway has historically engaged in strategic planning. Its plans are reviewed continuously to take account of changing conditions. Parkway is currently conducting a full evaluation of its strategy. This will include a comprehensive examination of Parkway’s investment strategy, financing strategy and operational strategy. Parkway is unable to predict at this time the strategic changes that may result from the ongoing review.

Discretionary Funds . On July 6, 2005, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $500.0 million discretionary fund, known as Parkway Properties Office Fund I, LP (“Fund I”), with Ohio Public Employee Retirement System (“Ohio PERS”) for the purpose of acquiring high-quality multi-tenant office properties. Ohio PERS is a 75% investor and Parkway is a 25% investor in the fund. Fund I has been fully invested since February 2008.

The Company has reached an agreement in principle to sell its interests in the office portfolio owned by Fund I, for which Parkway is a limited partner and serves as general partner. The office portfolio is comprised of 2.7 million square feet and Parkway’s effective ownership of the portfolio is approximately 28.2%. The properties are secured by a total of $293.1 million in non-recourse mortgage loans, of which $82.7 million is Parkway’s share, with an average interest rate of 5.6%. In connection with this agreement to sell the Company’s interests in the portfolio owned by Fund I, the Company recorded an impairment loss in the third quarter of 2011 totaling $100.2 million, of which $28.0 million is Parkway’s share.

On May 14, 2008, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $750.0 million discretionary fund, known as Parkway Properties Office Fund II, LP (“Fund II”), with Teacher Retirement System of Texas (“TRST”) for the purpose of acquiring high-quality multi-tenant office properties. TRST is a 70% investor and Parkway is a 30% investor in the fund, which will be capitalized with approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt. Parkway’s share of the equity contribution for the fund will be $112.5 million and will be funded with operating cash flows, proceeds from asset sales, issuance of equity securities and/or advances on the credit facility as needed on a temporary basis. Fund II targets acquisitions in the core markets of Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, and Ft. Lauderdale, as well as other growth markets to be determined at Parkway’s discretion.

Fund II targets properties with an anticipated leveraged internal rate of return of greater than 10%. Parkway serves as the general partner of the fund and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned. Thereafter, 56% will be distributed to TRST and 44% to Parkway. Parkway has four years, or through May 2012, to identify and acquire properties (the “Investment Period”), with funds contributed as needed to close acquisitions. Parkway will exclusively represent the fund in making acquisitions within the target markets and acquisitions with certain predefined criteria. Parkway will not be prohibited from making fee-simple or joint venture acquisitions in markets outside of the target markets, acquiring properties within the target markets that do not meet Fund II’s specific criteria or selling a full or partial interest in currently owned properties. The term of Fund II will be seven years from the expiration of the Investment Period, with provisions to extend the term for two additional one-year periods at the discretion of Parkway. At September 30, 2011, Fund II had remaining investment capacity of $113.9 million of which $17.1 million represents Parkway’s remaining equity contribution that would be due in connection with additional investments in office properties.

Financial Condition

Comments are for the balance sheet dated September 30, 2011 compared to the balance sheet dated December 31, 2010.

Office and Parking Properties. In 2011, Parkway continued the execution of its strategy of operating and acquiring office properties as well as liquidating non-core assets that no longer meet the Company’s investment criteria or the Company has determined value will be maximized by selling. During the nine months ended September 30, 2011, total assets increased $310.5 million or 19.4%.

Acquisitions and Improvements. Parkway's investment in office and parking properties increased $156.0 million net of depreciation to a carrying amount of $1.5 billion at September 30, 2011 and consisted of 68 office and parking properties. The primary reason for the increase in office and parking properties relates to the purchase of nine office properties.

On January 21, 2011, the Company and Fund II acquired the office and retail portion of 3344 Peachtree located in the Buckhead submarket of Atlanta for $167.3 million. 3344 Peachtree contains approximately 484,000 square feet of office and retail space and includes an adjacent eleven-story parking structure. Fund II’s investment in the property totaled $160.0 million, with Parkway funding the remaining $7.3 million. Due to Parkway’s additional investment, the Company’s effective ownership in the property is 33.03%. An additional $2.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. Simultaneous with closing, Fund II assumed the $89.6 million existing non-recourse mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%. In accordance with Generally Accepted Accounting Principles (“GAAP”), the mortgage loan was recorded at $87.2 million to reflect the value of the instrument based on a market interest rate of 5.25% on the date of purchase. Parkway's equity contribution in the investment is $25.5 million and was initially funded through borrowings under the Company's credit facility.

