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Section 1: 8-K/A (FORM 8-K AMENDMENT NO 1)

Form 8-K Amendment No 1

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 6, 2016

 

 

PARKWAY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   001-37819   61-1796261

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

San Felipe Plaza

5847 San Felipe Street, Suite 2200,

Houston, Texas

 

77057

(Address of Principal Executive Offices)   (Zip code)

(346) 200-3100

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


EXPLANATORY NOTE

This Current Report on Form 8-K/A (this “Amendment”) is being filed by Parkway, Inc. (the “Company”) to amend its Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on October 12, 2016, in connection with the consummation of the merger of Parkway Properties, Inc. (“Legacy Parkway”) with and into a subsidiary of Cousins Properties Incorporated (“Cousins”) on October 6, 2016, the subsequent separation of a portion of Cousins’ combined businesses relating to the ownership of real properties in Houston, Texas, as well as Legacy Parkway’s fee-based real estate services, from the remainder of the combined businesses, the reorganization of the Company and the spin-off of the Company on October 7, 2016, following which the Company became an independent, publicly traded real estate investment trust.

The Company is filing this Amendment solely to provide certain financial statements of Parkway Houston and Cousins Houston, the predecessors of the Company, and the Company as required by Item 9.01(a) of Form 8-K and certain pro forma financial information required by Item 9.01(b) of Form 8-K.


Item 9.01. Financial Statements and Exhibits

(a) Financial Statements of Businesses Acquired

The audited combined financial statements of Parkway Houston as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 are filed herewith as Exhibit 99.1 and are incorporated by reference herein.

The unaudited combined financial statements of Parkway Houston as of and for the three and nine months ended September 30, 2016 are filed herewith as Exhibit 99.2 and are incorporated by reference herein.

The audited combined financial statements of Cousins Houston as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 are filed herewith as Exhibit 99.3 and are incorporated by reference herein.

The unaudited combined financial statements of Cousins Houston as of and for the three and nine months ended September 30, 2016 are filed herewith as Exhibit 99.4 and are incorporated by reference herein.

(b) Pro Forma Financial Information

The unaudited pro forma combined financial statements of the Company as of and for the nine months ended September 30, 2016 and for the year ended December 31, 2015 are filed herewith as Exhibit 99.5 and are incorporated by reference herein.

(d) Exhibits

 

Exhibit No.

  

Description

23.1    Consent of Ernst & Young LLP.
23.2    Consent of Deloitte & Touche LLP.
99.1    Audited combined financial statements of Parkway Houston as of December 31, 2015 and 2014, and for the years ended December 31, 2015, 2014 and 2013.
99.2    Unaudited combined financial statements of Parkway Houston as of and for the three and nine months ended September 30, 2016.
99.3    Audited combined financial statements of Cousins Houston as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013.
99.4    Unaudited combined financial statements of Cousins Houston as of and for the three and nine months ended September 30, 2016.
99.5    Unaudited pro forma combined financial statements of Parkway, Inc. as of and for the nine months ended September 30, 2016 and for the year ended December 31, 2015.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: December 21, 2016     PARKWAY, INC.
    BY:   /s/ A. Noni Holmes-Kidd
      A. Noni Holmes-Kidd
      Vice President, General Counsel and Secretary


EXHIBIT INDEX

 

Exhibit No.

  

Description

23.1    Consent of Ernst & Young LLP.
23.2    Consent of Deloitte & Touche LLP.
99.1    Audited combined financial statements of Parkway Houston as of December 31, 2015 and 2014, and for the years ended December 31, 2015, 2014 and 2013.
99.2    Unaudited combined financial statements of Parkway Houston as of and for the three and nine months ended September 30, 2016.
99.3    Audited combined financial statements of Cousins Houston as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013.
99.4    Unaudited combined financial statements of Cousins Houston as of and for the three and nine months ended September 30, 2016.
99.5    Unaudited pro forma combined financial statements of Parkway, Inc. as of and for the nine months ended September 30, 2016 and for the year ended December 31, 2015.
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Section 2: EX-23.1 (CONSENT)

Consent

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the use of our report dated June 30, 2016, with respect to the combined financial statements of Parkway Houston as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013, and the related financial statement schedule, included in the Current Report on Form 8-K/A of Parkway, Inc. filed December 21, 2016 and the Registration Statement on Form S-8 (No. 333-214032) of Parkway, Inc.

/s/ Ernst & Young LLP

Indianapolis, Indiana

December 21, 2016

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Section 3: EX-23.2 (CONSENT)

Consent

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-214032 on Form S-8 of Parkway, Inc. of our report dated June 30, 2016, relating to the combined financial statements and financial statement schedule of Cousins Houston (which report expressed an unqualified opinion on the combined financial statements and financial statement schedule and includes an explanatory paragraph related to the allocation of certain operating expenses from Cousins Properties Incorporated) appearing in this Current Report on Form 8-K/A of Parkway, Inc. dated December 21, 2016.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia    

December 21, 2016

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Section 4: EX-99.1 (AUDITED COMBINED FINANCIAL STATEMENTS)

Audited combined financial statements

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

THE BOARD OF DIRECTORS AND STOCKHOLDERS

PARKWAY PROPERTIES, INC.

We have audited the accompanying combined balance sheets of Parkway Houston (the “Company”) as of December 31, 2015 and 2014, and the related combined statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the accompanying combined financial statement schedule. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 31, 2015 and 2014, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Indianapolis, Indiana

June 30, 2016

 

1


PARKWAY HOUSTON

COMBINED BALANCE SHEETS

(In thousands)

 

     December 31,
2015
    December 31,
2014
 

Assets

    

Real estate related investments:

    

Office properties

   $ 818,594      $ 772,957   

Accumulated depreciation

     (65,941     (34,111
  

 

 

   

 

 

 

Total real estate related investments, net

     752,653        738,846   

Condominium units

     —          9,318   

Cash and cash equivalents

     11,961        7,992   

Receivables and other assets

     76,300        67,657   

Intangible assets, net

     24,439        41,550   

Management contract intangibles, net

     378        1,133   
  

 

 

   

 

 

 

Total assets

   $ 865,731      $ 866,496   
  

 

 

   

 

 

 

Liabilities

    

Mortgage notes payable, net

   $ 396,901      $ 407,211   

Accounts payable and other liabilities

     36,299        37,270   

Below market leases, net of accumulated amortization of $36,175 and $18,586, respectively

     23,465        41,054   
  

 

 

   

 

 

 

Total liabilities

     456,665        485,535   
  

 

 

   

 

 

 

Equity

    

Parkway Equity

     409,066        380,053   

Noncontrolling interests

     —          908   
  

 

 

   

 

 

 

Total equity

     409,066        380,961   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 865,731      $ 866,496   
  

 

 

   

 

 

 

See notes to combined financial statements.

 

2


PARKWAY HOUSTON

COMBINED STATEMENTS OF OPERATIONS

(In thousands)

 

     Year Ended December 31,  
     2015     2014     2013  

Revenues

      

Income from office properties

   $ 108,507      $ 123,172      $ 20,965   

Management company income

     9,891        23,971        17,526   

Sale of condominium units

     11,063        16,554        —     
  

 

 

   

 

 

   

 

 

 

Total revenues

     129,461        163,697        38,491   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Property operating expenses

     45,385        54,856        9,119   

Management company expenses

     9,362        27,038        23,638   

Cost of sales—condominium units

     11,120        13,199        14   

Depreciation and amortization

     55,570        64,012        10,465   

Impairment loss on management contracts

     —          4,750        —     

General and administrative

     6,336        6,917        7,267   
  

 

 

   

 

 

   

 

 

 

Total expenses

     127,773        170,772        50,503   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,688        (7,075     (12,012

Other income and expenses

      

Interest and other income

     246        244        1,663   

Interest expense

     (16,088     (16,252     (3,296
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (14,154     (23,083     (13,645

Income tax (expense) benefit

     (1,635     180        1,276   
  

 

 

   

 

 

   

 

 

 

Net loss

     (15,789     (22,903     (12,369

Net (income) loss attributable to noncontrolling interests

     7        (148     —     
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Parkway Houston

   $ (15,782   $ (23,051   $ (12,369
  

 

 

   

 

 

   

 

 

 

See notes to combined financial statements.

 

3


PARKWAY HOUSTON

COMBINED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

 

     Parkway
Equity
    Noncontrolling
Interests
    Total
Equity
 

Balance at December 31, 2012

   $ 146,987      $ —        $ 146,987   

Net loss

     (12,369     —          (12,369

Contributions from Parkway, net

     262,367        —          262,367   

Contributions from noncontrolling interest holders in properties

     —          3,050        3,050   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 396,985      $ 3,050      $ 400,035   

Net income (loss)

     (23,051     148        (22,903

Distributions to noncontrolling interest holders in properties

     —          (2,290     (2,290

Contributions from Parkway, net

     6,119        —          6,119   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 380,053      $ 908      $ 380,961   

Net loss

     (15,782     (7     (15,789

Distributions to noncontrolling interest holders in properties

     —          (901     (901

Contributions from Parkway, net

     44,795        —          44,795   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 409,066      $ —        $ 409,066   
  

 

 

   

 

 

   

 

 

 

See notes to combined financial statements.

 

4


PARKWAY HOUSTON

COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended December 31,  
     2015     2014     2013  

Operating activities

      

Net loss

   $ (15,789   $ (22,903   $ (12,369

Adjustments to reconcile net loss to cash provided by operating activities:

      

Depreciation and amortization of office properties

     55,570        64,012        10,465   

Amortization of management contracts, net

     755        7,881        7,125   

Amortization of below market leases, net

     (16,937     (16,118     (1,826

Amortization of financing costs

     42        42        32   

Amortization of debt premium, net

     (3,992     (3,940     (93

Deferred income tax expense (benefit)

     363        (4,763     (1,960

Non-cash impairment loss on management contracts

     —          4,750        —     

Increase in deferred leasing costs

     (7,735     (14,661     (563

Changes in operating assets and liabilities:

      

Change in condominium units

     9,318        10,582        —     

Change in receivables and other assets

     (9,369     (20,396     (3,610

Change in accounts payable and other liabilities

     630        (1,294     6,398   
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     12,856        3,192        3,599   
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Improvements to real estate

     (46,421     (4,360     (623
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (46,421     (4,360     (623
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Principal payments on mortgage notes payable

     (6,360     (3,547     —     

Proceeds from issuance of mortgage notes payable

     —          —          80,000   

Debt financing costs

     —          —          (422

Change in Parkway investment, net

     44,795        4,573        (74,785

Distributions to noncontrolling interest holders in properties

     (901     (2,290     —     
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     37,534        (1,264     4,793   
  

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     3,969        (2,432     7,769   

Cash and cash equivalents at beginning of year

     7,992        10,424        2,655   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 11,961      $ 7,992      $ 10,424   
  

 

 

   

 

 

   

 

 

 

See notes to combined financial statements.

 

5


PARKWAY HOUSTON

COMBINED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

 

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

 

     Year Ended December 31,  
     2015      2014      2013  

Supplemental cash flow information:

        

Cash paid for interest

   $ 20,064       $ 20,313       $ 19,775   

Cash paid for income taxes

     1,783         4,383         100   

Supplemental schedule of non-cash investing and financing activity:

        

Real estate assets acquired in TPGI Merger

     —           —           645,284   

Intangible assets acquired in TPGI Merger

     —           —           61,562   

Condominium units acquired in TPGI Merger

     —           —           19,900   

Other assets acquired in TPGI Merger

     —           —           19,294   

Management contract intangibles acquired in TPGI Merger

     —           —           1,889   

Mortgage notes payable assumed in TPGI Merger

     —           —           335,038   

Below market leases assumed in TPGI Merger

     —           —           50,152   

Other liabilities assumed in TPGI Merger

     —           —           22,537   

Contributions from noncontrolling interests in condominium units

     —           —           3,050   

Contributions from Parkway, net

     —           1,546         —     

 

6


PARKWAY HOUSTON

NOTES TO COMBINED FINANCIAL STATEMENTS

December 31, 2015

Note 1—Organization

On April 28, 2016, the board of directors of Cousins Properties Incorporated, a Georgia corporation (“Cousins”), and the board of directors of Parkway Properties, Inc., a Maryland corporation (“Parkway”), each approved an agreement and plan of merger, dated as of April 28, 2016 (the “Merger Agreement”). Pursuant to the Merger Agreement, Cousins and Parkway will combine through a stock-for-stock merger (the “Merger”), followed by a spin-off (the “Distribution”) of the Houston-based assets of both companies (“Cousins Houston” and “Parkway Houston”, respectively) into a new publicly traded real estate investment trust (“REIT”) called Parkway, Inc. (“New Parkway”). Cousins Houston includes the combined accounts related to the office properties of Greenway Plaza and Post Oak Central, currently operated by subsidiaries of Cousins, and certain corporate costs. Parkway Houston includes the combined accounts related to the office properties of Phoenix Tower (for all periods presented), CityWestPlace and San Felipe Plaza (acquired on December 19, 2013), fee-based real estate services (for all periods presented) and the Murano residential condominium project (acquired on December 19, 2013), currently operated through subsidiaries of Parkway, and certain corporate costs. Unless the context otherwise requires, references to the “Company” refer to Parkway Houston. New Parkway is expected to operate and elect to be treated as a REIT under the Internal Revenue Code of 1986, as amended. REITs generally are not liable for federal corporate income taxes as long as they meet certain requirements and distribute at least 90% of their taxable income.

Following the Distribution, New Parkway will own five office properties with 8.7 million rentable square feet (unaudited) in the Galleria, Greenway and Westchase submarkets of Houston, Texas. In addition, New Parkway will provide fee-based real estate services through wholly owned subsidiaries, including Eola Office Partners, LLC (“Eola”), which in total managed and/or leased approximately 4.2 million square feet (unaudited) for primarily third-party owners at December 31, 2015 and will own certain other assets previously owned by Parkway.

