Parkway Properties (PKY)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

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FORM 10-Q 

x                                                                   Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For Quarterly Period Ended September 30, 2005

or

 

o                                                                    Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the Transition Period from ________ to ________
Commission File Number 1-11533

Parkway Properties, Inc.

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(Exact name of registrant as specified in its charter)

 

                                Maryland                                                                                                               74-2123597

___________________________________________                                    ___________________________________________________

                 (State or other jurisdiction of                                                                                     (IRS Employer Identification No.)

                 incorporation of organization

One Jackson Place Suite 1000
188 East Capitol Street
P. O. Box 24647
Jackson, Mississippi 39225-4647

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(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code    (601) 948-4091

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Registrant's web site www.pky.com

 

(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o  

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes x    No o  

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

        14,150,485 shares of Common Stock, $.001 par value, were outstanding as of  November 1, 2005.

 

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PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2005

Part I. Financial Information

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2005

(1)   Basis of Presentation

        The consolidated financial statements include the accounts of Parkway Properties, Inc. ("Parkway" or "the Company"), its wholly-owned subsidiaries and joint ventures in which the Company has a controlling interest.  Third party equity interests in the consolidated joint ventures are reflected as minority interests in the consolidated financial statements.  Parkway also consolidates subsidiaries where the entity is a variable interest entity and Parkway is the primary beneficiary, as defined in FASB Interpretation 46R "Consolidation of Variable Interest Entities" ("FIN 46R").  All significant intercompany transactions and accounts have been eliminated.

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

        The accompanying financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  Operating results for the three months and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.  The financial statements should be read in conjunction with the annual report and the notes thereto.

        The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

(2)   Reclassifications

        Certain reclassifications have been made in the 2004 consolidated financial statements to conform to the 2005 classifications.

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

         The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

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(4)   Acquisitions and Dispositions

        On January 5, 2005, the Company entered into an agreement to purchase the 70% interest held by Investcorp International, Inc., its joint venture partner, in the property known as 233 North Michigan Avenue in Chicago, Illinois. The gross purchase price for the 70% interest was $139.7 million, and the Company closed the investment in two stages. The Company closed 90% of the purchase on January 14, 2005. The second closing for the remainder of Investcorp's interest occurred on April 29, 2005, following lender and rating agency approval. The Company earned a $400,000 incentive fee from Investcorp based upon the economic returns generated over the life of the partnership.  The purchase was funded with a portion of the proceeds from the sale of 1.6 million shares of common stock to Citigroup Global Markets Inc. on January 10, 2005 and the assumption of an existing first mortgage on the property. The allocation of purchase price to intangible assets and liabilities is as follows (in thousands):

        The unaudited pro forma effect on the Company's results of operations for the 233 North Michigan purchase as if the purchase had occurred on January 1, 2004 is as follows (in thousands, except per share data):

        On March 30, 2005, the Company purchased for $29.3 million the Stein Mart Building and Riverplace South in downtown Jacksonville, Florida. In addition to the purchase price the Company expects to invest an additional $4.8 million in improvements and closing costs during the first two years of ownership.  The buildings total 302,000 square feet, and the purchase was funded with the remaining proceeds from the Company's January 2005 equity offering as well as funds obtained under its existing line of credit.  The allocation of purchase price to intangible assets and liabilities is as follows (in thousands):

        On June 16, 2005, the Company closed the joint venture of Maitland 200 to Rubicon America Trust ("Rubicon"), an Australian listed property trust.  Maitland 200 is a 203,000 square foot, 96.5% leased office property located in Orlando, Florida.  The consideration places total building value at $28.4 million.  Rubicon acquired an 80% interest in the single purpose entity that owns the property and assumed 100% of the existing $19.3 million, 4.4% first mortgage.  Parkway received a $947,000 acquisition fee at closing and retained management and leasing of the property and a 20% ownership interest.  Parkway recognized a gain for financial reporting purposes on the transfer of the 80% interest of $1.3 million in the second quarter.  The joint venture is accounted for using the equity method of accounting.

