Toggle SGML Header (+)


Section 1: S-11 (FORM S-11)

Form S-11
Table of Contents

As filed with the Securities and Exchange Commission on November 4, 2016

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

Parkway, Inc.

(Exact Name of Registrant as Specified in governing instruments)

 

 

San Felipe Plaza

5847 San Felipe Street, Suite 2200

Houston, Texas 77057

(346) 200-3100

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

A. Noni Holmes Kidd

Vice President, General Counsel and Secretary

Parkway, Inc.

390 North Orange Avenue, Suite 2400

Orlando, Florida 32801

(407) 650-0593

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Matt N. Thomson

Hogan Lovells US LLP

555 Thirteenth Street, NW

Washington, DC 20004

(202) 637-5600

Approximate date of commencement of proposed sale to the public:

From time to time after this registration statement becomes effective.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per share(2)

 

Proposed

maximum

aggregate

offering price(2)

 

Amount of

registration fee(2)

Common Stock, $0.001 par value per share

  5,847,168 shares   $17.47   $102,150,025   $11,840

 

 

(1) Pursuant to Rule 416(a) under the Securities Act of 1933, as amended (the “Securities Act”), this registration statement also covers an indeterminate number of shares of Parkway, Inc. by reason of certain corporate transactions or events, including any stock dividend, stock split, recapitalization or any other similar adjustment of the registrant’s outstanding shares of common stock.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and (h)(1) under the Securities Act based on the average of the high and low sales prices of the registrant’s common stock as reported by the New York Stock Exchange on November 2, 2016.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

Subject to Completion, dated November 4, 2016

PROSPECTUS

5,847,168 Shares

 

LOGO

Common Stock

 

 

This prospectus relates to the registration for resale from time to time of up to 5,847,168 shares of common stock, $0.001 par value per share, of Parkway, Inc. (“common stock”) by the selling stockholders identified in this prospectus or in supplements to this prospectus. This includes (i) 4,821,416 shares that were received by TPG VI Pantera Holdings, L.P. and TPG VI Management, LLC, collectively, in connection with the distribution by Cousins Properties Incorporated (“Cousins”) of all of our outstanding common stock on October 7, 2016, following the merger of Parkway Properties, Inc. (“Legacy Parkway”) with and into a wholly owned subsidiary of Cousins, and (ii) 1,025,752 shares that, from time to time, we may issue to holders of limited partnership units (“OP units”) in Parkway LP upon the tender of OP units for redemption in accordance with the Second Amended and Restated Agreement of Limited Partnership of Parkway LP, dated as of February 27, 2013, as amended. See “Selling Stockholders.” This prospectus does not necessarily mean that the selling stockholders will offer or sell those shares. We cannot predict when or in what amounts the selling stockholders may sell any of the shares offered by this prospectus. The prices at which the selling stockholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We are filing the registration statement of which this prospectus is a part pursuant to contractual obligations that exist with certain of the selling stockholders.

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “PKY.” On November 3, 2016, the last reported sale price of our common stock on the NYSE was $17.00 per share. Our principal executive offices are located at 5847 San Felipe Street, Suite 2200, Houston, Texas 77057, and our telephone number is (346) 200-3100.

We are not offering for sale any shares of our common stock in the registration statement of which this prospectus is a part. We will not receive any of the proceeds from sales of our common stock by the selling stockholders, but will incur expenses.

We intend to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2016. To assist us in qualifying as a REIT, stockholders generally are restricted from owning more than 9.8% of the outstanding shares of our common stock or our preferred stock, in each case by value or number of shares, whichever is more restrictive. See “Description of Shares—Restrictions on Transfer and Ownership of Shares of Parkway Common Stock.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 4 of this prospectus for a description of various risks you should consider in evaluating an investment in our common stock.

Neither the Securities and Exchange Commission nor any state or other securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is                , 2016.


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     4   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     32   

USE OF PROCEEDS

     34   

MARKET PRICE OF COMMON STOCK AND DIVIDENDS

     34   

DIVIDEND POLICY

     34   

SELECTED HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

     36   

SELECTED HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

     38   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     40   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52   

BUSINESS AND PROPERTIES

     75   

MANAGEMENT

     88   

EXECUTIVE AND DIRECTOR COMPENSATION

     97   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     114   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     117   

OUR RELATIONSHIP WITH COUSINS

     121   

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     125   

DESCRIPTION OF SHARES

     130   

SHARES ELIGIBLE FOR FUTURE SALE

     141   

PARTNERSHIP AGREEMENT

     143   

DESCRIPTION OF MATERIAL INDEBTEDNESS

     152   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     154   

SELLING STOCKHOLDERS

     181   

PLAN OF DISTRIBUTION

     185   

EXPERTS

     189   

LEGAL MATTERS

     189   

WHERE YOU CAN FIND MORE INFORMATION

     189   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

i


Table of Contents

You should rely only on the information contained in this prospectus. To the extent there are any inconsistencies between the information in this prospectus and any prospectus supplement, you should rely on the information in the applicable prospectus supplement. We have not, and the selling stockholders have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the selling stockholders are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current as of the date such information is presented. Our business, financial condition, liquidity, earnings before interest, taxes, depreciation and amortization, or EBITDA, funds from operations, or FFO, results of operations and prospects may have changed since those dates.

Except where the context suggests otherwise, we define certain terms in this prospectus as follows:

 

    “Parkway,” “the Company,” “we,” “us” and “our” refer to Parkway, Inc., a Maryland corporation, together with its consolidated subsidiaries, including Parkway Operating Partnership LP, a Delaware limited partnership, which we refer to as the “Operating Partnership”, and our predecessor, unless the context otherwise requires;

 

    “Charter” refers to the Articles of Amendment and Restatement of Parkway, filed with the Maryland State Department of Assessments and Taxation on October 4, 2016;

 

    “Bylaws” refers to the Amended and Restated Bylaws of Parkway; and

 

    “our predecessor” collectively refers to Parkway Houston and Cousins Houston as defined herein.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before making a decision to invest in our common stock. You should read carefully the more detailed information set forth under the heading “Risk Factors” and the other information included in this prospectus, including our historical and pro forma financial statements and related notes.

Our Company

We are a self-managed office REIT engaged in the ownership, acquisition, development and leasing of Class A office assets in attractive Houston, Texas submarkets. Our portfolio consists of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing geographic focus and significant operational scale and efficiencies. We believe that the creation of a geographically focused REIT with a strong balance sheet and targeted internal value-creation opportunities will generate attractive risk-adjusted returns for our stockholders while providing a platform for external growth opportunities over the longer term.

Our mission is to own and operate high-quality office properties located in attractive submarkets in Houston, with a primary focus on unlocking value within our existing portfolio through implementing active and creative leasing strategies, leveraging our scale to increase pricing power in lease and vendor negotiations and targeting redevelopment and asset repositioning opportunities. We expect to maintain a conservative balance sheet with low leverage and ample liquidity, which we expect will allow us to access multiple sources of capital. We believe that this strategy will support both our internal growth initiatives and our patient and disciplined approach to pursuing new investment opportunities at the appropriate times. We believe this strategy, combined with our highly experienced management team that has a successful history of operating a publicly traded REIT, significant expertise in the Houston, Texas office sector and extensive relationships with industry participants, also positions us for long-term external and internal growth. For more information, see “Business and Properties.”

Our Spin-Off From Cousins

On October 7, 2016, Cousins Properties Incorporated (“Cousins”) completed the spin-off of our company, by distributing all of our outstanding shares of common and limited voting stock to the holders of Cousins common and limited voting preferred stock as of the record date, October 6, 2016 (the “Spin-Off”). The Spin-Off was effected pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of April 28, 2016, by and among Parkway Properties, Inc. (“Legacy Parkway”), Parkway Properties LP (“Parkway LP”), Cousins and Clinic Sub Inc., a wholly owned subsidiary of Cousins, and pursuant to that certain Separation, Distribution and Transition Services Agreement (the “Separation and Distribution Agreement”), dated as of October 5, 2016, among Parkway, Cousins and certain other parties thereto. The Separation and Distribution Agreement is filed as Exhibit 2.1 to the registration statement of which this prospectus is a part.

Prior to the Spin-Off, we were incorporated on June 3, 2016 as a wholly owned subsidiary of Legacy Parkway. On October 6, 2016, pursuant to the Merger Agreement, Legacy Parkway merged with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation and a wholly owned subsidiary of Cousins (the “Merger”). In connection with the Merger, Parkway became a subsidiary of Cousins. Immediately following the effective time of the Merger, in accordance with the Merger Agreement, Cousins separated the portion of its combined businesses relating to the ownership of real properties in Houston, Texas, as well as Legacy Parkway’s fee-based real estate services (the “Third-Party Services Business” and together with the Houston real properties, the “Houston Business”), from the remainder of the combined businesses (the “Separation”). In connection with the Separation, Cousins and Parkway reorganized the businesses through a series of transactions (the “UPREIT Reorganization”), pursuant to which the Houston Business was transferred to Parkway, and the remainder of the combined business was transferred to Cousins Properties LP, a Delaware limited partnership (“Cousins LP”), the operating partnership of Cousins. Following the Separation and UPREIT Reorganization, Cousins effected the Spin-Off on October 7, 2016.

In connection with the Spin-Off and in accordance with the Merger Agreement, we entered into that certain Stockholders Agreement, dated as of October 7, 2016 (the “TPG Stockholders Agreement”), by and among Parkway, TPG VI Pantera Holdings, L.P. (“TPG Pantera”) and TPG VI Management, LLC (“TPG Management,” and together with TPG Pantera, the “TPG Parties”) pursuant to which, among other things, we are obligated to use commercially reasonable efforts to file a

 



 

1


Table of Contents

registration statement with the Securities and Exchange Commission (the “SEC”) within 30 days following the closing of the Merger to register for resale the shares held by the TPG Parties. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.”

In addition, in connection with the Separation, the UPREIT Reorganization, and the Spin-Off, we assumed the liabilities and obligations arising under that certain Registration Rights Agreement, dated as of October 13, 2004 (the “Registration Rights Agreement”), among Thomas Properties Group, Inc. (“TPGI”), Thomas Properties Group, L.P. and certain other investors named therein. For more information, see “Certain Relationships and Related Person Transactions—Agreement with Mr. James A. Thomas.”

Selling Stockholders

The 5,847,168 shares of our common stock, $0.001 par value per share (“common stock”), being registered for resale under this prospectus include (i) 4,821,416 shares of our common stock that were received by the TPG Parties, collectively, in connection with the Spin-Off on October 7, 2016 pursuant to the Merger Agreement and the Separation and Distribution Agreement, and (ii) 1,025,752 shares of our common stock that, from time to time, we may issue to holders of limited partnership units (“OP units”) in Parkway LP upon the redemption of such OP units in accordance with the Second Amended and Restated Agreement of Limited Partnership of Parkway LP, dated as of February 27, 2013, as amended (the “Parkway LP Partnership Agreement”), in each case, as well as the permitted transferees, pledges, donees, assignees, successors and others who later come to hold any of the selling stockholders’ interests other than through a public sale (collectively, the “selling stockholders”). The registration statement of which this prospectus is a part shall also cover any additional shares of common stock that become issuable in connection with the common stock registered for resale in this prospectus because of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration, which results in an increase in the number of our outstanding shares of common stock.

Pursuant to the TPG Stockholders Agreement, with respect to the TPG Parties, we have agreed to pay all of the costs and expenses incurred in connection with the registration statement of which this prospectus is a part, except that the TPG Parties will be responsible for any underwriting discounts and commissions attributable to the sale of their shares of common stock. Pursuant to the Registration Rights Agreement, with respect to the parties thereto, we have agreed to pay all federal and state filing fees, all fees and expenses of counsel and all independent certified public accountants, underwriters (excluding discounts and commissions and fees and expenses of counsel to the underwriters) and other persons retained by us, printing expenses, and all fees and expenses incurred in connection with the listing of shares in connection with the registration statement of which this prospectus is a part.

Risk Factors

You should carefully consider the matters discussed under the heading “Risk Factors” beginning on page 4 of this prospectus prior to deciding whether to invest in our common stock. Some of these risks include:

 

    the conditions of our primary markets affect our operations. All of our properties are located in Houston, Texas and are affected by the economic cycles and risks inherent in this market, including the continuing effects of the downturn in the energy industry;

 

    our business could be adversely affected by a decline in commodity prices, especially the price of crude oil;

 

    we derive 47% of our revenues from customers in the energy sector, which subjects us to more risk than if we were broadly diversified;

 

    we face risks associated with the acquisition, development and redevelopment of properties;

 

    we face a wide range of competition, including competition for acquisitions and competition in the leasing market, that could affect our ability to operate profitably;

 

    our performance is subject to risks inherent in owning real estate;

 



 

2


Table of Contents
    if we lose our key management personnel, we may not be able to successfully manage our business and achieve our objectives;

 

    some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations;

 

    we will have a debt burden that could materially adversely affect our future operations, and we may incur additional indebtedness in the future;

 

    covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial position or results of operations;

 

    we have no operating history as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results;

 

    certain of our directors and executive officers may have actual or potential conflicts of interest because of their previous or continuing equity interest in, or positions at, Cousins;

 

    the risk that we could incur a corporate tax liability if we were to sell the Houston assets previously owned by Parkway prior to 2019;

 

    we may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect our business; and

 

    if we do not qualify to be taxed as a REIT, or if we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face substantial tax liability, which would substantially reduce funds available for distribution to our stockholders.

Our Principal Office

Our principal executive offices are located at 5847 San Felipe Street, Suite 2200, Houston, Texas 77057. Our telephone number is (346) 200-3100. Our website is located at www.pky.com. The information found on or accessible through our website is not incorporated into, and does not form a part of, this prospectus or any other report or document that we have filed or will file with, or have furnished or will furnish to, the SEC. We have included our website address as an inactive textual reference and do not intend it to be an active link to our website.

 



 

3


Table of Contents

RISK FACTORS

You should carefully consider the following risks and other information in this prospectus in evaluating our company and our common stock. Any of the following risks could materially and adversely affect our business, results of operations and financial condition. Please refer to the section entitled “Cautionary Statement Concerning Forward-Looking Statements.”

Risks Related to Our Properties and Business

If global market and economic conditions deteriorate, our business, financial condition and results of operations could be materially adversely affected.

Weak economic conditions generally, sustained uncertainty about global economic conditions, a tightening of credit markets, business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio. Additionally, these factors and conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. No assurances can be given regarding such macroeconomic factors or conditions, and our ability to lease our properties and increase or maintain rental rates may be negatively impacted, which may have a material adverse effect on our business, financial condition and results of operations.

The conditions of our market affect our business, financial condition and results of operations.

All of our properties are located in Houston, Texas. Therefore, our business, financial condition, results of operations and ability to pay dividends to our stockholders are directly linked to economic conditions in Houston generally, as well as the market for office space in Houston. An economic downturn in Houston, particularly increases in unemployment and customer bankruptcies, may materially adversely affect our business, financial condition and results of operations.

Additionally, as a result of the geographic concentration of our properties in Houston, we are particularly susceptible to adverse weather conditions that threaten southern and coastal states, such as hurricanes and flooding. A single catastrophe or destructive weather event may have a material adverse effect on our business, financial condition and results of operations.

Our business could be materially adversely affected by a decline in commodity prices, particularly a decline in the price of crude oil.

The Houston market is economically dependent on the petroleum industry. A key economic variable that affects the petroleum industry is the price of crude oil, which can be influenced by general economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries, weather-related damage and disruptions, competing fuel prices and geopolitical risk. If the Houston market faces significant exposure to fluctuations in global crude oil prices, particularly for extended periods of time, or oil prices remain at historically low levels, the Houston market may experience business layoffs, downsizing, consolidations, industry slowdowns and other similar factors. These potential risks to our customers in Houston could negatively impact commercial real estate fundamentals and result in lower occupancy, an increased market for sublease space, lower rental rates and declining values in our real estate portfolio in Houston, which may have a material adverse effect on our business, financial condition and results of operations.

We derive a significant portion of our revenues from customers in the energy sector, which will subject us to more risk than if we were broadly diversified.

As of June 30, 2016, approximately 47% of our revenues were derived from customers in the energy sector. Our customers in the energy sector may be negatively impacted by changes in the supply and demand for crude oil, natural gas and other energy commodities, exploration, production and other capital expenditures related to the energy projects, government regulation and other risks related to commodity prices described in the risk factor entitled “—Our business could be adversely affected by a decline in commodity prices.” The occurrence of any of these events that have a negative impact on the energy sector would have a much larger adverse effect on our revenues than they would if we had a more diversified customer base, which may have a material adverse effect on our business, financial condition and results of operations.

 

4


Table of Contents

Our performance is subject to risks inherent in owning real estate investments.

We are generally subject to risks incidental to the ownership of real estate. These risks include:

 

    changes in supply of or demand for office properties in our market or sub-markets;

 

    competition for customers in our market or sub-markets;

 

    the ongoing need for capital improvements;

 

    increased operating costs, which may not necessarily be offset by increased rents, including insurance premiums, utilities and real estate taxes, due to inflation and other factors;

 

    changes in tax, real estate and zoning laws;

 

    changes in governmental rules and fiscal policies;

 

    inability of customers to pay rent;

 

    competition from the development of new office space in our market or sub-markets and the quality of competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record; and

 

    civil unrest, acts of war, terrorism, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses) and other factors beyond our control.

Should any of the foregoing occur, it may have a material adverse effect on our business, financial condition and results of operations.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to our existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our business, financial condition and results of operations.

We compete with a number of other owners and operators of office properties to renew leases with our existing customers and to attract new customers. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new customers, heightened competition may require us to give rent concessions or provide customer improvements to a greater extent than we otherwise would have. In addition, the economic downturn of the last several years has led to increased competition for creditworthy customers and we may have difficulty competing with competitors who have purchased properties at depressed prices, because our competitors’ lower cost basis in such properties may allow them to offer space to customers at reduced rental rates.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge, or may not be able to increase rates to market rates, in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased customer improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. Our inability to renew leases or re-let space in a reasonable time, a decline in rental rates or an increase in customer improvement, leasing commissions, or other costs may have a material adverse effect on our business, financial condition and results of operations.

 

5


Table of Contents

An oversupply of office space in our market could cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all.

Undeveloped land in the Houston market is generally more readily available and less expensive per square foot than in markets such as New York City, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, it may be easier for our competitors to construct new buildings that would compete with our properties than it would be if we operated in higher barrier-to-entry markets. Any oversupply of office space in our market could result in lower occupancy and rental rates in our portfolio, which may have a material adverse effect on our business, financial condition and results of operations.

Customer defaults may have a material adverse effect on our business, financial condition and results of operations.

The majority of our revenues and income comes from rental income from real property. As such, our business, financial condition and results of operations could be adversely affected if our customers default on their lease obligations. Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents. If a customer becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the customer promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that customer. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a customer becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the customer. A customer’s default on its obligations may have a material adverse effect on our business, financial condition and results of operations.

Some of our leases provide customers with the right to terminate their leases early, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our leases permit our customers to terminate their leases as to all or a portion of their leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee. To the extent that our customers exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third-party customers. If our customers elect to terminate their leases early, it may have a material adverse effect on our business, financial condition and results of operations.

Our expenses may remain constant or increase, even if our revenues decrease, which may have a material adverse effect on our business, financial condition and results of operations.

Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inelastic and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a customer fails to pay rent or other circumstances cause a reduction in property revenues. As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which may have a material adverse effect on our business, financial condition and results of operations.

Our property taxes could increase due to a change in property tax rates or a reassessment, which could impact our cash flows.

Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase, our financial condition, results of operations, cash flows, trading price of our common stock and our ability to satisfy our principal and interest obligations and to pay dividends to our stockholders could be adversely affected, which may have a material adverse effect on our business, financial condition and results of operations.

 

6


Table of Contents

Illiquidity of real estate may limit our ability to vary our portfolio.

Real estate investments are relatively illiquid. Our ability to vary our portfolio by selling properties and buying new properties in response to changes in economic and other conditions may therefore be limited. In addition, the Internal Revenue Code of 1986, as amended (the “Code”) limits our ability to sell our properties by imposing a penalty tax of 100% on the gain derived from prohibited transactions, which are generally defined as sales or other dispositions of property (other than foreclosure property) held primarily for sale in the ordinary course of a trade or business. The frequency of sales and the holding period of the property sold are two primary factors in determining whether the property sold fits within this definition. These considerations may limit our ability to sell our properties. If we must sell an investment, we cannot assure you that we will be able to dispose of the investment in the time period we desire or that the sales price of the investment will recoup or exceed our cost for the investment, or that the penalty tax would not be assessed, each of which may have a material adverse effect on our business, financial condition and results of operations.

Our portfolio is concentrated in five assets and, as a result, any adverse changes impacting any one of our properties may have a material adverse effect on our business, financial condition and results of operations.

As of June 30, 2016, four of our five assets, CityWestPlace, Greenway Plaza, Post Oak Central and San Felipe Plaza, each accounted for more than 10% of our assets on a consolidated basis. Our revenue and funds available for distribution to our stockholders would be materially and adversely affected if any of these properties were materially damaged or destroyed. Additionally, our revenue and funds available for distribution to our stockholders would be materially adversely affected if customers at any of these properties experienced a downturn in their business, which could weaken their financial condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy. The significance of these properties in our portfolio means that any adverse change at any of these properties may have a material adverse effect on our business, financial condition and results of operations.

Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.

We may acquire properties if we are presented with an attractive opportunity to do so. We may face competition for such acquisition opportunities from other investors, and such competition may adversely affect us by subjecting us to the following risks:

 

    an inability to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, sovereign wealth funds, pension trusts, partnerships and individual investors; and

 

    an increase in the purchase price for such acquisition property in the event we are able to acquire such desired property.

Accordingly, competition for acquisitions may limit our opportunities to grow, which may have a material adverse effect on our business, financial condition and results of operations.

We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

We may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our operating partnership. These transactions can result in stockholder dilution. This acquisition structure can have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require (and in the case of our properties, requires) that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions, which may have a material adverse effect on our business, financial condition and results of operations.

 

7


Table of Contents

We may face risks associated with future property acquisitions.