As of December 31, 2015, New Parkway had not conducted any business as a separate company and has no material assets or liabilities. The operations of Parkway Houston, which will be transferred to New Parkway immediately following the effective time of the Merger, are presented as if the transferred business was Parkway Houston’s business for all historical periods described and at the carrying value of such assets and liabilities reflected in Parkway’s books and records.

Note 2—Basis of Presentation and Consolidation

The accompanying combined financial statements include the accounts of Parkway Houston presented on a combined basis as the ownership interests are currently under common control and ownership of Parkway. All significant intercompany balances and transactions have been eliminated.

These combined financial statements are derived from the books and records of Parkway and were carved out from Parkway at a carrying value reflective of such historical cost in such Parkway records. Parkway Houston’s historical financial results reflect charges for certain corporate costs and we believe such charges are reasonable; however, such results do not necessarily reflect what our expenses would have been had we been operating as a separate stand-alone public company. Costs of the services that were charged to us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us. The historical combined financial information presented may therefore not be indicative of the results of operations, financial position or cash flows that would have been obtained if we had been an independent, stand-alone public company during the periods presented or of our future performance as an independent, stand-alone company.

 

7


Parkway Houston is a predecessor, as defined in applicable rules and regulations for the Securities and Exchange Commission (the “SEC”), to the Houston Business, which will commence operations on the date of the Distribution.

These combined financial statements reflect the consolidation of properties that are wholly owned or properties in which we own less than a 100% interest but that we control. Control of a property is demonstrated by, among other factors, our ability to refinance debt and sell the property without the consent of any other partner or owner and the inability of any other partner or owner to replace us. Eola, Phoenix Tower, CityWestPlace and San Felipe Plaza were all wholly owned for all periods presented.

Parkway Houston consolidates its Murano residential condominium project which it controls. Parkway Houston’s unaffiliated partner’s interest is reflected on its combined balance sheets under the “Noncontrolling Interests” caption. Parkway Houston’s partner has a stated ownership interest of 27%. Net proceeds from the project will be distributed, to the extent available, based on an order of preferences described in the partnership agreement. Parkway Houston may receive distributions, if any, in excess of its stated 73% ownership interest if certain return thresholds are met.

Note 3—Summary of Significant Accounting Policies

Real Estate Properties

Real estate properties are carried at cost less accumulated depreciation. Cost includes the carrying amount of Parkway Houston’s investment plus any additional consideration paid, liabilities assumed and improvements made subsequent to acquisition. Depreciation of buildings and building improvements is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of tenant improvements, including personal property, is computed using the straight-line method over the lesser of the useful life or the term of the lease involved. Maintenance and repair expenses are charged to expense as incurred.

Parkway Houston evaluates its real estate assets for impairment upon occurrence of significant adverse changes in its operations to assess whether any impairment indicators are present that affect the recovery of the carrying amount. The carrying amount includes the net book value of tangible and intangible assets and liabilities. Real estate assets are classified as held for sale or held and used. 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 discontinues 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, Parkway Houston 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, and contractual purchase and sale agreements. This market information is considered a Level 2 or Level 3 input as defined by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”.

 

8


Parkway Houston recognizes gains or losses on sales of real estate at times and in amounts determined in accordance with the accounting guidance for sales of real estate. The guidance takes into account the terms of the transaction and any continuing involvement, including in the form of management, leasing of space or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, then Parkway Houston defers gain recognition and accounts for the transaction by applying the deposit, finance, installment or cost recovery methods, as appropriate.

Cash Equivalents

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

Restricted Cash

Restricted cash, which is included in receivables and other assets, primarily consists of security deposits held on behalf of Parkway Houston’s tenants as well as capital improvements and real estate tax escrows required under certain loan agreements. There are restrictions on Parkway Houston’s ability to withdraw these funds other than for their specified usage.

Purchase Price Assignment

Parkway Houston assigns the purchase price of real estate to tangible and intangible assets and liabilities based on fair value. Tangible assets consist of land, building, garage, building improvements and tenant improvements. Intangible assets and liabilities 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 engages independent third-party appraisers to perform the valuations used to determine the fair value of these identifiable tangible and intangible assets. These valuations and appraisals use commonly employed valuation techniques, such as discounted cash flow analyses. Factors considered in these analyses include an estimate of costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases. Parkway Houston also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. Parkway Houston includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on specific local market conditions and the type of property acquired. Additionally, Parkway Houston estimates costs to execute similar leases including leasing commissions, legal and other related expenses.

The fair value of above or below market in-place lease values is the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the estimated current market lease rate expected over the remaining non-cancelable life of the lease. The capitalized above market lease values are amortized as a reduction of rental income over the remaining term of the respective leases. The portion of the values of the leases associated with below-market renewal options that are likely to be exercised are amortized to rental income over the respective renewal. The capitalized below market lease values are amortized as an increase to rental income over the remaining term of the respective leases. Total amortization for above and below market leases was a net increase of rental income of $17.1 million, $16.3 million and $1.8 million for the years ended December 31, 2015, 2014 and 2013, respectively.

 

9


As of December 31, 2015, the remaining amortization of below market leases, net is projected as a net increase to rental income as follows (in thousands):

 

     Amount  

2016

   $ 6,826   

2017

     4,254   

2018

     2,476   

2019

     2,113   

2020

     1,511   

Thereafter

     6,285   
  

 

 

 

Total

   $ 23,465   
  

 

 

 

The fair value of in-place leases is the present value associated with re-leasing the in-place lease as if the property was vacant. Factors to be considered include estimates of costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating costs, Parkway Houston includes estimates of lost rentals at market rates during the expected lease-up periods. The value of at market in-place leases is amortized as a lease cost amortization expense over the expected life of the lease. Total amortization expense for the value of in-place leases was $16.7 million, $30.1 million and $4.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, the remaining amortization expense for the value of in-place leases is projected as follows (in thousands):

 

     Amount  

2016

   $ 7,928   

2017

     4,481   

2018

     2,107   

2019

     1,532   

2020

     1,369   

Thereafter

     4,860   
  

 

 

 

Total

   $ 22,277   
  

 

 

 

A separate component of the fair value of in-place leases is identified for the lease costs. The fair value of lease costs represents the estimated commissions and legal fees paid in connection with the current leases in place. Lease costs are amortized over the non-cancelable terms of the respective leases as lease cost amortization expense.

In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a customer terminate its lease, the unamortized portion of the tenant improvement, in-place lease value and lease cost intangibles would be charged to expense. Additionally, the unamortized portion of above market in-place leases would be recorded as a reduction to rental income and the below market in-place lease value would be recorded as an increase to rental income.

Parkway Houston calculates the fair value of mortgage notes payable by discounting the remaining contractual cash flows on each instrument at the current market rate for these borrowings.

Capitalization of Costs

Costs related to planning, developing, leasing and constructing a property, including costs of development personnel working directly on projects under development, are capitalized. In addition, Parkway Houston

 

10


capitalizes interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, Parkway Houston first uses the interest incurred on specific project debt, if any, and next uses Parkway Houston’s weighted average interest rate for non-project specific debt. Parkway Houston also capitalizes certain costs of leasing personnel in connection with the completion of leasing arrangements.

Allowance for Doubtful Accounts

Accounts receivable are reduced by an allowance for amounts that Parkway Houston estimates to be uncollectible. The receivable balance is comprised primarily of rent and expense reimbursement income due from the customers. Management evaluates the adequacy of the allowance for doubtful accounts considering such factors as the credit quality of the customers, delinquency of payment, historical trends and current economic conditions. Parkway Houston provides an allowance for doubtful accounts for customer balances that are over 90 days past due and for specific customer receivables for which collection is considered doubtful.

The components of allowance for doubtful accounts for the years ended December 31, 2015, 2014 and 2013 are as follows (in thousands):

 

     For the Year Ended
December 31,
 
     2015      2014      2013  

Beginning balance:

   $ 38       $ 306       $ 136   

Bad debt expense

     261         88         351   

Write-offs

     (201      (356      (181
  

 

 

    

 

 

    

 

 

 

Ending balance:

   $ 98       $ 38       $ 306   
  

 

 

    

 

 

    

 

 

 

Noncontrolling Interest

A noncontrolling interest in a subsidiary is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported as amounts that include the amounts attributable to both the parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the combined statements of operations.

Revenue Recognition

Revenue from real estate rentals is recognized 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. The straight-line rent adjustment increased revenue by $13.9 million, $6.3 million and $841,000 in 2015, 2014 and 2013, respectively.

When Parkway Houston is the owner of the tenant 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 customer 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. Property operating cost recoveries from customers (“expense reimbursements”) are recognized as revenue in the period in which the expenses are incurred. The computation

 

11


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 adjustments, positive or negative, to expense reimbursement income quarterly 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 service agreements. Leasing and brokerage commissions, as well as salary and administrative fees, are recognized 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 fees is reasonably assured. Fees relating to the purchase or sale of property are recognized when the earnings process is complete and collection of fees is reasonably assured, which usually occurs at closing. All fees on company-owned properties are eliminated in consolidation. Parkway Houston recognizes fees earned from Parkway’s unconsolidated joint ventures in management company income.

Parkway Houston has one high-rise condominium project. Under the provisions of FASB ASC 360-20, “Property, Plant and Equipment” subsection “Real Estate and Sales,” revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at closing. Revenue is recognized on the contract price of individual units. Total estimated costs are allocated to individual units which have closed on a relative value basis.

Amortization of Debt Origination Costs and Leasing Costs

Debt origination costs are deferred and amortized using a method that approximates the effective interest method over the term of the loan. Leasing costs are deferred and amortized using the straight-line method over the term of the respective lease.

Income Taxes

Parkway elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1997. To qualify as a REIT, Parkway must meet a number of organizational and operational requirements, including a requirement that it distribute annually at least 90% of its “REIT taxable income,” subject to certain adjustments and excluding any net capital gain to its stockholders. It is management’s current intention to adhere to these requirements and maintain Parkway’s REIT status, and Parkway believes that it was in compliance with all REIT requirements at December 31, 2015. As a REIT, Parkway generally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders. If Parkway fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if Parkway qualifies for taxation as a REIT, Parkway may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. The properties in the combined financial statements are owned directly or indirectly by partnerships, limited partnerships or limited liability companies and as a result, the allocated share of income or loss for each period is included in the income tax returns of the partners. In addition, taxable income from non-REIT activities managed through the taxable REIT subsidiary is subject to federal, state and local income taxes. Parkway provides for income taxes based on pretax income and applicable tax rates in the various jurisdictions in which it operates. The effective tax rate reflects the impact of earnings attributable to REIT operations and noncontrolling interests for which no U.S. income taxes have been provided.

 

12


Fair Value Measurements

Level 1 fair value inputs are quoted prices for identical assets or liabilities in active, liquid and visible markets such as stock exchanges. Level 2 fair value inputs are observable information for similar assets or liabilities in active or inactive markets, and appropriately consider counterparty creditworthiness in the valuations. Level 3 fair value inputs reflect Parkway Houston’s best estimate of inputs and assumptions market participants would use in pricing an asset or liability at the measurement date. These inputs are unobservable in the market and significant to the valuation estimate.

Impairment of Intangible Assets

During 2014, Parkway Houston evaluated certain qualitative factors and determined that it was necessary to apply the two-step quantitative impairment test under ASU 2011-8. During the year ended December 31, 2014, Parkway Houston determined that the undiscounted cash flows indicated that the carrying amounts of certain Eola Capital, LLC (“Eola Capital”) management contracts were not expected to be recovered and, as a result, Parkway Houston recorded a $4.8 million pre-tax non-cash impairment loss related to these management contracts which resulted in the entire remaining balance of the Eola Capital contracts being written off as of December 31, 2014. During the year ended December 31, 2015, no impairment losses were recorded on Parkway Houston’s intangible assets.

Segment Reporting

Parkway Houston’s primary business is the ownership and operation of office properties. Parkway Houston has accounted for each office property or groups of related office properties as an individual operating segment. Parkway Houston has aggregated the individual operating segments into a single reporting segment due to the fact that the individual operating segments have similar operating and economic characteristics, such as being leased by the square foot, sharing the same primary operating expenses and ancillary revenue opportunities and being cyclical in economic performance based on current supply and demand conditions. The individual operating segments are also similar in that revenues are derived from the leasing of office space to customers and each office property is managed and operated consistently in accordance with standard operating procedures. The range and type of customer uses of the properties is similar throughout the portfolio regardless of location or class of building and the needs and priorities of the customers do not vary widely from building to building. Therefore, the management responsibilities do not vary widely from location to location based on the size of the building, geographic location or class. The operations of the Management Company are separately presented in the Combined Statements of Operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although Parkway Houston believes the assumptions and estimates made are reasonable and appropriate, as discussed in the applicable sections throughout these combined financial statements, different assumptions and estimates could materially impact reported results. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions; therefore, changes in market conditions could impact Parkway Houston’s future operating results. Parkway Houston’s most significant estimates relate to impairments on real estate and other assets and purchase price assignments. Actual results could differ from these estimates.

Recent Accounting Pronouncements

Adopted

In February 2015, 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

 

13


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.

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.

Note 4—Real Estate Related Investments, Net

Included in Real Estate Related Investments are three office assets located in the Galleria, Greenway and Westchase submarkets of Houston, Texas, comprising six buildings and two adjacent parcels of land totaling approximately 3.1 million square feet (unaudited).

