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Parkway Announces Agreement to Combine with Eola Capital and Purchase Six Office Properties Through Fund II
Company Release - 04/11/2011 08:45

JACKSON, Miss., April 11, 2011 /PRNewswire/ --

Highlights

  • Major acceleration of strategic objectives of FOCUS Plan
  • Addition of James Heistand to Parkway's Board of Directors
  • Substantially completes the investment of Fund II with high quality assets
  • Significantly expands Assets Under Management
  • Expected to be accretive to recurring FFO
  • Provides for potential pipeline for future growth

Parkway Properties, Inc. (NYSE: PKY) ("Parkway" or the "Company") announced today that it has entered into definitive agreements with privately-owned Eola Capital LLC ("Eola") and certain of its affiliates pursuant to which Eola will contribute its property management business to Parkway and Parkway will acquire six office properties currently owned and operated by Eola and its affiliates on behalf of Parkway Properties Office Fund II, LP ("Fund II"), two of which Fund II has already purchased.  The combination is valued at approximately $462 million, including costs, and Parkway expects the combination on a stand-alone basis to be $0.16 to $0.22 per share accretive to funds from operations ("FFO") based on a full-year run rate.  The combination is expected to close during the second quarter of 2011.

Following closing of the combination, James "Jim" Heistand, current Chairman of Eola, will be named as Executive Chairman of the Board of Directors of Parkway, succeeding Leland Speed, who will remain a member of the Board.  Henry F. Pratt III, currently Chief Operating Officer of Eola, will join Parkway as Executive Vice President and Head of Asset Management and Third Party Services.  All Parkway executive officers will remain in their current positions.  

Steven G. Rogers, President and Chief Executive Officer of Parkway, stated, "We believe this combination with Eola furthers the strategic objectives outlined in the Company's FOCUS Plan and accelerates the accomplishment of several key goals.  It increases the scale of the Company by significantly expanding assets under management and advances its full transition to an operator/owner.  The Company will put proven, best-in-class operating resources to work in some of the most attractive markets in the Southeast and Mid-Atlantic.  We will also benefit from the addition of highly-experienced Eola executives to our Company.  These executives are thoroughly invested in the success of Parkway by virtue of their opportunity to receive a significant equity ownership stake in Parkway through an earn-out provision."

Jim Heistand, Founder and Chairman of Eola, commented, "We are excited about the opportunity to partner with Parkway.  Eola's high quality assets, operational expertise and experienced management team married with a complementary Parkway platform should result in strong growth and value creation for Parkway's shareholders.  Together, our investors, customers and operators will benefit from a more diverse portfolio and enhanced platform to capitalize on market opportunities and improve operating performance.  We selected Parkway as a partner because of our similar corporate cultures and focus on growing the business.  I am personally looking forward to closing and starting a new chapter at the combined company."

Leland Speed, current Chairman of Parkway, said, "I am very pleased with the structured combination of Parkway and Eola and the potential benefit to our shareholders resulting from this important investment.  The combination will significantly increase Parkway's fee income, substantially complete the investment of Fund II with high quality assets, and present an opportunity for further growth through the option rights Parkway will receive to purchase certain additional properties.  I look forward to working with Steve and Jim as we continue to improve Parkway."