On February 4, 2011, the Company purchased its partner’s 50% interest in the Wink-Parkway Partnership (“Wink JV”) for $250,000. The Wink JV was established for the purpose of owning the Wink Building, a 32,000 square foot office property in New Orleans, Louisiana. Upon completing the purchase of its partner’s interest, Parkway now owns 100% of the Wink Building.

On March 31, 2011, Fund II purchased 245 Riverside located in the central business district of Jacksonville, Florida for $18.5 million. 245 Riverside contains approximately 135,000 square feet of office space. An additional $1.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. In connection with the purchase, Fund II placed a $9.3 million non-recourse mortgage loan secured by the property with an initial thirty-six month interest only period and a maturity date of March 31, 2019. The mortgage loan has a stated rate of LIBOR plus 200 basis points. In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.3% through September 30, 2018. Parkway’s equity contribution of $2.8 million was funded through availability under the Company’s credit facility. Parkway’s effective ownership interest in this asset is 30%.

On April 8, 2011, Fund II purchased Corporate Center Four at International Plaza (“Corporate Center Four”) located in the Westshore submarket of Tampa, Florida for $45.0 million. Corporate Center Four contains approximately 250,000 square feet of office space. An additional $5.6 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. In connection with the purchase, Fund II placed a $22.5 million non-recourse mortgage loan secured by the property with an initial thirty-six month interest only period and a maturity date of April 8, 2019. The mortgage loan has a stated rate of LIBOR plus 200 basis points. In connection with the mortgage loan, Fund II entered into an interest rate swap agreement that fixes the interest rate at 5.4% through October 8, 2018. Parkway’s equity contribution of $6.8 million was funded through availability under the Company’s credit facility. Parkway’s effective ownership interest in this asset is 30%.

On May 18, 2011, Fund II completed the closing of its purchase of four additional office properties for $316.5 million. The four properties include Two Liberty Place in Philadelphia, Two Ravinia Drive in Atlanta, Bank of America Center in Orlando, and Cypress Center I, II and III (“Cypress Center”) in Tampa. The properties contain approximately 2.1 million square feet of office space, and an additional $20.9 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. An existing institutional investor in Two Liberty Place retained an 11% ownership in the property. Parkway’s pro rata share of Two Liberty Place is 19% and Parkway’s partner in Fund II owns the remaining 70% interest. Fund II acquired 100% of the remaining three assets, with Parkway’s ownership at 30%. In connection with the purchases, Fund II placed separate non-recourse mortgage loans on each property totaling $158.3 million with a weighted average interest rate of 4.99%, initial thirty-six month interest only periods, and maturity dates ranging from May 2016 to June 2019. Parkway’s equity contribution of $37.6 million was funded through availability under the Company’s credit facility.

On May 18, 2011, the Company closed on the agreement with Eola Capital, LLC (“Eola”) in which Eola would contribute its Property Management Company (the “Management Company”) to Parkway. Eola’s principals contributed the Management Company to Parkway for initial consideration of $32.4 million in cash and Eola’s principals have the opportunity to earn (i) up to 1.574 million units of limited partnership interest in Parkway’s operating partnership (“OP Units”) through an earn-out arrangement and (ii) up to 226,000 additional OP Units through an earn-up arrangement. To the extent earned, all OP Units are redeemable for shares of Parkway common stock on a one-for-one basis. Earn-out and earn-up consideration is contingent upon the achievement by the Management Company of targeted annual gross fee revenue and/or share price levels during an initial period for the balance of 2011 after closing and a second period for the full calendar year 2012. Parkway also has protections against fee income loss in the form of a provision requiring specific payments to Parkway in the event of certain terminations of existing management contracts and a non-compete agreement with regard to the existing management contracts of the Management Company. The Management Company was contributed to a wholly-owned taxable REIT subsidiary and therefore, the Company began incurring income tax expenses upon closing of the agreement. The Management Company currently manages assets totaling approximately 11.2 million square feet and produced annual gross fee revenue of approximately $21.0 million during 2010. Parkway funded the cash consideration for the Management Company contribution with operating cash flow, proceeds from the disposition of office properties, proceeds from equity issuance and amounts available under the Company’s credit facility.