Balances of major classes of depreciable assets (in thousands) and their respective estimated useful lives are:

 

          December 31,  

Asset Category

  

Estimated Useful Life

   2015      2014  

Land

   Non-depreciable    $ 106,323       $ 106,323   

Building and garage

   40 years      600,562         600,562   

Building improvements

   7 to 40 years      14,426         4,174   

Tenant improvements

   Lesser of useful life or term of lease      97,283         61,898   
     

 

 

    

 

 

 
      $ 818,594       $ 772,957   
     

 

 

    

 

 

 

Depreciation expense related to these assets of $32.0 million, $28.8 million and $5.3 million was recognized in 2015, 2014 and 2013, respectively.

 

14


2013 Acquisitions

On December 19, 2013, in connection with Parkway’s merger transactions with TPGI (such transactions, the “TPGI Mergers”), Parkway Houston assumed TPGI’s ownership interest in two wholly owned office properties in Houston, Texas, CityWestPlace and San Felipe Plaza, and two parcels of land adjacent to CityWestPlace. The following table summarizes the aggregate purchase price assignment for CityWestPlace and San Felipe Plaza as of December 19, 2013 based on Level 2 and Level 3 inputs (in thousands):

 

     Amount  

Land

   $ 97,132   

Building

     502,537   

Tenant improvements

     41,697   

Lease commissions

     27,847   

Lease in place value

     61,562   

Above market leases

     3,176   

Below market leases

     (53,382

Mortgage debt assumed

     (317,688

Mortgage premium for mortgage assumed

     (9,974

Parkway Houston’s unaudited pro forma results of operations after giving to effect the purchases of CityWestPlace and San Felipe Plaza as if the purchases had occurred on January 1, 2013 is as follows (in thousands):

 

     2013  

Revenues

   $ 138,828   

Net loss attributable to Parkway Houston

     (2,465

2012 Acquisition

On December 20, 2012, Parkway completed the purchase of Phoenix Tower, an office tower located in the Greenway Plaza submarket of Houston, Texas, for a gross purchase price of $123.8 million. Phoenix Tower is a 26-story office tower that sits atop an eight-story parking garage. On February 20, 2013, Parkway obtained an $80.0 million non-recourse first mortgage loan secured by Phoenix Tower. The mortgage loan has a fixed interest rate of 3.9%, an initial 24-month interest only period and a maturity date of March 2023. See “Note 6—Mortgage Notes Payable” for additional details.

Contractual Obligations and Minimum Rental Receipts

Obligations for tenant improvement allowances and lease commission costs for leases in place and commitments for building improvements at December 31, 2015 are as follows (in thousands):

 

     Amount  

2016

   $ 10,432   

2017

     37   

2018

     10   

2019

     —     

2020

     —     

Thereafter

     —     
  

 

 

 

Total

   $ 10,479   
  

 

 

 

 

15


The following is a schedule by year of future minimum rental receipts under noncancelable leases for office buildings owned at December 31, 2015 (in thousands):

 

     Amount  

2016

   $ 87,844   

2017

     81,416   

2018

     72,966   

2019

     68,629   

2020

     64,493   

Thereafter

     436,128   
  

 

 

 

Total

   $ 811,476   
  

 

 

 

Parkway Houston is geographically concentrated in Houston, Texas. For the years ended December 31, 2015, 2014 and 2013, five, four and six tenants in the Parkway Houston portfolio, respectively, represented more than 5% of base rent.

Note 5—Intangible Assets, Net

The following table reflects the portion of the purchase price of office properties assigned to intangible assets, as discussed in “Note 3—Summary of Significant Accounting Policies.” The portion of the purchase price assigned to below market lease value and the related accumulated amortization is reflected in “Note 8—Accounts Payable and Other Liabilities.”

 

     December 31,  
     2015      2014  
     (In thousands)  

Lease in place value

   $ 73,064       $ 73,064   

Accumulated amortization

     (50,787      (34,115

Above market lease value

     3,044         3,044   

Accumulated amortization

     (882      (443
  

 

 

    

 

 

 
   $ 24,439       $ 41,550   
  

 

 

    

 

 

 

Note 6—Mortgage Notes Payable, Net

On February 20, 2013, Parkway obtained an $80.0 million non-recourse first mortgage loan secured by Phoenix Tower. The mortgage loan has a fixed interest rate of 3.9%, an initial 24-month interest only period and a maturity date of March 2023.

On December 19, 2013, in connection with the TPGI Mergers, Parkway assumed the existing first mortgage loans for CityWestPlace I & II, CityWestPlace III & IV, and San Felipe Plaza.

A summary of mortgage notes payable at December 31, 2015 and 2014 is as follows (dollars in thousands):

 

     Fixed
Rate
    Maturity
Date
     December 31,  

Office Properties

        2015      2014  

Phoenix Tower

     3.9     03/01/2023       $ 78,555       $ 80,000   

CityWestPlace I & II

     6.2     07/06/2016         114,460         116,111   

CityWestPlace III & IV

     5.0     03/05/2020         90,334         91,889   

San Felipe Plaza

     4.8     12/01/2018         107,877         109,585   

Unamortized premium, net

          5,981         9,974   

Unamortized debt issuance costs, net

          (306      (348
       

 

 

    

 

 

 

Total mortgage notes payable, net

        $ 396,901       $ 407,211   
       

 

 

    

 

 

 

 

16


The aggregate annual maturities of mortgage notes payable at December 31, 2015 are as follows (in thousands):

 

     Amount  

2016

   $ 119,879   

2017

     5,670   

2018

     108,166   

2019

     4,138   

2020

     85,602   

Thereafter

     67,771   
  

 

 

 

Total principal maturities

     391,226   

Unamortized premium, net

     5,981   

Unamortized debt issuance costs, net

     (306
  

 

 

 

Total Mortgage Notes Payable, net

   $ 396,901   
  

 

 

 

The fair value of mortgage notes payable was $394.3 million and $397.7 million as of December 31, 2015 and 2014, respectively. The fair value was determined using Level 2 inputs.

Note 7—Receivables and Other Assets

The following represents the composition of Receivables and Other Assets as of December 31, 2015 and 2014:

 

     December 31,  
     2015      2014  
     (In thousands)  

Rents and fees receivable

   $ 300       $ 2,093   

Allowance for doubtful accounts

     (98      (38

Straight-line rent receivable

     21,073         7,149   

Other receivables

     3,593         5,852   

Lease costs, net of accumulated amortization of $13,257 and $6,247, respectively

     40,451         39,929   

Escrow and other deposits

     1,865         3,383   

Prepaid expenses

     482         585   

Cost method investment

     3,500         3,500   

Deferred tax asset, non current

     4,999         5,040   

Other assets

     135         164   
  

 

 

    

 

 

 
   $ 76,300       $ 67,657   
  

 

 

    

 

 

 

 

17


Note 8—Accounts Payable and Other Liabilities

The following represents the composition of Accounts Payable and Other Liabilities as of December 31, 2015 and 2014:

 

     December 31,  
     2015      2014  
     (In thousands)  

Accounts payable and accrued expenses

   $ 17,065       $ 14,851   

Accrued property taxes

     9,300         14,832   

Prepaid rents

     5,319         3,304   

Security deposits

     1,052         821   

Deferred tax liability

     793         470   

Accrued payroll

     1,248         1,446   

Interest payable

     1,522         1,546   
  

 

 

    

 

 

 
   $ 36,299       $ 37,270   
  

 

 

    

 

 

 

Note 9—Income Taxes

As a REIT, Parkway generally will not be subject to corporate level U.S. federal income tax on taxable income it distributes currently to its stockholders. If Parkway fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if Parkway qualifies for taxation as a REIT, Parkway may be subject to certain state and local taxes on its income and property, and to U.S. federal income taxes on its undistributed taxable income.

The properties in the combined financial statements are owned directly or indirectly by a limited partnership or limited liability companies and as a result, the allocated share of income or loss for each period is included in the income tax returns of the partners.

Parkway Houston has certain entities as taxable REIT subsidiaries (“TRSs”), which are tax paying entities for income tax purposes and are taxed separately from Parkway Houston. TRSs may participate in non-real estate related activities and/or perform non-customary services for customers and are subject to U.S. federal and state income tax at regular corporate tax rates. The income tax benefit (expense) and related income tax assets and liabilities are based on actual and expected future income.

As of December 31, 2015 and 2014, Parkway Houston recorded net deferred tax assets of $4.2 million and $4.6 million, respectively, related to the TRSs. Deferred tax assets generally represent items that can be used as a tax deduction in Parkway Houston’s tax returns in future years for which Parkway Houston has already recorded a tax benefit in its combined statements of operations.

 

18


The significant components of the net deferred tax assets (liabilities) as of December 31, 2015 and 2014 are as follows (in thousands):

 

     December 31,  
     2015      2014  
     (In thousands)  

Deferred tax assets

     

Capitalizable transaction costs

   $ 667       $ 784   

Contingent consideration

     1,198         1,411   

Management contracts

     2,022         2,377   

Condominium sales

     1,064         331   

Other

     48         137   
  

 

 

    

 

 

 

Total deferred tax assets

     4,999         5,040   
  

 

 

    

 

 

 

Deferred tax liabilities

     

Cost method investment

     670         470   

Other

     123         —     
  

 

 

    

 

 

 

Total deferred tax liabilities

     793         470   
  

 

 

    

 

 

 

Total deferred tax assets, net

   $ 4,206       $ 4,570   
  

 

 

    

 

 

 

FASB ASC 740-10-30 “Accounting for Income Taxes” subsection “Initial Measurement,” requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. In determining whether the deferred tax asset is realizable, Parkway Houston considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and its ability to generate sufficient taxable income in future years. As of December 31, 2015, Parkway Houston concludes that a valuation allowance against its deferred tax asset is not necessary.

The components of income tax benefit (expense) for the years ended December 31, 2015, 2014 and 2013 are as follows (in thousands):

 

     For the Year Ended  
     December 31,  
     2015      2014      2013  

Current:

        

Federal

   $ (853    $ (2,870    $ (490

State

     (418      (1,713      (194
  

 

 

    

 

 

    

 

 

 

Total current

     (1,271      (4,583      (684
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     124         3,868         1,582   

State

     (488      895         378   
  

 

 

    

 

 

    

 

 

 

Total deferred

     (364      4,763         1,960   
  

 

 

    

 

 

    

 

 

 

Total income tax (expense) benefit

   $ (1,635    $ 180       $ 1,276   
  

 

 

    

 

 

    

 

 

 

 

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The reconciliation of income tax expense computed at the U.S. statutory income tax rate and the income tax expense in the combined statements of operations is shown below (in thousands):

 

     For the Years Ended December 31,  
     2015     2014     2013  
     Amount     Percentage     Amount     Percentage     Amount     Percentage  

Pre-tax income (loss) from continuing operations

   $ 4,812        34.0   $ 7,848        34.0   $ 4,639        34.0

Pass-through earnings without income tax provision

     (5,596     (39.5 )%      (7,003     (30.3 )%      (2,649     (19.4 )% 

Noncontrolling interest

     (2     —       50        0.2     —          —  

State income tax, net of federal tax benefit

     (510     (3.6 )%      (778     (3.4 )%      58        0.4

Effect of permanent differences

     (6     —       (41     (0.2 )%      (291     (2.1 )% 

Valuation allowance

     —          —       479        2.1     (479     (3.5 )% 

Cost method investment

     —          —       (422     (1.8 )%      —          —  

Other

     (333     (2.4 )%      47        0.2     (2     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax (expense) benefit

   $ (1,635     (11.5 )%    $ 180        0.8   $ 1,276        9.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FASB ASC 740-10-25, “Accounting for Income Taxes” subsection “Recognition,” clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Parkway Houston’s policy is to recognize interest and penalties related to unrecognized tax benefits as components of income tax expense. As of December 31, 2015, there was no material unrecognized tax benefits and we do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Note 10—Commitments and Contingencies

Parkway Houston and its subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. Parkway Houston does not believe that any such litigation will materially affect its financial position or operations.

Parkway Houston holds a 1% limited partnership interest in 2121 Market Street Associates LLC (“2121 Market Street”), which it acquired in the TPGI Mergers. A mortgage loan secured by a first trust deed on 2121 Market Street is guaranteed by Parkway Houston up to a maximum amount of $14.0 million expiring in December 2022.

Note 11—Related Party Transactions

On May 18, 2011, Parkway closed on the Contribution Agreement pursuant to which Eola Capital contributed its property management company (the “Management Company”) to Parkway. In connection with the Eola Capital contribution of its Management Company to Parkway, a subsidiary of Parkway made a $3.5 million preferred equity investment in an entity 21% owned by Mr. James R. Heistand, and which is included in receivables and other assets on Parkway Houston’s combined balance sheets. This investment provides that Parkway will be paid a preferred equity return equal to 7% per annum of the preferred equity outstanding. In 2015, 2014 and 2013 Parkway received preferred equity distributions on this investment in the aggregate amounts of approximately $245,000, $265,000 and $225,000, respectively. This preferred equity investment was approved by the board of directors of Parkway and is recorded as a cost method investment in receivables and other assets on the combined balance sheets.

 

20


Certain of Parkway’s executive officers own interests in properties that are managed and leased by the Management Company. Parkway Houston recorded $398,000, $3.5 million and $4.0 million in management fees and $869,000, $8.8 million and $10.2 million in reimbursements related to the management and leasing of these assets for the years ended December 31, 2015, 2014 and 2013, respectively. For the years ended December 31, 2015, 2014 and 2013, Parkway Houston recorded management fees and reimbursements, net of elimination, related to the unconsolidated joint ventures of Parkway of $384,000, $4.2 million and zero, respectively.

On December 8, 2014, Parkway Houston sold the retail unit at its Murano residential condominium project to its unaffiliated joint venture partner in the project for a gross sales price of $3.5 million.