From time to time, we may pursue the acquisition of properties or portfolios of properties, including large portfolios that could further increase our size and result in changes to our capital structure. Our acquisition activities and their success are subject to the following risks:

 

    acquisition agreements contain conditions to closing, which may include completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied;

 

    necessary financing for such acquisitions may not be available on favorable terms or at all;

 

    acquisition, development or redevelopment projects may require the consent of third parties, such as anchor customers, mortgage lenders and joint venture partners, and such consents may be withheld;

 

    the diversion of management’s attention to the assimilation of the operations of the acquired businesses or assets;

 

    acquired properties may fail to perform as expected;

 

    difficulties in the integration of operations and systems and the inability to realize potential operating synergies;

 

    difficulties in the assimilation and retention of the personnel of the acquired companies;

 

    challenges in retaining customers;

 

    the actual costs of repositioning acquired properties may be higher than our estimates;

 

    adequate insurance coverage for new properties may not be available on favorable terms or at all;

 

    future acquisitions may result in unanticipated expenses or charges to earnings, including unanticipated operating expenses and depreciation or amortization expenses over the life of any assets acquired;

 

    we may not achieve the expected benefits of future acquisitions;

 

    acquired properties may be located in new markets where we face risks associated with incomplete knowledge or understanding of the local market and a limited number of established business relationships in the area;

 

    accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and

 

    acquired properties may be subject to liabilities and we may not have any recourse, or only limited recourse, to the transferor with respect to unknown liabilities, including liabilities for cleanup of undisclosed environmental contamination or non-compliance with environmental laws. As a result, if a claim were asserted against us based upon ownership of such properties, we might be required to pay a substantial sum, either in settlements or in damages, which could adversely affect our cash flow.

Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

 

8


Table of Contents

We may be unable to develop new properties successfully, which could materially adversely affect our results of operations due to unexpected costs, delays and other contingencies.

From time to time, we may acquire unimproved real property for development purposes as market conditions warrant, with a joint venture partner or otherwise. In addition to the risks associated with the ownership of real estate investments in general, and investments in joint ventures specifically, there are significant risks associated with our development activities, including the following:

 

    delays in obtaining, or an inability to obtain, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in completion delays and increased development costs;

 

    incurrence of development costs for a property that exceed original estimates due to increased materials, labor or other costs, changes in development plans or unforeseen environmental conditions, which could make completion of the property more costly or uneconomical;

 

    abandonment of contemplated development projects or projects in which we have started development, and the failure to recover expenses and costs incurred through the time of abandonment which could result in significant expenses;

 

    risk of loss of periodic progress payments or advances to builders prior to completion;

 

    termination of leases by customers due to completion delays;

 

    failure to achieve expected occupancy levels, as the lease-up of space at our development projects may be slower than estimated; and

 

    other risks related to the lease-up of newly constructed properties.

In addition, we also rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing to a purchase price at the time we acquire unimproved real property. If our projections are inaccurate, including due to any of the risks described above, we may overestimate the purchase price for a property and be unable to charge rents that compensate us for our increased costs, which may have a material adverse effect on our business, financial condition and results of operations.

We may co-invest in joint ventures with third parties. Any future joint venture investments could be adversely affected by the capital markets, lack of sole decision-making authority, reliance on joint venture partners’ financial condition and any disputes that may arise between us and our joint venture partners.

We may co-invest with third parties through partnerships, joint ventures or other structures in which we acquire noncontrolling interests in, or share responsibility for, managing the affairs of a property, partnership, co-tenancy or other entity. We may also market minority interests in certain of our properties. If we enter into any such joint venture or similar ownership structure, we may not be in a position to exercise sole decision-making authority regarding the properties owned through such joint ventures or similar ownership structure. In addition, investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including potential deadlocks in making major decisions, restrictions on our ability to exit the joint venture, reliance on joint venture partners and the possibility that a joint venture partner might become bankrupt or fail to fund its share of required capital contributions, thus exposing us to liabilities in excess of our share of the joint venture or jeopardizing our REIT status. The funding of our capital contributions to such joint ventures may be dependent on proceeds from asset sales, credit facility advances or sales of equity securities. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to its policies or objectives. We may, in specific circumstances, be liable for the actions of our joint venture partners. In addition, any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase our expenses. Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

 

9


Table of Contents

We, our customers and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations.

We, our customers and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Failure to comply with these requirements could subject us, or our customers, to governmental fines or private litigant damage awards. In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us, or our customers, to incur significant expenditures. We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will develop. Environmental noncompliance liability also could impact a customer’s ability to make rental payments to us. Furthermore, our reputation could be negatively affected if we violate environmental laws or regulations, which may have a material adverse effect on our business, financial condition and results of operations.

In addition, as a current or former owner or operator of real property, we may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on, under or emanating from such property, including investigation and cleanup costs, natural resource damages, third-party liability for cleanup costs, personal injury or property damage and costs or losses arising from property use restrictions. In particular, some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on, adjacent to or near sites upon which others, including former owners or customers of our properties, have engaged, or may in the future engage, in activities that have released or may have released petroleum products or other hazardous or toxic substances. Cleanup liabilities are often imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. The presence of hazardous substances also may result in use restrictions on impacted properties or result in liens on contaminated sites in favor of the government for damages it incurs to address contamination. We also may be liable for the costs of removal or remediation of hazardous substances or waste disposal or treatment facilities if we arranged for disposal or treatment of hazardous substances at such facilities, whether or not we own such facilities. Moreover, buildings and other improvements on our properties may contain asbestos-containing material or other hazardous building materials or could have indoor air quality concerns (e.g., from airborne contaminants such as mold), which may subject us to costs, damages and other liabilities including abatement cleanup, personal injury, and property damage liabilities. The foregoing could adversely affect occupancy and our ability to develop, sell or borrow against any affected property and could require us to make significant unanticipated expenditures that may have a material adverse effect on our business, financial condition and results of operations.

We may be materially adversely affected by laws, regulations or other issues related to climate change.

If we become subject to laws or regulations related to climate change, our business, financial condition and results of operations could be materially adversely affected. The federal government has enacted, and Houston or the state of Texas may enact, certain climate change laws and regulations which may, among other things, regulate “carbon footprints” and greenhouse gas emissions. Such laws and regulations could result in substantial compliance costs, retrofit costs and construction costs, including monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment. Furthermore, our reputation could be negatively affected if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future interpretations of current laws and regulations related to climate change will affect our business, financial condition and results of operations. Additionally, the potential physical impacts of climate change on our operations are highly uncertain and would be particular to Houston. These may include changes in rainfall and storm patterns and intensity, water shortages, changing sea levels and changing temperatures. These impacts may have a material adverse effect on our business, financial condition and results of operations.

 

10


Table of Contents

Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.

Our properties must comply with the Americans with Disabilities Act (the “ADA”) and any equivalent state or local laws, to the extent that our properties are public accommodations as defined under such laws. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. If one or more of our properties is not in compliance with the ADA or any equivalent state or local laws, we may be required to incur additional costs to bring such property into compliance with the ADA or similar state or local laws. Noncompliance with the ADA or similar state and local laws could also result in the imposition of fines or an award of damages to private litigants. We cannot predict the ultimate amount of the cost of compliance with the ADA or any equivalent state or local laws. If we incur substantial costs to comply with the ADA or any equivalent state or local laws, it may have a material adverse effect on our business, financial condition and results of operations.

Our third-party management agreements are subject to the risk of termination and non-renewal.

Our third-party management agreements are subject to the risk of possible termination under certain circumstances, including our failure to perform as required under these agreements, and to the risk of non-renewal by the property owner upon expiration or renewal of such management agreements on terms less favorable to us than the terms of current management agreements. If management agreements are terminated, or are not renewed upon expiration, our expected revenues will decrease which may have a material adverse effect on our business, financial condition and results of operations.

Our Third-Party Services Business may subject us to certain liabilities.

We may hire and supervise third-party contractors to provide construction, engineering and various other services for properties we are managing on behalf of third-party clients. Depending upon (1) the terms of our contracts with third-party clients, which, for example, may place us in the position of a principal rather than an agent, or (2) the responsibilities we assume or are legally deemed to have assumed in the course of a client engagement (whether or not memorialized in a contract), we may be subjected to, or become liable for, claims for construction defects, negligent performance of work or other similar actions by third parties we do not control. Adverse outcomes of property management disputes or litigation could negatively impact our business, financial condition and results of operations, particularly if we have not limited in our contracts the extent of damages to which we may be liable for the consequences of our actions, or if our liabilities exceed the amounts of the commercial third-party insurance that we carry. Moreover, our clients may seek to hold us accountable for the actions of contractors because of our role as property manager, even if we have technically disclaimed liability as a legal matter, in which case we may find it commercially prudent to participate in a financial settlement for purposes of preserving the client relationship.

Acting as a principal may also mean that we pay a contractor before we have been reimbursed by the client, which exposes us to additional risks of collection from the client in the event of an intervening bankruptcy or insolvency of the client. The reverse can occur as well, where a contractor that we have paid files for bankruptcy or commits fraud before completing a project for which we have paid it in part or in full. As part of our project management business, we are responsible for managing the various contractors required for a project, including general contractors, in order to ensure that the cost of a project does not exceed the contract price and that the project is completed on time. In the event that one of the other contractors on the project does not or cannot perform as a result of bankruptcy or for any other reason, we may be responsible for cost overruns as well as the consequences for late delivery. In the event that we have not accurately estimated our own costs of providing services under warranted or guaranteed cost contracts, we may lose money on such contracts until such time as we can legally terminate them, which may have a material adverse effect on our business, financial condition and results of operations.

We are required to maintain certain licenses to conduct our Third-Party Services Business.

Our Third-Party Services Business, which involves the brokerage of real estate leasing transactions and property management, requires us to maintain licenses in various jurisdictions in which we operate and to comply with particular regulations in such jurisdictions. If we fail to maintain our licenses or conduct regulated activities without a license or in contravention of applicable regulations, we may be required to pay fines or return commissions, which may have a material adverse effect on our business, financial condition and results of operations.

 

11


Table of Contents

As a licensed real estate service provider and advisor in various jurisdictions, we may be subject to various due diligence, disclosure, standard-of-care, anti-money laundering and other obligations in the jurisdictions in which we operate our Third-Party Services Business. Failure to fulfill these obligations could subject us to litigation from parties who leased properties we brokered or managed. We could become subject to claims by participants in real estate sales or other services claiming that we did not fulfill our obligations as a service provider or broker. This may include claims with respect to conflicts of interest where we are acting, or are perceived to be acting, for two or more clients with potentially contrary interests. Any such claims may have a material adverse effect on our business, financial condition and results of operations.

Our assets may be subject to impairment charges.

We will regularly review our real estate assets for impairment, and based on these reviews, we may record impairment losses that have a material adverse effect on our business, financial condition and results of operations. Negative or uncertain market and economic conditions, as well as market volatility, increase the likelihood of incurring impairment losses. Such impairment losses may have a material adverse effect on our business, financial condition and results of operations.

Uninsured and underinsured losses may adversely affect our operations.

We, or in certain instances, customers at our properties, carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage, environmental and umbrella liability coverage on all of our properties. We also carry wind and flood coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate. Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement cost basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. However, we may be subject to certain types of losses that are generally uninsured losses, including, but not limited to losses caused by riots, war or acts of God. In the event of substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property, which may have a material adverse effect on our business, financial condition and results of operations.

We may be subject to litigation, which could have a material adverse effect on our financial condition.

We may be subject to litigation, including claims related to our assets and operations that are otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we may not be insured against. While we generally intend to vigorously defend ourselves against such claims, we cannot be certain of the ultimate outcomes of claims that may be asserted against us. Unfavorable resolution of such litigation may result in our having to pay significant fines, judgments, or settlements, which, if uninsured—or if the fines, judgments and settlements exceed insured levels—would adversely impact our earnings and cash flows, thereby negatively impacting our ability to service debt and pay dividends to our stockholders, which may have a material adverse effect on our business, financial condition and results of operations. Certain litigation, or the resolution of certain litigation, may affect the availability or cost of some of our insurance coverage, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and directors, each of which may have a material adverse effect on our business, financial condition and results of operations.

 

12


Table of Contents

Our business could be materially adversely affected by security breaches through cyber-attacks, cyber intrusions or otherwise.

We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization and other significant disruptions of our information technology networks and related systems. These risks include operational interruptions, private data exposure and damage to our relationships with our customers, among other things. There can be no assurance that our efforts to maintain the security and integrity of our information technology networks and related systems will be effective. A security breach involving our networks and related systems could disrupt our operations in numerous ways that may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to satisfy the regulatory requirements of the Sarbanes-Oxley Act, or if our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the trading price of our common stock.

As a public company, we are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act and the Dodd-Frank Act and are required to prepare our financial statements in accordance with the rules and regulations promulgated by the SEC. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. Although management will continue to review the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all of our control objectives. If we are not able to comply with these and other requirements in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of shares of our common stock could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which may have a material adverse effect on our business, financial condition and results of operations.

The success of our business depends on retaining officers and employees.

Our continued success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, Mr. James R. Heistand, our President and Chief Executive Officer, who would be difficult to replace. Although Legacy Parkway extended its employment agreement with Mr. Heistand in July 2016, which was assigned to and assumed by us pursuant to the Employee Matters Agreement, dated as of October 5, 2016 (“Employee Matters Agreement”), among Parkway, Cousins and certain other parties thereto, in connection with the Spin-Off in order to provide for an additional nine-month term, we cannot provide any assurance that Mr. Heistand will remain employed by us. Our ability to retain Mr. Heistand, or to attract a suitable replacement should he leave, is dependent on the competitive nature of the employment market. The loss of services of Mr. Heistand or other key personnel may have a material adverse effect on our business, financial condition and results of operations.

Additionally, our success depends in part upon our ability to retain key employees formerly employed by Cousins and Legacy Parkway, and no assurance can be given that we will be able to retain key employees, which may have a material adverse effect on our business, financial condition and results of operations.

We have a significant amount of indebtedness and may need to incur more in the future.

As of June 30, 2016, we had $804.1 million of total outstanding indebtedness. In addition, in connection with executing our business strategies going forward, we expect to continue to evaluate the possibility of acquiring additional properties and making strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for us, including:

 

    hindering our ability to adjust to changing market, industry or economic conditions;

 

13


Table of Contents
    limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions or emerging businesses;

 

    limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses;

 

    making us more vulnerable to economic or industry downturns, including interest rate increases; and

 

    placing us at a competitive disadvantage compared to less leveraged competitors.

Moreover, to respond to competitive challenges, we may be required to raise substantial additional capital to execute our business strategy. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. If we are able to obtain additional financing, our credit ratings could be further adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our obligations under our indebtedness, which may have a material adverse effect on our business, financial condition and results of operations.

We have existing debt and refinancing risks that could affect our cost of operations.

We have both fixed and variable rate indebtedness and may incur additional indebtedness in the future, including borrowings under a $350 million term loan facility (the “Term Loan”) and a $100 million revolving credit facility (the “Revolving Credit Facility,” and, together with the Term Loan, the “Credit Facilities”), to finance possible acquisitions and for general corporate purposes. As a result, we are, and expect to be, subject to the risks normally associated with debt financing including:

 

    that interest rates may rise;

 

    that our cash flow will be insufficient to make required payments of principal and interest;

 

    that we will be unable to refinance some or all of our debt;

 

    that any refinancing will not be on terms as favorable as those of our existing debt;

 

    that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines;

 

    that debt service obligations will reduce funds available for distribution to our stockholders;

 

    that any default on our debt, due to noncompliance with financial covenants or otherwise, could result in acceleration of those obligations;

 

    that we may be unable to refinance or repay the debt as it becomes due; and

 

    that if our degree of leverage is viewed unfavorably by lenders or potential joint venture partners, it could affect our ability to obtain additional financing.

If we are unable to repay or refinance our indebtedness as it becomes due, we may need to sell assets or to seek protection from our creditors under applicable law, which may have a material adverse effect on our business, financial condition and results of operations.

 

14


Table of Contents

Our governing documents do not limit the amount of indebtedness we may incur and we may become more highly leveraged.

Our Charter and Bylaws do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may permit us to incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We might become more highly leveraged as a result, and our financial condition, results of operations and funds available for distribution to stockholders might be negatively affected, and the risk of default on our indebtedness could increase, which may have a material adverse effect on our business, financial condition and results of operations.

The cost and terms of mortgage financings may render the sale or financing of a property difficult or unattractive.

The sale of a property subject to a mortgage loan may trigger pre-payment penalties, yield maintenance payments or make-whole payments to the lender, which would reduce the amount of gain or increase our loss on the sale of a property and could make the sale of a property less likely. Certain of our mortgage loans will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.” There is no assurance that we will be able to refinance such balloon payments upon the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial condition and results of operations. Additionally, at the time a loan matures, the property may be worth less than the loan amount and, as a result, we may determine not to refinance the loan and permit foreclosure, generating a loss. Any such losses may have a material adverse effect on our business, financial condition and results of operations.

Financial covenants could materially adversely affect our ability to conduct our business.

The credit agreement governing the Credit Facilities contains restrictions on the amount of debt we may incur and other restrictions and requirements on its operations. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declarations of default under, and acceleration of, any related indebtedness, which would result in adverse consequences to our financial condition. The Credit Facilities contain cross-default provisions that give the lenders the right to declare a default if we are in default resulting in (or permitting the) acceleration of other debt under other loans in excess of certain amounts. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which may have a material adverse effect on our business, financial condition and results of operations.

Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties (or portions thereof).

For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan generally would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to satisfy the distribution requirements applicable to REITs under the Code. Foreclosures could also trigger our tax indemnification obligations under the terms of our agreements with certain continuing investors with respect to sales of certain properties, which may have a material adverse effect on our business, financial condition and results of operations.

 

15


Table of Contents

Failure to hedge effectively against interest rate changes may have a material adverse effect on our business, financial condition and results of operations.

The interest rate hedge instruments we may use to manage some of our exposure to interest rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements. Failure to hedge effectively against such interest rate changes may have a material adverse effect on our business, financial condition and results of operations.

We depend on external sources of capital that are outside of our control, which may affect our ability to pursue strategic opportunities, refinance or repay our indebtedness and make distributions to our stockholders.

In order to qualify to be taxed as a REIT, we generally must distribute annually at least 90% of our “REIT taxable income,” subject to certain adjustments and excluding any net capital gain, to our stockholders. Because of this distribution requirement, it is not likely that we will be able to fund all future capital needs from income from operations. As a result, when we engage in the development or acquisition of new properties or expansion or redevelopment of existing properties, we will continue to rely on third-party sources of capital, including lines of credit, collateralized or unsecured debt (both construction financing and permanent debt) and equity issuances. Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market’s view of the quality of our assets, the market’s perception of our growth potential, our current debt levels and our current and expected future earnings. There can be no assurance that we will be able to obtain the financing necessary to fund our current or new developments or project expansions or our acquisition activities on terms favorable to us or at all. If we are unable to obtain a sufficient level of third-party financing to fund our capital needs, our ability to make distributions to our stockholders may be adversely affected which may have a material adverse effect on our business, financial condition and results of operations.

We may amend our investment strategy and business policies without stockholder approval.

Our board of directors may change our investment strategy or any of our investment guidelines, financing strategy or leverage policies with respect to investments, developments, acquisitions, growth, operations, indebtedness, capitalization and dividends at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. Such a change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, among other risks. These changes could adversely affect our ability to pay dividends to our stockholders, and may have a material adverse effect on our business, financial condition and results of operations.

TPG Pantera is a significant stockholder and may have conflicts of interest with us in the future.

As of November 3, 2016, TPG Pantera and TPG Management owned approximately 9.8% of our issued and outstanding common stock. In addition, pursuant to the TPG Stockholders Agreement, so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of our issued and outstanding common stock, the TPG Parties will have preemptive rights to participate in our future equity issuances, subject to certain conditions. This concentration of ownership in one group of stockholders, together with the contractual ability for these stockholders to acquire additional shares, could potentially be disadvantageous to other stockholders’ interests. If the TPG Parties were to sell or otherwise transfer all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.”

Additionally, the interests of the TPG Parties may differ from the interests of our other stockholders in material respects. For example, the TPG Parties may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in the TPG Parties’ judgment, could enhance their other equity investments, even though such transactions might involve risks to us. The TPG Parties are in the business of making or advising on investments in companies and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business. The TPG Parties may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us, which may have a material adverse effect on our business, financial condition and results of operations.

 

16


Table of Contents

The TPG Stockholders Agreement with the TPG Parties grants TPG Pantera certain rights that may restrain our ability to take various actions in the future.

On October 7, 2016, we entered into the TPG Stockholders Agreement, pursuant to which we granted TPG Pantera certain board rights, which could allow TPG Pantera to influence our board of directors. Under the TPG Stockholders Agreement, we have agreed, at the effective time of the Merger, to have a seven-member board of directors. We have granted TPG Pantera the right to nominate a specified number of directors to our board of directors and to have a specified number of such directors appointed to the compensation committee of our board of directors (the “Compensation Committee”) and the investment committee of our board of directors (the “Investment Committee”) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 2.5% of the outstanding shares of our common stock. TPG is entitled to nominate to our board of directors (i) three directors if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 30%, (ii) two directors if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 5% but less than 30% and (iii) one director if TPG Pantera’s beneficial ownership of the issued and outstanding shares of our common stock is at least 2.5% but less than 5%. In addition, we have agreed to constitute our Investment Committee as a four member committee and (i) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of the issued and outstanding shares of our common stock, TPG Pantera will have the right to have two of its designees to our board of directors appointed to the Investment Committee and one of its designees to our board of directors appointed to the Compensation Committee; and (ii) for so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 2.5% but less than 5% of the issued and outstanding shares of our common stock, TPG will have the right to have one of its designees to our board of directors appointed to the Investment Committee and the Compensation Committee. Pursuant to the terms of the TPG Stockholders Agreement, so long as TPG Pantera (together with its affiliates, other than portfolio companies of TPG Pantera or its affiliates) beneficially owns at least 5% of the outstanding shares of our common stock, other than in connection with any change in control of us, TPG Pantera also will have the right to consent to any change in the size or rights and responsibilities of either our Investment Committee or the Compensation Committee and to certain other matters described below under the caption “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties. For more information, see “Certain Relationships and Related Person Transactions—Agreement with the TPG Parties.” The ability of TPG Pantera to influence our board of directors may have a material adverse effect on our business, financial condition and results of operations.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder and may have interests that differ from our other stockholders.