On June 30, 2011, Fund II purchased Hayden Ferry I located in the Tempe submarket of Phoenix, Arizona, for $39.4 million. Hayden Ferry I contains approximately 203,000 square feet of office space. An additional $4.3 million is expected to be spent for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. Fund II obtained a $22.0 million non-recourse mortgage loan with a fixed interest rate of 4.5%, an initial thirty-six month interest only period, and a maturity date of July 25, 2018. Parkway's equity contribution of $5.2 million was funded through availability under the Company’s credit facility. Parkway’s effective ownership interest in this asset is 30%. Following the purchase of Hayden Ferry I, the total amount invested by Fund II is approximately $636.1 million or 84.8% of the fund’s investment capacity.

The Company is under contract to sell 111 East Wacker, a 1.0 million square foot office property located in the central business district of Chicago, Illinois, for a gross sale price of $150.6 million. The property currently serves as collateral for a $148.5 million non-recourse mortgage loan with a fixed interest rate of 6.3% and maturity date in July 2016. As of September 22, 2011, the buyer has concluded its due diligence and has deposited earnest money of $2.4 million. The sale is expected to close during the fourth quarter of 2011, subject to the buyer’s successful modification and assumption of the existing mortgage loan and customary closing conditions. The Company recognized a non-cash impairment loss of $18.8 million in the third quarter of 2011 and has classified the property as held for sale with all income classified as discontinued operations for all current and prior periods presented.


The Company has reached an agreement in principle to sell its interests in the office portfolio owned by Fund I, for which Parkway is a limited partner and serves as general partner. The office portfolio is comprised of 2.7 million square feet and Parkway’s effective ownership of the portfolio is approximately 28.2%. The properties are secured by a total of $293.1 million in non-recourse mortgage loans, of which $82.7 million is Parkway’s share, with an average interest rate of 5.6%. In connection with this agreement to sell the Company’s interests in the portfolio owned by Fund I, the Company recorded an impairment loss in the third quarter of 2011 totaling $100.2 million, of which $28.0 million is Parkway’s share.

Mortgage Loans. At September 30, 2011, the Company recorded a non-cash impairment loss on a mortgage loan of $9.2 million in connection with the B participation piece of a first mortgage secured by an 844,000 square foot office property in Dallas, Texas known as 2100 Ross. The borrower is currently in default on the first mortgage and based on current information, the Company does not believe it will recover its investment in the loan. Therefore, Parkway has written off its investment in the mortgage loan. The Company’s original cash investment in the loan was $6.9 million and was purchased in November 2007.

Receivables and Other Assets . For the nine months ended September 30, 2011, receivables and other assets increased $28.7 million or 21.7% (includes other assets held for sale). The net increase is primarily due to an increase in lease costs related to the purchase price allocation of eight office properties.

Intangible Assets, Net. For the nine months ended September 30, 2011, intangible assets net of related amortization increased $70.6 million or 139.5% (includes other assets held for sale) and was primarily due to the purchase of eight office properties and $26.2 million of goodwill recorded during the period in connection with the Eola combination.


Management Contracts, Net . For the nine months ended September 30, 2011, management contracts increased $50.7 million due to the Eola combination.

During the second quarter of 2011, as part of the Company’s combination with Eola, Parkway purchased the management contracts associated with Eola’s property management business. At the purchase date, the contracts were valued by an independent appraiser at $52.0 million. During the nine months ended September 30, 2011, the Company recorded amortization expense of $1.3 million on the management contracts. Also, in conjunction with the valuation of the management company, the Company recorded $26.2 million of goodwill, a $31.0 million liability related to contingent consideration and a deferred tax liability of $14.8 million. At September 30, 2011, the allocation of purchase price is still preliminary.

Cash and Cash Equivalents. Cash and cash equivalents increased $13.3 million or 67.5% during the nine months ended September 30, 2011 and is primarily due to equity contributions from Fund II’s limited partners for the purchase of office properties. Parkway’s proportionate share of cash and cash equivalents at September 30, 2011 and December 31, 2010 was $14.2 million and $9.7 million, respectively.