For the year ended December 31, 2013, Parkway Properties LP (“Parkway LP”) recognized interest income of approximately $1.3 million related to an $80.0 million bridge loan issued by Parkway LP to TPGI in connection with the TPGI Mergers.

As discussed in Note 1, the accompanying combined financial statements present the operations of Parkway Houston as carved out from the financial statements of Parkway. Transactions between the entities have been eliminated in the combined presentation. The combined financial statements include payroll costs and benefits for on-site personnel employed by Parkway. These costs are reflected in property operating expenses on the combined statements of operations. A summary of these for each of the periods presented is as follows (in thousands):

 

     For the Year Ended
December 31,
 
     2015      2014      2013  

Charged to property operating expense:

        

Direct payroll charges

   $ 2,747       $ 2,823       $ 568   

Management fees

     2,298         3,087         452   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,045       $ 5,910       $ 1,020   
  

 

 

    

 

 

    

 

 

 

Lease commissions and development fees paid to Parkway’s personnel and other leasing costs incurred by Parkway Houston are capitalized and amortized over the respective lease term. For the years ended December 31, 2015, 2014, and 2013, Parkway Houston capitalized $1.6 million, $982,000 and $88,000, respectively, in commissions and other leasing costs to the properties.

The expenses charged to Parkway Houston for these services are not necessarily indicative of the expenses that would have been incurred had Parkway Houston been a separate, independent entity.

Note 12—Subsequent Events

On April 6, 2016, Parkway paid in full the $114.0 million mortgage debt secured by CityWestPlace I & II.

Note 13—Subsequent Events (unaudited)

The Merger was consummated on October 6, 2016, and the Distribution was completed on October 7, 2016.

 

21


SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2015

(In thousands)

 

            Initial Cost to Parkway Houston                

Description

   Encumbrances (1)            Land            Building and
    Improvements    
     Subsequent
Capitalized
Costs
     Total Real
Estate
 

Texas

              

Phoenix Tower

   $ 78,555       $ 9,191       $ 98,183       $ 15,083       $ 122,457   

CityWestPlace

     204,794         56,785         295,869         73,418         426,072   

San Felipe Plaza

     107,877         40,347         206,510         22,822         269,679   

Other

              

Corporate

     —           —           —           386         386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Owned

   $ 391,226       $ 106,323       $ 600,562       $ 111,709       $ 818,594   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Encumbrances represent face amount of mortgage debt and exclude any premiums or discounts.

 

22


SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2015

(In thousands)

 

    Gross Amount at Which
Carried at Close of Period
                               

Description

  Land     Building and
Improvements
    Total (1)     Accumulated
Depreciation
    Net Book
Value of
Real
Estate
    Year
Acquired
    Year
Constructed
    Depreciable
Lives (Yrs.)
 

Texas

               

Phoenix Tower

  $ 9,191      $ 113,266      $ 122,457      $ 13,949      $ 108,508        2012        1984             (2) 

CityWestPlace

    56,785        369,287        426,072        35,075        390,997        2013        1993-2001             (2) 

San Felipe Plaza

    40,347        229,332        269,679        16,842        252,837        2013        1984             (2) 

Other

               

Corporate

    —          386        386        75        311        N/A        N/A        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Total Real Estate Owned

  $ 106,323      $ 712,271      $ 818,594      $ 65,941      $ 752,653         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

(1) The aggregate cost for federal income tax purposes was approximately $682.5 million (unaudited).
(2) Depreciation of buildings is 40 years from acquisition date.

 

23


NOTE TO SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

At December 31, 2015, 2014 and 2013

(In thousands)

A summary of activity for real estate and accumulated depreciation is as follows:

 

     December 31,  
     2015     2014      2013  

Real Estate:

       

Office Properties:

       

Balance at beginning of year

   $ 772,957      $ 763,126       $ 115,759   

Acquisitions and improvements

     45,637        9,831         647,429   

Real estate disposed

     —          —           (62
  

 

 

   

 

 

    

 

 

 

Balance at close of year

   $ 818,594      $ 772,957       $ 763,126   
  

 

 

   

 

 

    

 

 

 

Accumulated Depreciation:

       

Balance at beginning of year

   $ 34,111      $ 5,278       $ —     

Depreciation expense

     32,015        28,751         5,340   

Real estate disposed

     —          —           (62

Other adjustments

     (185     82         —     
  

 

 

   

 

 

    

 

 

 

Balance at close of year

   $ 65,941      $ 34,111       $ 5,278   
  

 

 

   

 

 

    

 

 

 

 

24

(Back To Top)

Section 5: EX-99.2 (UNAUDITED COMBINED FINANCIAL STATEMENTS)

Unaudited combined financial statements

Exhibit 99.2

PARKWAY HOUSTON

COMBINED BALANCE SHEETS

(In thousands)

(unaudited)

 

     September 30,
2016
    December 31,
2015
 

Assets

    

Real estate related investments:

    

Office properties

   $ 831,811      $ 818,594   

Accumulated depreciation

     (86,179     (65,941
  

 

 

   

 

 

 

Total real estate related investments, net

     745,632        752,653   

Cash and cash equivalents

     11,792        11,961   

Receivables and other assets

     79,667        76,300   

Intangible assets, net

     17,872        24,439   

Management contract intangibles, net

     —          378   
  

 

 

   

 

 

 

Total assets

   $ 854,963      $ 865,731   
  

 

 

   

 

 

 

Liabilities

    

Mortgage notes payable, net

   $ 276,744      $ 396,901   

Accounts payable and other liabilities

     30,128        36,299   

Below market leases, net of accumulated amortization of $41,376 and $36,175, respectively

     18,264        23,465   
  

 

 

   

 

 

 

Total liabilities

     325,136        456,665   
  

 

 

   

 

 

 

Equity

    

Legacy Parkway equity

     529,827        409,066   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 854,963      $ 865,731   
  

 

 

   

 

 

 

See notes to combined financial statements.

 

1


PARKWAY HOUSTON

COMBINED STATEMENTS OF OPERATIONS

(In thousands)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Revenues

        

Income from office properties

   $ 26,496      $ 28,851      $ 82,275      $ 80,731   

Management company income

     1,161        2,225        3,753        7,748   

Sale of condominium units

     —          1,209        —          11,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     27,657        32,285        86,028        99,524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Property operating expenses

     12,760        12,807        39,127        35,400   

Management company expenses

     906        2,238        2,912        7,812   

Cost of sales - condominium units

     —          988        —          11,079   

Depreciation and amortization

     9,309        14,006        30,314        40,634   

General and administrative

     1,894        1,634        4,787        4,821   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     24,869        31,673        77,140        99,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2,788        612        8,888        (222

Other income and expenses

        

Interest and other income

     61        62        192        184   

Gain on extinguishment of debt

     —          —          154        —     

Interest expense

     (2,899     (4,018     (9,854     (12,094
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (50     (3,344     (620     (12,132

Income tax expense

     (353     (441     (1,113     (802
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (403     (3,785     (1,733     (12,934

Net loss attributable to noncontrolling interests

     —          —          —          7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Parkway Houston

   $ (403   $ (3,785   $ (1,733   $ (12,927
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to combined financial statements.

 

2


PARKWAY HOUSTON

COMBINED STATEMENT OF CHANGES IN EQUITY

(In thousands)

(unaudited)

 

     Parkway
Equity
 

Balance at December 31, 2015

   $ 409,066   

Net loss

     (1,733

Contributions from Legacy Parkway, net

     122,494   
  

 

 

 

Balance at September 30, 2016

   $ 529,827   
  

 

 

 

See notes to combined financial statements.

 

3


PARKWAY HOUSTON

COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2016     2015  

Operating activities

    

Net loss

   $ (1,733   $ (12,934

Adjustments to reconcile net loss to cash provided by operating activities:

    

Depreciation and amortization of office properties

     30,314        40,634   

Amortization of management contract intangibles, net

     378        567   

Amortization of below market leases, net

     (4,596     (12,564

Amortization of financing costs

     32        32   

Amortization of debt premium, net

     (1,687     (2,980

Deferred income tax expense (benefit)

     566        (176

Gain on extinguishment of debt

     (154     —     

Increase in deferred leasing costs

     (6,229     (7,165

Changes in operating assets and liabilities:

    

Change in condominium units

     —          9,318   

Change in receivables and other assets

     (2,015     (5,412

Change in accounts payable and other liabilities

     (5,971     (3,974
  

 

 

   

 

 

 

Cash provided by operating activities

     8,905        5,346   
  

 

 

   

 

 

 

Investing activities

    

Improvements to real estate

     (13,220     (31,817
  

 

 

   

 

 

 

Cash used in investing activities

     (13,220     (31,817
  

 

 

   

 

 

 

Financing activities

    

Principal payments on mortgage notes payable

     (118,348     (4,615

Change in Legacy Parkway investment, net

     122,494        33,823   

Distributions to noncontrolling interest holders in properties

     —          (901
  

 

 

   

 

 

 

Cash provided by financing activities

     4,146        28,307   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (169     1,836   

Cash and cash equivalents at beginning of period

     11,961        7,992   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 11,792      $ 9,828   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid for interest

   $ 11,878      $ 15,084   

Cash paid for income taxes

     1,044        1,577   

See notes to combined financial statements.

 

4


PARKWAY HOUSTON

NOTES TO COMBINED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Note 1—Organization

On April 28, 2016, the board of directors of Cousins Properties Incorporated, a Georgia corporation (“Cousins”), and the board of directors of Parkway Properties, Inc., a Maryland corporation (“Legacy Parkway”), each approved an Agreement and Plan of Merger, dated as of April 28, 2016 (the “Merger Agreement”). 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”). 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 Legacy Parkway reorganized the combined businesses through a series of transactions (the “Reorganization”) pursuant to which the Houston Business was transferred to Parkway, Inc. (the “Company”). On October 7, 2016, Cousins completed the Spin-Off of the Company, by distributing all of the outstanding shares of common and limited voting stock of the Company to the holders of Cousins common and limited voting preferred stock as of the record date, October 6, 2016 (the “Spin-Off”).    

The Company was incorporated as a Maryland corporation on June 3, 2016 and was capitalized on June 29, 2016, and, as of September 30, 2016, the Company’s sole stockholder was Legacy Parkway.

Following the Merger and Spin-Off, the Company owns and operates five office assets with 8.7 million rentable square feet (unaudited) in the Galleria, Greenway and Westchase submarkets of Houston, Texas. In addition, the Company operates the Third-Party Services Business through a wholly owned subsidiary, Eola Office Partners, LLC and its wholly owned subsidiaries (collectively, “Eola”), which in total managed and/or leased approximately 4.0 million square feet (unaudited) for primarily third-party owners as of September 30, 2016.

The combined financial statements included herein represent the combined accounts and combined operations of the Houston Business previously owned and operated by Legacy Parkway as of September 30, 2016 (“Parkway Houston”).

Note 2—Basis of Presentation and Consolidation

The accompanying combined financial statements include the accounts of Parkway Houston presented on a combined basis as the ownership interests previously were under common control and ownership of Legacy Parkway during the reported periods. All significant intercompany balances and transactions have been eliminated.

These combined financial statements are derived from the books and records of Legacy Parkway and were carved out from 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 costs and Parkway Houston believes such charges are reasonable; however, such results do not necessarily reflect what Parkway Houston’s expenses would have been had Parkway Houston been operating as an independent, stand-alone public company. Costs of the services that were charged to Parkway Houston were based on either actual costs incurred or a proportion of costs estimated to be applicable to Parkway Houston. The historical combined financial information presented may therefore 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 public company during the periods presented or of Parkway Houston’s future performance as an independent, stand-alone company.

Parkway Houston is a predecessor, as defined in applicable rules and regulations for the Securities and Exchange Commission, to the Company, which commenced operations on the date of the Spin-Off.

 

5


These combined financial statements reflect the consolidation of properties that are wholly owned or properties in which, prior to the Merger, the Separation, the Reorganization and the Spin-off, Legacy Parkway owned less than a 100% interest but that Legacy Parkway controlled. Control of a property is demonstrated by, among other factors, Parkway Houston’s ability to refinance debt and sell the property without the consent of any other partner or owner and the inability of any other partner or owner to replace Legacy Parkway. Eola, Phoenix Tower, CityWestPlace and San Felipe Plaza were all wholly owned by Legacy Parkway for all periods presented.

Parkway Houston consolidates its Murano residential condominium project which it controls. Parkway Houston’s unaffiliated partner’s interest is reflected on its combined balance sheets under the “Noncontrolling Interests” caption. Parkway Houston’s partner has a stated ownership interest of 27%. Net proceeds from the project will be distributed, to the extent available, based on an order of preferences described in the partnership agreement. Parkway Houston may receive distributions, if any, in excess of its stated 73% ownership interest if certain return thresholds are met.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although management believes the assumptions and estimates made are reasonable and appropriate, as discussed in the applicable sections throughout these combined financial statements, different assumptions and estimates could materially impact reported results. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions; therefore, changes in market conditions could impact Parkway Houston’s future operating results. The Company’s most significant estimates relate to impairments on real estate and other assets and purchase price assignments. Actual results may differ from these estimates and assumptions.

Recent Accounting Pronouncements

Adopted

In February 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Updates (“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.

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 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

 

6


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. Management is currently assessing the potential impact of adopting the new guidance.

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.

Note 3—Real Estate Related Investments, Net

Included in real estate related investments, net are three office assets located in the Galleria, Greenway and Westchase submarkets of Houston, Texas, comprising six buildings and two adjacent parcels of land totaling approximately 3.1 million square feet (unaudited).