Mr. James A. Thomas, the chairman of our board of directors, is a significant stockholder on a fully diluted basis. Concurrently with the execution of the Merger Agreement, Legacy Parkway and Parkway LP entered into a letter agreement (the “Thomas Letter Agreement”) with Mr. Thomas, then chairman of the Legacy Parkway board of directors, and certain unitholders of Parkway LP who are affiliated with Mr. Thomas (together with Mr. Thomas, the “Thomas Parties”) relating to certain governance rights of Mr. Thomas, certain tax protection arrangements, and registration rights. Pursuant to the Separation and Distribution Agreement, the Thomas Letter Agreement is binding on us, and, is not binding upon Cousins, Cousins LP or any of their subsidiaries. Among other things, the Thomas Letter Agreement provides that Legacy Parkway would cause Mr. Thomas to be appointed as our chairman and that Legacy Parkway would modify certain existing tax protection agreements in favor of Mr. Thomas. While, as our director, Mr. Thomas has a fiduciary duty to us and our stockholders, Mr. Thomas’ interests may differ from the interests of our other stockholders and, given his significant ownership in us, he may influence opportunities that have an effect on our business, financial condition and results of operations. For more information, see “Certain Relationships and Related Person Transactions—Agreement with Mr. James A. Thomas.”

 

17


Table of Contents

Risks Related to the Separation, the UPREIT Reorganization and the Spin-Off

Our business and operating results could be negatively affected if we are unable to successfully integrate the Houston businesses previously owned by Cousins and Parkway.

The Merger involved the combination of two companies which previously operated as independent public companies. The Separation, the UPREIT Reorganization and the Spin-Off involved the separation, reorganization and distribution of the assets of two companies that previously operated as independent public companies. Our management team has and will continue to devote significant management attention and resources to post-closing activities following the occurrence of such events. Potential difficulties we or Cousins may encounter in the integration process, in the Separation, the UPREIT Reorganization and the Spin-Off, and in the related post-closing activities include the following:

 

    lost sales and customers as a result of certain customers of either of Cousins or Legacy Parkway deciding not to do business with us;

 

    difficulties in the integration of operations and systems of the Houston businesses previously owned by Cousins and Legacy Parkway;

 

    the inability to realize potential operating synergies;

 

    the failure by us to retain key employees;

 

    the complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases;

 

    accounting, regulatory or compliance issues that could arise, including internal control over financial reporting;

 

    potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger, the Separation, the UPREIT Reorganization and the Spin-Off; and

 

    challenges in retaining the customers of each of Cousins and Legacy Parkway after the Spin-Off.

For all these reasons, you should be aware that it is possible that the integration process, the Separation, the UPREIT Reorganization and the Spin-Off or the related post-closing activities could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the Separation, the UPREIT Reorganization and the Spin-Off, which may have a material adverse effect on our business, financial condition and results of operations.

We have no operating history as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about our business in this prospectus refers to Cousins’ portion of the Houston Business as operated and integrated with Legacy Parkway’s portion of the Houston Business. Our historical and pro forma financial information included in this prospectus is derived from the consolidated financial statements and accounting records of Cousins and Legacy Parkway. Accordingly, the historical and pro forma financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented, or those that we will achieve in the future. Factors which could cause our results to materially differ from those reflected in such historical and pro forma financial information and which may adversely impact our ability to achieve similar results in the future may include, but are not limited to, the following:

 

    the financial results in this prospectus do not reflect all of the expenses we will incur as a public company;

 

18


Table of Contents
    prior to the Separation, the UPREIT Reorganization and the Spin-Off, our business was operated by Legacy Parkway and Cousins as part of their respective corporate organizations. We will need to make investments to replicate or outsource from other providers certain facilities, systems, infrastructure, and personnel to which we will no longer have access after the Spin-Off, which will be costly;

 

    after the Spin-Off, we are unable to use Legacy Parkway’s and Cousins’ economies of scope and scale in procuring various goods and services and in maintaining vendor and customer relationships. Although we entered into the Separation and Distribution Agreement, which provides for certain transition-related arrangements between us and Cousins, these arrangements may not fully capture the benefits we have previously enjoyed as a result of our business being integrated within the businesses of Legacy Parkway and Cousins and may result in us paying higher charges than in the past for necessary services;

 

    prior to the Separation, the UPREIT Reorganization and the Spin-Off, our working capital requirements and capital for our general corporate purposes, including acquisitions, research and development, and capital expenditures, have been satisfied as part of the corporation-wide cash management policies of Cousins and Parkway. Following the Spin-Off, while we have entered into the Credit Facilities, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may not be on terms as favorable to those obtained by Cousins or Legacy Parkway, and the cost of capital for our business may be higher than Cousins’ or Legacy Parkway’s cost of capital prior to the Separation, the UPREIT Reorganization and the Spin-Off, which may have a material adverse effect on our business, financial condition and results of operations; and

 

    our cost structure, management, financing and business operations will be significantly different as a result of operating as an independent public company. These changes will result in increased costs, including, but not limited to, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of our status as an independent company. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, please see “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data—Parkway Houston,” “Selected Historical Combined Financial Data—Cousins Houston,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this prospectus.

Cousins may fail to perform under various transaction agreements that were executed as part of the Separation, the UPREIT Reorganization and the Spin-Off, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

Prior to the effective time of the Merger, we entered into agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Spin-Off including the Separation and Distribution Agreement, the Employee Matters Agreement and the Tax Matters Agreement (the “Tax Matters Agreement”), dated as of October 5, 2016, among Parkway, Cousins and certain other parties thereto. Certain of these agreements provide for the performance of services by each company for the benefit of the other for a period of time after the Spin-Off. We rely on Cousins to satisfy its performance and payment obligations under such agreements. If Cousins is unable to satisfy such obligations, including its indemnification obligations, we could incur operational difficulties or losses, which may have a material adverse effect on our business, financial condition and results of operations.

If we do not have in place similar agreements with other providers of these services when the transaction agreements terminate and we are not able to provide these services internally, we may not be able to operate our business effectively and our profitability may decline, which may have a material adverse effect on our business, financial condition and results of operations. For more information, see “Certain Relationships and Related Person Transactions.”

 

19


Table of Contents

Potential indemnification liabilities owed to Cousins pursuant to the Separation and Distribution Agreement may have a material adverse effect on our business, financial condition and results of operations.

The Separation and Distribution Agreement provides for, among other things, the principal corporate transactions required to effect the Separation, the UPREIT Reorganization and the Spin-Off, certain conditions to the Separation, the UPREIT Reorganization and the Spin-Off and provisions governing our relationship with Cousins with respect to and following the Spin-Off. Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist related to our business activities, whether incurred prior to or after the Spin-Off, as well as certain obligations of Cousins that we will assume pursuant to the Separation and Distribution Agreement. If we are required to indemnify Cousins under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our directors may have actual or potential conflicts of interest because of their previous or continuing equity interests in, or positions at, Cousins.

Certain of our directors are persons who have previously served as directors of Cousins or who may own Cousins common stock or other equity awards. Even though our board of directors consists of a majority of independent directors, we expect that certain of our directors will continue to have a financial interest in Cousins common stock. Continued ownership of Cousins common stock or other equity awards could create, or appear to create, potential conflicts of interest, which may have a material adverse effect on our business, financial condition and results of operations.

We may not achieve some or all of the expected benefits of the Separation, the UPREIT Reorganization and the Spin-Off, and the Separation, the UPREIT Reorganization and the Spin-Off may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, the UPREIT Reorganization and the Spin-Off, or such benefits may be delayed due to a variety of circumstances, not all of which may be under our control.

We may not achieve the anticipated benefits of the Separation, the UPREIT Reorganization and the Spin-Off for a variety of reasons, including, among others: (i) diversion of management’s attention from operating and growing our business; (ii) disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, which could adversely affect our ability to maintain relationships with customers; (iii) increased susceptibility to market fluctuations and other adverse events following the Separation, the UPREIT Reorganization and the Spin-Off; and (iv) lack of diversification in our business, compared to Legacy Parkway’s or Cousins’ businesses prior to the Separation, the UPREIT Reorganization and the Spin-Off. Failure to achieve some or all of the benefits expected to result from the Separation, the UPREIT Reorganization and the Spin-Off, or a delay in realizing such benefits, may have a material adverse effect on our business, financial condition and results of operations.

Our agreements with Cousins in connection with the Separation, the UPREIT Reorganization and the Spin-Off involve conflicts of interest, and we may have received better terms from unaffiliated third parties than the terms we will receive in these agreements.

Because the Separation, the UPREIT Reorganization and the Spin-Off involved the combination and division of certain businesses previously owned by Legacy Parkway and Cousins into two independent companies, we entered into certain agreements with Cousins to provide a framework for our relationship with Cousins following the Separation, the UPREIT Reorganization and the Spin-Off, including the Separation and Distribution Agreement, the Tax Matters Agreement and the Employee Matters Agreement. The terms of these agreements were determined while portions of our business were still owned by Cousins and Legacy Parkway and were negotiated by persons who were employees, officers or directors of Legacy Parkway, Cousins or their respective subsidiaries prior to the Separation, the UPREIT Reorganization and the Spin-Off, or who are employees, officers or directors of Cousins following the effective time of the Merger, and, accordingly, may have conflicts of interest. For example, during the

 

20


Table of Contents

period in which the terms of these agreements were negotiated, our board of directors was not independent of Legacy Parkway or Cousins. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties, which may have a material adverse effect on our business, financial condition and results of operations.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain pre-Spin-Off liabilities and liabilities related to Cousins’ assets. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities, or that Cousins’ ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement, Cousins will indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Cousins retains, and there can be no assurance that Cousins will be able to fully satisfy its indemnification obligations to us. Moreover, even if we ultimately succeed in recovering from Cousins any amounts for which we were held liable by such third parties, any indemnification received may be insufficient to fully offset the financial impact of such liabilities or we may be temporarily required to bear these losses while seeking recovery from Cousins, which may have a material adverse effect on our business, financial condition and results of operations.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our share price to decline.

As of November 3, 2016, we had an aggregate of approximately 49,110,645 shares of common stock issued and outstanding. Such shares of our common stock are freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.

Although we have no actual knowledge of any plan or intention on the part of any of our 5% or greater stockholders to sell their shares of our common stock, it is possible that some of our large stockholders will sell our common stock that they received in the Spin-Off. For example, our stockholders may sell our common stock because our concentration in Houston, Texas, our business profile or our market capitalization as an independent company does not fit their investment objectives, or because shares of our common stock are not included in certain indices after the Spin-Off. A portion of Cousins common stock is held by index funds, and if we are not included in these indices, these index funds may be required to sell our common stock. The sales of significant amounts of our common stock, or the perception in the market that this may occur, may result in the lowering of the market price of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

The Credit Facilities may limit our ability to pay dividends on our common stock, including repurchasing shares of our common stock.

Under the credit agreement governing the Credit Facilities, our dividends may not exceed the greater of (1) 90% of our funds from operations, and (2) the amount required for us to qualify and maintain our status as a REIT. Other permitted dividends include, among other things, the amount required for us to avoid the imposition of income and excise taxes. Any inability to pay dividends may negatively impact our REIT status or could cause stockholders to sell shares of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

The price of our common stock may be volatile or may decline.

The market price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside of our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These fluctuations in the stock market may adversely affect the market price of our common stock. Among the factors that could affect the market price of our common stock are:

 

21


Table of Contents
    actual or anticipated quarterly fluctuations in our business, financial condition and operating results;

 

    changes in revenues or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;

 

    the ability of our customers to pay rent to us and meet their other obligations to us under current lease terms;

 

    our ability to re-lease spaces as leases expire;

 

    our ability to refinance our indebtedness as it matures;

 

    any changes in our dividend policy;

 

    any future issuances of equity securities;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    general market conditions and, in particular, developments related to market conditions for the real estate industry; and

 

    domestic and international economic factors unrelated to our performance.

In addition, until the market has fully evaluated our business as a stand-alone entity, the prices at which shares of our common stock trade may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. The increased volatility of our stock price following the Spin-Off may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Status as a REIT

Failure to qualify to be taxed as a REIT, or failure to remain qualified as a REIT, would cause us to be subject to U.S. federal income tax as a regular corporation and could cause us to face substantial tax liability, which would substantially reduce funds available for distributions to our stockholders.

We intend to qualify and elect to be taxed as a REIT beginning with our short taxable year commencing on the day prior to the Spin-Off and ending December 31, 2016. We will receive an opinion from Hogan Lovells US LLP that, commencing with our short taxable year ending December 31, 2016, we are organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and our current and proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for our short taxable year ending December 31, 2016 and subsequent taxable years. You should be aware that Hogan Lovells US LLP’s opinion is based upon customary assumptions, will be conditioned upon certain representations made by us and Cousins as to factual matters, including representations regarding the nature of our and Cousins’ assets and the conduct of our and Cousins’ business, is not binding upon the IRS or any court, and speaks as of the date issued. In addition, Hogan Lovells US LLP’s opinion will be based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, both the validity of Hogan Lovells US LLP’s opinion and our qualification as a REIT will depend upon our ability to meet on a continuing basis, through actual annual operating results, certain asset, income, organizational, distribution, stockholder ownership and other requirements set forth in the U.S. federal tax laws. Hogan Lovells US LLP has not reviewed and will not review our compliance with those tests on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or more of our investments may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements or that the IRS will not contend that our investments violate the REIT requirements.

 

22


Table of Contents

If we were to fail to qualify as a REIT in any taxable year, we would face serious tax consequences that would substantially reduce the funds available for distributions to our stockholders because:

 

    we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

    we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and

 

    unless we were entitled to relief under certain U.S. federal income tax laws, we would not be able to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we were to fail to qualify as a REIT, we would no longer be required to make distributions. Any corporate tax liability imposed as a result of our failure to qualify as a REIT could be substantial and would reduce the amount of funds available for distribution to our stockholders. As a result of all these factors, our failure to qualify as a REIT could adversely affect the value of, and trading prices for, our common stock, and could have a material adverse effect on our business, financial condition and results of operations. See “Material U.S. Federal Income Tax Consequences” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

If either Cousins or Legacy Parkway failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, we would be prevented from electing to qualify as a REIT for several years.

We believe that, from the time of our formation until the issuance of our non-voting preferred stock to Cousins LP in the UPREIT Reorganization, we were a “qualified REIT subsidiary” of Cousins. Under applicable Treasury Regulations, if either Cousins or Legacy Parkway failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, unless Cousins’ or Legacy Parkway’s failure was or is subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Cousins or Legacy Parkway failed to qualify. Failure to qualify as a REIT would have a material adverse effect on our business, financial condition and results of operations.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify, and remain qualified, for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. For more information, see “Material U.S. Federal Income Tax Consequences.” For example, in order to meet the REIT qualification requirements, we may hold some of our assets or conduct certain of our activities through one or more taxable REIT subsidiaries (“TRSs”) or other subsidiary corporations that will be subject to federal, state and local corporate-level income taxes as regular C corporations. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes would decrease funds available for distribution to stockholders, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, for U.S. federal income tax purposes, if a REIT acquires property from a C corporation in a transaction in which gain is not required to be recognized for tax purposes and sells such property within a specified number of years after such acquisition, the REIT will be subject to corporate income tax on the gain that would have been recognized had the property been sold in a taxable transaction at the time of the acquisition (referred to as “sting tax gain”). Legacy Parkway acquired properties in December 2013 from a C corporation that are subject to these rules. Cousins transferred these properties to us in the Separation. The parties have structured the Separation in a manner intended to cause Cousins to recognize the “sting tax gain,” and to preclude us from having to recognize “sting tax gain” with respect to these properties if they were to be sold by us prior to January 2019. There can be no assurance, however, that if these properties were to be sold by us prior to January 2019 that we would not also be

 

23


Table of Contents

subject to the corporate income tax on the “sting tax gain” associated with those properties. If the IRS were to assert that position successfully, then we could incur a significant corporate income tax liability if it were to sell these former Legacy Parkway properties prior to January 2019.

Failure to make required distributions would subject us to federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT (and assuming that certain other requirements are also satisfied), we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. If we become subject to a federal corporate income tax, it could have a material adverse effect on our business, financial condition and results of operations.

REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

To satisfy the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of cash and the recognition of taxable income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT, which could have a material adverse effect on our business, financial condition and results of operations.

Our ownership of our TRS, and any other TRSs we form, will be subject to limitations and our transactions with our TRS, and any other TRSs we form, will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an arm’s-length rent. We will monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% (20% for taxable years beginning after December 31, 2017) TRS limitation or to avoid application of the 100% excise tax. The limitations and taxes imposed on TRSs could have a material adverse effect on our business, financial condition and results of operations

Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In

 

24


Table of Contents

addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries, and no more than 25% of the value of our total assets can be represented by nonqualified publicly offered REIT debt instruments. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or contribute to a TRS otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and funds available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain attractive investments, which could have a material adverse effect on our business, financial condition and results of operations.

You may be restricted from acquiring or transferring certain amounts of our common stock.

The stock ownership restrictions of the Code for REITs and the stock ownership limit in our Charter may inhibit market activity in our capital stock and restrict our business combination opportunities.

In order to qualify as a REIT for each of our taxable years after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each of our taxable years after 2016. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.

Our Charter generally authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, our Charter generally prohibits any person (other than a person who has been granted an exception) from actually or constructively owning more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or more than 9.8% of the aggregate of the outstanding shares of our preferred stock by value or by number of shares, whichever is more restrictive. Our Charter grants Cousins and certain of its affiliates an exemption from these ownership limits with respect to Cousins’ ownership of the non-voting preferred stock. Our Charter also permits exceptions to be made for stockholders provided our board of directors determines such exceptions will not jeopardize our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

Our board of directors has granted TPG an exemption from the stock ownership limits contained in our Charter to enable TPG to acquire up to 32% of our common stock, subject to continued compliance with the terms of our Charter.

We may pay taxable dividends on our common stock in common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in shares as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the

 

25


Table of Contents

IRS issued a revenue procedure creating a temporary safe harbor that authorized publicly traded REITs to make elective cash/share dividends, but that temporary safe harbor has expired. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends would be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay taxable dividends using both our common stock and cash, although we may choose to do so in the future.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends treated as qualified dividend income, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, income that we generate from derivatives or other transactions that we enter into to manage the risk of interest rate changes with respect to borrowings made, or to be made, to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% and 95% gross income requirements applicable to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transactions as a hedge, the income from such transactions is likely to be treated as non-qualifying income for purposes of both the 75% and 95% gross income tests. As a result of these rules, we may be required to limit the use of hedging techniques that might otherwise be advantageous, or implement those hedges through a TRS. This could increase the cost of our hedging activities because any such TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates or other changes than we would otherwise incur. In addition, losses in any TRS will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income in the TRS, which could have a material adverse effect on our business, financial condition and results of operations.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our Charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have a material adverse effect on our total return to our stockholders, or on our business, financial condition and results of operations.

 

26


Table of Contents

We may be subject to adverse legislative, administrative, or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. Any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation, could have a material adverse effect on our business, financial condition and results of operations.

The prohibited transactions tax may limit our ability to dispose of our assets, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of property. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some or all of our future dispositions may not qualify for that safe harbor. We intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our assets or may conduct such sales through a TRS, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to an Investment in Our Common Stock

Limitations on the ownership of our common stock and other provisions of our Charter may preclude the acquisition or change of control of our Company.

Certain provisions contained in our Charter and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control. Provisions of our Charter are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our capital stock that might jeopardize our REIT qualification. Among other things, unless exempted by our board of directors, no person may actually or constructively own more than 9.8% of the aggregate of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding shares of our preferred stock by value or by number of shares, whichever is more restrictive. Our Charter grants Cousins and certain of its affiliates an exemption from these ownership limits with respect to Cousins’ ownership of the non-voting preferred stock. Our board of directors may, in its sole discretion, grant other exemptions to the stock ownership limits, subject to such conditions and the receipt by our board of directors of certain representations and undertakings.

In addition to these ownership limits, our Charter also prohibits any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, shares of our capital stock that would result in us being “closely held” under Section 856(h) of the Code, (b) transferring our capital stock if such transfer would result in our stock being owned by fewer than 100 persons (determined without reference to any rules of attribution), (c) beneficially or constructively owning shares of our capital stock to the extent such ownership would result in us owning (directly or indirectly) an interest in a tenant if the income derived by us from that tenant for our taxable year during which such determination is being made would reasonably be expected to equal or exceed the lesser of one percent of our gross income or an amount that would cause us to fail to satisfy any of the REIT gross income requirements and (d) beneficially or constructively owning shares of our capital stock that would cause us otherwise to fail to qualify as a REIT. If any transfer of shares of our common stock occurs which, if effective, would result in any person beneficially or constructively owning shares of stock in excess, or in violation, of the above transfer or ownership limitations, (such person, a prohibited owner), then that number of shares of

 

27


Table of Contents

stock, the beneficial or constructive ownership of which otherwise would cause such person to violate the transfer or ownership limitations (rounded up to the nearest whole share), will be automatically transferred to a charitable trust for the exclusive benefit of a charitable beneficiary, and the prohibited owner will not acquire any rights in such shares. If the transfer to the charitable trust would not be effective for any reason to prevent the violation of the above transfer or ownership limitations, then the transfer of that number of shares of our capital stock that otherwise would cause any person to violate the above limitations will be void. The prohibited owner will not benefit economically from ownership of any shares of our capital stock held in the charitable trust, will have no rights to dividends or other distributions and will not possess any rights to vote or other rights attributable to the shares of our capital stock held in the charitable trust.

Generally, the ownership limits imposed under the Code are based upon direct or indirect ownership by “individuals,” but only during the last half of a taxable year. The ownership limits contained in our Charter are based upon direct or indirect ownership at any time by any “person,” which term includes entities. These ownership limitations in our Charter are common in REIT governing documents and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, the ownership limits on our common stock also might delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

Furthermore, under our Charter, our board of directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as our board of directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests, which could have a material adverse effect on our business, financial condition and results of operations.

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for Parkway common stock or that our stockholders otherwise believe to be in their best interest.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of Parkway common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10 percent or more of the voting power of our common stock or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of our then outstanding voting shares at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an “interested shareholder,” and thereafter impose fair price and/or supermajority and stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by the MGCL, we have elected to opt out of the business combination and control share provisions of the MGCL. However, we cannot assure you that our board of directors will not opt to be subject to such business combination and control share provisions of the MGCL in the future.