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        On July 26, 2005, the Company purchased for $19.25 million Forum I in Memphis, Tennessee.  In addition to the purchase price, the Company expects to invest an additional $1.9 million in improvements and closing costs during the first two years of ownership.  The building totals 162,000 square feet, and the purchase was funded with the Company's existing lines of credit and the assumption of an $11.7 million first mortgage. The allocation of the purchase price is preliminary pending completion of the valuation of tangible and intangible assets. The preliminary allocation of purchase price to intangible assets and liabilities is as follows (in thousands):

 
  On September 9, 2005, the Company sold The Park on Camelback for $17.5 million.  The Park is a 102,000 square foot office property located in Phoenix, Arizona. The Company recorded a gain on the sale of $4.4 million in the third quarter of 2005.  This property was previously classified as an office property held for sale.  See Note 5 - Discontinued Operations for more information.

        On September 14, 2005, the Company sold 250 Commonwealth, a 46,000 square foot office property located in Greenville, South Carolina, for $4 million. The Company recorded a loss on the sale of $238,000 in the third quarter of 2005.  See Note 5 - Discontinued Operations for more information.

        On September 28, 2005, the discretionary fund the Company has with Ohio Public Employees Retirement System ("Ohio PERS") purchased a two-building office portfolio in Orlando, Florida.  Parkway is a 25% investor and Ohio PERS is a 75% investor in the fund.  The two properties, Maitland 100 and 555 Winderley Place, total 230,000 square feet, and the two buildings were acquired for a combined purchase price of $28.4 million. The fund expects to spend an additional $3.3 million for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  The purchase was funded with a $17.2 million first mortgage placement by the fund and with equity contributions from the partners.  Parkway Realty Services will provide management and renewal leasing services through its existing team in Orlando. New leasing services will be provided by an unaffiliated third-party leasing agency.   Since Parkway is the sole general partner and has the authority to make major decisions on behalf of the fund, thereby giving Parkway a controlling interest, Parkway has included the discretionary fund in its consolidated financial statements. 

(5)  Discontinued Operations

        In the third quarter of 2005, the Company sold The Park on Camelback in Phoenix, Arizona for a gain of $4.4 million and 250 Commonwealth in Greenville, South Carolina for a loss of $238,000.  All current and prior period income from the office properties have been classified as discontinued operations.

 The amount of revenue and expense for these two office properties reported in discontinued operations for the three months and nine months ended September 30, 2005 and 2004 is as follows (in thousands):

 

 

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(6)   Investment  in Unconsolidated Joint Ventures

        As of September 30, 2005, the Company was invested in five unconsolidated joint ventures.  As required by generally accepted accounting principles, these joint ventures are accounted for using the equity method of accounting, as Parkway does not control any of these joint ventures and is not the primary beneficiary.  As a result, the assets and liabilities of the joint ventures are not included on Parkway's consolidated balance sheets as of September 30, 2005.  Information relating to the unconsolidated joint ventures is detailed below.

Balance sheet information for the unconsolidated joint ventures is summarized below as of September 30, 2005 and December 31, 2004 (in thousands):

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

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        The terms related to Parkway's share of unconsolidated joint venture mortgage debt are summarized below (in thousands):

        The following table presents Parkway's proportionate share of principal payments due for mortgage debt in unconsolidated joint ventures (in thousands):

        On April 11, 2005, the Viad Joint Venture refinanced its existing $42.5 million mortgage priced at LIBOR plus 260 basis points with a two-year $50 million mortgage priced at LIBOR plus 215 basis points. The new mortgage contains three one-year extension options with the first extension at no cost. Parkway's pro rata share of this mortgage is 30%.