Strategic and Financial Merits of the Combination

  • Accelerates Implementation of FOCUS Plan.  The combination advances the completion of objectives outlined in Parkway's FOCUS Plan, which began on July 1, 2010.
  • Addition of Key Eola Executives.  Senior Eola executives Jim Heistand and Henry Pratt have extensive experience acquiring, managing, and operating office properties in the Southeast and Mid-Atlantic markets. The addition of these and other seasoned executives will add significant expertise and depth to the Parkway team.
  • Substantially Completes the Investment of Fund II with High Quality Assets. The planned investments by Fund II would bring its total investment to $559 million, which represents 75% of the fund's $750 million total capacity.
  • Significantly Expands Assets Under Management. The combination significantly increases the size and scale of the Company and the quality and geography of the asset base, increasing the square footage of office properties under management by 89%.
  • Accretion. The combination, on a stand-alone basis, is expected to be between $0.16 and $0.22 per share accretive to Parkway's FFO based on a full-year run rate, without taking into account any planned asset sales by Parkway or costs of the combination.  Parkway will provide revisions to its 2011 earnings outlook as necessary once the combination, Fund II investments, and related capital activities are closed.
  • Completes Transition to Majority Operator/Owner.  Following the completion of the combination described above, Parkway will have a total of 9.5 million square feet of wholly-owned properties, 6.7 million square feet of properties in fund or joint-venture structures, and an additional 12.7 million square feet that will be managed and/or leased for third-party owners.  Parkway's fee income is expected to increase significantly following the closing, and 67% of square feet under management will be in third-party, fund, or fund-like structures.
  • Pipeline for Potential Future Growth. Parkway has received fixed price short term options to purchase the Eola principals' General Partner interest and/or a fee simple interest in three Class A office properties totaling 1.5 million square feet.  Additionally, Eola's principals have agreed to cooperate with Parkway to obtain options for Parkway to acquire three additional Class A office properties totaling 579,000 square feet.  

Combination Summary

Contribution of Eola's Property Management Company (the "Management Company")

  • Eola's principals will contribute the Management Company to Parkway for initial consideration of $32.4 million in cash and Eola's principals will have the opportunity to earn (i) up to 1.574 million units of limited partnership interest in Parkway's operating partnership ("OP Units") through an earn-out arrangement and (ii) up to 226,000 additional OP Units through an earn-up arrangement.  To the extent earned, all OP Units will be redeemable for shares of Parkway common stock on a one-for-one basis.
  • Earn-out and earn-up consideration will be contingent upon the achievement by the Management Company of targeted annual gross fee revenue and/or share price levels during an initial period for the balance of 2011 and a second period for the full calendar year 2012.  Parkway will also have protections against fee income loss in the form of a provision requiring specific payments to Parkway in the event of certain terminations of existing management contracts and a non-compete agreement with regard to the existing management contracts of the Management Company.  
  • The Management Company currently manages assets totaling approximately 11.2 million square feet and produced annual gross fee revenue of approximately $21 million during 2010.
  • Parkway has also received certain short-term options to purchase at a fixed price the Eola principals' General Partner interest and/or a fee simple interest in three Class A office properties consisting of eight individual buildings totaling 1.5 million square feet located in Jacksonville, Orlando, and the Washington DC Metro area.  Additionally, Eola principals have agreed to cooperate with Parkway to obtain options for Parkway to acquire, at a price to be determined by negotiation with Eola's limited partners, three additional Class A office properties located in Parkway's core markets totaling 579,000 square feet.  Parkway believes these options provide a potential opportunity for further growth but cannot provide assurances that these options will be exercised.

Fund II Purchases

  • Fund II has completed the purchase of two office properties totaling 385,000 square feet located in Jacksonville and Tampa.  In addition, Fund II has entered into agreements to purchase four additional office properties totaling 2.1 million square feet located in Atlanta, Orlando, Philadelphia, and Tampa.
  • The total purchase price for all six assets is $380 million, or $154 per square foot, which the Company believes is a significant discount to replacement cost.
  • Parkway expects to earn approximately $3.6 million in annual asset and property level management fee revenue as a result of these purchases.
  • The Fund II purchases are expected to produce a blended going-in capitalization rate ("cap rate") of 7.4% based on anticipated cash net operating income ("NOI") during the first twelve months of ownership.
  • Parkway's pro rata ownership of the six Fund II assets will be 24.8% and Parkway's portion of cash net operating income during the first twelve months of ownership is projected to be approximately $6.9 million.