 

28


Table of Contents

Subtitle 8 of Title 3 of the MGCL, known as the Maryland Unsolicited Takeover Act, permits the board of directors of a Maryland corporation, without stockholder approval and regardless of what is currently provided in the corporation’s charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of the corporation’s common stock with the opportunity to realize a premium over the then current market price. We have elected to opt out of the Maryland Unsolicited Takeover Act and cannot opt back in without obtaining stockholder approval in advance.

Market interest rates may have an effect on the value of our common stock.

One of the factors that influence the price of our common stock is its dividend yield, or the dividend per share as a percentage of the price of our common stock, relative to market interest rates. An increase in market interest rates, which are currently at historically low levels, may lead prospective purchasers of our common stock to expect a higher dividend yield, and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. If market interest rates increase and we are unable to increase our dividend in response, including due to an increase in borrowing costs, insufficient funds available for distribution or otherwise, investors may seek alternative investments with a higher dividend yield, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease as market interest rates increase, which may have a material adverse effect on our business, financial condition and results of operations.

The number of shares of our common stock available for future issuance or sale could adversely affect the per share trading price of our common stock and may be dilutive to current stockholders.

Our Charter authorizes our board of directors to, among other things, issue a certain amount of additional shares of our common stock without stockholder approval. We cannot predict whether future issuances or sales of shares of our common stock, or the availability of shares for resale in the open market, will decrease the per share trading price of our common stock. The issuance of a substantial number of shares of our common stock in the open market or the issuance of a substantial number of shares of our common stock upon the exchange of OP units, or the perception that such issuances might occur, could adversely affect the per share trading price of our common stock. In addition, any such issuance could dilute our existing stockholders’ interests in our company. In addition, we have adopted an equity incentive plan, and we may issue shares of our common stock or grant equity incentive awards exercisable for or convertible or exchangeable into shares of our common stock under the plan. Future issuances of shares of our common stock may be dilutive to existing stockholders, which may have a material adverse effect on our business, financial condition and results of operations.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or preferred equity securities which may be senior to our common stock for purposes of dividends or upon liquidation, may materially adversely affect the per share trading price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing the Operating Partnership to issue such debt securities), including medium-term notes, senior or subordinated notes and additional classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock or preferred units and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution of such assets to holders of our common stock. Additionally, any convertible or exchangeable securities that we may issue in the future may have rights, preferences and privileges more favorable than those of our common stock, and may result in dilution to owners of our common stock. Other than TPG Pantera’s rights pursuant to the TPG Stockholders Agreement, holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our non-voting preferred stock has a preference on liquidating distributions and a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Any shares of preferred stock or preferred units that we issue in the future could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Any such future offerings may reduce the per share trading price of our common stock, which may have a material adverse effect on our business, financial condition and results of operations.

 

29


Table of Contents

Our ability to pay dividends is limited by the requirements of Maryland law.

Our ability to pay dividends on our common stock is limited by Maryland law. Under the MGCL, a Maryland corporation generally may not make a dividend if, after giving effect to the dividend, the corporation would not be able to pay its debts as such debts become due in the ordinary course of business or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the dividend. Accordingly, we generally may not make a dividend on our common stock if, after giving effect to the dividend, we would not be able to pay our debts as they become due in the ordinary course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences upon dissolution senior to those of our common stock. If we are unable to pay dividends, or our ability to pay dividends is limited, investors may seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

We may change our dividend policy.

Future dividends will be declared and paid at the discretion of our board of directors, and the amount and timing of dividends will depend upon cash generated by operating activities, our business, financial condition, results of operations, capital requirements, annual distribution requirements under the REIT provisions of the Code, and such other factors as our board of directors deems relevant. Our board of directors may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods. Any reduction in our dividends may cause investors to seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common stock. As a result, the price of our common stock may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

During the period in which we qualify as an “emerging growth company,” we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We currently qualify as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, we are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (5) provide certain disclosure regarding executive compensation required of larger public companies or (6) hold stockholder advisory votes on executive compensation. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

30


Table of Contents

As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We do not intend to take advantage of such extended transition period.

 

31


Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus and other materials we have filed or will file with the SEC contain, or will contain, forward-looking statements within the meaning of the federal securities laws. Certain statements that are not in the present or past tense or that discuss our expectations (including any use of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “might,” “outlook,” “project,” “should” or similar expressions) are intended to identify such forward-looking statements, which generally are not historical in nature. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements.

Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such factors include, but are not limited to:

 

    our lack of operating history as an independent company;

 

    conditions associated with our primary market, including an oversupply of office space, customer financial difficulties and general economic conditions;

 

    that certain of our properties represent a significant portion of our revenues and costs;

 

    that the Spin-Off will not qualify for tax-free treatment;

 

    our ability to meet mortgage debt obligations on certain of our properties;

 

    the availability of refinancing current debt obligations;

 

    potential co-investments with third-parties;

 

    changes in any credit rating we may subsequently obtain;

 

    changes in the real estate industry and in performance of the financial markets and interest rates and our ability to effectively hedge against interest rate changes;

 

    the actual or perceived impact of global and economic conditions;

 

    declines in commodity prices, which may negatively impact the Houston, Texas market;

 

    the concentration of our customers in the energy sector;

 

    the demand for and market acceptance of our properties for rental purposes;

 

    our ability to enter into new leases or renewal leases on favorable terms;

 

    the potential for termination of existing leases pursuant to customer termination rights;

 

    the amount, growth and relative inelasticity of our expenses;

 

    risks associated with the ownership and development of real property;

 

    termination of property management contracts;

 

    the bankruptcy or insolvency of companies for which we provide property management services or the sale of these properties;

 

32


Table of Contents
    the outcome of claims and litigation involving or affecting the company;

 

    the ability to satisfy conditions necessary to close pending transactions and the ability to successfully integrate the assets and related operations acquired in such transactions after the closing;

 

    applicable regulatory changes;

 

    risks associated with acquisitions, including the integration of the combined businesses of Legacy Parkway and Cousins;

 

    risks associated with the fact that our historical and pro forma financial information may not be a reliable indicator of our future results;

 

    risks associated with achieving expected synergies or cost savings;

 

    risks associated with the potential volatility of our common stock; and

 

    other risks and uncertainties detailed from time to time in our SEC filings.

Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes.

Other factors that could cause actual results or events to differ materially from those anticipated include the matters described under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties.”

 

33


Table of Contents

USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders from time to time pursuant to this prospectus. The proceeds from the offering are solely for the account of the selling stockholders. We have agreed, however, to pay certain expenses of the selling stockholders relating to the registration of such shares under applicable securities laws.

MARKET PRICE OF COMMON STOCK AND DIVIDENDS

Our common stock has been listed on the NYSE since October 7, 2016 and is traded under the symbol “PKY.” The following table sets forth, for the periods indicated, the high, low and last sale prices per share in dollars on the NYSE for our common stock. We have not paid any dividends during or with respect to the periods indicated.

 

     High      Low      Last      Dividends  

Fourth quarter(1)

   $ 23.20       $ 16.42       $ 17.00         —     

 

(1) Information is provided only for the period from October 7, 2016 to November 3, 2016, as our common stock did not begin trading publicly in the regular way until October 7, 2016.

On November 3, 2016, the closing sale price for our common stock, as reported on the NYSE, was $17.00 per share and there were 1,366 holders of record of our common stock. This figure does not reflect the beneficial ownership of common stock held in nominee name.

DIVIDEND POLICY

We are a newly formed company that has recently commenced operations, and as a result, we have not paid any dividends as of November 3, 2016. We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Spin-Off and ending December 31, 2016. We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  (1) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  (2) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  (3) any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

We cannot assure you that our dividend policy will remain the same in the future, or that any estimated dividends will be made or sustained. Dividends made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, funds from operations and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, the annual REIT distribution requirements and such other factors as our board of directors deems relevant. For more information regarding risk factors that could materially and adversely affect our ability to pay dividends, see “Risk Factors” beginning on page 4.

Our dividends may be funded from a variety of sources. In particular, we expect that, initially, our dividends may exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are

 

34


Table of Contents

less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our anticipated revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends. In addition, our Charter allow us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock.

For a discussion of the tax treatment of distributions to holders of our common stock, please refer to “Material U.S. Federal Income Tax Consequences—Taxation of U.S. Stockholders” and “Material U.S. Federal Income Tax Consequences—Taxation of Non-U.S. Stockholders.”

 

35


Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA—PARKWAY HOUSTON

The following table sets forth the selected historical combined financial data of Parkway Houston, which was carved out from the financial information of Legacy Parkway as described below. The selected historical financial data set forth below as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2015, 2014 and 2013 has been derived from Parkway Houston’s audited combined financial statements, which are included elsewhere in this prospectus. The income statement data for each of the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Parkway Houston’s unaudited interim combined financial statements included elsewhere in this prospectus. Parkway Houston’s unaudited interim combined financial statements as of June 30, 2016 and for the six months ended June 30, 2016 were prepared on the same basis as Parkway Houston’s audited combined financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 and, in the opinion of management, include all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly Parkway Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

Parkway Houston’s combined financial statements were carved out from the financial information of Legacy Parkway at a carrying value reflective of such historical cost in such Legacy Parkway records. Parkway Houston’s historical financial results reflect charges for certain corporate expenses which include, but are not limited to, costs related to property management, accounting, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganization. Costs of the services were allocated based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly Parkway Houston’s percentage of Legacy Parkway’s square footage. Parkway Houston believes these charges are reasonable; however, these results may not reflect what Parkway Houston’s expenses would have been had Parkway Houston been operating as a separate, stand-alone public company. The historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Parkway Houston had been an independent, stand-alone entity during the periods shown. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Parkway—Basis of Presentation.”

The historical combined financial data set forth below does not indicate results expected for any future periods. The selected historical combined financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Parkway” and Parkway Houston’s combined financial statements and related notes thereto included elsewhere in this prospectus.

 

                                                                          
     Six Months ended
June 30,
    Year Ended
December 31,
 
     2016      2015     2015      2014     2013  
     (unaudited)                     

Income Statement Data (in thousands):

            

Revenues

            

Income from office properties

   $ 55,779       $ 51,880      $ 108,507       $ 123,172      $ 20,965   

Management company income

     2,592         5,523        9,891         23,971        17,526   

Sale of condominium units

     —          9,836        11,063         16,554        —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     58,371         67,239        129,461         163,697        38,491   

Expenses and other

            

Property operating expenses

     26,367         22,593        45,385         54,856        9,119   

Management company expenses

     2,006         5,574        9,362         27,038        23,638   

Cost of sales—condominium units

     —          10,091        11,120         13,199        14   

Depreciation and amortization

     21,005         26,628        55,570         64,012        10,465   

Impairment loss on management contracts

     —          —         —          4,750        —    

General and administrative

     2,893         3,187        6,336         6,917        7,267   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses and other

     52,271         68,073        127,773         170,772        50,503   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     6,100         (834     1,688         (7,075     (12,012

 

36


Table of Contents
                                                                          

Other income and expenses

          

Interest and other income

     131        122        246        244        1,663   

Gain on extinguishment of debt

     154        —         —         —         —    

Interest expense

     (6,955     (8,076     (16,088     (16,252     (3,296
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (570     (8,788     (14,154     (23,083     (13,645

Income tax benefit (expense)

     (760     (361     (1,635     180        1,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (1,330     (9,149     (15,789     (22,903     (12,369

Net (income) loss attributable to noncontrolling interests

     —         7        7        (148     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    

As of

June 30,

     As of December 31,  
     2016      2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Total real estate related investments, net

   $ 749,406       $ 752,653       $ 738,846       $ 757,848   

Total assets

     855,294         865,731         866,496         903,165   

Mortgage notes payable, net

     278,352         396,901         407,211         414,656   

Total liabilities

     323,546         456,665         485,535         503,130   

Legacy Parkway equity

     531,748         409,066         380,053         396,985   

Noncontrolling interests

     —          —          908         3,050   

 

37


Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA—COUSINS HOUSTON

The following table sets forth the selected historical combined financial data of Cousins Houston, which was carved out from the financial information of Cousins as described below. The selected historical combined financial data set forth below as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 has been derived from Cousins Houston’s audited combined financial statements, which are included elsewhere in this prospectus. The income statement data for each of the six months ended June 30, 2016 and 2015 and the balance sheet data as of June 30, 2016 have been derived from Cousins Houston’s unaudited interim combined financial statements included elsewhere in this prospectus. The selected historical combined financial data as of December 31, 2013 was derived from financial information not included in this prospectus. Cousins Houston’s unaudited interim combined financial statements as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 were prepared on the same basis as Cousins Houston’s audited combined financial statements as of December 31, 2015 and 2014, for the years ended December 31, 2015 and 2014, and for the period from February 7, 2013 (date of inception) to December 31, 2013, and, in the opinion of management, include all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly Cousins Houston’s financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

Cousins Houston’s combined financial statements were carved out from Cousins’ financial information based on historical cost. The historical financial results for Cousins Houston include certain allocated corporate costs, which we believe are reasonable. These costs were incurred by Cousins and estimated to be applicable to Cousins Houston based on proportionate leasable square footage. Such costs do not necessarily reflect what the actual costs would have been if Cousins Houston were operating as a separate stand-alone public company. These costs are discussed further in “Note 3—Related Party Transactions” of the combined financial statements of Cousins Houston for the year ended December 31, 2015 and the six months ended June 30, 2016, included elsewhere in this prospectus. The selected historical combined financial information presented may not be indicative of the results of operations, financial position or cash flows that would have been obtained if Cousins Houston had been an independent, stand-alone entity during the periods shown.

The selected historical combined financial data set forth below do not indicate results expected for any future periods. The selected historical combined financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Parkway” and Cousins Houston’s combined financial statements and related notes thereto included elsewhere in this prospectus.

 

     Six Months Ended
June 30,
    Year Ended December 31,    

Period from

February 7,

2013 (date of

inception) to

December 31,

 
     2016     2015     2015     2014     2013  
     (unaudited)                    

Income Statement (in thousands):

          

Rental property revenues

   $ 87,696      $ 88,594      $ 177,890      $ 184,536      $ 72,696   

Other revenues

     288        87        —         31        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     87,984        88,681        177,890        184,567        72,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rental property operating expenses

     (37,202     (38,043     (74,162     (79,625     (31,759

General and administrative expenses

     (4,976     (3,425     (6,328     (7,347     (3,793

Depreciation and amortization

     (31,168     (33,095     (63,791     (77,760     (29,146

Interest expense

     (3,939     (4,012     (7,988     (8,127     (2,618

Acquisition and related costs

     —         —         —         —         (3,858
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (77,285   $ (78,575   $ (152,269   $ (172,859   $ (71,174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,699      $ 10,106      $ 25,621      $ 11,708      $ 1,533   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents
    

As of

June 30,

     As of December 31,  
     2016      2015      2014      2013  
     (unaudited)                       

Balance Sheet Data (in thousands):

           

Operating properties, net

   $ 1,080,969       $ 1,086,451       $ 1,077,290       $ 1,087,181   

Total assets

     1,181,692         1,188,236         1,188,355         1,220,551   

Note payable

     179,302         180,937         184,097         187,120   

Total liabilities

     250,235         271,364         278,558         283,604   

Equity

     931,457         916,872         909,797         936,947   

 

39


Table of Contents

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

As of and for the Six Months Ended June 30, 2016 and for the Year Ended December 31, 2015

On April 28, 2016, Cousins, Legacy Parkway, Parkway LP and Clinic Sub Inc. entered into the Merger Agreement, pursuant to which Legacy Parkway merged with and into Clinic Sub Inc., a wholly owned subsidiary of Cousins, with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins. Upon consummation of the Merger, we were initially a wholly owned subsidiary of Cousins. Immediately after the effective time of the Merger, our businesses were separated from the remainder of Cousins’ businesses through the Separation and the UPREIT Reorganization. On the business day following the closing of the Merger, all of the outstanding shares of our common stock and our limited voting stock were distributed pro rata to the holders of Cousins common stock and Cousins limited voting preferred stock, respectively, including Legacy Parkway common and limited voting stockholders. The following unaudited pro forma combined financial statements reflect the distribution ratio of one share of our common stock for every eight shares of Cousins common stock and one share of our limited voting stock for every eight shares of Cousins limited voting preferred stock (the “Distribution Ratio”).

The following unaudited pro forma combined financial statements as of and for the six months ended June 30, 2016 and for the year ended December 31, 2015 have been derived from the historical combined financial statements of Cousins Houston and Parkway Houston included elsewhere in this prospectus.

The following unaudited pro forma combined financial statements give effect to the following:

 

    the Merger, the Separation, the UPREIT Reorganization, the Spin-Off and the Distribution Ratio;

 

    our post-Separation capital structure which includes proceeds from the $350.0 million Term Loan, $150.0 million of which the Operating Partnership will retain; and

 

    Cousins LP’s contribution of $5 million to Parkway in exchange for shares of our non-voting preferred stock, par value $0.001 per share.

The unaudited pro forma combined balance sheet assumes the Separation and the related transactions occurred on June 30, 2016. The unaudited pro forma combined statements of operations presented for the six months ended June 30, 2016, and for the year ended December 31, 2015, assume the Separation and the related transactions occurred on January 1, 2015. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to the Separation, the Spin-Off, and for purposes of the statements of operations, are expected to have a continuing impact on our business. Our unaudited pro forma combined financial statements and explanatory notes present how our financial statements may have appeared had we completed the above transactions as of the dates noted above.

The Merger will be accounted for as a “purchase,” as that term is used under GAAP, for accounting and financial reporting purposes. Under purchase accounting, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Legacy Parkway as of the effective time of the Merger will be recorded at their respective fair values and added to the assets and liabilities of Cousins. Any excess of purchase price over the fair values is recorded by Cousins as goodwill. The separation of the assets and liabilities related to our businesses from the remainder of Cousins’ businesses in the Separation and the UPREIT Reorganization will be at Cousins’ carryover basis after adjusting the Parkway Houston assets and liabilities to fair value. As a result, our future financial statements will initially reflect carryover basis for Cousins Houston and fair value basis for Parkway Houston.

The following unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to our unaudited pro forma combined financial statements. The unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2015 or as of June 30, 2016, as the case may be. The unaudited pro forma combined financial statements also do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

 

40


Table of Contents

The unaudited pro forma combined financial statements do not indicate results expected for any future period. The unaudited pro forma combined financial statements are derived from and should be read in conjunction with the historical combined financial statements and accompanying notes of Parkway Houston and Cousins Houston appearing elsewhere in this prospectus.

 

41


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF JUNE 30, 2016

(in thousands, except share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
     Parkway
Houston
Historical
     Adjustments            Total  

Assets

             

Real estate related investments:

             

Office properties, net

   $ 1,080,969       $ 749,406       $ (98,598     A       $ 1,731,777   

Cash and cash equivalents

     1,171         7,973         188,192        B         197,336   

Receivables and other assets

     35,107         78,275         (54,210     C         59,172   

Intangible assets, net

     64,445         19,640         41,515        A         125,600   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total assets

   $ 1,181,692       $ 855,294       $ 76,899         $ 2,113,885   
  

 

 

    

 

 

    

 

 

      

 

 

 

Liabilities

             

Mortgage notes payable, net

   $ 179,302       $ 278,352       $ (197     D       $ 457,457   

Notes payable to banks, net

     —          —          346,675        B         346,675   

Accounts payable and other liabilities

     32,927         25,625         —            58,552   

Below market leases, net

     38,006         19,569         827        A         58,402   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities

     250,235         323,546         347,305           921,086   
  

 

 

    

 

 

    

 

 

      

 

 

 

Equity

             

Stockholders’ equity:

             

Common stock $0.001 par value, 49,209,589 shares pro forma

     —          —          49        E         49   

Limited voting stock $0.001 par value, 858,420 shares pro forma

     —          —          1        E         1   

Non-voting preferred stock, $100,000 liquidation preference, 50 shares pro forma

     —          —          5,000        F         5,000   

Cousins Houston

     931,457         —          (931,457     G         —    

Parkway Houston

     —          531,748         (531,748     G         —    

Additional paid-in capital

     —          —          1,164,557        G         1,164,557   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total stockholders’ equity

     931,457         531,748         (293,598        1,169,607   
  

 

 

    

 

 

    

 

 

      

 

 

 

Noncontrolling interests

     —          —          23,192        H         23,192   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total equity

     931,457         531,748         (270,406        1,192,799   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities and equity

   $ 1,181,692       $ 855,294       $ 76,899         $ 2,113,885   
  

 

 

    

 

 

    

 

 

      

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

42


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(In thousands, except per share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
    Parkway
Houston
Historical
    Adjustments            Total  

Revenues

           

Income from office properties

   $ 87,696      $ 55,779      $ 1,024        a       $ 144,499   

Management company income

     —         2,592        —            2,592   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     87,696        58,371        1,024           147,091   
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses

           

Property operating expenses

     37,202        26,367        —            63,569   

Management company expenses

     —         2,006        —            2,006   

Depreciation and amortization

     31,168        21,005        (6,807     b         45,366   

General and administrative

     4,976        2,893        —         c         7,869   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     73,346        52,271        (6,807        118,810   
  

 

 

   

 

 

   

 

 

      

 

 

 

Operating income

     14,350        6,100        7,831           28,281   

Other income and expenses

           

Interest and other income

     288        131        (123     d         296   

Gain on extinguishment of debt

     —         154        (154     e         —    

Interest expense

     (3,939     (6,955     (5,383     f         (16,277
  

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     10,699        (570     2,171           12,300   

Income tax expense

     —         (760     —            (760
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     10,699        (1,330     2,171           11,540   

Net (income) attributable to noncontrolling interests

     —         —         (228     g         (228
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     10,699        (1,330     1,943           11,312   

Dividends on preferred stock

     —         —         (200     h         (200
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ 10,699      $ (1,330   $ 1,743         $ 11,112   
  

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

           i         49,210   
           

 

 

 

Weighted average shares outstanding—diluted

           i         50,188   
           

 

 

 

Basic and diluted earnings per share

            $ 0.23   
           

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

43


Table of Contents

PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2015

(In thousands, except per share data)

(Unaudited)

 

     Cousins
Houston
Historical(1)
    Parkway
Houston
Historical
    Adjustments            Total  

Revenues

           

Income from office properties

   $ 177,890      $ 108,507      $ (9,536     a       $ 276,861   

Management company income

     —         9,891        —            9,891   

Sale of condominium units

     —         11,063        —            11,063   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     177,890        129,461        (9,536        297,815   
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses

           

Property operating expenses

     74,162        45,385        —            119,547   

Management company expenses

     —         9,362        —            9,362   

Cost of sales—condominium units

     —         11,120        —            11,120   

Depreciation and amortization

     63,791        55,570        (26,108     b         93,253   

General and administrative

     6,328        6,336        —         c         12,664   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     144,281        127,773        (26,108        245,946   
  

 

 

   

 

 

   

 

 

      

 

 

 

Operating income

     33,609        1,688        16,572           51,869   

Other income and expenses

           

Interest and other income

     —         246        (245     d         1   

Interest expense

     (7,988     (16,088     (7,785     f         (31,861
  

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     25,621        (14,154     8,542           20,009   

Income tax expense

     —         (1,635     —            (1,635
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     25,621        (15,789     8,542           18,374   

Net (income) loss attributable to noncontrolling interests

     —         7        (351     g         (344
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     25,621        (15,782     8,191           18,030   

Dividends on preferred stock

     —         —         (400     h         (400
  

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ 25,621      $ (15,782   $ 7,791         $ 17,630   
  

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

           i         49,210   
           

 

 

 

Weighted average shares outstanding—diluted

           i         50,188   
           

 

 

 

Basic and diluted earnings per share

            $ 0.36   
           

 

 

 

 

(1) Certain of Cousins Houston historical balances have been reclassified to conform with Parkway Houston historical balances.