        On June 16, 2005, the Maitland Joint Venture was formed between Parkway, a 20% partner, and Rubicon, an 80% partner.  The Maitland Joint Venture assumed the existing $19.3 million, 4.39% first mortgage, which matures July 2011.  As part of the joint venture agreement, Rubicon's pro rata share of the existing mortgage is 100%. 

        On June 17, 2005, the Jackson Joint Venture refinanced its existing 5.84%, $11.2 million mortgage with a 10-year, 5.84%, $12.6 million mortgage.  The mortgage is interest only for four years and matures July 1, 2015.  Parkway's pro rata share of this mortgage is 20%.

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        Income statement information for the unconsolidated joint ventures is summarized below for the three months and nine months ending September 30, 2005 and 2004 (in thousands):

 

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 (7)   Minority Interest - Real Estate Partnerships

         In compliance with FIN 46R (see "Basis of Presentation"), Parkway began consolidating its ownership interest in Moore Building Associates LP ("MBALP") effective January 1, 2004.  Parkway has less than .1% ownership interest in MBALP and acts as the managing general partner of this partnership.

        MBALP was established for the purpose of owning a commercial office building (the Toyota Center in Memphis, Tennessee) and is primarily funded with financing from a third party lender, which is secured by a first lien on the rental property of the partnership.  The creditors of MBALP do not have recourse to Parkway.  In acting as the general partner, Parkway is committed to providing additional funding to meet partnership operating deficits up to an aggregate amount of $1 million.  MBALP has a fixed rate non-recourse first mortgage in the amount of $13.1 million that is secured by the Toyota Center, which has a carrying amount of $23 million.

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        Parkway receives income from MBALP in the form of interest from a construction note receivable, incentive management fees and property management fees.  As a result of the consolidation of MBALP, Parkway has eliminated any intercompany asset, liability, revenue and expense accounts between Parkway and MBALP.

        On July 6, 2005, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $500 million discretionary fund ("the fund") with Ohio Public Employees 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.  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. The fund has fixed rate non-recourse mortgage debt totaling $17.2 million that is secured by two office properties, Maitland 100 and 555 Winderley Place, which have a carrying value of $28.5 million.

        Since Parkway is the sole general partner and has the authority to make major decisions on behalf of the fund, thereby giving Parkway a controlling interest, Parkway is required to include the discretionary fund in its consolidated financial statements. 

        Minority interest in real estate partnerships represents the other partners' proportionate share of equity in the partnerships discussed above at September 30, 2005.  Income is allocated to minority interest based on the weighted average percentage ownership during the year.

 (8)   Stock Based Compensation

        The Company has granted stock options for a fixed number of shares to employees and directors with an exercise price equal to or above the fair value of the shares at the date of grant.  The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method), and accordingly, recognizes no compensation expense for the stock option grants.

        Effective January 1, 2006, Parkway will begin recording compensation expense based on the grant-date fair value of employee stock options in accordance with SFAS No. 123R, "Share-Based Payment."  Parkway does not anticipate that the adoption of SFAS No. 123R will have a significant impact on the Company's consolidated financial statements since Parkway has begun granting restricted stock and/or deferred incentive share units instead of stock options to employees of the Company.  The compensation expense associated with stock options is estimated at approximately $40,000 for 2006.

        The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands).

	Nine Months Ended September 30
	2005	2004
Net income available to common stockholders	$           13,495	$      11,117
Stock based employee compensation costs assuming fair value method	(96)	(206)
Pro forma net income available to common stockholders	$           13,399	$        10,91
Pro forma net income per common share
Basic:
Net income available to common stockholders	$                 .96	$          1.00
Stock based employee compensation costs assuming fair value method	(.01)	(.02)
Pro forma net income per common share	$                 .95	$            .98
Diluted:
Net income available to common stockholders	$                 .95	$            .98
Stock based employee compensation costs assuming fair value method	(.01)	(.02)
Pro forma net income per common share	$                 .94	$            .96