Notes Payable to Banks. Notes payable to banks increased $3.0 million or 2.7% during the nine months ended September 30, 2011. At September 30, 2011, notes payable to banks totaled $113.9 million and the net increase is attributable to advances under the Credit Facility to make investments in and improvements to office properties.

On January 31, 2011, the Company closed a new $190.0 million unsecured revolving credit facility and a new $10.0 million unsecured working capital revolving credit facility (the “Credit Facility”). The new Credit Facility has an initial term of three years and replaced the existing unsecured revolving credit facility, term loan and working capital facility that were scheduled to mature on April 27, 2011. The Company had a $100.0 million interest rate swap associated with the credit facilities that expired March 31, 2011, locking LIBOR at 3.635%. The interest rate on the Company’s Credit Facility is based on LIBOR plus 275 to 350 basis points depending on the Company’s overall leverage with the current rate set at LIBOR plus 325 basis points. Additionally, the Company pays fees on the unused portion of the Company’s Credit Facility ranging between 40 and 50 basis points based upon usage of the aggregate commitment, with the current rate set at 40 basis points. Wells Fargo Securities and JP Morgan Securities LLC acted as Joint Lead Arrangers and Joint Book Runners on the unsecured revolving credit facility. In addition, Wells Fargo Bank, N.A. acted as Administration Agent and JPMorgan Chase Bank, N.A. acted as Syndication Agent. Other participating lenders include PNC Bank, N.A., Bank of America, N.A., US Bank, N.A., Trustmark National Bank, and BancorpSouth Bank. The working capital revolving credit facility was provided solely by PNC Bank, N.A. On September 20, 2011, the Company entered into an amendment to the revolving credit facility, which amendment became effective the date of its execution. The amendment reduced the Tangible Net Worth requirement and adjusted the definition of FFO under the revolving credit facility.

Mortgage Notes Payable. During the nine months ended September 30, 2011, mortgage notes payable increased $205.4 million or 26.6% (including liabilities held for sale) and is due to the placement of non-recourse mortgage loans on eight Fund II properties totaling $222.1 million and the assumption of the $87.2 million non-recourse mortgage loan related to the purchase of 3344 Peachtree, offset by the payoff of two mortgage loans and scheduled principal payments of $9.2 million.

On January 21, 2011, in connection with its purchase of 3344 Peachtree in Atlanta, Georgia, Fund II assumed the $89.6 million existing non-recourse first mortgage loan, which matures on October 1, 2017, and carries a fixed interest rate of 4.8%. In accordance with GAAP, the mortgage loan was recorded at $87.2 million to reflect the fair value of the instrument based on a market interest rate of 5.25% on the date of purchase.

On February 18, 2011, Fund II obtained a $10.0 million non-recourse mortgage loan secured by Carmel Crossing, a 326,000 square foot office complex in Charlotte, North Carolina. The mortgage loan has a fixed rate of 5.5% and is interest only through maturity at March 10, 2020. Parkway received $2.4 million in net proceeds from the loan, which represents its 30% equity investment in the property. The proceeds were used to reduce amounts outstanding under the Company’s credit facility.

On March 31, 2011, Fund II obtained a $9.3 million non-recourse mortgage loan secured by 245 Riverside, a 135,000 square foot office property in Jacksonville, Florida. The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of March 31, 2019. In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.3% through September 30, 2018.

On April 8, 2011, Fund II obtained a $22.5 million non-recourse mortgage loan secured by Corporate Center Four, a 250,000 square foot office property in Tampa, Florida. The mortgage has a stated rate of LIBOR plus 200 basis points, an initial thirty-six month interest only period and a maturity of April 8, 2019. In connection with this mortgage, Fund II entered into an interest rate swap that fixes the interest rate at 5.4% through October 8, 2018.

On May 11, 2011, in connection with the sale of 233 North Michigan, Parkway repaid the $84.6 million non-recourse mortgage loan that was scheduled to mature in July 2011. The Company recognized a gain on extinguishment of debt of $302,000 during the second quarter of 2011, which is recorded in income from discontinued operations.