See notes to unaudited pro forma combined financial statements

 

44


Table of Contents

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Adjustments to the Unaudited Pro Forma Combined Balance Sheet

The unaudited pro forma combined balance sheet as of June 30, 2016 reflects the following adjustments:

A. Office properties, net, intangible assets, net, and below market leases, net

The preliminary fair market value is based on a valuation prepared by Cousins with the assistance of a third-party valuation advisor. The Merger adjustments reflected in the unaudited pro forma combined balance sheet for net office properties, net intangible assets and net below market leases represent the differences between the fair market value of Parkway Houston acquired in connection with the Merger and Legacy Parkway’s historical balances for Parkway Houston, which are presented as follows (in thousands):

 

     As of June 30, 2016  
     Parkway
Houston
Historical
     Fair Market
Value of
Parkway

Houston
     Adjustments
as a Result of
Merger
 

Office properties, net

   $ 749,406       $ 650,808       $ (98,598

Intangible assets, net

     19,640         61,155         41,515   

Below market leases, net

     (19,569      (20,396      (827

Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate. The fair value of land included in office properties, net, is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and tenant improvements, included in office properties, net, are based upon current market replacement costs and other relevant market rate information. The fair value of the below market leases, net of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. The fair value of acquired in-place leases, included in intangibles, net, is derived based on assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period.

B. Cash and cash equivalents and notes payable to banks, net

In connection with the Merger and the Spin-Off, the Operating Partnership, as borrower, entered into a senior secured term loan facility in an aggregate principal amount of up to $350 million and a senior unsecured revolving credit facility in an aggregate principal amount of $100 million by and among Wells Fargo Bank, National Association, Bank of America, N.A. and JPMorgan Chase Bank, N.A. Per the terms of the credit agreement, the Credit Facilities have a term of three years. Following the effective time of the Merger, but prior to the Spin-Off, the Term Loan was funded. In the UPREIT Reorganization, the proceeds of the Term Loan were used to fund a $200 million distribution to the partners of the Operating Partnership, who in turn caused such funds to be contributed to Cousins LP, which used the funds to repay a portion of approximately $550 million outstanding under Legacy Parkway’s credit facilities. The remaining $150 million of proceeds from the Term Loan was retained by the Operating Partnership under the Credit Facilities following consummation of the Spin-Off. These remaining proceeds from the Term Loan and future proceeds from the Revolving Credit Facility will be used for general corporate purposes of Parkway. Additionally, in the UPREIT Reorganization, Cousins LP contributed $5 million to Parkway in exchange for shares of non-voting preferred stock with a liquidation preference of $5 million, a cumulative dividend of 8.00% per annum per share and limited voting rights as set forth in our Charter.

 

45


Table of Contents

Additionally, the adjustments to the cash and cash equivalents includes approximately $42.4 million of cash that was retained by Parkway pursuant to the terms of the Separation and Distribution Agreement.

The adjustment to notes payable to banks, net in the unaudited pro forma combined balance sheet comprises the following as of June 30, 2016 (in thousands):

 

     As of
June 30,
2016
 

Term Loan

   $ 350,000   

Credit Facilities deferred financing costs

     (3,325
  

 

 

 

Total

   $ 346,675   
  

 

 

 

C. Receivables and other assets

The straight-lining of rents pursuant to the underlying leases associated with the real estate acquired in connection with the Separation will commence at the effective time of the Separation; therefore, the balance of deferred rent of $23.8 million included on Parkway Houston’s historical balance sheet has been eliminated.

The investment in ACP Peachtree Center Manager, LLC, which is included in Parkway Houston’s historical financial statements, will be retained by Cousins in connection with the Merger and Separation, therefore the balance of $3.5 million included on Legacy Parkway’s historical balance sheet has been eliminated.

Lease commissions will be adjusted to reflect the fair market value for Parkway Houston. The fair value of leasing commissions is based upon current market replacement costs and other relevant market information.

The adjustment to receivables and other assets in the unaudited pro forma combined balance sheet comprises the following as of June 30, 2016 (in thousands):

 

     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
     Adjustments
as a Result of
Merger
 

Straight-line rent

   $ 23,783       $ —        $ (23,783

Lease commissions, net

     42,424         15,497         (26,927

Investment in ACP Peachtree

     3,500         —          (3,500
        

 

 

 
         $ (54,210
        

 

 

 

 

46


Table of Contents

D. Mortgage notes payable, net

Represents the adjustment to reflect the premium on mortgage notes payable, net to fair value (in thousands):

 

     As of June 30, 2016  
     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
Assumed Debt
     Adjustments
as a Result of
Merger
 

Premium on notes payables

   $ (4,266    $ (4,069    $ (197

The fair values of mortgage notes payable, net assumed in connection with the Merger were based on discounted cash flow analysis using the current market borrowing rates for similar types of borrowing arrangements as of the measurement dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

E. Common stock and limited voting stock

Represents the issuance of one share of Parkway common stock or Parkway limited voting stock for every eight shares of Cousins common stock or Cousins limited voting preferred stock, respectively, on the business day following the effective time of the Merger, pursuant to which each Legacy Parkway common stockholder received 1.63 newly issued shares of Cousins common stock or Cousins limited voting preferred stock for each share of Legacy Parkway common stock or Legacy Parkway limited voting stock, respectively (in thousands, except per share data and exchange ratio):

 

     As of June 30,
2016
 

Outstanding shares of Legacy Parkway common stock—historical basis

     111,735   

Legacy Parkway equity-based awards converted in Legacy Parkway common stock

     847   
  

 

 

 

Outstanding shares of Legacy Parkway common stock

     112,582   

Exchange Ratio

     1.63   
  

 

 

 

Shares of Cousins common stock to be issued—pro forma basis

     183,509   

Outstanding shares of Cousins common stock—historical basis

     210,170   
  

 

 

 

Total shares to be issued at Merger

     393,679   
  

 

 

 

Distribution Ratio of 8:1

     8   
  

 

 

 

Shares of Parkway common stock to be issued—pro forma basis

     49,210   

Parkway common stock par value per share

   $ 0.001   
  

 

 

 

Pro forma adjustment to Parkway common stock

   $ 49   
  

 

 

 
     As of June 30,
2016
 

Outstanding shares of Legacy Parkway limited voting stock—historical basis

     4,213   

Exchange Ratio

     1.63   
  

 

 

 

Total shares to be issued at Merger

     6,867   

Distribution Ratio of 8:1

     8   
  

 

 

 

Shares of Parkway limited voting stock to be issued—pro forma basis

     858   

Parkway limited voting stock par value per share

   $ 0.001   
  

 

 

 

Pro forma adjustment to Parkway limited voting stock

   $ 1   
  

 

 

 

 

47


Table of Contents

F. Non-Voting Preferred Stock

Represents the non-voting preferred stock acquired by Cousins LP in exchange for a $5 million contribution by Cousins LP to Parkway in connection with the Separation, the UPREIT Reorganization and the Spin-Off. The issuance of the $5 million of non-voting preferred stock was negotiated between the parties to satisfy the parties’ overall business and economic objectives, including the intended tax treatment of the Spin-Off. The non-voting preferred stock pays a dividend of 8.00% per annum.

G. Cousins Houston, Parkway Houston and additional paid-in capital

The following table represents the pro forma adjustments to eliminate the equity for Cousins Houston and Parkway Houston and reflects the net equity of the Houston Business in the Spin-Off (in thousands):

 

     As of June 30,
2016
 

Cousins Houston

   $ 931,457   

Parkway Houston

     531,748   

Net equity value of Houston Business distributed in Spin-Off

     (298,648
  

 

 

 

Pro forma adjustment

   $ 1,164,557   
  

 

 

 

The net equity value of the Houston Business distributed in the distribution is as follows (in thousands):

  

Adjustment to Office properties, net for Parkway Houston to fair value as discussed in Note A

   $ (98,598

Adjustment to Cash for Parkway Houston as discussed in Note B

     188,192   

Adjustment to Receivables and other assets for Parkway Houston to fair value as discussed in Note C

     (54,210

Adjustment to Intangible assets, net for Parkway Houston to fair value as discussed in Note A

     41,515   

Adjustment to mortgage notes payable, net for Parkway Houston to fair value as discussed in Note D

     197   

Adjustment to notes payable to banks, net for Parkway Houston to fair value as discussed in Note B

     (346,675

Adjustment to below market leases, net for Parkway Houston to fair value as discussed in Note A

     (827

Adjustment to common stock as discussed in Note E

     (49

Adjustment to limited voting stock as discussed in Note E

     (1

Adjustment to preferred stock as discussed in Note F

     (5,000

Adjustment to Noncontrolling interest as discussed in Note H

     (23,192
  

 

 

 

Total

   $ (298,648
  

 

 

 

H. Noncontrolling interests

Pro forma adjustment represents the post-Separation noncontrolling interest estimated using the expected noncontrolling interest of 2% of total estimated units applied to the pro forma total net equity value of Parkway.

 

48


Table of Contents

Adjustments to the Unaudited Pro Forma Combined Statements of Operations

a. Income from office properties

Represents the elimination of historical straight-line rents and historical amortization of above- and below-market rent associated with the leases of Parkway Houston, which will be eliminated after the Merger and the amount of above- and below-market rents associated with Parkway Houston based on fair value in the Merger. The entire lease term was used to calculate the pro forma adjustments for straight-line rent and amortization of above- and below-market rent. No early termination options in leases were accounted for in the lease term because leases including such options contain penalties substantial enough that the continuation of such leases appears, at inception, to be reasonably assured.

The following table summarizes the adjustments made to income from office properties for Parkway Houston’s properties for the six months ended June 30, 2016 and the year ended December 31, 2015 (in thousands):

 

     Six Months
Ended June 30,
2016
 

Pro forma Parkway Houston straight-line rent adjustment

   $ 6,170   

Pro forma (above)/below market rent adjustment

     1,272   

Historical Parkway Houston amounts

     (6,418
  

 

 

 

Pro forma adjustment

   $ 1,024   
  

 

 

 

 

     Year Ended
December 31,
2015
 

Pro forma Parkway Houston straight-line rent adjustment

   $ 18,991   

Pro forma (above)/below market rent adjustment

     2,546   

Historical Parkway Houston amounts

     (31,073
  

 

 

 

Pro forma adjustment

   $ (9,536
  

 

 

 

b. Depreciation and amortization

The following tables summarize the adjustments made to depreciation and amortization for Parkway Houston’s properties based on fair values in the Merger for the six months ended June 30, 2016 and the year ended December 31, 2015:

 

     Six Months
Ended June 30,
2016
 

Parkway Houston building and site improvements

   $ 5,990   

Parkway Houston in-place leases

     8,208   

Parkway Houston historical depreciation and amortization

     (21,005
  

 

 

 

Pro forma adjustment

   $ (6,807
  

 

 

 

 

49


Table of Contents
     Year Ended
December 31,
2015
 

Parkway Houston building and site improvements

   $ 13,043   

Parkway Houston in-place leases

     16,419   

Parkway Houston historical depreciation and amortization

     (55,570
  

 

 

 

Pro forma adjustment

   $ (26,108
  

 

 

 

c. General and administrative expenses

Management initially expects annual general and administrative expenses to be in the range of $14.0 million to $16.0 million without consideration for share-based compensation expenses for Parkway.

This estimate is based on anticipated: (i) corporate-level salaries, including salaries set forth in employment agreements with the executive officers of Legacy Parkway that were assigned to and assumed by Parkway pursuant to the Employee Matters Agreement in connection with the Spin-Off, but not including non-cash compensation, (ii) benefits, (iii) director fees, (iv) rent and related expenses, (v) professional fees and (vi) costs to operate as a public company.

d. Interest and other income

Represents the elimination of the interest income related to Legacy Parkway’s investment in ACP Peachtree Center Manager, LLC.

e. Gain on extinguishment of debt

Represents the elimination of gain on extinguishment of debt related to the payoff in full of the $114.0 million mortgage debt secured by CityWestPlace I & II.

f. Interest expense

Represents the pro forma interest expense and pro forma amortization of deferred financing costs related to the Credit Facilities and pro forma amortization of above-market debt values created by marking the assumed debt of the Parkway Houston properties to fair market value. Upon completion of the Separation, the UPREIT Reorganization and the Spin-Off, our properties are subject to the existing secured, property-level indebtedness, equal to $454.1 million as of June 30, 2016.

The following tables summarize the adjustments to the unaudited pro forma combined statements of operations to reflect the Credit Facilities activity and amortization of Parkway Houston properties’ above-market debt and the elimination of the historical interest expense on the CityWestPlace I & II debt (in thousands):

 

     Six Months
Ended June 30,
2016
 

Pro forma interest on Credit Facilities

   $ 6,073   

Pro forma amortization of deferred financing costs

     554   

Pro forma amortization of above market debt

     (644

Historical Parkway Houston amortization of above market debt

     1,274   

Historical interest on CityWestPlace I & II

     (1,874
  

 

 

 

Pro forma adjustment

   $ 5,383   
  

 

 

 

 

50


Table of Contents
     Year Ended
December 31,
2015
 

Pro forma interest on Credit Facilities

   $ 11,160   

Pro forma amortization of deferred financing costs

     1,108   

Pro forma amortization of above market debt

     (1,282

Historical Parkway Houston amortization of above market debt

     3,991   

Historical interest on CityWestPlace I & II

     (7,192
  

 

 

 

Pro forma adjustment

   $ 7,785   
  

 

 

 

The Term Loan bears interest at LIBOR plus a spread that ranges from 2.50% to 3.50% per annum (the “Margin”) based on the ratio of total indebtedness to total asset value. Based upon management’s expectation of the ratio of indebtness to our total assets after the Spin-Off, the Term Loan bears interest at LIBOR plus a spread of 3.00% for the purposes of pro forma adjustments. At June 30, 2016 and December 31, 2015, LIBOR was approximately 0.47% and 0.19%, respectively, for a total pro forma borrowing rate of approximately 3.47% and 3.19%, respectively. A 0.125% change in LIBOR would result in a change in pro forma interest expense on the Term Loan of approximately $400,000 per year. A 0.50% change in the margin would result in a change in pro forma interest expense on the Term Loan of approximately $1.8 million per year.

g. Noncontrolling interest

Represents the adjustment to allocate net income to limited partners of OP units of Parkway LP.

h. Dividends on Non-Voting Preferred Stock

Represents the pro forma dividend on the $5 million non-voting preferred stock, with an 8.00% per annum stated dividend rate.

i. Weighted average shares

The following table summarizes the pro forma weighted average shares of Parkway common stock outstanding as if the Spin-Off occurred on June 30, 2016 (for more information, see note E above)

 

     As of June 30,
2016
 

Weighted average shares of common stock—basic

     49,210   

Effect of conversion and exchange of OP units in Parkway LP

     978   
  

 

 

 

Weighted average shares of Parkway common stock—diluted

     50,188   
  

 

 

 

 

51


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the historical results of operations and liquidity and capital resources of Parkway Houston and Cousins Houston, each of which are our predecessors. Parkway Houston and Cousins Houston were not operated by Legacy Parkway or Cousins as stand-alone businesses. You should read the following discussion and analysis in conjunction with “Selected Historical Combined Financial Data—Parkway Houston,” Selected Historical Combined Financial Data—Cousins Houston,” “Unaudited Pro Forma Combined Financial Statements” and the financial statements beginning on page F-1 included elsewhere in this prospectus. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to “Risk Factors,” beginning on page 4 and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

The Merger and the Separation

On April 28, 2016, Cousins, Legacy Parkway, Parkway LP and Clinic Sub Inc. entered into the Merger Agreement, pursuant to which Legacy Parkway merged with and into Clinic Sub Inc., a wholly owned subsidiary of Cousins, with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins. Immediately following the effective time of the Merger, Cousins consummated the Separation and the UPREIT Reorganization to separate the Houston Business and Third-Party Services Business of Cousins and Legacy Parkway, such that these businesses are now owned and operated by the Operating Partnership.

For every eight shares of Cousins common stock or limited voting preferred stock held of record by Cousins stockholders as of the close of business on the record date for the Spin-Off, such stockholder received, on October 7, 2016, one share of Parkway common stock or limited voting stock, respectively, meaning that legacy holders of Legacy Parkway common stock or limited voting stock who continued to hold the Cousins shares they received in the Merger through the effective time of the Spin-Off received one share of Parkway common or limited voting stock, respectively, for approximately every 4.91 shares of Legacy Parkway common stock or limited voting stock they owned prior to the effective time of the Merger. As of the Spin-Off, Cousins and Parkway are two independent, publicly traded companies.

Parkway’s mission is to own and operate high-quality office properties located in attractive submarkets of Houston, Texas, including the Galleria, Greenway and Westchase submarkets. Parkway is the largest owner of Class A office assets in Houston, Texas, with a portfolio of five Class A assets, comprising 19 buildings and totaling 8.7 million rentable square feet as of June 30, 2016. Parkway also operates the Third-Party Services Business, providing fee-based real estate services through wholly owned subsidiaries of Parkway, which in total managed or leased approximately 2.7 million square feet primarily for third-party owners as of June 30, 2016, and owns certain other assets previously owned by Legacy Parkway.

Basis of Presentation

The combined financial statements of Parkway Houston and Cousins Houston include the allocation of certain assets and liabilities that have historically been held at their respective corporate levels but which are specifically identifiable or allocable to Parkway Houston and Cousins Houston. All intercompany transactions and accounts have been eliminated. The total net effect of the settlement of these intercompany transactions is reflected in the combined historical financial statements of cash flow as a financing activity and in the combined balance sheets as equity in the Parkway Houston and Cousins Houston financial statements.

The combined historical financial statements of Parkway Houston and Cousins Houston do not necessarily include all of the expenses that would have been incurred had Parkway been operating as a separate, stand-alone entity and may not necessarily reflect our results of operations, financial position and cash flows had Parkway been a stand-alone company during the periods presented. Our combined historical financial statements include charges related to certain corporate functions, including senior management, property management, legal, leasing,

 

52


Table of Contents

development, marketing, human resources, finance, public reporting, tax and information technology. These expenses have been charged based on direct usage or benefit where identifiable, with the remainder charged on a pro rata basis of square footage. Parkway Houston and Cousins Houston consider the expense allocation methodology and results reasonable for all periods presented. However, the charges may not be indicative of the actual expenses that would have been incurred had Parkway operated as an independent, publicly-traded company for the periods presented.

PARKWAY HOUSTON

Critical Accounting Policies and Estimates

The accounting policies and estimates used in the preparation of the Parkway Houston and Cousins Houston combined financial statements are more fully described in the notes to the respective combined financial statements. However, certain significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our consolidated financial statements. Parkway Houston considers critical accounting policies and estimates to be those used in the determination of the reported amounts and disclosure related to the following:

Revenue Recognition

Parkway Houston recognizes revenue from real estate rentals on a straight-line basis over the noncancelable lease term at the inception of each respective lease in accordance with ASC 840, Leases. The cumulative difference between lease revenue recognized under this method and contractual lease payment terms is recorded as straight-line rent receivable on the accompanying balance sheets. When Parkway Houston is the owner of the customer improvements, the leased space is ready for its intended use when the tenant improvements are substantially completed, at which point revenue recognition begins. In limited instances, when the tenant is the owner of the tenant improvements, straight-line rent is recognized when the tenant takes possession of the unimproved space. The leases also typically provide for tenant reimbursement of a portion of common area maintenance, real estate taxes and other operating expenses. Parkway Houston recognizes property operating cost recoveries from customers (“expense reimbursements”) as revenue in the period in which the expenses are incurred. The computation of expense reimbursements is dependent on the provisions of individual customer leases. Most customers make monthly fixed payments of estimated expense reimbursements. Parkway Houston makes quarterly adjustments, positive or negative, to expense reimbursement income to adjust the recorded amounts to Parkway Houston’s best estimate of the final property operating costs based on the most recent annual estimate. After the end of the calendar year, Parkway Houston computes each customer’s final expense reimbursements and issues a bill or credit for the difference between the actual amount and the amounts billed monthly during the year. Differences between actual billed amounts and accrued amounts are considered immaterial.

Management company income represents market-based fees earned from providing management, construction, leasing, brokerage, and acquisition services to unconsolidated joint ventures, related parties, and third parties. Management fee income is computed and recorded monthly in accordance with the terms set forth in the management contracts. Leasing and brokerage commissions, as well as salary and administrative fees, are recognized by Parkway Houston pursuant to the terms of the agreements at the time underlying leases are signed, which is the point at which the earnings process is complete and collection of the fees is reasonably assured. Fees relating to the purchase or sale of property are recognized by Parkway Houston when the earnings process is complete and the collection of fees is reasonably assured, which usually occurs at closing. Parkway Houston recognizes fees earned from Legacy Parkway’s unconsolidated joint ventures in management company income. Parkway Houston is not a party to any consolidated or unconsolidated joint ventures. The fees from management company income from Legacy Parkway’s unconsolidated joint ventures recognized by Parkway Houston are included herein because they are reflected in the historical financial statements of Legacy Parkway and are attributable to Parkway Houston because of its ownership of Eola Office Partners, LLC, which provides or has provided property management services to certain of Legacy Parkway’s unconsolidated joint ventures.