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        Effective January 1, 2003, the stockholders of the Company approved Parkway's 2003 Equity Incentive Plan (the "2003 Plan") that authorized the grant of up to 200,000 equity based awards to employees of the Company.  At present, it is Parkway's intention to grant restricted stock and/or deferred incentive share units instead of stock options.  Restricted stock and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway common shares (NYSE ticker symbol, PKY) as of the date of grant.  As of September 30, 2005, 124,000 restricted shares have been issued and are valued at $4,484,000 and 8,610 deferred incentive share units have been granted and are valued at $395,000.  The Company accounts for restricted stock and deferred incentive share units in accordance with APB No. 25 and accordingly, compensation expense is recognized over the expected vesting period.  Compensation expense related to restricted stock and deferred incentive share units of $351,000 and $590,000 was recognized for the nine months ending September 30, 2005 and 2004, respectively.

        The restricted stock granted under the 2003 Plan vests the earlier of seven years from grant date or effective December 31, 2005 if certain goals of the VALUE² Plan are met.  The VALUE² Plan has as its goal to achieve funds from operations available to common stockholders ("FFO") growth that is 10% higher than that of the National Association of Real Estate Investment Trusts ("NAREIT") Office Index peer group.  Achievement of the goals of the plan will be determined during the first quarter of 2006 upon completion of the audited financial statements for 2005 for the Company and each company comprising the peer group.  However, based on the results for the nine months ended September 30, 2005 and the projected results for the year ended December 31, 2005, it is unlikely that the Company will meet the equity return goal of the plan. The value of the restricted shares is being amortized ratably over the seven-year period until such time as it becomes probable that the conditions of early vesting will be met.  The deferred incentive share units granted under the 2003 Plan vest four years from grant date and are being amortized ratably over the four-year period.

        Restricted stock and deferred incentive share units are forfeited if an employee leaves the Company before the vesting date.  Shares and/or units that are forfeited become available for future grant under the 2003 Plan.  In connection with the forfeited shares/units, the value of the forfeited shares/units, unearned compensation, accumulated amortization of unearned compensation and accumulated dividends, if any, are reversed. 

(9)   Capital and Financing Transactions

        The purchase of the 70% interest in 233 North Michigan Avenue was subject to an existing non-recourse first mortgage with an outstanding balance of $100 million, which matures July 2011 and carries a fixed interest rate of 7.21%. In accordance with generally accepted accounting principles, the mortgage was recorded at $111.7 million to reflect the fair value of the financial instrument based on the market rate of 4.94% on the date of purchase.

        On January 10, 2005, the Company sold 1,600,000 shares of common stock to Citigroup Global Markets Inc. The Company used the net proceeds of $76 million towards the acquisition of the 70% interest held by its joint venture partner in the property known as 233 North Michigan Avenue in Chicago, Illinois and the acquisition of two properties in Jacksonville, Florida.

        On February 4, 2005, Parkway amended and renewed the one-year $15 million unsecured line of credit with PNC Bank.  This line of credit matures February 2, 2006 and is expected to fund the daily cash requirements of the Company's treasury management system.  The interest rate on the $15 million line is equal to the 30-day LIBOR rate plus 100 to 150 basis points, depending upon overall Company leverage (with the current rate set at LIBOR plus 132.5 basis points or 5.2%).  The Company paid a facility fee of $15,000 (10 basis points) upon closing of the loan agreement.  Under the $15 million line, the Company does not pay annual administration fees or fees on the unused portion of the line.

        On March 31, 2005, Parkway entered into an amended Credit Agreement with a consortium of 10 banks with Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Runner, Wachovia Bank, National Association as Administrative Agent, PNC Bank, National Association as Syndication Agent, and other banks as participants.  The amended Credit Agreement provides for a three-year $190 million unsecured revolving credit facility.  The $190 million line replaces the previous $170 million unsecured revolving credit facility.  The interest rate on the $190 million line is equal to the 30-day LIBOR rate plus 100 to 150 basis points, depending upon overall Company leverage (with the current rate set at LIBOR plus 132.5 basis points or 4.9%).  The $190 million line matures February 6, 2007 and allows for a one-year extension option available at maturity.  The line is expected to fund acquisitions of additional investments.