CONF CALL

Thomas Blalock

Good morning, everyone, and welcome to Parkway's 2010 third quarter conference call. Before we get started with this morning's presentation, I would like to direct you to our website at pky.com where you can find a printable version of today's presentation.

On our website, you will also find copies of the earnings press release from November 1 and a supplemental information package for the third quarter, both of which include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures.

Certain statements contained in this presentation that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Please see the forward-looking statement disclaimer in Parkway's press release for factors that could cause material differences between forward-looking statements and actual results.

I would now like to turn the call over to Steve.

Steve Rogers

Good morning and thank you for joining us today. We accomplished since our last call, so I'll be brief in my comments on the overall economy this quarter. Let's start with some economic commentary from Dr. Barton Smith, our good friend and noticed economist.

PRS sponsors and distributes a quarterly research report by Dr. Smith known as Ahead of the Curve. We've provided an overview of his report as well as a link to the latest edition on Page 2 of our web presentation.

Dr. Smith notes that all recessions have a purpose, and this one is not finished yet. Purpose of this recession is to reset the arrows that created the real estate bubble. To correct these flaws, several adjustments are needed. The most important of which is change in expectations that quick and easy wealth can be obtained through asset speculation.

Until we finish the job of reducing our nation's debt and increasing our savings rate, we will continue to have a low growth recovery similar to Japan in the early '90s. We are optimistic that our country will be successful in correcting these problems and we'll have a strong or better economy long term.

In the meantime, job growth continues to be stagnant. Another 218,000 jobs were lost during the third quarter as the temporary jobs from the 2010 census expired as shown in spaghetti chart on Page 3. The private sector created small amount of jobs in September, but in total only 600,000 of jobs lost have been recovered thus far.

As expected, minimal job growth continues to put pressure on market fundamentals. Our strategy is aligned with the expectation that jobs will not recover quickly and that a new normal or slow economy growth with low to no job growth is possible.

Under this assumption, we believe that our focus should continue to be on financial flexibility which means more liquidity and less overall debt, which we've identified as the C in our now FOCUS plan and reported herein.

A more liquid company during this economic environment should result in more free cash flow to take advantage of accretive investment opportunities that typically exist at the tail end of prolonged recessions.

Toward that end and since our last conference call, we've taken three major steps to improve Parkway's balance sheet. First, we raised $45 million through the reopening of our Series D Preferred Stock. Several great investors participated in the offering and interests far exceeded our needs. This offering was timed in close proximity to our $33 million purchase of our deeply discounted first mortgage notes secured by RubiconPark I assets and proceeds were used primarily to reduce our line of credit.

Second, we completed the foreclosure of RubiconPark I assets and subsequently made our first investment by the Texas Teachers Fund II by selling two of the assets to the Fund and have a third asset under contract for selling to the Fund. This sale to the Fund not only represents a great opportunity to produce attractive returns, but it also represents a $23 million cash inflow to Parkway. The total amount of net cash proceeds from Parkway after the loan purchase, the Preferred Stock offering and the asset contribution to Fund II is around $34 million to $35 million.

To put this amount of cash flow into perspective, $35 million is equal to Partkway's equity requirement to purchase $230 million in total assets in the Fund II. Completing our first investment in Fund II is a big step and we're very active in our other offerings at this time.

The third major step we've taken toward an improved balance sheet is progress made on the company's revolving credit facility renewal. As announced last week, we obtained commitments from eight lenders for a total of $320 million. The company is carrying through with previously communicated plan of structuring a more efficient credit facility that better meets our borrowing needs and company strategy. It is important to note that a very high-quality group of bank line participants led by Wells Fargo and JPMorgan are involved in the credit facility renewal.

Our performance during the third quarter was in line with our expectations, and we're in good shape to meet our operational and financial goals for the year. We signed over 1 million square feet of leases during the third quarter, which represents the single largest quarterly volume of record. Additionally, we made substantial progress on our lease rollover exposure which Will intends to cover in a moment.

FFO for the quarter was $0.63 per share, and we've increased the low end of our guidance range by $0.02 per share. Our FAD for the quarter was $0.24 per share, bringing us to a total FAD of $1.02 per share year-to-date. While this was much better than we expected at this point of the year, the timing of the capital projects related to several of the large long-term leases we signed this summer are expected to occur during the fourth quarter. We ended the quarter at 95.7% occupancy, 87.4% leased and have a 75% customer retention rate during the quarter.