 

53


Table of Contents

Impairment of Long-Lived Assets

Changes in the supply or demand of customers for Parkway Houston’s properties could impact Parkway Houston’s ability to fill available space. Should a significant amount of available space exist for an extended period, Parkway Houston’s investment in a particular office building may be impaired. Parkway Houston has evaluated its real estate assets and intangible assets upon the occurrence of significant adverse changes to assess whether any impairment indicators are present that affect the recovery of the carrying amount. Parkway Houston classifies certain assets as held for sale based on management having the authority and intent of entering into commitments for sale transactions to close in the next 12 months. Parkway Houston considers an office property as held for sale once it has executed a contract for sale, allowed the buyer to complete its due diligence review and received a substantial non-refundable deposit. Until a buyer has completed its due diligence review of the asset, necessary approvals have been received and substantive conditions to the buyer’s obligation to perform have been satisfied, Parkway Houston does not consider a sale to be probable. When Parkway Houston identifies an asset as held for sale, it estimates the net realizable value of such asset and discontinue recording depreciation on the asset. Parkway Houston records assets held for sale at the lower of the carrying amount or fair value less cost to sell. If the fair value of the asset net of estimated selling costs is less than the carrying amount, it records an impairment loss. With respect to assets classified as held and used, Parkway Houston recognizes an impairment loss if the carrying amount is not recoverable and exceeds the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the asset. Upon impairment, Parkway Houston recognizes an impairment loss to reduce the carrying value of the real estate asset to the estimate of its fair value. The cash flow and fair value estimates are based on assumptions about employing the asset for its remaining useful life. Factors considered in projecting future cash flows include, but are not limited to: existing leases, future leasing and terminations, market rental rates, capital improvements, tenant improvements, leasing commissions, inflation, discount rates, capitalization rates and other known variables.

Depreciable Lives Applied to Real Estate and Improvements to Real Estate

Parkway Houston computes depreciation of buildings and parking garages using the straight-line method over an estimated useful life of 40 years. Depreciation of building improvements is computed using the straight-line method over the estimated useful life of the improvement. If Parkway Houston’s estimate of useful lives proves to be incorrect, the depreciation expense recognized would also be incorrect. Therefore, a change in the estimated useful lives assigned to buildings and improvements would result in either an increase or decrease in depreciation expense prospectively, which would result in a decrease or increase in earnings.

Initial Recognition, Measurement and Assignment of the Cost of Real Estate Acquired

Parkway Houston accounts for its acquisitions of real estate by allocating the fair value of real estate to acquired tangible assets, consisting of land, building, garage, building improvements and tenant improvements, identified intangible assets and liabilities, which consist of the value of above and below market leases, lease costs, the value of in-place leases and any value attributable to above or below market debt assumed with the acquisition.

Parkway Houston assigns the purchase price of properties to tangible and intangible assets based on fair values. Parkway Houston determines the fair value of the tangible and intangible components using a variety of methods and assumptions all of which result in an approximation of fair value. Differing assumptions and methods could result in different estimates of fair value and thus, a different purchase price assignment and corresponding increase or decrease in depreciation and amortization expense.

Recent Accounting Pronouncements

Adopted

In February 2015, the Financial Accounting Standards Board (“the FASB”) issued ASU No. 2015-02, “Amendments to the Consolidated Analysis.” This update amends consolidation guidance which makes changes to both the variable interest model and the voting model. The new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. Parkway Houston adopted this update on January 1, 2016. The new standard must be applied using a modified retrospective approach by recording either a cumulative-effect adjustment to equity as of the beginning of the period of adoption or retrospectively to each period presented. This did not have an impact on Parkway Houston’s financial statements.

 

54


Table of Contents

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. Parkway Houston adopted this update on January 1, 2016. Retrospective application of the guidance set forth in this update is required and resulted in the classification of the deferred financing costs within the combined balance sheets as a direct deduction from the carrying amount of debt within total liabilities.

Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842”) (“ASU 2016-02”). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for Parkway Houston’s fiscal year beginning as early as January 1, 2019 and subsequent interim periods. Management is currently assessing this guidance for future implementation.

Results of Operations

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015.

Net loss attributable to Parkway Houston was $1.3 million and $9.1 million for the six months ended June 30, 2016 and 2015. The decrease in net loss attributable to Parkway Houston in the amount of $7.8 million for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, is primarily attributable to an increase in operating income and a decrease in interest expense.

Income from Office Properties. Income from office properties increased $3.9 million, or 7.5%, during the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to the commencement of a lease at CityWestPlace during the second half of 2015, partially offset by the impact of a tenant move out at CityWestPlace during the first half of 2015, and a tenant move out during the first quarter of 2016.

Sale of Condominium Units. Parkway Houston sold its remaining Murano residential condominium units available for sale and recognized $9.8 million in income during the six months ended June 30, 2015. Parkway Houston accordingly had no income to report for such sales for the six months ended June 30, 2016.

Cost of Sales—Condominium Units. Parkway Houston sold its remaining Murano residential condominium units available for sale and recognized $10.1 million in expenses during the six months ended June 30, 2015. Parkway Houston accordingly had no expenses to report for such sales for the six months ended June 30, 2016.

Property Operating Expenses. Property operating expenses increased $3.8 million, or 16.7%, during the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to the commencement of a lease at CityWestPlace during the second half of 2015, partially offset by the impact of a tenant move out at CityWestPlace during the first half of 2015, and a tenant move out during the first quarter of 2016.

Management Company Income and Expenses. Management company income decreased $2.9 million, or 53.1%, during the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to the termination of certain Eola Capital, LLC (“Eola Capital”) management contracts. Management company expenses decreased $3.6 million, or 64.0%, during the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to a decrease in salary expense associated with personnel formerly employed at assets for which the related management contracts have been terminated.

Depreciation and Amortization. Depreciation and amortization expense attributable to office properties decreased $5.6 million, or 21.1%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to a decrease in amortization expense of in-place leases.

 

55


Table of Contents

General and Administrative. General and administrative expense decreased $294,000, or 9.2%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to decreases in professional expenses.

Gain on Extinguishment of Debt. On April 6, 2016, Legacy Parkway paid in full the $114.0 million mortgage debt secured by CityWestPlace I & II and recognized a gain on extinguishment of debt of $154,000 during the six months ended June 30, 2016. This paydown has been reflected as a capital contribution for Parkway Houston.

Interest Expense. Interest expense decreased $1.1 million, or 13.9%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, and is primarily due to a decrease in mortgage interest expense as a result of Legacy Parkway’s April 6, 2016 payment in full of the $114.0 million mortgage debt secured by CityWestPlace I & II.

Income Taxes. The analysis below includes changes attributable to income tax (expense) benefit for the six months ended June 30, 2016 and 2015 (in thousands):

 

     Six Months Ended June 30,  
     2016      2015      $ Change      % Change  

Income tax expense—current

   $ (504    $ (762    $ 258         (33.9 )%

Income tax (expense) benefit—deferred

     (256      401         (657      *N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax expense

   $ (760    $ (361    $ (399      *N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* N/M—Not meaningful

Current income tax expense decreased $258,000 for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. The decrease is primarily attributable to the sale of the Murano residential condominium units during the six months ended June 30, 2015, partially offset by an increase in net income of Parkway Houston’s TRS during the first quarter of 2016. Deferred income tax expense increased $657,000 for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. The increase is primarily attributable to the book to tax differences related to the sale of the Murano residential condominium units.

Comparison of the year ended December 31, 2015 to the year ended December 31, 2014.

Net loss attributable to Parkway Houston was $15.8 million and $23.1 million for the years ended December 31, 2015 and 2014, respectively. The decrease in net loss attributable to Parkway Houston in the amount of $7.3 million for the year ended December 31, 2015, as compared to the year ended December 31, 2014, is primarily attributable to an increase in operating income, partially offset by an increase in income tax expenses.

Income from Office Properties. Income from office properties decreased $14.7 million, or 11.9%, during the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a tenant move out at CityWestPlace during the first half of 2015.

Sale of Condominium Units. Income from the sale of condominium units decreased $5.5 million during the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to a decrease in the sale of condominium units partially as a result of a decrease in the number of remaining condominium units available for sale.

Cost of Sales—Condominium Units. Cost of sales decreased $2.1 million during the year ended December 31, 2015, compared to the year ended December 31, 2015, primarily due to the decrease in the sale of condominium units during the period.

 

56


Table of Contents

Property Operating Expenses. Property operating expenses decreased $9.5 million, or 17.3%, during the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to cost savings related to a tenant move out at CityWestPlace during the first half of 2015.

Management Company Income and Expenses. Management company income decreased $14.1 million, or 58.7%, during the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to the termination of certain Eola Capital management contracts. Management company expenses decreased $17.7 million, or 65.4%, during the year ended December 31, 2015 compared to the year ended December 31, 2014, and is primarily due to a decrease in salary expense associated with personnel formerly employed at assets for which the related management contracts have been terminated and a decrease in amortization of management contract intangibles, net.

Depreciation and Amortization. Depreciation and amortization expense attributable to office properties decreased $8.4 million, or 13.2%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a decrease in amortization expense of in-place leases, partially offset by an increase in depreciation expense associated with tenant improvements.

Impairment Loss on Management Contracts. During the year ended December 31, 2014, Parkway Houston recorded a $4.8 million pre-tax non-cash impairment loss related to certain Eola Capital management contracts. Parkway Houston did not record any impairment losses on management contracts during the year ended December 31, 2015.

General and Administrative. General and administrative expense decreased $581,000, or 8.4%, for the year ended December 31, 2015, compared to the year ended December 31, 2014, and is primarily due to a decrease in allocated general and administrative expenses, largely related to share-based compensation expense for equity based awards issued by Legacy Parkway to its directors and officers.

Interest Expense. Interest expense decreased $164,000, or 1.0%, for the year ended December 31, 2015 compared to the year ended December 31, 2014.

Income Taxes. The analysis below includes changes attributable to income tax benefit (expense) for the years ended December 31, 2015 and 2014 (in thousands):

 

     Year Ended
December 31,
               
     2015      2014      $ Change      % Change  

Income tax expense—current

   $ (1,272    $ (4,583    $ 3,311         (72.2 )%

Income tax (expense) benefit—deferred

     (363      4,763         (5,126      *N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax (expense) benefit

   $ (1,635    $ 180       $ (1,815      *N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* N/M—Not meaningful

Current income tax expense decreased $3.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease is primarily attributable to the decrease of income from the sale of Murano residential condominium units. Deferred income tax benefit decreased $5.1 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease is primarily attributable to the book to tax differences related to the impairment loss associated with certain Eola Capital management contracts and the reversal of a valuation allowance on the deferred tax assets in 2014.

 

57


Table of Contents

Comparison of the year ended December 31, 2014 to the year ended December 31, 2013.

Net loss attributable to Parkway Houston was $23.1 million and $12.4 million for the years ended December 31, 2014 and 2013, respectively. The increase in net loss attributable to Parkway Houston in the amount of $10.7 million for the year ended December 31, 2014, as compared to the year ended December 31, 2013, is primarily attributable to an increase in interest expense associated with mortgage debt assumed on CityWestPlace and San Felipe Plaza from Legacy Parkway’s merger transactions with TPGI in December 2013 (such transactions, the “TPGI Mergers”) and a decrease in interest and other income, partially offset by a decrease in operating loss.

Income from Office Properties. Income from office properties increased $102.2 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the December 2013 acquisitions of CityWestPlace and San Felipe Plaza in connection with the TPGI Mergers.

Property Operating Expenses. Property operating expenses increased $45.7 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the December 2013 acquisitions of CityWestPlace and San Felipe Plaza in connection with the TPGI Mergers.

Sale of Condominium Units. Parkway Houston recognized $16.5 million in income from the sale of condominium units during the year ended December 31, 2014. Parkway Houston acquired such condominium units in connection with the TPGI Mergers and accordingly had no income to report for such sales for the year ended December 31, 2013.

Cost of Sales—Condominium Units. Cost of sales increased $13.2 million during the year ended December 31, 2014, compared to the year ended December 31, 2013, due to the sale of condominium units during the period.

Management Company Income and Expenses. Management company income increased $6.4 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the addition of management contracts in connection with the TPGI Mergers. Management company expenses increased $3.4 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, and is primarily due to the addition of a management contract in connection with the TPGI Mergers and the associated increase in personnel costs.

Depreciation and Amortization. Depreciation and amortization expense attributable to office properties increased $53.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The primary reason for the increase is the December 2013 acquisitions of CityWestPlace and San Felipe Plaza in connection with the TPGI Mergers, which were owned for a full year during 2014.

Impairment Loss on Management Contracts. During the year ended December 31, 2014, Parkway Houston recorded a $4.8 million pre-tax non-cash impairment loss related to certain Eola Capital management contracts.

General and Administrative. General and administrative expense decreased $350,000 for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease is primarily due to an increase in allocated general and administrative expenses attributable to acquisition costs in connection with the TPGI Mergers that were recognized in 2013.

Interest Expense. Interest expense, including amortization of deferred financing costs, increased $13.0 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to an increase in mortgage interest associated with mortgage debt assumed on CityWestPlace and San Felipe Plaza in connection with the TPGI Mergers, partially offset by amortization of premiums on mortgage debt.

 

58


Table of Contents

Income Taxes. The analysis below includes changes attributable to income tax benefit (expense) for the years ended December 31, 2014 and 2013 (in thousands):

 

     Year Ended
December 31,
               
     2014      2013      $ Change      % Change  

Income tax expense—current

   $ (4,583    $ (684    $ (3,899      *N/M   

Income tax benefit—deferred

     4,763         1,960         2,803         *N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax benefit

   $ 180       $ 1,276       $ (1,096      (85.9 )%
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* N/M—Not meaningful

Current income tax expense increased $3.9 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase is primarily attributable to an increase in income from Parkway Houston’s TRS and additional state taxes associated with additional properties that Legacy Parkway had in Pennsylvania and Texas as a result of the TPGI Mergers. Deferred income tax benefit increased $2.8 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase is primarily attributable to the book to tax differences related to the impairment loss associated with certain Eola Capital management contracts and the reversal of a valuation allowance on the deferred tax assets in 2014.

Liquidity and Capital Resources

Cash Flows

Cash and cash equivalents were $8.0 million and $12.0 million at June 30, 2016 and December 31, 2015, respectively. Cash flows used in operating activities for the six months ended June 30, 2016 and 2015 were $130,000 and $508,000, respectively. The decrease in cash flows used in operating activities of $378,000 is primarily attributable to timing of receipt of revenues and payment of expenses.

Cash used in investing activities was $10.9 million and $9.3 million for the six months ended June 30, 2016 and 2015, respectively. The increase in cash used in investing activities of $1.6 million is due to an increase in improvements to real estate.

Cash provided by financing activities was $7.0 million and $13.6 million for the six months ended June 30, 2016 and 2015, respectively. The decrease in cash provided by financing activities of $6.6 million is primarily attributable to an increase in principal payments on mortgage notes payable, including Legacy Parkway’s April 6, 2016 payment in full of the $114.0 million mortgage debt secured by CityWestPlace I & II, partially offset by an increase in Legacy Parkway investment, net.

Cash and cash equivalents were $12.0 million and $8.0 million at December 31, 2015 and 2014, respectively. Cash flows provided by operating activities for the years ended December 31, 2015 and 2014 were $12.9 million and $3.2 million, respectively. The increase in cash flows from operating activities of $9.7 million is primarily attributable to timing of receipt of revenues and payment of expenses.

Cash used in investing activities was $46.4 million and $4.4 million for the years ended December 31, 2015 and 2014, respectively. The increase in cash used in investing activities of $42.0 million is primarily due to an increase in improvements to real estate.

Cash provided by financing activities was $37.5 million for the year ended December 31, 2015. Cash used in financing activities was $1.3 million for the year ended December 31, 2014. The increase in cash provided by (used in) financing activities of $38.8 million is primarily attributable to an increase in Legacy Parkway investment, net and a decrease in distributions to noncontrolling interests in Parkway Houston’s residential condominium project, offset by an increase in principal payments on mortgage notes payable.

 

59


Table of Contents

Mortgage Notes Payable, Net

At June 30, 2016, Parkway Houston had $278.4 million in mortgage notes payable, net secured by office properties, including unamortized net premiums on debt acquired of $4.6 million and unamortized debt issuance costs of $285,000, with a weighted average interest rate of 4.6%.

The table below presents the principal payments due and weighted average interest rates for total mortgage notes payable at June 30, 2016 (dollars in thousands).

 

     Weighted
Average
Interest Rate
    Total
Mortgage
Maturities
     Balloon
Payments
     Principal
Amortization
 

Schedule of Mortgage Maturities by Years:

          

2016

     4.5   $ 2,740       $ —        $ 2,740   

2017

     4.5     5,670         —          5,670   

2018

     4.8     108,166         102,402         5,764   

2019

     4.4     4,138         —          4,138   

2020

     5.0     85,602         82,949         2,653   

Thereafter

     3.9     67,770         62,193         5,577   
    

 

 

    

 

 

    

 

 

 

Total principal maturities

       274,086       $ 247,544       $ 26,542   
    

 

 

    

 

 

    

 

 

 

Unamortized debt issuance costs, net

     N/A        (285      

Fair value premiums on mortgage debt acquired, net

     N/A        4,551         
  

 

 

   

 

 

       

Total mortgage notes payable, net

     4.6   $ 278,352         
  

 

 

   

 

 

       

Fair value at June 30, 2016

     $ 281,120         
    

 

 

       

At December 31, 2015, Parkway Houston had $396.9 million in mortgage notes payable secured by office assets, including unamortized net premiums on debt acquired of $6.0 million and unamortized debt issuance costs of $306,000, with a weighted average interest rate of 5.1%.

The table below presents the principal payments due and weighted average interest rates for total mortgage notes payable, at December 31, 2015 (dollars in thousands).

 

     Weighted
Average
Interest Rate
    Total
Mortgage
Maturities
     Balloon
Payments
     Principal
Amortization
 

Schedule of Mortgage Maturities by Years:

          

2016(1)

     6.1   $ 119,879       $ 113,604       $ 6,275   

2017

     4.5     5,670         —          5,670   

2018

     4.8     108,166         102,402         5,764   

2019

     4.4     4,138         —          4,138   

2020

     5.0     85,602         82,949         2,653   

Thereafter

     3.9     67,771         62,193         5,578   
    

 

 

    

 

 

    

 

 

 

Total principal maturities

       391,226       $ 361,148       $ 30,078   
    

 

 

    

 

 

    

 

 

 

Unamortized debt issuance costs, net

     N/A        (306      

Fair value premiums on mortgage debt acquired, net

     N/A        5,981         
  

 

 

   

 

 

       

Total mortgage notes payable, net

     5.1   $ 396,901         
  

 

 

   

 

 

       

Fair value at December 31, 2015

     $ 394,267         
    

 

 

       

 

(1) Includes the $114.0 million mortgage debt secured by CityWestPlace I & II that was paid by Legacy Parkway on April 6, 2016.

 

60


Table of Contents

Contractual Obligations

Parkway Houston has contractual obligations including mortgage notes payable, net and lease obligations. The table below presents total payments due under specified contractual obligations by year through maturity at June 30, 2016 (in thousands):

 

     Payments Due By Period  

Contractual Obligations

   2016      2017      2018      2019      2020      Thereafter      Total  

Long-term debt principal and interest payments

   $ 9,024       $ 18,049       $ 120,283       $ 11,139       $ 89,319       $ 73,440       $ 321,254   

Purchase obligations (tenant improvements and lease commissions)

     8,370         82         10         —          —          —          8,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,394       $ 18,131       $ 120,293       $ 11,139       $ 89,319       $ 73,440       $ 329,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amounts presented above for long-term debt include principal and interest payments. The amounts presented for purchase obligations represent the remaining tenant improvement allowances and lease commissions for leases in place at June 30, 2016.

The table below presents total payments due under specified contractual obligations by year through maturity at December 31, 2015 (in thousands):

 

     Payments Due By Period  

Contractual Obligations

   2016(1)      2017      2018      2019      2020      Thereafter      Total  

Long-term debt principal and interest payments

   $ 136,661       $ 18,049       $ 120,283       $ 11,139       $ 89,319       $ 73,440       $ 448,891   

Purchase obligations (tenant improvements and lease commissions)

     10,885         16         10         —          —          —          10,911   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 147,546       $ 18,065       $ 120,293       $ 11,139       $ 89,319       $ 73,440       $ 459,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes the $114.0 million mortgage debt secured by CityWestPlace I & II that was paid by Legacy Parkway on April 6, 2016.

 

61


Table of Contents

The amounts presented above for long-term debt include principal and interest payments. The amounts presented for purchase obligations represent the remaining tenant improvement allowances and lease commissions for leases in place at December 31, 2015.

Capital Expenditures

During the six months ended June 30, 2016, Parkway Houston incurred approximately $3.5 million, $7.5 million, and $5.1 million in building improvements, tenant improvements, and leasing commissions, respectively. All such improvements were financed with cash flow from the properties, capital expenditure escrow accounts and Legacy Parkway contributions.

During the year ended December 31, 2015, Parkway Houston incurred approximately $11.8 million, $36.3 million, and $8.6 million in building improvements, tenant improvements, and leasing commissions, respectively. All such improvements were financed with cash flow from the properties, capital expenditure escrow accounts and Legacy Parkway contributions.

Off-Balance Sheet Arrangements

Parkway Houston’s off-balance sheet arrangements are discussed in the section “Certain Relationships and Related Party Transactions—Agreement with Mr. James A. Thomas” and Note 10 “Commitments and Contingencies” of the accompanying consolidated financial statements for Parkway Houston.

Non-GAAP Financial Measures

Funds From Operations (FFO)

Parkway Houston’s management believes that FFO is an appropriate measure of performance for a REIT and computes this measure in accordance with the NAREIT definition of FFO (including any guidance that NAREIT releases with respect to the definition). FFO is defined by NAREIT as net income (computed in accordance with GAAP), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate under GAAP, plus depreciation and amortization related to depreciable real estate. Further, Parkway Houston does not adjust FFO to eliminate the effects of non-recurring charges. Parkway Houston believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. Parkway Houston believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs by the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Parkway Houston may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. 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 Parkway Houston’s operating performance or as an alternative to cash flow as a measure of liquidity.