Balances of major classes of depreciable assets and their respective estimated useful lives are (in thousands):

 

Asset Category

  

Useful Life

   September 30,
2016
     December 31,
2015
 

Land

   Non-depreciable    $ 106,323       $ 106,323   

Buildings and garages

   40 years      600,562         600,562   

Building improvements

   7 to 40 years      18,440         14,426   

Tenant improvements

   Lesser of useful life or term of lease      106,486         97,283   
     

 

 

    

 

 

 
      $ 831,811       $ 818,594   
     

 

 

    

 

 

 

Note 4—Mortgage Notes Payable, Net

A summary of mortgage notes payable, net at September 30, 2016 and December 31, 2015 is as follows (dollars in thousands):

 

Office Properties

   Fixed
Rate
    Maturity
Date
     September 30,
2016
     December 31,
2015
 

Phoenix Tower

     3.87     03/01/2023       $ 77,067       $ 78,555   

CityWestPlace I and II

     6.16     07/06/2016         —           114,460   

CityWestPlace III and IV

     5.03     03/05/2020         89,116         90,334   

San Felipe Plaza

     4.78     12/01/2018         106,541         107,877   

Unamortized premium, net

          4,294         5,981   

Unamortized debt issuance costs, net

          (274      (306
       

 

 

    

 

 

 

Total mortgage notes payable, net

        $ 276,744       $ 396,901   
       

 

 

    

 

 

 

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

The fair value of mortgage notes payable was $278.4 million and $394.3 million as of September 30, 2016 and December 31, 2015, respectively. The fair value was determined using Level 2 inputs. Level 2 inputs are observable information for similar items in active or inactive markets and appropriately consider counterparty creditworthiness in the valuations.

 

7


Note 5—Commitments and Contingencies

Parkway Houston and its subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. Parkway Houston does not believe that any such litigation will materially affect its business or financial condition or operations.

Parkway Houston holds a 1% limited partnership interest (acquired on December 19, 2013) in 2121 Market Street Associates LLC (“2121 Market Street”). A mortgage loan secured by a first trust deed on 2121 Market Street is guaranteed by Parkway Houston up to a maximum amount of $14.0 million expiring in December 2022.

Note 6—Related Party Transactions

As discussed in Note 1 and Note 2, the accompanying combined financial statements present the operations of Parkway Houston as carved out from the financial statements of Legacy Parkway. Transactions between the entities have been eliminated in the combined presentation. The combined financial statements include payroll costs and benefits for on-site personnel employed by Legacy Parkway. These costs are reflected in property operating expenses on the combined statements of operations. A summary of these for each of the periods presented is as follows (in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Charged to property operating expense:

           

Direct payroll charges

   $ 804       $ 699       $ 2,411       $ 1,985   

Management fees

     703         572         2,137         1,745   

Other allocated expenses

     359         419         1,130         1,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,866       $ 1,690       $ 5,678       $ 4,969   
  

 

 

    

 

 

    

 

 

    

 

 

 

Lease commissions and development fees paid to Legacy Parkway’s personnel and other leasing costs incurred by Parkway Houston are capitalized and amortized over the respective lease term. For the three months ended September 30, 2016 and 2015, Parkway Houston capitalized $144,000 and $255,000, respectively, in commissions and other leasing costs to the properties. For the nine months ended September 30, 2016 and 2015, Parkway Houston capitalized $403,000 and $668,000, respectively, in commissions and other leasing costs to the properties.

The expenses charged to Parkway Houston for these services are not necessarily indicative of the expenses that would have been incurred had Parkway Houston been an independent, stand-alone public company.

On May 18, 2011, Legacy Parkway entered into a contribution agreement pursuant to which Eola contributed its property management company (the “Management Company”) to Legacy Parkway. In connection with the Eola contribution of the Management Company to Legacy Parkway, a subsidiary of Legacy Parkway made a $3.5 million preferred equity investment in an entity 21% owned by Mr. James R. Heistand, and which is included in receivables and other assets on Parkway Houston’s combined balance sheets. This investment provides that Legacy Parkway will be paid a preferred equity return equal to 7% per annum of the preferred equity outstanding. For the three and nine months ended September 30, 2016 and 2015, Parkway Houston received preferred equity distributions on this investment in the aggregate amounts of $61,250 and $183,750, respectively. This preferred equity investment was approved by the board of directors of Legacy Parkway, and recorded as a cost method investment in receivables and other assets on the balance sheets.

Certain of Legacy Parkway’s executive officers own interests in properties that are managed and leased by the Management Company. During the three months ended September 30, 2016 and 2015, Parkway Houston recorded approximately $80,000 and $69,000 in management fees, respectively, and $191,000 in reimbursements related to the management and leasing of these assets during the three months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016 and 2015, Parkway Houston recorded approximately $236,000 and $299,000 in management fees, respectively, and $579,000 and $727,000, respectively, in reimbursements related to the management and leasing of these assets.

 

8


On September 28, 2016, Eola entered into an agreement and side letter with affiliates of 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 Eola performs property management, accounting and finance services for such TPG Party affiliates at certain assets owned by such TPG Party affiliates (collectively, the “TPG Owner”). The agreement has a one-year term. Pursuant to the agreement and side letter, Eola will receive a monthly management fee equal to approximately 2.5% of the aggregate gross revenues received from the operation of the properties and is reimbursed for certain personnel expenses. Eola has not recorded any management fees or reimbursements related to this agreement for the periods presented.

Note 7—Subsequent Events

The Merger, the Separation and the Reorganization were consummated on October 6, 2016, and the Spin-Off was completed on October 7, 2016.

 

9

(Back To Top)

Section 6: EX-99.3 (AUDITED COMBINED FINANCIAL STATEMENTS)

Audited combined financial statements

Exhibit 99.3

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

Cousins Properties Incorporated

Atlanta, Georgia

We have audited the accompanying combined balance sheets of Cousins Houston (the “Company”) as of December 31, 2015 and 2014, and the related combined statements of operations, equity, and cash flows for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (inception) to December 31, 2013. Our audits also included the accompanying financial statement schedule. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Cousins Houston as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (inception) to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the combined financial statements, the combined financial statements of Cousins Houston include allocations of certain operating expenses from Cousins Properties Incorporated. These costs may not be reflective of the actual costs which would have been incurred had Cousins Houston operated as an independent, stand-alone entity separate from Cousins Properties Incorporated.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

June 30, 2016

 

1


COUSINS HOUSTON

COMBINED BALANCE SHEETS

 

     As of December 31,  
     2015      2014  
     (in thousands)  

Assets

     

Operating Properties, net of accumulated depreciation of $111,949 and $66,228 in 2015 and 2014, respectively

   $ 1,086,451       $ 1,077,290   

Cash and cash equivalents

     109         684   

Deferred rents receivable

     22,798         13,914   

Accounts receivable

     4,549         3,004   

Intangible assets, net of accumulated amortization of $61,567 and $42,641 in 2015 and 2014, respectively

     72,166         91,092   

Other assets

     2,163         2,371   
  

 

 

    

 

 

 

Total Assets

   $ 1,188,236       $ 1,188,355   
  

 

 

    

 

 

 

Liabilities and Equity

     

Liabilities

     

Note payable

   $ 180,937       $ 184,097   

Accounts payable and accrued liabilities

     47,126         44,366   

Intangible liabilities, net of accumulated amortization of $20,107 and $13,119 in 2015 and 2014, respectively

     41,089         48,078   

Other liabilities

     2,212         2,017   
  

 

 

    

 

 

 

Total liabilities

     271,364         278,558   
  

 

 

    

 

 

 

Commitments and contingencies

     —           —     

Equity

     916,872         909,797   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 1,188,236       $ 1,188,355   
  

 

 

    

 

 

 

See notes to combined financial statements

 

2


COUSINS HOUSTON

COMBINED STATEMENTS OF OPERATIONS

 

    

 

Years ended December 31,

     Period from
February 7, 2013
(date of inception) to
December 31, 2013
 
           2015                  2014           
     (in thousands)  

Revenues:

  

Rental property revenues

   $ 177,890       $ 184,536       $ 72,696   

Other

     —           31         11   
  

 

 

    

 

 

    

 

 

 
     177,890         184,567         72,707   
  

 

 

    

 

 

    

 

 

 

Costs and Expenses:

        

Rental property operating expenses

     74,162         79,625         31,759   

General and administrative expenses

     6,328         7,347         3,793   

Depreciation and amortization

     63,791         77,760         29,146   

Interest expense

     7,988         8,127         2,618   

Acquisition and related costs

     —           —           3,858   
  

 

 

    

 

 

    

 

 

 
     152,269         172,859         71,174   
  

 

 

    

 

 

    

 

 

 

Net Income

   $ 25,621       $ 11,708       $ 1,533   
  

 

 

    

 

 

    

 

 

 

See notes to combined financial statements

 

3


COUSINS HOUSTON

COMBINED STATEMENTS OF EQUITY

 

     Amount  
     (in thousands)  

Balance at inception, February 7, 2013

   $ —     

Contributions by Cousins, net

     935,414   

Net income

     1,533   
  

 

 

 

Balance, December 31, 2013

     936,947   

Distributions to Cousins, net

     (38,858

Net income

     11,708   
  

 

 

 

Balance, December 31, 2014

     909,797   

Distributions to Cousins, net

     (18,546

Net income

     25,621   
  

 

 

 

Balance, December 31, 2015

   $ 916,872   
  

 

 

 

See notes to combined financial statements.

 

4


COUSINS HOUSTON

COMBINED STATEMENTS OF CASH FLOWS

 

    

 

Years Ended December 31,

    Period from February 7,
2013 (date of

inception) to
December 31, 2013
 
           2015                 2014          
     (in thousands)  

Net income

   $ 25,621      $ 11,708      $ 1,533   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     63,791        77,760        29,146   

Amortization of loan closing costs

     179        177        59   

Effect of certain non-cash adjustments to rental revenues

     (14,626     (17,895     (6,868

Bad debt expense (recovery)

     (321     464        109   

Changes in operating assets and liabilities

      

Accounts receivable and other assets, net

     (1,224     482        (9,055

Operating liabilities

     2,975        7,524        26,846   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     76,395        80,220        41,770   
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities

      

Purchase of properties

     —          —          (1,148,388

Property improvements and tenant asset expenditures

     (55,085     (37,478     (15,857
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (55,085     (37,478     (1,164,245
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

      

Change in Cousins’ investment, net

     (18,546     (38,858     935,414   

Payment of loan issuance costs

     —          —          (1,249

Proceeds from note payable

     —          —          188,830   

Repayment of note payable

     (3,339     (3,200     (520
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (21,885     (42,058     1,122,475   
  

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash

     (575     684        —     

Cash at Beginning of Period

     684        —          —     
  

 

 

   

 

 

   

 

 

 

Cash at End of Period

   $ 109      $ 684      $ —     
  

 

 

   

 

 

   

 

 

 

Supplemental Cash Flow Information:

      

Cash paid for interest

   $ 7,821      $ 7,960      $ 1,891   

Change in accrued property and tenant asset expenditures

   $ (214   $ (731   $ 1,622   

See notes to combined financial statements.

 

5


COUSINS HOUSTON

NOTES TO COMBINED FINANCIAL STATEMENTS

Note 1—Organization And Basis Of Presentation

Proposed Transaction. Cousins, Parkway, Parkway Properties LP and Clinic Sub Inc., a wholly owned subsidiary of Cousins, entered into an agreement and plan of merger, dated as of April 28, 2016 (as amended from time to time, the “Merger Agreement”). Pursuant to the Merger Agreement, Cousins and Parkway will combine through a stock-for-stock merger (the “Merger”), followed by a spin-off of the combined Houston-based assets of both companies (the “Houston Business”) into a new publicly traded real estate investment trust (“REIT”) called Parkway Inc. (“New Parkway”).

The spin-off of New Parkway will be accomplished by the distribution of all of the shares of common stock and limited voting stock of New Parkway to holders of shares of Cousins common stock and Cousins limited voting preferred stock (including legacy Parkway common stockholders and limited voting stockholders) on the business day following the closing of the Merger (the “Distribution”).

Basis of Presentation. The combined financial statements included herein represent the combined accounts and combined operations of the portion of the Houston Business owned and operated by Cousins (“Cousins Houston”). Cousins Houston includes the combined accounts related to the office properties of Greenway Plaza and Post Oak Central, currently operated through subsidiaries of Cousins, and certain corporate costs. The assets and liabilities in these combined financial statements represent historical carrying amounts of the following properties:

 

     Acquisition Date      Number of Office
Buildings
     Total Square Feet  

Post Oak Central

     February 7, 2013         3         1,280,000   

Greenway Plaza

     September 9, 2013         10         4,348,000   
     

 

 

    

 

 

 
        13         5,628,000   
     

 

 

    

 

 

 

Cousins Houston is a predecessor, as defined in applicable rules and regulations of the Securities and Exchange Commission, to the Houston Business, which will commence operations on the date of the Distribution.

Cousins Houston presents its financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) as outlined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). The Codification is the single source of authoritative accounting principles applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Intercompany transactions and balances have been eliminated.

For the periods presented, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.

Allocated Costs. The historical financial results for Cousins Houston include certain allocated corporate costs which Cousins Houston believes 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.”

Recently Issued Accounting Standards. 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

 

6


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.

Note 2—Significant Accounting Policies

Real Estate Assets

Cost Capitalization. Cousins Houston capitalizes costs related to property and tenant improvements, including allocated costs of Cousins’ personnel working directly on projects. Cousins Houston capitalizes direct leasing costs related to leases that are probable of being executed. These costs include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement, and costs incurred by personnel of Cousins that are based on time spent on successful leases. Cousins Houston allocates these costs to individual tenant leases and amortizes them over the related lease term.