I am very pleased to report to you that in September, Parkway was again selected as one of the best small and medium workplaces by Great Place to Work Institute. This is our fourth time overall and third consecutive year to be chosen for this award. It's a testament to the high level of trust and mutual respect we have at Parkway, which models our strong culture.

With that, I'll now turn the call over to Will for an update on operations.

Will Flatt

Thank you, Steve. The national office vacancy at the end of the third quarter was 17.5% and was slightly better than last quarter. The vacancy rate in Parkway's market was 19% compared to Parkway's vacancy rate of 14%. Construction levels continue to remain at historically low levels, which should help support growth and occupancy as the job market recovers. According to CoStar, it had a second consecutive quarter of positive net absorption and a total of 7 million square feet of positive absorption year-to-date.

We have provided a brief over of the market fundamentals by our three largest markets, Chicago, Houston, Atlanta, on pages 9 through 11 of our company presentation, and I would like to highlight a few of these items for you.

Chicago's vacancy decreased to 20% compared to Parkway's vacancy in Chicago of 9.8%. As we discussed last quarter, the main driver of Parkway's increase in occupancy in Chicago was the commencement of combined insurances 99,000 square foot lease. We have also signed an additional 29,000 square feet of leases in Chicago, but have not commenced yet, including AOL's 19,000 square foot lease at 233 North Michigan, which brings Parkway Chicago lease percentage up to 91.2%.

The Chicago office market had negative net absorption of 1.8 million square feet for the first three quarters of 2010, but there are currently no new office developments under construction today.

Houston's market vacancy remains flat at 18.5%, whereas Parkway's vacancy in Houston increased slightly to 7.6%. As we announced earlier this month, we signed two major new leases at 1401 Enclave with Chemical Market Associates and Callon Petroleum for a total of 38,000 square feet. These new leases combined with our other leasing activity bring our Houston portfolio to 95% leased.

We also signed a major renewal with Nabors for 205,000 square feet which removes a significant amount of lease rollover exposure in Houston for 2011. Overall, the Houston market had negative net absorption of 416,000 square feet so far in 2010 with 2 million square feet or 1.1% of total stock under construction today, most of which is in the CBD where Parkway is not located.

Atlanta's market vacancy took a small step backward this quarter with an increase of 23.3% and negative 165,000 square feet of net absorption year-to-date. Parkway's vacancy in Atlanta followed this trend and increased to 14.3% during this year. Atlanta currently has no new developments under construction today, which should help mitigate continued losses in occupancy in the area.

For our entire portfolio, we had over 1 million square feet of leasing activity during the third quarter, and our customer retention rate was up to 75%. We signed a total of 50 renewals totaling 711,000 square feet and the average rent per square foot of $19.51. While the average rental rates of our renewals have increased over the past two quarters, they're still well below the expiring rates with a negative 15% spread on leasing activity during the third quarter.

This is continued evidence of an extremely competitive leasing environment with the majority of the negotiating power remaining with the customer.

When evaluating a lease, the company considers the overall economics of the lease through a net present value analysis. For example, the Nabors renewal which is our largest renewal during the third quarter at 205,000 square feet was a four-year lease of acquired no-tenant improvements. Total rental rate decline on this lease was approximately 4%. We were able to maintain a relatively high net present value of the lease due to minimal upfront capital cost.

One of the main drivers of the large negative spread in lease renewals this quarter is related to U.S. Cellular's long-term lease at the U.S. Cellular Plaza in Chicago. Since the renewal was signed during the quarter, the effective renewal spread related to this lease is included in the 15.3% average reported. However, U.S. Cellular's lease prior to our renewal does not expire until December 2011.

The structure of renewal keeps U.S. Cellular brand at approximately the same level until January 2012, which is when the effect of a negative rent spread will occur. Our rent spread excluding U.S. Cellular renewal is negative 7.6%, which is in line with our expected rent declines during 2010. We have provided an updated embedded growth chart on Page 13 of the presentation, which also shows that our current estimated market rents are 7.3% below our current inflation rents.