 

62


Table of Contents

The following table reconciles net loss attributable to Parkway Houston to FFO for the six months ended June 30, 2016 and 2015, and for the years ended December 31, 2015, 2014, and 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO

   $ 19,675      $ 17,486      $ 39,788      $ 40,961      $ (1,904
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Parkway Houston believes that using EBITDA as a non-GAAP financial measure helps investors and its management analyze its ability to service debt and pay cash distributions. Parkway Houston defines EBITDA as net loss attributable to Parkway Houston before interest expense, income tax expense (benefit) and depreciation and amortization.

The following table reconciles net loss attributable to Parkway Houston to EBITDA for the six months ended June 30, 2016 and 2015, and for the years ended December 31, 2015, 2014, and 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Interest expense

     6,955        8,076        16,088        16,252        3,296   

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   

Income tax expense (benefit)

     760        361        1,635        (180     (1,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 27,390      $ 25,923      $ 57,511      $ 57,033      $ 116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Operating Income (NOI)

Parkway Houston defines NOI as income from office properties less property operating expenses. Parkway Houston considers NOI to be a useful performance measure to investors and management because it reflects the revenues and expenses directly associated with owning and operating its properties and the impact to operations from trends in occupancy rates, rental rates and operating costs not otherwise reflected in net income.

The following table reconciles net loss attributable to Parkway Houston to NOI for the six months ended June 30, 2016 and 2015 and for the years ended December 31, 2015, 2014, and 2013 (in thousands):

 

                                                                          
     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2016     2015     2015     2014     2013  
     (unaudited)     (unaudited)  

Net loss attributable to Parkway Houston

   $ (1,330   $ (9,142   $ (15,782   $ (23,051   $ (12,369

Interest expense

     6,955        8,076        16,088        16,252        3,296   

Gain on extinguishment of debt

     (154     —         —         —         —    

Depreciation and amortization

     21,005        26,628        55,570        64,012        10,465   

Management company expenses

     2,006        5,574        9,362        27,038        23,638   

Income tax expense (benefit)

     760        361        1,635        (180     (1,276

General and administrative

     2,893        3,187        6,336        6,917        7,267   

 

63


Table of Contents
                                                                          

Sale of condominium units

     —         (9,836     (11,063     (16,554     —    

Cost of sales—condominium units

     —         10,091        11,120        13,199        14   

Net income (loss) attributable to noncontrolling interests

     —         (7     (7     148        —    

Impairment loss on management contracts

     —         —         —         4,750        —    

Management company income

     (2,592     (5,523     (9,891     (23,971     (17,526

Interest and other income

     (131     (122     (246     (244     (1,663
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOI

   $ 29,412      $ 29,287      $ 63,122      $ 68,316      $ 11,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leasing Activity

For the year ended 2015, six leases were renewed totaling 52,000 rentable square feet at an average annual rental rate per square foot of $37.73 and at an average cost of $5.76 per square foot per year of the lease term. Leases totaling 109,000 rentable square feet were not renewed.

For the year ended 2015, three expansion leases were signed totaling 5,000 rentable square feet at an average annual rental rate per square foot of $42.25 and at an average cost of $9.11 per square foot per year of the lease term.

For the year ended 2015, 10 new leases were signed totaling 42,000 rentable square feet at an average annual rental rate per square foot of $41.34 and at an average cost of $7.43 per square foot per year of the term.

During the six months ended June 30, 2016, six leases were renewed totaling 95,164 rentable square feet at an average annual rental rate per square foot of $35.59 and at an average cost of $6.53 per square foot per year of the lease term. Leases totaling approximately 328,000 rentable square feet were not renewed during the six months ended June 30, 2016.

During the six months ended June 30, 2016, two expansion leases were signed totaling 6,375 rentable square feet at an average annual rental rate per square foot of $40.46 and at an average cost of $7.31 per square foot per year of the lease term.

During the six months ended June 30, 2016, four new leases were signed totaling 20,126 rentable square feet at an average annual rental rate per square foot of $41.02 and at an average cost of $9.00 per square foot per year of the lease term.

COUSINS HOUSTON

Critical Accounting Policies

Cousins Houston’s financial statements are prepared in accordance with GAAP, as outlined in the FASB’s Accounting Standards Codification (“ASC”), and the notes to the combined financial statements include a summary of the significant accounting policies. The preparation of financial statements in accordance with GAAP requires the use of certain estimates, a change in which could materially affect revenues, expenses, assets, or liabilities. Some of Cousins Houston’s accounting policies are considered to be critical accounting policies, which are policies that are both important to the portrayal of Cousins Houston’s financial condition, results of operations and cash flows, and policies that also require significant judgment or complex estimation processes. Cousins Houston’s critical accounting policies are as follows:

Operating Property Acquisitions

Upon acquisition of an operating property, Cousins Houston records the acquired tangible and intangible assets and assumed liabilities at fair value at the acquisition date. Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an acquired

 

64


Table of Contents

operating property generally include, but are not limited to: land, buildings, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market leases, and value of acquired in-place leases.

The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.

The fair value of the above-market or below-market component of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. In-place leases at acquired properties are reviewed at the time of acquisition to determine if contractual rents are above or below current market rents for the acquired property, and an identifiable intangible asset or liability is recorded if there is an above-market or below-market lease.

The fair value of acquired, in-place leases, is derived based on Cousins Houston’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance, and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal, and other related expenses.

The amounts recorded for above-market and in-place leases are included in intangible assets on the balance sheets, and the amounts for below-market leases are included in intangible liabilities on the balance sheets. These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases.

The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, since the values of above-market and below-market leases are amortized as either a reduction or increase to rental income, respectively, the judgments for these intangibles could have a significant impact on reported rental revenues and results of operations.

Depreciation and Amortization

Cousins Houston depreciates or amortizes operating real estate assets over their estimated useful lives using the straight-line method of depreciation. Cousins Houston uses judgment when estimating the life of real estate assets and when allocating certain indirect project costs to projects under development. Historical data, comparable properties, and replacement costs are some of the factors considered in determining useful lives and cost allocations. The use of different assumptions for the estimated useful life of assets or cost allocations could significantly affect depreciation and amortization expense and the carrying amount of its real estate assets.

Impairment

Cousins Houston reviews its real estate assets on a property-by-property basis for impairment. The first step in this process is for Cousins Houston to use judgment to determine whether an asset is considered to be held and used or held for sale, in accordance with accounting guidance. In order to be considered a real estate asset held for sale, Cousins Houston must, among other things, have the authority to commit to a plan to sell the asset in its current condition, have commenced the plan to sell the asset, and have determined that it is probable that the asset will sell within one year. If Cousins Houston determines that an asset is held for sale, it must record an impairment loss if the fair value less costs to sell is less than the carrying amount. All real estate assets not meeting the held for sale criteria are considered to be held and used.

 

65


Table of Contents

In the impairment analysis for assets held and used, Cousins Houston must use judgment to determine whether there are indicators of impairment. These indicators could include a decline in a property’s leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a decline in lease rates for that property or others in the property’s market, or an adverse change in the financial condition of significant tenants.

If Cousins Houston determines that an asset that is held and used has indicators of impairment, Cousins Houston must determine whether the undiscounted cash flows associated with the asset exceed the carrying amount of the asset. If the undiscounted cash flows are less than the carrying amount of the asset, Cousins Houston must reduce the carrying amount of the asset to fair value.

In calculating the undiscounted net cash flows of an asset, Cousins Houston must estimate a number of inputs, including future rental rates, expenditures for future leases, future operating expenses, and market capitalization rates for residual values, among other things. In addition, if there are alternative strategies for the future use of the asset, Cousins Houston must assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset. Cousins Houston must use considerable judgment in determining the alternative strategies and in assessing the probability of each strategy selected.

In determining the fair value of an asset, Cousins Houston exercises judgment on a number of factors. Cousins Houston may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information. Cousins Houston must determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. Cousins Houston must use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.

The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. If Cousins Houston determines that an asset is held and used, the results of operations could be materially different than if Cousins Houston determines that an asset is held for sale. Different assumptions used in the calculation of undiscounted net cash flows of a project, including the assumptions associated with alternative strategies and the probabilities associated with alternative strategies, could cause a material impairment loss to be recognized when no impairment is otherwise warranted. Cousins Houston’s assumptions about the discount rate used in a discounted cash flow estimate of fair value and its judgment with respect to market information could materially affect the decision to record impairment losses or, if required, the amount of the impairment losses.

Valuation of Receivables

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Cousins Houston reviews its receivables regularly for potential collection problems in computing the allowance to record against its receivables. This review requires Cousins Houston to make certain judgments regarding collectability, notwithstanding the fact that ultimate collections are inherently difficult to predict. Economic conditions fluctuate over time, and Cousins Houston has tenants in many different industries which experience changes in economic health, making collectability prediction difficult. Therefore, certain receivables currently deemed collectible could become uncollectible, and those reserved could ultimately be collected. A change in judgments made could result in an adjustment to the allowance for doubtful accounts with a corresponding effect on net income.

Recoveries from Tenants

Recoveries from tenants for operating expenses are determined on a calendar year and on a lease-by-lease basis. The most common types of cost reimbursements in Cousins Houston’s leases are utility expenses, building operating expenses, real estate taxes and insurance, for which the tenant pays its pro rata share in excess of a base year amount, if applicable. The computation of these amounts is complex and involves numerous judgments,

 

66


Table of Contents

including the interpretation of lease terms and other tenant lease provisions. Leases are not uniform in dealing with such cost reimbursements and there are many variations in the computation. Cousins Houston accrues income related to these payments each month. Cousins Houston makes monthly accrual adjustments, positive or negative, to recorded amounts to its best estimate of the annual amounts to be billed and collected with respect to the cost reimbursements. After the end of the calendar year, Cousins Houston computes each tenant’s final cost reimbursements and, after considering amounts paid by the tenant during the year, issues a bill or credit for the appropriate amount to the tenant. The differences between the amounts billed less previously received payments and the accrual adjustments are recorded as increases or decreases to revenues when the final bills are prepared, which occurs during the first half of the subsequent year.

Discussion of New Accounting Pronouncements

In 2015, the FASB voted to defer ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Under the new guidance, companies will recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. This new guidance could result in different amounts of revenue being recognized and could result in revenue being recognized in different reporting periods than under the current guidance. The standard specifically excludes revenue associated with lease contracts. The guidance is effective for periods beginning after December 15, 2017, with early adoption permitted for periods beginning after December 15, 2016. Cousins is currently assessing the potential impact of adopting the new guidance.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends the existing standards for lease accounting by requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting and reporting. The new standard will require lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, and classify such leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method (finance leases) or on a straight-line basis over the term of the lease (operating leases). Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes previous leasing standards. The guidance is effective for the fiscal years beginning after December 15, 2018 with early adoption permitted. Cousins is currently assessing the potential impact of adopting the new guidance.

The following discussion and analysis should be read in conjunction with the selected financial data and the combined financial statements and notes.

Results of Operations

Comparison of the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

Rental Property Revenues. Rental property revenues decreased $898,000, or 1.0%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to a decrease in amortization of above- and below-market rents and a decrease in parking revenues.

Rental Property Operating Expenses. Rental property operating expenses decreased $841,000, or 2.2%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to a decrease in utility expenses, security and bad debt expense.

General and Administrative Expenses. General and administrative expenses increased $1.6 million, or 45.3%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of an increase in long-term incentive compensation expense incurred by Cousins and allocated to Cousins Houston.

 

67


Table of Contents

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.9 million, or 5.8%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to lease expirations and extensions of useful lives of tenant assets as a result of lease modifications at Greenway Plaza.

Comparison of the year ended December 31, 2015 compared to the year ended December 31, 2014.

Rental Property Revenues. Rental property revenues decreased $6.6 million, or 3.6%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a decrease in occupancy at Greenway Plaza.

Rental Property Operating Expenses. Rental property operating expenses decreased $5.5 million, or 6.9%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a decrease in real estate taxes coupled with the decrease in occupancy at Greenway Plaza.

General and Administrative expenses. General and administrative expenses decreased $1.0 million between the 2014 and 2015 reporting periods, primarily as a result of a decrease in long-term incentive compensation expense incurred by Cousins and allocated to Cousins Houston.

Depreciation and Amortization Expense. Depreciation and amortization decreased $14.0 million, or 18.0%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a decrease in occupancy at Greenway Plaza and decreases related to extensions of useful lives of certain tenant assets as a result of lease modifications at Greenway Plaza.

Comparison of the year ended December 31, 2014 to the period from February 7, 2013 (date of inception) to December 31, 2013.

Operations for Cousins Houston commenced with the acquisition of Post Oak Central on February 7, 2013 and the 2013 results include the operations of Greenway Plaza from September 9, 2013 through December 31, 2013.

These two properties were owned for all of 2014 resulting in an increase in revenues and expenses between the periods. Conversely, acquisition and related costs decreased $3.9 million between the periods as a result of the 2013 acquisitions.

Interest expense increased $5.5 million between the 2013 and 2014 periods as a result of the closing of the Post Oak Central mortgage loan in September 2013.

Liquidity and Capital Resources

Cash Flows

Cash and cash equivalents were $1.2 million and $109,000 at June 30, 2016 and December 31, 2015, respectively. The following table summarizes the changes in cash flows for the six months ended June 30, 2016 and 2015 (in thousands):

 

     Six Months Ended
June 30,
     Increase/  
     2016      2015      (Decrease)  

Net cash provided by operating activities

   $ 17,012       $ 14,486       $ 2,526   

Net cash used in investing activities

     (18,112      (26,709      8,597   

Net cash provided by financing activities

     2,162         11,539         (9,377

Cash flows from operating activities increased $2.5 million between the periods, primarily due to the timing of cash receipts and expenditures of operating assets and liabilities.

Cash flows used in investing activities decreased $8.6 million between the periods due to a decrease in property improvements and tenant asset expenditures.

 

68


Table of Contents

Cash flows provided by financing activities decreased $9.4 million between the periods due to a decrease in contributions, net from Cousins. These contributions decreased during the periods due to an increase in operating cash flows and a decrease in cash required to fund investing activities.

Cash and cash equivalents were $109,000, $684,000 and $0 at December 31, 2015, 2014 and 2013, respectively. The following table summarizes the changes in cash flows for the periods presented (in thousands):

 

     Year Ended December 31,    

Period from

February 7,

2013 (date of

inception)

to December 31,

   

2015 to

2014

    2014 to 2013  
     2015     2014     2013     Change     Change  

Net cash provided by operating activities

   $ 76,395      $ 80,220      $ 41,770      $ (3,825   $ 38,450   

Net cash used in investing activities

     (55,085     (37,478     (1,164,245     (17,607     1,126,767   

Net cash provided by (used in) financing activities

     (21,885     (42,058     1,122,475        20,173        (1,164,533

Cash flows from operating activities decreased $3.8 million between the 2015 and 2014 periods primarily due to the timing of operating cash receipts and payments, and a decrease in net cash received from property operations as a result of decreased occupancy at Greenway Plaza. Cash flows from operating activities increased $38.5 million between the 2014 and 2013 periods due to the property acquisitions in 2013.

Cash flows used in investing activities increased $17.6 million between the 2015 and 2014 periods due to an increase in property improvements and tenant asset expenditures. Cash flows used in investing activities decreased $1.1 billion between the 2014 and 2013 periods from the property acquisitions in 2013.

Cash flows used in financing activities decreased $20.2 million between the 2015 and 2014 periods due to a decrease in net distributions to Cousins. This decrease was primarily due to the increase in cash used for building improvement and tenant asset expenditures. Cash flows provided by financing activities decreased $1.2 billion between the 2014 and 2013 periods due to the following:

 

    decrease in contributions by Cousins, net of $974.3 million as a result of the property acquisitions in 2013; and

 

    decrease of $188.8 million in proceeds from note payable due to the closing of the Post Oak Central mortgage loan in 2013.

 

69


Table of Contents

Contractual Obligations and Commitments

Cousins Houston was subject to the following contractual obligations and commitments at June 30, 2016 (in thousands):

 

     Total      Less than 1
Year
     1-3 Years      3-5 Years      More than
5 Years
 

Contractual Obligations:

              

Debt:

              

Mortgage notes payable

   $ 180,046       $ 3,560       $ 7,589       $ 168,897       $ —    

Interest commitments

     31,782         7,601         14,731         9,450      

Operating leases

     16         16         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 211,844       $ 11,177       $ 22,320       $ 178,347       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments:

              

Unfunded tenant improvements

   $ 56,632       $ 41,189       $ 5,158       $ 10,285       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cousins Houston was subject to the following contractual obligations and commitments at December 31, 2015 (in thousands):

 

     Total      Less than 1
Year
     1-3 Years      3-5 Years      More than
5 Years
 

Contractual Obligations:

              

Debt:

              

Mortgage notes payable

   $ 181,770       $ 3,485       $ 7,430       $ 170,855       $ —    

Interest commitments

     35,639         7,676         14,891         13,072      

Operating leases

     70         36         34         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 217,479       $ 11,197       $ 22,355       $ 183,927       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments:

              

Unfunded tenant improvements

   $ 60,668       $ 29,132       $ 16,093       $ 15,443       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In addition, Cousins Houston has several standing or renewable service contracts mainly related to the operation of the buildings. These contracts are in the ordinary course of business and are generally one year or less. These contracts are not included in the above tables and are generally reimbursed in whole or in part by tenants.

Capital Expenditures

Total property improvements and tenant asset expenditures for the six months ended June 30, 2016 and 2015 are as follows (in thousands):

 

     Six Months Ended
June 30,
 
     2016      2015  

Operating properties—leasing costs

   $ 9,476       $ 19,469   

Operating properties—building improvements

     8,922         7,142   

Accrued capital expenditures adjustment

     (286      98   
  

 

 

    

 

 

 

Total property improvements and tenant asset expenditures

   $ 18,112       $ 26,709   
  

 

 

    

 

 

 

 

70


Table of Contents

Capital expenditures decreased in 2016 mainly due to decreased capitalized leasing costs. Capitalized leasing costs, which include tenant improvements, leasing costs and related capitalized personnel costs, are a function of the number and size of newly executed leases or renewals of existing leases. The amounts of tenant improvement and leasing costs on a per square foot basis for the six months ended June, 2016 were as follows:

 

     Six Months Ended
June 30, 2016
 

New leases

   $ 7.32   

Renewed leases

   $ 4.95   

Expansion leases

   $ 7.18   

Total property improvements and tenant asset expenditures for the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 are as follows (in thousands):

 

     Year Ended December 31,     

Period from

February 7,

2013 (date of

inception) to

December 31,

 
     2015      2014      2013  

Operating properties—leasing costs

   $ 37,109       $ 26,628       $ 14,316   

Operating properties—building improvements

     17,762         10,119         3,163   

Accrued capital expenditures adjustment

     214         731         (1,622
  

 

 

    

 

 

    

 

 

 

Total property improvements and tenant asset expenditures

   $ 55,085       $ 37,478       $ 15,857   
  

 

 

    

 

 

    

 

 

 

Capital expenditures increased in 2015 mainly due to increased capitalized leasing costs and building improvement expenditures. The amounts of tenant improvement and leasing costs on a per square foot basis for the year ended December 31, 2015 were as follows:

 

     Amount  

New leases

   $ 6.02   

Renewed leases

   $ 4.38   

Expansion leases

   $ 4.09   

The amounts of tenant improvement and leasing costs vary by lease and by market. Given the level of expected leasing and renewal activity, management expects tenant improvement and leasing costs in the immediate future to remain consistent.

Off-Balance Sheet Arrangements

Cousins Houston did not have any off-balance sheet arrangements during the six month period ended June 30, 2016.

 

71


Table of Contents

Non-GAAP Financial Measures

Funds From Operations (FFO)

Cousins Houston’s management believes that FFO is an appropriate measure of performance for a REIT and computes this measure in accordance with the NAREIT definition of FFO (including any guidance that NAREIT releases with respect to the definition). FFO is defined by NAREIT as net income (computed in accordance with GAAP), reduced by preferred dividends, excluding gains or losses from sale of previously depreciable real estate assets, impairment charges related to depreciable real estate under GAAP, plus depreciation and amortization related to depreciable real estate. Further, Cousins Houston does not adjust FFO to eliminate the effects of non-recurring charges. Cousins Houston believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. Cousins Houston believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs by the investing public and making comparisons of operating results among such companies more meaningful. FFO as reported by Cousins Houston may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. 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 Cousins Houston’s operating performance or as an alternative to cash flow as a measure of liquidity.

The following table reconciles net income to FFO for Cousins Houston for the six months ended June 30, 2016 and 2015, the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

     Six Months Ended
June 30,
     Year Ended December 31,     

Period from

February 7,

2013 (date of

inception) to

December 31,

 
     2016      2015      2015      2014      2013  
     (unaudited)      (unaudited)      (unaudited)  

Net income

   $ 10,699       $ 10,106       $ 25,621       $ 11,708       $ 1,533   

Depreciation and amortization

     31,168         33,095         63,791         77,760         29,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FFO

   $ 41,867       $ 43,201       $ 89,412       $ 89,468       $ 30,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Cousins Houston believes that using EBITDA as a non-GAAP financial measure helps investors and Cousin Houston’s management analyze its ability to service debt and pay cash distributions. Cousins Houston defines EBITDA as net income before interest expense and depreciation and amortization.

The following table reconciles net income to EBITDA of Cousins Houston for the six months ended June 30, 2016 and 2015, for the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

72


Table of Contents
     Six Months Ended
June 30,
     Year Ended December 31,     

Period from

February 7,

2013 (date of

inception) to

December 31,

 
     2016      2015      2015      2014      2013  
     (unaudited)      (unaudited)      (unaudited)  

Net income

   $ 10,699       $ 10,106       $ 25,621       $ 11,708       $ 1,533   

Interest expense

     3,939         4,012         7,988         8,127         2,618   

Depreciation and amortization

     31,168         33,095         63,791         77,760         29,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 45,806       $ 47,213       $ 97,400       $ 97,595       $ 33,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Operating Income (NOI)

Cousins Houston defines NOI as income from office properties less property operating expenses. Cousins Houston considers NOI to be a useful performance measure to investors and management because it reflects the revenues and expenses directly associated with owning and operating Cousins Houston’s properties and the impact to operations from trends in occupancy rates, rental rates and operating costs not otherwise reflected in net income.