Property Name

Location

Square Feet

% Leased

Parkway's Ownership %

Two Liberty Place

Philadelphia

940,654

99.4%

19.0%

Two Ravinia Drive

Atlanta

437,846

86.3%

30.0%

Bank of America Center

Orlando

421,069

81.6%

30.0%

Cypress Center I, II, III

Tampa

286,326

93.9%

30.0%

International Plaza Four

Tampa

250,097

75.3%

30.0%

245 Riverside

Jacksonville

135,286

94.6%

30.0%

Total / Averages


2,471,278

90.7%

24.8%




Fund II completed the purchase of 245 Riverside on March 31, 2011, and International Plaza Four on April 8, 2011.  Closing on the remaining four assets is expected to occur in the second quarter of 2011, simultaneously with the closing of the contribution of the Management Company.  An existing institutional investor in Two Liberty Place will maintain an 11% ownership in the property.  This will result in an effective 89% ownership interest by Fund II in Two Liberty Place.  Parkway's pro rata share of Two Liberty Place will be 19%, and Parkway's partner in Fund II will own the remaining 70% interest.  Fund II will acquire 100% of the remaining five assets, with Parkway's ownership share in these Fund II assets at 30%.  Parkway's overall ownership interest in the six Fund II assets will be 24.8%.  An additional $28.1 million is expected to be spent by Fund II for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership, bringing the total investment to approximately $408.1 million.

The Fund II assets are expected to produce an initial blended cap rate of 7.4% based on projected first year property level cash NOI, and a leveraged internal rate of return ("IRR") of approximately 12.1% over Fund II's anticipated holding period.  Adding projected market-based fees payable by Fund II to Parkway for asset and property management, leasing, and construction supervision services to the projected first year NOI increases the expected return to Parkway to an initial cap rate of 11.1% and a leveraged IRR of approximately 18.7%.  The supplemental information table at the end of the press release further outlines the property information, projected returns and fee structure as it relates to the Fund II investments.

Fund II is a $750 million discretionary fund formed in May 2008 for the purpose of acquiring high-quality, multi-tenant office properties.  Parkway is a 30% investor in the Fund, which, when fully invested, is expected to be capitalized with approximately $375 million of equity capital and $375 million of non-recourse, fixed-rate first mortgage debt.  This represents a target debt to total capitalization of approximately 50% for the Fund.  The Fund targets investments in office buildings in Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, and Ft. Lauderdale, as well as other growth markets to be determined at Parkway's discretion. Upon completion of the purchase of the six Eola properties, the total amount invested by Fund II will be approximately $559 million, or 75% of the Fund's investment capacity, and the Fund will own 10 assets with a combined total of 3.5 million square feet.

Funding for the Combination

Parkway's total investment for the combination, including both its portion of the purchase of the six assets through Fund II and the contribution of the Management Company, is expected to be approximately $171.7 million and will be funded through available cash, potential proceeds from asset sales, proceeds from first mortgage debt, borrowings under Parkway's revolving credit facility, and issuance of OP Units and shares of Parkway Series D preferred stock.  Specifically, Parkway expects to use proceeds primarily from the anticipated sale of its 233 North Michigan property in Chicago and other non-strategic asset sales scheduled to close this year.  Parkway has also received a commitment from an institutional investor to invest approximately $26 million in the Company's existing Series D preferred stock simultaneous with closing.

Parkway has obtained a commitment for bridge financing of up to $50 million in the form of preferred stock which will be available to fund the combination, if needed.  

With regard to the Fund II purchases, Parkway's partner in Fund II is expected to fund its share of the equity portion of the Fund II purchase, including its share of working capital and costs, with $137.7 million in cash.  Parkway has arranged for the placement of new first mortgage debt of approximately $190 million, or 50% of the purchase price, on the Fund II assets at the respective closings.  


(Values in millions)



Use of Funds

Amount

Parkway's Share

Purchase of Fund II Assets

$380.0

$94.2

Purchase of Management Company (1)

58.4

58.4

Fund II Working Capital

3.0

0.7

Transaction Costs

17.5

14.9

Asset-Level Preferred Investment

3.5

3.5

Transaction Value

$462.4

$171.7




Source of Funds

Amount

Parkway's Share

Fund II Debt

$190.0

$47.1

Fund II Partner Equity Contribution

137.7

-

Equity from Existing Investor in Two Liberty

10.1

-

Series D Preferred Stock Issuance (2)

26.2

26.2

Parkway Cash Contribution

72.4

72.4

Earn-Out OP Units (1)

26.0

26.0

Transaction Value

$462.4

$171.7




(1) Value of 1.574 million OP Units based on share price of $16.50 on April 8, 2011.  Excludes all OP Units subject to earn-up arrangement.