        On June 16, 2005, Parkway transferred an 80% joint venture interest in Maitland 200 to Rubicon.  In addition to acquiring an 80% interest in the single purpose entity that owns the property, Rubicon assumed 100% of the existing $19.3 million, 4.4% first mortgage.   Therefore, this mortgage was transferred to the Maitland Joint Venture as of June 16, 2005.

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In connection with the purchase of Forum I in Memphis, Tennessee on July 26, 2005, Parkway assumed an $11.7 million fixed rate mortgage, of which $5 million is recourse debt.  The mortgage matures in June 2011 and bears interest at 7.31%.  In accordance with GAAP, the mortgage was recorded at $12.8 million to reflect the fair value of the financial instrument based on the market interest rate of 5.25% on the date of purchase. 

    In connection with the purchase of Maitland 100 and 555 Winderley Place on behalf of the discretionary fund with Ohio PERS, on September 29, 2005, the fund placed a $17.2 million seven-year first mortgage at a fixed interest rate of 4.92%. Payments during the first five years of the mortgage term will be on an interest-only basis, and the loan includes provisions for two one‑year extensions.

            To protect against the potential for rapidly rising interest rates, the Company entered into two interest rate swap agreements during the third quarter of 2005.  The first interest rate swap is for a $40 million notional amount and fixes the 30-day LIBOR interest rate at 4.36%, which equates to a total interest rate of 5.685%, for the period January 1, 2006 through December 31, 2008. The second interest rate swap is for a $20 million notional amount and fixes the 30-day LIBOR interest rate at 4.245%, which equates to a total interest rate of 5.57%, for the period July 1, 2006 through December 31, 2008.

(10)     Segment Information

            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 Company believes that 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 from building to building. Therefore, Parkway's management responsibilities do not vary from location to location based on the size of the building, geographic location or class.

            The management of the Company evaluates the performance of the reportable office segment based on FFO. Parkway computes FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  FFO is defined as net income available to common stockholders, computed in accordance with GAAP, excluding gains or losses from sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.

            Management believes that FFO is an appropriate measure of performance for equity REITs.  We believe FFO is helpful to investors as a supplemental measure that enhances the comparability of our operations by adjusting net income for items not reflective of our principal and recurring operations.  This measure, along with cash flows from operating, financing and investing activities, provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs.  In addition, FFO has widespread acceptance and use within the REIT investor and analyst communities.    We believe that in order to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with the net income as presented in our consolidated financial statements and notes thereto.  FFO does not represent cash generated from operating activities in accordance with GAAP and is not an indication of cash available to fund cash needs.  FFO should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

        Parkway is a self-administered and self-managed REIT specializing in the acquisition, operations and leasing of office properties.  The Company is geographically focused on the Southeastern and Southwestern United States and Chicago.  As of October 1, 2005, Parkway owned or had an interest in 65 office properties located in 11 states with an aggregate of approximately 12.1 million square feet of leasable space.  The Company generates revenue primarily by leasing office space to its customers and providing management 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.  As a result of job losses and over supply of office properties during 2001 through 2003, vacancy rates increased nationally and in Parkway's markets.  In 2004, the office sector began to recover from high vacancy rates due to improving job creation.  As of October 1, 2005, occupancy of Parkway's office portfolio was 90.0% compared to 90.4% as of July 1, 2005 and 90.7% as of October 1, 2004.  Not included in the October 1, 2005 occupancy rate are 31 signed leases totaling 106,000 square feet, which commence during the fourth quarter of 2005 through first quarter of 2006 and will raise our percentage leased to 90.9%.  To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases.  These include the Broker Bill of Rights, a short-form service agreement (lease) and customer advocacy programs which are models in the industry and have helped the Company maintain occupancy around 90% during a time when the national occupancy rate is approximately 85.6%.  Parkway projects average occupancy of 90% for the remainder of 2005 for its office properties.