The following table reconciles net income to NOI of Cousins Houston for the six months ended June 30, 2016 and 2015, for the years ended December 31, 2015 and 2014, and the period from February 7, 2013 (date of inception) to December 31, 2013 (in thousands):

 

     Six Months Ended
June 30,
    Year Ended December 31,    

Period from

February 7,

2013 (date of

inception) to

December 31,

 
     2016     2015     2015      2014     2013  
     (unaudited)     (unaudited)     (unaudited)  

Net income

   $ 10,699      $ 10,106      $ 25,621       $ 11,708      $ 1,533   

Other income

     (288     (87     —          (31     (11

General and administrative expenses

     4,976        3,425        6,328         7,347        3,793   

Depreciation and amortization

     31,168        33,095        63,791         77,760        29,146   

Interest expense

     3,939        4,012        7,988         8,127        2,618   

Acquisition and related expenses

     —         —         —          —         3,858   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NOI

   $ 50,494      $ 50,551      $ 103,728       $ 104,911      $ 40,937   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Leasing Activity

In the six months ended June 30, 2016, Cousins Houston leased or renewed approximately 131,000 square feet of office space. Net effective rent, representing base rent less operating expense reimbursements and leasing costs, for new or renewed non-amenity leases with terms greater than one year was $11.72 per square foot for the six months ended June 30, 2016. Cash basis net effective rent per square foot increased 5.46% in the same period on spaces that have been previously occupied. Cash basis net effective rent represents net rent at the end of the term paid by the prior tenant compared to the net rent at the beginning of the term paid by the current tenant. During the six months ended June 30, 2016, Cousins Houston had 133,000 square feet of office space under leases that expired and were not renewed.

 

73


Table of Contents

In 2015, Cousins Houston leased or renewed approximately 1.3 million square feet of office space. Net effective rent, representing base rent less operating expense reimbursements and leasing costs, for new or renewed non-amenity leases with terms greater than one year was $15.90 per square foot for the year ended December 31, 2015. Cash basis net effective rent per square foot increased 32.52% during 2015 on spaces that have been previously occupied. Cash basis net effective rent represents net rent at the end of the term paid by the prior tenant compared to the net rent at the beginning of the term paid by the current tenant. During 2015, Cousins Houston had 356,000 square feet of office space under leases that expired and were not renewed.

Quantitative and Qualitative Disclosures About Market Risk

See the information under “—Parkway Houston—Liquidity and Capital Resources,” including the information and tables under “—Parkway Houston—Liquidity and Capital Resources—Mortgage Notes Payable, Net.”

 

74


Table of Contents

BUSINESS AND PROPERTIES

Our Company

We are a self-managed office REIT, engaged in the ownership, acquisition, development and leasing of Class A office assets in attractive Houston, Texas submarkets. Our portfolio consists of five Class A assets comprising 19 buildings and totaling approximately 8.7 million rentable square feet in the Greenway, Galleria and Westchase submarkets of Houston, providing geographic focus and significant operational scale and efficiencies. Our portfolio has proven to be resilient throughout market cycles and is occupied by a diversified customer base with strong credit profiles and limited near-term lease expirations. We believe that the creation of a geographically focused REIT with a strong balance sheet and targeted internal value-creation opportunities will generate attractive risk-adjusted returns for our stockholders while providing a platform for external growth opportunities over the longer-term.

Our mission is to own and operate high-quality office properties located in attractive submarkets in Houston, with a primary focus on unlocking value within our existing portfolio through implementing active and creative leasing strategies, leveraging our scale to increase pricing power in lease and vendor negotiations and targeting redevelopment and asset repositioning opportunities. We plan to maintain a conservative balance sheet with low leverage and ample liquidity, which we expect will allow us to access multiple sources of capital. We believe that this strategy will support both our internal growth initiatives and our patient and disciplined approach to pursuing new investment opportunities at the appropriate time. We believe this strategy, combined with our highly experienced management team that has a successful history of operating a publicly traded REIT, significant expertise in the Houston, Texas office sector and extensive relationships with industry participants, positions us for long-term internal and external growth.

We are self-managed and led by a dedicated and seasoned management team and a board of directors consisting of a majority of independent directors. Mr. Heistand, an industry veteran who previously served as Legacy Parkway’s president and chief executive officer, is our President and Chief Executive Officer. Mr. Lipsey, who previously served as Legacy Parkway’s executive vice president and chief operating officer, holds the same position at Parkway. Several other members of Legacy Parkway’s former management team joined Parkway following the Spin-Off. Mr. Thomas, who previously served as the chairman of Parkway’s board of directors, serves as the non-executive chairman of our board of directors.

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Spin-Off.

Competitive Strengths

Accomplished management team with a demonstrated track record of acquiring, operating and repositioning assets and managing a public office REIT. Our management team, led by Mr. Heistand, has extensive experience in the office real estate industry, including in the operations, leasing, acquisition, development and disposition of office assets through all stages of the real estate cycle, and has a proven track record of executing business strategies and delivering strong results for stockholders. Since joining Legacy Parkway in the fourth quarter of 2011 through June 30, 2016, our management team acquired $3.9 billion of high-quality, Class A office assets and disposed of approximately $2.6 billion of non-core assets resulting in approximately $290.0 million of net gains. During this time, our management team also realized significant portfolio-wide operational improvements as evidenced by a 47.6% increase in average in-place rents and an increase in the leased percentage of the portfolio from 85.7% to 90.5%. In addition, our management team has proven its ability to be creative in unlocking value from complex transactions and to create stockholder value through targeted asset sales and strategic capital recycling. Through this experience, our management team has proven its strong execution capabilities and established relationships with industry participants.

Houston focus with local and regional expertise. We are focused initially on owning and operating office properties in Houston, Texas, which is a region we believe is well-positioned for economic recovery. We believe our position as a “pure-play” Houston real estate company allows us to have a targeted focus on property performance that otherwise could be diluted in a company with more geographically diverse holdings. Additionally, our management and property-level teams have in-depth knowledge of the Houston real estate market and an extensive

 

75


Table of Contents

network of long-standing relationships with leading local, regional and national industry participants that we believe will drive our ability to identify and capitalize on internal and external value-creation opportunities and attractive acquisition opportunities as well as identify opportunities with potential joint venture partners, as such opportunities arise from time to time.

High-quality portfolio of Class A office assets concentrated in desirable, resilient Houston submarkets. We own five Class A assets comprising 19 buildings and totaling approximately 8.7 million square feet in the Greenway, Galleria and Westchase submarkets, which are among the most desirable submarkets in Houston. These particular submarkets have a strong track record of outperforming the overall Houston market in rental rates, occupancy and value improvement over time. They are located adjacent to many high-income residential areas and offer state-of-the-art amenities, including high-end retail, restaurants, entertainment and recreational activities. We are the largest landlord in each of these submarkets, owning 72% of the Class A office inventory in Greenway, 18% in Galleria, and 17% in Westchase based on square footage as of June 30, 2016. We expect that these ownership levels will lead to pricing power in lease and vendor negotiations; the ability to attract, hire and retain superior local market leadership and leasing teams; flexibility to meet changing customer space demands; and an enhanced ability to identify and capitalize on emerging investment opportunities.

High-quality, creditworthy customer base with limited near-term lease maturities. Our diversified customer base generally consists of high-quality and creditworthy customers. As of June 30, 2016, nearly 47% of our customers based on annual base rent had investment grade credit ratings from major credit rating agencies. In order to monitor the credit quality of our customers, our property management teams communicate regularly with all of our customers. Further, we receive monthly credit reports for the largest customers in our portfolio and regularly review the financials of those customers that are in the energy industry. Further, with a weighted average remaining lease term of approximately six years as of June 30, 2016, our portfolio has limited near-term lease maturities which is expected to provide stable cash flows with minimal decline in contractual revenue over the next several years.

Flexible and conservative capital structure. We believe our flexible and conservative capital structure provides us with an advantage over many of our private and public competitors. We have limited near-term debt maturities, approximately $197 million in cash and cash equivalents and up to $100 million of additional liquidity through the Revolving Credit Facility, all of which provide financial flexibility, support ongoing capital improvement needs and reinforce our business and growth strategies of unlocking the value in our portfolio through leasing and asset repositioning. In addition, we believe our conservative approach to balance sheet management may provide strategic benefits by providing us with enhanced access to multiple sources of attractively priced capital that may not be available to many of our competitors in Houston. We also believe that our moderate leverage and strong liquidity will enable us to take advantage of attractive redevelopment and acquisition opportunities as they rise from time to time.

Embedded growth opportunities through leasing, asset repositioning and redevelopment. Our portfolio has significant, identified embedded growth opportunities both through leasing the remaining vacancies in the portfolio and through targeted asset repositioning and redevelopment opportunities. We expect that our initial focus on one geographic location, combined with our strong balance sheet, market knowledge and customer relationships, will allow us to more successfully execute internal and external growth strategies. With our scale, we expect that we will have the ability to attract, hire and maintain a best-in-class leasing team that will help us identify opportunities early and implement aggressive and creative leasing strategies at our properties. We also own assets that offer various pricing points within the same submarkets, giving us the flexibility to move and relocate customers within our portfolio based on their changing needs, which we expect will lead to higher customer retention. We also believe there are opportunities to add revenue-generating amenities to our assets, such as additional retail options and parking. We believe that our management team’s experience, as well as its ability to exclusively focus on our growth strategy following the Spin-Off will allow us to unlock the value that we expect exists in our portfolio.

Business and Growth Strategies

Maximize cash flow growth and value through proactive asset management and leasing strategies. We believe we are well-positioned to drive growth in cash flow and maximize the value of our portfolio with proactive, creative and aggressive leasing and asset management strategies. We also expect that our substantial scale in the Greenway, Galleria and Westchase submarkets will provide us with enhanced visibility into submarket dynamics

 

76


Table of Contents

that will lead to stronger negotiating leverage with customers and vendors and will result in a potential reduction in our operating costs and improvement in NOI over time. We expect that we will also be able to leverage our broad existing customer relationships, leading market position and deep financial flexibility to attract new, high-quality customers, increase occupancy over the long-term and maximize customer retention rates at our properties.

Focus on unlocking value through repositioning and redeveloping existing properties. We expect that our management team will devote significant attention to internal value-creating investment opportunities that are intended to generate attractive growth in revenues and cash flow, enhancing the value of our portfolio. Specifically, we expect to leverage our real estate expertise to reposition and redevelop our existing properties, as well as properties that we may acquire in the future, with the objective of increasing occupancy, rental rates and risk-adjusted returns on our invested capital. As the Houston, Texas market continues to recover, our management team will seek to identify investment opportunities, that may include creating joint ventures with existing ownership interests in certain of our properties, that will create value for our stockholders, enable us to better serve our customers, be consistent with our strategic objectives and have attractive risk-return profiles.

Maintain a conservative, flexible balance sheet with adequate liquidity to fund near-term growth opportunities. We maintain a conservative capital structure that will provide the resources and flexibility to position our company for both internal and external growth. Upon completion of the Spin-Off, we had approximately $197 million in cash and cash equivalents and $100 million of additional liquidity through the Revolving Credit Facility. We focus on maintaining sufficient liquidity with minimal short-term debt maturities, allowing us to pursue value enhancement strategies within our portfolio and support acquisition activities as they may arise from time to time. Initially, we expect to maintain a mix of property-level secured indebtedness as well as corporate debt secured by a pool of assets. As the Houston market recovers, we anticipate funding additional growth opportunities through proceeds received from asset dispositions, joint ventures, the refinancing of debt or public equity offerings. We also expect to target a net debt to Adjusted EBITDA multiple of no more than 6.0x.

Pursue acquisitions with a patient, prudent approach. While our initial focus is to unlock internal embedded growth in our existing portfolio, we intend to take advantage of current and future market dislocation in Houston to capitalize on emerging acquisition opportunities within our current submarkets as well as other Houston submarkets, if such assets meet our investment criteria. We may also acquire assets in other markets from time to time if such opportunities meet our investment criteria. However, we intend to devote the majority of our resources to sourcing opportunities within the Houston market for the foreseeable future. We believe that our management team’s in-depth market knowledge and relationships and its extensive acquisitions experience will enhance our ability to source new acquisition opportunities as they may arise from time to time. Whether we operate exclusively in Houston, or diversify our market exposure over the longer-term, our management team will use a patient, prudent and disciplined approach to investment decision-making.

Our Portfolio

Our portfolio consists of five Class A office assets located in the Galleria, Greenway and Westchase submarkets in Houston, Texas, comprising 19 buildings and totaling approximately 8.7 million rentable square feet. As of June 30, 2016, our portfolio had an occupancy rate of 86.5%.

The following table sets forth the occupancy rates by property for our portfolio as of June 30, 2016:

 

Office Property

   Ownership
Interest
    Total Rentable
Square Feet
(in thousands)
     Occupancy
%
    Weighted Average
Rental Rate per
Rentable
Square Foot
     % of Leases
Expiring in
2016(1)
    Year Built  

Phoenix Tower

     100     630         79.0   $ 18.24         1.0     1984   

CityWestPlace

     100     1,473         77.5     24.58         5.1     1993-2001   

San Felipe Plaza

     100     980         84.4     22.72         1.7     1984   

Greenway Plaza

     100     4,347         89.1     16.32         2.3     1969-1981   

Post Oak Central

     100     1,280         93.3     18.60         2.6     1974-1980   
    

 

 

    

 

 

   

 

 

    

 

 

   
       8,710         86.5   $ 18.76         2.7  
    

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) The percentage of leases expiring in 2016 represents the ratio of square feet under leases expiring in 2016 divided by total rentable square feet.

 

77


Table of Contents

Top 20 Customers

As of June 30, 2016, our top 20 customers (identified by industry) based on annualized rent are as follows:

 

Customer (identified by industry)

   Expiration
Date
     Occupied Square
Footage
(in thousands)
     Annualized
Rental Revenue
(in thousands)(1)
     Percentage of Total
Annualized
Rental Revenue
 

Energy

     2016, 2026         956       $ 14,006         10.3

Energy

     2016, 2032         582         13,994         10.3

Energy

     2019         524         9,328         6.9

Finance

     2023         391         6,525         4.8

Energy

     2023         176         4,378         3.2

Technology

     2026         216         3,708         2.7

Energy

     2023         255         3,494         2.6

Finance

     2016, 2019         190         3,358         2.5

Energy

     2017, 2025         167         3,251         2.4

Energy

     2023         209         3,006         2.2

Energy

     2018         130         2,361         1.7

Energy

     2020         135         2,156         1.6

Finance

     2021         92         1,910         1.4

Finance

     2025         87         1,713         1.3

Energy

     2018, 2021         87         1,513         1.1

Energy

     2016, 2022         83         1,397         1.0

Energy

     2017         76         1,289         0.9

Energy

     2020         71         1,270         0.9

Insurance

     2016, 2017         84         1,265         0.9

Energy

     2024         99         1,188         0.9

 

(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

 

78


Table of Contents

Lease Expirations

The table below sets forth lease expirations for all of our properties, assuming none of our customers exercise renewal options as of June 30, 2016:

 

Year of Expiration

   Number of
Leases
     Occupied
Square Footage
of Leases
(in thousands)
     Percentage
of Total
Square
Feet
    Annualized
Rental
Revenue
(in thousands)(1)
     Percentage of
Annualized
Rental
Revenue
Expiring
    Weighted
Average
Expiring
Rental Rate
per Square
Foot
 

2016

     62         235         2.7   $ 3,871         2.8   $ 16.47   

2017

     73         603         6.9     10,205         7.4     16.92   

2018

     56         495         5.7     9,219         6.7     18.62   

2019

     51         1,076         12.4     19,739         14.2     18.34   

2020

     57         560         6.4     11,259         8.1     20.11   

2021

     39         441         5.1     8,667         6.3     19.65   

2022

     26         388         4.5     7,066         5.1     18.21   

2023

     18         1,188         13.6     20,879         15.1     17.57   

2024

     10         220         2.5     3,874         2.8     17.61   

2025

     7         369         4.2     7,903         5.7     21.42   

Thereafter

     20         1,959         22.5     35,848         25.8     18.30   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     419         7,534         86.5   $ 138,530         100.0   $ 18.39   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

Significant Properties

We have four properties, CityWestPlace, Greenway Plaza, Post Oak Central and San Felipe Plaza, whose book value exceeded 10% of total assets at December 31, 2015 or whose rental revenue exceeded 10% of consolidated gross revenues for the year ended December 31, 2015.

CityWestPlace

CityWestPlace is located in Houston, Texas and comprises four office buildings in a 35.3 acre complex that range from six stories to 21 stories with an aggregate of 1.5 million rentable square feet. Parkway Houston acquired CityWestPlace in December 2013. The buildings were constructed between 1993 and 2001. CityWestPlace’s major customers include companies in the technology and energy industries. At June 30, 2016, the property was 77.5% occupied with an average effective annual rental rate per square foot of $24.58. The average occupancy and rental rate per square foot since Parkway Houston acquired ownership of CityWestPlace is as follows:

 

Year

   Average Occupancy     Average Rental Rate
per Square Foot
 

2013

     97.4   $ 16.30   

2014

     96.4     16.54   

2015

     85.3     19.43   

For the six months ended June 30, 2016

     77.9     21.89   

 

79


Table of Contents

Lease expirations for CityWestPlace at June 30, 2016 are as follows (in thousands, except square feet of leases expiring and number of leases):

 

Year

   Square Feet of
Leases Expiring
     Percentage of Total
Square Feet
    Annualized
Rental Revenue(1)
     Percentage of Total
Annualized Rent
    Number of
Leases
 

2016

     74,823         5.1   $ 2,635         9.4     5   

2017

     75,816         5.1     1,289         4.6     2   

2018

     —          —       —          —       —    

2019

     —          —       —          —       1   

2020

     35,550         2.4     1,191         4.2     5   

2021

     16,286         1.1     384         1.4     3   

2022

     —          —       —          —       —    

2023

     176,349         12.0     4,378         15.6     1   

2024

     —          —       —          —       —    

2025

     39,114         2.7     1,214         4.3     1   

Thereafter

     723,657         49.1     16,975         60.5     3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     1,141,595         77.5   $ 28,066         100.0     21   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

CityWestPlace has three customers that occupy 10% or more of the rentable square footage. Information regarding these customers is as follows:

 

Nature of Business

   Square Feet Expiring
(in thousands)
     Lease Expiration
Date
     Effective Rental
Rate Per Square
Foot
     Lease Options  

Oil & Gas

     582         2016, 2032         24.06         (1

Technology

     216         2026         17.15         (2

Oil & Gas

     176         2023         24.82         (3

 

(1) This customer has three one-time options to cancel one floor, each effective August 31, 2022, August 31, 2024, and August 21, 2027 upon 12 months prior notice.
(2) This customer has an option to cancel 10,448 square feet, effective July 2, 2021 upon 12 months prior notice.
(3) This customer has an option to cancel up to 23,000 square feet, effective October 1, 2017 upon 12 months prior notice.

For tax purposes, depreciation is calculated over 20 to 40 years for buildings and garages, seven to 40 years for building and tenant improvements and five to seven years for equipment, furniture and fixtures. The federal tax basis net of accumulated tax depreciation of CityWestPlace is estimated as follows at June 30, 2016 (in thousands):

 

     CityWestPlace  

Land

   $ 31,555   

Building and garage

     202,100   

Building and tenant improvements

     52,909   

Real estate tax expense for the property for the six months ended June 30, 2016 was $5.7 million.

 

80


Table of Contents

Greenway Plaza

Greenway Plaza is located in Houston, Texas and comprises 10 office buildings in a 52.4 acre complex that range from five stories to 31 stories with an aggregate of 4.3 million rentable square feet. Cousins Houston acquired Greenway Plaza in September 2013. The buildings were constructed between 1969 and 1981. Greenway Plaza’s major customers include companies primarily in the energy and finance industries. At June 30, 2016, the property was 89.1% occupied with an average effective annual rental rate per square foot of $16.32. The average occupancy and rental rate per square foot since Cousins Houston acquired ownership of Greenway Plaza is as follows:

 

Year

   Average Occupancy     Average Rental Rate
per Square Foot
 

2013

     95.2   $ 13.18   

2014

     93.1     14.42   

2015

     89.8     15.40   

For the six months ended June 30, 2016

     88.6     16.31   

Lease expirations for Greenway Plaza at June 30, 2016 are as follows (in thousands, except square feet of leases expiring and number of leases):

 

Year

   Square Feet of
Leases Expiring
     Percentage of Total
Square Feet
    Annualized
Rental Revenue(1)
     Percentage of Total
Annualized Rent
    Number of
Leases
 

2016

     100,263         2.4   $ 1,063         1.7     33   

2017

     299,290         6.9     4,855         7.7     38   

2018

     210,010         4.8     3,797         6.0     31   

2019

     245,056         5.6     4,327         6.8     29   

2020

     265,713         6.1     5,130         8.1     32   

2021

     206,277         4.7     3,733         5.9     19   

2022

     288,799         6.6     5,010         7.9     15   

2023

     917,361         21.1     14,366         22.7     12   

2024

     147,713         3.4     2,097         3.3     4   

2025

     137,074         3.2     2,811         4.5     3   

Thereafter

     1,054,026         24.3     16,059         25.4     9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     3,871,582         89.1   $ 63,248         100.0     225   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Annualized rental revenue represents the rental rate per square foot, multiplied by the number of square feet leased by the customer, multiplied by 12. Annualized rental revenue is defined as rental revenue less operating expense reimbursements.

Greenway Plaza has two customers that occupy 10% or more of the rentable square footage. Information regarding these customers is as follows:

 

Nature of Business

   Square Feet Expiring
(in thousands)
     Lease Expiration
Date
     Effective Rental
Rate Per Square
Foot
     Lease Options  

Finance

     391         2023         16.69         (1

Energy

     961         2026         14.57         (2

 

(1) This customer has the option to cancel up to two full floors after December 31, 2018, upon 12 months prior notice.
(2) This customer has the once per year option through December 31, 2014 to cancel up to three full floors in the aggregate, upon 12 months prior notice.

 

81


Table of Contents

For tax purposes, depreciation is calculated over 27 to 39 years for buildings and garages, 15 to 39 years for building and tenant improvements and seven years for equipment, furniture and fixtures. The federal tax basis net of accumulated tax depreciation of Greenway Plaza is estimated as follows at June 30, 2016 (in thousands):

 

     Greenway&nbs