(2) Series D issuance with previously referenced institutional investor.




Organization

Following the closing of the combination, Mr. Heistand and Mr. Rudolfo "Rudy" Prio-Touzet will be appointed to Parkway's Board of Directors, bringing the total size of the Board to 11 members. Parkway will maintain its corporate headquarters in Jackson, Mississippi, which will remain the principal place of business for the Company.

Approvals

Completion of the combination is subject to the satisfaction of customary closing conditions.  No shareholder vote is required.

Advisors

Wells Fargo Securities / Eastdil Secured is acting as financial advisor to Parkway, and Hunton & Williams LLP, Jaeckle Fleischmann & Mugel LLP, and Forman Perry Watkins Krutz & Tardy LLP are acting as legal counsel. Bank of America Merrill Lynch and Barclays Capital are acting as financial advisors to Eola, and Hogan Lovells LLP is acting as Eola's legal counsel.  CBRE Investors and CBRE Capital Advisors are acting as financial advisors to the institutional investor who is selling its interests in four of the assets while retaining the 11% interest in Two Liberty Place.

Conference Call and Webcast

Parkway and Eola will hold a conference call to discuss this combination on Monday, April 11, 2011, at 1:00 p.m. Central Time (2:00 p.m. Eastern Time). The conference call can be accessed by dialing 800-857-4978 and using the verbal passcode "PARKWAY."  A live audio webcast of the conference call will also be available on Parkway's website at www.pky.com.  A replay of the conference call will be available through April 24, 2011, by calling 866-475-8039 and using the passcode 2353.  The webcast will be archived on Parkway's website for 30 days following the call.

Materials relating to the combination will be available prior to the conference call on Parkway's website at www.pky.com by downloading the file named "Parkway and Eola Presentation."

About Parkway Properties

Parkway Properties, Inc., a member of the S&P Small Cap 600 Index, is a self-administered real estate investment trust specializing in the operation, leasing, acquisition, and ownership of office properties. The Company is geographically focused on the Southeastern and Southwestern United States and Chicago. Parkway owns or has an interest in 67 office properties located in 11 states with an aggregate of approximately 14.1 million square feet of leasable space as of April 11, 2011. Included in the portfolio are 22 properties totaling 4.5 million square feet that are owned jointly with other investors, representing 32.2% of the portfolio. Fee-based real estate services are offered through the Company's wholly-owned subsidiary, Parkway Realty Services, which also manages and/or leases approximately 1.6 million square feet for third-party owners at April 11, 2011.

FOCUS

On July 1, 2010, Parkway initiated its newest strategic and operating plan referred to as the "FOCUS" Plan, which is centered on accomplishing a set of specific goals that the Company believes will lead to a 12% compounded annual total return to its shareholders over a three-year period.  FOCUS is an acronym that details the actions the Company is currently taking and expects to take during the Plan, which began July 1, 2010, and will end June 30, 2013.  The Company views Fund and Fund-Like Investments as the highest priority of its capital allocation, because it gives our shareholders the highest risk adjusted return as measured by internal rate of return, cap rate, and accretion per share.  Parkway plans to continue its transformation to an Operator/Owner through these investments as well as the expansion of Parkway Realty Services, with the goal of being a majority operator/owner at the end of the Plan.  Capital Allocation Discipline is a two-fold goal that refers to balance sheet strength as well as investment capital, including the goal to exit non-strategic markets and sell properties that no longer meet the Company's acquisition criteria in core markets through the continuation of its Asset Recycling program.  Parkway believes that its Uncompromising Focus on Operations is what sets the Company apart from other office property owners, and the accomplishment of these goals will contribute to the ultimate goal of the Plan, which is to maximize Shareholder Returns.