Page 14 of the presentation shows year-to-date average terms leasing cost of our leasing activity compared to our averages over the past five years. Our average lease terms are slightly above average, yet well below late 2009 levels. I mean we've been able to keep our leasing costs at historically low levels on a cost per square foot per year basis.

Our average in-place rents increased for the second consecutive quarter, and our year-to-date average rent is slightly high than our average rent during the first three quarters of 2009. We ended the quarter at 85.7% occupied and increased on lease percentage to 87.4%. The lease percentage includes 121,000 square feet, which will take occupancy in the fourth quarter of 2010. Our year-to-date average occupancy is 85.9%.

Page 15 of the presentation shows an updated schedule of major lease expirations. We have reduced our 2011 expirations to 1.6 million square feet or 11.8% with AutoTrader, Motorola and Alta Mesa Holdings remaining as the only long leases greater than 50,000 square feet that expired during the year.

As we've announced before, we know AutoTrader will vacate upon their expiration date in February 2011. We currently have over 200,000 square feet of prospects for this space, and we are negotiating a lease for approximately 50,000 square feet. However, our customer retention will be lower than normal during the first quarter, and we expect our occupancy to drop in early 2011 until we're able to backfill this space.

Blue Cross Blue Shield at 111 East Wacker in Chicago officially exercised their early termination option as expected and will vacate approximately 230,000 square feet in March of 2012. They will be relocating to the regional expanded headquarters building (inaudible) within the East Loop submarket. With over 17 months of advance notice, we feel confident in our ability to back that significant portion of this space with minimal downtime.

The Blue Cross Blue Shield space shows well and is in good condition, and it is possible that we could receive early buyout dollars during the 17-month period which could help on TI leasing cost needed to re-lease the space.

Looking even further into the future, we have a very manageable expiration schedules show on Page 16 of the presentation with less than 12% expiring each year for the next five years.

With that, I'd now like to turn to Richard for an update on our financial results.

Richard Hickson

Thanks, Will. Our reported FFO for the third quarter was $0.63 per share and our recurring FFO for the quarter was $0.61 per share. We have provided a reconciliation of FFO to recurring FFO on Page 18 of the presentation.

In light of year-to-date performance and our expectations for the fourth quarter, we are revising our 2010 guidance range for reported FFO from $2.72 to $2.92 per share to $2.82 to $2.92 per share and recurring FFO from $2.40 to $2.60 per share to $2.47 to $2.57 per share.

We have provided a list of the major assumptions for our 2010 outlook on Page 20 of the company presentation. The main drivers of the adjustment for guidance are the net effect of higher lease termination fee income than expected and lower interest and G&A expenses, offset by lower NOI, the impact from the sale of One Park Ten and additional dividends from our preferred stock offering.

Parkway's share of recurring same-store GAAP NOI for the quarter was down 7.4% from the same period last year and is down 5.9% year-to-date. We anticipate ending the year with a slightly larger decline in Parkway's share of same-store GAAP NOI relative to our original guidance range, primarily due to straight-line rent associated with new leasing activity and large early renewals. Parkway's share of recurring same store cash NOI was down 4.3% compared to the same period last year and was down 5.8% year-to-date.

FAD is better than expected at this point in year at $0.24 per share for the third quarter and $1.02 per share year-to-date. However, we are expecting a significant amount of capital to be spent during the fourth quarter. We are forecasting negative FAD for the fourth quarter, but our project FAD amount for the year is still in line with our expectations.

On August 9, the company priced an offering of approximately 2 million additional shares of its 8% Series D Cumulative Redeemable Preferred Stock at an offer price of $23.76 per share and an offer yield of 8.5%. We believe an issuance of our Series D Preferred Stock represented favorable pricing for long-term equity capital, while at the same time reducing dilution relative to common equity.

The company used a portion of the $45 million in net proceeds to reduce borrowings under its revolving credit facility with the remainder being used for general corporate purposes. It is important to note that this was a reopening of this Preferred Series, which provides the company the flexibility to call the issuance at any time at Park.

Last week, we announced that we received aggregate commitments from eight lenders totaling $320 million for a new unsecured revolving credit facility. The amount of commitments we received far exceeded our goal of the $190 million, which is the anticipated final size of the credit facility.