Impairment. For real estate assets that are considered to be held for sale according to accounting guidance, Cousins Houston records impairment losses if the fair value of the asset net of estimated selling costs is less than the carrying amount. For those long-lived assets that are held and used according to accounting guidance, management reviews each asset for the existence of any indicators of impairment. If indicators of impairment are present, Cousins Houston calculates the expected undiscounted future cash flows to be derived from such assets. If the undiscounted cash flows are less than the carrying amount of the asset, Cousins Houston reduces the asset to its fair value.

Acquisition of Operating Properties. Cousins Houston records the acquired tangible and intangible assets and liabilities and assumed liabilities of operating property acquisitions at fair value at the acquisition date. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, and identified tangible and intangible assets and liabilities associated with in-place leases, including leasing costs, value of above-market and below-market tenant leases, value of above-market and below-market ground leases, acquired in-place lease values, and tenant relationships, if any.

The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, 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

 

7


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 amounts recorded for above-market and below-market leases are included in intangible assets and intangible liabilities, respectively, and are amortized on a straight-line basis into rental property operating revenues over the remaining terms of the applicable leases.

The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount recorded for acquired in-place leases is included in intangible assets and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases.

Depreciation and Amortization. Real estate assets are stated at depreciated cost less impairment losses, if any. Buildings are depreciated over their estimated useful lives, which range from 30 to 42 years. The life of a particular building depends upon a number of factors including whether the building was developed or acquired and the condition of the building upon acquisition. Furniture, fixtures and equipment are depreciated over their estimated useful lives of five years. Tenant improvements, leasing costs and leasehold improvements are amortized over the term of the applicable leases or the estimated useful life of the assets, whichever is shorter. Cousins Houston accelerates the depreciation of tenant assets if it estimates that the lease term will end prior to the termination date. This acceleration may occur if a tenant files for bankruptcy, vacates its premises or defaults in another manner on its lease. Deferred expenses are amortized over the period of estimated benefit. Cousins Houston uses the straight-line method for all depreciation and amortization.

Revenue Recognition

Cousins Houston recognizes contractual revenues from leases on a straight-line basis over the noncancelable lease term at the inception of each respective lease in accordance with ASC 840, Leases. In addition, leases typically provide for reimbursement of the tenants’ share of real estate taxes, insurance, and other operating expenses to Cousins Houston. Operating expense reimbursements are recognized as the related expenses are incurred. For the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013, the Company recognized $59.1 million, $59.2 million, and $21.3 million, respectively, in revenues from tenants related to reimbursement of operating expenses.

Cousins Houston makes valuation adjustments to all tenant-related accounts receivable based upon its estimate of the likelihood of collectability. The amount of any valuation adjustment is based on the tenant’s credit and business risk, history of payment, and other factors considered by management.

Income Taxes

Cousins Houston’s properties are currently owned by Cousins, a Georgia corporation which has elected to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, Cousins is not subject to federal income tax provided it distributes annually its adjusted taxable income, as defined in the Code, to stockholders and meets certain other organizational and operating requirements. Accordingly, the combined financial statements of Cousins Houston do not include a provision for federal income tax.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly-liquid money market instruments with maturities of three months or less.

Segment Disclosure

Cousins Houston is in the business of the ownership, development and management of office real estate. Cousins Houston has aggregated its office operations into one reportable segment. This segment is the

 

8


aggregation of the aforementioned Cousins Houston office properties as reported to the Chief Operating Decision Maker and is aggregated due to the properties having similar economic and geographic characteristics.

Fair Value Measurements

Level 1 fair value inputs are quoted prices for identical items in active, liquid and visible markets such as stock exchanges. Level 2 fair value inputs are observable information for similar items in active or inactive markets and appropriately consider counterparty creditworthiness in the valuations. Level 3 fair value inputs reflect Cousins Houston’s best estimate of inputs and assumptions market participants would use in pricing an asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation estimate. We have no investments for which fair value is measured on a recurring basis using Level 3 inputs.

Note 4 includes fair values of assets acquired and liabilities assumed in business combinations using Level 2 and Level 3 inputs. Note 6 includes fair values of debt measured using Level 2 inputs.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 3—Related Party Transactions

The combined financial statements include direct payroll costs and benefits for on-site personnel employed by Cousins. These costs are reflected in rental property operating expenses on the Combined Statements of Operations. As described in Note 2, also included are costs for certain functions and services performed by Cousins including, but not limited to, corporate-level salaries and other related costs, stock compensation, and other general and administrative costs. These costs were allocated to Cousins Houston based on proportionate leasable square footage which management believes is an appropriate estimate of usage. These costs are reflected as general and administrative expenses on the Combined Statements of Operations. The expenses allocated to Cousins Houston for these services are not necessarily indicative of the expenses that would have been incurred had Cousins Houston been a separate, independent entity that had otherwise managed these functions. A summary of these costs for each of the periods presented is as follows (in thousands):

 

     For the year ended
December 31,
     For the period
from February 7,
2013 (date of
inception) to
 
     2015      2014      December 31, 2013  

Charged to rental property operating expenses:

        

Direct payroll charges

   $ 6,826       $ 6,678       $ 2,471   

Other allocated expenses

     2,043         2,178         1,257   

Charged to general and administrative expenses:

        

Office rental expense

     337         329         149   

Payroll and other expenses

     5,991         7,018         3,644   

Leasing commissions paid to Cousins’ personnel and other leasing costs incurred by Cousins are capitalized and amortized over the respective lease term. For the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013, the Company capitalized $3.8 million, $2.5 million and $237,000, respectively, in commissions and other leasing costs to the properties.

 

9


Note 4—Real Estate Transactions

In 2013, Cousins Houston purchased Post Oak Central, a 1.3 million square foot, Class-A office complex in the Galleria district of Houston, Texas for $230.9 million. Also in 2013, Cousins Houston acquired Greenway Plaza, a 10-building, 4.3 million square foot office complex in Houston, Texas, for $928.6 million. Cousins Houston incurred $231,000 and $3.7 million in acquisition and related costs for Post Oak Central and Greenway Plaza, respectively.

The following tables summarize allocations of the estimated fair values of the assets and liabilities of the operating properties at the acquisition dates discussed above (in thousands and excludes certain operating assets and liabilities assumed) (in thousands):

 

     Post Oak
Central
     Greenway
Plaza
     Total  

Tangible assets:

        

Land and improvements

   $ 88,406       $ 273,651       $ 362,057   

Building

     118,470         499,262         617,732   

Tenant improvements

     10,877         96,284         107,161   
  

 

 

    

 

 

    

 

 

 

Total tangible assets

     217,753         869,197         1,086,950   
  

 

 

    

 

 

    

 

 

 

Intangible assets:

        

Above-market leases

     995         3,466         4,461   

In-place leases

     26,968         101,047         128,015   

Below-market ground leases

     —           1,257         1,257   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

     27,963         105,770         133,733   
  

 

 

    

 

 

    

 

 

 

Intangible liabilities:

        

Below-market leases

     (14,792      (43,896      (58,688

Above-market ground lease

     —           (2,508      (2,508
  

 

 

    

 

 

    

 

 

 
     (14,792      (46,404      (61,196
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 230,924       $ 928,563       $ 1,159,487   
  

 

 

    

 

 

    

 

 

 

The following unaudited supplemental pro forma information is presented for the period from February 7, 2013 to December 31, 2013 and reflects Cousins Houston’s historical combined statements of operations, adjusted as if the Greenway Plaza acquisition occurred on February 7, 2013. The supplemental pro forma information is not necessarily indicative of the actual results that would have been achieved had the transaction been consummated on such date (in thousands).

 

     Amount  

Revenues

   $ 144,575   

Net income

     5,962   

 

10


Note 5—Intangible Assets

Intangible assets on Cousins Houston’s balance sheet at December 31, 2015 and 2014 included the following (in thousands):

 

     As of December 31,  
     2015      2014  
     (in thousands)  

In-place leases, net of accumulated amortization of $58,715 and $40,699 in 2015 and 2014, respectively

   $ 69,300       $ 87,316   

Above-market leases, net of accumulated amortization of $2,852 and $1,942 in 2015 and 2014, respectively

     2,866         3,776   
  

 

 

    

 

 

 
   $ 72,166       $ 91,092   
  

 

 

    

 

 

 

Aggregate net amortization expense related to intangible assets and liabilities was $11.9 million, $21.6 million and $8.2 million for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013, respectively. Over the next five years and thereafter, aggregate amortization of these intangible assets and liabilities is anticipated to be as follows (in thousands):

 

     Below
Market
Rents
     Above
Market
Rents
     In-Place
Leases
     Total  
     (in thousands)  

2016

   $ (6,093    $ 691       $ 13,423       $ 8,021   

2017

     (5,830      427         11,730         6,327   

2018

     (5,472      378         10,146         5,052   

2019

     (5,201      305         8,646         3,750   

2020

     (3,459      238         5,850         2,629   

Thereafter

     (15,034      827         19,505         5,298   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (41,089    $ 2,866       $ 69,300       $ 31,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average remaining lease term

     9.3 years         8.2 years         7.3 years      

Note 6—Note Payable

In September 2013, Cousins Houston entered into a $188.8 million non-recourse mortgage notes payable secured by Post Oak Central. The note bears interest at 4.26%, and the maturity date is October 1, 2020. In connection with this note payable, Cousins Houston incurred $1.2 million in loan costs. These costs, net of accumulated amortization of $416,000 and $237,000 in 2015 and 2014, respectively, are reflected as a reduction of the loan balance on the accompanying balance sheets. Future principal payments due on the note at December 31, 2015 are as follows (in thousands):

 

     Amount  

2016

   $ 3,485   

2017

     3,636   

2018

     3,794   

2019

     3,959   

2020

     166,896   
  

 

 

 
   $ 181,770   
  

 

 

 

Fair value of debt is calculated by discounting the debt’s remaining contractual cash flows at estimated rates at which similar loans could have been obtained. The estimate of the current market rate is intended to replicate

 

11


debt of similar maturity and loan-to-value relationships. These fair value calculations are considered to be Level 2 under the guidelines set forth in ASC 820, as Cousins Houston utilizes market rates for similar type loans from third party brokers. At December 31, 2015 and 2014, the fair value of this financial instrument and the related discount rate assumptions are summarized as follows (in thousands):

 

     As of December 31,  
     2015     2014  
     (in thousands)  

Carrying value

   $ 180,937      $ 184,097   

Fair value

   $ 186,449      $ 196,909   

Discount rate assumed in calculating fair value

     3.65     3.00

Note 7—Commitments and Contingencies

Commitments

Cousins Houston had a total of $60.7 million in future obligations under leases to fund tenant improvements at December 31, 2015. Amounts due under these lease commitments are as follows (in thousands):

 

     Amount  

2016

   $ 29,132   

2017

     8,047   

2018

     8,047   

2019

     7,721   

2020

     7,721   
  

 

 

 
   $ 60,668   
  

 

 

 

Litigation

Cousins Houston is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. Cousins Houston records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, Cousins Houston accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, Cousins Houston accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, Cousins Houston discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, Cousins Houston discloses the nature and estimate of the possible loss of the litigation. Cousins Houston does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of Cousins Houston.

 

12


Note 8—Future Minimum Rents

Cousins Houston’s leases typically contain escalation provisions and provisions requiring tenants to pay a pro rata share of operating expenses. The leases typically include renewal options and are classified and accounted for as operating leases.

At December 31, 2015, future minimum rents to be received under existing non-cancellable leases are as follows:

 

     Amount  

2016

   $ 94,855   

2017

     93,191   

2018

     93,662   

2019

     87,524   

2020

     65,732   

Thereafter

     295,794   
  

 

 

 
   $ 730,758   
  

 

 

 

 

13


SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

COUSINS HOUSTON

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2015

 

          Initial Cost to Company     Costs Capitalized Subsequent
to Acquisition
    Gross Amount at Which Carried at Close of
Period
                         

Description/
Metropolitan Area

  Encumbrances     Land and
Improvements
    Buildings and
Improvements
    Land and
Improvements
less Cost of
Sales,
Transfers and
Other
    Building and
Improvements
less Cost of
Sales,
Transfers and
Other
    Land and
Improvements
less Cost of
Sales,
Transfers and
Other
    Building and
Improvements
less Cost of
Sales,
Transfers and
Other
    Total(a)     Accumulated
Depreciation(a)(b)
    Date of
Construction/
Renovation
    Date
Acquired
    Life on
Which
Depreciation
in the 2015
Statement of
Operations
is
Computed(c)
 
    (in thousands)  

Greenway Plaza Houston, TX

  $ —        $ 273,651      $ 595,547      $ —        $ 76,544      $ 273,651      $ 672,091      $ 945,742      $ 85,616        —          2013        30 years   

Post Oak Central Houston, TX

    181,770        87,264        129,347        —          36,047        87,264        165,394        252,658        26,333        —          2013        42 years   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Total Operating Properties

  $ 181,770      $ 360,915      $ 724,894      $ —        $ 112,591      $ 360,915      $ 837,485      $ 1,198,400      $ 111,949         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

NOTES:

 

(a) Reconciliations of total real estate carrying value and accumulated depreciation 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:

 

     Real Estate      Accumulated Depreciation  
     2015      2014      2013      2015      2014      2013  
     (in thousands)  

Balance at beginning of period

   $ 1,143,518       $ 1,104,463       $ —         $ 66,228       $ 17,281       $ —     

Additions during the period:

                 

Acquisitions

     —           —           1,086,950         —           —           —     

Improvements and other capitalized costs

     54,882         39,055         17,513         —           —           —     

Depreciation expense

     —           —           —           45,710         48,926         17,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,198,400         1,143,518         1,104,463         111,938         66,207         17,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deductions and other during the period

     —           —           —           11         21         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 1,198,400       $ 1,143,518       $ 1,104,463       $ 111,949       $ 66,228       $ 17,281   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(b) The aggregate cost for federal income tax purposes was approximately $1.2 billion (unaudited) at December 31, 2015.
(c) Buildings and improvements are depreciated over 30 to 42 years. Leasehold improvements and other capitalized leasing costs are depreciated over the life of the asset or the term of the lease, whichever is shorter.