About Eola Capital

Eola Capital is one of the largest privately held commercial real estate firms in the Eastern United States.  Based in Orlando with regional offices in Atlanta, Charlotte, Jacksonville and Tampa, Eola's objective is to acquire real estate investments that provide attractive returns for its investment partners.  Eola and its affiliates own, manage or have an interest in 90 office properties located in 6 states with an aggregate of approximately 14.7 million square feet of leasable space.

Forward Looking Statements

Certain statements in this release that are not in the present or past tense or discuss the Company's expectations (including the use of the words anticipate, believe, forecast, intends, project, or similar expressions) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events. Examples of forward-looking statements include projected net operating income, cap rates, internal rates of return (IRR), forecasts of FFO accretion, projected capital improvements, expected sources of financing, expectations as to the timing of acquisitions or dispositions, and descriptions relating to these expectations.  There can be no assurance that future developments affecting the Company will be those anticipated by the Company. These forward-looking statements involve risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of the Company's properties for rental purposes; the amount and growth of the Company's expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in those areas where the Company owns properties; risks associated with joint venture partners; the risks associated with the ownership and development of real property; the failure to acquire or sell properties as and when anticipated; termination of property management contracts, the bankruptcy or insolvency of companies for which Eola or Parkway provide property management services, the ability of Parkway to integrate the business of Eola and unanticipated costs in connection with such integration, the outcome of claims and litigation involving or affecting the Company; and other risks and uncertainties detailed from time to time in the Company's SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's results could differ materially from those expressed in the forward-looking statements. The Company does not undertake to update forward-looking statements.


Fund II Assets

Supplemental Information



Property Information        

Fund II Assets (1)

Location

Atlanta, Jacksonville, Orlando, Philadelphia, Tampa    

Square Footage

2,471,278

% Leased as of April 11, 2011

90.7%   

Year built

Various    

Purchase price

$380,000,000

Estimated initial improvements during first two years

$28,112,000



Property Level Return Information


Projected cash net operating income (initial 12 months)

$28,051,000

Initial cap rate

7.4%   

Leveraged internal rate of return (based on 50% debt)

12.1%   



Parkway Return Information


Parkway's share of projected net operating income (initial 12 months)

$6,855,000

Projected management, leasing, and services fee income (2) (initial 12 months)

$3,606,000

Parkway's projected initial cap rate (including fee income)

11.1%   

Parkway's projected leveraged internal rate of return (based on 50% debt)

18.7%   



Financial Information


Purchase price paid to seller

$380,000,000

Projected proceeds from first mortgages

$190,000,000

Initial total equity investment

$190,000,000

24.8% equity investment by Parkway (3)

$47,079,000



Notes:

(1) In accordance with generally accepted accounting principles, the properties will be included in Parkway's consolidated financial statements.  Each quarter the Company will provide information about debt, results of operations and FFO related to the Fund properties in the Company's Supplemental Financial and Property Information Package.

(2) Asset management fees for the Fund II assets except Two Liberty Place are calculated annually based on 1.25% of the Fund's invested equity capital. Asset management fees for Two Liberty Place are calculated annually based on 1.00% of the invested equity capital.  Property management fees are calculated based on 3.0% of gross revenue.  Leasing fees are included at market-based rates on projected renewal and expansion leases.  Construction management fees are calculated as 4.0% of the Fund's projected capital expenditures.

(3)Parkway's projected equity investment is a blended 24.8% based on its 19% investment in Two Liberty Place and a 30% investment in the remaining five assets.  An existing institutional investor will maintain an 11% equity share in Two Liberty Place.




CONTACT:

STEVEN G. ROGERS


PRESIDENT & CHIEF EXECUTIVE OFFICER


RICHARD G. HICKSON IV


CHIEF FINANCIAL OFFICER


(601) 948-4091



SOURCE Parkway Properties, Inc.

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