As we have reported to you in the past, the company is proactively reducing the size of its credit facility in order to have a more efficient facility that better matches our actual borrowing capacity and funding strategy and should also serve to minimize the amount of unused fees potentially paid by the company over the term of the facility.

In addition to the $190 million credit facility is a $10 million commitment for a separate working capital revolving credit facility, which brings the anticipated combined size of the two facilities to $200 million. The pricing on the new facility will vary between 275 basis points to 350 basis points over a 30-day LIBOR depending upon the company's total debt to total assets ratio. This pricing compared to a spread of 130 basis points on our current credit facility.

It is important to note that the company's $100 million interest rate swap, which fixes LIBOR at 3.64%, will remain in place until its expiration on March 31, 2011. As a result, the company's effective interest rate on its borrowings under the new credit facility will be initially higher than the company currently pays, but should be reduced materially once the rate lock expires assuming LIBOR remains at current levels.

The valuation cap rate used for our property net operating income will remain at 8.25%, and the cap rate used for the company's fee income will decline to 15% from 20%.

We would like to thank Wells Fargo and JPMorgan as lead arrangers and all the other lenders that have provided important commitments to this new credit facility. We plan to have the new credit facility closed during the forth quarter, which is subject to customary documentation and closing conditions, and we will discuss the comprehensive final turns of the new credit facility once it is closed.

On October 8, the company used its credit facility to pay off a $7.6 million mortgage loan secured by One Jackson Place and Jackson Mississippi. This loan had a 7.9% interest rate.

Parkway's only remaining debt maturity in 2010 is a $31 million first mortgage loan secured by Squaw Peak Corporate Center in Phoenix, Arizona, with a fixed interest rate of 4.9%. The company plans to utilize available cash balances and its credit facility to repay this upcoming debt maturity.

Beyond revolving credit facility, our only major debt maturity in 2011 is the mortgage loan secured by 233, North Michigan in Chicago, Illinois. As previously stated, we still anticipate having an ability to achieve a refinancing of this mortgage loan at favorable new terms and pursuit levels.

We made progress this quarter towards reducing the company's debt. Our net debt to EBITDA multiple dropped to six times below our target of 6.5 times or less. Our net debt to gross asset value also dropped to 50.4%, slightly above our goal of 50% or less. Despite this quarter's metrics, maintaining these debt metric levels may prove challenging as our NOI and EBITDA are expected to remain under pressure in these current market conditions.

We also recognize that even though our primary leverage metrics improved this quarter, our increased preferred equity dividends had a negative impact on our fix charge covered ratio. The fixed charge coverage ratio of 1.7 times is lower than we prefer, and we intend to look for opportunities to improve it over time, such as through the reduction of debt and refinancing the secured debt at a lower cost.

On the capital investment side of the business, we announced last week that we completed the first investment by Texas Fund II with the Fund's acquisition of Falls Pointe, Lakewood II and the pending acquisition of Carmel Crossing. We issued a detailed press release on October 29 which provided information on these assets and the history of Parkway's ownership in them. We've also provided a synopsis of the investment on Page 24 of the company presentation.

The sale price of the assets will be a total of $33 million or $59 per square foot. The initial capitalization rate based on projected year one cash NOI at 6.1%. There is currently over $1.4 million of contractual free rent during the first year of ownership of these properties. And adding back this free rent to the cash NOI results in adjusted cap rate of over 10%.

We are projecting a property level leverage internal rate to return of 12% over the whole period and a leverage internal rate of return of 23.5% to Parkway. Parkway expects to receive a total of approximately $22.5 million in cash proceeds in connection with this sale, and Parkway's resulting ownership in the properties will be 30% or $9.9 million.

With that, I'll turn the call back over to Steve.

Steve Rogers

In summary, we had another good quarter with increased leasing activities, steady FFO and cash flow, lower debt and our first investment by Texas Fund II. We also made good progress on the renewal of our revolving credit facility.

You may have noticed that Sarah Clark is not on the call this morning. Sarah is facing some health issues and was used for work hours at Parkway while she deals with those issues. She is on demand and with us today. And I'd like to add that Many Pope and Thomas Blalock have many years of Investor Relations experience between them. And as always, any member of the management team would be happy to answer any investor-related questions you may have about Parkway.

With that, we will be happy to answer any questions you may have at this time.

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