 

14

(Back To Top)

Section 7: EX-99.4 (UNAUDITED COMBINED FINANCIAL STATEMENTS)

Unaudited combined financial statements

Exhibit 99.4

COUSINS HOUSTON

COMBINED BALANCE SHEETS

(In thousands)

(unaudited)

 

     September 30,
2016
     December 31,
2015
 

ASSETS

     

Operating Properties, net of accumulated depreciation of $147,770 and $111,949 in 2016 and 2015 respectively

   $ 1,080,899       $ 1,086,451   

Cash and cash equivalents

     59         109   

Deferred rents receivable

     28,002         22,798   

Accounts receivable, net of allowance for doubtful accounts of $304 and $254 in 2016 and 2015, respectively

     3,645         4,549   

Intangible assets, net of accumulated amortization of $72,683 and $61,567 in 2016 and 2015, respectively

     61,050         72,166   

Other assets

     2,469         2,163   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,176,124       $ 1,188,236   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

LIABILITIES

     

Note payable

   $ 178,471       $ 180,937   

Accounts payable and other liabilities

     35,827         47,126   

Intangible liabilities, net of accumulated amortization of $24,706 and $20,107 in 2016 and 2015, respectively

     36,490         41,089   

Other liabilities

     2,500         2,212   
  

 

 

    

 

 

 

Total liabilities

     253,288         271,364   
  

 

 

    

 

 

 

Commitments and contingencies

     

EQUITY

     922,836         916,872   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 1,176,124       $ 1,188,236   
  

 

 

    

 

 

 

See notes to combined financial statements.

 

1


COUSINS HOUSTON

COMBINED STATEMENTS OF OPERATIONS

(unaudited, in thousands)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Revenues:

           

Rental property revenues

   $ 46,192       $ 45,254       $ 133,888       $ 133,848   

Other

     —           176         288         263   
  

 

 

    

 

 

    

 

 

    

 

 

 
     46,192         45,430         134,176         134,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Costs and Expenses:

           

Rental property operating expenses

     19,758         19,194         56,958         57,236   

General and administrative expenses

     1,688         1,119         6,665         4,545   

Depreciation and amortization

     15,221         15,348         46,389         48,442   

Interest expense

     1,956         1,993         5,896         6,004   

Transaction costs

     494         —           494         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     39,117         37,654         116,402         116,227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 7,075       $ 7,776       $ 17,774       $ 17,884   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to combined financial statements.

 

2


COUSINS HOUSTON

COMBINED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2016 and 2015

(unaudited, in thousands)

 

Balance at December 31, 2014

   $ 909,797   

Distributions to Cousins, net

     (1,904

Net income

     17,884   
  

 

 

 

Balance at September 30, 2015

   $ 925,777   
  

 

 

 

Balance at December 31, 2015

   $ 916,872   

Distributions to Cousins, net

     (11,810

Net income

     17,774   
  

 

 

 

Balance at September 30, 2016

   $ 922,836   
  

 

 

 

See notes to combined financial statements.

 

3


COUSINS HOUSTON

COMBINED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Nine Months Ended
September 30,
 
     2016     2015  

Net income

   $ 17,774      $ 17,884   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     46,389        48,442   

Amortization of loan closing costs

     133        134   

Effect of certain non-cash adjustments to rental revenues

     (9,204     (11,587

Bad debt expense

     111        314   

Changes in operating assets and liabilities:

    

Accounts receivable and assets, net

     436        (2,468

Operating liabilities

     (12,038     (6,160
  

 

 

   

 

 

 

Net cash provided by operating activities

     43,601        46,559   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Property improvements and tenant asset expenditures

     (29,242     (42,506
  

 

 

   

 

 

 

Net cash used in investing activities

     (29,242     (42,506
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Change in Cousins’ investment, net

     (11,810     (1,904

Repayment of note payable

     (2,599     (2,491
  

 

 

   

 

 

 

Net cash used in financing activities

     (14,409     (4,395
  

 

 

   

 

 

 

NET DECREASE IN CASH

     (50     (342

CASH AT BEGINNING OF PERIOD

     109        684   
  

 

 

   

 

 

 

CASH AT END OF PERIOD

   $ 59      $ 342   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 5,771      $ 5,879   

Tenant related deferred income

     511        362   

Change in accrued property and tenant asset expenditures

     (1,538     1,334   

See notes to combined financial statements.

 

4


COUSINS HOUSTON

NOTES TO COMBINED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Note 1—Organization And Basis Of Presentation

Merger and Spin-Off

On October 6, 2016, Cousins Properties Incorporated (“Cousins”) and Parkway Properties, Inc. (“Legacy Parkway”) completed a stock-for-stock merger (the “Merger”), followed on October 7, 2016 by a spin-off (the “Spin-Off”) of the combined Houston-based assets of both companies (the “Houston Business”) into a new publicly traded real estate investment trust, Parkway, Inc. (the “Company”).

Basis of Presentation

The combined financial statements included herein represent the combined accounts and combined operations of the portion of the Houston Business owned and operated by Cousins (“Cousins Houston”). Cousins Houston includes the combined accounts related to the office properties of Greenway Plaza and Post Oak Central, operated prior to the Merger and the Spin-Off through subsidiaries of Cousins as of and for the three months ended September 30, 2016, and certain corporate costs. The assets and liabilities in these combined financial statements represent historical carrying amounts of the following properties:

 

    

Acquisition Date

   Number of Office
Buildings
     Total Square Feet  

Post Oak Central

   February 7, 2013      3         1,280,000   

Greenway Plaza

   September 9, 2013      10         4,348,000   
     

 

 

    

 

 

 
        13         5,628,000   
     

 

 

    

 

 

 

Cousins Houston is a predecessor, as defined in applicable rules and regulations of the Securities and Exchange Commission (the “SEC”), to the Company which commenced operations upon completion of the Spin-Off.

The combined financial statements are unaudited and were prepared by Cousins Houston in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of Cousins Houston’s financial position as of September 30, 2016 and the results of operations for the three and nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These combined financial statements should be read in conjunction with the consolidated financial statements and the notes thereto as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 and for the period from February 7, 2013 (date of inception) to December 31, 2013 included in the Company’s Information Statement dated September 27, 2016. The accounting policies employed are substantially the same as those shown in Note 2 to those financial statements.

For the periods presented, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.

 

5


Allocated Costs

The historical financial results for Cousins Houston include certain allocated corporate costs which Cousins Houston believes 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 an independent, stand-alone public company. Additionally, the historical results for Cousins Houston include transaction costs that were incurred by Cousins related to the Spin-Off. These costs are discussed further in Note 3—Related Party Transactions.

Recently Issued Accounting Standards

In 2015, the Financial Accounting Standards Board (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. Management 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. Management is currently assessing the potential impact of adopting the new guidance.

Note 2—Significant Accounting Policies

Real Estate Assets

Cost Capitalization

Cousins Houston capitalizes costs related to property and tenant improvements, including allocated costs of Cousins’ personnel working directly on projects. Cousins Houston capitalizes direct leasing costs related to leases that are probable of being executed. These costs include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement, and costs incurred by personnel of Cousins that are based on time spent on successful leases. Cousins Houston allocates these costs to individual tenant leases and amortizes them over the related lease term.

Impairment

For real estate assets that are considered to be held for sale according to accounting guidance, Cousins Houston records impairment losses if the fair value of the asset net of estimated selling costs is less than the carrying amount. For those long-lived assets that are held and used according to accounting guidance, management reviews each asset for the existence of any indicators of impairment. If indicators of impairment are present, Cousins Houston calculates the expected undiscounted future cash flows to be derived from such assets. If the undiscounted cash flows are less than the carrying amount of the asset, Cousins Houston reduces the asset to its fair value.

 

6


Acquisition of Operating Properties

Cousins Houston records the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions at fair value at the acquisition date. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, and identified tangible and intangible assets and liabilities associated with in-place leases, including leasing costs, value of above-market and below-market tenant leases, value of above-market and below-market ground leases, acquired in-place lease values, and tenant relationships, if any.

The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, 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. The amounts recorded for above-market and below-market leases are included in intangible assets and intangible liabilities, respectively, and are amortized on a straight-line basis into rental property operating revenues over the remaining terms of the applicable leases.

The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount recorded for acquired in-place leases is included in intangible assets and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases.

Depreciation and Amortization

Real estate assets are stated at depreciated cost less impairment losses, if any. Buildings are depreciated over their estimated useful lives, which range from 30 to 42 years. The life of a particular building depends upon a number of factors including whether the building was developed or acquired and the condition of the building upon acquisition. Furniture, fixtures and equipment are depreciated over their estimated useful lives of five years. Tenant improvements, leasing costs and leasehold improvements are amortized over the term of the applicable leases or the estimated useful life of the assets, whichever is shorter. Cousins Houston accelerates the depreciation of tenant assets if it estimates that the lease term will end prior to the termination date. This acceleration may occur if a tenant files for bankruptcy, vacates its premises or defaults in another manner on its lease. Deferred expenses are amortized over the period of estimated benefit. Cousins Houston uses the straight-line method for all depreciation and amortization.

Revenue Recognition

Cousins Houston recognizes contractual revenues from leases on a straight-line basis over the term of the respective lease. In addition, leases typically provide for reimbursement of the tenants’ share of real estate taxes, insurance, and other operating expenses to Cousins Houston. Operating expense reimbursements are recognized as the related expenses are incurred. For the three months ended September 30, 2016 and 2015, Cousins Houston recognized $16.8 million and $15.8 million, respectively, in revenues from tenants for reimbursements of operating expenses, and recognized $46.6 million and $45.0 million in the nine months ended September 30, 2016 and 2015, respectively.

Cousins Houston makes valuation adjustments to all tenant-related accounts receivable based upon its estimate of the likelihood of collectability. The amount of any valuation adjustment is based on the tenant’s credit and business risk, history of payment, and other factors considered by management.

 

7


Income Taxes

Through October 6, 2016, Cousins Houston’s properties were owned by Cousins, a Georgia corporation which has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, Cousins is not subject to federal income tax provided it distributes annually its adjusted taxable income, as defined in the Code, to stockholders and meets certain other organizational and operating requirements. Accordingly, the combined financial statements of Cousins Houston do not include a provision for federal income tax.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly-liquid money market instruments with maturities of three months or less.

Segment Disclosure

Cousins Houston is in the business of the ownership, development and management of office real estate. Cousins Houston has aggregated its office operations into one reportable segment. This segment is the aggregation of the aforementioned Cousins Houston office properties as reported to the Chief Operating Decision Maker and is aggregated due to the properties having similar economic and geographic characteristics.

Fair Value Measurements

Level 1 fair value inputs are quoted prices for identical items in active, liquid and visible markets such as stock exchanges. Level 2 fair value inputs are observable information for similar items in active or inactive markets and appropriately consider counterparty creditworthiness in the valuations. Level 3 fair value inputs reflect Cousins Houston’s best estimate of inputs and assumptions market participants would use in pricing an asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation estimate. Cousins Houston has no investments for which fair value is measured on a recurring basis using Level 3 inputs. Note 5 includes fair values of debt measured using Level 2 inputs.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 3—Related Party Transactions

The combined financial statements include direct payroll costs and benefits for on-site personnel employed by Cousins. These costs are reflected in rental property operating expenses on the Combined Statements of Operations. As described in Note 2, also included are costs for certain functions and services performed by Cousins including, but not limited to, corporate level salaries and other related costs, stock compensation, and other general and administrative costs. These costs were allocated to Cousins Houston based on proportionate leasable square footage which management believes is an appropriate estimate of usage. These costs are reflected as general and administrative expenses on the Combined Statements of Operations. As described in Note 1, also included are transaction costs that were incurred by Cousins related to the Spin-Off. The amounts included are based on the estimated direct costs incurred by Cousins. The expenses allocated to Cousins Houston for these services are not necessarily indicative of the expenses

 

8


that would have been incurred had Cousins Houston been an independent, stand-alone public company that had otherwise managed these functions. A summary of these costs for each of the periods presented is as follows (in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Charged to property operating expense:

           

Direct payroll charges

   $ 1,720       $ 1,665       $ 5,198       $ 5,002   

Management fees

     492         517         1,487         1,524   

Charged to general and administrative expense:

           

Office rental expense

     85         96         265         248   

Payroll and other expenses

     1,603         1,023         6,400         4,297   

Transaction costs

     494         —           494         —     

Leasing commissions paid to Cousins’ personnel and other leasing costs incurred by Cousins are capitalized and amortized over the respective lease term. Cousins Houston capitalized $757,000 and $552,000, respectively, in commissions and other leasing costs to the properties in the three months ended September 30, 2016 and 2015, respectively, and $1.3 million and $3.2 million in the nine months ended September 30, 2016 and 2015, respectively.

Note 4—Intangible Assets

Intangible assets on the balance sheets at September 30, 2016 and December 31, 2015 included the following (in thousands):

 

     September 30,
2016
     December 31,
2015
 

In-place leases, net of accumulated amortization  of $69,232 and $58,715 in 2016 and 2015, respectively

   $ 58,782       $ 69,300   

Above-market leases, net of accumulated amortization of $3,451 and $2,852 in 2016 and 2015, respectively

     2,268         2,866   
  

 

 

    

 

 

 
   $ 61,050       $ 72,166   
  

 

 

    

 

 

 

Aggregate net amortization expense related to intangible assets and liabilities was $1.9 million and $2.5 million for the three months ended September 30, 2016 and 2015, respectively, and $6.5 million and $9.5 million for the nine months ended September 30, 2016 and 2015, respectively.