Rental Rates.  An increase in vacancy rates has the effect of reducing market rental rates and vice versa.  Parkway's leases typically have three to seven year terms.  As leases expire, the Company replaces the existing leases with new leases at the current market rental rate, which today is often lower than the existing lease rate.  Customer retention is increasingly important in controlling costs and preserving revenue. 

Customer Retention.  Keeping our 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 customer.  In making this estimate, Parkway takes into account the sum of revenue lost during downtime on the space plus leasing costs, which rise as market vacancies increase.  Therefore, Parkway focuses a great deal of energy on customer retention.  Parkway's operating philosophy is based on the premise that we are 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 our customers and our stockholders.  Over the past eight years, Parkway maintained an average 74.3% customer retention rate.  Parkway's customer retention for the quarter ending September 30, 2005 was 69% compared to 79% for the quarter ending September 30, 2004. 

Strategic Planning.  For many years, Parkway has been engaged in a process of strategic planning and goal setting.  The material goals and objectives of Parkway's earlier strategic plans have been achieved, and benefited Parkway's stockholders through increased FFO and dividend payments per share.  Effective January 1, 2003, the Company adopted a three-year strategic plan referred to as VALUE² (Value Square).  This plan reflects the employees' commitment to create value for its shareholders while holding firm to the core values as espoused in the Parkway Commitment to Excellence.  The Company plans to create value by Venturing with best partners, Asset recycling, Leverage neutral growth, Uncompromising focus on operations and providing an Equity return to its shareholders that is 10% greater than that of its peer group, the National Association of Real Estate Investment Trusts ("NAREIT") office index.  Equity return is defined as growth in funds from operations ("FFO") per diluted share.

The highlights of 2003, 2004 and 2005 reflect the strategy set forth in VALUE² as described below:

? Venture with Best Partners.  During 2003 through 2005, we sold joint venture interests in seven office properties.  Parkway continues to evaluate its existing portfolio for joint venture candidates and anticipates joint venturing more properties, as well as purchasing new properties with the intention of joint venturing them.  During 2005, Parkway purchased two office buildings totaling $28 million on behalf of the discretionary fund with Ohio Public Employees Retirement System.

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?  Asset Recycling.  Parkway sold one office property, while maintaining a 10-year non-cancelable management contract, and a .74 acre parcel of land in 2003 and two office properties in 2005. Using the proceeds from the joint ventures, property sales, stock offerings and bank lines of credit, Parkway purchased four office buildings totaling $125 million in 2003, three office buildings totaling $150 million in 2004 and four office buildings totaling $188 million in 2005.

 

? Leverage Neutral Growth.  Parkway began 2003 with a debt to total market capitalization of 45% and operated 2003 and 2004 at an average of 41%.  The decrease in debt to total market capitalization is a result of timing delays in reinvesting proceeds from joint ventures, asset sales and stock offerings in addition to a rising stock price.  The Company anticipates that the debt to total market capitalization will average around 45% for the three years of VALUE².  During 2003, the Company assumed one mortgage for $20 million in connection with the Citrus Center purchase in Orlando, closed four mortgages for approximately $97 million, issued 690,000 common shares for a net $24 million, redeemed 2,650,000 shares of 8.75% Series A Preferred stock and issued 2.4 million shares of 8.0% Series D Preferred stock.   During 2004, Parkway assumed two mortgages totaling $78 million in connection with the Capital City Plaza purchase in Atlanta and the Squaw Peak Corporate Center purchase in Phoenix and placed three mortgages totaling $81 million.  During 2005, Parkway issued 1.6 million shares of common shares for a net $76 million,