Note 5—Note Payable

In September 2013, Cousins Houston entered into a $188.8 million non-recourse mortgage note payable secured by Post Oak Central. The note bears interest at 4.26%, and the maturity date is October 1, 2020. In connection with this note payable, Cousins Houston incurred $1.2 million in loan costs. These costs, net of accumulated amortization of $550,000 and $416,000 at September 30, 2016 and December 31, 2015, respectively, are reflected as a reduction of the loan balance on the accompanying balance sheets.

Fair value of debt is calculated by discounting the debt’s remaining contractual cash flows at estimated rates at which similar loans could have been obtained. The estimate of the current market rate is intended to replicate debt of similar maturity and loan-to-value relationship. These fair value calculations are considered to be Level 2 under the guidelines set forth in ASC 820, as Cousins Houston utilizes market rates for similar type loans from third party brokers. At September 30, 2016 and 2015, the fair value of this financial instrument and the related discount rate assumptions are summarized as follows (dollars in thousands):

 

     September 30,
2016
    December 31,
2015
 

Carrying value

   $ 178,471      $ 180,937   

Fair value

     185,800        186,449   

Discount rate assumed in calculating fair value

     3.25     3.65

 

9


Note 6—Commitments And Contingencies

Commitments

Cousins Houston had a total of $63.5 million in future obligations under leases to fund tenant improvements at September 30, 2016.

Litigation

Cousins Houston is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. Cousins Houston records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, Cousins Houston accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, Cousins Houston accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, Cousins Houston discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, Cousins Houston discloses the nature and estimate of the possible loss of the litigation. Cousins Houston does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of Cousins Houston.

 

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Section 8: EX-99.5 (UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS)

Unaudited pro forma combined financial statements

Exhibit 99.5

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

As of and for the Nine Months Ended September 30, 2016 and for the Year Ended December 31, 2015

On April 28, 2016, Cousins Properties Incorporated (“Cousins”), Parkway Properties, Inc. (“Legacy Parkway”), Parkway Properties LP (“Parkway LP”) and Clinic Sub Inc., a wholly owned subsidiary of Cousins, entered into the Merger Agreement, pursuant to which Legacy Parkway merged with and into Clinic Sub Inc., with Clinic Sub Inc. continuing as the surviving corporation of the Merger and a wholly owned subsidiary of Cousins (the “Merger”). Upon consummation of the Merger, Parkway, Inc. (the “Company” or “Parkway”) was initially a wholly owned subsidiary of Cousins. Immediately after the effective time of the Merger, Parkway’s businesses were separated from the remainder of Cousins’ businesses (the “Separation”) through a series of transactions (the “UPREIT Reorganization”). On the business day following the closing of the Merger, all of the outstanding shares of the Company’s common stock and 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 “Spin-Off”). The following unaudited pro forma combined financial statements reflect the distribution ratio of one share of the Company’s common stock for every eight shares of Cousins common stock and one share of the Company’s 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 nine months ended September 30, 2016 and for the year ended December 31, 2015 have been derived from the historical combined financial statements of the Houston-based business of Cousins (“Cousins Houston”) and the Houston-based business of Legacy Parkway (“Parkway Houston”) filed as Exhibits 99.1, 99.2, 99.3, and 99.4 to the Form 8-K/A of which this is filed as an exhibit and the unaudited consolidated financial statements of the Company filed in its Quarterly Report on Form 10-Q on November 14, 2016.

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;

 

    the Company’s post-Separation capital structure which includes proceeds from the $350.0 million Term Loan, $150.0 million of which Parkway Operating Partnership LP, the Company’s operating partnership (the “Operating Partnership”) will retain; and

 

    the contribution by Cousins Properties LP (“Cousins LP”) of $5 million to the Company in exchange for shares of the Company’s 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 September 30, 2016. The unaudited pro forma combined statements of operations presented for the nine months ended September 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 Parkway believes 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 the Company’s business. The Company’s unaudited pro forma combined financial statements and explanatory notes present how the Company’s financial statements may have appeared had the Company 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 the Company’s 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, the Company’s future financial statements will initially reflect carryover basis for Cousins Houston and fair value basis for Parkway Houston.

 

1


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 the 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 the Company 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 September 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.

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 the Form 8-K/A of which this is filed as an exhibit.

 

2


PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2016

(in thousands, except share data)

(Unaudited)

 

     Parkway,
Inc
    Cousins
Houston
Historical (1)
     Parkway
Houston
Historical
     Adjustments          Total  

Assets

               

Real estate related investments:

               

Office properties, net

   $ —        $ 1,080,899       $ 745,632       $ (175,791   A    $ 1,650,740   

Cash and cash equivalents

     5        59         11,792         185,485      B      197,341   

Receivables and other assets

     375        34,116         79,667         (51,425   C      62,733   

Intangible assets, net

     —          61,050         17,872         53,387      A      132,309   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total assets

   $ 380      $ 1,176,124       $ 854,963       $ 11,656         $ 2,043,123   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Liabilities

               

Mortgage notes payable, net

   $ —        $ 178,471       $ 276,744       $ 1,454      D    $ 456,669   

Notes payable to banks, net

     —          —           —           346,675      B      346,675   

Accounts payable and other liabilities

     1,370        38,327         30,128         —             69,825   

Below market leases, net

     —          36,490         18,264         (14,453   A      40,301   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities

     1,370        253,288         325,136         333,676           913,470   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Equity

               

Stockholders’ equity:

               

Common stock $0.001 par value, 49,110,645 shares pro forma

     —          —           —           49      E      49   

Limited voting stock $0.001 par value, 858,417 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

     —          922,836         —           (922,836   G      —     

Parkway Houston

     —          —           529,827         (529,827   G      —     

Additional paid-in capital

     4,382        —           —           1,104,549      G      1,108,931   

Accumulated deficit

     (5,372     —           —           —             (5,372
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total stockholders’ equity

     (990     922,836         529,827         (343,064        1,108,609   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Noncontrolling interests

     —          —           —           21,044      H      21,044   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total equity

     (990     922,836         529,827         (322,020        1,129,653   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities and equity

   $ 380      $ 1,176,124       $ 854,963       $ 11,656         $ 2,043,123   
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

 

 

(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

 

3


PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands, except per share data)

(Unaudited)

 

     Parkway
Inc.
    Cousins
Houston
Historical (1)
    Parkway
Houston
Historical
    Adjustments          Total  

Revenues

             

Income from office properties

   $ —        $ 133,888      $ 82,275      $ 242      a    $ 216,405   

Management company income

     —          —          3,753        —             3,753   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     —          133,888        86,028        242           220,158   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Expenses

             

Property operating expenses

     —          56,958        39,127        —             96,085   

Management company expenses

     —          —          2,912        —             2,912   

Depreciation and amortization

     —          46,389        30,314        (8,163   b      68,540   

General and administrative

     5,372        6,665        4,787        —        c      16,824   

Transaction costs

     —          494        —          (494   d      —     
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     5,372        110,506        77,140        (8,657        184,361   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Operating income (loss)

     (5,372     23,382        8,888        8,899           35,797   

Other income and expenses

             

Interest and other income

     —          288        192        (192   e      288   

Gain on extinguishment of debt

     —          —          154        (154   f      —     

Interest expense

     —          (5,896     (9,854     (8,942   g      (24,692
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     (5,372     17,774        (620     (389        11,393   

Income tax expense

     —          —          (1,113     —             (1,113
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     (5,372     17,774        (1,733     (389        10,280   

Net income attributable to noncontrolling interests

     —          —          —          (203   h      (203
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     (5,372     17,774        (1,733     (592        10,077   

Dividends on preferred stock

     —          —          —          (300   i      (300
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ (5,372   $ 17,774      $ (1,733   $ (892      $ 9,777   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

           j      49,111   
             

 

 

 

Weighted average shares outstanding—diluted

           j      50,137   
             

 

 

 

Basic and diluted earnings per share

              $ 0.20   
             

 

 

 

 

(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

 

4


PARKWAY, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2015

(In thousands, except per share data)

(Unaudited)

 

     Parkway,
Inc.
     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        (26,287   b      93,074   

General and administrative

     —           6,328        6,336        —        c      12,664   
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Total expenses

     —           144,281        127,773        (26,287        245,767   
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Operating income

        33,609        1,688        16,751           52,048   

Other income and expenses

              

Interest and other income

     —           —          246        (246   e      0   

Interest expense

     —           (7,988     (16,088     (7,785   g      (31,861
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     —           25,621        (14,154     8,720           20,187   

Income tax expense

     —           —          (1,635     —             (1,635
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

     —           25,621        (15,789     8,720           18,552   

Net (income) loss attributable to noncontrolling interests

     —           —          7        (351   h      (344
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to controlling interests

     —           25,621        (15,782     8,369           18,208   

Dividends on preferred stock

     —           —          —          (400   i      (400
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss) attributable to common stockholders

   $ —         $ 25,621      $ (15,782   $ 7,969         $ 17,808   
  

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding—basic

            j      49,111   
              

 

 

 

Weighted average shares outstanding—diluted

            j      50,137   
              

 

 

 

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

 

5


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 September 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 September 30, 2016  
     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
     Adjustments as
a Result of
Merger
 

Office properties, net

   $ 745,632       $ 569,841       $ (175,791

Intangible assets, net

     17,872         71,259         53,387   

Below market leases, net

     (18,264      (3,811      14,453   

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. The fair value of management contracts, included in intangibles, net represents the present value of the after-tax cash flows from property management fees.

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 (the “Term Loan”) and a senior unsecured revolving credit facility in an aggregate principal amount of $100 million (the “Revolving Credit Facility,” and together with the Term Loan, the “Credit Facilities”) 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

 

6


the Revolving Credit Facility will be used for general corporate purposes of the Company. Additionally, in the UPREIT Reorganization, Cousins LP contributed $5 million to the Company 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 the Company’s articles of amendment and restatement.

Additionally, the adjustment to cash and cash equivalents includes approximately $42.4 million of cash that was retained by the Company 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 September 30, 2016 (in thousands):

 

     As of September 30, 2016  

Term Loan

   $ 350,000   

Credit Facilities deferred financing costs

     (3,325
  

 

 

 

Total

   $ 346,675   
  

 

 

 

C. Receivables and other assets

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

 

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

Straight-line rent

   $ 25,071       $ —         $ (25,071

Lease commissions, net

     42,450         19,596         (22,854

Investment in ACP Peachtree

     3,500         —           (3,500
        

 

 

 
         $ (51,425
        

 

 

 

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 $25.1 million included on Parkway Houston’s historical balance sheet has been eliminated.

Lease commissions, net 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 investment in ACP Peachtree Center Manager, LLC, which is included in Parkway Houston’s historical financial statements, was 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.

D. Mortgage notes payable, net

Represents the adjustment to reflect the premium on mortgage notes payable, net to fair value as of September 30, 2016 (in thousands):

 

     Parkway
Houston
Historical
     Fair Market
Value of
Parkway
Houston
Assumed Debt
     Adjustment
as a Result of
Merger
 

Premium on mortgage notes payable, net

   $ (4,295    $ (2,841    $ 1,454   

 

7


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
September 30,
2016
 

Outstanding shares of Legacy Parkway common stock-historical basis

     111,768   

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

     698   
  

 

 

 

Outstanding shares of Legacy Parkway common stock

     112,466   

Exchange Ratio

     1.63   
  

 

 

 

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

     183,320   

Outstanding shares of Cousins common stock-historical basis

     210,170   
  

 

 

 

Total shares issued in the Merger

     393,490   

Distribution Ratio of 8:1

     8   
  

 

 

 
     49,186   

Less: fractional shares

     (75
  

 

 

 

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

     49,111   

Parkway common stock par value per share

   $ 0.001   
  

 

 

 

Pro forma adjustment to Parkway common stock

   $ 49   
  

 

 

 
     As of
September 30,
2016
 

Outstanding shares of Legacy Parkway limited voting stock-historical basis

     4,213   

Exchange Ratio

     1.63   
  

 

 

 

Total shares issued in the 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   
  

 

 

 

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.

 

8


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
September 30,
2016
 

Cousins Houston

   $ 922,836   

Parkway Houston

     529,827   

Net equity value of Houston Business distributed in Spin-Off

     (348,114
  

 

 

 

Pro forma adjustment

   $ 1,104,549   
  

 

 

 

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

   $ (175,791

Adjustment to Cash and cash equivalents for Parkway Houston as discussed in Note B

     185,485   

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

     (51,425

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

     53,387   

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

     (1,454

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

     14,453   

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 interests as discussed in Note H

     (21,044
  

 

 

 

Total

   $ (348,114
  

 

 

 

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.

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.

 

9


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

 

    Nine Months Ended
September 30, 2016
 

Pro forma Parkway Houston straight-line rent adjustment

  $ 4,974   

Pro forma (above)/below market rent adjustment

    215   

Historical Parkway Houston amounts

    (4,947
 

 

 

 

Pro forma adjustment

  $ 242   
 

 

 

 
    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 nine months ended September 30, 2016 and the year ended December 31, 2015:

 

     Nine Months Ended
September 30, 2016
 

Parkway Houston building and site improvements

   $ 8,918   

Parkway Houston in-place leases

     13,286   

Parkway Houston management contract

     (53

Parkway Houston historical depreciation and amortization

     (30,314
  

 

 

 

Pro forma adjustment

   $ (8,163
  

 

 

 
     Year Ended
December 31, 2015
 

Parkway Houston building and site improvements

   $ 11,891   

Parkway Houston in-place leases

     17,715